<PAGE>   1

                                                                   EXHIBIT 10.17








                               OPERATING AGREEMENT
                                       OF
                            HEART HOSPITAL OF BK, LLC
                   A NORTH CAROLINA LIMITED LIABILITY COMPANY
                                  AS AMENDED BY
                       FIRST AMENDMENT DATED JULY 11, 1996




<PAGE>   2



                                TABLE OF CONTENTS
                                     TO THE
                               OPERATING AGREEMENT
                                       OF
                            HEART HOSPITAL OF BK, LLC
                   A North Carolina Limited Liability Company


<TABLE>

<S>                                                                                                              <C>
ARTICLE I  DEFINITIONS............................................................................................2


ARTICLE II  FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY..................................................2


   Section 2.1.   Company Formation; Effective Date...............................................................2

   Section 2.2.   Name of Company.................................................................................2

   Section 2.3.   Purposes and Investment Objectives..............................................................2

   Section 2.4.   Registered Agent and Office; Principal Place of Business........................................3

   Section 2.5.   Commencement and Term...........................................................................3

ARTICLE III  MEMBERS AND CAPITAL CONTRIBUTIONS....................................................................4


   Section 3.1.   Contributions of Members........................................................................4

   Section 3.2.   Liability of Members - For Capital..............................................................4

   Section 3.3.   Members' Accounts and Withdrawals...............................................................4

   Section 3.4.   Interest on Capital Contributions or Capital Accounts...........................................4

   Section 3.5.   Additional Funding..............................................................................5

ARTICLE IV  NAMES AND ADDRESSES OF MEMBERS........................................................................5


ARTICLE V  MANAGEMENT OF THE COMPANY..............................................................................6


   Section 5.1.   General Authority and Powers of Managers........................................................6

   Section 5.2.   Management of Day-to-Day Operations............................................................10

   Section 5.3.   Restrictions on Authority of the Managers......................................................13

   Section 5.4.   Duties of the Managers.........................................................................14

   Section 5.5.   Delegation by the Managers.....................................................................15

   Section 5.6.   Right to Rely Upon the Authority of the Managers...............................................15

   Section 5.7.   Company Expenses...............................................................................15

   Section 5.8.   No Management by Members.......................................................................17

   Section 5.9.   Consent by Members to Exercise of Certain Rights and Powers by Managers........................17
</TABLE>

                                       i

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<TABLE>
   <S>               <C>                                                                                         <C>
   Section 5.10.     Other Business of Members...................................................................17

   Section 5.11.     Managers' Standard of Care..................................................................19

   Section 5.12.     Limitation of Liability.....................................................................19

   Section 5.13.     Indemnification of the Managers.............................................................20

   Section 5.14.     Election and Replacement of Investor Manager................................................20

   Section 5.15      Role of Investor Manager....................................................................20

   Section 5.16.     Purchase of Goods and Services from HHBF....................................................20

ARTICLE VI  DISTRIBUTIONS AND ALLOCATIONS........................................................................21


   Section 6.1.   Distributions of Cash Flow from Operations and Cash from Sales or Refinancing..................21

   Section 6.2.   Profits........................................................................................21

   Section 6.4.   Code Section 704(c) Tax Allocations............................................................21

   Section 6.5.   Miscellaneous..................................................................................22

ARTICLE VII  DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS...............................................23


   Section 7.1.   No Termination by Certain Acts of Member.......................................................23

   Section 7.2.   Dissolution....................................................................................23

   Section 7.3.   Dissolution and Final Liquidation..............................................................24

   Section 7.4.   Termination....................................................................................25

   Section 7.5.   Payment in Cash................................................................................25

   Section 7.6.   Goodwill and Trade Name........................................................................25

   Section 7.7.   Termination of Noncompetition Covenants........................................................25

ARTICLE VIII  REMOVAL OR WITHDRAWAL OF MANAGERS AND MEMBERS AND
TRANSFER OF MEMBERS' MEMBERSHIP AND/OR ECONOMIC INTERESTS........................................................26


   Section 8.1.   Manager - Transfers............................................................................26

   Section 8.2.   Members' Right to Continue When Company has no Manager.........................................27

   Section 8.3.   Relationship with Substitute Manager...........................................................27

   Section 8.4.   Members Who Are Not Managers - Restriction on Transfer.........................................27

   Section 8.5.   Condition Precedent to Transfer of Economic Interest and/or Membership Interest................28

   Section 8.6.   Substitute Member - Conditions to Fulfill......................................................29

   Section 8.7.   Allocations Between Transferor and Transferee..................................................29

   Section 8.8.   Rights, Liabilities of, and Restrictions on Assignee...........................................30

   Section 8.9.   Death of a Member..............................................................................30
</TABLE>


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<TABLE>

<S>                  <C>                                                                                         <C>
   Section 8.10.     Repurchase of Interests in Certain Event....................................................31

   Section 8.11.     Permissible Transfers by Investor Members...................................................31

   Section 8.12.     Special Provisions Regarding Withdrawal.....................................................31

ARTICLE IX  RECORDS, ACCOUNTINGS AND REPORTS.....................................................................33

   Section 9.1.   Books of Account...............................................................................33

   Section 9.2.   Access to Records..............................................................................33

   Section 9.3.   Bank Accounts and Investment of Funds..........................................................33

   Section 9.4.   Fiscal Year....................................................................................34

   Section 9.5.   Accounting Reports.............................................................................34

   Section 9.6.   Tax Returns....................................................................................34

ARTICLE X  MEETINGS AND VOTING RIGHTS OF MEMBERS.................................................................35

   Section 10.1.     Meetings....................................................................................35

   Section 10.2.     Voting Rights of Members....................................................................35

ARTICLE XI  AMENDMENTS...........................................................................................36

   Section 11.1.     Authority to Amend by Managers..............................................................36

   Section 11.2.     Restrictions on Managers' Amendments: Amendments by Investor Members........................37

   Section 11.3.     Amendments to Certificates..................................................................37

ARTICLE XII  MISCELLANEOUS.......................................................................................37

   Section 12.1.     Limited Power of Attorney...................................................................37

   Section 12.2.     Waiver of Provisions........................................................................39

   Section 12.3.     Interpretation and Construction.............................................................39

   Section 12.4.     Governing Law; Judicial Venue...............................................................39

   Section 12.5.     Partial Invalidity..........................................................................39

   Section 12.6.     Binding on Successors.......................................................................39

   Section 12.7.     Notices and Delivery........................................................................39

   Section 12.8.     Counterpart Execution; Facsimile Execution..................................................40

   Section 12.9.     Statutory Provisions........................................................................40

   Section 12.10.    Waiver of Partition.........................................................................40

   Section 12.11.    Change In Law...............................................................................40

   Section 12.12.    Investment Representations of the Members...................................................42
</TABLE>


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<TABLE>

   <S>               <C>                                                                                         <C>
   Section 12.13.    Decisions by Investor Manager...............................................................43

   Section 12.14.    Referrals to Hospital and Ownership of Shares of Common Stock of MedCath Incorporated.......43

   Section 12.15.    Exhibits....................................................................................43
</TABLE>


                                       iv
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                                                                   EXHIBIT 10.17


                               OPERATING AGREEMENT
                                       OF
                            HEART HOSPITAL OF BK, LLC
                   A North Carolina Limited Liability Company


         THESE SECURITIES ARE BEING ISSUED PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND THE CALIFORNIA SECURITIES ACT
IN RELIANCE UPON THE REPRESENTATION OF EACH PURCHASER OF THE SECURITIES THAT THE
SAME ARE BEING ACQUIRED FOR INVESTMENT PURPOSES. THESE SECURITIES MAY
ACCORDINGLY NOT BE RESOLD OR OTHERWISE TRANSFERRED OR CONVEYED IN THE ABSENCE OF
REGISTRATION OF THE SAME PURSUANT TO THE APPLICABLE SECURITIES LAWS UNLESS AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS FIRST OBTAINED THAT SUCH
REGISTRATION IS NOT THEN NECESSARY. ANY TRANSFER CONTRARY HERETO SHALL BE VOID.

         THIS OPERATING AGREEMENT (the "Agreement") of HEART HOSPITAL OF BK, LLC
(the "Company"), a North Carolina Limited Liability Company is made and entered
into by and among the Company and HHBF, Inc., a North Carolina corporation
("HHBF"), as a Member and each of the other parties identified on the
Information Exhibit as Members (the "Investor Members").


                                    RECITALS

         1.       The Company has been formed to develop, own and operate an
acute care hospital which hospital shall be located in or near Bakersfield,
California and shall specialize in all aspects of adult cardiology and adult
cardiovascular care and surgery which HHBF and the Investor Manager may agree
upon;

         2.       It is intended that the hospital will be a low-cost, high
quality provider of medical services within the Bakersfield, California area in
a manner which is consistent with the national health care policy of lowering
the costs of health care;

         3.       The Capital Contributions and active involvement of the
Investor Members are necessary to enable the Company to achieve its objectives.


<PAGE>   7




                                    ARTICLE I

                                   DEFINITIONS

         Unless otherwise indicated, capitalized words and phrases in this
Operating Agreement shall have the meanings set forth in the attached Glossary
of Terms.


                                   ARTICLE II

         FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY

         Section  2.1. Company Formation; Effective Date. The Company was formed
upon the filing of the Articles of Organization with the Secretary of State of
North Carolina in accordance with the provisions of the Act. Upon the
effectiveness of this Agreement, the Persons listed on the attached Information
Exhibit shall be admitted to the Company as Members and the Persons who executed
the Articles shall be withdrawn as Members (unless they are listed on the
Information Exhibit), all without the necessity of any further act or instrument
and without causing the dissolution of the Company. HHBF shall execute or cause
to be executed all other such certificates or documents, and shall do or cause
to be done all such filing, recording, or other acts, as may be necessary or
appropriate from time to time to comply with the requirements of law for the
continuation and/or operation of a limited liability company in the State of
North Carolina, and other documents to reflect the admission of additional
Members to the Company. Any costs incurred by HHBF in connection with the
foregoing shall be reimbursed promptly upon the completion of such action. The
Agreement shall be effective as of the date the Company was formed.

         Section  2.2. Name of Company. The name of the Company is HEART
HOSPITAL OF BK, LLC.

         Section  2.3. Purposes and Investment Objectives. The principal
purposes of the Company are as follows:

                  (a)      To develop, own and operate the Hospital which would
         include, but not be limited to, the following:

                           (i)      Services and facilities to meet all
         requirements of the State of California, Medicare, JCAHO and other
         credentialling or licensing bodies or agencies in order to have the
         Hospital licensed as a general acute care hospital and to perform
         adult cardiology and adult cardiovascular surgical services of every
         type or nature and to be eligible to obtain appropriate reimbursements
         therefore;


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<PAGE>   8

                           (ii)     70,000 to 80,000 square feet in a building
                  to be constructed in accordance with plans and specifications
                  approved by the Company;

                           (iii)    Approximately 60 medical/surgical beds;

                           (iv)     4 heart catheterization laboratories with
                  one set up for procedures relating to electrophysiology and
                  pacemakers;

                           (v)      3 heart surgical suites with space for the
                  development of one additional heart surgical suite;

                           (vi)     All appropriate support services and
                  systems; and

                           (vii)    Appropriate Equipment and services with
                  respect to the facilities described above and as otherwise
                  reasonably necessary or appropriate for the diagnosis and
                  treatment of cardiovascular disease, including but not limited
                  to invasive and non-invasive cardiac testing, interventional
                  treatment including percutaneous transluminal coronary
                  angioplasty and atherectomy, and cardiac surgery which would
                  include, but not be limited to, bypass grafts and valve
                  surgery.

                  The above size, number and scope of facilities of the Hospital
         are only preliminary estimates. The Managers are authorized to finally
         make all determinations with respect thereto.

                  (b).     To lease or acquire the real property, and if
appropriate to construct a suitable building, in which the Hospital shall be
located;

                  (c).     Any other purpose reasonably related to (a) and (b)
above.

         Section  2.4. Registered Agent and Office; Principal Place of Business.
The registered agent and office of the Company shall be as indicated in the
Articles of Organization, as amended from time to time. The principal place of
business of the Company shall be at such location in California as selected by
HHBF from time to time. HHBF shall promptly notify the Members of any changes in
the Company's registered agent, registered office, or principal place of
business.

         Section  2.5. Commencement and Term. The Company commenced on the
filing of the Articles of Organization in the Office of the Secretary of State
of North Carolina, as required by Section 2.1 hereof, and shall continue until
December 31, 2035, unless sooner terminated or dissolved as provided herein;
provided, however, that the termination date may be extended for up to an
additional forty (40) years in five (5) year increments upon the election of
HHBF. In the event HHBF does not elect to extend the term


                                       3
<PAGE>   9


hereof, the Investor Manager may instead elect to extend the term hereof,
subject to HHBF's consent which shall not be unreasonably withheld or delayed.


                                   ARTICLE III

                        MEMBERS AND CAPITAL CONTRIBUTIONS

         Section  3.1. Contributions of Members. The Members shall contribute
capital as follows:

                  (a)      HHBF shall own at least a fifty-one percent (51%)
         Membership Interest in the Company and shall contribute to the Company
         for its Membership Interest One Million Five Hundred Thirty Thousand
         Dollars ($1,530,000).

                  (b)      The Investor Members shall own in the aggregate up to
         a forty-nine percent (49%) Membership Interest and shall contribute to
         the Company for their Membership Interests an amount, in the aggregate,
         of up to One Million Four Hundred Seventy Thousand Dollars
         ($1,470,000). The Membership Interests of the Investor Members shall be
         owned as shown on the Information Exhibit attached hereto.

         The Members may be liable to the Company for amounts distributed to
them as a return of capital as provided by the Act. The Members shall not be
required to contribute any additional capital to the Company except as provided
in Section 3.5.

         Section  3.2. Liability of Members - For Capital. The liability of each
Member, as such, shall be limited to the amount of its agreed Capital
Contribution as a Member as provided in Section 3.1.

         Section  3.3. Members' Accounts and Withdrawals. An individual Capital
Account shall be maintained for each Member in accordance with requirements of
the Code and the Regulations promulgated thereunder. Except as provided in
Section 8.12 below, no Member shall be entitled to withdraw or to make demand
for withdrawal of any part of its Capital Account or to receive any distribution
except as provided herein.

         Section  3.4. Interest on Capital Contributions or Capital Accounts. No
interest shall be paid to any Member based solely on its Capital Contributions
or Capital Account. The preceding sentence shall not prevent the Company from
earning interest on its bank accounts and investments and distributing such
earnings to the Member in accordance with Articles VI and VII.


                                       4
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         Section  3.5. Additional Funding. If from time to time, HHBF reasonably
determines that funds in addition to that contemplated by Sections 3.1 and 3.2
are necessary or appropriate for the development or operation of the Hospital,
then:

                  (a)      First, HHBF shall use commercially reasonable efforts
         to borrow such funds from a bank or other lender on terms and
         conditions reasonably acceptable to HHBF, or HHBF may, but shall not be
         required, to loan such funds to the Company at the Prime Rate plus one
         percent (1%) per annum which loan shall be secured by the Company's
         assets. Interest shall be paid monthly in arrears and principal shall
         be repaid as the Company has funds available therefore. All loans
         obtained hereunder shall be subject to the approval of the Investor
         Manager which approval shall not be unreasonably withheld or delayed;

                  (b)      Second, if loans as provided in (a) above are not
         available, HHBF may request that the Members contribute additional
         capital to the Company pro rata according to their respective
         Membership Interests, provided however, such Capital Contributions
         shall be made only if HHBF and the Investor Manager approve such
         Capital Contributions. If additional Capital Contributions are so
         approved, each Member may elect whether or not to contribute its pro
         rata portion thereof. The other Investor Members may elect to
         contribute capital not contributed by any Investor Member hereunder.
         HHBF may then elect to contribute amounts which the Investor Members,
         in the aggregate, have not so contributed. Thereafter, HHBF shall
         reasonably adjust the percentage Membership Interest of each Member
         (based on the relative aggregate Capital Contributions made by the
         Members in accordance with this Agreement) in the event any Member
         elected not to contribute capital pursuant to a capital call approved
         in accordance with this Section 3.5; and

                  (c)      Third, if funds are not available in accordance with
         (a) or (b) above, then HHBF may elect to dissolve the Company.


