Exhibit 10.28
OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware Limited Liability Company

 

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TABLE OF CONTENTS
TO THE
OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware Limited Liability Company

         
ARTICLE I DEFINITIONS
    1  
 
       
ARTICLE II FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY
    2  
SECTION 2.1 Company Formation; Effective Date
    2  
SECTION 2.2 Name of Company
    2  
SECTION 2.3 Purposes and Business Objectives
    2  
SECTION 2.4 Statement of Philosophy and Values
    3  
SECTION 2.5 Registered Agent and Office; Principal Place of Business
    3  
SECTION 2.6 Commencement and Term
    4  
 
       
ARTICLE III MEMBERS AND CAPITAL CONTRIBUTIONS
    4  
SECTION 3.1 Initial Capital Contributions of Members
    4  
SECTION 3.2 Liability of Members — For Capital
    5  
SECTION 3.3 Maintenance of Capital Accounts; Withdrawals of Capital; Withdrawals
from the Company
    6  
SECTION 3.4 Interest on Capital Contributions or Capital Accounts
    6  
SECTION 3.5 Additional Funding
    6  
SECTION 3.6 Member Documentation
    7  
SECTION 3.7 Reserved Powers of Members
    8  
SECTION 3.8. Appointment of Board of Directors
    9  
SECTION 3.9 Obligations Relating to Real Property
    9  
SECTION 3.10 Involvement of Physician Members and/or Owners
    10  
 
       
ARTICLE IV NAMES AND ADDRESSES OF MEMBERS
    11  
 
       
ARTICLE V MANAGEMENT OF THE COMPANY
    11  
SECTION 5.1 General Authority and Powers of DCHMI and the Board of Directors
    11  
SECTION 5.2 Restrictions on Authority of the Board of Directors
    12  
SECTION 5.3 Duties of the Board of Directors
    13  
SECTION 5.4 Delegation by the Board of Directors
    14  
SECTION 5.5 Right to Rely Upon the Authority of the Manager
    14  
SECTION 5.6 Company Expenses
    14  
SECTION 5.7 No Management by Members
    17  
SECTION 5.8 Consent by Members to Exercise of Certain Rights and Powers by Board
of Directors
    17  
SECTION 5.9 Meetings, Quorum and Vote of the Board of Directors
    17  
SECTION 5.10 Other Business of Members
    18  
SECTION 5.11 Board of Directors’ Standard of Care
    21  

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SECTION 5.12 Limitation of Liability
    21  
SECTION 5.13 Indemnification of the Directors
    21  
SECTION 5.14 Purchase of Goods and Services from DCHMI
    22  
SECTION 5.15 Indemnity by the Company
    22  
SECTION 5.16 Force Majeure
    22  
 
       
ARTICLE VI DISTRIBUTIONS AND ALLOCATIONS
    23  
SECTION 6.1 Distributions of Cash Flow from Operations and Cash from Sales or
Refinancing
    23  
SECTION 6.2 Profits
    23  
SECTION 6.3 Losses
    24  
SECTION 6.4 Code Section 704(c) Tax Allocations
    24  
SECTION 6.5 Miscellaneous
    25  
SECTION 6.6 Special Allocations of Guarantee and Financing Fees
    25  
 
       
ARTICLE VII DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS
    25  
SECTION 7.1 No Termination by Certain Acts of Member
    25  
SECTION 7.2 Dissolution
    26  
SECTION 7.3 Dissolution and Final Liquidation
    27  
SECTION 7.4 Termination
    28  
SECTION 7.5 Payment in Cash
    28  
SECTION 7.6 Termination of Noncompetition Covenants
    28  
 
       
ARTICLE VIII REMOVAL OR WITHDRAWAL OF MEMBERS AND TRANSFER OF MEMBERS’
MEMBERSHIP AND/OR ECONOMIC INTERESTS
    28  
SECTION 8.1 Members — Restriction on Transfer
    28  
SECTION 8.2 Condition Precedent to Transfer of Membership Interest
    31  
SECTION 8.3 Substitute Member — Conditions to Fulfill
    31  
SECTION 8.4 Allocations Between Transferor and Transferee
    31  
SECTION 8.5 Rights, Liabilities of, and Restrictions on Assignee
    32  
SECTION 8.6 Repurchase of Interests in Certain Events
    32  
SECTION 8.7 Death of a Member
    33  
 
       
ARTICLE IX RECORDS, ACCOUNTINGS AND REPORTS
    33  
SECTION 9.1 Books of Account
    33  
SECTION 9.2 Access to Records
    34  
SECTION 9.3 Bank Accounts and Investment of Funds
    34  
SECTION 9.4 Fiscal Year
    34  
SECTION 9.5 Accounting Reports
    34  
SECTION 9.6 Tax Matters Partner
    35  
 
       
ARTICLE X MEETINGS AND VOTING RIGHTS OF MEMBERS
    35  
SECTION 10.1 Meetings
    35  
SECTION 10.2 Voting Rights of Members
    35  

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ARTICLE XI AMENDMENTS
    36  
SECTION 11.1 Authority to Amend by the Board of Directors
    36  
SECTION 11.2 Restrictions on the Board of Directors’ Amendments: Amendments by
Members
    37  
SECTION 11.3 Amendments to Certificate of Formation
    37  
 
       
ARTICLE XII MISCELLANEOUS
    37  
SECTION 12.1 Limited Power of Attorney
    37  
SECTION 12.2 Waiver of Provisions
    37  
SECTION 12.3 Interpretation and Construction
    38  
SECTION 12.4 Governing Law
    38  
SECTION 12.5 Partial Invalidity
    38  
SECTION 12.6 Binding on Successors
    38  
SECTION 12.7 Notices and Delivery
    38  
SECTION 12.8 Counterpart Execution; Facsimile Execution
    39  
SECTION 12.9 Statutory Provisions
    39  
SECTION 12.10 Waiver of Partition
    39  
SECTION 12.11 Change in Law
    39  
SECTION 12.12 Investment Representations of the Members
    40  
SECTION 12.13 Decisions by Directors
    41  
SECTION 12.14 Referrals to Hospital and Ownership of Shares of Common Stock of
MedCath Incorporated
    41  
SECTION 12.15 Acknowledgments Regarding Legal Representation
    42  
SECTION 12.16 Arbitration
    42  
SECTION 12.17 Exhibits
    42  
SECTION 12.18 Schedules
    43  

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OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware Limited Liability Company
     THESE SECURITIES ARE BEING ISSUED PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND THE ARIZONA SECURITIES ACT IN
RELIANCE UPON THE REPRESENTATION OF EACH PURCHASER OF THE SECURITIES THAT THE
SAME ARE BEING ACQUIRED FOR INVESTMENT PURPOSES. THESE SECURITIES MAY
ACCORDINGLY NOT BE RESOLD OR OTHERWISE TRANSFERRED OR CONVEYED IN THE ABSENCE OF
REGISTRATION OF THE SAME PURSUANT TO THE APPLICABLE SECURITIES LAWS UNLESS AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS FIRST OBTAINED THAT SUCH
REGISTRATION IS NOT THEN NECESSARY. ANY TRANSFER CONTRARY HERETO SHALL BE VOID.
     THIS OPERATING AGREEMENT (the “Agreement”) of Doctors Community Hospital,
LLC (the “Company”), a Delaware Limited Liability Company, is made and entered
into by and among Persons whose names, addresses and taxpayer identification
numbers are listed on the Information Exhibit (Exhibit A).
RECITALS
     A. The Company has been formed to develop, own and operate a general acute
care hospital which hospital shall be located in or near Kingman, Arizona and
shall provide inpatient and outpatient care, surgery and other services which
the Board of Directors may approve from time to time;
     B. It is intended that the Hospital will be an efficient, quality provider
of medical services within the greater Kingman, Arizona area;
     C. The Capital Contributions and active involvement of the Members are
necessary to enable the Company to achieve its objectives.
ARTICLE I
DEFINITIONS
     Unless otherwise indicated, capitalized words and phrases in this Operating
Agreement shall have the meanings set forth in the attached Glossary of Terms
(Exhibit B).

 

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ARTICLE II
FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY
     SECTION 2.1 Company Formation; Effective Date.
     The Company was formed upon the filing of the Certificate of Formation with
the Delaware Secretary of State in accordance with the provisions of the Act
which shall be the “Effective Date” of this Agreement. Upon the Effective Date,
the Persons listed on the attached Information Exhibit shall be admitted to the
Company as Members and the Persons who executed the Certificate of Formation
shall be withdrawn as Members (unless they are listed on the Information
Exhibit), all without the necessity of any further act or instrument and without
causing the dissolution of the Company. This Agreement shall be effective as of
the date the Company was formed.
     SECTION 2.2 Name of Company.
     The name of the Company is Doctors Community Hospital, LLC.
     SECTION 2.3 Purposes and Business Objectives.
     The principal purposes and business objectives of the Company are as
follows:
     (a) To develop, own and operate a general acute care hospital which
hospital shall be located in or near Kingman, Arizona and shall provide
inpatient and outpatient care, surgery and other services which the Board of
Directors may approve from time to time, which would include, but not be limited
to, the following:
     (i) Services and facilities to meet all requirements of the State of
Arizona, Medicare, Medicaid, the Joint Commission on Accreditation of Healthcare
Organizations (“JCAHO”) and other credentialing or licensing bodies or agencies
in order to have the Hospital licensed and provide services as a general acute
care hospital and to be eligible to obtain appropriate reimbursements therefor;
     (ii) Approximately 200,000 square feet in a building to be constructed in
accordance with plans and specifications approved by the Company’s Board of
Directors;
     (iii) Approximately seventy-two (72) medical/surgical beds (with expansion
space for thirty-three (33) additional beds);
     (iv) Heart catheterization laboratories;
     (v) Surgical suites with space for the development of additional surgical
suite;

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     (vi) All appropriate support services and systems; and
     (vii) Appropriate Equipment and services with respect to the facilities
described above and as otherwise reasonably necessary or appropriate for the
services to be provided by the Hospital.
     The above size, number and scope of facilities of the Hospital are only
preliminary estimates. The Board of Directors is authorized to finally make all
determinations with respect thereto.
     (b) To lease or acquire the real property, and to construct a suitable
building, where the Hospital shall be located;
     (c) Any other purpose reasonably related to (a) and (b) above.
     SECTION 2.4 Statement of Philosophy and Values.
     Notwithstanding anything in this Agreement to the contrary, the Company and
the Hospital shall be operated in accordance with the following philosophy and
values in all material respects:
     (a) The Hospital shall seek to participate in all public health care
financing programs applicable to its business including the Medicare and
Medicaid programs:
     (b) The Board of Directors shall adopt and oversee the adherence to the
policies of the Hospital, as they may be reasonably amended from time to time,
for providing care for those patients who are unable to pay for Hospital care;
     (c) The medical staff of the Hospital shall be open to any physician or
allied health professional who meets the qualifications stated in the Bylaws,
Rules and Regulations of the Medical Staff;
     (d) The Company shall adopt and adhere to a conflict of interest policy
with respect to contracts between the Company and Members or Directors;
     (e) All medical decisions and all policies and procedures relating to the
delivery of medical services at the Hospital shall be made by those physicians
who are members of the Hospital’s medical staff or qualified medical personnel
of the Hospital under the direction of such a physician as provided in the
Bylaws, Rules and Regulations of the Medical Staff.
     SECTION 2.5 Registered Agent and Office; Principal Place of Business.
     The registered agent and office of the Company shall be as indicated in the
Certificate of Formation, as amended from time to time. The principal place of
business of the Company shall

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be at such location in the greater Kingman, Arizona area as selected by the
Board of Directors from time to time. The Board of Directors shall promptly
notify the Members of any changes in the Company’s registered agent, registered
office, or principal place of business.
     SECTION 2.6 Commencement and Term.
     The Company commenced on the filing of the Certificate of Formation in the
Office of the Secretary of State of Delaware, as required by Section 2.1 hereof,
and shall continue until terminated as provided in this Agreement.
ARTICLE III
MEMBERS AND CAPITAL CONTRIBUTIONS
     SECTION 3.1 Initial Capital Contributions of Members.
     (a) The initial Capital Contributions of the initial Members listed on
Exhibit A attached hereto and incorporated by reference herein (the “Initial
Members”) shall equal Seventeen Million Five Hundred Thousand Dollars
($17,500,000).
     (b) Such initial Capital Contribution shall be made as follows:
     (i) DCHMI shall initially own at least a 66.6% Membership Interest in the
Company and shall contribute Eleven Million Six Hundred Fifty Thousand Dollars
($11,650,000.00) to the Company for its Membership Interest as its Capital
Contribution.
     (ii) The Investor Members shall initially own up to a 33.4% Membership
Interest and shall contribute up to Five Million Eight Hundred Fifty Thousand
Dollars ($5,850,000.00)(the “Investor Member Maximum”) to the Company for such
Membership Interests. A group of Investor Members have previously created an
organization and made substantial efforts to organize and develop the proposed
hospital. In that connection they have made expenditures and made commitments of
time which are valuable to the Company. These items will be assigned a value, as
determined by an independent third party appraiser firm (the “Development
Contribution”), which amount shall constitute a portion of the Investor Member
Maximum and which amount is not anticipated to exceed $240,000.
     (iii) Each Member shall contribute his, her or its initial Capital
Contribution (x) sixty percent (60%) in cash upon execution of a subscription
agreement for such Member’s Membership Interest and (y) forty percent (40%) in
cash (the “Second Payment”) payable upon Manager’s written notice thereof, which
amount shall be due approximately one hundred twenty (120) days prior to the
date that Manager anticipates that Hospital will be available for its first
patient

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treatment. A Member shall be issued and shall own the portion of Membership
Interest paid for by the Second Payment only when the Second Payment has been
made by the Member. In the event that a Member fails to deliver the Second
Payment in cash when due, DCHMI may elect on behalf of the Company either to
(i) cancel such Member’s subscription and to return the initial payment without
interest, (ii) institute a legal action to enforce the obligation to make the
Second Payment or (iii) maintain the subscription by such Member for a pro rata
portion of the Membership Interest to the extent of the 60% payment but only if
the amount of such initial 60% payment to the Company was $15,000 or more.
     In the event DCHMI contributes Real Property, as defined in Section 3.9, as
part of its Capital Contribution, the value of the property, based upon DCHMI’s
purchase price therefore, shall be applied first against DCHMI’s obligation
under (iii)(x) above.
     This subsection (iii) shall not apply to the Development Contribution, and
the Membership Interest related thereto shall be deemed fully issued upon
receipt of the Development Contribution.
     (iv) DCHMI shall have the right to purchase any portion of the Membership
Interest described in (ii) above which the Investor Members do not purchase by
July 1, 2007. If DCHMI purchases a portion of the Membership Interests described
in (ii) above initially offered to Investor Members, the Membership Interests
and aggregate Capital Contributions of DCHMI and the Investor Members shall be
adjusted proportionately.
     (c) The percentage Membership Interests of each Member shall be finally
determined by DCHMI at the end of the initial subscription period, but in no
event later than July 1, 2007, based upon the amount of initial Capital
Contributions then obligated to be made by each Member as a percentage of all
initial Capital Contributions then obligated to be made by all of the Members of
the Company (“Initial Percentage Membership Interest”). The Initial Percentage
Membership Interest of all Investor Members as of July 1, 2007 is referred to as
the “Total Initial Percentage Investor Membership Interest”. The percentage
Membership Interests shall be adjusted proportionally by DCHMI if any Member
fails to make the Second Payment.
     SECTION 3.2 Liability of Members — For Capital.
     The liability of each Member for capital shall be limited to the amount of
its agreed Capital Contribution as a Member as provided in Section 3.1 and
Section 3.5, except that the Members may be liable to the Company for amounts
distributed to them as a return of capital as provided by the Act. The Members
shall not be required to contribute any additional capital to the Company except
as provided in Section 3.5.

