-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I3GaUYlAvKI0nwDGRAMUTi+HofRFhCXzcZlko/YG5u8+1WrJj7Hlr4JzfpK7HUdS SMVwjgpQUgRl1+creNrEhw== 0000724024-98-000002.txt : 19980401 0000724024-98-000002.hdr.sgml : 19980401 ACCESSION NUMBER: 0000724024-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN PHYSICIANS SERVICE GROUP INC CENTRAL INDEX KEY: 0000724024 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT SERVICES [8741] IRS NUMBER: 751458323 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-11453 FILM NUMBER: 98580961 BUSINESS ADDRESS: STREET 1: 1301 CAPITAL OF TEXAS HWY STREET 2: C-300 CITY: AUSTIN STATE: TX ZIP: 78746 BUSINESS PHONE: 5123280888 MAIL ADDRESS: STREET 1: 1301 CAPITAL OF TEXAS HIGHWAY CITY: AUTIN STATE: TX ZIP: 78746 10-K 1 1997 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-K MARK ONE: [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO -------------------- -------------------- COMMISSION FILE NUMBER 0-11453 AMERICAN PHYSICIANS SERVICE GROUP, INC. (Exact name of registrant as specified in its charter) TEXAS 75-1458323 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 1301 CAPITAL OF TEXAS HIGHWAY AUSTIN, TEXAS 78746 (Address of principal executive offices) (Zip Code) (512) 328-0888 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b)OF THE ACT: Name of Each Exchange on Title of Each Class Which Registered ------------------- ------------------------ None None SECURITIES REGISTERED PURSUANT TO SECTION 12(g)OF THE ACT: Common Stock, $.10 Par Value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d ) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K _____ State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. Aggregate Market Value at March 18, 1998: $30,121,524 Indicate the number of shares outstanding of each of the registrant's class of common stock, as of the latest practicable date. NUMBER OF SHARES OUTSTANDING AT TITLE OF EACH CLASS MARCH 18, 1998 -------------------- ---------------- Common Stock, $.10 par value 4,154,693 DOCUMENTS INCORPORATED BY REFERENCE Selected portions of the Registrant's definitive proxy material for the 1997 annual meeting of shareholders are incorporated by reference into Part III of the Form 10-K. In addition, Item14(a) of Prime Medical Services, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997 is incorporated by reference. ============================================================================ AMERICAN PHYSICIANS SERVICE GROUP, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 PART I ITEM 1. BUSINESS General American Physicians Service Group, Inc. (the "Company"), through its subsidiaries, provides financial services that include management services to malpractice insurance companies, and brokerage and investment services to individuals and institutions. The Company also owns space in the office building which serves as its headquarters. Through its real estate subsidiary it leases space that is surplus to its needs. The Company owns 3,064,000 shares of common stock of Prime Medical Services, Inc. ("Prime Medical"), representing at March 15, 1998 approximately 16% of the outstanding shares of common stock of Prime Medical. Two of Prime Medical's eight directors are members of the Company's five member board of directors. The Company records its pro-rata share of Prime Medical's results on the equity basis. Prime Medical is the largest provider of lithotripsy services in the United States, currently servicing over 450 hospitals and surgery centers in 34 states. Lithotripsy is a non-invasive method of treating kidney stones through the use of shock waves. The common stock of Prime Medical is traded on the NASDAQ National Market under the symbol "PMSI." Prime Medical is a Delaware corporation which is required to file annual, quarterly and other reports and documents with the Securities and Exchange Commission (the "SEC"), which reports and documents contain financial and other information regarding Prime Medical. The summary information regarding Prime Medical contained herein is qualified in its entirety by reference to such reports and documents. Such reports and documents may be examined and copies may be obtained from the offices of the SEC. On October 1, 1997, the Company formed APS Practice Management, Inc., later renamed Syntera HealthCare Corporation ("Syntera") with an initial ownership of 85%. Syntera specializes in the management of OB/GYN and related medical practices. In a typical transaction, Syntera acquires the non-medical assets of a physician's practice, signs a long-term management contract with the physician to provide the majority of the non-medical requirements of the practice, such as non-professional personnel, office space, billing