August 2, 2005
Mr. William Choi
Branch Chief
U.S. Securities and Exchange Commission
100 F Street, N.W.
Washington, D.C. 20549
Re: Emergent Group Inc.
Form 10-KSB for the Year Ended December 31, 2004
File No. 0-21475
Dear Mr. Choi:
This letter is in response to your comment letter, dated July 22, 2005,
concerning the above referenced filing.
Consolidated Statements of Operations, page F-3
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1. Comment:
We note your presentation of basic and diluted earnings per share. Please
explain your basis for excluding from diluted weighted-average shares
outstanding the 203,993 shares underlying your options that are exercisable
and in-the-money at December 31, 2004.
Response:
We have recomputed basic and fully diluted earnings per share and shares
outstanding as shown per the attached spreadsheet. The diluted weighted
average shares outstanding were computed using the weighted average price
of the 13,777 shares that traded during 2004. We will use this approach in
future filings or to the extent that minimal shares trade, we will prepare
an updated valuation of the fair value of our common stock. Please note
that the presentation included in our Form 10-KSB for 2004 was based on a
valuation of $0.40 per share. As disclosed in our Form 10-KSB, there is no
active trading market for our common shares. During 2004, only 13,777
common shares traded on the OTC Bulletin Board of total shares outstanding
of 4,745,530. Such shares traded at share prices ranging from $0.11 to
$2.50. The Company's common stock price is easily impacted by only a few
shares trading due to the lack of trading volume. Under these
circumstances, we believe that such share prices are not necessarily
reflective of fair value. We used a fair market price per share of $0.40 in
connection with our calculation of fully diluted shares outstanding. The
price per share of $0.40 was based on an independent third party valuation
performed in connection with a private placement of our common stock in
June 2003. Therefore, we had concluded that such options were not
in-the-money as of December 31, 2004 as the exercise prices of options were
either equal to or greater than $0.40 per share. In any event, the earnings
per share, as previously presented, did not change in light of the revised
calculation.
August 2, 2005
Page 2
Notes to Financial Statements, page F-7
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Note 4 - Equity Investment in Limited Liability Companies, page F-11
- --------------------------------------------------------------------
2. Comment:
We note your disclosure related to your consolidation of two limited
liability companies in which you hold 15% and 3% interest. We further note
that you provide operating and administrative services to the LLCs. Please
tell us on what basis you have concluded that PRI Medical is the primary
beneficiary. Also, please provide us with information that supports your
conclusion. Examples of information that may support your conclusion could
include the agreement among the investors in the LLCs designating PRI
Medical as the entity to absorb the majority of the entities' loss and/or
receive the majority of the benefits or calculations demonstrating that PRI
Medical bears the majority of the entities' credit risk.
Response:
PRI Medical provides all operational and administrative support to the LLCs
for which we receive compensation. Such activities include, but are not
limited to, providing the LLCs with sales and technician personnel,
logistics and scheduling, and accounting and administrative services. In
addition to our equity interest in such entities, PRI Medical receives a
monthly management fee and is compensated or reimbursed for all services
provided to the LLCs. The LLCs are heavily dependent upon PRI Medical in
conducting and sustaining their on-going operations. Further, although
there are no outstanding leases in 2004, historically, PRI Medical arranges
for equipment lease financing on behalf of the LLCs and has served as the
primary obligor under such arrangements. Should the need arise, PRI Medical
will provide on-going financial support to the LLCs through cash advances
until such time the LLCs realize sufficient cash flow to support operations
on a stand-alone basis. In light of these circumstances we believed it to
be appropriate to consolidate these LLCs to comply with the requirements of
FIN 46. Attached is a copy of a typical Operating Agreement and Management
Agreement used in connection with the formation and operation of such LLCs.
Note 5 - Property and Equipment, page F-11
- ------------------------------------------
3. Comment:
Please confirm that the "accessories and eyewear" component of property and
equipment are items that you rent to customers as oppose to items that you
sell to customers.
Response:
Accessories and eyewear are used in connection with the delivery of our
mobile laser equipment rental and technician services to customers. We do
not sell such items to customers.
Note 8 - Accrued Expenses, page F-13
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4. Comment:
Please tell us what the main components of the "other" category are.
Response:
August 2, 2005
Page 3
Please note that the "other" category consists of the following:
2004 2003
---- ----
Accrued Payables - vendors $ 185,867 $238,492
Sales Tax Payable 85,895 92,264
Accrued Professional Fees 75,470 75,772
Customer Deposits 30,150 31,042
Accrued Commissions 14,757 25,886
Accrued 401K 5,639 5,305
------------- ------------
$ 397,778 $468,761
============= ============
We will provide a more detailed breakdown of this line item in future
filings.
5. Comment:
It appears that your calculation of the weighted average exercise price of
your outstanding options at December 31, 2003 and 2004 may be incorrect.
For example, it is unclear to us how granting options during 2003 with a
weighted-exercise price of $0.40 could increase the weighted-average
exercise price of outstanding options from $0.02 at January 1, 2003 to
$0.50 at December 31, 2003. Please provide us with your calculations that
support your roll-forward of the weighted average exercise price.
Response:
Review of the detailed spreadsheet used to calculate the weighted average
exercise prices of outstanding stock options showed a formula error, which
caused the weighted average exercise prices to be calculated incorrectly.
The attached roll-forward schedule shows the corrected weighted average
prices. We will make the appropriate corrections in our next filing of Form
10-KSB.
The Company and its management are responsible for the adequacy and accuracy of
the disclosures in the filing discussed herein. Further, we understand the staff
comments or changes to disclosures in response to staff comments do not
foreclose the Commission from taking action with respect to the filing; and the
Company may not assert staff comments as a defense in any proceeding initiated
by the Commission or any person under the federal securities laws of the United
States.
We appreciate your review and comments regarding our filing. Please feel free to
call me at (818) 638-4616 if you should have any questions or should you require
additional information.
Very truly yours,
/S/ William M. McKay
- --------------------
William M. McKay
Chief Financial Officer
Emergent Group Inc.
Basic and Fully Diluted Shares Outstanding
Year Ended December 31, 2004
Re: Comment #1
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As Presented:
2004 2003
---- ----
Net income $ 23,280 $ 58,305
Basic and diluted earnings per share:
Before extraordinary item $ -- $ (0.03)
Extraordinary item 0.00 0.05
--------- ------------
Basic and diluted earnings per share $ -- $ 0.02
========= ============
Basic and diluted weighted-average shares outstanding 4,744,551 2,684,339
========= ============
As Revised:
Net income $ 23,280 $ 58,305
Basic earnings per share:
Before extraordinary item $ -- $ (0.03)
Extraordinary item 0.00 0.05
--------- ------------
Basic earnings per share $ -- $ 0.02
========= ============
Diluted earnings per share:
Before extraordinary item $ -- $ (0.03)
Extraordinary item 0.00 0.05
--------- ------------
Diluted earnings per share $ -- $ 0.02
========= ============
Basic weighted-average shares outstanding 4,744,551 2,684,339
========= ============
Diluted weighted-average shares outstanding 4,836,388 2,684,339
========= ============
Re: Comment #2
- --------------
MANAGEMENT AGREEMENT
FOR FRONT RANGE HOLMIUM LASER (LS#6), LLC
BY
PHYSIOLOGIC
REPS INC.
- --------------------------------------------------------------------------------
This Management Agreement ("Agreement") is entered into on May _, 2000
between FRONT RANGE HOLMIUM LASER (LS#6), LLC ("Front Range"), and PHYSIOLOGIC
REPS INC. ("PRI").
RECITALS
A. Front Range is a recently formed entity which owns and rents lasers for
medical application.
B. PRI is in the business of renting lasers to hospital, physicians and
other health care providers.
C. Front Range desires to engage the management services of PRI.
In consideration of the promises and covenants contained in this Agreement,
the parties hereto agree as set forth below.
AGREEMENT
Article 1
ENGAGEMENT
1.1 Engagement. Front Range engages PRI to furnish the management services
described below to Front Range on the terms and conditions stated in this
Agreement, and PRI accepts such engagement.
- 1 -
Article 2 TERM AND
TERMINATION
2.1 Term. The term of this Agreement shall commence upon the close of the
offering as described in the Private Placement Memorandum For Front Range
Holmium Laser (LS#6), LLC, dated May 1, 2000 {"Memorandum"), and shall terminate
upon the liquidation of Front Range.
Article 3
DUTIES AND
RIGHTS OF PRI
3.1 Appointment of PRI. During the Term of this Agreement, PRI agrees for,
and in consideration of the compensation provided below, to provide all
management and operations of Front Range, as agent of Front Range, No fiduciary
relationship is created as a result of this Agreement.
3.2 Operation and Management of Front Range. PRI shall carefully and
efficiently operate and manage Front Range and its business affairs under the
provisions set forth in this Agreement. PRI's duties and obligations shall
include, without limitation, those set forth below.
3.3 Management Services. PRI shall oversee and manage all business aspects
of Front Range, including but not limited to accounting, leasing, marketing,
purchasing of supplies, administration, planning, collections, data processing,
and other business office and administrative matters.
3.4 Performance of Obligations. Provided Front Range timely provides PRI
with the necessary funds, PRI will comply with and perform all covenants,
obligations and iimitations, and pay all amounts imposed by law or by any
contract.
3.5 Consulting Duties.
3.5.1 PRI shall hold himself available to consult with Front Range and
at reasonable times.
3.5.2 Under this Agreement PRI is an independent contractor and shall
not be treated as an employee or member of Front Range for any purposes. PRI
shall retain, at the expense of Front Range, such persons as it deems reasonably
necessary to carry out or perform its functions under this Agreement.
3.6 Employment of Others. PRI shall have the right to employ, engage,
retain or deal with any persons, firms or corporations, including, but not
limited to,
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attorneys, accountants, brokers, or other assistants, to perform services for
Front Range that PRI believes is reasonably necessary in order for PR1 to
properly perform the duties and obligations required of PRI under this
Agreement. The cost to PRI for said services shall be chargeable to Front Range,
and Front Range shall reimburse and pay over to PRI said costs on demand.
3. 7 Bank and Other Accounts. All monies owned to or received by PRI on
behalf of Front Range shall be deposited in Front Range's bank, checking or
money market account.
PRI shall, from time to time, establish, maintain or close such bank
accounts, money market accounts or other accounts by and in the name of Front
Range as PRI deems advisable, necessary or appropriate in order to properly
manage the business affairs of Front Range. PRI may also open such investment,
stock brokerage, stock trading, stock margin, or other types of investment
and/or trading accounts as PRI deems reasonably necessary to carry out his
obligations under this Agreement. PRI is authorized on behalf of Front Range and
on his own act to sign all appropriate forms required for the establishment of
said accounts and to sign all checks, drafts, notes, bills of exchange,
acceptances, or other orders for the payment of money, and to endorse any
checks, notes, bills, or other instruments owned, held, or endorsed to Front
Range, or to do any other acts convenient or necessary to the opening,
maintenance, and closing of such accounts, the deposit or withdrawal of funds
therefrom and for any and all transactions related thereto. PRI is authorized,
from time to time to designate or change the designation of the agent or agents
of PRI who will be authorized to sign or countersign checks, drafts, or other
orders for the payment of money issued in the name of Front Range against any
funds deposited in any such accounts, and to revoke any such designation.
3.8 Collection of Monies Due; Payment of Expenses. The collection of all
rents, fees and other monies due Front Range, the payment and discharge of all
costs, expenses, liabilities and obligations of or relating to Front Range.
3.9 Collection of Rent: Payment of Expenses. The collection of all rents,
and provided Front Range makes available the necessary funds, the payment and
discharge of all costs, expenses, liabilities and obligations of or relating to
the Lasers owned by Front Range.