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     SECTION 3.3 Maintenance of Capital Accounts; Withdrawals of Capital;
Withdrawals from the Company.
     An individual Capital Account shall be maintained for each Member in
accordance with requirements of the Code and the Regulations promulgated
thereunder. No Member shall be entitled to withdraw or to make demand for
withdrawal of any part of its Capital Account or to receive any distribution
except as provided herein. Except as otherwise provided in this Agreement, each
Member shall look solely to the assets of the Company for the return of its
Capital Contributions and shall have no right or power to demand or receive
property other than cash from the Company. No Member shall have priority over
any other Member as to the return of its Capital Contributions, distributions or
allocations, except as provided in this Agreement.
     Except as otherwise provided herein, a Member may not withdraw from the
Company without the written consent of the Required Members. In no case shall a
Member have the right to require that his, her or its Membership Interest be
redeemed by the Company unless approved by the Required Members.
     SECTION 3.4 Interest on Capital Contributions or Capital Accounts.
     No interest shall be paid to any Member other than based solely on his, her
or its Capital Contributions or Capital Account. The preceding sentence shall
not prevent the Company from earning interest on its bank accounts and
investments and distributing such earnings to the Member in accordance with
Articles VI and VII.
     SECTION 3.5 Additional Funding.
     The Company is hereby authorized to borrow up to $50,280,000 for real
estate acquisition, construction costs and other development costs and up to
$9,412,000 for equipment and other related costs from DCHMI’s Affiliate, MedCath
Finance Company, LLC (“MFC”) which loans shall be secured by all of the assets
of the Company and which shall be based upon fair market value terms and
conditions as reasonably proposed by MFC (“MFC Loans”). DCHMI is authorized to
execute all necessary or appropriate loan agreements, collateral agreements and
promissory notes with MFC in order to document and close the MFC Loans. With the
approval of the Board of Directors (which determination shall not be
unreasonably withheld or delayed), the amounts of the MFC Loans may be increased
to reflect the actual costs to be incurred by the Company.
     If from time to time, the Board of Directors reasonably determines (which
determination shall not be unreasonably withheld or delayed) that funds in
addition to that contemplated by Sections 3.1, 3.2 and the first paragraph of
this Section 3.5 are necessary or appropriate for the development or operation
of the Hospital, then:
     (a) The Board of Directors may use commercially reasonable efforts to
borrow such funds from a bank, other lender or lessor on terms and conditions
reasonably acceptable to the Board of Directors. All loans obtained hereunder
shall be subject to the

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approval of the Board of Directors, which approval shall not be unreasonably
withheld or delayed.
     (b) On terms and conditions reasonably acceptable to the Board of
Directors, MFC may elect, but shall not be obligated, to make loans to the
Company in an amount to be agreed upon by the Company and MFC with market rates
of interest which loans shall be secured by all of the Company’s assets;
     (c) If loans as provided above in (a) or (b) are not available or its
apparent that efforts to seek such financing are not likely to be successful,
the Board of Directors shall request, but not require, that Members make
additional Capital Contributions on a pro rata basis. The other Members may
elect, pro rata, to contribute optional Capital Contributions not made by any
other Member hereunder. Thereafter, DCHMI shall reasonably adjust the percentage
Membership Interest of each Member (based on the aggregate of all Capital
Contributions made by all of the Members in accordance with this Agreement) in
the event any Member elected not to make optional Capital Contributions pursuant
to this Section 3.5(c); and
     (d) Forth, if adequate funds have not been obtained or raised in accordance
with (a) through (c) above, then the Board of Directors may elect to dissolve
the Company provided, however, if any Members or any of their Affiliates
(i) have any outstanding loans to the Company or are committed to provide such
loans or (ii) are providing a guaranty or are committed to provide a guaranty
for any indebtedness of the Company, then only those Members alone upon approval
of a majority of such Members (determined based upon their Membership
Interests), upon at least fifteen (15) days prior written notice to the other
Members, shall be entitled to so dissolve the Company due to the Company not
having sufficient funds to meet its financial obligations or liabilities as they
come due.
     SECTION 3.6 Member Documentation.
     Prior to the execution of this Agreement, each Investor Member that is an
Entity and each Entity with a direct or indirect ownership interest in an
Investor Member (each, an “Investor Entity”), if any, shall have delivered to
DCHMI copies of all documents, instruments and agreements related to the
formation, ownership and governance of the Investor Entities (the “Investor
Documents”). None of the Investor Documents will be altered or amended without
the consent of DCHMI, which consent shall not be unreasonably withheld.
Contemporaneously with the Investor Members’ admission as Members of the
Company: (i) the Investor Entities shall each execute an Addendum to
Subscription Agreement under which, among other things, they agree to be bound
by the terms and conditions of Section 5.10 hereof, and no additional Investor
Entities shall be admitted as owners of a Member unless such Investor Entities
executes an Addendum to Subscription Agreement; and (ii) the Owners shall each
execute an Addendum to Subscription Agreement under which, among other things,
those individuals agree to be personally bound by the terms and conditions of
Section 5.10 hereof. Additionally (unless such requirement is waived by the
Board of Directors), Owners who are physicians (or their Practices) shall also
execute a Hospital Professional Services Agreement and Right of First Refusal

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Agreement with the Company. No Person shall be admitted hereafter as an owner of
the Investor Members or Investor Entities unless such Person also executes such
Addendum to Subscription Agreement, the Hospital Professional Services Agreement
and the Right of First Refusal Agreement (Owners who are physicians or their
Practices only) so that they are bound thereby to the same extent as are Owners
as of the date hereof.
     SECTION 3.7 Reserved Powers of Members.
     The following actions are the only actions which can be taken by the
Members and shall require the consent of the Required Members, either by a vote
of the Required Members at a meeting of the Members or by the written consent of
the Required Members:
     (a) Except as provided in Section 11.1, amendments to the Certificate of
Formation of the Company or this Agreement;
     (b) A merger, consolidation, liquidation, or similar reorganization or
transfer of a substantial portion of the Company’s assets; provided, however,
that if the Investor Members fail to own at such time, in the aggregate, at
least a percentage Membership Interest of the Company equal to the Total Initial
Percentage Investor Membership Interest, the Investor Members and the members of
the Board of Directors which they elect shall no longer have the right to vote
on a merger, consolidation, liquidation, or similar reorganization or transfer
of a substantial portion of the Company’s assets and Required Members for such
purpose shall mean only DCHMI;
     (c) A sale, lease encumbrance or other transfer of all or substantially all
of the Company’s assets, except for encumbrances incurred in connection with
loans or other financing provided to the Company; provided, however, that if the
Investor Members fail to own at such time, in the aggregate, at least a
percentage Membership Interest of the Company equal to the Total Initial
Percentage Investor Membership Interest, the Investor Members and the members of
the Board of Directors which they elect shall no longer have the right to vote
on a sale, lease encumbrance or other transfer of all or substantially all of
the Company’s assets and Required Members for such purpose shall mean only
DCHMI;
     (d) Admission of new Members to the Company other than those Members who
become Members in the offering described in the Confidential Private Placement
Memorandum dated March 16, 2007;
     (e) Any alteration or amendment of the Company’s Statement of Philosophy
and Values and Purposes and Business Objectives and any action which is
inconsistent with the Company’s Statement of Philosophy and Values and Purposes
and Business Objectives; and
     (f) Approval and authorization of disproportionate distributions or
allocations of profits, losses or assets of the Company, except as specifically
permitted elsewhere in this Agreement.

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     SECTION 3.8. Appointment of Board of Directors.
     The Members shall appoint a Board of Directors as follows:
     (a) DCHMI shall appoint four (4) Directors; provided, however, DCHMI may
elect at any time to reduce the number of its appointed Directors to less than
four (4) and thereafter to increase such number up to four (4) again; and
     (b) The Investor Members shall appoint four (4) Directors and each such
Director shall be an Investor Member or an Owner of an Investor Member;
provided, however, Investor Members may elect at any time to reduce the number
of its appointed Directors to less than four (4) and to increase such number up
to four (4) again.
     Subject to the foregoing, a Member or group of Members shall have the
right, with or without cause, to remove, substitute or replace any Director
which it or they appointed.
     The Directors shall have the voting rights set forth in Section 5.9 hereof.
     SECTION 3.9 Obligations Relating to Real Property.
     The Company intends to purchase real property located in Kingman, Arizona
(the “Real Property”) subject to the following:
     (a) DCHMI is hereby authorized to complete the purchase of such Real
Property on which the Hospital and a medical office building (“MOB”) would be
located, consisting of up to thirty-five acres in Kingman, Arizona for a
purchase price not to exceed approximately Five Million Three Hundred Thousand
($5,300,000), on behalf of the Company;
     (b) The Real Property contains sufficient acreage for the development by a
third party developer, which may include Investor Members, of a MOB adjacent to
the Hospital. DCHMI is authorized to sell the site for the MOB to a developer
reasonably approved by the Board of Directors based upon the fair market value
of such site and upon such other terms and conditions as reasonably approved by
the Board of Directors;
     (c) In the event that the Company acquires Real Property which exceeds that
which is necessary for the development of the Hospital and the MOB, DCHMI may
sell such excess property on behalf of the Company to a thirty party or to
Investor Members on fair market value terms; and
     (d) If Real Property is first acquired by DCHMI, DCHMI may contribute the
Real Property to the Company as part of DCHMI’s Capital Contributions made
pursuant to Section 3.1 (b)(i).

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     SECTION 3.10 Involvement of Physician Members and/or Owners.
     The nature of the services that Company has been formed to provide at the
Hospital contemplates the integral involvement of the Investor Members in the
performance of the services, and as such the involvement of Investor Members (or
if the Investor Member is an entity, its respective direct or indirect owners
who are physicians (“Physician Owners”)) in the functions required of them is a
condition of each Investor Member’s direct or indirect continued ownership in
the Company. All Investor Members and Physician Owners agree that they must be
eligible for active Medical Staff Membership at the Hospital and possess
education and training that enables them to perform the required physician
involvement activities. Further the Investor Members and Physician Owners hereby
agree to perform such functions and responsibilities as are reasonably assigned
to them by the Board of Directors taking into consideration the needs and
requirements of the Hospital which may include, but are not limited to, Investor
Member and Physician Owner participation in:
     (a) One or more task force(s) to establish and implement procedures for
performance improvement, utilization management, quality standards, and peer
review for the Hospital which shall in all events be performed under the
performance improvement and peer review function of the Hospital;
     (b) The evaluation of clinical competencies and performance evaluation
processes for patient care personnel performing services at the Hospital;
     (c) The evaluation of the impact of new and emerging technologies and
making recommendations for both new and existing technology to be offered at the
Hospital;
     (d) The development of clinical protocols, policies and procedures to be
implemented for the Hospital and the performance of periodic review and
evaluation of the same to make recommendations for necessary revisions;
     (e) The evaluation of supply utilization in the Hospital; and
     (f) The development and implementation of physician profiles for those
physicians practicing in the Hospital that would be reviewed and benchmarked
against available data for other hospitals.
     The Board of Directors hereby delegates to DCHMI the task of implementing a
system to monitor and document each Investor Member’s (or as applicable, the
Physician Owners) compliance with these involvement requirements as revised from
time to time, and the Manager shall have the authority to assign specific
functions and responsibilities to each Investor Member and Physician Owner.

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ARTICLE IV
NAMES AND ADDRESSES OF MEMBERS
     The names and addresses of the initial Members are as indicated on the
Information Exhibit attached hereto as Exhibit A, which may be amended by the
Manager on behalf of the Board of Directors from time to time.
ARTICLE V
MANAGEMENT OF THE COMPANY
     SECTION 5.1 General Authority and Powers of DCHMI and the Board of
Directors.
     (a) Except as set forth in those provisions of this Agreement that
specifically require the vote, consent, approval or ratification of the Members
and subject to (b) below, the Board of Directors shall have complete authority
and exclusive control over the management of the business and affairs of the
Company. Subject to the terms and conditions of this Agreement and except as
otherwise provided herein, all Material Agreements and Material Decisions with
respect to the business and affairs of the Company shall be approved or made by
the Board of Directors in accordance with this Section 5.1. No Member has the
actual or apparent authority to cause the Company to become bound in any
contract, agreement or obligation, and no Member shall take any action
purporting to be on behalf of the Company. No Director shall cause the Company
to become bound to any contract, agreement or obligation, and no Director shall
take any other action on behalf of the Company, unless such matter has received
the vote, consent, approval or ratification if, and as, required pursuant to
this Agreement with respect to such matter or except as provided below with
respect to the authority and actions of DCHMI.
     (b) The day-to-day management of the business and affairs of the Company
shall be the responsibility of DCHMI pursuant to the terms of the Management
Services Agreement, which management shall be subject to decisions, guidelines
and policies made or established by the Board of Directors hereunder, provided,
however, decisions relating to medical and clinical practice at the Hospital
shall be made exclusively by the qualified medical personnel of the Hospital
under the direction of a member of the Hospital’s medical staff.
     (c) The Members acknowledge that the Management Services Agreement is an
integral part of the plans to develop and operate the Hospital and its execution
is a condition to DCHMI’s participation in the Company.
     (d) If DCHMI and/or its Affiliates are (i) providing a guaranty or are
committed to provide a guaranty for any indebtedness of the Company for borrowed

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money (or for any such financing structured as a lease), and/or (ii) have any
outstanding loans to the Company or are committed to provide such loans, then
notwithstanding anything in this Agreement to the contrary, all decisions and
actions to be made by the Board of Directors with respect to any loan, lease or
other similar financing of the development, construction or operation of the
Hospital or the Company’s affairs, including without limitation the decisions
with respect to incurring any indebtedness or the refinancing thereof, shall be
made by the Directors designated by DCHMI and, if no event of default on any
such loan exists or is reasonably anticipated to exist, shall be subject to the
consent of at least one of the Directors appointed by the Investor Members,
which consent shall not be unreasonably withheld or delayed.
     (e) The Board of Directors shall be deemed to have specifically approved
all expenditures proposed by DCHMI under this Article V that are substantially
consistent with the Development Budget Exhibit (Exhibit C) or an approved
operating budget when funded from additional Capital Contributions made to the
Company by the Members pursuant to Section 3.5 above.
     (f) The development and annual operating budgets to be proposed by DCHMI
hereunder shall be approved by the Board of Directors as provided above subject
to the following:
     (i) The Board of Directors shall be deemed to have approved a development
budget which is substantially consistent with the attached Development Budget
Exhibit to this Agreement;
     (ii) No Director shall unreasonably withhold its approval of budgets which
are within the reasonable revenue expectations of the Hospital and which are in
compliance (both as to terms and availability of financing) with agreements with
the Company’s lenders and other parties providing financing to the Company; and
     (iii) In the event that the Board of Directors is unable to approve an
annual budget, DCHMI shall be authorized to operate the Company pursuant to this
Agreement under the previous year’s budget increased by the greater of 10% or
the amounts which are in reasonable relation to increases in revenues,
procedural or patient volumes that exceed those in the prior year’s budget.
     (g) Without DCHMI’s written consent, the Investor Members and the Board of
Directors will not approve any change to the construction, design or equipment
of the Hospital, if the effect thereof is to materially increase the cost
thereof as set forth on the Development Budget Exhibit (Exhibit C) approved
hereunder.
     SECTION 5.2 Restrictions on Authority of the Board of Directors.
     The Board of Directors shall not do any of the following:

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     (a) Act in contravention of this Agreement;
     (b) Act in any manner which would make it impossible to carry on the
express business purposes of the Company;
     (c) Commingle the Company funds with those of any other Person other than
as part of a funds management program of MedCath Incorporated and its
Affiliates;
     (d) Admit an additional Member without the approval of the Required Members
except as provided otherwise in this Agreement;
     (e) Alter the primary purposes of the Company as set forth in Section 2.3;
     (f) Possess any property or assign the rights of the Company in specific
property for other than a Company purpose;
     (g) Employ, or permit the employ of, the funds or assets of the Company in
any manner except for the exclusive benefit of the Company;
     (h) Make any payments of any type, directly or indirectly, to anyone for
the referral of patients to the Hospital in order to use the Hospital or to
provide other services; or
     (i) Sell all or substantially all of the assets of the Company or merge the
Company with or into any other Entity without the approval of the Required
Members, except as set forth in Sections 3.7(b) and (c).
     SECTION 5.3 Duties of the Board of Directors.
     The Board of Directors shall do the following:
     (a) Diligently and faithfully devote such of its time to the business of
the Company as may be necessary to properly conduct the affairs of the Company,
provided, however, the individual Directors shall not be required to devote
their full time to such duties;
     (b) Use its best efforts to cause the Company to comply with such
conditions as may be required from time to time to permit the Company to be
classified for federal income tax purposes as a partnership and not as an
association taxable as a corporation;
     (c) File and publish all certificates, statements, or other instruments
required by law for the formation and operation of the Company as a limited
liability company in all appropriate jurisdictions; and
     (d) Use their commercially reasonable best efforts to cause the Company to
obtain and keep in force during the term of the Company fire and extended
coverage and

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public liability and professional liability insurance with such issuers and in
such amounts as the Board of Directors shall deem advisable, but in amounts not
less (and deductible amounts not greater) than those customarily maintained with
respect to the business equipment and property comparable to the Company’s.
     SECTION 5.4 Delegation by the Board of Directors.
     Subject to restrictions otherwise provided herein, the Board of Directors
may at any time employ any other Person, including Persons and Entities employed
by, affiliated with, or related to any Director or any Member to perform
services for the Company and its business, and may delegate all or part of their
authority or control to any such other Persons, provided that such employment or
delegation shall not relieve the Board of Directors of its responsibilities and
obligations under this Agreement or under the laws of the State of Delaware nor
will it make any such Person a Member of the Company.
     SECTION 5.5 Right to Rely Upon the Authority of the Manager.
     Persons dealing with the Company may rely upon the representation of the
Manager that such Manager is the manager of the Company and that such Manager
has the authority to make any commitment or undertaking on behalf of the
Company. No Person dealing with the Manager shall be required to determine its
authority to make any such commitment or undertaking. In addition, no purchaser
from the Company shall be required to determine the sole and exclusive authority
of the Manager to sign and deliver on behalf of the Company any instruments of
transfer with respect thereto or to see to the application or distribution of
revenues or proceeds paid or credited in connection therewith, unless such
purchaser shall have received written notice from the Company affecting the
same.
     SECTION 5.6 Company Expenses.
     (a) The Company shall pay the amounts due to DCHMI under the Management
Services Agreement from time to time.
     (b) The Company shall also pay the following expenses of the Company:
     (i) All development and operational expenses of the Company, which may
include, but are not limited to: the salary and related expenses of employees
and staff of the Hospital and the Hospital President and other members of
Hospital’s senior management team who may be employed by MedCath Incorporated,
as well as the costs of all employee benefits for such employees whether
employed by Hospital or MedCath, including without limitation (as applicable)
the employer’s contribution to F.I.C.A., unemployment compensation and other
employment taxes, all bonuses, pension or profit sharing plan contributions,
worker’s compensation, group life, accident and health insurance premiums,
disability and other benefits when applicable, all costs of borrowed money
including without limitation all principal, interest and other costs relating to
the MFC Loans, taxes, and assessments on the Hospital, and other taxes

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applicable to the Company; expenses in connection with the acquisition,
maintenance, leasing, refinancing, operation, and disposition of the Equipment,
furniture and fixtures of the Hospital (including legal, accounting, audit,
commissions, engineering, appraisal, and the other fees); and the maintenance of
the Hospital and its Equipment, which may be performed by DCHMI or one of its
Affiliates as long as the charges to the Company for such services are fair
market value, and principal, interest and expenses due on any loans from MFC or
other lender of the Company;
     (ii) A medical director’s fee in an amount approved by the Board of
Directors which shall be at fair market value to be paid to the Medical Director
of the Hospital for services actually rendered pursuant to the Medical Director
Agreement;
     (iii) All fees and expenses paid to third parties for accounting, legal,
documentation, professional, and reporting services to the Company, which may
include, but are not limited to: the legal fees and expenses of Moore & Van
Allen, PLLC incurred in preparation and negotiation of this Agreement and the
Company’s Private Placement Memorandum, the Management Services Agreement, the
Right of First Refusal and the Hospital Professional Services Agreement
(collectively referred to as the “Other Documents”); the legal fees and expenses
of Mariscal Weeks McIntyre & Friedlander, P.A., counsel for the Investor
Members, for its efforts in preparing this Agreement and the Other Documents and
for advising the Company on compliance with Arizona law; preparation and
documentation of Company bookkeeping, accounting and audits; preparation and
documentation of budgets, cash flow projections, and working capital
requirements; preparation and documentation of Company state and federal tax
returns; and taxes incurred in connection with the issuance, distribution,
transfer, registration, and recordation of documents evidencing ownership of a
Membership Interest in the Company or in connection with the business of the
Company; expenses in connection with preparing and mailing reports required to
be furnished to the Members for tax reporting or other purposes, including
reports, if any, that may be required to be filed with any federal or state
regulatory agencies, or expenses associated with furnishing reports to Members
which the Board of Directors deems to be in the best interest of the Company;
expenses of revising, amending, converting, modifying, or terminating the
Company or this Agreement; costs incurred in connection with any litigation in
which the Company is involved as well as any examination, investigation, or
other proceedings conducted by any regulatory agency involving the Company;
costs of any computer equipment or services used for or by the Company; and the
costs of preparing and disseminating informational material and documentation
relating to a potential sale, refinancing, or other disposition of the Hospital
or the Equipment; and
     (iv) A fair market value consulting fee may be paid to one Investor Member
to compensate such individual for their documented time and efforts to

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assist in the operations and development of the Company’s business prior to the
opening of the Hospital.
     (c) Guarantee and Financing Fee. In the event that any Member or its
Affiliates, including, without limitation, MFC, either (x) provide a guarantee
of any indebtedness of the Company which is acceptable to and required by the
Company’s lenders or (y) provide loans to the Company (“Financing Members”) and
such guarantees or loans are not provided on a pro rata basis by all other
Members of the Company (the “Non-Financing Members”), then the Financing Members
shall be paid an annual guarantee and financing fee equal to (a) the amount of
such indebtedness which is guaranteed or loans made by the Financing Members,
multiplied by (b) .0075, multiplied by (c) the percentage Membership Interest in
the Company owned by the Non-Financing Members (the “Guarantee and Financing
Fee”). The annual Guarantee and Financing Fee shall be paid in quarterly
installments and the expense thereof shall be allocated to the Non-Financing
Members as follows:
     (i) The Guarantee and Financing Fee shall be deducted from the Cash
Distributions otherwise distributable to the Non-Financing Members and shall be
paid to the Financing Members;
     (ii) To the extent that at the time such Guarantee and Financing Fee is due
to be paid hereunder there are no anticipated Cash Distributions, then the
Company shall pay such Guarantee and Financing Fee to the Financing Members and
the amount of such payments shall be charged to the Capital Accounts of the
Non-Financing Members;
     (iii) When Cash Distributions become available for distribution to the
Members in the future, the Cash Distributions otherwise distributable to the
Non-Financing Members shall first be retained by the Company to the extent that
amounts were previously charged to the Capital Accounts of the Non-Financing
Members in accordance with subsection (ii) above and any remaining Cash
Distributions shall be distributed to the Members in accordance with
Section 6.1.
     (d) Operating Budgets. Once a budget has been approved by the Board of
Directors, DCHMI shall have the authority to expend up to one hundred and ten
percent (110%) of any and all funds which are included in the budget and sign
all agreements related thereto, including reimbursement to DCHMI and its
Affiliates for goods and services provided to the Company. DCHMI shall have the
right to recast the budget by transferring all or part of the funds approved for
specific line items to another category or line item by an aggregate amount not
to exceed ten percent (10%) of the total budgeted funds. DCHMI is further
authorized to make additional expenditures reasonably related to additional
revenues or increased patient or procedural volumes.

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     SECTION 5.7 No Management by Members.
     Except for those management obligations of DCHMI set forth herein and in
the Management Services Agreement, the Members shall take no part in, or at any
time interfere in any manner with, the management, conduct, or control of the
Company’s business and operations and shall have no right or authority to act
for or bind the Company except as set forth in this Agreement. The rights and
powers of such Members shall not extend beyond those set forth in this
Agreement, the Act, or those granted under the Certificate of Formation and any
attempt to participate in the control of the Company in a manner contrary to the
rights and powers granted herein, under the Act or Certificate of Formation
shall be null and void and without force and effect. Subject to the decisions
and judgment with respect to all professional medical or clinical matters of
qualified medical personnel, the Board of Directors shall have the right to
determine when and how the operations of the Company shall be conducted. The
exercise by a Member of any of the rights granted to such Member, including the
exercise of any rights granted to DCHMI in its capacity as Manager hereunder,
shall not be deemed to be a Member taking part in the control of the business of
the Company and shall not constitute a violation of this Section.
     SECTION 5.8 Consent by Members to Exercise of Certain Rights and Powers by
Board of Directors.
     By its execution hereof, each Member expressly consents to the exercise by
the Board of Directors of the rights, powers, and authority conferred on the
Board of Directors by this Agreement.
     SECTION 5.9 Meetings, Quorum and Vote of the Board of Directors.
     (a) The Board of Directors shall meet at least quarterly. Notice of any
meeting, regular or special, shall be delivered to each Director personally, by
telephone, by electronic mail, by facsimile transmission or in writing at least
five (5) business days before the meeting.
     (b) An emergency meeting of the Board of Directors may be called by any
Director upon shorter notice. Action taken at the emergency meeting shall be
valid so long as the meeting is attended by at least three (3) members of the
Board of Directors who are appointed by the Investor Members and by members of
the Board of Directors who are appointed by of DCHMI who have the authority to
cast at least (3) votes on behalf of such Directors, and the action is
unanimously approved by the members of the Board of Directors present at such
meeting.
     (c) The Board of Directors shall elect one of its members to preside over
the meetings as the Chairperson and one of its members, as the Secretary, to
oversee the preparation and delivery of meeting notices and the preparation of
minutes of the meetings of the Board of Directors and Members.

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     (d) A quorum of the Board of Directors shall be necessary to conduct
business at any meeting. A quorum must include Directors who have the authority
to cast at least five (5) votes, including Directors appointed by Investor
Members who have the authority to cast at least two (2) votes and Directors
appointed by of DCHMI who have the authority to cast at least two (2) votes. A
Director may attend a meeting by telephone or other electronic means and be
considered present for purposes of a quorum so long as the telephone or other
connection allows each Director to hear and be heard by all other Directors.
     (e) Each Director shall have the right to cast one (1) vote on all matters
and issues before the Board of Directors, provided that during any period in
which DCHMI or the Investor Members have reduced the number of their respective
Directors below four (4) in accordance with the provisions of Section 3.8, the
Directors appointed by DCHMI or the Investor Members, as applicable, (even if
less than 4) shall in all events be entitled to cast four (4) votes on all
matters and issues, in which event DCHMI or the Investor Members, as the case
may be, shall be entitled to decide how to allocate such votes among its
appointed Directors.
     (f) Except as provided in Section 5.1 or as otherwise expressly provided in
this Agreement, any action taken by the Board of Directors shall require the
affirmative vote of at least a majority of the Directors present at a meeting in
which a quorum is present and shall require the vote of Directors appointed by
the Investor Members who have the authority to cast at least (2) votes on behalf
of the Investor Members and the vote of Directors appointed by DCHMI who have
the authority to cast at least two (2) votes on behalf of DCHMI, which
affirmative vote or consent shall not be unreasonably withheld or delayed.
     (g) Any action which is required to be or may be taken at a meeting of the
Board of Directors may be taken without a meeting if consented to in writing,
either collectively or in counterparts, setting forth the action so taken.
     (h) Attendance at a meeting of the Board of Directors constitutes waiver of
any objection to the Notice of the meeting.
     (i) A Director may give a written proxy to another Director to vote on any
matter or take any other action that a Director is required or permitted to take
under this Agreement or under applicable law.
     SECTION 5.10 Other Business of Members.
     (a) Subject to (b) below, any Member may engage independently or with
others in other business ventures of every nature and description, including
without limitation the purchase of medical equipment, the rendering of medical
services of any kind, and the making or management of other investments and
neither the Company nor any Member shall have any right by virtue of this
Agreement or the relationship created hereby in or to such other ventures or
activities or to the income or proceeds derived therefrom, and the pursuit of
such ventures.

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     (b) Except as specifically provided in this Section 5.10, as long as any
Member owns a Membership Interest in the Company, and for a period of two
(2) years after a Member ceases for any reason to own a Membership Interest in
the Company, neither a Member nor any related Investor Entity, Owner, Practice
or any of their respective Affiliates, shall hold, directly or indirectly, an
investment, ownership or other beneficial interest in (x) any hospital, or
(y) any other Entity (including a sole proprietorship) which provides any of the
services or facilities, whether on an inpatient or outpatient basis, provided by
the Hospital, including, but not limited to, cardiac catheterization
laboratories, imaging centers (CT Scanners, MRI, PET, etc.) and ambulatory
surgery centers (the “Restricted Services”), in the Territory.
     For purposes of this Agreement, “Territory” shall mean the geographic area
bordered by the boundary line pictured on Exhibit D, and which area currently
includes the areas having the following zip codes: 86401, 86409, 86411, 86412,
86413, 86429, 86430, 86433, 86437, 86438, 86439, 86442, and 86446.
     Notwithstanding the terms of this Section 5.10 (b):
     (i) No Member or Owner who is a physician or allied health professional
shall be prohibited from maintaining his or her staff privileges and admitting
and treating patients at any other hospital, as applicable;
     (ii) Nothing herein shall prohibit a Member, Owner, Practice or their
Affiliates from owning up to three percent (3%) of the outstanding capital stock
of a company which provides healthcare services or supplies and whose stock is
publicly traded and listed on a nationally recognized securities exchange or
from investing in a publicly traded mutual fund or making other investments with
the prior written approval of the Board of Directors;
     (iii) Nothing herein shall prevent any Member, Owner or Practice, or its
Affiliates, from (x) continuing to hold an ownership interest in those
outpatient facilities listed on Schedule 1 attached hereto which such Member,
Owner, Practice or Affiliate held prior to January 1, 2007 provided that each
Member, Owner, Practice or Affiliate with any such arrangement with any
outpatient facility listed on Schedule 1 is obligated to use their best efforts
to prevent any such facility from hereafter adding or expanding to include
inpatient facilities or from adding new services and equipment which are not
customarily provided by those types of facilities in Phoenix or Kingman Arizona,
(y) continuing to provide management or other services to such outpatient
facilities listed on Schedule 1 to the extent such Member, Owner, Practice or
Affiliate was obligated to provide such services prior to January 1, 2007, or
(z) providing services which are incidental to and are customarily provided by a
physician or allied health professional in Phoenix or Kingman, Arizona in his or
her medical office for the practice of medicine; and