                                   ARTICLE IV

                         NAMES AND ADDRESSES OF MEMBERS

         The names and addresses of the Members are as indicated on the
Information Exhibit, attached hereto and as amended from time to time.


                                       5
<PAGE>   11

                                    ARTICLE V

                            MANAGEMENT OF THE COMPANY

         Section  5.1. General Authority and Powers of Managers. Except as set
forth in those provisions of this Agreement that specifically require the vote,
consent, approval or ratification of the Members, the Managers shall have
complete authority and exclusive control over the management of the business and
affairs of the Company. No Member has the actual or apparent authority to cause
the Company to become bound in any contract, agreement or obligation, and no
Member shall take any action purporting to be on behalf of the Company. No
Manager shall cause the Company to become bound to any contract, agreement or
obligation, and no Manager shall take any other action on behalf of the Company,
unless such matter has received the vote, consent, approval or ratification as
required pursuant to this Agreement with respect to such matter or except as
provided in Section 5.2 below with respect to the authority and actions of HHBF.
It is acknowledged that all decisions relating to the Hospital and medical staff
bylaws and physician credentialling matters shall be handled in accordance with
Section 11.1(g).

         Except as provided in this Agreement, decisions and actions to be taken
by the Managers shall be deemed to have been made only upon the affirmative
approval or consent of HHBF and the Investor Manager. In the event a decision,
approval or consent is requested of the Investor Manager by HHBF, it shall be
deemed to have been affirmatively made if the Investor Manager fails to respond
to any such written request therefor within five (5) days of notice thereof by
HHBF, provided however, once the Hospital has opened for business and regularly
conducts such business the five (5) day period shall be extended to ten (10)
days. Notwithstanding anything in this Agreement to the contrary, all decisions
and actions to be made by the Managers with respect to any loan, lease or other
similar financing of the development, construction or operation of the Hospital
or the Company's affairs, including without limitation the decisions with
respect to incurring any indebtedness or the refinancing thereof, shall be made
by HHBF and shall be subject to the consent of the Investor Manager, which
consent shall not be unreasonably withheld; provided, the application of the
Company's funds toward the repayment of all or a portion of any financing of the
Company in excess of amounts then required to be paid (i.e., voluntary
prepayments) shall be made only with the consent of HHBF and the Investor
Manager.

         The following material decisions shall be made by the Managers as
determined above, except as otherwise provided:

         (a)      Hospital Development. HHBF and the Investor Manager shall
approve the development plan for the Hospital, the selection of the site for the
Hospital, the design of the Hospital and the construction for the development of
the Hospital.

         (b)      Capital Improvements and Expansion. Any renovation and
expansion plans and capital equipment expenditures with respect to the Hospital
shall be reviewed and


                                       6
<PAGE>   12

approved by HHBF and the Investor Manager and shall be based upon economic
feasibility, patient care criteria and then current market conditions.

         (c)      Key Management and Clinical Employees. The selection,
retention and removal of the president/senior administrator, vice
president-clinical, vice president-managed care, catheterization laboratory
director, nurses and technicians, operating room/surgery suites director, nurses
and technicians, and ICU/CCU director, nurses and technicians shall be subject
to the approval of HHBF and the Investor Manager upon the written request of the
Investor Manager on an employee by employee basis. Either HHBF or the Investor
Manager may initiate the process to determine whether the employment of any of
the above individuals should be terminated by providing to the other a written
report which documents the reasons why the individual's job performance is
materially deficient and includes a recommended course of action for the Company
to take. With the consent of the non-initiating Manager, which consent shall not
be unreasonably withheld, the Managers shall cause the Company to take such
recommended actions; provided, such actions shall be consistent with the
established disciplinary procedures of the Company with respect to employees,
which shall include any procedures set forth in any employee handbooks or
manuals; provided further, the actions must be consistent with the obligations
of the Company under any contracts or agreements to which it is a party,
including agreements with the individual in question, and with applicable law.

         (d)      Certain Service Providers. The selection, retention and
removal of perfusionists, radiologists, emergency room physicians, pathologists
and anesthesiologists to provide services at the Hospital shall be subject to
the approval of HHBF and the Investor Manager upon the written request of the
Investor Manager on an employee by employee basis. Either HHBF or the Investor
Manager may initiate the process to determine whether the service relationship
of any of the above service providers should be terminated by providing to the
other a written report which documents the reasons why the service provider's
performance is materially deficient and includes a recommended course of action
for the Company to take. With the consent of the non-initiating Manager, which
consent shall not be unreasonably withheld, the Managers shall cause the Company
to take such recommended actions; provided, such actions shall be consistent
with the established disciplinary procedures of the Company (i) contained in the
medical staff bylaws and rules and regulations and Hospital bylaws and (ii) with
respect to employees, whether or not such service provider is an employee of the
Company, which shall include any procedures set forth in any employee handbooks
or manuals; provided further, the actions must be consistent with the
obligations of the Company under any contracts or agreements to which it is a
party, including agreements with the service provider in question, and with
applicable law.

         (e)      Marketing. All advertising and other marketing of the services
performed at the Hospital shall be subject to the prior review and approval of
HHBF and the Investor Manager.


                                       7
<PAGE>   13



         (f)      Ancillary Services. HHBF and the Investor Manager shall
approve Hospital-provided ancillary services based upon the pricing, access to
and quality of such services.

         (g)      Provider and Payor Relationships. Decisions regarding the
establishment or maintenance of relationships with other health care providers
and payors shall be made by HHBF and the Investor Manager.

         (h)      Strategic Planning. HHBF and the Investor Manager shall
develop long-term strategic planning objectives and adopt a strategic plan for
the Hospital.

         (i)      Capital Expenditures and Replacements. HHBF and the Investor
Manager shall determine the priority of major capital expenditures. In addition,
with respect to equipment for the catheterization laboratory, the operating
rooms/surgery suites and the ICC/CCU department, either HHBF or the Investor
Manager may present to the other proposals for the replacement of any such
equipment that is used and obsolete and such proposal shall be implemented with
the consent of the other Manager, which consent shall not be unreasonably
withheld; provided, such replacement shall be made only after the cost of any
such used equipment has been fully recovered as depreciation on the Company's
books and financial records in accordance with general accepted accounting
principals.

         (j)      Selection of Surgical Supplies and Implants. Decisions
regarding the selection of supplies and implants used in cardiac, thoracic and
vascular surgery, including instruments, sutures, cardioplegia, valves and
synthetic graphs, shall be made by HHBF and the Investor Manager as follows:

                  (i)      The Investor Manager shall submit to HHBF a list of
                           preferred parties to be the "primary vendor" for such
                           items.

                  (ii)     HHBF shall solicit bids from those parties who desire
                           to serve as the Hospital's primary vendor for such
                           items.

                  (iii)    HHBF shall submit such bids to the Investor Manager
                           and the Investor Manager shall choose one such party
                           to be the primary vendor and another such party to be
                           the "secondary vendor."

                  (iv)     The Managers shall cause the Company to enter into an
                           agreement with the party selected by the Investor
                           Manager as the primary vendor pursuant to which such
                           party shall provide such items to the Hospital.

                  (v)      The needed items shall thereafter be acquired from
                           the party selected as the primary vendor pursuant to
                           the agreement reached with that party. In the event
                           the primary vendor is not able to provide the
                           required items, the Hospital may acquire them from
                           the secondary vendor. In


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<PAGE>   14

                           the case of specialty items that neither the primary
                           vendor nor the secondary vendor can provide, the
                           Hospital may acquire them from other vendors.

                  (vi)     Upon reasonable notice, the Investor Manager may give
                           notice to HHBF of its desire to change the party who
                           will serve as the primary vendor, and to the extent
                           such a change will not violate any contract or
                           agreement to which the Company is a party, including
                           any contract or agreement with the party who is the
                           primary vendor at that time, HHBF will attempt to
                           enter into an agreement with the party selected by
                           the Investor Manager to replace the prior party as
                           the primary vendor.

         (k)      Selection of Supplies Utilized in the Catheterization
Laboratory. Decisions regarding the selection of supplies, including pacemakers,
used in the catheterization laboratory shall be made by HHBF and the Investor
Manager as follows:

                  (i)      The Investor Manager shall submit to HHBF a list of
                           preferred parties to be the "primary vendor" for such
                           items.

                  (ii)     HHBF shall solicit bids from those parties who desire
                           to serve as the Hospital's primary vendor for such
                           items.

                  (iii)    HHBF shall submit such bids to the Investor Manager
                           and the Investor Manager shall choose one such party
                           to be the primary vendor and another such party to be
                           the "secondary vendor."

                  (iv)     The Managers shall cause the Company to enter into an
                           agreement with the party selected by the Investor
                           Manager as the primary vendor pursuant to which such
                           party shall provide such items to the Hospital.

                  (v)      The needed items shall thereafter be acquired from
                           the party selected as the primary vendor pursuant to
                           the agreement reached with that party. In the event
                           the primary vendor is not able to provide the
                           required items, the Hospital may acquire them from
                           the secondary vendor. In the case of specialty items
                           that neither the primary vendor nor the secondary
                           vendor can provide, the Hospital may acquire them
                           from other vendors.

                  (vi)     Upon reasonable notice, the Investor Manager may give
                           notice to HHBF of its desire to change the party who
                           will serve as the primary vendor, and to the extent
                           such a change will not violate any contract or
                           agreement to which the Company is a party, including
                           any contract or agreement with the party who is the
                           primary vendor at that time,


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<PAGE>   15

                           HHBF will attempt to enter into an agreement with the
                           party selected by the Investor Manager to replace the
                           prior party as the primary vendor.

         (l)      Scope of Hospital Services. Any decision to expand the scope
of the Hospital services beyond those consistent with the services reasonably
expected to be provided by a hospital specializing in all aspects of adult
cardiology and adult cardiovascular care and surgery shall be made only upon the
unanimous consent of HHBF and the Investor Manager, which consent can be given
or withheld on the sole and absolute discretion of each Manager.

         (m)      Exclusive Contracts. HHBF and the Investor Manager shall
approve the execution of exclusive contracts to provide physician services to
the Hospital.

         (n)      Global Contracting. HHBF and the Investor Manager shall
develop and approve a unified managed care strategy under which the Hospital and
physicians practicing at the Hospital would enter into managed care agreements
including agreements containing package pricing for the services of the Hospital
and such physicians.

         (o)      Other Material Decisions. HHBF and the Investor Manager shall
approve any binding agreement which may not be canceled upon less than ninety
(90) days' notice and which calls for the expenditure of funds, or involves an
obligation for financing, in excess of $100,000, exclusive of agreements or
obligations contemplated by any budget, development plan, financing or
construction contract approved by the Managers or agreements incurred in the
ordinary course of business such as employment agreements for other than key
employees, purchases of supplies and routine services and the like.

         (p)      Budgets. The development and annual operating budgets to be
proposed by HHBF shall be approved by the Managers as provided above subject to
the following:

                  (i)      The Investor Manager shall be deemed to have approved
         a development budget which is substantially consistent with the
         attached Development Budget Exhibit to this Agreement;

                  (ii)     The Investor Manager shall not unreasonably withhold
         its approval of budgets which are within the reasonable revenue
         expectations of the Hospital and which are in compliance (both as to
         terms and availability of financing) with agreements with the Company's
         lenders and other parties providing financing to the Company; and

                  (iii)    In the event that the Managers are unable to approve
         an annual budget, HHBF shall be authorized to operate the Company under
         the previous year's budget increased by the greater of 5% or the
         increase during the previous year in the Consumer Price Index for
         Medical Items until a new budget is approved.

         Section  5.2. Management of Day-to-Day Operations. The day-to-day
management of the business and affairs of the Company shall be the
responsibility of HHBF, which management shall be subject to decisions,
guidelines and policies made or established by the Managers hereunder, including
those governed by Section 5.1, provided, however, decisions relating to


                                       10
<PAGE>   16

medical and clinical practice at the Hospital shall be made exclusively by the
qualified medical personnel of the Hospital. Subject in all cases to the
foregoing, HHBF shall have the right and the power, if, as, and when it, from
time to time, deems necessary or appropriate on behalf of the Company, subject
only to the terms and conditions of this Agreement:

                  (a)      To negotiate and execute on behalf of the Company all
         documents, instruments and agreements reasonably necessary or
         appropriate to lease, acquire and/or construct the Hospital and/or the
         real property on which the Hospital is or will be located, and to
         borrow funds to finance such lease, acquisition and/or construction (it
         being acknowledged that the Hospital may be an existing building or may
         be a newly constructed building);

                  (b)      To prepare a budget for the development of the
         Hospital and thereafter, annual operating budgets;

                  (c)      To acquire the Equipment and enter into loans or
         other financing arrangements therefor;

                  (d)      To handle the negotiation and execution of all such
         other agreements regarding the purchase of goods or services for the
         Hospital;

                  (e)      To establish procedures for quality assurance, peer
         review and granting privileges to physicians with other specialties at
         the Hospital, subject to the terms of the Hospital and medical staff
         bylaws adopted for the Hospital;

                  (f)      To expend all or portions of the Company's capital
         and income in furtherance of or relating to the Company's business and
         purposes, including, but not limited to, payment of all ongoing
         operational expenses, payment of commissions, organization expenses,
         professional fees, rental fees, and management fees, and to invest in
         short-term debt obligations (including, but not limited to, obligations
         of federal and state governments and their agencies, commercial paper,
         and certificates of deposit of commercial banks, or savings banks or
         savings and loan associations) such of the Company's funds as are
         temporarily not required for the development or operation of the
         Company and the payment of Company obligations; provided, that the
         Managers shall establish cash management guidelines to be followed by
         HHBF;

                  (g)      To employ or retain on such terms and for such
         compensation as HHBF may reasonably determine, such persons, firms, or
         corporations as HHBF may deem advisable, including without limitation
         qualified medical and other employees


                                       11
<PAGE>   17

         necessary or appropriate to operate the Hospital, attorneys,
         accountants, financial and technical consultants, supervisory managing
         agents, insurance brokers, brokers and loan brokers, appraisers,
         architects and engineers, who may also provide such services to HHBF,
         provided that the selection of the senior administrator of the Hospital
         shall be a Material Decision;

                  (h)      To execute leases, deeds, contracts, rental
         agreements, construction contracts, sales agreements, and management
         contracts;

                  (i)      To exercise all rights, powers, and privileges of the
         Company as lessee with respect to the Hospital or rights held by the
         Company;

                  (j)      To consent to the modification, renewal, or extension
         of any obligations to the Company of any Person or of any agreement to
         which the Company is a party or of which it is a beneficiary;

                  (k)      To execute in furtherance of any or all of the
         purposes of the Company, any deed, lease, deed of trust, security
         interest, mortgage, promissory note, bill of sale, assignment,
         contract, or other instrument purporting to purchase or convey or
         encumber in whole or in part the Equipment or the Hospital or other
         real or personal property of the Company;

                  (l)      To prepay in whole or in part, refinance, recast,
         increase, modify, or extend any security interest, deed of trust, or
         mortgage affecting the Hospital and in connection therewith to execute
         any extensions or renewals thereof on the Hospital and to grant
         security interests in any of the Equipment or the Hospital;

                  (m)      To adjust, compromise, settle, or refer to
         arbitration any claim against or in favor of the Company, and to
         institute, prosecute, and defend any actions or proceedings relating to
         the Company, its business, and properties;

                  (n)      To acquire and enter into any contract of insurance
         which HHBF deems necessary or appropriate for the protection of the
         Company and HHBF, for the conservation of the Company or its assets, or
         for any purpose beneficial to the Company; however, neither HHBF nor
         its Affiliates shall be compensated for providing insurance brokerage
         services relating to obtaining such insurance;

                  (o)      To prepare or cause to be prepared reports,
         statements, and other relevant information for distribution to the
         Members, including annual reports;

                  (p)      To open accounts and deposit and maintain funds in
         the name of the Company in banks or savings and loan associations;
         provided, however, that the Company's funds shall not be commingled
         with the funds of any other Person;


                                       12
<PAGE>   18

                  (q)      To cause the Company to make or revoke any of the
         elections referred to in Section 754 of the Internal Revenue Code of
         1986 as amended or any similar provisions enacted in lieu thereof;

                  (r)      To make all decisions related to generally accepted
         principles of accounting to be applied on a consistent basis and
         federal income tax elections;

                  (s)      To possess and exercise, subject to the restrictions
         contained in this Agreement, any and all of the rights, powers and
         privileges of a manager under the Act;

                  (t)      To execute, acknowledge, and deliver any and all
         documents or instruments in connection with any or all of the
         foregoing;

                  (u)      To modify or otherwise improve the Hospital, subject
         to the restrictions contained in this Agreement;

                  (v)      To manage, direct, and guide the operation of the
         Hospital including all necessary acts relating thereto, other than
         medical or clinical matters which shall be under the direction of the
         Investor Manager and other agreed upon qualified medical personnel;

                  (w)      To establish minimum insurance requirements for all
         physicians practicing at the Hospital;

                  (x)      To admit as Members additional investors who have
         been proposed for Member status by HHBF and approved by the Investor
         Manager, which approval shall be given or withheld in the sole and
         absolute discretion of the Investor Manager; and

                  (y)      To sell assets of the Company, subject to the
         restrictions contained in this Agreement.