and collection, and other day-to-day non-medical operating functions. In turn, Syntera is paid a variable management fee that rewards the efficient operation and the expansion of the practice. Medical services are not provided by Syntera. The Company expects its ownership interest in Syntera (currently 74%) to be reduced to a minority level as Syntera exchanges its stock for assets of additional physician practices. Due 1 to the short time frame anticipated for this change in ownership to occur, the Company has accounted for its ownership in Syntera on the equity basis in 1997. On October 31, 1996, the Company invested $3,300,000 in the common stock of Consolidated Eco-Systems, Inc. (formerly Exsorbet Industries, Inc.) ("Con-Eco") (NASDAQ:EXSO) with a put option. Con-Eco is a diversified environmental and technical services company. On November 26, 1996, the Company exercised its put in exchange for a promissory note from Con-Eco. The promissory note was secured by the shares which were subject to the put plus all of the stock and substantially all of the assets of a wholly-owned subsidiary of Con-Eco and the guarantees of all operating subsidiaries of Con-Eco. The Company renegotiated the debt with Con-Eco in November, 1997. In connection with the renegotiation, the Company extended the debt for two years and refinanced unpaid accrued interest, resulting in a new promissory note for $3,788,000. No interest income has been recognized by the Company. Con-Eco provided additional collateral to the Company in the form of stock of two additional subsidiaries, and a second lien on all assets of one of these subsidiaries. Payments under the new note were scheduled to begin on January 1, but were delayed until March, 1998 with the Company's consent. The March 1998 payment has been received; however, is anticipated that Con-Eco will be required to sell certain assets in order to meet its obligations to the Company. The Company has declared Con-Eco in default for failure to comply with certain non-payment obligations, but believes its collateral position is sufficient to allow ultimate repayment of the debt. The Company was organized in October 1974 under the laws of the State of Texas. The Company maintains its principal executive office at 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746, and its telephone number is (512) 328-0888. Unless the context otherwise requires, all references herein to the "Company" shall mean American Physicians Service Group, Inc. and its subsidiaries (other than affiliates Prime Medical and Syntera). The Company, through its wholly owned subsidiary, APS Systems, Inc. ("APS Systems"), had previously developed software and marketed it to medical clinics and medical schools. This business segment became unprofitable in 1996. A joint venture with a software developer was formed in 1996 with a plan to develop new products, but was discontinued in 1997 when it was determined that the high cost of developing competitive products precluded an adequate return on investment. Subsequently, the Company ceased marketing the software and reduced the scope of APS Systems' operations to a level adequate to service existing clients through the terms of their contracts. The Company has assumed that all clients will have migrated to other software products by the end of 1999 and has reflected the expected financial impact of discontinuing this segment on that date in the current financial statements. The Company had previously published Spanish language buying guides of U.S. businesses for distribution in Mexico. This business segment had been unprofitable and, in 1995 substantially all of the assets of this business were sold. There was no material financial impact on the Company. 2 FINANCIAL SERVICES The Company's financial services consist of management services to medical malpractice insurance companies by APS Insurance Services, Inc., an 80% owned subsidiary of the Company ("Insurance Services"), and brokerage and investment services primarily to institutional and high net worth individuals performed by APS Financial Corporation, a wholly-owned subsidiary of the Company ("APS Financial"). MANAGEMENT SERVICES TO MEDICAL MALPRACTICE INSURANCE COMPANIES Insurance Services, through its wholly-owned subsidiaries APS Facilities Management, Inc. ("FMI") and American Physicians Insurance Agency, Inc. ("Agency"), provides management services to medical malpractice insurance companies. The primary insurance company client, American Physicians Insurance Exchange ("APIE") is a reciprocal insurance exchange. A reciprocal insurance exchange is an organization which sells insurance only to its subscribers, who pay, in addition to their annual insurance