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     (iv) Nothing herein shall prevent any Member or Owner who is a physician or
allied health professional from personally performing professional medical
services directly for his or her patients at any hospital or facility and from
billing and receiving professional fees as a result of his or her professional
medical services from any payor.
     (c) The Members and Owners have reviewed the term and geographical
restrictions included in Section 5.10(b), and in light of the interests of the
Members and Owners, agree that such restrictions are fair and reasonable.
     (d) In order to ensure that the Hospital has available to it at all times
leading and qualified physicians and surgeons, as of the date hereof the Company
is entering into the Hospital Professional Services Agreement with each of the
Investor Members and Owners who are physicians, or their Practices, which
Hospital Professional Services Agreement includes in Section 7 thereof certain
covenants by the Owners who are physicians, or their Practices, which are
designed to ensure that the Owners who are physicians will be available to the
Hospital from time to time in order to enable it to meet its objectives of being
an efficient quality provider of hospital services. The Members, Practices, and
Owners acknowledge and agree that the execution of the Hospital Professional
Services Agreement by the Investor Members, Owners who are physicians and/or
their Practices is further consideration for the execution by the Members of
this Agreement.
     (e) If there is a breach or threatened breach of the provisions of this
Section 5.10 of this Agreement, in addition to other remedies at law or equity,
the non-breaching parties shall be entitled to injunctive relief. The Members
and Owners desire and intend that the provisions of this Section 5.10 shall be
enforced to the fullest extent permissible under the law and public policies
applied, but the unenforceability or modification of any particular paragraph,
subparagraph, sentence, clause, phrase, word, or figure shall not be deemed to
render unenforceable the remainder of this Section 5.10. Should any such
paragraph, subparagraph, sentence, clause, phrase, word, or figure be
adjudicated to be wholly invalid or unenforceable, a court with applicable
authority is hereby authorized to “blue pencil” or modify this Section, the
balance of this Section 5.10 shall thereupon be modified in order to render the
same valid and enforceable and the unenforceable portion of this Section 5.10
shall be deemed to have been deleted from this Agreement.
     (f) The Company, the Board of Directors and the Members agree that the
benefits to any Member, Owner, Practice or their Affiliates hereunder do not
require, are not payment for, and are not in any way contingent upon the
referral, admission or any other arrangement for the provision of any item or
service offered by the Company to patients of such Member, any Owner, Practice
or their Affiliates or in any facility, laboratory, cardiac catheterization
facility or other health care operation controlled, managed or operated by the
Company and nothing herein is intended to prohibit any Investor Member or Owner
who is a physician or allied health professional from providing health care
services at any other facility.

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     (g) The Investor Members and Investor Entities shall cause each of their
existing and future Owners to agree in writing to be personally bound by the
terms of this Section 5.10.
     SECTION 5.11 Board of Directors’ Standard of Care.
     Each Director shall act in a manner he or she believes in good faith to be
in the best interest of the Company and with such care as an ordinarily prudent
Person in a like position would use under similar circumstances. In discharging
his or her duties, each Director shall be fully protected in relying in good
faith upon the records required to be maintained under this Agreement and upon
such information, opinions, reports and statements by any of its other
Directors, Members, or agents, or by any other Person as to matters each
Director reasonably believes are within such other Person’s professional or
expert competence and who has been selected with reasonable care by or on behalf
of the Company, including information, opinions, reports or statements as to the
value and amount of the assets, liabilities, income or losses of the Company or
any other facts pertinent to the existence and amount of assets from which
distributions to Members might properly be paid.
     Notwithstanding anything herein to the contrary, a Director or Member shall
have the right to vote or approve Company matters in accordance with the terms
of this Agreement regardless of the personal interest of any Member or Director
in the outcome of any vote, decision or matter.
     SECTION 5.12 Limitation of Liability.
     A Director shall not be liable to the Company or the Members for any action
taken in managing the business or affairs of the Company if he or she performs
the duty of his or her office in compliance with the standard contained in
Section 5.11. No Director has guaranteed nor shall have any obligation with
respect to the return of a Member’s Capital Contribution or share of income from
the operation of the Company. Furthermore, no Director shall be liable to the
Company or to any Member for any loss or damage sustained by the Company or any
Member except loss or damage resulting from gross negligence or intentional
misconduct or knowing violation of law or a transaction for which such Director
received a personal benefit in violation or breach of the provisions of this
Agreement; provided, however, that the limitation of liability set forth at this
Section 5.12 does not apply to any liabilities related to the performance of
professional medical services.
     SECTION 5.13 Indemnification of the Directors.
     (a) Each Director shall be indemnified by the Company against any losses,
judgments, liabilities, expenses, including attorneys’ fees and amounts paid in
settlement of any claims sustained by such Director arising out of any action or
inaction of the Director in his or her capacity as a Director of the Company to
the fullest extent allowed by law, provided that the same were not the result of
gross negligence or willful misconduct on the part of the Director and provided
that the Director, in good faith, reasonably determined that such course of
conduct was in the best interest of the

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Company; provided, however, that such indemnification and agreement to hold
harmless shall be recoverable only out of Company assets. Subject to applicable
law, the Company shall advance expenses incurred with respect to matters for
which a Director may be indemnified hereunder.
     (b) If at any time, the Company has insufficient funds to furnish
indemnification as herein provided, it shall provide such indemnification if and
as it generates sufficient funds and prior to any cash distributions, pursuant
to Article VI or Article VII hereof, to the Members.
     SECTION 5.14 Purchase of Goods and Services from DCHMI.
     Goods and services may be purchased from Members or their Affiliates as
long as those occur on fair and reasonable terms.
     SECTION 5.15 Indemnity by the Company.
     The Company agrees to indemnify, defend and hold DCHMI, its directors,
officers, employees and agents harmless from and against any and all loss,
claim, cause of action, demand, penalty, liability, action, damage or
deficiency, lawsuit or other proceeding against DCHMI in its capacity as Manager
of the Company, resulting or arising from (a) acts or omissions of the Company,
its Members, officers, employees (unless due to the gross negligence or willful
misconduct of DCHMI), (b) any liability or obligation of the Company, except
those which DCHMI created in violation of this Article V; (c) any nonfulfillment
of the Company of any of its covenants or agreements under this Article V;
(d) any violation of law by the Company; and (e) any loss or damage, reasonable
attorney’s fees and other costs and expenses incident to any of (a) through (d).
The indemnity covenants set forth in this Section 5.15 shall survive the
termination of this Agreement for any reason.
     SECTION 5.16 Force Majeure.
     DCHMI shall not be liable nor shall it be deemed to be in default for any
delay or failure in performance under this Article V or other interruption of
service or employment deemed resulting directly or indirectly from Acts of God,
civil or military authority, acts of public enemy, war, accidents, fires,
explosions, earthquakes, floods, failure of transportation, strikes or other
work interruptions by DCHMI’s employees or any similar or dissimilar cause
beyond the reasonable control of DCHMI. Further, DCHMI shall not be in default
under this Article V if the default resulted from actions taken at the request
or direction of the Board of Directors or if the Board of Directors failed to
take reasonable action recommended by DCHMI to enable it to meet its obligations
hereunder.

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ARTICLE VI
DISTRIBUTIONS AND ALLOCATIONS
     SECTION 6.1 Distributions of Cash Flow from Operations and Cash from Sales
or Refinancing.
     (a) Prior to the dissolution of the Company, and subject to the terms and
conditions to which the Company is bound with respect to its lenders, including
MFC or other lenders that are Affiliates of DCHMI (“Loan Conditions”), Cash Flow
from Operations and Cash from Sales or Refinancing, if any, remaining after
repayment of any amounts currently due with respect to loans made by the Members
to the Company, shall be distributed annually by the Manager as Cash
Distributions according to the relative percentage Membership Interests of the
Members at such times as the Board of Directors deems appropriate and after
completion of the annual audit of the Company, provided however, the Board of
Directors has the authority to make interim distributions if determined to be
appropriate by them. Any unpaid Guarantee and Financing Fee shall be deducted
from the Cash Distributions otherwise distributable to the Non-Financing Members
and paid to the Financing Members as set forth in Section 5.6(c) or retained by
the Company as set forth in Section 5.6(c)(iii). Notwithstanding anything herein
to the contrary, no distributions shall be made to Members if prohibited by the
Act or any other applicable law and unless there are no amounts due, whether
principal or interest, on any working capital loans made to the Company by any
lender including without limitation DCHMI, MFC, or another Affiliate of MedCath
pursuant to Section 3.5.
     (b) Notwithstanding the terms of Section 6.1(a), the Board of Directors
shall, to extent permitted by the Loan Conditions and subject to the
availability of Cash Flow from Operations and using commercially reasonable
efforts, distribute cash annually pro rata to Members in an amount which is
sufficient to enable them to pay income taxes, if any, which arise from the
taxable income of the Company. In determining the amount, if any, of a
distribution from the Company to enable the Members to pay incomes taxes on
taxable income of the Company, the taxable income of each Member for the current
year shall be reduced by any cumulative tax losses incurred in prior years
(after reduction by taxable income in prior years) regardless of whether the tax
losses from the prior years were used by any Member as deductions or as
carryforwards. Such distributions shall assume for all Members the highest
combined federal and state tax rates applicable to any Member with respect to
his or its Profits from the Company. Each Member recognizes that there is no
assurance that cash will be available to enable distributions to be made to
cover taxes at the time such taxes are due.
     SECTION 6.2 Profits.
     Except as provided in the Regulatory Allocations Exhibit (Exhibit E) and
subject to Section 6.6, Profits shall be allocated as follows:

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     (a) First, to the Members who have been allocated Losses pursuant to
Section 6.3(a) below until the cumulative Profits allocated pursuant to this
Section 6.2(a) equal the cumulative prior allocations of Losses under that
Section.
     (b) Next, to the Members who have been allocated Losses pursuant to
Section 6.3(b) below until the cumulative Profits allocated pursuant to this
Section 6.2(b) equal the cumulative prior allocations of Losses under that
Section.
     (c) All remaining Profits shall be allocated to the Members in accordance
with their percentage Membership Interests.
     SECTION 6.3 Losses.
     Except as provided in the Regulatory Allocations Exhibit (Exhibit E) and
subject to Section 6.6, Losses shall be allocated as follows:
     (a) First, Losses shall be allocated to the Members with positive Adjusted
Capital Account balances in proportion to those balances.
     (b) All remaining Losses shall be allocated to the Members in accordance
with their percentage Membership Interests.
     SECTION 6.4 Code Section 704(c) Tax Allocations.
     Income, gain, loss, and deduction with respect to any property contributed
to the capital of the Company shall, solely for tax purposes, be allocated among
the Members so as to take account of any variation between the adjusted basis of
such property to the Company for federal income tax purposes and its initial
Agreed Value pursuant to any method allowable under Code Section 704(c) and the
Regulations promulgated thereunder.
     In the event the Agreed Value of any Company asset is adjusted after its
contribution to the Company, subsequent allocations of income, gain, loss and
deduction with respect to such asset shall take into account any variation
between the adjusted basis of such asset for federal income tax purposes and its
Agreed Value pursuant to any method allowable under Code Section 704(c) and the
Regulations promulgated thereunder.
     Any elections or other decisions relating to allocations under this Section
shall be determined by the Board of Directors. Absent a determination by the
Board of Directors, the remedial allocation method under
Regulation Section 1.704-3(d) shall be used. Allocations pursuant to this
Section are solely for purposes of federal, state, and local taxes and shall not
be taken into account in computing any Member’s Capital Account or share of
Profits, Losses, other items, or distributions pursuant to any provision of this
Agreement.

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     SECTION 6.5 Miscellaneous.
     (a) Allocations Attributable to Particular Periods. For purposes of
determining Profits, Losses or any other items allocable to any period, such
items shall be determined on a daily, monthly, or other basis, as determined by
the Board of Directors using any permissible method under Code Section 706 and
the Regulations thereunder.
     (b) Other Items. Except as otherwise provided in this Agreement, all items
of Company income, gain, loss, deduction, credit and any other allocations not
otherwise provided for shall be divided among the Members in the same proportion
as they share Profits or Losses, as the case may be, for the year.
     (c) Tax Consequences; Consistent Reporting. The Members are aware of the
income tax consequences of the allocations made by this Article and by the
Regulatory Allocations and hereby agree to be bound by those allocations as
reflected on the information returns of the Company in reporting their shares of
Company income and loss for income tax purposes. Each Member agrees to report
its distributive share of Company items of income, gain, loss, deduction and
credit on its separate return in a manner consistent with the reporting of such
items to it by the Company. Any Member failing to report consistently, and who
notifies the Internal Revenue Service of the inconsistency as required by law,
shall reimburse the Company for any legal and accounting fees incurred by the
Company in connection with any examination of the Company by federal or state
taxing authorities with respect to the year for which the Member failed to
report consistently.
     SECTION 6.6 Special Allocations of Guarantee and Financing Fees.
     Any and all deductions, losses or reductions to Capital Accounts
attributable to the payment by the Company of Guarantee and Financing Fees shall
be allocated to the Non-Financing Members in accordance with their relative
percentage Membership Interests.
ARTICLE VII
DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS
     SECTION 7.1 No Termination by Certain Acts of Member.
     Neither the transfer of interest, withdrawal from the Company, bankruptcy,
insolvency, dissolution, liquidation or other disability, nor the legal
incompetency of any Member shall result in the termination or dissolution of the
Company or affect its continuance in any manner whatsoever.

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     SECTION 7.2 Dissolution.
     The Company shall be dissolved upon the happening of any of the following
events, whichever shall first occur:
     (a) The election to dissolve the Company in accordance with the terms of
Section 3.5(d) hereof;
     (b) The expiration of the term of the Company as provided in Section 2.6
hereof;
     (c) The adjudication of bankruptcy of the Company;
     (d) Upon the written consent of the Required Members;
     (e) In accordance with Section 12.11 hereof;
     (f) The entry of a decree of judicial dissolution or the administrative
dissolution of the Company as provided in the Act;
     (g) Upon the written election of DCHMI and after prior notice is given by
DCHMI at any time to the Investor Members fifteen (15) days prior to the
execution by DCHMI on behalf of the Company of definitive agreements for the
construction of the Hospital, in the event that DCHMI has determined that the
Company and the Hospital do not continue to meet DCHMI’s investment criteria;
provided, however, that upon a dissolution under this subsection (g), if, at the
time of such election by DCHMI, Investor Members have committed to make initial
Capital Contributions of at least Two Million Five Hundred and Five Thousand
Dollars ($2,505,000) in the aggregate and have paid at least sixty (60%) of such
initial Capital Contributions (or $1,503,000) in cash to Company in accordance
with Section 3.1(b)(iii), then DCHMI shall be obligated to pay the reasonable
legal fees and expenses of Mariscal Weeks McIntyre & Friedlander, P.A., counsel
for the Investor Members, for its efforts in preparing this Agreement and the
Company’s Private Placement Memorandum, the Management Services Agreement, the
Right of First Refusal and the Hospital Professional Services Agreement, and for
assisting the Company in complying with Arizona law applicable to the Company,
or
     (h) Upon the written election of either DCHMI or a majority in interest of
the Investor Members, in the event that within eighteen (18) months following
the earlier of the execution of this Agreement by all Initial Members or the
date that all of the Initial Members otherwise become bound under this
Agreement, the Company has not commenced construction of the Hospital, unless
such period is extended by the mutual written agreement of the Required Members.