         Section  5.3. Restrictions on Authority of the Managers. The Managers
shall not do any of the following:

                  (a)      Act in contravention of this Agreement;

                  (b)      Act in any manner which would make it impossible to
         carry on the express business purposes of the Company;

                  (c)      Commingle the Company funds with those of any other
         Person;

                  (d)      Admit an additional Manager, except as provided in
         this Agreement;


                                       13
<PAGE>   19

                  (e)      Admit an additional Member, except as provided in
         this Agreement;

                  (a)      Alter the primary purposes of the Company as set
         forth in Section 2.3;

                  (b)      Possess any property or assign the rights of the
         Company in specific property for other than a Company purpose;

                  (c)      Employ, or permit the employ of, the funds or assets
         of the Company in any manner except for the exclusive benefit of the
         Company;

                  (d)      Make any payments of any type, directly or
         indirectly, to anyone for the referral of patients to the Hospital in
         order to use the Hospital or to provide other services payable by
         Medicare or Medicaid; or

                  (e)      Sell all or substantially all of the assets of the
         Company or merge the Company with or into any other Entity without the
         approval of a Supermajority Vote of the Members.

         Section  5.4. Duties of the Managers. Each Manager shall do the
following:

                  (a)      Diligently and faithfully devote such of its time to
         the business of the Company as may be necessary to properly conduct the
         affairs of the Company, however, each Manager shall not be required to
         devote its full time to such duties;

                  (b)      Use its best efforts to cause the Company to comply
         with such conditions as may be required from time to time to permit the
         Company to be classified for federal income tax purposes as a
         partnership and not as an association taxable as a corporation;

                  (c)      In the case of HHBF file and publish all
         certificates, statements, or other instruments required by law for the
         formation and operation of the Company as a limited liability company
         in all appropriate jurisdictions;

                  (d)      In the case of HHBF cause the Company to obtain and
         keep in force during the term of the Company fire and extended coverage
         and public liability and professional liability insurance with such
         issuers and in such amounts as HHBF shall deem advisable, but in
         amounts not less (and deductible amounts not greater) than those
         customarily maintained with respect to the business equipment and
         property comparable to the Company's;

                  (e)      Have a fiduciary duty to conduct the affairs of the
         Company in the best interests of the Company and of the Members,
         including the safekeeping and use of all funds and assets, whether or
         not in its immediate possession and control, and it


                                       14
<PAGE>   20

         shall not employ or permit others besides Managers to employ such funds
         or assets in any manner except for the benefit of the Company; and

                  (f)      In the case of HHBF, deliver to the Secretary of
         State of North Carolina for filing an annual statement in accordance
         with the Act and make any similar filings required under California
         law.

         Section  5.5. Delegation by the Managers. Subject to restrictions
otherwise provided herein, the Managers may at any time employ any other Person,
including Persons and Entities employed by, affiliated with, or related to the
Managers to perform services for the Company and its business, and may delegate
all or part of their authority or control to any such other Persons, provided
that such employment or delegation shall not relieve the Managers of their
respective responsibilities and obligations under this Agreement or under the
laws of the State of North Carolina nor will it make any such Person a Member or
Manager of the Company.

         Section  5.6. Right to Rely Upon the Authority of the Managers. Persons
dealing with the Company may rely upon the representation of the Managers that
such Managers are managers of the Company and that such Managers have the
authority to make any commitment or undertaking on behalf of the Company. No
Person dealing with the Managers shall be required to determine its authority to
make any such commitment or undertaking. In addition, no purchaser from the
Company shall be required to determine the sole and exclusive authority of any
Manager to sign and deliver on behalf of the Company any instruments of transfer
with respect thereto or to see to the application or distribution of revenues or
proceeds paid or credited in connection therewith, unless such purchaser shall
have received written notice from the Company affecting the same.

         Section 5.7.  Company Expenses.

                  (a)      In general, the Company's expenses shall be billed
         directly to and paid by the Company. The Company shall reimburse the
         Managers or their Affiliates for: (i) all Organization Expenses
         incurred by the Managers or their Affiliates in connection with the
         formation of the Company; (ii) the actual costs to the Managers or
         their Affiliates of goods, services, and materials used for and by the
         Company; and (iii) all reasonable travel and other out-of-pocket
         expenses incurred by the Managers in the development and management of
         the Company and its business. Notwithstanding the above provision, each
         party hereto shall bear the costs of its own legal fees incurred prior
         to the execution of this Agreement in connection with this venture and
         HHBF shall not be reimbursed for any salary or compensation of its
         employees or its Affiliates' employees for services prior to the
         execution of this Agreement (i.e., HHBF and its Affiliates shall not be
         entitled to a reimbursement of corporate overhead resulting from
         employee compensation); provided, the parties hereto specifically
         recognize that HHBF and its Affiliates have incurred legal fees, filing
         fees, and other out-of-pocket costs for the benefit of the Company,
         including


                                       15
<PAGE>   21

         costs in connection with the preparation of documents for securities
         law and health care law compliance, real estate acquisition matters and
         formation and registration of the Company, and agree that HHBF shall be
         reimbursed for the first $25,000.00 of such costs. The reimbursement
         for expenses provided for in this Section 5.7(a) shall be made to the
         Managers or their Affiliates regardless of whether any distributions
         are made to the Members under Article VI and Article VII.

                  (b)      The Company shall also pay the following expenses of
         the Company:

                           (i)      All development and operational expenses of
                                    the Company, which may include, but are not
                  limited to: the salary and related expenses of employees and
                  staff of the Hospital, all costs of borrowed money, taxes, and
                  assessments on the Hospital, and other taxes applicable to the
                  Company; expenses in connection with the acquisition,
                  maintenance, leasing, refinancing, operation, and disposition
                  of the Equipment, furniture and fixtures of the Hospital
                  (including legal, accounting, audit, commissions, engineering,
                  appraisal, and the other fees); and the maintenance of the
                  Hospital and its Equipment, which may be performed by HHBF or
                  one of its Affiliates as long as the charges to the Company
                  for such service are no greater than the charges for such
                  service from a third party service provider;

                           (ii)     All fees and expenses paid to third parties
                  for accounting, legal, documentation, professional, and
                  reporting services to the Company, which may include, but are
                  not limited to: preparation and documentation of Company
                  bookkeeping, accounting and audits; preparation and
                  documentation of budgets, cash flow projections, and working
                  capital requirements; preparation and documentation of Company
                  state and federal tax returns; and taxes incurred in
                  connection with the issuance, distribution, transfer,
                  registration, and recordation of documents evidencing
                  ownership of a Membership Interest or Economic Interest in the
                  Company or in connection with the business of the Company;
                  expenses in connection with preparing and mailing reports
                  required to be furnished to the Members or Economic Interest
                  Owners for tax reporting or other purposes, including reports,
                  if any, that may be required to be filed with any federal or
                  state regulatory agencies, or expenses associated with
                  furnishing reports to Members which HHBF deems to be in the
                  best interest of the Company; expenses of revising, amending,
                  converting, modifying, or terminating the Company or this
                  Agreement; costs incurred in connection with any litigation in
                  which the Company is involved as well as any examination,
                  investigation, or other proceedings conducted by any
                  regulatory agency involving the Company; costs of any computer
                  equipment or services used for or by the Company; and the
                  costs of preparing and disseminating informational material
                  and documentation relating to a potential sale, refinancing,
                  or other disposition of the Hospital or the Equipment.


                                       16
<PAGE>   22

         Section  5.8. No Management by Members. Other than the Managers, the
Members shall take no part in, or at any time interfere in any manner with, the
management, conduct, or control of the Company's business and operations and
shall have no right or authority to act for or bind the Company except as set
forth in this Agreement. The rights and powers of such Members shall not extend
beyond those set forth in this Agreement and those granted under the Articles of
Organization and any attempt to participate in the control of the Company in a
manner contrary to the rights and powers granted herein and under the Articles
of Organization shall be null and void and without force and effect. Subject to
the decisions and judgment with respect to all professional medical or clinical
matters of qualified medical personnel, HHBF, in conjunction with the Investor
Manager when applicable, shall have the right to determine when and how the
operations of the Company shall be conducted. The exercise by any other Member
of any of the rights granted to the Member hereunder shall not be deemed to be
taking part in the control of the business of the Company and shall not
constitute a violation of this Section.

         Section  5.9. Consent by Members to Exercise of Certain Rights and
Powers by Managers. By its execution hereof, each Member expressly consents to
the exercise by the Managers of the rights, powers, and authority conferred on
the Managers by this Agreement.

         Section  5.10. Other Business of Members.

                  (a)      Subject to (b) below, any Member, including any
         Manager, may engage independently or with others in other business
         ventures of every nature and description, including without limitation
         the purchase of medical equipment, the rendering of medical services of
         any kind, and the making or management of other investments and neither
         the Company nor any Member shall have any right by virtue of this
         Agreement or the relationship created hereby in or to such other
         ventures or activities or to the income or proceeds derived therefrom,
         and the pursuit of such ventures.

                  (b)      As long as any Member owns a Membership Interest in
         the Company, and for a period of five (5) years (the "Tail Period")
         after a Member ceases for any reason to own a Membership Interest in
         the Company, neither a Member nor any of its respective Affiliates,
         shall hold, directly or indirectly, an investment, ownership or other
         beneficial interest in (i) any hospital or (ii) other Entity (including
         a sole proprietorship) which provides any of the following services or
         facilities: cardiac catheterization, angioplasty, peripheral
         angioplasty, atherectomy, stenting and PTCA or other cardiac surgical
         procedures or services, in any case within Kern County, California and
         Tulare County, California (the "Territory"), provided that (i) no
         Member who is a physician shall be prohibited from maintaining his or
         her staff privileges at any other hospital or from owning an interest
         in a medical practice that provides the professional service component
         of the medical procedures described in (b)(ii) above and (ii) nothing
         herein shall prohibit a Member from owning up to three


                                       17
<PAGE>   23

         percent (3%) of the outstanding capital stock of a company whose stock
         is publicly traded and listed on a nationally recognized securities
         exchange or from investing in a publicly traded mutual fund; provided,
         further, the Tail Period shall be reduced to two (2) years once the
         Hospital has been opened for business and regularly conducting that
         business provided the Member in question can demonstrate that at the
         commencement of the Tail Period he was not a party to any agreement,
         whether written or oral, binding or conditional/tentative, to acquire
         (or have an option to acquire) an interest in any entity or enterprise
         to which this Section 5.10(b) would otherwise apply. If at any time
         after the Hospital has been opened for business and regularly
         conducting business for at least five (5) years substantially all of
         the assets or stock of MedCath Incorporated or HHBF is acquired by one
         Person or a group of Persons who are not Affiliates of MedCath
         Incorporated in one transaction or series of related transactions
         within a twelve (12) month period, the Tail Period shall be reduced to
         one (1) year. Further, if during the first five (5) years after the
         Hospital has opened for business and is regularly conducting that
         business the stock of HHBF is sold to a Person who is neither an
         Affiliate of MedCath Incorporated nor a purchaser of all or
         substantially all of MedCath Incorporated's assets or stock, then there
         will be no Tail Period. In addition, neither HHBF nor its Affiliates
         shall separately operate a mobile catheterization laboratory within the
         Territory. Nothing contained herein shall limit the ability of a
         relative of an individual Member to own an interest in an Entity
         providing the above-referenced services or facilities if such relative
         is actively engaged in the practice of medicine as a licensed physician
         or if the Member in question can reasonably demonstrate that such
         relative's ownership is not designed to circumvent the intent of this
         Section 5.10(b). Notwithstanding the above limitations, if a written
         proposal is made by either HHBF or the Investor Manager regarding the
         establishment or operation of a mobile catheterization laboratory in
         the Territory by the Company, and HHBF (if the proposal is made by the
         Investor Manager) or the Investor Manager (if the proposal is made by
         HHBF), does not approve such proposal, then the party making such
         proposal may, alone or with other Members establish or operate such a
         service but only in substantial conformity with such proposal. Any such
         written proposal must have sufficient details and specificity to allow
         a proper evaluation of it and to determine whether any Member(s)
         separately establishing or operating such a service have done so in
         substantial conformance with such proposal.

                  (c)      The Members, including the Managers, have reviewed
         the term and geographical restrictions included in Section 5.10(b), and
         in light of the interests of the parties hereto, agree that such
         restrictions are fair and reasonable.

                  (d)      If there is a breach or threatened breach of the
         provisions of this Section 5.10 of this Agreement, in addition to other
         remedies at law or equity, the non-breaching party shall be entitled to
         injunctive relief. The parties desire and intend that the provisions of
         this Section 5.10 shall be enforced to the fullest extent permissible
         under the law and public policies applied, but the unenforceability or


                                       18
<PAGE>   24

         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, 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.

                  (e)      The Company, the Managers and the Investor Members
         agree that the benefits to any Investor Member hereunder do not
         require, are not payment for, and are not in any way contingent upon
         the referral, admission or any other arrangement for the provision of
         any item or service offered by HHBF or the Company to patients of such
         Investor Member in any facility, laboratory, cardiac catheterization
         facility or other health care operation controlled, managed or operated
         by HHBF or the Company and nothing herein is intended to prohibit any
         party from practicing medicine at any other facility.

                  (f)      If an Investor Member is a legal entity and not an
         individual, such Investor Member shall cause each of its existing and
         future Affiliates to agree in writing to be personally bound by the
         terms of this Section 5.10.

         Section  5.11. Managers' Standard of Care. Each Manager shall act in a
manner it believes in good faith to be in the best interest of the Company and
with such care as an ordinarily prudent Person in a like position would use
under similar circumstances. In discharging its duties, each Manager shall be
fully protected in relying in good faith upon the records required to be
maintained under this Agreement and upon such information, opinions, reports and
statements by any of its other Managers, Members, or agents, or by any other
Person as to matters each Manager reasonably believes are within such other
Person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Company, including information, opinions,
reports or statements as to the value and amount of the assets, liabilities,
income or losses of the Company or any other facts pertinent to the existence
and amount of assets from which distributions to members might properly be paid.

         Notwithstanding anything herein to the contrary, a Manager or Member
shall have the right to vote or approve Company matters in accordance with the
terms of this Agreement regardless of the personal interest of any Member or
Manager in the outcome of any vote, decision or matter.

         Section  5.12. Limitation of Liability. A Manager shall not be liable
to the Company, its Members, or other Managers for any action taken in managing
the business or affairs of the Company if it performs the duty of its office in
compliance with the standard contained in Section 5.11. No Manager has
guaranteed nor shall have any obligation with respect to the return of a
Member's Capital Contribution or share of income from the


                                       19
<PAGE>   25

operation of the Company. Furthermore, no Manager, its Affiliates or its
employees (collectively, its "Agents") shall be liable to the Company or to any
Member for any loss or damage sustained by the Company or any Member except loss
or damage resulting from gross negligence or intentional misconduct or knowing
violation of law or a transaction for which such Manager or Agent received a
personal benefit in violation or breach of the provisions of this Agreement.

         Section  5.13.Indemnification of the Managers.

                  (a)      Each Manager and its Agents shall be indemnified by
         the Company against any losses, judgments, liabilities, expenses,
         including attorneys' fees and amounts paid in settlement of any claims
         sustained by them arising out of any action or inaction of the Member
         or its Agents in its capacity as a Manager of the Company (or, in the
         case of an Agent, within the scope of the Manager's authority) to the
         fullest extent allowed by law, provided that the same were not the
         result of gross negligence or willful misconduct on the part of the
         Manager or an Agent and provided that the Manager or an Agent, in good
         faith, reasonably determined that such course of conduct was in the
         best interest of the Company; provided, however, that such
         indemnification and agreement to hold harmless shall be recoverable
         only out of Company assets. Subject to applicable law, the Company
         shall advance expenses incurred with respect to matters for which a
         Manager may be indemnified hereunder.