3.10 Power Of Attorney. PRI is given and granted full power and authority
to do for Front Range and in Front Range's name, place and stead, and for Front
Range's use and benefit, all and every act and thing whatsoever and to undertake
any and all transactions, acts and proceedings (legal, arbitral or otherwise) in
Front Range's name, place and every kind, nature and description whatsoever in
connection with the business and personal affairs relative to the property of
Front Range, as fully
-3-
and to all intents and purposes as the Front Range might or could do if
personally acting except PRI shall not have the power to buy, sell exchange,
convey or transfer any interest in the property of Front RangG. The following
enumeration of specific power shall not be interpreted as limiting, in any
manner, the general grant of authority to PRI in this sub-paragraph, which power
shall be absolute:
3.10.1 To deposit in and withdraw funds from any and all bank,
brokerage, or other accounts in and to which Front Range has any interest or
right, including endorsing and cashing of checks and drafts payable to Front
Range for any purpose related to Front Range's property or this Agreement.
3.10.2 To execute, acknowledge and deliver rental agreements,
covenants, agreements and assignments of agreements, mortgages {or deeds of
trust) and assignments or mortgages (or deeds of trust), subordinations or liens
or encumbrances, bills of lading, bills, bonds, notes, receipts, evidences of
debts, releases and satisfactions of mortgages {or deeds of trust), judgments
and other debts, and other instruments in writing of whatever kind and nature,
all upon such terms and conditions and under such covenants as said PRI shall
approve.
3.11 Use Of The Lasers. PRI shall not permit any use of Front Range's
Lasers, except as contemplated by the Memorandum.
3.12 Contracts And Supplies. PRi shall, if Front Range provides the
necessary funds therefor, purchase any materials and supplies that are necessary
to properly maintain or use the Lasers. PRI shall use his best efforts to secure
for and credit to Front Range any discounts, commissions or rebates obtainable
as a result of such purchases. PRI shall, at all times, make purchases of labor
and materials at the lowest possible cost as in its judgment is consistent with
good quality workmanship and service standards.
3.13 Legal Proceedings. PRI shall institute in the name of PRI or Front
Range, but in any event at the expense of Front Range, any and all legal actions
or proceedings, including, but not limited to proceedings to collect charges,
rent or other income from Front Range's Lasers.
3.14 Minimum Amount Of Service PRI shall devote only so much time to the
affairs of Front Range as PRI in its judgment deems necessary; and PRi may
represent, perform services for, and be employed by such additional clients,
persons, or companies as PRI in its sole discretion sees fit.
3.15 Right To Manage. Except as specifically provided in the contrary
herein, and to the greatest degree allowable under the laws of the State of
California, it is the
- 4-
intent of Front Range to confer on PRI the right to manage and direct the
business affairs of Front Range which arise in the ordinary course of business.
3.16 Broad Powers Granted To PRI. Except as expressly provided for in this
Article PRI is given and granted full power and authority to do for Front Range
and in Front Range's name, place and stead, and for Front Range's use and
benefit, all and every act and thing whatsoever and to undertake any and all
transactions, acts and proceedings (legal, arbitral or otherwise) in Front
Range's name, place and every kind, nature and description whatsoever in
connection with the business affairs of Front Range, as fully and to all intents
and purposes as Front Range might or could do if personally acting.
Article 4
ACCOUNTING
4.1 Books and Records. In conjunction with Front Range's accountant, PRI
shall, at the expense of Front Range, keep and, on behalf of Front Range,
supervise and direct the keeping of a comprehensive system of office records,
books and accounts in a manner satisfactory to Front Range, which records shall
be subject to examination by Front Range or his authorized agents and attorneys
at all reasonable hours.
Article 5
RIGHT TO REVIEW
5.1 Front Range's Right of Inspection and Review. PRI shall accord to Front
Range, its accountants, attorneys and agents, the right to enter upon any part
of Front Range's premises upon reasonable notice during the term of this
Agreement for the purpose of examining, inspecting, or making extracts of books
and records of Front Range, but any inspection shall be done with as little
disruption to the business of PRI as possible. Books and records of Front Range
shall be kept at the business office of PRI or at the location where any central
accounting and bookkeeping services are performed by or for PRI, or at such
other place as Front Range and PRI agree.
Article 6
COMPENSATION
6.1 Compensation. Front Range agrees to pay to PRI and PRI agrees to accept
compensation for the services to be provided under this Agreement and amount
equal to twenty-five percent (25%) of the gross revenue of Front Range. Such
amount will be calculated, and distributed to PRI within 30 days of the
conclusion of each calendar quarter.
-5-
The compensation due under this Agreement, is separate from, and in
addition to any compensation to be received by PRI under the Memorandum or the
Operating Agreement for Front Range.
6.2 Reimbursement of Expenses. Front Range shall advance to PRI or
reimburse PRI for any and all costs, expenses, debts and expenditures which PRI
suffers or incurs in connection with rendering services under this Agreement.
Front Range shall reimburse PRI at the request of PRI, subject to presentation
by PRI of proper receipts or supporting documentation, unless such receipts or
documentation are not available due to circumstances beyond PRI's control.
Article 7
EXCLUSIVITY
7.1 Exclusivity. PRI intends to provide management and consulting services
to other entities, some of whom may be in competitive business with that of
Front Range. Front Range hereby acknowledges this potential conflict of
interest, and waives same to the fullest extent permitted by law.
Article 8
LIMITATION ON LIABILITY
8.1 Limited Liability. PRI shall not be liable to Front Range, or to anyone
who may claim any right due to his relationship with Front Range, for any acts
or omissions or alleged acts or omissions in the performance of said services on
the part of PRI or by any of his agents, employees or consultants; except when
said acts or omissions or alleged acts or omissions of PRI are due to his
willful misconduct.
8.2 Indemnification. Front Range shall indemnify and hold PRI, his agents,
accountants, attorneys, employees and independent contractors free and harmless
from and against any loss, expense, damage, injury, obligations, costs, claims,
judgments, attorneys' fees, and attachments arising from or growing out of his
activities on behalf of Front Range or the services rendered to Front Range
pursuant to the terms of this Agreement or in any way connected with the
rendering of said services, except when the same shall arise due to the willful
misconduct of PRI, and PRI is adjudged to be guilty of willful misconduct by a
court of competent jurisdiction.
Article 9
MISCELLANEOUS
9.1 Amendment. This Agreement may be amended by the parties. No amendment
will be effective unless in writing, and signed by both of the parties.
-6-
9.2 Assignability. Except as otherwise expressly provided in this
Agreement, no party may assign any rights or delegate any duties under this
Agreement without the prior written consent of the other party. Any attempted
assignment or delegation without the required consent shall be void.
9.3 Captions. The titles and captions are included only as a matter of
convenience. They shall not affect the interpretation of any provision.
9.4 Consents and Approvals. A party shall not unreasonably withhold a
consent provided for in this Agreement, unless the Agreement specially permits
otherwise. Consents shall be effected only by notice.
9.5 Construction of Agreement. Each party and their/its counsel have
participated fully in the review and revision of this Agreement. Any rule of
construction to the effect that ambiguities are to be resolved against the
drafting party shall not apply in the interpretation of this Agreement.
9.6 Corporate Assets. If a party breaches this Agreement, the non-breaching
party agrees to look solely to the assets of the breaching corporation in
satisfaction of any damages incurred or judgment obtained as a result of the
breach. The non-breaching party waives any claim it has against the breaching
corporation to pierce the corporate veil, or to otherwise disregard the
corporation. The shareholders, corporate officers, directors, employees,
attorneys, agents or affiliates of the breaching party shall not be liable under
or with respect to this Agreement.
9.7 Counterparts. This Agreement may be executed in two counterparts, each
of which shall be deemed an original, but taken together shall constitute one
instrument. This Agreement shall be effective only when signed by all of the
parties.
9.8 Further Assurances. Each party will do such further acts, including
executing and delivering additional agreements or instruments as the other may
reasonably require, to consummate, evidence or confirm the agreements contained
in this Agreement.
9.9 Governing Law. This Agreement shall be construed and enforced according
to the laws of the State of California applicable to agreements made and to be
performed wholly within the State.
9.10 Independent Contractor. Nothing contained in this Agreement shall
constitute or be construed to create a partnership or joint venture between
Front Range and PRI. In entering into this Agreement, and in acting in
compliance with it, PRI is at all times acting and performing as an independent
contractor.
-7-
9.11 Integration. The making, execution and delivery of this Agreement by
the parties has not been induced by any representations, statements, warranties
or agreements other than those expressed in this Agreement. This Agreement
embodies the entire understanding of the parties. There are no other agreements
or understandings, written or oral, in effect between the parties relating to
the subject matter of this Agreement, unless expressly referenced in this
Agreement.
9.12 No Third Party Rights. The parties do not intend the benefits of this
Agreement to inure to any person or entity not a party to this Agreement.
9.13 Notices.
9.13.1 All notices, demands or requests ("Notices") which are required
or permitted to be given pursuant to this Agreement shall be in writing. Notices
shall be delivered personally, by commercial carrier, by fax or by registered or
certified mail, postage prepaid, to the party's last known address.
9.13.2 Notice given personally, by commercial carrier and by fax is
effective upon delivery. Notice given by United States mail is effective the
third (3rd) United States Post Office delivery day after the date of mailing.
9.13.3 Either party may change their/its address for Notices by notice
given pursuant to this section.
9.14 Partial Invalidity. If any provision of this Agreement is found to be
invalid or unenforceable by any court or arbitral tribunal, only that provision
will be ineffective, unless its invalidity or unenforceability will defeat an
essential business purpose of this Agreement.
9.15 Successors and Assigns. This Agreement and the rights and obligations
of the parties shall be binding upon and inure to the benefit of the parties and
their respective successors and permitted assigns.
9.16 Waiver of Right. No waiver of or failure by any party to enforce a
provision, covenant, condition or right under this Agreement (collectively,
"Right") shall be construed as a subsequent waiver of the same Right, or a
waiver of any other Right. No extension of time for performance of any
obligations or acts shall be deemed an extension of the time for performance of
any other obligations or acts.
-8-
IN WITNESS WHEREOF, the parties have executed this Agreement in Los
Angeles, California.
FRONT RANGE HOLMIUM LASER (LS#6), LLC
By its manager:
PHYSIOLOGIC REPS INC.
By:______________________
Gregory A. Bonnifield, President
PHYSIOLOGIC REPS INC.
By:_____________________
Gregory A. Bonnifield, President
-9-
Re: Comment #2
- --------------
FRONT RANGE HOLMIUM LASER (LS #6), LLC
FIRST AMENDED AND RESTATED
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
This Amended and Restated Limited Liability Company Operating Agreement
(the "Agreement") is entered into as of January 6, 2004 (the "Effective Date")
by and among Physiologic Reps Inc., a California corporation ("PRI") and those
persons who subscribe to membership in Front Range Holmium Laser (LS #6), LLC
("Front Range" or the "Company"), and whose signature pages are attached to this
Agreement (collectively, the "Members").
RECITALS
WHEREAS, PRI as a Member and Manager, and the Members formed Front Range, a
California limited liability company pursuant to the provisions of the
California Beverly-Kille a Limited Liability Company Act as set forth in Title
2.5 (commencing with Section 17000) of the Corporations Code of the State of
California (the "Law").
WHEREAS, effective May 1, 2000, PRI and the Members entered into an
Operating Agreement to provide for governance of the Company (the "Initial
Operating Agreement");
WHEREAS, in order to provide for more effective governance of the Company
and clarify certain provisions, PRI and the Members are entering into this
Amended and Restated Operating Agreement.