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     SECTION 7.3 Dissolution and Final Liquidation.
     (a) Upon any dissolution of the Company, the Company shall not terminate,
but shall cease to engage in further business except to the extent necessary to
perform existing contracts and preserve the value of its assets. Its assets
shall be liquidated and its affairs shall be wound up as soon as practical
thereafter by the Manager or, if for any reason there is no Manager, by another
Person designated by the Board of Directors. In winding up the Company and
liquidating assets, the Manager, or other Person so designated for such purpose,
may arrange, either directly or through others, for the collection and
disbursement to the Members of any future receipts from the Hospital or other
sums to which the Company may be entitled, and shall sell the Company’s interest
in the Hospital and the Equipment to any Person, including any Member or any
Affiliate thereof, on such terms and for such consideration as shall be
consistent with obtaining the fair market value thereof, as such fair market
value is approved by the Required Members.
     (b) Upon any such dissolution and liquidation of the Company, the net
assets, if any, of the Company available for distribution, including any cash
proceeds from the liquidation of Company assets, shall be applied and
distributed in the following manner or order, to the extent available:
     (i) To the payment of, or creation of reserves for, all debts, liabilities,
and obligations to all creditors of the Company (including but not limited to
the Members and their Affiliates) and the expenses of liquidation; and
     (ii) The balance to the Members with positive Capital Account balances
after taking into account all other adjustments during the Fiscal Year in which
liquidation occurs.
     (c) The Members shall look solely to the assets, if any, of the Company for
any return of their Capital Contributions and, if the assets of the Company
remaining after payment or discharge of the Company’s debts and liabilities, or
provision therefor, are insufficient to return all or any part of the Capital
Contributions, no Member shall have any right of recourse against the Directors
or other Members or to charge the Board of Directors or other Members for any
amounts except as provided herein and except to the extent otherwise provided by
the Act and/or Arizona law.
     (d) Upon such dissolution, reasonable time shall be allowed for the orderly
liquidation of the assets of the Company and the discharge of liabilities to
creditors so as to minimize the losses normally attendant to a liquidation.
     (e) The Capital Accounts of the Members, as adjusted, shall be utilized by
the Company for the purpose of making distributions to those Members with
positive balances in their respective Capital Accounts pursuant to
Section 7.3(b). In making such distributions, the Board of Directors or the
Person winding up the affairs of the Company shall distribute all funds
available for distribution to the Members (after establishing any

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reserves that the Board of Directors or the Person winding up the affairs of the
Company deems reasonably necessary pursuant to Section 7.3(b)) prior to the
later of (i) the end of the taxable year in which the event which caused the
termination and dissolution of the Company occurs, or (ii) ninety (90) days
after the occurrence of such event. The Board of Directors in its sole
discretion, or the Person winding up the affairs of the Company, in its
discretion, may elect to have the Company retain any installment obligations
owed to the Company until collected in full so long as any portion of the
reserves which are later determined to be unnecessary, and all collections on
such installment obligations which are not deemed to be reasonably necessary by
the Board of Directors or the Person winding up the affairs of the Company to
add to such reserves are distributed as soon as practicable in accordance with
the provisions of Section 7.3(b) as modified by this Section.
     SECTION 7.4 Termination.
     Upon completion of the dissolution, winding up, distribution of the
liquidation proceeds and any other Company assets, the Company shall terminate.
     SECTION 7.5 Payment in Cash.
     Any payments made to any Member pursuant to this Article VII shall be made
only in cash.
     SECTION 7.6 Termination of Noncompetition Covenants.
     Members shall have no continuing liability or obligation under
Section 5.10(b) following the dissolution of the Company.
ARTICLE VIII
REMOVAL OR WITHDRAWAL OF MEMBERS AND TRANSFER OF MEMBERS’
MEMBERSHIP AND/OR ECONOMIC INTERESTS
     SECTION 8.1 Members — Restriction on Transfer.
     (a) Except as otherwise set forth in this Section or in this Agreement, no
Membership Interest or any portion thereof, shall be validly sold or assigned
directly or indirectly whether voluntarily, involuntarily or by operation of
law, and no purported assignee shall be recognized by the Company for any
purpose, unless such Membership Interest shall have been transferred in
accordance with the provisions of this Agreement and in compliance with such
additional restrictions as may be imposed by any federal or state securities
regulatory authority or law and with the consent of the Board of Directors. In
no event, however, shall a Member transfer or sell all or any of its Membership
Interest to any party which, if a Member, would be in violation of
Section 5.10(b) hereof.

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     The Members acknowledge that there is no obligation of the Company or any
Member to purchase the Membership Interest of any Member at any time under the
terms of this Agreement.
     (b) Except as otherwise set forth in this Section or in this Agreement, a
Member may transfer, sell or assign its entire Membership Interest only if it
has received the approval of the Board of Directors, provided that:
     (i) the Company first for a period of fifteen (15) days, and thereafter the
other Members in proportion to their Membership Interest in the Company for a
period of fifteen (15) days, shall have the right, but not the obligation, to
purchase all, but not less than all, of the Membership Interest proposed to be
transferred, which right shall be exercisable on the terms and for the purchase
price set forth in writing in a bona fide offer made for the Membership
Interests by a third-party (the “Right of First Refusal”); provided, however,
the Board of Directors can in its discretion on a case by case basis approve a
sale by an Investor Member without requiring the transferring Investor Member to
first comply with the Right of First Refusal requirements; and
     (ii) there shall have been filed with the Company a duly executed and
acknowledged counterpart of the instrument making such assignment signed by both
the assignor and assignee and such instrument evidences the written acceptance
by the assignee of all of the terms and provisions of the Agreement, represents
that such assignment was made in accordance with all applicable laws and
regulations and the assignee shall have represented to the Company in writing
that it meets the investor suitability standards established by the appropriate
state of residence, or, in the absence thereof, the investor suitability
standards established by the Company. The Board of Directors shall use
reasonable care to determine that transfers are in accordance with applicable
laws and regulations, including obtaining an opinion of counsel to that effect.
Any Member that assigns all of its Membership Interest shall cease to be a
Member of the Company. Any Membership Interests acquired by the Company pursuant
to Section 8.1 may, subject to applicable law, be re-offered by the Company to
suitable investors.
     (c) Subject to (d) below, any dissolution, liquidation, merger (unless
Members or their Affiliates existing prior to such merger own at least fifty-one
percent (51%) of the surviving entity after the merger or unless both parties to
such merger are majority owned by parties who are Members or their Affiliates
prior to such merger) or sale of a Member which is an Entity (a sale shall
include a transfer of fifty percent (50%) or more of its ownership interests or
of substantially all of its assets or any other transaction or series of related
transactions intended to accomplish, in substance, a sale of such Entity), which
event shall not occur, subject to (d) below, without the written consent of the
Board of Directors, shall constitute an offer by such Member to sell such
Member’s Membership Interest to the Company pursuant to Section 8.6 for a
purchase price equal to five (5) multiplied by the net income (as reasonably
determined by the Company’s accountants) of the Company for the twelve
(12) month period ending as of the calendar

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quarter most recently ended prior to such event multiplied by the percentage
Membership Interest of such Member in the Company (the “Formula Purchase
Price”). The Formula Purchase Price shall be paid in three (3) equal annual
installments, the first third of which shall be paid upon the determination of
the Formula Purchase Price and the remaining two (2) installments of which shall
be paid on the first and second anniversary of such date (the “Payment Method”).
The remaining two (2) installments shall bear interest at the Prime Rate as of
the date of the date of the determination of the Formula Purchase Price. Accrued
interest shall be paid as of the dates payments of principal are due as provided
above according to the Payment Method.
     (d) Notwithstanding anything herein to the contrary, DCHMI may, upon the
approval of at least two (2) of the Board Members appointed by the Investor
Members, which determination shall not be unreasonably withheld, assign its
Membership Interest in the Company, its rights to designate Directors hereunder,
and its rights as manager under the Management Services Agreement to any third
party who acquires such Membership Interest and rights and who is not controlled
by, controlling, or under common ownership with DCHMI so long as such third
party (i) assumes in writing or by operation of law the obligations of DCHMI
hereunder, and (ii) would not be in violation of the terms of this Agreement.
Notwithstanding anything contained in this Agreement to the contrary, DCHMI may
assign its Membership Interest in the Company, its right to designate Directors
and its rights under the Management Services Agreement to any party controlled
by, controlling or under common ownership with DCHMI without the consent of the
Investor Members or the Board of Directors. DCHMI may also assign its Membership
Interest in the Company, its right to designate Directors, and its rights under
the Management Services Agreement to a financial institution as collateral
security for repayment of indebtedness for borrowed funds by MFC, MedCath
Incorporated or its Affiliates or by the Company without the consent of the
Investor Members or the Board of Directors.
     (e) Notwithstanding anything in this Agreement to the contrary, an Investor
Member may, upon the consent of the Board of Directors, assign his, her or its
Membership Interest to a trust or family limited partnership that is formed and
maintained for the sole benefit of the Investor Member or the individual who
owns the Investor Member, as the case may be, and/or his or her immediate family
so long as: (i) the Investor Member or individual who owns the Investor Member
agrees in writing that he or she continues to be bound by the terms of
Section 5.10 of the Agreement and all confidentiality obligations under this
Agreement; (ii) the Investor Member or individual who owns the Investor Member
agrees in writing that he or she shall remain a trustee, general partner or
otherwise exercises control over the trust or family limited partnership as
determined by the Board of Directors in its sole discretion; (iii) the Manager
first approves in writing the terms of all documents creating and constituting
the trust or family limited partnership; (iv) the Company shall continue to have
the benefit of its purchase rights under Section 8.6 as if such assignment had
not occurred; and (v) the assignment meets such other requirements as reasonably
established by the Board of Directors from time to time. Other than (i) through
(iv) above, an assignment made under this Section 8.1(e) shall not be subject to
any of the restrictions on the transfer of

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Membership Interests set forth in this Agreement including, but not limited to,
the Right of First Refusal set forth at Section 8.1(b).
     (f) Notwithstanding anything contained in this Agreement to the contrary,
subsequent to the initial capitalization of the Company, DCHMI will make
available for sale a portion of its Membership Interest based on fair market
value terms and conditions to qualified investors provided, however, that DCHMI
shall not reduce its Membership Interest below 51% except as otherwise provided
in this Section 8.1.
     SECTION 8.2 Condition Precedent to Transfer of Membership Interest.
     Notwithstanding anything herein to the contrary, no transfer of Membership
Interest may be made if such transfer (a) constitutes a violation of the
registration provisions of the Securities Act of 1933, as amended, or the
registration provisions of any applicable state securities laws; (b) if after
such transfer the Company will not be classified as a partnership for federal
income tax purposes; and (c) if when taken together with other prior transfers,
results in a “termination” of the Company for federal income tax purposes. The
Company may require, as a condition precedent to transfer of Membership
Interest, delivery to the Company, at the proposed transferor’s expense, of an
opinion of counsel satisfactory (both as to the counsel and substance of the
opinion) to the Company that the transfer will not violate any of the foregoing
restrictions.
     SECTION 8.3 Substitute Member — Conditions to Fulfill.
     No assignee of a Member’s Membership Interest in the Company shall have the
right to become a Substitute Member in place of its assignor unless, in addition
to any other requirement herein, all of the following conditions are satisfied:
     (a) The Company has waived its right pursuant to Section 8.1 to purchase
the Membership Interest held by the assignee;
     (b) The duly executed and acknowledged written instrument of assignment
which has been filed with the Company sets forth that the assignee becomes a
Substitute Member in place of the assignor;
     (c) The assignor and assignee execute and acknowledge such other
instruments as the Board of Directors may deem reasonably necessary or desirable
to effect such admission, including, but not limited to, the written acceptance
and adoption by the assignee of the provisions of this Agreement;
     (d) The payment by the assignee of all costs to the Company associated with
the transaction, including but not limited to legal fees, transfer fees, and
filing fees.
     SECTION 8.4 Allocations Between Transferor and Transferee.
     Upon the transfer of a Membership Interest, all items of income, gain,
loss, deduction and credit attributable to the Membership Interest so
transferred shall be allocated between the

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transferor and the transferee in such manner as the transferor and transferee
agree at the time of transfer; provided such allocation does not violate federal
or state income tax law. If the Board of Directors, in its sole discretion,
deems such laws violated, then such allocation shall be made pro rata for the
fiscal year based upon the number of days during the applicable fiscal year of
the Company that the Membership Interest so transferred was held by the
transferor and transferee, without regard to the results of Company activities
during the period in which each was the holder, or in such other manner as the
Board of Directors deems necessary to comply with federal or state income tax
laws. Distributions as called for by this Agreement shall be made to the holder
of record of the Membership Interest on the date of distribution.
Notwithstanding anything contained in this Agreement to the contrary, the
Company shall be entitled to treat the assignor of any assigned Membership
Interest as the absolute owner thereof in all respects, and shall incur no
liability for distributions made in good faith to such assignor in reliance on
the Company records as they exist until such time as the written assignment has
been received by, and recorded on the books of the Company. For purposes of this
Article VIII, the effective date of an assignment of any Membership Interest
shall be the last day of the month specified in the written instrument of
assignment.
     SECTION 8.5 Rights, Liabilities of, and Restrictions on Assignee.
     No assignee of a Membership Interest shall have the right to participate in
the Company, inspect the books of account of the Company or exercise any other
right of a Member unless and until admitted as a Substitute Member.
Notwithstanding the failure or refusal to admit an assignee as a Substitute
Member, such assignee shall be entitled to receive the share of income, credit,
gain, expense, loss and deduction and cash distributions provided hereunder that
is assigned to it, and, upon demand, may receive copies of all reports
thereafter delivered pursuant to the requirements of this Agreement; provided,
however, that the Company shall have first received notice of such assignment
and all required consents thereto shall have been obtained and other conditions
precedent to transfer thereof shall have been satisfied. The Company’s tax
returns shall be prepared to reflect the interests of assignees as well as
Members.
     SECTION 8.6 Repurchase of Interests in Certain Events.
     (a) In the discretion of the Board of Directors, the Company may, but is
not obligated to, repurchase a Member’s Membership Interest upon a breach by the
Member or any of its Affiliates of the Member’s or any of its Affiliate’s
obligations contained in Article III, Sections 5.10, 8.1, 12.1 and 12.11 of this
Agreement.
     (b) Each Member agrees to sell his, her or its Membership Interest to the
Company in the event the Company elects to exercise the rights of repurchase
granted under Section 8.6(a) and the purchase price shall be the lower of
(i) the Capital Contributions of the Member less all amounts distributed to such
Member by the Company, and (ii) the Formula Purchase Price.
     (c) The Directors designated solely by any Member or any Director who is a
Member, or who is an Owner of a Member, if such Member’s activities give rise to
the event set forth in Section 8.6(a), shall not have a vote hereunder and a
majority of the

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other Directors shall make all decisions under this Section 8.6 with respect to
such activities.
     (d) Notwithstanding anything herein to the contrary, the repurchase of the
Economic Interest or Membership Interest of DCHMI under Section 8.6(a) shall not
become effective unless and until DCHMI and its Affiliates are fully released
from their liability as guarantors for any indebtedness of the Company and
unless and until all amounts loaned by DCHMI or its Affiliates to the Company
are paid in full.
     SECTION 8.7 Death of a Member.
     Heirs of Members who are individuals shall be entitled to inherit the
Membership Interests of a deceased Member or a deceased Owner, provided that
upon a Member’s death (or the death of an individual that owns a Member) such
interests shall be automatically converted to an Economic Interest only in the
Company until such heir agrees in writing to all of the terms and conditions of
this Agreement and such other reasonable terms as may be established by the
Board of Directors, in which event such interest shall again become a Membership
Interest in the Company. Notwithstanding the previous sentence, within one
hundred twenty (120) days of the Company first learning of the death of a Member
or Owner, the Company shall have the option to purchase the Membership Interest
owned by such deceased Member or Owner, and the estate of the deceased
individual shall be obligated to sell such Membership Interest to the Company,
in accordance with the terms of this Section 8.7. The Company may exercise its
option by giving written notice thereof to the estate of the deceased
individual, or the appropriate representative thereof, within such one hundred
twenty (120) day period. The purchase price for such Membership Interest shall
equal the Formula Purchase Price. The purchase price shall be paid according to
the Payment Method. The outstanding amounts due from the Company to the estate
of the deceased individual shall bear interest at Prime Rate as of the date of
such individual’s death. Accrued interest shall be paid as of the dates payments
of principal are due as provided above.
ARTICLE IX
RECORDS, ACCOUNTINGS AND REPORTS
     SECTION 9.1 Books of Account.
     At all times during the continuance of the Company, the Board of Directors
shall maintain or cause to be maintained true and full financial records and
books of account showing all receipts and expenditures, assets and liabilities,
income and losses, and all other records necessary for recording the Company’s
business and affairs including those sufficient to record the allocations and
distributions required by the provisions of this Agreement.