premiums, a contribution to the exchange's surplus. Such exchanges generally have no paid employees but instead enter into a contract with an "attorney-in-fact", that provides all management and administrative services for the exchange. As the attorney-in-fact for APIE, FMI receives a percentage of the earned premiums of APIE, as well as a portion of APIE's profit. The amount of these premiums can be adversely affected by competition. Substantial underwriting losses, which might result in a curtailment or cessation of operations by APIE, would also adversely affect FMI's revenue. To limit possible underwriting losses, APIE currently reinsures its risk in excess of $250,000 per medical incident. APIE offers medical professional liability insurance for doctors in Texas and Arkansas. FMI's assets are not subject to any insurance claims by policyholders of APIE. FMI organized APIE and has been its exclusive manager since its inception in 1975. The management agreement between FMI and APIE basically provides for full management by FMI of the affairs of APIE under the direction of APIE's physician Board of Directors. Subject to the direction of this Board, FMI sells and issues policies, investigates, settles and defends claims, and otherwise manages APIE's affairs. In consideration for performing its services, FMI receives a percentage fee based on APIE's earned premiums (before payment of reinsurance premiums), as well as a portion of APIE's profit. FMI pays all salaries and personnel related expenses, rent and office operations costs, data processing costs and many other operating expenses of APIE. APIE is responsible for the payment of all claims, claims expenses, peer review expenses, directors' fees and expenses, legal, actuarial and auditing expenses, its taxes and certain other specific expenses. Under the management agreement, FMI's authority to act as manager of APIE is automatically renewed each year unless a majority of the subscribers to APIE elect to terminate the management agreement by reason of an adjudication that FMI has been grossly negligent, has acted in bad faith or with fraudulent intent or has committed willful misfeasance in its management activities. During 1997, 1996 and 1995 approximately 48%, 57% and 35%, respectively, of the Company's revenues from continuing operations, and substantially all of Insurance Services' 3 revenues were received pursuant to the agreement with APIE discussed above. Termination of the agreement with APIE would have a material adverse effect on the Company. During 1997, FPIC Insurance Group, Inc. ("FPIC"), purchased a 20% interest in Insurance Services from the Company. In conjunction with that purchase, FPIC's subsidiary, Florida Physicians Insurance Company, Inc. ("Florida Physicians"), entered into agreements with Agency and APIE granting Agency the exclusive right to market Florida Physician's policies in Texas. Agency has sales, marketing, underwriting and claims handling authority for Florida Physicians in Texas and receives commissions for such services. Florida Physicians also entered into a reinsurance agreement with APIE in which APIE reinsures substantially all of Florida Physicians' risk in Texas under medical professional liability policies issued or renewed by Florida Physicians on behalf of Texas health care providers after March 27, 1997. The Company has also granted FPIC an option, exercisable at any time during 1999, to purchase an additional 35% interest in Insurance Services from the Company at a price based on the average net earnings of Insurance Services for 1997 and 1998. APIE is authorized to do business in the states of Texas and Arkansas. Florida Physicians is a stock company licensed in several states. Both companies specialize in writing medical professional liability insurance for health care providers. The insurance written in Texas is primarily through purchasing groups and is not subject to certain rate and policy form regulations issued by the Texas Department of Insurance. Applicants for insurance coverage are reviewed based on the nature of their practices, prior claims records and other underwriting criteria. APIE is the third largest medical professional liability insurance company in the State of Texas and is one of the largest in the State of Arkansas. APIE is the only insurance company based in Texas that is wholly-owned by its subscriber physicians. Florida Physicians is one of the larger physician insurers in the country, insuring over 5,000 physicians nationwide. Florida Physicians is rated A- (Excellent) by AM Best. Generally, medical professional liability insurance is offered on either a "claims made" basis or an "occurrence" basis. "Claims made" policies insure