1. Definitions
1.1. Definitions. The following terms shall have the meanings set forth
next to each term:
A. "Adjusted Capital Account Deficit" means, with respect to any
Member, the deficit balance, if any, in such Member's Capital Account as of the
end of the relevant Fiscal Year, after giving effect to the following
adjustments:
(i). Increase such Capital Account by any amounts which such
Member is obligated to contribute to Front Range (pursuant to the terms of this
Agreement) or is deemed to be obligated to contribute to Front Range pursuant to
Regulations Sections 1.7042(g)(1) and 1.704-2(i)(5); and
(ii). Reduce such Capital Account by the amount of the items
described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6).
B. "Affiliate" means, when used with reference to a specified Person,
(i) the Principal of the Person, (ii) any Person directly or indirectly
controlling, controlled by or under common control with such Person, (iii) any
Person owning or controlling 10% or more of the outstanding voting interests of
such Person, and (iv) any relative or spouse of such Person;
2
C. "Agreement" means this Limited Liability Company Operating
Agreement, as originally executed and as amended from time to time;
D. "Articles of Organization" means the articles of organization filed
with the California Secretary of State for the purpose of forming the Company;
E. "Available Cash Flow" means, with respect to any Fiscal Year or
other period, the sum of all cash receipts of Front Range from any and all
sources, less all cash disbursements (including loan repayments, capital
improvements and replacements) and a reasonable allowance for Reserves,
contingencies and anticipated obligations as determined by the Manager;
F. "Business of Front Range" shall have the meaning set forth in
Section 2.6 hereof;
G. "Capital Account" of a Member shall have the meaning set forth in
Section 3.5 hereof;
H. "Capital Contribution" means the total amount of cash and the
agreed fair market value (net of liabilities) contributed to Front Range by that
Member;
I. "Code" means the Internal Revenue Code of 1986, as amended (or any
corresponding provision or provisions of any succeeding law);
J. "Depreciation" means, for, each Fiscal Year or other period, an
amount equal to the depredation, amortization or other cost recovery reduction
allowable with respect to an asset for such Fiscal Year or other period;
K. "Dissolution" means (i) when used with reference to Front Range,
the earlier of (A) the date upon which Front Range is terminated under the Law,
or any similar provision enacted in lieu thereof, or (B) the date upon which
Front Range ceases to be a going concern, and (ii) when used with reference to
any Member, the earlier of (A) the date upon which there is a Dissolution of
Front Range or (B) the date upon which such Member's entire interest in Front
Range is terminated by means of a distribution or series of distributions by
Front Range to such Member;
L. "Fiscal Year" means the period starting January 1 and ending
December 31 of that year;
M. "Front Range Interest" or "Interest" means an ownership interest in
Front Range as a Member or Manager, expressed as a Percentage Interest, and the
right to vote or participate in the management of Front Range, and the right to
information concerning the business and affairs of Front Range, as provided in
this Agreement and under the Law;
3
N. "Front Range Loan" means any loan made by the Manager to the
Company, such Loans to be made at the option of the Manager without an
obligation to so do, and only to the extent Front Range does not have sufficient
resources (assets, borrowings or otherwise) to meet its obligations. A Front
Range Loan shall bear interest at a rate equal to the highest rate of interest
being paid by the Manager, or ten percent (10%) per annum, whichever is less;
O. "Front Range Minimum Gain" means the amount determined by computing
with respect to each non-recourse liability of Front Range, the amount of gain
(of whatever character), if any, that would be realized by Front Range if it
disposed (n a taxable transaction) of the Property subject to such liability in
full satisfaction thereof, and by then aggregating the amounts so computed as
set forth in Regulations Section 1.704-2(d);
P. "Manager" means PRI or the Person elected to manage the Company,
each pursuant to Section 6.1 of this Agreement;
Q. "Member" means each Person who:
(i). Has been admitted to Front Range as a member in accordance
with the Articles of Organization or this Agreement, or an assignee of an
Interest.
(ii). Has not resigned, withdrawn or been expelled as a Member
or, if other than an individual, been dissolved. Reference to a "Member" shall
be to any one of the Members.
(iii). Is set forth on Schedule 1.1(A) (including PRI in its
capacity as a Member), has that Capital Contribution set forth next to its name,
and who owns that Interest also set forth next to its name.
R. "Member Non-Recourse Debt" has the meaning set forth in Regulations
Section 1.7042(b)(4);
S. "Member Non-Recourse Debt Minimum Gain" means an amount, with
respect to each Member Non-Recourse Debt, equal to Front Range Minimum Gain that
would result if such Member Non-Recourse Debt were treated as a non-recourse
liability of Front Range, determined in accordance with Regulations Sections
1.7042(i)(2) and (3);
T. "Member Non-Recourse Deductions" has the meaning set forth in
Regulations Section 1.714-2(i)(2). The amount of Member Non-Recourse Deductions
with respect to a Member Non-Recourse Debt for a Fiscal Year of Front Range
equals the excess (if any) of the net increase (if any) in the amount of Member
Non-Recourse Debt Minimum Gain attributable to such Member Non-Recourse Debt
during that Fiscal Year over the aggregate amount of any distributions during
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that Fiscal Year to the Member that bears (or is deemed to bear) the economic
loss for such Member Non-Recourse Debt to the extent such distributions are from
the proceeds of such Member Non-Recourse Debt and are allocable to an increase
in Member Non-Recourse Debt Minimum Gain attributable to such Member
Non-Recourse Debt determined in accordance with Regulations Section
1.704-2(i)(2);
U. "Net Capital Contributions" means the aggregate of a Member's
Capital Contributions over the aggregate distributions theretofore made to such
Member pursuant to Section 5.1;
V. "Net Profits" and "Net Loss" mean, for each Fiscal Year or other
period, an amount equal to the Company's taxable income or loss for such year or
period (as calculated after fees, charges and costs payable to PRI as Manager),
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)(1) shall be included in taxable income or loss, less the
Manager Fee, etc.), with the following adjustments;
(i). Any income of Front Range that is exempt from Federal income
tax and not otherwise taken into account in computing Net Profits or Net Loss
shall be added to such taxable income or loss;
(ii). Any expenditures of Front Range described in Code section
705(b)(2)(B) or treated as Code section 705(b)(2)(B) expenditures pursuant to
Regulations Section 1.704-1 (b)(2)(iv)(i) and not otherwise taken into account
in computing Net Profits or Net Loss shall be subtracted from such taxable
income or loss;
(iii). Gain or loss resulting from any disposition of Property
with respect to which gain or loss is recognized for Federal income tax purposes
shall be computed by reference to the fair market value of the Property disposed
of, notwithstanding that the adjusted tax basis of such Property differs from
its fair market value;
(iv). In lieu of depreciation, amortization, and other cost
recovery deductions taken into account in computing such taxable income or loss,
there shall be taken into account Depreciation for such Fiscal Year or other
period, computed in accordance with the subsection hereof entitled
"Depreciation"; and
(v). Notwithstanding any other provision of this subsection, any
items of income, gain, loss or deduction, which are specifically allocated,
shall not be taken into account in computing Net Profits or Net Loss.
W. "Percentage Interests" or "Interest" of the Members in the Net
Profits and Losses of the Company means the interest of a Member in the Company
expressed as a percentage based on the total number of interests in the Company
owned by a Member (fractional and whole) over the total number of Interests
outstanding. Profits and losses and distributions of the Company will be
5
allocated to Members based on their Percentage Interests. (for example, if there
are 15 equal Members, then each shall be allocated 6-2/3% of the profits and
losses of Front Range). The Percentage Interests of the Members are set forth on
Schedule 1.1(A) of this Agreement;
X. "Period of Duration" has the meaning set forth in Section 2.5
hereof;
Y. "Person" means an individual, partnership, limited partnership,
corporation, trust, estate, association, limited liability company, or other
entity, whether domestic or foreign; and
Z. "Principal means the natural Person who is in ultimate control of a
Member.
AA. "Property" means all of the assets of Front Range, both tangible
and intangible, real or personal, and any portion thereof;
BB. "Regulations" means the federal income tax regulations promulgated
by the Treasury Department under the Code, as such regulations may be amended
from time to time. All references herein to a specific section of the
Regulations shall be deemed also to refer to any corresponding provisions of
succeeding Regulations;
CC. "Reserves" means funds set aside from Capital Contributions or
gross cash revenues as reserves. Reserves shall be maintained in amounts
reasonably deemed sufficient by the Manager for working capital and the payment
of taxes, insurance, debt service, repairs, replacements renewals, or other
costs or expenses incident to the Business of Front Range, or in the
alternative, the Dissolution of the Company;
DD. "Secretary of State" shall mean the Secretary of State of the
State of California;
EE. "Vote" means, except where provided otherwise in this Agreement,
or required by the terms of the Law, Code or Regulations, all decisions made by
the Company shall be approved by a vote of fifty-one percent (51 %) of the
Members (including the Manager in its capacity as a Member), wherein each Member
casts a number of votes equal to its Percentage Interest;
1.2. Other Definitional Provisions. Any of the Terms defined in Section 1.1
above unless the context requires otherwise, be used in the singular or in the
plural depending on the reference. The term "including", "includes," and
"include" shall be deemed to be followed by the words "without limitation; and
words such as "herein", "hereinafter", "hereto", "hereby" and "hereunder", when
used with reference to this Agreement, refer to this Agreement as a whole,
unless the context otherwise requires;
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2. Organization
2.1. Organization. The Members formed Front Range pursuant to the Law by
filing the Articles of Organization with the Secretary of State.
2.2. Name. The name of Company is "Front Range Holmium Laser (LS #6), LLC.
The Members shall operate the Business of the Company under that name or such
other or additional names as the Members deem necessary or desirable.
2.3. Principal Office. Front Range shall maintain its principal place of
business at 932 Grand Central Avenue, Glendale, CA 91201, or any other location
as determined by the Manager.
2.4. Agent for Service of Process. The name and address of the Company's
agent for service of process is Medical Resources Management Financial, Inc.,
932 Grand Central Avenue, Glendale, CA 91201, attention [name of officer].
2.5. Duration. The period of duration of Front Range ("Period of Duration")
shall be ten (10) years commencing on the date of the filing of the Articles of
Organization with the California Secretary of State unless sooner terminated in
accordance with this Agreement. In the event that there is a change in
applicable law that makes it difficult, or potentially illegal for Front Range
to operate as planned, then the Manager shall either restructure the business of
Front Range, or it shall terminate Front Range sooner than the 10 years.
2.6. Business and Purpose. The purpose of Front Range is limited to the
acquisition through purchase or lease and operation of medical equipment,
including lasers principally for soft tissue lithotripsy. Front Range will
initially acquire two (2) lasers; and may acquire additional medical equipment
in the future, if in the reasonable discretion of the Manager such acquisition
is warranted. In connection with such Business, the Company may enter into a
management agreement with Physiologic Reps Inc., an affiliate of Manager (or
such other third party as the Manager may deem appropriate), to manage the
leasing of the Equipment to hospitals and other healthcare facilities,
institutions and providers.
3. Capital Contributions
3.1. Contributions and Issuance of New Membership Interests.
3.1.1. The-Members executing this Agreement as of the Effective Date
(other than Manager) shall have contributed to Front Range the sum of Five
Thousand Dollars ($5,000.00) (in cash, guaranteed debt amount or otherwise) for
each Percentage Interest acquired by that Member, as a Capital Contribution.
3.1.2. Thereafter, the Manager shall determine on each and every third
anniversary of the Effective Date of this Agreement (the "Re-Evaluation Date")
the amount of the Capital Contribution to be required from a Person seeking to
become a Member or acquire additional Interests. In establishing the amount of
the Capital Contribution on each Re-Evaluation Date, the Manager shall use
commercially reasonable efforts to determine the fair market value of the
7
Interests as of the Re-Evaluation Date and may in its discretion retain the
services of outside consultants to assist in the re-evaluation.