                  (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. Election and Replacement of Investor Manager. In
accordance with the procedures outlined in Section 10.1 herein, the Investor
Members shall elect an Investor Manager to serve for one year terms or until a
successor is duly elected. At any time, in accordance with Section 10.1, the
Investor Members may replace the Investor Manager and elect a new Investor
Manager.

         Section  5.15. Role of Investor Manager. Notwithstanding anything
herein to the contrary, the Investor Manager shall take no action nor make any
decision on behalf of the Company except to the extent it is expressly
authorized to do so under this Agreement in its capacity as Investor Manager.

         Section  5.16. Purchase of Goods and Services from HHBF. Goods and
services purchased from HHBF or its Affiliates shall be of substantially the
same quality and price as could be obtained from an unrelated third party.


                                       20
<PAGE>   26

                                   ARTICLE VI

                          DISTRIBUTIONS AND ALLOCATIONS

         Section 6.1. Distributions of Cash Flow from Operations and Cash from
Sales or Refinancing. Prior to the dissolution of the Company, Cash Flow from
Operations and Cash from Sales or Refinancing, if any, remaining after repayment
of any loans made by the Members to the Company shall be distributed quarterly
by the Managers as Cash Distributions according to the relative percentage
Membership Interests of the Members and Economic Interest Owners.
Notwithstanding anything herein to the contrary, no distributions shall be made
to Members if prohibited by the Act.

         Section 6.2. Profits. Except as provided in the Regulatory Allocations
Exhibit, Profits shall be allocated as follows:

         (a)      First, to the Members who have been allocated Losses pursuant
to Subsection 6.3(c) below until the cumulative Profits allocated pursuant to
this Subsection 6.2(a) equal the cumulative prior allocations of Losses under
that Subsection.

         (b)      Next, to the Members who have been allocated Losses pursuant
to Subsection 6.3(b) below until the cumulative Profits allocated pursuant to
this Subsection 6.2(b) equal the cumulative prior allocations of Losses under
that Subsection.

         (c)      All remaining Profits shall be allocated to the Members in
accordance with their percentage Membership Interests.

         Section 6.3. Losses. Except as provided in the Regulatory Allocations
Exhibit, Losses shall be allocated as follows:

         (a)      First, to the Members who have been allocated Profits pursuant
to Subsection 6.2(c) above until the cumulative Losses allocated pursuant to
this Subsection 6.3(a) equal the cumulative prior allocations of Profits under
that Subsection.

         (b)      Next, Losses shall be allocated to the Members with positive
Adjusted Capital Account balances in proportion to those balances.

         (c)      All remaining Losses shall be allocated to the Members in
accordance with their percentage Membership Interests.

         Section 6.4. Code Section 704(c) Tax Allocations. Income, gain, loss,
and deduction with respect to any property contributed to the capital of the
Company shall, solely for tax purposes, be allocated among the Members so as to
take account of any variation between the adjusted basis of such property to the
Company for federal income tax purposes and its initial Agreed Value pursuant to
any method allowable under Code Section 704(c) and the Regulations promulgated
thereunder.


                                       21
<PAGE>   27

         In the event the Agreed Value of any Company asset is adjusted after
its contribution to the Company, subsequent allocations of income, gain, loss
and deduction with respect to such asset shall take into account any variation
between the adjusted basis of such asset for federal income tax purposes and its
Agreed Value pursuant to any method allowable under Code Section 704(c) and the
Regulations promulgated thereunder.

         Any elections or other decisions relating to allocations under this
Section shall be determined by HHBF. Absent a determination by HHBF, the
remedial allocation method under Regulation Section 1.704-3(d) shall be used.
Allocations pursuant to this Section are solely for purposes of federal, state,
and local taxes and shall not be taken into account in computing any Member's
Capital Account or share of Profits, Losses, other items, or distributions
pursuant to any provision of this Agreement.

         Section 6.5. Miscellaneous.

         (a)      Allocations Attributable to Particular Periods. For purposes
of determining Profits, Losses or any other items allocable to any period, such
items shall be determined on a daily, monthly, or other basis, as determined by
HHBF using any permissible method under Code Section 706 and the Regulations
thereunder.

         (b)      Other Items. Except as otherwise provided in this Agreement,
all items of Company income, gain, loss, deduction, credit and any other
allocations not otherwise provided for shall be divided among the Members in the
same proportion as they share Profits or Losses, as the case may be, for the
year.

         (c)      Tax Consequences; Consistent Reporting. The Members are aware
of the income tax consequences of the allocations made by this Article and by
the Regulatory Allocations and hereby agree to be bound by those allocations as
reflected on the information returns of the Company in reporting their shares of
Company income and loss for income tax purposes. Each Member agrees to report
its distributive share of Company items of income, gain, loss, deduction and
credit on its separate return in a manner consistent with the reporting of such
items to it by the Company. Any Member failing to report consistently, and who
notifies the Internal Revenue Service of the inconsistency as required by law,
shall reimburse the Company for any legal and accounting fees incurred by the
Company in connection with any examination of the Company by federal or state
taxing authorities with respect to the year for which the Member failed to
report consistently.

         (d)      Economic Interest Owners. Each Economic Interest Owner shall
be entitled to the distributions and allocations to which its predecessor in
interest would have been entitled under this Article VI had it retained the
Economic Interest acquired by the Economic Interest Owner.


                                       22
<PAGE>   28

                                   ARTICLE VII

              DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS

         Section 7.1. No Termination by Certain Acts of Member. Neither the
transfer of interest, withdrawal from the Company, bankruptcy, insolvency,
dissolution, liquidation or other disability, nor the legal incompetency of any
Member shall result in the termination or dissolution of the Company or affect
its continuance in any manner whatsoever.

         Section 7.2. Dissolution. The Company shall be dissolved upon the
happening of any of the following events, whichever shall first occur:

                  (a)      The election by HHBF to dissolve the Company in
         accordance with the terms of Section 3.5(c) hereof;

                  (b)      The death, insanity, bankruptcy, retirement (other
         than due to a failure of an Investor Manager to be re-elected as an
         Investor Manager), resignation (other than due to an Investor Manager's
         resigning from serving as a Manager while still remaining a Member) or
         expulsion of any Manager who is also a Member, unless the Company is
         continued by the consent of not less than a majority in interest
         (defined in accordance with Revenue Procedure 94-46 or successor
         provisions) of the remaining Members within ninety (90) days after
         notice of such event, effective as of the date of such event. If there
         is no remaining Manager, the remaining Members owning at least 51% of
         the Membership Interests which are owned by the remaining Members
         shall, if they desire to continue the Company, elect a Substitute
         Manager who shall assume all of the rights and duties of HHBF under
         this Agreement (which Substitute Manager accepts such election);

                  (c)      Upon the written agreement of HHBF and the Investor
         Manager;

                  (d)      The expiration of the term of the Company as provided
         in Section 2.5 hereof;

                  (e)      The adjudication of bankruptcy of the Company;

                  (f)      Upon the written consent of a Supermajority Vote of
         the Members;

                  (g)      In accordance with Section 12.11 hereof;

                  (h)      The entry of a decree of judicial dissolution or the
         administrative dissolution of the Company as provided in the Act; and


                                       23
<PAGE>   29

                  (i)      In accordance with Section 8.12 hereof.

         Section 7.3. Dissolution and Final Liquidation.

                  (a)      Upon any dissolution of the Company, the Company
         shall not terminate, but shall cease to engage in further business
         except to the extent necessary to perform existing contracts and
         preserve the value of its assets. Its assets shall be liquidated and
         its affairs shall be wound up as soon as practical thereafter by the
         Managers, or if for any reason there is no Manager, by another Person
         designated by a Supermajority Vote of the Members. In winding up the
         Company and liquidating assets, the Managers, or other Person so
         designated for such purpose, may arrange, either directly or through
         others, for the collection and disbursement to the Members of any
         future receipts from the Hospital or other sums to which the Company
         may be entitled, and shall sell the Company's interest in the Hospital
         and the Equipment to any Person, including HHBF or any Affiliate
         thereof, on such terms and for such consideration as shall be
         consistent with obtaining the fair market value thereof; provided if
         the buyer is HHBF or any of its Affiliates, such fair market value
         shall, at the option of the Investor Manager, be determined by
         independent appraisal.

                  (b)      Upon any such dissolution and liquidation of the
         Company, the net assets, if any, of the Company available for
         distribution, including any cash proceeds from the liquidation of
         Company assets, shall be applied and distributed in the following
         manner or order, to the extent available:

                           (i)      To the payment of or creation of reserves
                  for all debts, liabilities, and obligations to all creditors
                  of the Company (other than the Members or their Affiliates)
                  and the expenses of liquidation;

                           (ii)     To the payment of all debts and liabilities
                  (including interest) owed to the Members or their Affiliates
                  as creditors; and

                           (iii)    The balance to the Members with positive
                  Capital Account balances after taking into account all other
                  adjustments during the Fiscal Year in which liquidation
                  occurs.

                  (c)      The Members shall look solely to the assets, if any,
         of the Company for any return of their Capital Contributions and, if
         the assets of the Company remaining after payment or discharge of the
         Company's debts and liabilities, or provision therefor, are
         insufficient to return all or any part of the Capital Contributions, no
         Member shall have any right of recourse against the Managers or other
         Members or to charge the Managers or other Members for any amounts
         except as provided herein and except to the extent otherwise provided
         by the Act and/or North Carolina law.


                                       24
<PAGE>   30

                  (d)      Upon such dissolution, reasonable time shall be
         allowed for the orderly liquidation of the assets of the Company and
         the discharge of liabilities to creditors so as to minimize the losses
         normally attendant to a liquidation.

                  (e)      The Capital Accounts of the Members, as adjusted,
         shall be utilized by the Company for the purpose of making
         distributions to those Members with positive balances in their
         respective Capital Accounts pursuant to Section 7.3(b). In making such
         distributions, the Managers or the Person winding up the affairs of the
         Company shall distribute all funds available for distribution to the
         Members and Economic Interest Owners (after establishing any reserves
         that the Managers deem or the Person winding up the affairs of the
         Company deems reasonably necessary pursuant to Section 7.3(b)) prior to
         the later of (a) the end of the taxable year in which the event occurs
         which caused the termination and dissolution of the Company, or (b)
         ninety (90) days after the occurrence of such event. The Managers in
         their sole discretion, or the Person winding up the affairs of the
         Company, in its discretion, may elect to have the Company retain any
         installment obligations owed to the Company until collected in full so
         long as any portion of the reserves which are later determined to be
         unnecessary, and all collections on such installment obligations which
         are not deemed to be reasonably necessary by the Managers or the Person
         winding up the affairs of the Company to add to such reserves are
         distributed as soon as practicable in accordance with the provisions of
         Section 7.3(b) as modified by this Section.

                  (f)      Each Economic Interest Owner shall be entitled to the
         distributions to which its predecessor in interest would have been
         entitled pursuant to this Article VII had it retained the Economic
         Interest acquired by the Economic Interest Owner.

         Section 7.4. Termination. Upon completion of the dissolution, winding
up, distribution of the liquidation proceeds and any other Company assets, the
Company shall terminate.

         Section 7.5. Payment in Cash. Any payments made to any Member pursuant
to this Article VII shall be made only in cash.

         Section 7.6. Goodwill and Trade Name. Upon the dissolution of the
Company, the firm or trade name of the Company and any goodwill associated
therewith shall become the sole property of HHBF, provided that distributions
and allocations otherwise due to HHBF shall not be reduced as a result of HHBF
becoming entitled to such assets, unless the dissolution was caused due to
HHBF's breach of this Agreement in which case such intangible assets shall not
be distributed to HHBF on a non pro rata basis; provided however, upon a
dissolution of the Company in connection with the sale of substantially all of
the assets of the Company, this Section 7.6 shall not increase the distributions
and allocations to which HHBF is otherwise entitled.

         Section 7.7. Termination of Noncompetition Covenants. Upon the later
of the dissolution of the Company and the completion of the liquidation process,
the Members shall have no continuing liability, or obligation under Section
5.10(b) except that Section 5.10(b) shall continue to be binding upon a Member
whose breach of this Agreement caused a dissolution of


                                       25
<PAGE>   31

the Company and any actions for a breach of this Agreement, including a breach
of Section 5.10(b), shall not be impaired by the dissolution or completed
liquidation.


                                  ARTICLE VIII

                REMOVAL OR WITHDRAWAL OF MANAGERS AND MEMBERS AND
            TRANSFER OF MEMBERS' MEMBERSHIP AND/OR ECONOMIC INTERESTS

         Section 8.1. Manager - Transfers.

                  (a)      Except as provided in this Section 8.1, without the
         consent of a Majority Vote of Investor Members, HHBF shall not
         voluntarily withdraw from the Company as a Member at any time prior to
         its termination, or transfer or assign any of its rights and duties as
         a Manager, provided that HHBF may assign its Membership Interest in the
         Company and its rights to be a Manager to any party who purchases all
         or substantially all of MedCath Incorporated's assets or capital stock
         if such purchaser assumes in writing the obligations of HHBF hereunder
         or to a party under control of, common control, or which controls,
         HHBF. HHBF may also assign its Membership Interest in the Company and
         its rights to be a Manager to a financial institution as collateral
         security for repayment of indebtedness for borrowed funds by HHBF or
         its Affiliates. In the event that HHBF desires to sell any Membership
         Interest and such sale is not in connection with the sale of all or
         substantially all of the assets or capital stock of MedCath
         Incorporated, then the other Members shall first have an option to
         purchase such Membership Interest in accordance with the Right of First
         Refusal provided in Section 8.4. In addition, HHBF shall ensure that
         for the first five (5) years after the Hospital first opened for
         business and regularly conducted such business the stock of HHBF will
         not be sold to any Person or Entity that is not an Affiliate of MedCath
         Incorporated other than in connection with the sale of substantially
         all of the assets of MedCath Incorporated and thereafter, the Investor
         Members shall be given written notice of any proposed sale and shall
         have a right of first refusal to acquire the stock of HHBF should the
         owner intend to sell such stock other than in connection with the sale
         of substantially all of the assets of MedCath Incorporated, which right
         shall be exercisable for forty-five (45) days after the date the
         Investor Members receive notice of a proposed sale.

                  (b)      The Investor Manager may not assign its rights to be
         a Manager herein. Upon the withdrawal or resignation of the Investor
         Manager, a substitute therefore who must be an Investor Member may be
         elected by a Majority Vote of Investor Members.


                                       26
<PAGE>   32

                  (c)      Any resignation or withdrawal by a Manager as a
         manager shall not constitute such Manager's withdrawal as a Member.

         Section 8.2. Members' Right to Continue When Company has no Manager.
If at any time there is no remaining Manager, a meeting of the Members shall be
held at the principal place of business of the Company within forty-five (45)
days after the happening of such event to consider whether to continue the
Company on the same terms and conditions as are contained in this Agreement
(except that the Managers may be different) and to select a Manager for the
Company, or whether to wind up the affairs of the Company, liquidate its assets
and distribute the proceeds therefrom in accordance with Article VII hereof. The
Company may be continued and a new Manager (who accepts such appointment)
selected by the Members within ninety (90) days of the occurrence of the event
described in Section 7.2(b) with respect to the last Manager. The new Manager
shall execute, acknowledge, file or record (as appropriate) Articles of
Organization and an Operating Agreement, or amendments to those documents, and
such other documents as may be required by the Act. The continuance of the
Company pursuant to the terms of this Section 8.2 is conditioned upon (i) any
amendment required by the Act of the Articles of Organization to reflect the
foregoing change and, if applicable, compliance by the Company with any notice
provisions of the Act and (ii) delivery to the withdrawing Manager of an
indemnification agreement by the Company, in form and substance reasonably
satisfactory to the withdrawing Manager, indemnifying and holding the
withdrawing Manager harmless against all future liabilities of the Company.