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     SECTION 9.2 Access to Records.
     The books of account and all documents and other writings of the Company,
including the Certificate of Formation and any amendments thereto, shall at all
times be kept and maintained at the principal office of the Company or elsewhere
as decided by the Board of Directors. Each Member or its designated
representatives shall, upon reasonable notice to the Company, have access to
such financial books, records and documents during reasonable business hours and
may inspect and make copies of any of them.
     SECTION 9.3 Bank Accounts and Investment of Funds.
     (a) DCHMI shall open and maintain, on behalf of the Company, a bank account
or accounts in a federally insured bank or savings institution as it shall
determine, in which all monies received by or on behalf of the Company shall be
deposited. All withdrawals from such accounts shall be made upon the signature
of such person or persons as DCHMI may from time to time designate.
     (b) Any funds of the Company which DCHMI may determine are not currently
required for the conduct of the Company’s business may be deposited with a
federally insured bank or savings institution or invested in short term debt
obligations (including obligations of federal or state governments and their
agencies, commercial paper, certificates of deposit of commercial banks, savings
banks or savings and loan associations) as shall be determined by DCHMI in its
sole discretion. DCHMI has the right but not the obligation to invest funds of
the Company in any corporate cash management program of MedCath and its
Affiliates.
     SECTION 9.4 Fiscal Year.
     The Fiscal Year and accounting period of the Company shall end on
September 30 of each year.
     SECTION 9.5 Accounting Reports.
     As soon as reasonably practicable after the end of each fiscal year but in
no event later than 120 days after the end thereof, each Member shall be
furnished an annual accounting showing the financial condition of the Company at
the end of such fiscal year and the result of its operations for the fiscal year
then ended, which annual accounting shall be prepared on an accrual basis in
accordance with generally accepted accounting principles applied on a consistent
basis and shall be delivered to each of the Members promptly after it has been
prepared. It shall include a balance sheet as of the end of such Fiscal Year and
statements of income and expense, each Member’s equity, and cash flow for such
Fiscal Year. At the Manager’s election the Company shall either be audited or
such annual accountings shall be either reviewed or compiled by a firm of
independent certified public accountants engaged by the Manager on behalf of the
Company which shall also be the accounting firm of the Manager. The audit may be
a simple audit provided that the audit report shall set forth the distributions
to the Members for such Fiscal Year and shall separately identify distributions
from (i) operating revenue during such Fiscal

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Year, (ii) operating revenue from a prior period which had been held as
reserves, (iii) proceeds from the sale or refinancing of the Equipment, and
(iv) unexpended proceeds received from the sale of Membership Interests.
Following the opening of the Hospital, the Manager shall also cause to be
prepared and distributed to the Members quarterly financial statements.
     SECTION 9.6 Tax Matters Partner.
     DCHMI shall act as the “Tax Matters Partner” of the Company as that term is
defined Section 6231 of the Code.
ARTICLE X
MEETINGS AND VOTING RIGHTS OF MEMBERS
     SECTION 10.1 Meetings.
     (a) Meetings of the Members of the Company for any purpose may be called by
the Board of Directors or any Member that owns, or group of Members that owns in
the aggregate, at least thirty-five percent (35%) Membership Interest in the
Company. Such meetings shall be held in the Kingman, Arizona area. A Member may
attend a meeting by telephone or other electronic means and be considered
present for purposes of a quorum so long as the telephone or other connection
allows each Member to hear and be heard by all other Members. A quorum of
Members shall be necessary to conduct business at any Members’ meeting. A quorum
shall consist of the Required Members.
     (b) A notice of any such meeting shall be given by mail, not less than ten
(10) days nor more than sixty (60) days before the date of the meeting, to each
Member at its address as specified in Section 12.7. Such notice shall be in
writing, and shall state the place, date and hour of the meeting, and shall
indicate by whom it is being issued. The notice shall state the purpose or
purposes of the meeting. If a meeting is adjourned to another time or place, and
if any announcement of the adjournment of time or place is made at the meeting,
it shall not be necessary to give notice of the adjourned meeting.
     (c) Each Member may authorize any Person or Persons to act for the Member
by proxy in all matters in which a Member is entitled to participate, whether by
waiving notice of any meeting, or voting or participating at a meeting. Every
proxy must be signed by the Member or its attorney-in-fact. No proxy shall be
valid after the expiration of eleven months from the date thereof unless
otherwise provided in the proxy. Every proxy shall be revocable at the pleasure
of the Member executing it.
     SECTION 10.2 Voting Rights of Members.
     (a) Each Member shall take no part in or interfere in any manner with the
control, conduct or operation of the Company, and shall have no right or
authority to act for or bind the Company except as provided herein. Votes or
decisions, to the extent

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taken or to be made, of the Members may be cast by a duly authorized
representative of the Member designated by written notice to the Company and
each Member. Such votes may be cast at any duly called meeting of the Company or
in writing within ten (10) days after written request therefor. Except as
otherwise provided herein, any matters requiring the consent or approval of the
Members shall require the affirmative vote of the Required Members. Each Member
shall be entitled to the number of votes equal to the percentage Membership
Interest of such Member.
     (b) No Member shall have the right or power to vote to: (i) withdraw or
reduce the Member’s Capital Contributions except as a result of the dissolution
and liquidation of the Company or as otherwise provided by law or this
Agreement; (ii) bring an action for partition against the Company; (iii) cause
the termination and dissolution of the Company by court decree or otherwise,
except as set forth in this Agreement; or (iv) demand or receive property other
than cash in return for its Capital Contributions.
ARTICLE XI
AMENDMENTS
     SECTION 11.1 Authority to Amend by the Board of Directors.
     Notwithstanding Section 3.7 of this Agreement and except as otherwise
provided in Section 11.2, the Board of Directors may amend this Agreement or the
Article of Organization of the Company without the consent of the Required
Members for the following purposes only:
     (a) To admit additional Members or Substitute Members but only in
accordance with and if permitted by the other terms of this Agreement;
     (b) To preserve the legal status of the Company as a limited liability
company under the Act or other applicable state or federal laws if such does not
change the substance hereof, and the Company has obtained the written opinion of
its counsel to that effect;
     (c) To cure any ambiguity, to correct or supplement any provision herein
which may be inconsistent with any other provision herein, to clarify any
provision of this Agreement, or to make any other provisions with respect to
matters or questions arising under this Agreement which will not be inconsistent
with the provisions of this Agreement;
     (d) To satisfy the requirements of the Code and Regulations with respect to
limited liability companies or of any federal or state securities laws or
regulations, provided such amendment does not adversely affect the Membership
Interests of Members and is necessary or appropriate in the written opinion of
counsel and any amendment under this subsection (d) shall be effective as of the
date of this Agreement;

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     (e) To the extent that it can do so without materially reducing the
economic return on investment in the Company to any Member, to satisfy any
requirements of federal or state legislation or regulations, court order, or
action of any governmental administrative agency with respect the operation or
ownership of the Hospital; and
     (f) Subject to the terms of Section 2.6, to extend the term of the Company.
Any amendment proposed by a member of the Board of Directors shall not be
unreasonably delayed or rejected by any other member of the Board of Directors.
     SECTION 11.2 Restrictions on the Board of Directors’ Amendments: Amendments
by Members.
     Except as provided in Section 11.1, amendments to this Agreement shall be
made only upon the consent of the Required Members. No amendment shall be made
pursuant to Section 11.1 above which would materially and adversely affect the
federal income tax treatment to be afforded each Member, materially and
adversely affect the Membership Interests and liabilities of each Member as
provided herein, materially change the purposes of the Company, extend or
otherwise modify the term of the Company, or materially change the method of
allocations and distributions as provided in Article VI and Article VII.
     SECTION 11.3 Amendments to Certificate of Formation.
     In making any amendments to this Agreement, there shall be prepared,
executed and filed for recording by the Board of Directors such documents
amending the Certificate of Formation as required under the Act.
ARTICLE XII
MISCELLANEOUS
     SECTION 12.1 Limited Power of Attorney.
     Upon the execution hereof, each Member hereby irrevocably constitutes and
appoints the Directors he, she or it has appointed as his, her or its true and
lawful attorney in the Member’s name and on the Member’s behalf to take at any
time all such action which such Directors are expressly authorized to perform,
or which a Member is expressly required to perform, under this Agreement.
     SECTION 12.2 Waiver of Provisions.
     The waiver of compliance at any time with respect to any of the provisions,
terms or conditions of this Agreement shall not be considered a waiver of such
provision, term or condition itself or of any of the other provisions, terms or
conditions hereof.

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     SECTION 12.3 Interpretation and Construction.
     This Agreement, together with the Management Services Agreement and the
Hospital Professional Services Agreement, constitutes the entire agreement among
the Members. Any modification or amendment to this Agreement must be
accomplished in accordance with the provisions of Article III and Article XI.
Where the context so requires, the masculine shall include the feminine and the
neuter, and the singular shall include the plural. The headings and captions in
this Agreement are inserted for convenience and identification only and are in
no way intended to define, limit or expand the scope and intent of this
Agreement or any provision thereof. The references to Section and Article in
this Agreement are to the Sections and Articles of this Agreement.
     SECTION 12.4 Governing Law.
     This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware, exclusive of its conflict of law rules.
     SECTION 12.5 Partial Invalidity.
     In the event that any part or provision of this Agreement shall be
determined to be invalid or unenforceable, the remaining parts and provisions of
said Agreement which can be separated from the invalid or unenforceable
provision and shall continue in full force and effect.
     SECTION 12.6 Binding on Successors.
     The terms, conditions and provisions of this Agreement shall inure to the
benefit of, and be binding upon the Members and their respective heirs,
successors, distributees, legal representatives, and assigns. However, none of
the provisions of this Agreement shall be for the benefit of or enforceable by
any creditors of the Company.
     SECTION 12.7 Notices and Delivery.
     (a) To Members. Any notice to be given hereunder at any time to any Member
or any document reports or returns required by this Agreement to be delivered to
any Member, may be delivered personally or mailed to such Member, postage
prepaid, addressed to the Member at such times as the Member shall by notice to
the Company have designated as the Member’s address for the mailing of all
notices hereunder or, in the absence of such notice, to the address set forth in
the Information Exhibit (Exhibit A) hereof. Any notice, or any document, report
or return so delivered or mailed shall be deemed to have been given or delivered
to such Member at the time it is mailed, as the case may be.
     (b) To the Company. Any notice to be given to the Company hereunder shall
be delivered personally or mailed to the Company, by certified mail, postage
prepaid, addressed to the Company at its registered office. Any notice so
delivered or mailed shall

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be deemed to have been given to the Company at the time it is delivered or
mailed, as the case may be.
     SECTION 12.8 Counterpart Execution; Facsimile Execution.
     This Agreement may be executed in any number of counterparts with the same
effect as if all of the Members had signed the same document. Such executions
may be transmitted to the Company and/or the other Members by facsimile and such
facsimile execution shall have the full force and effect of an original
signature. All fully executed counterparts, whether original executions or
facsimile executions or a combination, shall be construed together and
constitute one and the same agreement.
     SECTION 12.9 Statutory Provisions.
     Any statutory reference in this Agreement shall include a reference to any
successor to such statute and/or revision thereof.
     SECTION 12.10 Waiver of Partition.
     Each Member does hereby waive any right to partition or the right to take
any other action which might otherwise be available to such party for the
purpose of severing its relationship with the Company or such Member’s interest
in the assets held by the Company from the interests of other Members until the
end of the term of both this Company and any successor company formed pursuant
to the terms hereof.
     SECTION 12.11 Change in Law.
     If due to any new law, rule or regulation, or due to an interpretation or
enforcement of any existing law, rule or regulation, health care counsel
reasonably selected by DCHMI and approved by the Board of Directors, which
approval shall not be unreasonably withheld, determines in writing that it is
reasonably likely that the relationships established between any of the parties
to this Agreement including any Member, Owner, Practice or their Affiliates
and/or successors or assigns will not comply with any law, rule, regulation or
interpretation thereof (“Applicable Law”), then the Members shall be given
notice thereof (a “Change of Law Event”). If the Required Members disagree with
whether a Change of Law Event exists and that disagreement is not resolved among
such parties within the following thirty (30) days, then that disagreement shall
be resolved by arbitration under Section 12.16 hereof. If a Change of Law Event
is determined to exist, then the Members hereby agree first, to negotiate in
good faith to restructure the relationships established under this Agreement so
as to bring them into compliance with such applicable laws while at the same
time preserving the material benefits of each of the Members. In the event that
a specific proposal for the restructuring of this Agreement is approved by the
Board of Directors and the Required Members, such restructured agreement shall
become binding upon all Members of the Company. The approval of any such
proposal for the restructuring of this Agreement shall not be unreasonably
withheld or delayed by any Investor Member. Second, in the event that within
forty-five (45) days following the Company’s receipt of legal advice in writing
from such health care counsel regarding Applicable

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Law the parties hereto are unable to negotiate an acceptable restructuring of
their relationship, then, if one or more Member’s ownership is not involved in
such non-compliance, such Members, within the following forty-five (45) day
period, shall have the right to purchase at their election the Membership
Interests of each Member whose ownership is involved with such noncompliance
with Applicable Law for a purchase price equal to the greater of: (a) the
Formula Purchase Price or (b) the amount of the Capital Contributions made by
such Member to the Company together with interest thereon computed at the Prime
Rate as of the date of this Agreement from the date of such contribution through
the date upon which the purchasing Members pays all amounts due under the terms
of this Section 12.11. For these purposes, distributions to the Members by the
Company after the effective date of this Agreement (and whether before or after
health care counsel determined there was a problem under an Applicable Law or
before or after the exercise of the purchase option) shall be treated as
payments by the purchasing Members. Such purchase price shall be paid in
accordance with the Payment Method, plus interest at the Prime Rate as of the
date of that the first installment of principal is due. Accrued interest shall
be paid as of the dates payments of principal are due as provided above. Third,
in the event that the compliant Members do not exercise their option to purchase
Membership Interests of a Member whose ownership causes the Company not to be in
compliance with Applicable Law, any Member may elect in writing within the
following forty-five (45) day period, to require that the Company be dissolved,
in which event the Company shall be dissolved in accordance with the terms of
this Agreement.
     SECTION 12.12 Investment Representations of the Members.
     (a) Each Member or individual executing this Agreement on behalf of an
Entity which is a Member hereby represents and warrants to the Company and to
the Members that such Member has acquired such Member’s Membership Interest in
the Company for investment solely for such Member’s own account with the
intention of holding such Membership Interest for investment, without any
intention of participating directly or indirectly in any distribution of any
portion of such Membership Interest and without the financial participation of
any other Person in acquiring such Membership Interest in the Company and that
by executing this Agreement, or holding such Membership Interest, such Member or
individual is not in violation of any other agreement or obligation.
     (b) Each Member or individual executing this Agreement on behalf of an
Entity which is a Member hereby acknowledges that such Member is aware that such
Member’s Membership Interest in the Company has not been registered (i) under
the Securities Act of 1933, as amended (the “Federal Act”), (ii) under
applicable Arizona securities laws, or (iii) under any other state securities
laws. Each Member or individual executing this Agreement on behalf of an Entity
which is a Member further understands and acknowledges that his representations
and warranties contained in this Section are being relied upon by the Company
and by the Members as the basis for the exemption of the Members’ Membership
Interest in the Company from the registration requirements of the Federal Act
and from the registration requirements of applicable Arizona securities laws and
all other state securities laws. Each Member or individual executing this
Agreement on behalf of an Entity which is a Member further acknowledges that the