3.1.3. The Manager shall issue fractional interests or issue
additional Interests to new or existing Members upon approval of the Executive
Board.
3.1.4. Each Member's Interest in the Company shall be expressed as a
percentage equal to the number of Interests owned by such Member over the total
number of Interests outstanding.
3.2. Additional Contributions. No Member shall be required to (a) make any
additional Capital Contributions, or (b) make any loan (except for loans
authorized under this Agreement from PRI in its capacity as Manager and
Manager's obligation to fund the costs of operations of the Company for the
first six (6) months ending October 2000.
3.3. Right to Capital. No Member shall have the right to withdraw, or
receive any return of, its Capital Contribution, and no Capital Contribution may
be returned in the form of property other than cash except as specifically
provided herein. Except as expressly provided in this Agreement, no Capital
Contribution of any Member shall bear any interest or otherwise entitle the
contributing Member to any compensation for use of the contributed capital.
3.4. No Compensation to Members. Subject to Section 6.8 below and such
other fees and expenses as may be paid to Manager; the Company shall not pay any
compensation to any Member or any Principal of any Member.
3.5. Capital Accounts.
3.5.1. A separate capital account ("Capital Account") shall be
maintained for each Member. For book purposes, each Member's Capital Account
will be separated into a contribution account and an income (loss) account, and
will be maintained according to generally accepted accounting principles.
3.5.2. The Capital Account of each Member shall be:
A. Increased by (i) such Member's cash contributions; and (ii)
the fair market value of property contributed by such Member as agreed to by the
Member and the Manager based on a good faith determination of market value (net
of liabilities secured by such contributed property that Front Range is
considered to assume or take subject to under Code section 752); and
B. Decreased by (i) the amount of cash distributed to such
Member; (ii) the agreed fair market value of all actual and deemed distributions
of property made to such Member pursuant to this Agreement (net of liabilities
secured by such distributed property that the Member is considered to assume or
take subject to under Code section 752); and (iii) all items of deductions and
loss allocated to such Member pursuant to Article 4 or other provisions of this
Agreement.
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3.5.3. For purposes of computing the balance in a Member's Capital
Account, no credit shall be given for any Capital Contribution that such Member
is to make until such contribution is actually made.
3.5.4. Section 3.4 and 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 Section. To the extent such provisions are inconsistent
with such Regulations Section or are incomplete with respect thereto, Capital
Accounts shall be maintained in accordance with such Regulations Section.
3.5.5. In the event a Member transfers an Interest 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 Interest.
4. Allocation Of Profits And Losses
4.1. Allocation of Net Profits and Losses. Except as otherwise provided in
this Article 4, Net Profits and Net Loss for each Fiscal Year shall be allocated
among the Members as follows:
4.1.1. Net Profits shall be allocated among the Members (i) first, to
each Member until the cumulative Net Profits allocated to such Member is equal
to the cumulative Net Loss allocated to the Member pursuant to Section 4. (b)
below for any prior period; and (ii) thereafter, to the Members in accordance
with their Percentage Interests.
4.1.2. Except as may be otherwise provided in this Article 4, Net Loss
shall be allocated among the Members:
A. First, to offset any Net Profits allocated pursuant to Section
4(a) (i) above, and then to offset any Net Profits allocated pursuant to Section
4(a) (ii) hereof (in each case pro rata in proportion to their shares of Net
Profits being offset);
B. Second, in proportion to the positive balances, if any, in the
Members' respective Capital Accounts, until such balances are reduced to zero;
and
C. Third, to the Members, pro rata, in accordance with their
Percentage Interests; provided, however, that if. and to the extent that the
allocation of Net Loss in this manner would cause a Member to have an Adjusted
Capital Account Deficit at the end of the Fiscal Year, then such Net Loss shall
instead be allocated to the Member who has the largest Percentage Interest.
4.2. Residual Allocations. Except as otherwise provided in this Agreement,
all items of Front Range income, gain, loss, deduction, and any other
allocations not otherwise provided for in this Agreement shall be divided among
the Members in the same proportions as they share Net Profits or Net Losses, as
the case may be, for the Fiscal Year.
9
4.3. Qualified Income Offset. If any Member unexpectedly receives any
adjustments, allocation or distributions described in clauses (4), (5) or (6) of
Regulations Section 1.704-1(b)(2)(i)(d), then items of Front Range income shall
be specially allocated to such Member in an amount and manner sufficient to
eliminate the Adjusted Capital Account Deficit created by such adjustments,
allocations or distributions as quickly as possible. This Section 4.3 Is
intended to constitute a "qualified income offset" within the meaning of
Regulations Section 1.7041(b)(2)(i)(d)(3).
4.4. Minimum Gain Chargeback. If there is a net decrease in Front Range
Minimum Gain during a Fiscal Year, each Member will be allocated, before any
other allocation under this Article 4, items of income and gain for such Fiscal
Year (and if necessary, subsequent years) in proportion to and to the extent of
an amount equal to such Member's share of the net decrease in Front Range
Minimum Gain determined in accordance with Regulations Section 1.704-2(g)(2).
This Section 4.4 is intended to comply with, and shall be interpreted
consistently with, the "minimum gain chargeback" provisions of Regulations
Section 1.704-2(f).
4.5. Member Non-Recourse Debt Minimum Gain Chargeback. Notwithstanding any
other provision of this Article 4, (but subject to Section 4.4 above), if there
is a net decrease in Member Non-Recourse Debt Minimum Gain attributable to a
Member Non-Recourse Debt during any Fiscal Year of Front Range, each Member who
has a share of the Member Non-Recourse Debt Minimum Gain attributable to such
Member Non-Recourse Debt, determined in accordance with Treasury Regulations
Section 1.70420(5), shall be specially allocated items of Front Range income and
gain for such year (and, if necessary, subsequent years) in an amount equal such
Member's share of the net decrease in Member Non-Recourse Debt Minimum Gain
attributable to such Member Non-Recourse Debt, determined in accordance with
Regulations Section 1.704-20(4). Allocations pursuant to the previous sentence
shall be made in proportion to the respective amounts required to be allocated
to each Member pursuant thereto. The items to be so allocated shall be
determined in accordance with Regulations Section 1.70420(4). This Section 4.5
is intended to comply with a minimum gain chargeback requirement of the
Regulations, and shall be interpreted consistently therewith.
4.6. Member Non-Recourse Deductions. Any Member Non-Recourse Deduction for
any Fiscal Year or other period, shall be specially allocated to the Member who
bears (or is deemed to bear) the economic risk of loss with respect to the
Member Non-Recourse Debt to which such Member Non-Recourse Deductions are
attributable in accordance with Regulations Section 1.704-20(2).
4.7. Special Allocations. Any special allocations of items of Net Profits
pursuant to Sections 4.4, 4.5 and 4.6 shall be taken into account in computing
subsequent allocations of Net Profits pursuant to Section 4. 1, so that the net
amount of any items so allocated and the gain, loss and any other item allocated
to each Member pursuant to Section 4.1 shall, to the extent possible, be equal
to the net amount that would have been allocated to each such Member pursuant to
the provisions of this Article if such special allocations had not occurred.
10
4.8. Section 704(c) Allocation. Any item of income, gain, loss, and
deduction with respect to any property (other than cash) that has been
contributed by a Member to the capital of Front Range and which is required or
permitted to be allocated to such Member for income tax purposes under Section
704(c) of the Code so as to take into account the variation between the tax
basis of such property and its fair market value at the time of its contribution
shall be allocated to such Member solely for income tax purposes in the manner
so required or permitted.
4.9. Obligations of Members to Report Allocations. The Members acknowledge
the income tax consequences of the allocations made by this Agreement and hereby
agree to be bound by this Agreement in reporting their shares of Front Range
income and loss for income tax purposes.
5. Distributions
5.1. Available Cash Flow. Available Cash Flow (after reservation of such
amounts for reserves as is deemed appropriate by Manager) shall be distributed
to the Members as follows:
5.1.1. First, to the Manager in payment of any outstanding loans from
the Manager to the Company, with payments made first to all accrued but unpaid
interest on all Front Range Loans, if any, has been paid, and then to the
principal amounts thereof.
5.1.2. Second, to the Members, pari passu, on a pro rata basis, until
all Net Capital Contributions have been repaid.
5.1.3. Third, to the Members in accordance with their applicable
Percentage Interests as of the date of such distribution.
5.2. Time of Distributions. Manager shall use reasonable efforts to make
distributions of Available Cash Flow, if any, to the Members within 30 days
after the end of each calendar quarter.
6. Rights. Duties. Obligations And Compensation Of Managers And Officers
6.1. Manager.
6.1.1. The initial manager of the Company shall be PRI who shall serve
as Manager until such time as PRI seeks to resign. In the event PRI participates
in a merger or consolidation with another company, "PRI" shall be deemed to
include the entity surviving the merger or resulting from the consolidation.
6.1.2. Manager represents that it shall use commercially reasonable
efforts to provide that level and quality of services supporting the provision
of the Equipment to healthcare facilities that is at least equal to the level
and quality of services provided by companies similar to Front Range to
healthcare facilities in the community.
11
6.2. Duties and Responsibilities of Manager.
6.2.1. The Manager shall have such rights, duties and powers as are
set forth in this Agreement, and such additional powers, rights and duties as
may be granted to Manager by the Members from time to time. The Manager shall be
the chief executive officer of the Company, and has sole responsibility for the
general management, supervision, direction, and control of the business of Front
Range as is typically vested in the office of president of a corporation. Except
to the extent otherwise provided herein, the Manager shall have all of the
rights and powers which may be possessed by Managers under the Law including,
without limitation, the right and power to:
A. Preside at all meetings of the Members;
B. Acquire by purchase, lease or otherwise any real or personal
property, including but not limited to the lease or acquisition of the
Equipment, which may be necessary, convenient or incidental to the
accomplishment of the purposes of Front Range;
C. Operate, maintain, finance, refinance, improve, construct,
own, grant options with respect to, sell, convey, assign, mortgage and lease any
real estate and any personal property necessary, convenient or incidental to the
accomplishment of the purposes of Front Range;
D. Execute any and all agreements, contracts, documents,
certifications, and instruments necessary or convenient in connection with the
management, maintenance and operation of Front Range;
E. Borrow money and issue evidences of indebtedness necessary,
convenient or incidental to the accomplishment of the purposes of Front Range,
and secure the same by mortgage, pledge or other lien on any Front Range
property, as are necessary to consummate the purchase or refinancing of any
Front Range Property;
F. Execute, in furtherance of any or all of the purposes of Front
Range, any deed, lease, mortgage, deed of trust, mortgage note, promissory note,
bill of sale, contract or other instrument purporting to convey or encumber any
or all of Front Range Property;
G. Prepay in whole or in part, refinance, recast, increase,
modify or extend any liabilities affecting Front Range Property and in
connection therewith execute any extensions or renewals of encumbrances on any
or all of Front Range property;
H. Care for and distribute funds to the Members by way of cash,
income, return of capital or otherwise, all in accordance with the provisions of
this Agreement, and perform all matters in furtherance of the objectives of
Front Range or this Agreement;
12
I. Contract on behalf of Front Range for the employment and
services of employees and/or independent contractors and delegate to such
persons the duty to manage or supervise any of the assets or operations of Front
Range;
J. Execute any contract, agreement, deed, bill of sale, mortgage,
lease, contract of sale, or other commitment purporting to convey or encumber
the interest of Front Range in all or any portion of any real, leasehold or
personal property at any time held in its name, and no other signatures shall be
required;
K. Engage in any kind of activity and perform and carry out
contracts of any kind (including contracts of insurance covering risks to Front
Range and Manager liability) necessary or incidental to, or in connection with,
the accomplishment of the purposes of Front Range, as may be lawfully carried on
or performed by a Front Range under the laws of each state in which Front Range
is then formed or qualified;
L. Make any and all elections for federal, state and local tax
purposes including, without limitation, any election, if permitted by applicable
law: (i) to adjust the basis of Front Range Property pursuant to Code sections
754, 734(b) and 743(b), or comparable provisions of state or local law, in
connection with transfers of Percentage Interest, and Front Range distributions
(ii) to extend the statute of limitations for assessment of tax deficiencies
against Members with respect to adjustments to Front Range's federal, state or
local tax returns, and (iii) to represent Front Range, and Members before taxing
authorities or courts of competent jurisdiction in tax matters affecting Front
Range, and Members in their capacity as Members, and to execute any agreements
or other documents relating to or affecting such tax matters, including
agreements or other documents that bind the Members with respect to such tax
matters or otherwise affect the rights of Front Range, or its Members. The
Manager is not required to make any election. If there is any cost or time
required to Front Range or the Manager in making an election that does not
benefit equally all of the members, the Manager may, in its sole and absolute
discretion charge such Member a reasonable fee; and
M. All other rights and authority to run the business of Front
Range, as provided for in the Law.