         Section 8.3. Relationship with Substitute Manager. The relationship of
the Members to any Person that has either acquired the Membership Interest of
HHBF or has been elected as a successor Manager as provided herein shall be
governed by this Agreement. If such Person was not previously a Manager, then
such Person, as Substitute Manager, shall have all the rights and powers of its
predecessor Manager under this Agreement; provided, such Person assumes in
writing the obligations of such Manager under this Agreement and any arising
thereafter, and accepts and adopts all the terms and provisions of this
Agreement in writing. The withdrawing Manager shall be liable for all of its
covenants and obligations under this Agreement for all periods prior to its
withdrawal until such liability is assumed by a Substitute Manager.

         Section 8.4. Members Who Are Not Managers - Restriction on Transfer.
Except as otherwise set forth in this Section or in this Agreement, no Economic
Interest and/or Membership Interest of an Investor Member or any portion
thereof, shall be validly sold or assigned whether voluntarily, involuntarily or
by operation of law, and no purported assignee shall be recognized by the
Company for any purpose, unless such Economic Interest and/or Membership
Interest shall have been transferred in accordance with the provisions of this
Agreement and in compliance with such additional restrictions as may be imposed
by HHBF to comply with requirements imposed by any federal or state securities
regulatory authority and unless HHBF's consent is obtained. In no event,
however, shall an Investor Member transfer or sell all or any of its Economic
Interest and/or Membership Interest to


                                       27
<PAGE>   33

any party which, if a Member, would be in violation of Section 5.10(b) hereof.
Except as otherwise set forth in this Section or in this Agreement, an Investor
Member may transfer, sell or assign its entire Economic Interest and/or
Membership Interest if it has received the approval of HHBF, not to be
unreasonably withheld, provided however: (a) the other Investor Members (on a
pro rata basis of all such Investor Members desiring to do so) first for a
period of fifteen (15) days, and thereafter the Company for a period of fifteen
(15) days shall have the right, but not the obligation, to purchase all, but not
less than all, of the Economic Interest and/or Membership Interest proposed to
be transferred, which right shall be exercisable on the terms and for the
purchase price set forth in writing in a bona fide offer made for the Interests
by a third-party (the "Right of First Refusal"), and (b) there shall have been
filed with the Company a duly executed and acknowledged counterpart of the
instrument making such assignment signed by both the assignor and assignee and
such instrument evidences the written acceptance by the assignee of all of the
terms and provisions of the Agreement, represents that such assignment was made
in accordance with all applicable laws and regulations and the assignee shall
have represented to the Company in writing that it meets the investor
suitability standards established by the appropriate state of residence, or, in
the absence thereof, the investor suitability standards established by the
Company. HHBF shall use reasonable care to determine that transfers are in
accordance with applicable laws and regulations, including obtaining an opinion
of counsel to that effect. Any Member who is not a Manager that assigns all its
Membership Interest shall cease to be a Member of the Company, except that
unless and until a Substitute Member is admitted in his or her stead, such
assigning Member shall retain the statutory rights of an assignor of a
Membership Interest under the Act. Any Membership Interests acquired by the
Company pursuant to Section 8.4 shall, subject to applicable law, be re-offered
by the Company to suitable investors.

         Any dissolution, liquidation, merger (unless Investor Members or their
Affiliates existing prior to such merger own at least fifty-one percent (51%) of
the surviving entity after the merger or unless both parties to such merger are
majority owned by parties who are Investor Members or their Affiliates prior to
such merger) or sale of an Investor Member which is an Entity (a sale shall
include a transfer of fifty percent (50%) or more of its ownership interests or
of substantially all of its assets or any other transaction or series of related
transactions intended to accomplish, in substance, a sale of such Entity) shall
constitute an offer by such Investor Member to sell such Investor Member's
Interest pursuant to Section 8.4 for the Formula Purchase Price (as defined in
Section 8.9 below).

         Section 8.5. Condition Precedent to Transfer of Economic Interest
and/or Membership Interest. Notwithstanding anything herein to the contrary, no
transfer of an Economic Interest and/or Membership Interest may be made if such
transfer (a) constitutes a violation of the registration provisions of the
Securities Act of 1933, as amended, or the registration provisions of any
applicable state securities laws; (b) if after such transfer the Company will
not be classified as a partnership for federal income tax purposes; and (c) if
when taken together with other prior transfers, results in a "termination" of
the Company for federal income tax purposes. The Company may require, as a
condition precedent to transfer


                                       28
<PAGE>   34

of an Economic Interest and/or Membership Interest, delivery to the Company, at
the proposed transferor's expense, of an opinion of counsel satisfactory (both
as to the counsel and substance of the opinion) to HHBF that the transfer will
not violate any of the foregoing restrictions.

         Section 8.6. Substitute Member - Conditions to Fulfill. No assignee of
a Member's Membership Interest in the Company shall have the right to become a
Substitute Member in place of its assignor unless, in addition to any other
requirement herein, all of the following conditions are satisfied:

                           (a)      The Company has waived its right pursuant to
                  Section 8.4 to purchase the Membership Interest held by the
                  assignee;

                           (b)      The duly executed and acknowledged written
                  instrument of assignment which has been filed with the Company
                  sets forth that the assignee becomes a Substitute Member in
                  place of the assignor;

                           (c)      The assignor and assignee execute and
                  acknowledge such other instruments as HHBF may deem reasonably
                  necessary or desirable to effect such admission, including,
                  but not limited to, the written acceptance and adoption by the
                  assignee of the provisions of this Agreement;

                           (d)      The written consent of HHBF and a majority
                  of the other Members to such substitution is obtained, which
                  consent may be withheld in HHBF's or the other Members' sole
                  and absolute discretion; and

                           (e)      The payment by the assignee of all costs to
                  the Company associated with the transaction, including but not
                  limited to legal fees, transfer fees, and filing fees.

         Section 8.7. Allocations Between Transferor and Transferee. Upon the
transfer of a Member's Economic Interest or Membership Interest, all items of
income, gain, loss, deduction and credit attributable to the Economic Interest
or Membership Interest so transferred shall be allocated between the transferor
and the transferee in such manner as the transferor and transferee agree at the
time of transfer; provided such allocation does not violate federal or state
income tax law. If HHBF, in its sole discretion, deems such laws violated, then
such allocation shall be made pro rata for the fiscal year based upon the number
of days during the applicable fiscal year of the Company that the Economic
Interest or Membership Interest so transferred was held by the transferor and
transferee, without regard to the results of Company activities during the
period in which each was the holder, or in such other manner as HHBF deems
necessary to comply with federal or state income tax laws. Distributions as
called for by this Agreement shall be made to the holder of record of the
Economic Interest or Membership Interest on the date of distribution.
Notwithstanding anything contained in this Agreement to the contrary, both the
Company and HHBF shall be


                                       29
<PAGE>   35

entitled to treat the assignor of any assigned Economic Interest or Membership
Interest as the absolute owner thereof in all respects, and shall incur no
liability for distributions made in good faith to such assignor in reliance on
the Company records as they exist until such time as the written assignment has
been received by, and recorded on the books of the Company. For purposes of this
Article VIII, the effective date of an assignment of any Economic Interest or
Membership Interest shall be the last day of the month specified in the written
instrument of assignment.

         Section 8.8. Rights, Liabilities of, and Restrictions on Assignee. No
assignee of a Member's Economic Interest or Membership Interest shall have the
right to participate in the Company, inspect the books of account of the Company
or exercise any other right of a Member unless and until admitted as a
Substitute Member. Notwithstanding HHBF's failure or refusal to admit an
assignee as a Substitute Member, such assignee shall be entitled to receive the
share of income, credit, gain, expense, loss and deduction and cash
distributions provided hereunder that is assigned to it, and, upon demand, may
receive copies of all reports thereafter delivered pursuant to the requirements
of this Agreement; provided, the Company shall have first received notice of
such assignment and all required consents thereto shall have been obtained and
other conditions precedent to transfer thereof shall have been satisfied. The
Company's tax returns shall be prepared to reflect the interests of assignees as
well as Members.

         Section 8.9. Death of a Member. Heirs of Members shall be entitled to
inherit the Membership Interests of a deceased Member, provided that upon a
Member's death such interests shall be automatically converted to an Economic
Interest only in the Company until such heir agrees in writing to all of the
terms and conditions of this Agreement and such other reasonable terms as may be
established by HHBF as a condition to such heir becoming a Member, in which
event such interest shall again become a Membership Interest in the Company.
Notwithstanding the previous sentence, within one hundred twenty (120) days of
the Company first learning of the death of a Member, the Company shall have the
option to purchase the Membership Interest of the deceased Member, and the
estate of the deceased Member shall be obligated to sell such Membership
Interest to the Company, in accordance with the terms of this Section 8.9. The
Company may exercise its option by giving written notice thereof to the estate
of the deceased Member, or the appropriate representative thereof, within such
one hundred twenty (120) day period. The purchase price for such Membership
Interest shall equal the greater of (a) such deceased Member's Capital Account
balance as of the last day of the calendar quarter most recently ended prior to
such Member's death, or (b) five (5) multiplied by the net income (as reasonably
determined by the Company's accountants) of the Company for the twelve (12)
month period ending as of the calendar quarter most recently ended prior to the
death of such Member multiplied by the percentage Membership Interest of such
Member in the Company (the "Formula Purchase Price"). The purchase price shall
be paid (the "Payment Method") in three (3) equal annual installments, the first
third of which shall be paid upon the determination of the purchase price and
the remaining two (2) installments of which shall be paid on the first and
second anniversary of such date. The outstanding amounts due from the


                                       30
<PAGE>   36

Company to the estate of the deceased Member shall bear interest at Prime Rate
as of the date of such Member's death. Accrued interest shall be paid as of the
dates payments of principal are due as provided above.

         Section 8.10. Repurchase of Interests in Certain Event.

                  (a)      In the discretion of HHBF, the Company may, but is
         not obligated to, repurchase a Member's Economic Interest or Membership
         Interest upon such Member's breach of the Member's obligations
         contained in Article III, Sections 5.10, 8.1(b), 8.4, 8.9, 12.1 and
         12.11 of this Agreement.

                  (b)      Each Member agrees to sell its Membership Interest to
         the Company in the event HHBF elects to exercise the right of
         repurchase granted under Section 8.10(a) and the purchase price shall
         the lower of (x) the Capital Contribution of the Member less all
         amounts distributed to such Member by the Company, and (y) the fair
         market value of such Member's Membership Interest determined by an
         independent appraiser reasonably selected by HHBF.

         Section 8.11. Permissible Transfers by Investor Members.
Notwithstanding anything in this Agreement to the contrary, an Investor Member
may elect within thirty (30) days of acquiring a Membership Interest in the
Company to assign its Membership Interest to a corporation, limited liability
company or limited partnership formed and maintained for the sole purpose of
holding such Membership Interest if such assignee is owned by the Investor
Member or such assignee's owners are substantially identical to the owners of
such Investor Member as long as such assignee and its Affiliates agree in
writing to be bound by all the terms and conditions of this Agreement and HHBF
first approves in writing the terms of all documents creating and constituting
such Entity.

         Section 8.12. Special Provisions Regarding Withdrawal. Notwithstanding
anything else contained in the Act or this Agreement, the withdrawal of an
Investor Member from the Company shall be governed by and made only pursuant to
the terms of this Section 8.12 and the withdrawal of HHBF shall be governed by
Section 8.1.

                  (a)      Subject to this Section 8.12, an Investor Member may
         withdraw from the Company by giving written notice of such withdrawal
         to the Company at least six (6) months prior to the effective date of
         the withdrawal except that, during the first thirty six (36) months
         after an Investor Member is first admitted to the Company as a Member,
         such Investor Member shall not withdraw from the Company except as
         further permitted in subsections (b) or (c) below. Upon the effective
         date of a withdrawal, the Investor Member shall no longer be a Member
         in the Company and shall have the status as if he were only an assignee
         of a Member and shall be only an Economic Interest Owner to the extent
         the withdrawing Investor Member retains its Economic Interest. Except
         as expressly provided below, an Investor Member shall not be entitled
         to any distributions or to have its Economic Interest redeemed or to


                                       31
<PAGE>   37

         any other type of payment from the Company or any other Member as a
         result of the Investor Member's withdrawal. Except as otherwise
         expressly provided below, the Company shall have the option to redeem
         the Membership Interest of any Investor Member who has withdrawn from
         the Company for an amount equal to such withdrawn Investor Member's
         Capital Account balance as of the effective date of such withdrawal net
         of distributions to such withdrawn Investor Member after the effective
         date of such withdrawal. HHBF may exercise such option on behalf of the
         Company by causing it to tender the redemption price to the withdrawn
         Investor Member within three (3) months of the effective date of the
         withdrawal.

                  (b)      If, by the end of the sixth (6th) month after an
         Investor Member is first admitted to the Company as a Member, the
         Company has not received a written commitment from a lender for the
         financing of the construction of the Hospital (which commitment shall
         contain commercially reasonable terms and shall be subject to
         negotiation of definitive loan agreements), such Investor Member may
         withdraw from the Company by providing written notice of such
         withdrawal to the Company within ten (10) days of that six (6) month
         anniversary. In such a case, the Membership Interest of the withdrawing
         Investor Member shall be redeemed by the Company for an amount equal to
         the Investor Member's Capital Contributions to the Company net of any
         previous distributions by the Company to such Investor Member.

                  (c)      If, by the end of the eighteenth (18th) month after
         an Investor Member is first admitted to the Company as a Member, the
         Company has not commenced, or is not diligently pursuing, construction
         of the Hospital pursuant to a construction contract or series of
         related construction contracts to build the Hospital, such Investor
         Member may withdraw from the Company by providing written notice of
         such withdrawal to the Company within ten (10) days of that eighteen
         (18) month anniversary. In such a case and subject to (f) below, the
         Membership Interest of the withdrawing Investor Member shall be
         redeemed by the Company for an amount equal to the Investor Member's
         Capital Account balance as of that eighteen (18) month anniversary.

                  (d)      If the Company receives notices of withdrawal from
         any Investor Member pursuant to subsection (c) above that would result,
         when aggregated with withdrawals previously made pursuant to subsection
         (b) above, in the withdrawal of Members holding at least twenty percent
         (20%) of the percentage Membership Interests in the Company held by
         Investor Members, at the election of HHBF, the Company may be dissolved
         and liquidated and no Investor Member will be entitled to withdraw or
         have its Membership Interest redeemed. HHBF shall make this election by
         written notice to the Investor Manager within thirty (30) days of the
         above referenced withdrawal notices.

                  (e)      In the event an Investor Member withdraws from the
         Company pursuant to (b) or (c) above and is not and has not as of the
         withdrawal date been in


                                       32
<PAGE>   38

         breach of this Agreement, there shall be no "Tail Period" for the
         purposes of Section 5.10(b) of this Agreement with respect to the
         withdrawn Investor Member, it being acknowledged that if an Investor
         Member withdraws from the Company pursuant to subsection (a) above,
         there shall be a Tail Period as set forth in Section 5.10(b).

                  (f)      In the event an Investor Member withdraws from the
         Company pursuant to (b) or (c) above and has not as of the withdrawal
         date been in breach of this Agreement, then such Investor Member shall
         simultaneously be released from the restrictions set forth in paragraph
         7 of the Hospital Professional Services Agreement entered into by and
         among the Company, the Investor Member's medical practice and the
         owners of such medical practice.


                                   ARTICLE IX

                        RECORDS, ACCOUNTINGS AND REPORTS

         Section 9.1. Books of Account. At all times during the continuance of
the Company, HHBF shall maintain or cause to be maintained true and full
financial records and books of account showing all receipts and expenditures,
assets and liabilities, income and losses, and all other records necessary for
recording the Company's business and affairs including those sufficient to
record the allocations and distributions required by the provisions of this
Agreement.

         Section 9.2. Access to Records. The books of account and all documents
and other writings of the Company, including the Articles of Organization and
any amendments thereto, shall at all times be kept and maintained by HHBF or, if
required by law, at the registered office of the Company. Each Member or its
designated representatives shall, upon reasonable notice to HHBF, have access to
such financial books, records and documents during reasonable business hours and
may inspect and make copies of any of them. Each Member may receive by mail,
upon written request to the Company and at such Member's cost, a list of the
names and addresses of the Members and Economic Interest Holders and the
percentage of Economic Interest held by each of them or such other information
which may be obtained pursuant to requirements of the Act.

         Section 9.3. Bank Accounts and Investment of Funds.