40

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Company will not and has no obligation to recognize any sale, transfer, or
assignment of all or any part of such Member’s Membership Interest in the
Company to any Person unless and until the provisions of this Agreement hereof
have been fully satisfied.
     (c) Each Member or individual executing this Agreement on behalf of an
Entity which is a Member hereby acknowledges that prior to his execution of this
Agreement, such Member received a copy of this Agreement and that such Member
has examined this Agreement or caused this Agreement to be examined by such
Member’s representative or attorney. Each Member or individual executing this
Agreement on behalf of an Entity which is a Member hereby further acknowledges
that such Member or such Member’s representative or attorney is familiar with
this Agreement and with the Company’s business plans. Each Member or individual
executing this Agreement on behalf of an Entity which is a Member acknowledges
that such Member or such Member’s representative or attorney has made such
inquiries and requested, received, and reviewed any additional documents
necessary for such Member to make an informed investment decision and that such
Member does not desire any further information or data relating to the Company
or to the Members. Each Member or individual executing this Agreement on behalf
of an Entity which is a Member hereby acknowledges that such Member understands
that the purchase of such Member’s Membership Interest in the Company is a
speculative investment involving a high degree of risk and hereby represents
that such Member has a net worth sufficient to bear the economic risk of such
Member’s investment in the Company and to justify such Member’s investing in a
highly speculative venture of this type.
     (d) Each Member or Owner who is a physician hereby represents and warrants
that he or she shall apply for and qualify to obtain medical staff privileges at
the Hospital in order to be authorized to perform services at the Hospital as
required in order to qualify for the Hospital Ownership Exception to the Federal
Limitation on Certain Physician Referrals (commonly referred to as the Stark
Law) set forth at 42 U.S.C. 1395nn(d)(3) and regulations promulgated thereunder,
as amended from time to time.
     SECTION 12.13 Decisions by Directors.
     Each of the Members hereby authorize their respective appointed Directors
to make the decisions to be made by the Directors hereunder and hereby release
and hold harmless the Directors from any and all claims, liabilities, losses or
damages which any of them may have now or in the future resulting from any
decision made by the Directors hereunder unless due to the gross negligence or
willful misconduct of such Directors.
     SECTION 12.14 Referrals to Hospital and Ownership of Shares of Common Stock
of MedCath Incorporated.
     Each Member agrees that if in the reasonable opinion of health care counsel
of MedCath Incorporated, referrals of patients to the Hospital by a Member,
Owner, Practice or their Affiliate or ownership of shares of common stock in
MedCath Corporation or MedCath Incorporated by a

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Member, Owner, Practice or their Affiliate would cause or constitute a violation
of any federal or state law, rule or regulation, then, as applicable,
     (a) the Member, Owner, Practice or their Affiliate shall not refer patients
to the Hospital; and
     (b) the Member, Owner, Practice or their Affiliate shall not acquire, nor
continue to own any of shares of common stock of MedCath Corporation or MedCath
Incorporated.
     SECTION 12.15 Acknowledgments Regarding Legal Representation.
     Each of the Members hereunder acknowledge and agree that Moore & Van Allen,
PLLC is counsel for DCHMI, MedCath Incorporated and their Affiliates, and may,
upon approval of the Board of Directors, also serve as counsel for the Company
from time to time. Each of the Members hereby acknowledges and consents to such
representation. Each Member other than DCHMI further acknowledges and agrees
that they shall have no attorney-client relationship with Moore & Van Allen,
PLLC as a result of Moore & Van Allen, PLLC’s representation of the Company from
time to time.
     SECTION 12.16 Arbitration.
     Subject to the right of any Member to seek an injunction or other equitable
relief from a court with applicable authority, any controversy, dispute or
disagreement arising out of or relating to this Agreement shall be resolved by
binding arbitration, which shall be conducted in Phoenix, Arizona in accordance
with the American Health Lawyers Association Alternative Dispute Resolution
Service Rules of Procedure for Arbitration (the “Rules”). Such arbitration shall
be conducted in accordance with the Rules by a panel of three (3) arbitrators
none of whom shall reside in or practice primarily in Arizona nor have
previously represented any Members, Owners or their Affiliates in any capacity.
Any decision rendered by the arbitrators shall be final and binding on the
Members and shall be enforceable in any court having jurisdiction thereof. The
arbitrators shall have the authority to require the losing party to pay all
costs associated with such arbitration, including expenses and fees of
arbitrators.
     SECTION 12.17 Exhibits.
     The Exhibits to this Agreement, each of which is incorporated by reference,
are:

     
EXHIBIT A:
  Information Exhibit.
EXHIBIT B:
  Glossary of Terms.
EXHIBIT C:
  Development Budget Exhibit.
EXHIBIT D:
  Territory.
EXHIBIT E:
  Regulatory Allocations.

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     SECTION 12.18 Schedules.
     Schedule 1 to this Agreement, “Outpatient Facilities”, is incorporated
herein by reference.
     IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
following execution pages, to be effective as of the date described in
Article II.
[EXECUTIONS APPEAR ON THE FOLLOWING PAGES]

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EXECUTION PAGE
TO THE
OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware Limited Liability Company

                  MEMBERS:    
 
                Doctors Community Hospital Management, Inc.    
 
           
 
  By:        
 
 
Title:  
 
   
 
     
 
   
 
                     
 
           
 
  By:        
 
 
Title:  
 
   
 
     
 
   
 
                     
 
  Name:        
 
     
 
   
 
                     
 
  Name:        
 
     
 
   
 
                     
 
  Name:        
 
     
 
   

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For the purpose of acknowledging and agreeing to be bound by the terms of
Article III and Sections 5.10, 8.1, 8.6, 8.7, 12.12 and 12.14 hereof, the
undersigned Affiliates of the Members other than DCHMI, Investor Entities and
Owners hereby execute this Operating Agreement.

                            [signature]    
 
                          [print name]    
 
                          [print name of entity]    
 
           
 
  By:        
 
  Title:  
 
   
 
     
 
   

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EXHIBIT A
TO THE
OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware Limited Liability Company
INFORMATION EXHIBIT

                      Initial Capital     Percentage   Name and Address  
Contribution     Membership Interest  
Doctors Community Hospital Management, Inc.
c/o MedCath Incorporated
10720 Sikes Place, Suite 300
Charlotte, NC 28277
(704)708-6600
Tax ID#:                     
  $ 11,650,000       66.6 %
 
               
Investor Members
  $ 5,850,000 *     33.4 %
 
           
 
               
 
  $ 17,500,000       100 %

 

*   Assumes that Investor Members have purchased all of the Membership Interests
made available to them and fully funded such purchase as provided in
Section 3.1. DCHMI may purchase Units not purchased by Investor Members as long
as Investor Members purchase at least 167 Units.

A-1

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EXHIBIT B
TO THE
OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware Limited Liability Company
GLOSSARY OF TERMS
     As used in this Agreement, the following terms shall have the following
definitions (unless otherwise expressly provided herein).
     “Act” means the Delaware Limited Liability Company Act, as in effect in
Delaware and set forth at N.C. Gen. Stat. §§ 57C-1-01 through 57C-10-07 (or any
corresponding provisions of succeeding law).
     “Adjusted Capital Account” means, with respect to any Member, such Person’s
Capital Account (as defined below) as of the end of the relevant Fiscal Year
increased by any amounts which such Person is obligated to restore, or is deemed
to be obligated to restore pursuant to the next to last sentences of Regulations
Section 1.704-2(g)(1) (share of minimum gain) and Regulations Section
1.704-2(i)(5) (share of member nonrecourse debt minimum gain) and decreased by
the items described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6).
     “Affiliate” means with respect to a Person, (i) any relative of such
Person; (ii) any officer, director, trustee, partner, manager, employee or
holder of ten percent (10%) or more of any class of the outstanding voting
securities or of an equity interest of such Person; or (iii) Entity or holder of
ten percent (10%) or more of the outstanding voting securities or of an equity
interest of any Entity, controlling, controlled by, or under common control with
such Person. Affiliates shall also include each individual holding or owning an
ownership interest in the Investor Members or Investor Entities.
     “Agreed Value” means with respect to any noncash asset of the Company an
amount determined and adjusted in accordance with the following provisions:
     (a) The initial Agreed Value of any noncash asset contributed to the
capital of the Company by any Member shall be its gross fair market value, as
agreed to by the contributing Member and the Company.
     (b) The initial Agreed Value of any noncash asset acquired by the Company
other than by contribution by a Member shall be its adjusted basis for federal
income tax purposes.

B-1

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     (c) The initial Agreed Values of all the Company’s noncash assets,
regardless of how those assets were acquired, shall be reduced by depreciation
or amortization, as the case may be, determined in accordance with the rules set
forth in Regulations Section 1.704-1(b)(2)(iv)(f) and (g).
     (d) The Agreed Values, as reduced by depreciation or amortization, of all
noncash assets of the Company, regardless of how those assets were acquired,
shall be adjusted from time to time to equal their gross fair market values, as
agreed to by the Members in writing, as of the following times:
     (i) the acquisition of a Membership Interest or an additional Membership
Interest in the Company by any new or existing Member in exchange for more than
a de minimis Capital Contribution;
     (ii) the distribution by the Company of more than a de minimis amount of
money or other property as consideration for all or part of a Membership
Interest in the Company; and
     (iii) the termination of the Company for federal income tax purposes
pursuant to Code Section 708(b)(1)(B).
     If, upon the occurrence of one of the events described in (i), (ii) or
(iii) above the Members do not agree in writing on the gross fair market values
of the Company’s assets, it shall be deemed that the fair market values of all
the Company’s assets equal their respective Agreed Values immediately prior to
the occurrence of the event and thus no adjustment to those values shall be made
as a result of such event.
     “Agreement” means this Operating Agreement, as amended from time to time.
     “Board of Directors,” “Director” or “Directors” means those persons
appointed by the Members, pursuant to Section 3.8 of the Operating Agreement,
and given the power and authority under Article V of the Operating Agreement to
manage the Company. The terms “Director” or “Directors” is used for convenience,
but is intended to have the same meaning as the terms “Manager” or “Managers” in
the Act.
     “Bylaws, Rules and Regulations of the Medical Staff” means those bylaws,
rules and regulations adopted for the Hospital’s Medical Staff.
     “Capital Account” means with respect to each Member or assignee an account
maintained and adjusted in accordance with the following provisions:
     (a) Each Person’s Capital Account shall be increased by Person’s Capital
Contributions, such Person’s distributive share of Profits, any items in the
nature of income or gain that are allocated pursuant to the Regulatory
Allocations and the amount of any Company liabilities that are assumed by such
Person or that are secured by Company property distributed to such Person.

B-2

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     (b) Each Person’s Capital Account shall be decreased by the amount of cash
and the Agreed Value of any Company property distributed to such Person pursuant
to any provision of this Agreement, such Person’s distributive share of Losses,
any items in the nature of loss or deduction that are allocated pursuant to the
Regulatory Allocations, and the amount of any liabilities of such Person that
are assumed by the Company or that are secured by any property contributed by
such Person to the Company.
     In the event any Membership Interest is transferred in accordance with the
terms of this Agreement, the transferee shall succeed to the Capital Account of
the transferor to the extent it relates to the transferred Membership Interest.
     In the event the Agreed Values of the Company assets are adjusted pursuant
to the definition of Agreed Value contained in this Agreement, the Capital
Accounts of all Members shall be adjusted simultaneously to reflect the
aggregate adjustments as if the Company recognized gain or loss equal to the
amount of such aggregate adjustment.
     The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner
consistent with such regulations. In the event the Board of Directors shall
determine that it is prudent to modify the manner in which the Capital Accounts,
or any debits or credits thereto, are computed to comply with such Regulation,
the Board of Directors may make such modification, provided that it is not
likely to have a material effect on the amounts distributable to any Member
pursuant to Articles VI or VII hereof upon the dissolution of the Company. In
the event the Board of Directors shall determine such adjustments are necessary
or appropriate to comply with Regulations Section 1.704-1(b)(2)(iv), the Board
of Directors shall adjust the amounts debited or credited to Capital Accounts
with respect to (i) any property contributed by the Members or distributed to
the Members and (ii) any liabilities secured by such contributed or distributed
property or assumed by the Members. The Board of Directors shall also make any
other appropriate modifications in the event unanticipated events might
otherwise cause this Agreement not to comply with Regulations
Section 1.704-1(b). In the event any Membership Interest in the Company is
transferred in accordance with the terms of this Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent it relates to the
transferred Membership Interest.
     “Capital Contribution” means with respect to any Member, the amount of
money and the initial Agreed Value of any property (other than money)
contributed to the Company with respect to the Membership Interest of such
Member.
     “Cash Distributions” means net cash distributed to Members resulting from
Cash Flow from Operations or Cash from Sales or Refinancing, but shall not
include cash payments made to DCHMI as its Management Fee for services rendered
pursuant to Article V hereof or any amount in repayment of loans made by the
Members to the Company.
     “Cash Flow from Operations” means net cash funds provided from operations,
exclusive of Cash from Sales or Refinancing, of the Company or investment of any
Company funds,

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without deduction for depreciation, but after deducting cash funds used to pay
or establish a reserve for expenses, debt payments, capital improvements, and
replacements and for such other items as the Board of Directors reasonably
determines to be necessary or appropriate and subject to Loan Conditions.
     “Cash from Sales or Refinancing” means the net cash proceeds received by
the Company from or as a result of any Sale or Refinancing of property after
deducting (i) all expenses incurred in connection therewith, (ii) any amounts
applied by the Board of Directors in their sole and absolute discretion or as
required by any loan agreement toward the payment of any indebtedness and other
obligations of the Company then due and payable, including payments of principal
and interest on mortgages, (iii) the payment of any other expenses or amounts
owed by the Company to other parties, MFC, or to any MedCath Affiliate to the
extent then due and payable, and (iv) the establishment of any reserves deemed
necessary by the Board of Directors in their sole and absolute discretion. If
the proceeds of any sale or refinancing are paid in more than one installment,
each such installment shall be treated as a separate Sale or Refinancing for the
purposes of this definition.
     “Certificate of Formation” means the Certificate of Formation of the
Company, as filed with the Secretary of State of Delaware as the same may be
amended from time to time.
     “Code” means the Internal Revenue Code of 1986, as amended from time to
time. Any reference herein to a specific section(s) of the Code shall be deemed
to include a reference to any corresponding provision of future law.
     “Company” means and shall refer to Doctors Community Hospital, LLC, which
was created upon the filing of the Certificate of Formation with the Office of
the Secretary of State of Delaware, to be operated as a Delaware limited
liability company, and to continue under this Agreement, as amended from time to
time.
     “DCHMI” means Doctors Community Hospital Management, Inc.
     “Default Rate” means a per annum rate of return on a specified principal
sum, compounded monthly, equal to the greater of (a) the Prime Rate plus 500
basis points, or (b) 18%, but in no event greater than the highest rate allowed
by law.
     “Entity” means any general partnership, limited partnership, limited
liability company, limited liability partnership, corporation, joint venture,
trust, business trust, cooperative or association or any foreign trust or
foreign business organization.
     “Equipment” means the appropriate equipment and supplies required from time
to time in connection with the development and operation of the Hospital.
     “Fiscal Year” means, with respect to the first year of the Company, the
period beginning upon the formation of the Company and ending on the next
September 30, with respect to subsequent years of the Company, the twelve month
period beginning October 1 and ending