6.2.2. Manager is specifically authorized to contract with or
otherwise engage the services of Physiologic Reps Inc., a California corporation
affiliated with Manager ("PRI"), to manage the business of the Corporation
pursuant to the terms of a management agreement between PRI and the Corporation
("Management Agreement"). The Management Agreement shall provide for
compensation of PRI at fair market value rates and shall include reimbursement
to PRI by the Corporation of all operating expenses and costs incurred by PRI
for or on behalf of the Corporation or allocated by PRI to the Corporation.
13
6.3. Limitations on Rights and Powers. Except by the unanimous agreement of
the Members evidenced in writing, neither the Manager nor any other officer of
Front Range shall have authority to:
A. Subject to the obligations of PRI as Manager, enter into or
commit to any agreement, contract, commitment or obligation on behalf of Front
Range obligating any Member to find additional capital, to make or guarantee a
loan or to increase its personal liability either to Front Range or to third
parties (this does not apply to the obligations of the Manager);
B. Materially after the Business of Front Range or deviate from
any business plan of Front Range approved by the Members;
C. Permit or cause the Company to place title to any Property in
the name of a nominee;
D. Do any act in contravention of this Agreement; and
E. Do any act that would make it impossible to carry on the
Business of Front Range.
6.4. Delegation of Powers. Manager may delegate authority to third parties
to assist him in the management of the Company provided that at all times
Manager remains in charge of and responsible for the management of the Company.
6.5. Election of New Manager. Subject to Section 6.1 above, in the event
PRI ceases to serve as Manager, then (a) PRI shall at its option continue to own
its Interests, and (b) the Members shall elect a new Manager by the Vote of the
Members. Any Manager shall also be a Member and shall own a minimum of a 1%
Interest.
6.6. Officers. The Manager, with the consent of the Members may appoint a
secretary, a chief financial officer, and/or such other officers of the Company
as the Business of Front Range may require, each of whom shall hold office for
such period, have such authority and perform such duties as the Members may
determine.
6.7. Resignation. Manager or other officer of Front Range may resign at any
time by giving written notice to the Members. Any such resignation shall take
effect at the date of the receipt of such notice or at any later time specified
therein; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
6.8. Compensation of Manager. The Manager shall be compensated by the
Company for its services as follows:
A. Unless otherwise prohibited by this Agreement, the Company
shall pay compensate and reimburse Manager for all services rendered, goods
provided and expenses and costs paid to or on behalf of the Company or allocated
to the Company by Manager or if so directed by Manager, to any third party
company responsible for or providing certain management services to Company (the
"Third Party Manager") pursuant to the terms of a management agreement between
14
the Company and such Third Party Manager. The parties agree that Manager shall
initially be paid $250.00 for each rental of equipment owned by the Company.
This amount can be increased based on actual costs incurred by Manager as
described above.
B. The Company shall reimburse the Manager for the Manager's
general and overhead expenses, this fee will be equal to twenty-five percent
(25%) of the gross revenue of Front Range.
C. The Company shall reimburse Manager and/or the Third Party
Manager for all costs and expenses relating to the organization of the Company
and the Business of the Company which were incurred prior to the effective date
of the Initial Operating Agreement (including without limitation legal and
accounting costs and fees); and
D. The Manager shall not be entitled to any further compensation
for services from the Company.
6.9. Federal Income Tax Elections. The Manager on behalf of Front Range may
make all elections for federal income tax purposes, including but not limited
to, the following:
A. To the extent permitted by applicable law and regulations, the
election to use an accelerated depreciation method on any depreciable unit of
the assets of Front Range; and
B. In case of a transfer of all or part of the Interest of any
Member, the election pursuant to Code sections 734, 743, and 754 of the Code to
adjust the basis of the assets of Front Range.
6.10. Tax Matters Partner.
6.10.1. The Manager, shall act as the Tax Matters Partner of Front
Range, as provided for in Treasury Regulations issued pursuant to Code section
6231. The Members hereby consent to such designation and agree to execute,
certify, acknowledge, deliver, swear to, file and record at the appropriate
public offices such documents as may be deemed necessary or appropriate to
evidence such consent.
6.10.2. To the extent and in the manner provided by applicable Code
sections and Treasury regulations issued thereunder, Manager shall furnish the
name, address, number of Units and taxpayer identification number of each
Partner to the Internal Revenue Service ("IRS").
6.10.3. The Manager shall register Front Range with the Secretary of
the Treasury pursuant to Code section 6111, if appropriate. The Tax Matters
Partner shall furnish to each Member the identification number assigned to Front
Range pursuant to Code section 6111, which number shall be used by Front Range
and the Members in connection with the filing of federal income tax returns and
by the Members in connection with the filing of required notices of transfers of
interests in Front Range.
15
6.10.4. To the extent and in the manner provided by applicable Code
sections and Treasury Regulations thereunder, the Manager shall inform each
Member of administrative or judicial proceedings for the adjustment of Front
Range items required to be taken into account by a Partner for income tax
purposes (such administrative proceedings being referred to as a "tax audit" and
such judicial proceedings being referred to as "judicial review").
6.10.5. The Manager is authorized, but not required:
A. To enter into any settlement with the IRS with respect to any
tax audit or judicial review, and in the settlement agreement the Manager may
expressly state that such agreement shall bind all Members except that such
settlement agreement shall not bind any Member who (within the time prescribed
pursuant to the Code and Regulations thereunder) files a statement with the IRS
providing that the Manager shall not have the authority to enter into a
settlement agreement on behalf of such Member;
B. In the event that a notice of a final administrative
adjustment at Front Range level of any item required to be taken into account by
a Member for tax purposes (a "final adjustment") is mailed to the Manager, it
may seek judicial review of such final adjustment, including the filing of a
petition for readjustment with the United States Tax Court or the United States
Claims Court, or the filing of a complaint for refund with the District Court of
the United States for the district in which Front Range's principal place of
business is located;
C. To intervene in any action brought by any other member for
judicial review of a final adjustment;
D. To file a request for an administrative adjustment with the
IRS at any time and, if any part of such request is not allowed by the IRS to
file an appropriate pleading (petition or complaint), for judicial review with
respect to such request;
E. To enter into an agreement with the IRS to extend the period
for assessing any tax which is attributable to any item required to be taken
into account by a partner for federal income tax purposes, or an item affected
by such item; and
F. To take any other action on behalf of the Members or Front
Range in connection with any tax audit or judicial review proceeding to the
extent permitted by applicable law or Treasury Regulation.
16
6.10.6. Front Range and each Member personally shall indemnify
and reimburse the Manager, and each of its officers, directors, shareholder,
employees, agents, attorneys, for all expenses, including legal and accounting
fees (as such fees are incurred), claims, liabilities, losses and damages
incurred in connection with any tax audit or judicial review proceeding with
respect to the tax liability of the Members (other than the Managers personal
tax liability), the payment of all such expenses shall be made before the
distribution of cash available for distribution to the Members. The Manager
shall not be obligated to provide funds for such purpose. The taking of any
action and the incurring of any expense by the Manager in connection with any
such proceeding, except to the extent required by law, is a matter in the sole
discretion of the Manager and the provisions of limitations of liability of the
Manager and indemnification set forth in this Agreement shall be fully
applicable to the Manager in its capacity as such.
6.11. Right to Rely.
6.11.1. Any Person dealing with the Company may rely upon a
certificate signed by the Manager as to (a) the identity of a Manager or any
Member; (b) the existence or nonexistence of any fact or facts which constitute
a condition precedent to acts by a Manager or which are in any other manner
germane to the affairs of Front Range; (c) persons who are authorized to execute
and deliver any instrument or document of Front Range; or (d) any act, or
failure to act by Front Range or any other matter whatsoever involving Front
Range or any Member.
6.11.2. Persons dealing with the Company may rely upon the
representation of the Manager that such Manager has the authority to make any
commitment or undertaking on behalf of Front Range.
6.12. Limitation on Liability of Manager. The Manager shall not be
liable, responsible or accountable in damages or otherwise to Front Range or any
Member for any action taken or failure to act (even if such action or failure to
act constituted the simple negligence of the Manager, or even if gross
negligence of the Manager or such officer, director or shareholder, employee,
agent or representative thereof) on behalf of Front Range within the scope of
the authority conferred on the Manager by this Agreement or by law unless such
act or omission was performed or omitted, fraudulently.
7. Members Rights and Obligations
7.1. Place of Meetings. Meetings of the Members shall be held at the
principal office of Front Range, provided that Manager may designate another
appropriate and convenient location, either within or without the State of
California, upon notice to the Members.
7.2. Annual Meeting. An annual meeting of the Members shall be held each
year, within one month of the anniversary of the date of this Agreement. At the
annual meeting, the Members shall transact such other business as may be
properly brought before the meeting and if PRI is no longer the Manager, elect a
Manager.
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7.3. Special Meeting. Special meetings of the Members may be called at any
time by the Manager or by one or more Members holding an aggregate of more than
ten percent (10%) of the Percentage Interests. Upon receipt of a written
request, from the Members, which request may be mailed or delivered personally
to the Manager, the Manager shall cause notice to be given to the Members that a
meeting will be held at a time requested by the Members calling the meeting,
which time for the meeting shall be not less than ten (10) nor more than sixty
(60) days after the receipt of such request. If such notice is not given within
twenty (20) days after receipt of such request, the Members calling the meeting
may give notice thereof in the manner provided by this Agreement.
7.4. Notice of Meetings.
7.4.1. Except as provided for in Section 7.3 for special meetings,
notice of meetings shall be given to the Members in writing not less than ten
(10) nor more than sixty (60) days before the date of the meeting by the
Manager. Notices for regular and special meetings shall be given personally, by
mail, or by facsimile, and shall be sent to each Member's last known business
address appearing on the books of Front Range. Such notice shall be deemed given
at the time it is delivered personally, or deposited in the mail, or sent by
facsimile.
7.4.2. Notice of any meeting of Members shall specify the place, the
day and the hour of the meeting, and (i) in case of a special meeting, the
general nature of the business to be transacted, or (ii) in the case of an
annual meeting, those matters which the Manager, at the date of mailing, intends
to present for action by the Members.
7.5. Meeting by Consent. The transactions of a meeting of Members which was
not called or noticed pursuant to the provisions of Section 7.3 or 7.4 shall be
valid as though transacted at a meeting duty held after regular call and notice,
if Members holding in the aggregate fifty one percent (51%) or more of the
Percentage Interests are present, and if, either before or after the meeting,
each of the Members entitled to vote but not present (whether in person or by
proxy, as that term is used in the Law) at the meeting signs a written waiver of
notice, or a consent to the holding of such meeting, or an approval of the
minutes thereof. All such waivers, consents or approvals shall be filed with the
records of Front Range. Attendance shall constitute a waiver of notice, unless
objection shall be made.