                  (a)      HHBF shall open and maintain, on behalf of the
         Company, a bank account or accounts in a federally insured bank or
         savings institution as it shall determine, in which all monies received
         by or on behalf of the Company shall be deposited. All withdrawals from
         such accounts shall be made upon the signature of such Person or
         Persons as HHBF may from time to time designate.


                                       33
<PAGE>   39

                  (b)      Any funds of the Company which HHBF may determine are
         not currently required for the conduct of the Company's business may be
         deposited with a federally insured bank or savings institution or
         invested in short-term debt obligations (including obligations of
         federal or state governments and their agencies, commercial paper,
         certificates of deposit of commercial banks, savings banks or savings
         and loan associations) as shall be determined by HHBF in its sole
         discretion.

         Section 9.4. Fiscal Year. The Fiscal Year and accounting period of the
Company shall end on September 30 of each year.

         Section 9.5. Accounting Reports. As soon as reasonably practicable
after the end of each fiscal year but in no event later than 120 days after the
end thereof, each Member shall be furnished an annual accounting showing the
financial condition of the Company at the end of such fiscal year and the result
of its operations for the fiscal year then ended, which annual accounting shall
be prepared on an accrual basis in accordance with generally accepted accounting
principles applied on a consistent basis and shall be delivered to each of the
Members promptly after it has been prepared. It shall include a balance sheet as
of the end of such Fiscal Year and statements of income and expense, each
Member's equity, and cash flow for such Fiscal Year. At HHBF's election the
Company shall either be audited or such annual accountings shall be either
reviewed or compiled by a firm of independent certified public accountants
engaged by HHBF on behalf of the Company. The report shall set forth the
distributions to the Members for such Fiscal Year and shall separately identify
distributions from (i) operating revenue during such Fiscal Year, (ii) operating
revenue from a prior period which had been held as reserves, (iii) proceeds from
the sale or refinancing of the Equipment, and (iv) unexpended proceeds received
from the sale of Membership Interests. Following the opening of the Hospital,
HHBF shall also cause to be prepared and distributed to the Members quarterly
financial statements following HHBF's public announcement of its results for
such quarter in a form and containing such information as reasonably determined
by HHBF.

         Section 9.6. Tax Returns. HHBF shall cause income tax returns for the
Company to be prepared, at Company expense, and timely filed with the
appropriate authorities. As soon as is reasonably practicable, and in any event
on or before the expiration of 75 days following the end of each Fiscal Year,
each Member shall be furnished with a statement to be used in the preparation of
the Member's tax returns, showing the amounts of any Profits or Losses allocated
to the Member, and the amount of any distributions made to the Member, pursuant
to this Agreement, along with a reconciliation of the annual report with
information furnished to Members for income tax purposes.


                                       34
<PAGE>   40

                                    ARTICLE X

                      MEETINGS AND VOTING RIGHTS OF MEMBERS

         Section 10.1. Meetings.

                  (a)      Meetings of the Members of the Company for any
         purpose may be called by HHBF, the Investor Manager or by Investor
         Members holding in the aggregate ten percent (10%) of the Membership
         Interests. Such request shall state the purpose of the proposed meeting
         and the matters proposed to be acted upon thereat. Such meetings shall
         be held in the Bakersfield, California area.

                  (b)      A notice of any such meeting shall be given by mail,
         not less than fifteen (15) days nor more than sixty (60) days before
         the date of the meeting, to each Member at its address as specified in
         Section 12.7. Such notice shall be in writing, and shall state the
         place, date and hour of the meeting, and shall indicate that it is
         being issued at or by the direction of HHBF or by the Investor Members,
         as the case may be. The notice shall state the purpose or purposes of
         the meeting. If a meeting is adjourned to another time or place, and if
         any announcement of the adjournment of time or place is made at the
         meeting, it shall not be necessary to give notice of the adjourned
         meeting.

                  (c)      Each Member may authorize any Person or Persons to
         act for the Member by proxy in all matters in which a Member is
         entitled to participate, whether by waiving notice of any meeting, or
         voting or participating at a meeting. Every proxy must be signed by the
         Member or its attorney-in-fact. No proxy shall be valid after the
         expiration of eleven months from the date thereof unless otherwise
         provided in the proxy. Every proxy shall be revocable at the pleasure
         of the Member executing it.

         Section 10.2. Voting Rights of Members.

                  (a)      Each Member shall take no part in or interfere in any
         manner with the control, conduct or operation of the Company, and shall
         have no right or authority to act for or bind the Company except as
         provided herein. Votes or decisions, to the extent taken or to be made,
         of the Members may be cast at any duly called meeting of the Company or
         in writing within ten (10) days after written request therefor. Each
         Member shall be entitled to the number of votes equal to the percentage
         Membership Interest of such Member.

                  (b)      No Member shall have the right or power to vote to:
         (i) withdraw or reduce the Member's Capital Contributions except as a
         result of the dissolution and liquidation of the Company or as
         otherwise provided by law or this Agreement; (ii) bring an action for
         partition against the Company; (iii) cause the termination and


                                       35
<PAGE>   41

         dissolution of the Company by court decree or otherwise, except as set
         forth in this Agreement; or (iv) demand or receive property other than
         cash in return for its Capital Contributions.


                                   ARTICLE XI

                                   AMENDMENTS

         Section 11.1. Authority to Amend by Managers. Except as otherwise
provided by Section 11.2, this Agreement and the Articles of Organization of the
Company may be amended by HHBF with the approval of the Investor Manager which
approval shall not be unreasonably withheld or delayed:

                  (a)      To admit additional Members or Substitute Members but
         only in accordance with and if permitted by the other terms of this
         Agreement;

                  (b)      To preserve the legal status of the Company as a
         limited liability company under the Act or other applicable state or
         federal laws if such does not change the substance hereof, and the
         Company has obtained the written opinion of its counsel to that effect;

                  (c)      To cure any ambiguity, to correct or supplement any
         provision herein which may be inconsistent with any other provision
         herein, to clarify any provision of this Agreement, or to make any
         other provisions with respect to matters or questions arising under
         this Agreement which will not be inconsistent with the provisions of
         this Agreement;

                  (d)      To satisfy the requirements of the Code and
         Regulations with respect to limited liability companies or of any
         federal or state securities laws or regulations, provided such
         amendment does not adversely affect the Membership Interests of Members
         and is necessary or appropriate in the written opinion of counsel. Any
         amendment under this subsection (d) shall be effective as of the date
         of this Agreement;

                  (e)      To the extent that it can do so without materially
         reducing the economic return on investment in the Company to any
         Member, to satisfy any requirements of federal or state legislation or
         regulations, court order, or action of any governmental administrative
         agency with respect the operation or ownership of the Hospital;

                  (f)      Subject to the terms of Section 2.5, to extend the
         term of the Company; and


                                       36
<PAGE>   42

                  (g)      Upon written notice to all Members, HHBF may elect to
         expand the number of Managers up to nine (9) so that the Managers can
         serve as the governing body of the Hospital. In such event, the
         Managers shall include, in addition to HHBF or its designee, the
         president or chief executive officer of the Hospital who shall be
         designated by HHBF and three (3) additional Managers elected from time
         to time by the Investor Members one of whom must be the medical
         director of the hospital. The remaining Managers shall be elected from
         time to time by HHBF. HHBF may delegate to such governing body such
         duties and responsibilities of HHBF as HHBF deems necessary or
         appropriate. Notwithstanding the foregoing, in the event the number of
         Managers is expanded, the Investor Members shall continue to have the
         right to elect an Investor Manager who shall be designated to make
         decisions which are specifically authorized to be made by the Investor
         Manager under this Agreement and HHBF shall continue to have the right
         to make decisions with respect to matters which are reserved for HHBF
         at the time the number of Managers is so expanded.

                  Subject to and in accordance with the requirements of the
         accreditation requirements of JCAHO, the governing body shall be
         responsible for adopting and approving the Hospital's and medical
         staff's bylaws except that the governing body's approval of such bylaws
         shall be conditioned upon the approval thereof by a majority of the
         Managers designated hereunder by the Investor Members.

         Section 11.2. Restrictions on Managers' Amendments: Amendments by
Investor Members. Except as provided in Section 11.1, amendments to this
Agreement shall be made only upon the consent of HHBF and with a Majority Vote
of Investor Members. Except as set forth in this Section 11.2, no amendment
shall be made pursuant to Section 11.1 which would materially and adversely
affect the federal income tax treatment to be afforded each Member, materially
and adversely affect the Membership Interests and liabilities of each Member as
provided herein, materially change the purposes of the Company, extend or
otherwise modify the term of the Company, or materially change the method of
allocations and distributions as provided in Article VI and Article VII.

         Section 11.3. Amendments to Certificates. In making any amendments to
this Agreement, there shall be prepared, executed and filed for recording by
HHBF such documents amending the Articles of Organization as required under the
Act.


                                   ARTICLE XII

                                  MISCELLANEOUS

         Section 12.1. Limited Power of Attorney. Upon the execution hereof,
each Member hereby irrevocably constitutes and appoints HHBF as its true and
lawful attorney in the Member's name and on the Member's behalf to take at any
time all such action which HHBF is expressly authorized to perform, or which a
Member is expressly required to


                                       37
<PAGE>   43
perform, under this Agreement; provided that HHBF shall give written notice at
least five (5) days in advance of executing any document on behalf of a Member
pursuant to this Section 12.1.

         Section 12.2. Waiver of Provisions. The waiver of compliance at any
time with respect to any of the provisions, terms or conditions of this
Agreement shall not be considered a waiver of such provision, term or condition
itself or of any of the other provisions, terms or conditions hereof.

         Section 12.3. Interpretation and Construction. This Agreement contains
the entire agreement among the Members and any modification or amendment hereto
must be accomplished in accordance with the provisions of Article XI and Article
XII. Where the context so requires, the masculine shall include the feminine and
the neuter, and the singular shall include the plural. The headings and captions
in this Agreement are inserted for convenience and identification only and are
in no way intended to define, limit or expand the scope and intent of this
Agreement or any provision thereof. The references to Section and Article in
this Agreement are to the Sections and Articles of this Agreement.

         Section 12.4. Governing Law; Judicial Venue. This Agreement shall be
governed by and construed in accordance with the laws of the State of North
Carolina, exclusive of its conflict of law rules. The parties hereby agree to
designate the state courts having jurisdiction over the Bakersfield, California
area to be the appropriate venues for the resolution of any disputes arising
under this Agreement and specifically submit themselves to those courts for this
purpose.

         Section 12.5. Partial Invalidity. In the event that any part or
provision of this Agreement shall be determined to be invalid or unenforceable,
the remaining parts and provisions of said Agreement which can be separated from
the invalid or unenforceable provision and shall continue in full force and
effect.

         Section 12.6. Binding on Successors. The terms, conditions and
provisions of this Agreement shall inure to the benefit of, and be binding upon
the parties hereto and their respective heirs, successors, distributees, legal
representatives, and assigns. However, none of the provisions of this Agreement
shall be for the benefit of or enforceable by any creditors of the Company.

         Section 12.7. Notices and Delivery.

                  (a)      To Members. Any notice to be given hereunder at any
         time to any Member or any document reports or returns required by this
         Agreement to be delivered to any Member, may be delivered personally or
         mailed to such Member, postage prepaid, addressed to the Member at such
         times as the Member shall by notice to the Company have designated as
         the Member's address for the mailing of all notices hereunder or, in
         the absence of such notice, to the address set forth in Article IV


                                       38
<PAGE>   44

         hereof. Any notice, or any document, report or return so delivered or
         mailed shall be deemed to have been given or delivered to such Member
         at the time it is mailed, as the case may be.

                  (b)      To the Company. Any notice to be given to the Company
         hereunder shall be delivered personally or mailed to the Company, by
         certified mail, postage prepaid, addressed to the Company at its
         registered office. Any notice so delivered or mailed shall be deemed to
         have been given to the Company at the time it is delivered or mailed,
         as the case may be.

         Section 12.8. Counterpart Execution; Facsimile Execution. This
Agreement may be executed in any number of counterparts with the same effect as
if all of the Members had signed the same document. Such executions may be
transmitted to the Company and/or the other Members by facsimile and such
facsimile execution shall have the full force and effect of an original
signature. All fully executed counterparts, whether original executions or
facsimile executions or a combination, shall be construed together and
constitute one and the same agreement.

         Section 12.9. Statutory Provisions. Any statutory reference in this
Agreement shall include a reference to any successor to such statute and/or
revision thereof.

         Section 12.10. Waiver of Partition. Each party does hereby waive any
right to partition or the right to take any other action which might otherwise
be available to such party for the purpose of severing its relationship with the
Company or such party's interest in the Equipment held by the Company from the
interests of other Members until the end of the term of both this Company and
any successor company formed pursuant to the terms hereof.

         Section 12.11. Change In Law. If due to any new law, rule or
regulation, or due to an interpretation or enforcement of any existing law, rule
or regulation, health care counsel reasonably selected by HHBF determines in
writing that it is reasonably likely that the relationships established between
any of the parties to this Agreement including any of their Affiliates and/or
successors or assigns will not comply with any law, rule, regulation or
interpretation thereof ("Applicable Law"), then the parties hereto hereby agree
first, to negotiate in good faith to restructure the relationships established
under this Agreement so as to bring them into compliance with such applicable
laws while at the same time preserving the material benefits of each of the
parties hereto. In the event that a specific proposal for the restructuring of
this Agreement is approved by HHBF and a Majority Vote of Investor Members, such
restructured agreement shall become binding upon all Members of the Company.
Second, in the event that within forty-five (45) days following the Company's
receipt of legal advice in writing from such health care counsel regarding
Applicable Law the parties hereto are unable to negotiate an acceptable
restructuring of their relationship, then HHBF shall have the option, within the
following forty-five (45) day period, to purchase the Membership Interests of
some or all of the Investor Members whose ownership is involved with such
noncompliance with Applicable Law for a purchase price equal to the greater of:


                                       39
<PAGE>   45

(a) the Formula Purchase Price or (b) the amount of the Capital Contribution
made by each such Member to the Company together with interest thereon computed
at the Prime Rate as of the date of this Agreement from the date of such
contribution through the date upon which HHBF pays all amounts due under the
terms of this Section 12.11. For these purposes, distributions to the Members by
the Company shall be treated as payments by HHBF. Such purchase price shall be
paid in accordance with the Payment Method. Third, in the event that HHBF does
not exercise its option to purchase Membership Interests of a Member whose
ownership causes the Company not to be in compliance with Applicable Law, such
Members may elect in writing within the following forty-five (45) day period, to
require that the Company be dissolved, in which event the Company shall be
dissolved in accordance with the terms of this Agreement.

         Section 12.12. Investment Representations of the Members.

                  (a)      Each Member or individual executing this Agreement on
         behalf of an Entity which is a Member hereby represents and warrants to
         the Company and to the Members that such Member has acquired such
         Member's Membership Interest in the Company for investment solely for
         such Member's own account with the intention of holding such Membership
         Interest for investment, without any intention of participating
         directly or indirectly in any distribution of any portion of such
         Membership Interest, including an Economic Interest, and without the
         financial participation of any other Person in acquiring such
         Membership Interest in the Company.

                  (b)      Each Member or individual executing this Agreement on
         behalf of an entity which is a Member hereby acknowledges that such
         Member is aware that such Member's Membership Interest in the Company
         has not been registered (i) under the Securities Act of 1933, as
         amended (the "Federal Act"), (ii) under applicable California
         securities laws, or (iii) under any other state securities laws. Each
         Member or individual executing this Agreement on behalf of an Entity
         which is a Member further understands and acknowledges that his
         representations and warranties contained in this Section are being
         relied upon by the Company and by the Members as the basis for the
         exemption of the Members' Membership Interest in the Company from the
         registration requirements of the Federal Act and from the registration
         requirements of applicable California securities laws and all other
         state securities laws. Each Member or individual executing this
         Agreement on behalf of an Entity which is a Member further acknowledges
         that the Company will not and has no obligation to recognize any sale,
         transfer, or assignment of all or any part of such Member's Membership
         Interest, including an Economic Interest in the Company to any Person
         unless and until the provisions of this Agreement hereof have been
         fully satisfied.