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September 30, and, with respect to the last year of the Company, the portion of
the period beginning October 1 and ending with the date of the final liquidating
distributions.
     “Formula Purchase Price” has the meaning set forth at Section 8.1(c) of the
Agreement.
     “Hospital” means the licensed, general acute care hospital in Kingman,
Arizona, as further described in Section 2.3 of the Agreement.
     “Initial Members” shall mean DCHMI and those Investor Members who make
initial Capital Contributions to the Company under Section 3.1.
     “Investor Entity” means an Investor Member that is an Entity or an Entity
that has a direct or indirect ownership interest in an Investor Member.
     “Investor Members” shall mean the Members other than DCHMI admitted as
Members of the Company in accordance with the terms of this Agreement.
     “Management Services Agreement” means the agreement by and between the
Company and DCHMI pursuant to which DCHMI will manage the day-to-day business
and affairs of the Company.
     “Manager” shall mean DCHMI.
     “Material Agreement” means any binding agreement which may not be canceled
upon less than ninety (90) days notice and which calls for the expenditure of
funds, or involves an obligation for financing, in excess of $100,000.00
exclusive of: (1) agreements or obligations contemplated by any budget,
development plan, financing or construction contract approved by the Board of
Directors as adjusted in Section 5.6(d); or (2) agreements incurred in the
ordinary course of business such as employment agreements, purchases of supplies
and routine services and the like.
     “Material Decision” means any decisions regarding approvals of the
development and operating budgets for the Hospital, the selection of the site
for the Hospital, the design of the Hospital, the selection of the Hospital’s
senior administrator, strategic planning, the execution of managed care
contracts and the execution of exclusive contracts to provide physician services
to the Hospital.
     “Medical Director” means the individual designated as the medical director
of the Hospital pursuant to a Medical Director Agreement.
     “Medical Director Agreement” means the Medical Director Agreement by and
between the Company and a medical director approved by the Board of Directors.
     “Member” means and shall refer to the organizers of the Company (unless or
until any such organizer has withdrawn) and each of the Persons identified as
“Members” in the then

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applying Information Exhibit attached hereto and incorporated herein by this
reference or admitted as a Member in accordance with the terms of this
Agreement.
     “Membership Interest” means all of a Member’s rights in the Company,
including without limitation the Member’s share of Profits, Losses, Cash
Distributions and other benefits of the Company, any right to vote, any right to
participate in the management of the business and affairs of the Company,
including the right to vote on, consent to, or otherwise participate in any
decision or action of or by the Members granted pursuant to this Operating
Agreement or the Act. The percentage Membership Interest of each Member, their
Capital Contributions and other related information shall be listed on the
Information Exhibit. The percentage Membership Interests generally shall be
based upon the pro rata Capital Contribution of each Member.
     “Organization Expenses” means those expenses incurred, either by the
Company, on behalf of the Company or for which the Company has agreed to make
reimbursement, in connection with the formation of the Company including such
expenses as: (i) registration fees, filing fees, and taxes; and (ii) legal fees
incurred in connection with any of the foregoing.
     “Owner” means an individual who, through an Investor Entity or otherwise,
has a direct or indirect ownership interest in an Investor Member.
     “Payment Method” has the meaning set forth at Section 8.1(c) of the
Agreement.
     “Person” means any individual or Entity, and the heirs, executors,
administrators, legal representatives, successors, and assigns of such
individual or Entity where the context so permits.
     “Practice” means the Entity or sole proprietorship through which an Owner
primarily conducts his medical office practice.
     “Prime Rate” means the rate of interest as of the relevant day or time
period as announced by the Bank of America, N.A. or its successor in interest
from time to time as its prime or reference rate.
     “Profits and Losses” means, for each Fiscal Year or other period, an amount
equal to the Company’s taxable income or loss for such year or period,
determined in accordance with Code Section 703(a) (for this purpose, all items
of income, gain, loss, or deduction required to be stated separately pursuant to
Code Section 703(a)(l) shall be included in taxable income or loss), with the
following adjustments:
     (a) Any income of the Company that is exempt from federal income tax and
not otherwise taken into account in computing Profits or Losses shall be added
to such taxable income or loss;
     (b) Any expenditures of the Company described in Code Section 705(a)(2)(B)
or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations
Section

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1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits
or Losses, shall be subtracted from such taxable income or loss;
     (c) Gain or loss resulting from dispositions of Company assets shall be
computed by reference to the Agreed Value of the property disposed of,
notwithstanding that the adjusted tax basis of such property differs from its
Agreed Value.
     “Project Costs” shall include, without limitation, all costs incurred by
the Company in connection with the development, opening, and construction of the
Hospital, including without limitation, land acquisition costs, equipment costs,
architectural, design and engineering costs, legal and accounting costs,
construction costs, construction period interest, pre-opening expenses, fees
payable to DCHMI or its Affiliates, projected working capital requirements, and
other construction, opening and development costs incurred in connection with
the construction, opening, and development of the Hospital, which total amount
shall finally be determined by DCHMI following the opening of the Hospital.
     “Refinancing” means any borrowing incurred or made to recapitalize the
Company or the equity investment in, or to refinance any loan used to finance
the acquisition of property.
     “Regulations” means rules, orders, and regulations issued pursuant to or
under the authority of the Code and shall include revisions to and succeeding
provisions as appropriate.
     “Regulatory Allocations” means those allocations of items of Company
income, gain, loss or deduction set forth on the Regulatory Allocations Exhibit
and designed to enable the Company to comply with the alternate test for
economic effect prescribed in Regulations Section 1.704-1(b)(2)(ii)(d), and the
safe-harbor rules for allocations attributable to nonrecourse liabilities
prescribed in Regulations Section 1.704-2.
     “Required Members” shall mean DCHMI and the Investor Members owning a
majority of the percentage Membership Interests owned by Investor Members in the
aggregate.
     “Sale” means the sale, exchange, involuntary conversion (other than a
casualty followed by reconstruction), condemnation, or other disposition of
property by the Company, except for dispositions of inventory items and personal
property in the ordinary course of business and in connection with the
replacement of such property.
     “Substitute Member” means an assignee of a Member who has been admitted to
the Company and granted all the rights of a Member in place of its assignor
pursuant to the provisions of this Agreement. A Substitute Member, upon its
admission as such, shall replace and succeed to the rights, privileges, and
liabilities of the Member from whom it acquired its interest in the Company.

B-7

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EXHIBIT C
TO THE
OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware Limited Liability Company
DEVELOPMENT BUDGET EXHIBIT

         
Construction Costs
  $ 48,000,000  
Equipment
    12,170,000  
Land
    2,229,000  
Pre-Opening Expenses
    5,550,000  
Working Capital
    9,000,000  
 
     
Total
  $ 76,950,000  
 
     

C-1

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EXHIBIT D
TO THE
OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware Limited Liability Company
TERRITORY
(MAP) [g25507g2550702.gif]

D-1

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EXHIBIT E
TO THE
OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware Limited Liability Company
REGULATORY ALLOCATIONS
     This Exhibit contains special rules for the allocation of items of Company
income, gain, loss and deduction that override the basic allocations of Profits
and Losses in the Agreement to the extent necessary to cause the overall
allocations of items of Company income, gain, loss and deduction to have
substantial economic effect pursuant to Regulations Section 1.704-1(b) and shall
be interpreted in light of that purpose. Subsection (a) below contains special
technical definitions. Subsections (b) through (h) contain the Regulatory
Allocations themselves. Subsections (i), (j) and (k) are special rules
applicable in applying the Regulatory Allocations.
     (a) Definitions Applicable to Regulatory Allocations. For purposes of the
Agreement, the following terms shall have the meanings indicated:
     (i) “Company Minimum Gain” means the same as the meaning of “partnership
minimum gain” set forth in Regulations Section 1.704-2(d), and is generally the
aggregate gain the Company would realize if it disposed of its property subject
to Nonrecourse Liabilities in full satisfaction of each such liability, with
such other modifications as provided in Regulations Section 1.704-2(d). In the
case of Nonrecourse Liabilities for which the creditor’s recourse is not limited
to particular assets of the Company, until such time as there is regulatory
guidance on the determination of minimum gain with respect to such liabilities,
all such liabilities of the Company shall be treated as a single liability and
allocated to the Company’s assets using any reasonable basis selected by DCHMI.
     (ii) “Member Nonrecourse Deductions” means losses, deductions or Code
Section 705(a)(2)(B) expenditures attributable to Member Nonrecourse Debt under
the general principles applicable to “partner nonrecourse deductions” set forth
in Regulations Section 1.704-2(i)(2).
     (iii) “Member Nonrecourse Debt” means any Company liability with respect to
which one or more but not all of the Members or related Persons to one or more
but not all of the Members bears the economic risk of loss within the meaning of
Regulations Section 1.752-2 as a guarantor, lender or otherwise.
     (iv) “Member Nonrecourse Debt Minimum Gain” means the minimum gain
attributable to Member Nonrecourse Debt as determined pursuant to

E-1

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Regulations Section 1.704-2(i)(3). In the case of Member Nonrecourse Debt for
which the creditor’s recourse against the Company is not limited to particular
assets of the Company, until such time as there is regulatory guidance on the
determination of minimum gain with respect to such liabilities, all such
liabilities of the Company shall be treated as a single liability and allocated
to the Company’s assets using any reasonable basis selected by DCHMI.
     (v) “Nonrecourse Deductions” means losses, deductions, or Code Section
705(a)(2)(B) expenditures attributable to Nonrecourse Liabilities (see
Regulations Section 1.704-2(b)(1)). The amount of Nonrecourse Deductions for a
Fiscal Year shall be determined pursuant to Regulations Section 1.704-2(c), and
shall generally equal the net increase, if any, in the amount of Company Minimum
Gain for that taxable year, determined generally according to the provisions of
Regulations Section 1.704-2(d), reduced (but not below zero) by the aggregate
distributions during the year of proceeds of Nonrecourse Liabilities that are
allocable to an increase in Company Minimum Gain, with such other modifications
as provided in Regulations Section 1.704-2(c).
     (vi) “Nonrecourse Liability” means any Company liability (or portion
thereof) for which no Member bears the economic risk of loss under Regulations
Section 1.752-2.
     (vii) “Regulatory Allocations” means allocations of Nonrecourse Deductions
provided in Paragraph (b) below, allocations of Member Nonrecourse Deductions
provided in Paragraph (c) below, the minimum gain chargeback provided in
Paragraph (d) below, the member nonrecourse debt minimum gain chargeback
provided in Paragraph (e) below, the qualified income offset provided in
Paragraph (f) below, the gross income allocation provided in Paragraph
(g) below, and the curative allocations provided in Paragraph (h) below.
     (b) Nonrecourse Deductions. All Nonrecourse Deductions for any Fiscal Year
shall be allocated to the Members in accordance with their percentage Membership
Interests.
     (c) Member Nonrecourse Deductions. All Member Nonrecourse Deductions for
any Fiscal Year shall be allocated to the Member who bears the economic risk of
loss under Regulations Section 1.752-2 with respect to the Member Nonrecourse
Debt to which such Member Nonrecourse Deductions are attributable.
     (d) Minimum Gain Chargeback. If there is a net decrease in Company Minimum
Gain for a Fiscal Year, each Member shall be allocated items of Company income
and gain for such year (and, if necessary, subsequent years) in an amount equal
to such Member’s share of such net decrease in Company Minimum Gain, determined
in accordance with Regulations Section 1.704-2(g)(2) and the definition of
Company Minimum Gain set forth above. This provision is intended to comply with
the minimum

E-2

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gain chargeback requirement in Regulations Section 1.704-2(f) and shall be
interpreted consistently therewith.
     (e) Member Nonrecourse Debt Minimum Gain Chargeback. If there is a net
decrease in Member Nonrecourse Debt Minimum Gain attributable to a Member
Nonrecourse Debt for any Fiscal Year, each Member who has a share of the Member
Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt as of
the beginning of the Fiscal Year, determined in accordance with Regulations
Section 1.704-2(i)(5), shall be allocated items of Company income and gain for
such year (and, if necessary, subsequent years) in an amount equal to such
Member’s share of the net decrease in Member Nonrecourse Debt Minimum Gain
attributable to such Member Nonrecourse Debt, determined in accordance with
Regulations Sections 1.704-2(i)(4) and (5) and the definition of Member
Nonrecourse Debt Minimum Gain set forth above. This Paragraph is intended to
comply with the member nonrecourse debt minimum gain chargeback requirement in
Regulations Section 1.704-2(i)(4) and shall be interpreted consistently
therewith.
     (f) Qualified Income Offset. In the event any Member unexpectedly receives
any adjustments, allocations, or distributions described in Regulations Sections
1.704-1(b)(2)(ii)(d)(4), (5), or (6), items of Company income and gain
(consisting of a pro rata portion of each item of Company income, including
gross income, and gain for such year) shall be allocated to such Member in an
amount and manner sufficient to eliminate, to the extent required by the
Regulations, any deficit in such Member’s Adjusted Capital Account created by
such adjustments, allocations or distributions as quickly as possible.
     (g) Gross Income Allocation. In the event any Member has a deficit in its
Adjusted Capital Account at the end of any Fiscal Year, each such Member shall
be allocated items of Company gross income and gain, in the amount of such
Adjusted Capital Account deficit, as quickly as possible.
     (h) Curative Allocations. When allocating Profits and Losses under
Article VI, such allocations shall be made so as to offset any prior allocations
of gross income under Paragraph (g) above to the greatest extent possible so
that overall allocations of Profits and Losses shall be made as if no such
allocations of gross income occurred.
     (i) Ordering. The allocations in this Exhibit to the extent they apply
shall be made before the allocations of Profits and Losses under Article VI and
in the order in which they appear above.
     (j) Waiver of Minimum Gain Chargeback Provisions. If DCHMI determines that
(i) either of the two minimum gain chargeback provisions contained in this
Exhibit would cause a distortion in the economic arrangement among the Members,
(ii) it is not expected that the Company will have sufficient other items of
income and gain to correct that distortion, and (iii) the Members have made
Capital Contributions or received net income allocations that have restored any
previous Nonrecourse Deductions or Member

E-3

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Nonrecourse Deductions, then DCHMI shall have the authority, but not the
obligation, after giving notice to the Members, to request on behalf of the
Company the Internal Revenue Service to waive the minimum gain chargeback or
member nonrecourse debt minimum gain chargeback requirements pursuant to
Regulations Sections 1.704-2(f)(4) and 1.704-2(i)(4). The Company shall pay the
expenses (including attorneys’ fees) incurred to apply for the waiver. DCHMI
shall promptly copy all Members on all correspondence to and from the Internal
Revenue Service concerning the requested waiver.
     (k) Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code
Section 743(b) is required, pursuant to Regulations
Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be treated
as an item of gain (if the adjustment increases the basis of the asset) or loss
(if the adjustment decreases such basis), and such gain or loss shall be
specially allocated to the Members in a manner consistent with the manner in
which their Capital Accounts are required to be adjusted pursuant to such
Section of the Regulations.
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SCHEDULE 1
TO THE
OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware Limited Liability Company
OUTPATIENT FACILITIES
[To Be Added]