7.6. Actions without a Meeting.
7.6.1. Any action which may be taken at any annual or special meeting
of Members may be taken without a meeting and without prior notice if a consent
in writing, setting forth the action so taken, shall be signed by Members
holding in the aggregate the number of votes equal to or greater than the Vote,
unless a lesser vote is provided for by this Agreement or the Law; provided,
however, that any action which by the terms of this Agreement or by the Law is
required to be taken pursuant to a greater vote of the Members and Manager may
only be taken by a written consent which has been signed by Members holding the
requisite number of votes.
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7.6.2. Unless the consents of all Members have been given in writing,
notice of any approval made by the Members without a meeting by less than
unanimous written consent shall be given at least ten (10) days before the
consummation of the action authorized by such approval. Any Member giving a
written consent may revoke the consent by a writing received by Front Range
prior to the time that written consents of Members required to authorize the
proposed action have been filed with Front Range. Such revocation is effective
upon its receipt by Front Range.
7.6.3 The Members shall elect three (3) Members to an Executive Board
(the "Board") which shall consist of the three (3) elected Members and one
person appointed by PRI. The Board shall have the right to authorize any actions
requiring Member approval upon a unanimous vote of the Board in favor of the
action.
7.7. Quorum and Effect of Vote. Each Member and Manager shall have a number
of votes equal to the Percentage Interest held by such Member, provided that if,
pursuant to the Law or the terms of this Agreement, a Member is not entitled to
vote on a specific matter, then such Member's number of votes and Percentage
Interest shall not be considered for purposes of determining whether a quorum is
present, or whether approval by Vote of the Members has been obtained, in
respect of such specific matter. Members holding an aggregate of fifty-one
percent (51%) or more of the Percentage Interests shall constitute a quorum at
all meetings of the Members for the transaction of business, and the Vote of
Members shall be required to approve any action, unless a greater vote is
required or a lesser vote is provided for by this Agreement or by the Law.
7.8. Non-Solicitation. At all times while a Member and for a period of one
(1) year thereafter, each Member and each of its affiliates and successors agree
that it shall not hire or solicit for employment or for service as a contractor,
any employee or contractor of PRI or its affiliates or any Third Party Manager
(collectively, the "PRI Parties"), while such individual is employed by or under
contract with any of the PRI Parties and for a period of 180 days thereafter.
The Members acknowledge and agree that monetary damages arising from a breach of
this provision would be inadequate and difficult to ascertain and would cause
the Company, Manager and Third Party Managers irreparable harm. Each Member
therefore agrees that in the event it breaches this provision, the Company,
Manager and/or Third Party Managers shall be entitled to such temporary and
permanent injunctive relief in addition to any other remedies, including
monetary damages, to which they may be entitled.
8. Restrictions On Transfer, Admission Of New Members
8.1. Right of First Refusal.
8.1.1. If a Member desires to sell or transfer its Interests (the
"Selling Interests"), such Member shall give written notice (the "Transfer
Notice") to Manager setting forth the proposed purchaser's name, the terms on
which the Interests are to be sold or exchanged, and the purchase price. Only
bona fide sales or exchanges are permitted.
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8.1.2. The Manager shall have the right to purchase the Selling
Interests on the same terms as the terms of the bona fide offer set forth in the
Transfer Notice. Within twenty (20) days of Manager receiving the Transfer
Notice, Manager must exercise its option to acquire the Selling Interests. In
the event the Manager does not exercise its option to acquire the Selling
Interests, for any reason, then the Company Gate shall have a right of first
refusal to acquire the Selling Interests upon the terms set forth in the
Transfer Notice for ten (10) days. In no event can the Company or the Manager
purchase less than the entire interest of the offering Member.
8.1.3. If the Managers and Front Range do not exercise their right to
purchase the offered Interests, the offering Member may within thirty (30) days
after the Company fails to acquire the Selling Interests, and on the terms and
conditions stated in the Transfer Notice, sell or transfer the Selling Interests
to the purchaser named in the notice.
8.2. Transfers In General. Except as otherwise set forth in this Section, a
Member shall not sell, assign, transfer, pledge or hypothecate ("Transfer") all
or any portion of their Interests in Front Range except as follows:
A. Without the written consent of Manager, which consent may be
unreasonably withheld;
B. Subject to the right of first refusal set forth in Section 8.1
above;
C. Such Transfer is with respect to a whole Interests;
D. Such Transfer, when aggregated with any prior Transfers of
Interests, does not result in a sale or exchange within a 12-month period of
fifty percent (50%) or more of the total Interests in Front Range's capital and
profits within the meaning of Section 708(b) of the IRC;
E. The purchaser or transferee or assignee of the Interests
executes, acknowledges, and delivers to Manager such instruments of transfer and
assignment with respect to such transaction as are in form and substance
satisfactory to Manager;
F. Unless the transfer is to the heirs, devises or legatees of a
deceased Member, such Member delivers to Manager an opinion of counsel
satisfactory to Manager's counsel that the Interests may be sold in reliance on
an exemption from such registration requirements; and,
G. Such Member reimburses Front Range for all expenses of the
Company in connection with such transaction (which, in no case will such fee be
less than Five Hundred Dollars ($500) per Interest).
8.3. Substituted Member. If the Person acquiring Interests from any Member
elects to be admitted as a substituted Member with full rights of a Member, such
Person must (i) deliver written notice of such election to the Manager; (ii)
execute, and deliver to Front Range such other instruments as Manager may deem
necessary or advisable to effect the admission of such person as a substituted
Member, and (iii) secure the consent of the Manager which consent shall not be
unreasonably withheld.
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8.4. Heirs. Devises And Legatees. The heirs, devises and legatees of a
deceased Member shall have the rights of a transferee of a Member, subject to
administration of such deceased Member's estate, and may become a substituted
Members in lieu of the deceased Member upon the consent of Manager and
compliance with the conditions of Section 8 hereof.
8.5. Distributions And Allocations In Respect To Transferred Interests. If
any Interest is sold, assigned or transferred during any accounting period in
compliance with the provisions of this Section, profits, losses, each item
thereof and all other items attributable to such Member's interest shall be
divided and allocated between the transferor and the transferee by taking into
account their varying interests during the period In accordance with IRC Section
706(d), using any conventions permitted by law and selected by Manager. All
distributions on or before the date of such transfer shall be made to the
transferor, and all distributions thereafter shall be made to the transferee.
8.6. Consequences of Actions in Violation of this Section 8. If a Member at
any time attempts to sell, assign, transfer, pledge, hypothecate, mortgage,
encumber or otherwise dispose of his or her Interests or any part thereof in
violation of the provisions of this Article, no assignee, transferee or pledgee
thereof, or holder of the mortgage or encumbrance with respect thereto, shall be
deemed a substituted Member, or have any right or interest in such Interests, or
rights therein, and any purported Transfer shall be void ab initio.
8.7. Conditions Precedent to Membership.A Person shall not be a Member
until (i) the Manager shall have approved the admission of such proposed Member;
(ii) the Capital Contribution required of such Person shall have been made; and
(iii) such Person has become a party to this Agreement.
9. Books, Records, Reports And Bank Accounts
9.1. Maintenance of Books and Records. The books and records of Front Range
shall be maintained in accordance with generally accepted accounting principles,
and for financial reporting purposes, shall be kept on the accrual method of
accounting applied in a consistent manner and shall reflect all transactions of
Front Range and be appropriate and adequate for the purposes of Front Range.
9.2. Records. The following shall be maintained at the principal office of
the Company:
A. A current list of the full name and last known business or
residence address of each Member and of the Manager, set forth in alphabetical
order, together with the Capital Contributions and share in Net Profits and Net
Loss of each Member;
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B. A copy of the Articles of Organization and any amendments
thereto, together with any powers of attorney pursuant to which the Articles of
Organization and any amendments thereto were executed;
C. Copies of Front Range's federal, state and local income tax or
information returns and reports, if any, for the six most recent Fiscal Years;
D. A copy of this Agreement and any amendments thereto, together
with any powers of attorney pursuant to which this Agreement and any amendments
thereto were executed;
E. Copies of the financial statements of Front Range, if any, for
the six most recent Fiscal Years;
F. Front Range's books and records as they relate to the internal
affairs of Front Range for at least the current and past four Fiscal Years;
G. Originals or copies of all minutes, actions by written
consent, consents to action and waivers of notice to Members and of an vote,
actions and consents; and
H. Any other information required to be maintained by Front Range
pursuant to the Law.
9.3. Annual Accounting. Within 120 days after the close of each Fiscal Year
of Front Range, the Manager shall (i) cause to be prepared and submitted to each
Member a balance sheet and income statement for the preceding Fiscal Year (or
portion thereof) in conformity with generally accepted accounting principles and
(ii) provide to the Members all information necessary for them to complete
federal and state tax returns.
9.4. Inspection and Audit Rights. Each Member has the right upon reasonable
request, for purposes reasonably related to the interest of that Person, to
inspect and copy during normal business hours any of Front Range books and
records required to be maintained in accordance with Section 9. Such right may
be exercised by the Person or by that Person's agent or attorney. Any Member may
require a review and/or audit of the books, records and reports of Front Range.
The determination of the Manager as to adjustments to the financial reports,
books, records and returns of Front Range, in the absence of fraud, shall be
final and binding upon Front Range and all of the Members. The inspecting Member
shall not use the information maintained for any commercial or business purpose,
and will keep all information obtained as confidential.
9.5. Rights of Members. Upon the request of a Member, for purposes
reasonably related to the interest of that Person, the Manager shall promptly
deliver to the Member, at the expense of Front Range, a copy of this Agreement
and a copy of the information listed in Section 9 hereof.
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9.6. Bank Accounts. The bank accounts of Front Range shall be maintained in
such banking institutions as the Manager shall determine, including any bank
with which the Manager or an Affiliate does business.
10. Termination And Dissolution
10.1. Dissolution. Front Range shall be dissolved upon the first to occur
of any of the following events:
A. When the Period of Duration of Front Range expires;
B. The Vote of the Members to dissolve Front Range;
C. The death, withdrawal, resignation, expulsion, bankruptcy or
dissolution of the Manager or the occurrence of any other event which terminates
the Manager's continued membership in Front Range, unless the business of Front
Range is continued by the unanimous vote of all remaining Members within ninety
(90) days of the happening of that event; or
D. If legislation is enacted, regulations promulgated in final
form, or there is an administrative or judicial interpretation of law that
renders it illegal or impractical for Front Range to operate profitably. The
Manager may rely upon the written opinion of an attorney or law firm that
specializes in health care matters in making this determination.
10.2. Statement of Intent to Dissolve. As soon as possible after the
occurrence of any of the events specified in Section 10.1 above, Front Range
shall execute a Statement of Intent to Dissolve in such form as prescribed by
the Secretary of State.
10.3. Conduct of Business. Upon the filing of the Statement of Intent to
Dissolve with the Secretary of State, Front Range shall cease to carry on its
business, except insofar as may be necessary for the winding up of its business,
but Front Range's separate existence shall continue until the Articles of
Dissolution have been filed with the Secretary of State or until a decree
dissolving Front Range has been entered by a court of competent jurisdiction.
10.4. Distribution of Net Proceeds. Net Profits and Losses, and Available
Cash Flow shall be distributed to Members during the winding-up period in the
same manner and the same priorities as provided for in Articles 4 and 5 hereof.