                  (c)      Each Member or individual executing this Agreement on
         behalf of an Entity which is a Member hereby acknowledges that prior to
         his execution of this


                                       40
<PAGE>   46

         Agreement, such Member received a copy of this Agreement and that such
         Member has examined this Agreement or caused this Agreement to be
         examined by such Member's representative or attorney. Each Member or
         individual executing this Agreement on behalf of an Entity which is a
         Member hereby further acknowledges that such Member or such Member's
         representative or attorney is familiar with this Agreement and with the
         Company's business plans. Each Member or individual executing this
         Agreement on behalf of an Entity which is a Member acknowledges that
         such Member or such Member's representative or attorney has made such
         inquiries and requested, received, and reviewed any additional
         documents necessary for such Member to make an informed investment
         decision and that such Member does not desire any further information
         or data relating to the Company or to the Members. Each Member or
         individual executing this Agreement on behalf of an Entity which is a
         Member hereby acknowledges that such Member understands that the
         purchase of such Member's Membership Interest in the Company is a
         speculative investment involving a high degree of risk and hereby
         represents that such Member has a net worth sufficient to bear the
         economic risk of such Member's investment in the Company and to justify
         such Member's investing in a highly speculative venture of this type.

         Section 12.13. Decisions by Investor Manager. Each of the Investor
Members hereby authorize the Investor Manager to make the decisions to be made
by the Investor Manager hereunder and hereby release and hold harmless the
Investor Manager from any and all claims, liabilities, losses or damages which
any of them may have now or in the future resulting from any decision made by
the Investor Manager hereunder unless due to the gross negligence or willful
misconduct of the Investor Manager.

         Section 12.14. Referrals to Hospital and Ownership of Shares of Common
Stock of MedCath Incorporated. Each Investor Member agrees that if in the
reasonable opinion of health care counsel to HHBF, referrals of patients to the
Hospital by the Investor Member or ownership of shares of common stock in
MedCath Incorporated by the Investor Member would cause or constitute a
violation of any federal or state law, rule or regulation, then, as applicable,

         (a)      the Investor Member shall not refer patients to the Hospital;
and

         (b)      the Investor Member shall not acquire, nor continue to own any
of shares of common stock of MedCath Incorporated.

         Section 12.15. Exhibits. The Exhibits to this Agreement, each of which
is incorporated by reference, are:

         EXHIBIT A:  Articles of Organization.
         EXHIBIT B:  Information Exhibit.
         EXHIBIT C:  Glossary of Terms.


                                       41
<PAGE>   47

         EXHIBIT D:  Development Budget Exhibit.
         EXHIBIT E:  Regulatory Allocations.

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the following execution page(s), to be effective as of the date described in
Article II.


                  [EXECUTIONS APPEAR ON THE FOLLOWING PAGE(S)]


                                       42
<PAGE>   48



                                 EXECUTION PAGE
                                     TO THE
                               OPERATING AGREEMENT
                                       OF
                            HEART HOSPITAL OF BK, LLC
                   A NORTH CAROLINA LIMITED LIABILITY COMPANY



For the purpose of acknowledging and agreeing to be bound by the terms of
Section 5.10 hereof, the undersigned Affiliates of the Members other than HHBF
hereby execute this Operating Agreement.

[***]

[***]    These portions of this exhibit have been omitted and filed separately
with the Commission pursuant to a request for confidential treatment.


                                      E-1
<PAGE>   49

                                    EXHIBIT A
                                     TO THE
                               OPERATING AGREEMENT
                                       OF
                            HEART HOSPITAL OF BK, LLC
                   A North Carolina Limited Liability Company

                      SEE ATTACHED ARTICLES OF ORGANIZATION


<PAGE>   50

                             STATE OF NORTH CAROLINA
                      DEPARTMENT OF THE SECRETARY OF STATE

                            LIMITED LIABILITY COMPANY
                            ARTICLES OF ORGANIZATION

Pursuant to ss.57C-2-20 of the General Statutes of North Carolina, the
undersigned does hereby submit these Articles of Organization for the purpose of
forming a limited liability company.

1.       The name of the limited liability company is: Heart Hospital of BK, LLC
                                                      --------------------------

2.       The latest date on which the limited liability company is to dissolve
         is: December 31, 2035
            -------------------

3.       The name and address of each organizer executing these articles of
         organization is as follows;

<TABLE>
         <S>                                 <C>
         HHBF, Inc.                          Ronda K. Sifford
         7621 Little Avenue, Suite 106       7621 Little Avenue, Suite 106
         Charlotte, NC 28226                 Charlotte, NC 28226
</TABLE>

4.       The street address and county of the initial registered office of the
         limited liability company is:

         Number and Street  7621 Little Avenue, Suite 106
                           -----------------------------------------------------
         City, State, Zip Code Charlotte, N.C.  28226     County Mecklenburg
                              ------------------------           ---------------

5.       The mailing address if different from the street address of the initial
         registered office is:
                              ------------

6.       The name of the initial registered agent is:  Lawrence J. Scott
                                                     ---------------------------

7.       Check one of the following:

          (i)     Member-managed LLC:  all of the members by virtue of their
---------         status as members shall be managers of this limited liability
                  company.

   x      (ii)    Manager-managed  LLC: except as provided by N.C.G.S.
---------         ss.57C-3-20(a), the members of this limited liability company
                  shall not be managers by virtue of their status as members.

8.       A manager of the limited liability company shall not be personally
         liable for monetary damages for breach of any duty provided for in
         N.C.G.S. ss. 57C-3-22 (other than liability under N.C.G.S. ss.
         57C-4-07). Any repeal or modification of this paragraph shall be
         prospective only and shall not diminish the rights or expand the
         personal liability of a manager of the limited liability company with
         respect to any act or omission occurring prior to the time of such
         repeal or modification.

This the  11   day of  June, 1996
         -----        -----    ---

HHBF, Inc.


By:    /s/ Lawrence J. Scott                  By:     /s/ Ronda K. Sifford
   -----------------------------                 -------------------------------
Name: Lawrence J. Scott                                 Ronda K. Sifford
Title: Vice President

NOTES:
1.       Filing fee is $100. This document and one exact or conformed copy of
         these articles must be filed with the Secretary of State.

CORPORATIONS DIVISION       300 N. SALISBURY STREET      RALEIGH, NC  27603-5909


<PAGE>   51

                                    EXHIBIT B
                                     TO THE
                               OPERATING AGREEMENT
                                       OF
                            HEART HOSPITAL OF BK, LLC
                   A North Carolina Limited Liability Company

                               INFORMATION EXHIBIT

<TABLE>
<CAPTION>
                                  Initial Capital           Percentage
                                  ---------------           ----------
    Name, Address & TIN            Contribution         Membership Interest
    -------------------            ------------         -------------------

<S>                               <C>                   <C>
HHBF, Inc.                          $1,530,000                53.31%
7621 Little Avenue, Suite 106
Charlotte, NC 28226
(56-2000564)

Investor Members                    $1,340,000                46.69%
</TABLE>


<PAGE>   52

                                    EXHIBIT C
                                     TO THE
                               OPERATING AGREEMENT
                                       OF
                            HEART HOSPITAL OF BK, LLC
                   A North Carolina Limited Liability Company

                                GLOSSARY OF TERMS

         As used in this Agreement, the following terms shall have the following
definitions (unless otherwise expressly provided herein).

         "Act" shall mean the North Carolina Limited Liability Company Act, as
in effect in North Carolina and set forth at N.C. Gen. Stat. ss.ss. 57C-1-01
through 57C-10-07 (or any corresponding provisions of succeeding law).

         "Adjusted Capital Account" means, with respect to any Member or
Economic Interest Owner, such Person's Capital Account (as defined below) as of
the end of the relevant Fiscal Year increased by any amounts which such Person
is obligated to restore, or is deemed to be obligated to restore pursuant to the
next to last sentences of Regulations Section 1.704-2(g)(1) (share of minimum
gain) and Regulations Section 1.704-2(i)(5) (share of member nonrecourse debt
minimum gain) and decreased by the items described in Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5) and (6).

         "Affiliate" with respect to a Person, (i) any relative of such Person;
(ii) any officer, director, trustee, partner, manager, employee or holder of ten
percent (10%) or more of any class of the outstanding voting securities or of an
equity interest of such Person; or (iii) Entity or holder of ten percent (10%)
or more of the outstanding voting securities or of an equity interest of any
Entity, controlling, controlled by, or under common control with such Person.

         "Agreed Value" shall mean with respect to any noncash asset of the
Company an amount determined and adjusted in accordance with the following
provisions:

         (a)      The initial Agreed Value of any noncash asset contributed to
the capital of the Company by any Member shall be its gross fair market value,
as agreed to by the contributing Member and the Company.

         (b)      The initial Agreed Value of any noncash asset acquired by the
Company other than by contribution by a Member shall be its adjusted basis for
federal income tax purposes.

         (c)      The initial Agreed Values of all the Company's noncash assets,
regardless of how those assets were acquired, shall be reduced by depreciation
or amortization, as the case may be, determined in accordance with the rules set
forth in Regulations Section 1.704-1(b)(2)(iv)(f) and (g).


<PAGE>   53

         (d)      The Agreed Values, as reduced by depreciation or amortization,
of all noncash assets of the Company, regardless of how those assets were
acquired, shall be adjusted from time to time to equal their gross fair market
values, as agreed to by the Members in writing, as of the following times:

         (i)      the acquisition of a Membership Interest or an additional
                  Membership Interest in the Company by any new or existing
                  Member in exchange for more than a de minimis Capital
                  Contribution;

         (ii)     the distribution by the Company of more than a de minimis
                  amount of money or other property as consideration for all or
                  part of a Membership Interest in the Company; and

         (iii)    the termination of the Company for federal income tax purposes
                  pursuant to Code Section 708(b)(1)(B).

         If, upon the occurrence of one of the events described in (i), (ii) or
(iii) above the Members do not agree in writing on the gross fair market values
of the Company's assets, it shall be deemed that the fair market values of all
the Company's assets equal their respective Agreed Values immediately prior to
the occurrence of the event and thus no adjustment to those values shall be made
as a result of such event.

         "Agreement" shall mean this Operating Agreement, as amended from time
to time.

         "Articles of Organization." The Articles of Organization of the
Company, as filed with the Secretary of State of North Carolina as the same may
be amended from time to time.

         "Capital Account" shall mean with respect to each Member or assignee an
account maintained and adjusted in accordance with the following provisions:

         (a)      Each Person's Capital Account shall be increased by Person's
Capital Contributions, such Person's distributive share of Profits, any items in
the nature of income or gain that are allocated pursuant to the Regulatory
Allocations and the amount of any Company liabilities that are assumed by such
Person or that are secured by Company property distributed to such Person.

         (b)      Each Person's Capital Account shall be decreased by the amount
of cash and the Agreed Value of any Company property distributed to such Person
pursuant to any provision of this Agreement, such Person's distributive share of
Losses, any items in the nature of loss or deduction that are allocated pursuant
to the Regulatory Allocations, and the amount of any liabilities of such Person
that are assumed by the Company or that are secured by any property contributed
by such Person to the Company.

         In the event any Membership Interest is transferred in accordance with
the terms of this Agreement, the transferee shall succeed to the Capital Account
of the transferor to the extent it relates to the transferred Membership
Interest.


<PAGE>   54

         In the event the Agreed Values of the Company assets are adjusted
pursuant to the definition of Agreed Value contained in this Agreement, the
Capital Accounts of all Members shall be adjusted simultaneously to reflect the
aggregate adjustments as if the Company recognized gain or loss equal to the
amount of such aggregate adjustment.

         The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner
consistent with such regulations. In the event HHBF shall determine that it is
prudent to modify the manner in which the Capital Accounts, or any debits or
credits thereto, are computed to comply with such Regulation, HHBF may make such
modification, provided that it is not likely to have a material effect on the
amounts distributable to any Member pursuant to Articles VI or VII hereof upon
the dissolution of the Company. In the event HHBF shall determine such
adjustments are necessary or appropriate to comply with Regulations Section
1.704-1(b)(2)(iv), HHBF shall adjust the amounts debited or credited to Capital
Accounts with respect to (i) any property contributed by the Members or
distributed to the Members and (ii) any liabilities secured by such contributed
or distributed property or assumed by the Members. HHBF shall also make any
other appropriate modifications in the event unanticipated events might
otherwise cause this Agreement not to comply with Regulations Section
1.704-1(b). In the event any Membership Interest in the Company is transferred
in accordance with the terms of this Agreement, the transferee shall succeed to
the Capital Account of the transferor to the extent it relates to the
transferred Membership Interest.

         "Capital Contribution" shall mean with respect to any Member, the
amount of money and the initial Agreed Value of any property (other than money)
contributed to the Company with respect to the Membership Interest of such
Member.

         "Cash Distributions" shall mean net cash distributed to Members
resulting from Cash Flow from Operations or Cash from Sales or Refinancing, but
shall not include cash payments made to HHBF as its Management Fee for services
or any amount in repayment of loans made by the Members to the Company.

         "Cash Flow from Operations" shall mean net cash funds provided from
operations, exclusive of Cash from Sales or Refinancing, of the Company or
investment of any Company funds, without deduction for depreciation, but after
deducting cash funds used to pay or establish a reserve for expenses, debt
payments, capital improvements, and replacements and for such other items as
HHBF reasonably determines to be necessary or appropriate; provided, without the
consent of the Investor Manager, HHBF shall not use such net cash funds for the
early repayment of Company debt. In addition, HHBF shall not cause the sum of
the reserves of Cash Flow from Operations plus the reserves of Cash from Sales
or Refinancing to exceed $3,000,000.00, without the consent of the Investor
Manager.

         "Cash from Sales or Refinancing" shall mean the net cash proceeds
received by the Company from or as a result of any Sale or Refinancing of
property after deducting (i) all expenses incurred in connection therewith, (ii)
any amounts applied by HHBF in its sole and


<PAGE>   55

absolute discretion toward the payment of any indebtedness and other obligations
of the Company then due and payable, including payments of principal and
interest on mortgages, (iii) the payment of any other expenses or amounts owed
by the Company to other parties to the extent then due and payable, and (iv) the
establishment of any reserves deemed necessary by HHBF in its sole and absolute
discretion. If the proceeds of any sale or refinancing are paid in more than one
installment, each such installment shall be treated as a separate Sale or
Refinancing for the purposes of this definition. In addition, HHBF shall not
cause the sum of the reserves of Cash Flow from Operations plus the reserves of
Cash from Sales or Refinancing to exceed $3,000,000.00, without the consent of
the Investor Manager.

         "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time. Any reference herein to a specific section(s) of the Code shall be
deemed to include a reference to any corresponding provision of future law.

         "Company" shall refer to HEART HOSPITAL OF BK, LLC, which shall be
created upon the filing of the Articles of Organization with the Office of the
Secretary of State of North Carolina, to be operated under the name HEART
HOSPITAL OF BK, LLC, a North Carolina limited liability company, and to continue
under this Agreement, as amended from time to time.

         "Economic Interest" shall refer to that portion of the Membership
Interest of a Member in the economic rights and benefits of the Company,
including but not limited to all Profits, Losses and Cash Distributions. Such an
Economic Interest will be measured by an amount equal to the Member's percentage
Membership Interest in the Company as the same may be adjusted from time to
time.

         "Economic Interest Owner" shall mean a Person who has validly acquired
a Member's Economic Interest as permitted under this Agreement but who has not
become a Member. Such Person shall be entitled to the allocations of Profits and
Losses and Cash Distributions under Article VI and VII to which the previous
owner of the Economic Interest would have been entitled had such previous owner
retained the Economic Interest. Unless and until such Economic Interest Holder
is admitted as a Substitute Member, it shall be a mere assignee of a Member.

         "Entity" shall mean any general partnership, limited partnership,
limited liability company, corporation, joint venture, trust, business trust,
cooperative or association or any foreign trust or foreign business
organization.

         "Equipment" shall mean the appropriate equipment and supplies required
from time to time in connection with the development and operation of the
Hospital.

         "Fiscal Year" shall mean, with respect to the first year of the
Company, the period beginning upon the formation of the Company and ending on
the next September 30, with respect to subsequent years of the Company, the
twelve month period beginning October 1 and ending September 30, and, with
respect to the last year of the Company, the portion of the period beginning
October 1 and ending with the date of the final liquidating distributions.


<PAGE>   56

         "HHBF" shall refer to HHBF, Inc., which shall serve as a Manager of the
Company.

         "Hospital" shall mean an acute care hospital specializing in all
aspects of cardiology and cardiovascular care and surgery in Bakersfield,
California, as further described in Section 2.3 of the Agreement.