10.5. Proceeds of Liquidation.
10.5.1. The proceeds from the liquidation of Property shall be applied
in the following order (i) to the payment of creditors, in the order of priority
as provided by law, except to Members on account of their contributions; (ii) to
the payment of loans or advances that may have been made by Manager for working
capital or other requirements of Front Range; and finally (iii) to the Members,
in accordance with the positive balances in their Capital Accounts, after
adjustments for all allocations of Net Profits and Net Loss of the Members.
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10.5.2. Where the distribution pursuant to this Section 10.4 consists
both of cash (or cash equivalents) and non-cash assets, the cash (or cash
equivalents) shall first be distributed, in a descending order, to fully satisfy
each category starting with the most preferred category above. In the case of
non cash assets, the distribution values are to be based on the fair market
value thereof as determined in good faith by the liquidator, and the shortest
maturity portion of such non-cash assets (e.g., notes or other indebtedness)
shall, to the extent such non-cash assets are readily divisible, be distributed,
in a descending order, to fully satisfy each category above, starting with the
most preferred category.
11. Indemnification
11.1. Indemnification of Manager.
11.1.1. Front Range shall indemnify, to the broadest extent permitted
by California law, and hold harmless the Manager and each of its officers,
directors, shareholders, attorneys-at-law or in-fact, affiliates,
representatives, agents and employees (the "Indemnitees") from any loss,
liability or damage (including reasonable attorney's fees which shall be paid as
incurred) incurred or suffered by Manager or Indemnitee by reason of any act
performed or omitted to be performed by Manager or its Indemnitees in connection
with the Business of Front Range. This indemnification specifically includes but
is not limited to any claim against the Manager (i) by the Members; (ii) as a
result of any claim or claims that the Manager is liable as such for any Front
Range obligation which Front Range is unable to pay; and (iii) relating to any
liability or damage incurred by reason of any act performed or omitted to be
performed by the Manager in connection with the business of Front Range,
including all such liabilities under federal and state securities laws, the
fullest extend permitted by law.
11.1.2. All judgments or other assessments against Front Range and the
Manager and/or Indemnitees for which the Manager and/or Indemnitees are entitled
to indemnification shall be first satisfied from Front Range assets before the
Manager or Indemnitees shall be required to satisfy such liability or
obligation; provided, however, that such indemnification or agreement to hold
harmless shall be recoverable only out of Front Range assets and not from the
Members.
11.1.3. Any indemnification required to be made by Front Range shall
be made promptly following the determination by a final judgment of any court,
settlement, contract or otherwise of the loss, liability or damage incurred or
suffered by Manager and/or Indemnitees.
11.1.4. The Manager and Indemnitees shall not be liable to Front Range
for any loss, liability or damage suffered or incurred by Front Range, directly
or indirectly, in connection with their activities; provided that the action of
a the Manager or Indemnitee entitled to indemnification did not constitute fraud
(however, until there is a judicial determination of fraud, the indemnification
and defense shall be provided to Manager and Indemnitees).
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11.1.5. Expenses incurred by Manager or an Indemnitee in defending any
claim, demand, action, suit or proceeding subject to Section 11.1 shall, from
time to time, be advanced by Front Range prior to the final disposition of such
claim, demand, action, suit or proceeding upon receipt by Front Range of a
written agreement by or on behalf of the Manager or Indemnitee that it shall
repay any amounts to which it shall be determined that such Person is not
entitled to be indemnified.
11.1.6. The indemnification provided by Section 11.1 shall be in
addition to any other rights to the Manager and/or Indemnitee may be entitled
under any agreement, Vote of the Members, as a matter of law or equity or
otherwise, both as to action in the Indemnitee's capacity as a Member, as an
Affiliate or as an officer, director, employee, agent or Principal of a Member
and as to any action in another capacity, and shall continue as to an Indemnitee
who has ceased to serve in such capacity and shall inure to the benefit of the
heirs, successors, assigns and administrators of the Indemnitee.
11.2. Insurance. Front Range may purchase and maintain insurance, at Front
Range's expense, on behalf of the Members and such other Persons as the Members
shall determine, against any liability that may be asserted against, or any
expense that may be incurred by, such Person in connection with the activities
of Front Range and/or the Manager's and/or Members' acts or omissions would have
the power to indemnify such Person against such liability under the provisions
of this Agreement.
11.3. Assets of the Company. Any indemnification shall be satisfied solely
out of the assets of Front Range. No Member shall be subject to personal
liability or required to fund or to cause to be funded any obligation by reason
of these indemnification provisions.
12. Issuance Of Certificates
12.1. Issuance of Certificates. The Interest of each Member shall be
represented by a Front Range Certificate. Upon the execution of this Agreement
and the payment of the Capital Contributions by a Member, the Manager shall
cause Front Range to issue one or more Front Range Certificates in the name of
each Member certifying that the Person named therein is the record holder of
Front Range Units set forth therein. For purposes of this Agreement, the term
"record holder' shall mean the person whose name appears in the books and
records of Front Range.
12.2. Transfer of Certificates. A Front Range Interest which is transferred
in accordance with the terms of this Agreement shall be transferable on the
books of Front Range by the record holder thereof in person or by such record
holders duly authorized attorney, but, except as provided in Section 12.3 hereof
with respect to lost, stolen or destroyed certificates, no transfer of a Front
Range Interest shall be entered until the previously issued Front Range
Certificate representing such Front Range Interest shall have been surrendered
to Front Range and cancelled and a replacement Front Range Certificate issued to
the assignee of such Front Range Interest in accordance with such procedures as
the Manager may establish. The Manager shall issue to the transferring Member a
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new Front Range Certificate representing Front Range Units not being transferred
by the Member, in the event such Member only transferred some, but not all, of
Front Range Units represented by the original Front Range Certificate. Except as
otherwise required by law, Front Range shall be entitled to treat the record
holder of a Front Range Certificate on its books as the owner thereof for all
purposes regardless of any notice or knowledge to the contrary.
12.3. Lost, Stolen or Destroyed Certificates.
12.3.1. Front Range shall issue a new Front Range Certificate in place
of any Front Range Certificate previously issued if the record holder of Front
Range Certificate:
A. Provides proof by affidavit, in form and substance
satisfactory to the Manager, that a previously issued Front Range Certificate
has been lost, destroyed or stolen;
B. Requests the issuance of a new Front Range Certificate before
Front Range has notice that Front Range Certificate has been acquired by a
purchaser for value in good faith and without notice of an adverse claim;
C. If requested by the Manager, delivers to Front Range a bond,
in form and substance reasonably satisfactory to the Manager, with such surety
or sureties and with fixed or open penalty as the Manager may direct, in his
reasonable discretion, to indemnify Front Range against any claim that may be
made on account of the alleged loss, destruction or theft of Front Range
Certificate; and
D. Satisfies any other reasonable requirements imposed by the
Manager.
12.3.2. If a Member fails to notify Front Range within a reasonable
time after it has notice of the loss, destruction or theft of a Front Range
Certificate, and a transfer of Front Range Interest represented by Front Range
Certificate is registered before receiving such notification, Front Range shall
have no liability with respect to any claim against Front Range for such
transfer or for a new Front Range Certificate.
13. Amendments
13.1. Amendment. This Agreement may be adopted, altered, amended, or
repealed and a new operating agreement may be adopted by a Vote of the Members.
13.2. Amendment of the Articles of Organization. In no event shall the
Articles of Organization be amended without the Vote of Members.
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14. Investment Representations
14.1. Representations. Each Member hereby represents and warrants to and
covenants with the Manager and Front Range as follows:
14.1.1. The Percentage Interests, and any and all rights related to
Front Range acquired hereby has been acquired in good faith for the personal
account of the Member, and not with a view to or for sale in connection with any
distribution thereof.
14.1.2. The Member meets the Suitability Standards described in
Section 14.1(c) hereof, and in any event, either (i) has a pre-existing personal
or business relationship with Manager, or any of its officers, directors or
controlling Persons of the Manager, or (ii) by reason of the Member's business
and financial experience or the business and financial experience of his
professional advisor who is not affiliated with and who is not compensated by
Front Range, the Manager or either of their affiliates, directly or indirectly,
can be reasonably assumed to have the capacity to protect his own interest in
connection with his investment in Front Range and can bear the loss of their
entire investment.
14.1.3. If an individual, the Member is at least 21 years of age and
meets the following financial suitability requirements (which are intended to
mirror the "accredited investor" rules under Regulation D):
A. Any natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that person's
spouse in excess of $ 300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year; or
B. An individual (or jointly with his/her spouse) whose net worth
is more than $1 million (exclusive of home and automobile) at the time of the
purchase; or
C. Any ERISA plan the investment decision is made by a plan
fiduciary, which is either a bank, savings and loan association, insurance
company, or registered investment adviser, or if the plan has total assets in
excess of $ 5,000,000 or, if a self-directed plan, with investment decisions
made solely by persons that are accredited investors; or
D. Any trust, with total assets in excess of $5,000,000, that is
not formed for the specific purpose of acquiring the securities offered, whose
purchase is directed by a sophisticated person as described in Regulation D Rule
506(b)(2)(ii); or
E. A California or Utah corporation, partnership or limited
liability company, all of the shareholders/members of which are persons
described in clause "A." through "D.", above.
14.1.4. The Members and each of them has been reasonably provided with
full and complete access to all agreements, leases, documents, plans,
specifications, financial information and the like as they have requested
(collectively referred to as "Documents"); the Manager has made available to the
Members all Documents, and has answered the satisfaction of the foregoing
persons all questions of the foregoing persons, and Members have been
represented by, and have consulted with, competent and experienced accounting,
business and legal advisors of their own choosing in negotiating the terms of
this Agreement and in investigating the proposed activities of Front Range.
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A. That their respective interests in Front Range are being
acquired for investment purposes and that they are not acquiring the same with a
view toward the sale or distribution thereof. In furtherance of this
representation, all Members acknowledge that Front Range Interests have not been
registered under the Securities Act of 1933, as amended (the "1933 Act") in
reliance on the exemptions afforded by Section 4(2) of the 1933 Act (and the
rules promulgated thereunder), and the private offering exemption of the
California Corporations Code set forth in Section 25102(f) and Utah Law
61-1-14(2)(n) [non-public offering exemption]. Therefore, to preserve said
exemptions and notwithstanding anything contained herein to the contrary, the
Members hereby agree that interests of the Member shall be nontransferable and
nonassignable, except in compliance with registration provisions of the 1933
Act, or an exemption or exemptions therefrom, and in compliance with (or
exemptions from) California and Utah securities laws and rules and regulations
promulgated thereunder, and any attempted or purported transfer or assignment in
violation of the foregoing shall be void and of no effect;
B. Accordingly, as an additional condition precedent to any
assignment or other transfer of any interest in Front Range, the Manager may
require an opinion of counsel satisfactory to the Manager that such assignment
or transfer will be made in compliance with the registration provisions of the
1933 Act or exemption(s) therefrom, and in compliance with (or exemption from)
applicable state securities laws and rules and regulations promulgated
thereunder, and such transferor or assignor shall be responsible for paying said
counsel's fee for the opinion. The foregoing shall not limit the restrictive
legend set forth at the beginning of this Agreement.
15. Conflicts Of Interest
15.1. Independent Activities. Notwithstanding anything in Section 15.3 to
the contrary, Manager, PRI, and each of their officers, directors, shareholders
and Affiliates (collectively the "Managing Parties") may engage in whatever
activities each may choose, whether the same are competitive with Front Range or
otherwise, without having or incurring any obligation to offer any interest in
such activities to Front Range or to any Member. Neither this Agreement nor any
activity undertaken pursuant hereto shall prevent the Managing Parties from
engaging in such activities, or require the Managing Parties to permit Front
Range or any Member to participate in any such activities, and as a material
part of the consideration for the execution of this Agreement by the Manager and
the admission of each Member, each Member hereby waives, relinquishes and
renounces any such right or claim of participation.
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15.2. Investment Opportunities. Neither the Manager, its officers,
directors, shareholders, nor any Affiliate of the Manager shall be obligated to
present any particular investment opportunity to Front Range, or to any Member
even if the opportunity is of a character which, if presented to Front Range or
the Member could be taken by Front Range or the Member, and Manager and/or its
officers, directors, shareholders, and Affiliates have the right to take for its
own account or to recommend to others any investment opportunity, and each
Member hereby waives any and all rights he may have in such opportunity, or as
against Manager, its officers, directors, shareholders, and Affiliates to
personally taking such opportunity without sharing it with Front Range or the
Members.
15.3. Competition. No Member nor any of the Member's officers, directors,
shareholders, or Affiliate may own, or operate any laser that is competitive
with the lasers owned by Front Range. It is specifically provided however, that
no Member nor any Affiliate of a Member is under any obligation whatsoever to
refer patients to any company or facility in which a laser owned or leased by
the Company is sited.
16. Miscellaneous Provisions
16.1. Additional Documents. Each Member, upon the request of the Manager,
agrees to perform all further acts and execute, acknowledge and deliver all
documents which may be reasonably necessary, appropriate or desirable to carry
out the provisions of this Agreement, including but not limited to acknowledging
before a notary public any signature heretofore or hereafter made by a Member.
16.2. Arbitration.
16.2.1. Any Member may require the arbitration of any dispute between
Members or between a member and the Manager arising under or in connection with
this Agreement or any related agreement. Such Member may initiate and require
arbitration by giving notice to the other parties specifying the matter to be
arbitrated. If legal action is already pending on any matter concerning which
the notice is given, the notice shall not be effective unless given by the
defendant therein and given before the expiration of twenty (20) days after
service of process on the person giving the notice. Except as provided to the
contrary in these provisions on arbitration, the arbitration shall be in
conformity with and subject to applicable rules and procedures of the American
Arbitration Association ("AAA"). If AAA is not then in existence and there is no
successor, or if for any reason AAA fails or refuses to act, the arbitration
shall be in conformity with and subject to the provisions of applicable
California statutes (if any) relating to arbitration at the time of the notice.
The arbitrators shall be bound by this agreement and all related agreements.
Pleadings in any action pending on the same matter shall, if arbitration is
required as aforesaid, be deemed amended to limit the issues to those
contemplated by the rules prescribed above. Each Member shall pay the costs of
arbitration, including arbitrator's fees, as awarded by the arbitrator(s). The
number and selection of arbitrator(s) shall be in accordance with the rules
prescribed above, except that (i) each arbitrator selected shall be neutral and
familiar with the principal subject matter of the issues to be arbitrated, such
as, by way of example, real estate development, or real estate management, or
such other subject matter as may be at issue, (ii) the testimony of witnesses
shall be given under oath, and (iii) depositions and other discovery may be
ordered by the arbitrator(s).
29
16.2.2. BY SUBSCRIBING TO THE INTERESTS, AND BECOMING A MEMBER, YOU
ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE
'ARBITRATION OF DISPUTES' PROVISION DECIDED BY NEUTRAL ARBITRATION AND YOU ARE
GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT
OR JURY TRIAL. EACH MEMBER GIVES UP THEIR JUDICIAL RIGHTS TO DISCOVERY AND
APPEAL, UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN THE ARBITRATION OF
DISPUTES' PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO
THIS PROVISION YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE
APPLICABLE STATE STATUTE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS
VOLUNTARY.
16.3. Attorney's Fees. In the event of any litigation, arbitration or other
dispute arising as a result of or by reason of this Agreement, the prevailing
party in any such litigation, arbitration or other dispute shall be entitled to,
in addition to any other damages assessed, its reasonable attorneys' fees, and
all other costs and expenses incurred in connection with settling or resolving
such dispute. The attorneys' fees which the prevailing party is entitled to
recover shall include fees for prosecuting or defending any appeal and shall be
awarded for any supplemental proceedings until the final judgment is satisfied
in full. In addition to the foregoing award of attorneys' fees to the prevailing
party, the prevailing party in any lawsuit or arbitration procedure on this
Agreement shall be entitled to its reasonable attorneys' fees incurred in any
post judgment proceedings to collect or enforce the judgment. This attorneys'
fees provision is separate and several and shall survive the merger of this
Agreement into any judgment.
16.4. Confidentiality. The Members hereby agree that it is in all of their
best interests to keep this Agreement and all financial information concerning
the business of the Company confidential.
16.5. Construction. The language in all parts of this Agreement shall be in
all cases construed simply according to its fair meaning and not strictly for or
against any of the Members.
16.6. Counterparts. This Agreement may be executed in several counterparts,
and all counterparts so executed shall constitute one Agreement, binding on all
of the parties hereto, notwithstanding that all of the parties are not signatory
to the original or the same counterpart.
16.7. Entire Agreement. This Agreement, the Management Agreement, and the
Articles of Organization constitute the entire agreement of the Members with
respect to, and supersede all prior written and oral agreements, understandings
and negotiations with respect to, the subject matter hereof.
30
16.8. Further Actions. Each of the Members agrees to execute, acknowledge
and deliver such additional documents, and take such further actions, as may
reasonably be required from time to time to carry out each of the provisions,
and the intent, of this Agreement, and every agreement or document relating
hereto, or entered into in connection herewith.
16.9. Governing Law. This Agreement shall be construed according to the
laws of the State of California.
16.10. Notice. Except for notices to be given under Articles 6 and 7 for
purposes of meetings of Managers and meetings of Members, any notice or other
communication required or permitted hereunder shall be in writing and shall be
deemed to have been given if personally delivered, transmitted by facsimile
(with mechanical confirmation of transmission), or deposited in the United
States mail, registered or certified, postage prepaid, addressed to the parties'
addresses set forth below. Notices given in the manner provided for in this
Section 16.10 shall be deemed effective on the third day following deposit in
the mail or on the day of transmission or delivery if given by facsimile or by
hand. Notices must be addressed to the parties hereto at such address as is
indicated that their subscription agreement, or such address as Front Range
mails the tax information for a Member. Notices to the Manager shall be
addressed to the office of Front Range.
16.11. No Partition. The Members agree that the Property that Front Range
may own or have an interest in is not suitable for partition. Each of the
Members hereby irrevocably waives any and all rights that it may have to
maintain any action for partition of any Property Front Range may at any time
have an interest in.
16.12. Pronouns and Plurals. Whenever the context may require, any pronoun
used in this Agreement shall include the corresponding masculine, feminine and
neuter forms, and the singular form of nouns, pronouns and verbs shall include
the plural and vice versa.
16.13. Section Headings. The captions of the Articles or Sections in this
Agreement are for convenience only and in no way define, limit, extend or
describe the scope or intent of any of the provisions hereof, shall not be
deemed part of this Agreement and shall not be used in construing or
interpreting this Agreement.
16.14. Severability. In the event any Section, or any sentence within any
Section, is declared by a court of competent jurisdiction to be void or
unenforceable, such sentence or Section shall be deemed severed from the
remainder of this Agreement and the balance of this Agreement shall remain in
full force and effect.
16.15. Survival. This Agreement shall be binding upon, and, as to permitted
or accepted successors, transferees and assigns, inure to the benefit of the
Members and Front Range and their respective heirs, legatees, legal
representatives, successors, transferees and assigns, in all cases whether by
the laws of descent and distribution, merger, reverse merger, consolidation,
sale of assets, other sale, operation of law or otherwise.
31
16.16. No Third Party Beneficiaries. There are no third party beneficiaries
of this Agreement.
16.17. Waiver No failure by any party to insist upon the strict performance
of any covenant, duty, agreement or condition of this Agreement or to exercise
any right or remedy consequent upon a breach thereof shall constitute a waiver
of any such breach or any other covenant, duty, agreement or condition.
16.18. Waiver of Jury. With respect to any dispute arising under or in
connection with this agreement or any related agreement, as to which no member
invokes the right to arbitration herein above provided, or as to which legal
action nevertheless occurs, each member hereby irrevocably waives all rights it
may have to demand a jury trial. This waiver is knowingly, intentionally, and
voluntarily made by the members and each member acknowledges that none of the
other members nor any person acting on behalf of the other parties has made any
representation of fact to induce this waiver of trial by jury or in any way to
modify or nullify its effect. The members each further acknowledge that it has
been represented (or has had the opportunity to be represented) in the signing
of this agreement and in the making of this waiver by independent legal counsel,
selected of its own free will, and that it has had the opportunity to discuss
this waiver with counsel. The members each further acknowledge that it has read
and understand the meaning and ramifications of this waiver provision.
IN WITNESS WHEREOF, the parties hereto have hereunto executed this
Agreement as of the date first written above.
PHYSIOLOGIC REPS INC. ("PRI")
By:_____________________________
Bruce J. Haber, Chairman
By: _____________________________
, Member
32
RE: Comment #5
- ---------------
Schedule 1.1(A)
Percentage Interests of Members
Name Percentage Interest Owned
- --------------------------------------------------------------------------------
Emergent Group Inc.
Stock Option Rollforward - Weighted Average Exercise Price
Year Ended December 31, 2004
Re: Comment #5
- --------------
------------------------------------------
Balance, January 1, 2003
------------------------------------------
Exercise Options Granted Cancelled
Price Outstanding Total # of Options Total $ # of Options Total $
---------------------------------------------------------------------------------------------------
Common Stock Options $ 0.40 271,151 108,460 226,701 90,680 26,683 10,673
$ 8.00 4,000 32,000
$ 40.00 14,625 585,000 4,000 160,000
$ 8.00 59,000 472,000
$ 40.00 1,875 75,000
$ 162.00 171 27,702
$ 27.20 1,114 30,301
---------------------------------------------------------------------------------------------------
351,936 1,330,463 226,701 90,680 30,683 170,673
Weighted Average Exercise Price 3.78 0.40 5.56
---------------------------------------------------------------------------------------------------
Per Form 10-KSB 0.02 0.40 5.66
-----------------------------------------
Balance, 12/31/03
-----------------------------------------
Exercise Options Granted Cancelled
Price Outstanding Total # of Options Total $ # of Options Total $
---------------------------------------------------------------------------------------------------
Common Stock Options $ 0.40 471,169 188,468 95,000 38,000 172,279 68,912
$ 8.00 4,000 32,000 4,000 32,000
$ 40.00 10,625 425,000 125 5,000
$ 8.00 59,000 472,000 52,500 420,000
$ 40.00 1,875 75,000
$ 162.00 171 27,702
$ 27.20 1,114 30,301 5 136
---------------------------------------------------------------------------------------------------
547,954 1,250,470 95,000 38,000 228,909 526,048
Weighted Average Exercise Price 2.28 0.40 2.30
--------------------------------------------------------------------------------------
Per Form 10-KSB 0.50 0.40 1.90
------------------------------------------
Balance, 12/31/04
------------------------------------------
Exercise Options Options
Price Outstanding Total Exercisable Total
---------------------------------------------------------------------
Common Stock Options $ 0.40 393,890 157,556 203,747 81,499
$ 8.00 0 0 0 0
$ 40.00 10,500 420,000 10,500 420,000
$ 8.00 6,500 52,000 6,500 52,000
$ 40.00 1,875 75,000 1,875 75,000
$ 162.00 171 27,702 171 27,702
$ 27.20 1,109 30,165 1,109 30,165
---------------------------------------------------------------------
414,045 762,423 223,902 686,366
Weighted Average Exercise Price 1.84 3.07
---------------------------------------------------------
Per Form 10-KSB 1.80 2.97