         "Investor Manager" shall refer to the individual elected by Investor
Members in accordance with Section 5.13 who shall serve as a Manager of the
Company.

         "Investor Members" shall mean the Members other than HHBF listed on the
Information Exhibit attached hereto.

         "Majority Vote of Investor Members" shall refer to the affirmative
vote, approval or consent of Investor Members holding a majority of the
percentage Membership Interests held by the Investor Members in the aggregate.

         "Manager" or "Managers" shall refer to one or more managers designated
pursuant to this Agreement. Pursuant to this Agreement and the Articles of
Organization, no Member shall automatically be a manager by virtue of such
Person's status as a Member. Subject to Section 11.1(g) hereof, the Managers of
the Company shall be HHBF and the Investor Manager. The powers, rights and
duties of each Manager to manage the affairs of the Company are specified or
designated in this Agreement.

         "Management Fee" shall mean the amounts payable to HHBF pursuant to
Section 5.6(b)(ii) for services rendered in managing the operations of the
Company.

         "Member" shall refer to the organizers of the Company (unless or until
any such organizer has withdrawn) and each of the members identified in the then
applying Information Exhibit attached hereto and incorporated herein by this
reference. To the extent a Manager has purchased a Membership Interest in the
Company, such Person will have all the rights of a Member with respect to such
Membership Interest, and the term "Member" as used herein shall include a
Manager to the extent such Person has purchased such Membership Interest in the
Company. If a Person is already a Member immediately prior to the purchase or
other acquisition by such Person of an Economic Interest or Membership Interest,
such Person shall have all the rights of a Member with respect to such purchased
or otherwise acquired Membership Interest or Economic Interest, as the case may
be.

         "Membership Interest" shall mean all of a Member's rights in the
Company, including without limitation the Member's share of Profits, Losses,
Cash Distributions and other benefits of the Company, any right to vote, any
right to participate in the management of the business and affairs of the
Company, including the right to vote on, consent to, or otherwise participate in
any 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.

<PAGE>   57
         "Organization Expenses" shall mean those expenses incurred, either by
the Company or for which the Company has agreed to make reimbursement, in
connection with the formation of the Company including such expenses as: (i)
registration fees, filing fees, and taxes; and (ii) legal fees incurred in
connection with any of the foregoing.

         "Person" shall mean any individual or Entity, and the heirs, executors,
administrators, legal representatives, successors, and assigns of such
individual or Entity where the context so permits.

         "Prime Rate" means the rate of interest as of the relevant day or time
period as announced by the First Union National Bank, N.A. or its successor in
interest from time to time as its prime or reference rate.

         "Profits and Losses" shall mean, for each Fiscal Year or other period,
an amount equal to the Company's taxable income or loss for such year or period,
determined in accordance with Code Section 703(a) (for this purpose, all items
of income, gain, loss, or deduction required to be stated separately pursuant to
Code Section 703(a)(l) shall be included in taxable income or loss), with the
following adjustments:

         (a)      Any income of the Company that is exempt from federal income
tax and not otherwise taken into account in computing Profits or Losses shall be
added to such taxable income or loss;

         (b)      Any expenditures of the Company described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account
in computing Profits or Losses, shall be subtracted from such taxable income or
loss;

         (c)      Gain or loss resulting from dispositions of Company assets
shall be computed by reference to the Agreed Value of the property disposed of,
notwithstanding that the adjusted tax basis of such property differs from its
Agreed Value.

         "Refinancing" means any borrowing incurred or made to recapitalize the
Company or the equity investment in, or to refinance any loan used to finance
the acquisition of property.

         "Regulations" shall mean rules, orders, and regulations issued pursuant
to or under the authority of the Code and shall include revisions to and
succeeding provisions as appropriate.

         "Regulatory Allocations" shall mean those allocations of items of
Company income, gain, loss or deduction set forth on the Regulatory Allocations
Exhibit and designed to enable the Company to comply with the alternate test for
economic effect prescribed in Regulations Section 1.704-1(b)(2)(ii)(d), and the
safe-harbor rules for allocations attributable to nonrecourse liabilities
prescribed in Regulations Section 1.704-2.

         "Sale" means the sale, exchange, involuntary conversion (other than a
casualty followed by reconstruction), condemnation, or other disposition of
property by the Company, except for


<PAGE>   58

dispositions of inventory items and personal property in the ordinary course of
business and in connection with the replacement of such property.

         "Substitute Manager" shall mean a Manager who succeeds either HHBF or
the Investor Manager with all of the specific rights and powers of such Manager
under this Agreement.

         "Substitute Member" shall mean an assignee of a Member who has been
admitted to the Company and granted all the rights of a Member in place of its
assignor pursuant to the provisions of this Agreement. A Substitute Member, upon
its admission as such, shall replace and succeed to the rights, privileges, and
liabilities of the Member from whom it acquired its interest in the Company, to
the extent of the Economic Interest assigned.

         "Supermajority Vote of the Members" shall refer to the affirmative
vote, approval or consent of Members holding sixty-seven percent (67%) of the
percentage Membership Interests held by the Members in the aggregate.


<PAGE>   59




                                    EXHIBIT D
                                     TO THE
                               OPERATING AGREEMENT
                                       OF
                            HEART HOSPITAL OF BK, LLC
                   A North Carolina Limited Liability Company

                           DEVELOPMENT BUDGET EXHIBIT


                   [SEE ATTACHED CAPITAL EXPENSE INFORMATION.]


<PAGE>   60



                           BAKERSFIELD HEART HOSPITAL
                                CAPITAL EXPENSES


<TABLE>
<CAPTION>
FACILITY SIZE
     Total Beds                 48 occ. beds       =[***}% of capacity  60 beds
     Total Square Feet          [***] sqft/bed     +[***] add'l sqft    [***]

                                                                TOTAL           DEPRECIATION &               INTEREST
CAPITAL EXPENSES                                                AMOUNT           AMORTIZATION                EXPENSE
                                                                           ---------------------       --------------------
                                                                             TERM         AMOUNT       RATE          AMOUNT
<S>                         <C>                <C>             <C>         <C>            <C>          <C>           <C>
Property:
     Building Construction                     $[***]/sqft      $[***]     40 years       $[***]
     Land Lease              11.00 acres       @$[***]/sqft     $[***]     70 years       $[***]
     Architectural Fees      [***]% of constr.                  $[***]     40 years       $[***]
     Interest During Con     9 months          @ [***]%         $[***]     40 years       $[***]
                                                               -------
         Total Property                                         $[***]                                 [***]%        $[***]

Equipment:                   Capacity
     Cath Labs              [***]/lab/yr       4 lab(s)         $[***]
     Operating Rooms        [***]/OR/yr        3 OR(s)          $[***]
     Angiography Suite                                          $[***]
     CVRU/Recovery                                              $[***]
     Radiology & Laboratory                                     $[***]
     Patient Care                                               $[***]
     Other Departments                                          $[***]
                                                               -------
         Total Equipment                                        $[***]     7 years        $[***]       [***]%        $[***]

Startup Costs:
     Loan Acquisition Costs:
         Loan Commitment                 [***]% of loan amt     $[***]     7 years        $[***]       [***]%        $[***]
         Legal Fees                                             $[***]     5 years        $[***]       [***]%        $[***]
                                                               -------
                                                                $[***]

Pre-Opening Costs:                                              $[***]     2 years        $[***]       [***]%        $[***]

                                                               -------                    ------                     ------
TOTALS                                                          $[***]                    $[***]                     $[***]
</TABLE>




[***] These portions of this exhibit have been omitted and filed separately with
the Commission pursuant to a request for confidential treatment.


                                                                          6/6/96



<PAGE>   61


                                    EXHIBIT E
                                     TO THE
                               OPERATING AGREEMENT
                                       OF
                            HEART HOSPITAL OF BK, LLC
                   a North Carolina limited liability company


                             REGULATORY ALLOCATIONS


         This Exhibit contains special rules for the allocation of items of
Company income, gain, loss and deduction that override the basic allocations of
Profits and Losses in the Agreement to the extent necessary to cause the overall
allocations of items of Company income, gain, loss and deduction to have
substantial economic effect pursuant to Regulations Section 1.704-1(b) and shall
be interpreted in light of that purpose. Subsection (a) below contains special
technical definitions. Subsections (b) through (h) contain the Regulatory
Allocations themselves. Subsections (i), (j) and (k) are special rules
applicable in applying the Regulatory Allocations.

         (a)      Definitions Applicable to Regulatory Allocations. For purposes
of the Agreement, the following terms shall have the meanings indicated:

         (i)      "Company Minimum Gain" has the meaning of "partnership minimum
                  gain" set forth in Regulations Section 1.704-2(d), and is
                  generally the aggregate gain the Company would realize if it
                  disposed of its property subject to Nonrecourse Liabilities in
                  full satisfaction of each such liability, with such other
                  modifications as provided in Regulations Section 1.704-2(d).
                  In the case of Nonrecourse Liabilities for which the
                  creditor's recourse is not limited to particular assets of the
                  Company, until such time as there is regulatory guidance on
                  the determination of minimum gain with respect to such
                  liabilities, all such liabilities of the Company shall be
                  treated as a single liability and allocated to the Company's
                  assets using any reasonable basis selected by HHBF.

         (ii)     "Member Nonrecourse Deductions" shall mean losses, deductions
                  or Code Section 705(a)(2)(B) expenditures attributable to
                  Member Nonrecourse Debt under the general principles
                  applicable to "partner nonrecourse deductions" set forth in
                  Regulations Section 1.704-2(i)(2).

         (iii)    "Member Nonrecourse Debt" means any Company liability with
                  respect to which one or more but not all of the Members or
                  related Persons to one or more but not all of the Members
                  bears the economic risk of loss within the meaning of
                  Regulations Section 1.752-2 as a guarantor, lender or
                  otherwise.

         (iv)     "Member Nonrecourse Debt Minimum Gain" shall mean the minimum
                  gain attributable to Member Nonrecourse Debt as determined
                  pursuant to Regulations Section 1.704-2(i)(3). In the case of
                  Member Nonrecourse Debt for which the


<PAGE>   62

                  creditor's recourse against the Company is not limited to
                  particular assets of the Company, until such time as there is
                  regulatory guidance on the determination of minimum gain with
                  respect to such liabilities, all such liabilities of the
                  Company shall be treated as a single liability and allocated
                  to the Company's assets using any reasonable basis selected by
                  HHBF.

         (v)      "Nonrecourse Deductions" shall mean losses, deductions, or
                  Code Section 705(a)(2)(B) expenditures attributable to
                  Nonrecourse Liabilities (see Regulations Section
                  1.704-2(b)(1)). The amount of Nonrecourse Deductions for a
                  Fiscal Year shall be determined pursuant to Regulations
                  Section 1.704-2(c), and shall generally equal the net
                  increase, if any, in the amount of Company Minimum Gain for
                  that taxable year, determined generally according to the
                  provisions of Regulations Section 1.704-2(d), reduced (but not
                  below zero) by the aggregate distributions during the year of
                  proceeds of Nonrecourse Liabilities that are allocable to an
                  increase in Company Minimum Gain, with such other
                  modifications as provided in Regulations Section 1.704-2(c).

         (vi)     "Nonrecourse Liability" means any Company liability (or
                  portion thereof) for which no Member bears the economic risk
                  of loss under Regulations Section 1.752-2.

         (vii)    "Regulatory Allocations" shall mean allocations of Nonrecourse
                  Deductions provided in Paragraph (b) below, allocations of
                  Member Nonrecourse Deductions provided in Paragraph (c) below,
                  the minimum gain chargeback provided in Paragraph (d) below,
                  the member nonrecourse debt minimum gain chargeback provided
                  in Paragraph (e) below, the qualified income offset provided
                  in Paragraph (f) below, the gross income allocation provided
                  in Paragraph (g) below, and the curative allocations provided
                  in Paragraph (h) below.

         (b)      Nonrecourse Deductions. All Nonrecourse Deductions for any
Fiscal Year shall be allocated to the Members in accordance with their
percentage Membership Interests.

         (c)      Member Nonrecourse Deductions. All Member Nonrecourse
Deductions for any Fiscal Year shall be allocated to the Member who bears the
economic risk of loss under Regulations Section 1.752-2 with respect to the
Member Nonrecourse Debt to which such Member Nonrecourse Deductions are
attributable.

         (d)      Minimum Gain Chargeback. If there is a net decrease in Company
Minimum Gain for a Fiscal Year, each Member shall be allocated items of Company
income and gain for such year (and, if necessary, subsequent years) in an amount
equal to such Member's share of such net decrease in Company Minimum Gain,
determined in accordance with Regulations Section 1.704-2(g)(2) and the
definition of Company Minimum Gain set forth above. This provision is intended
to comply with the minimum gain chargeback requirement in Regulations Section
1.704-2(f) and shall be interpreted consistently therewith.


<PAGE>   63

         (e)      Member Nonrecourse Debt Minimum Gain Chargeback. If there is a
net decrease in Member Nonrecourse Debt Minimum Gain attributable to a Member
Nonrecourse Debt for any Fiscal Year, each Member who has a share of the Member
Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt as of
the beginning of the Fiscal Year, determined in accordance with Regulations
Section 1.704-2(i)(5), shall be allocated items of Company income and gain for
such year (and, if necessary, subsequent years) in an amount equal to such
Member's share of the net decrease in Member Nonrecourse Debt Minimum Gain
attributable to such Member Nonrecourse Debt, determined in accordance with
Regulations Sections 1.704-2(i)(4) and (5) and the definition of Member
Nonrecourse Debt Minimum Gain set forth above. This Paragraph is intended to
comply with the member nonrecourse debt minimum gain chargeback requirement in
Regulations Section 1.704-2(i)(4) and shall be interpreted consistently
therewith.

         (f)      Qualified Income Offset. In the event any Member unexpectedly
receives any adjustments, allocations, or distributions described in Regulations
Sections 1.704-1(b)(2)(ii)(d)(4), (5), or (6), items of Company income and gain
(consisting of a pro rata portion of each item of Company income, including
gross income, and gain for such year) shall be allocated to such Member in an
amount and manner sufficient to eliminate, to the extent required by the
Regulations, any deficit in such Member's Adjusted Capital Account created by
such adjustments, allocations or distributions as quickly as possible.

         (g)      Gross Income Allocation. In the event any Member has a deficit
in its Adjusted Capital Account at the end of any Fiscal Year, each such Member
shall be allocated items of Company gross income and gain, in the amount of such
Adjusted Capital Account deficit, as quickly as possible.

         (h)      Curative Allocations. When allocating Profits and Losses under
Article VI, such allocations shall be made so as to offset any prior allocations
of gross income under Paragraph (g) above to the greatest extent possible so
that overall allocations of Profits and Losses shall be made as if no such
allocations of gross income occurred.

         (i)      Ordering. The allocations in this Exhibit to the extent they
apply shall be made before the allocations of Profits and Losses under Article
VI and in the order in which they appear above.

         (j)      Waiver of Minimum Gain Chargeback Provisions. If HHBF
determines that (i) either of the two minimum gain chargeback provisions
contained in this Exhibit would cause a distortion in the economic arrangement
among the Members, (ii) it is not expected that the Company will have sufficient
other items of income and gain to correct that distortion, and (iii) the Members
have made Capital Contributions or received net income allocations that have
restored any previous Nonrecourse Deductions or Member Nonrecourse Deductions,
then HHBF shall have the authority, but not the obligation, after giving notice
to the Members, to request on behalf of the Company the Internal Revenue Service
to waive the minimum gain chargeback or member nonrecourse debt minimum gain
chargeback requirements pursuant to Regulations Sections 1.704-2(f)(4) and
1.704-2(i)(4). The Company shall pay the expenses (including


<PAGE>   64

attorneys' fees) incurred to apply for the waiver. HHBF shall promptly copy all
Members on all correspondence to and from the Internal Revenue Service
concerning the requested waiver.

         (k)      Code Section 754 Adjustments. To the extent an adjustment to
the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or
Code Section 743(b) is required, pursuant to Regulations Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts,
the amount of such adjustment to the Capital Accounts shall be treated as an
item of gain (if the adjustment increases the basis of the asset) or loss (if
the adjustment decreases such basis), and such gain or loss shall be specially
allocated to the Members in a manner consistent with the manner in which their
Capital Accounts are required to be adjusted pursuant to such Section of the
Regulations.

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