physicians only against claims actually made during the period covered by the policy. "Occurrence" policies insure physicians against claims based on occurrences during the policy period regardless of when the claim is actually made. APIE and Florida Physicians offer only a "claims made" policy in Texas and Arkansas, but provide for an extended reporting option upon termination. APIE and Florida Physicians reinsure 100% of all Texas and Arkansas coverage per medical incident between $250,000 and $1,000,000, primarily through certain domestic and international insurance companies. The following table presents selected financial and other data for APIE. The management agreement with FMI obligates APIE to pay management fees to FMI based on APIE's earned premiums before payment of reinsurance premiums. The fee percentage is 13.5% with the provision that any profits of APIE will be shared equally with FMI so long as the total 4 reimbursement (fees and profit sharing) do not exceed a cap based on premium levels. No profit sharing fee was received in 1993. In 1997, 1996, 1995, and 1994, management fees attributable to profit sharing were $1,961,000, $1,191,000, $700,000, and $1,107,000, respectively.
Years Ended December 31, 1997 1996 1995 1994 1993 ------ ------ ------ ---- ----- (thousands, except for number of insureds) Earned premiums before reinsurance premiums...... $25,899 $28,754 $30,857 $30,261 $29,205 Total assets................ 81,594 90,193 101,251 98,302 94,019 Total surplus............... 11,854 10,017 9,402 9,315 9,196 Management fees and commissions to FMI and Agency ................... 5,854 (4) 5,281 (4) 5,010 (4) 4,703 (2) 3,790 (1) Number of insureds......... 2,629 (3) 3,019 3,226 3,216 (3) 3,575 - ----------------
(1) Gross fee of $3,942 less tax refund of $152 attributable to APIE's association with FMI. (2) Gross fee of $5,193 less tax credit of $490 attributable to APIE's association with FMI. (3) The decrease was the result of APIE's decision to raise premiums on certain unprofitable specialties. Included in the totals are doctors for which APIE provides reinsurance through a relationship with another malpractice insurance company. (4) Includes commissions of $1,214, $860 and $676 in 1997, 1996 and 1995, respectively, from Florida Physicians and other carriers directly related to APIE's controlled business. BROKERAGE AND INVESTMENT SERVICES APS Financial, a fully licensed broker/dealer, provides brokerage and investment services primarily to institutional and high net worth individual clients. APS Financial also provides complete portfolio accounting, analysis, and management services, to insurance companies, banks, and public funds. APS Financial's employees have extensive investment expertise and knowledge. APS Financial is a member of the National Association of Securities Dealers, Inc. ("NASD"), the Securities Investor Protection Corporation ("SIPC"), the Securities Industry Association, and, in addition, is licensed in 44 states. Commissions are charged on both exchange and over-the-counter ("OTC") transactions generally in accordance with industry practice. When OTC transactions are executed by APS Financial as a dealer, APS Financial receives, in lieu of commissions, mark-ups or mark-downs. Every registered broker-dealer doing business with the public is subject to stringent rules with respect to net capital requirements promulgated by the SEC. These rules, which are designed 5 to measure the financial soundness and liquidity of broker-dealers, specify minimum net capital requirements. Since the Company is not itself a registered broker-dealer, it is not subject to these rules. However, APS Financial is subject to these rules. Compliance with applicable net capital requirements could limit operations of APS Financial such as trading activities that require the use of significant amounts of capital. A significant operating loss or an extraordinary charge against net capital could adversely affect the ability of APS Financial to expand or even maintain its present levels of business. At December 31, 1997, APS Financial was in compliance with all net capital requirements. APS Financial clears and executes its transactions through Southwest Securities, Inc. ("Southwest") on a fully disclosed basis. Southwest also processes orders and floor reports, matches trades, transmits execution reports to APS Financial and records all data pertinent to trades. APS Financial pays Southwest a fee based on the number and type of transactions performed by Southwest. REAL ESTATE APS Realty, Inc., a wholly-owned subsidiary of the Company ("APS Realty"), owns condominium space in an office project located in Austin, Texas. APS Realty leases approximately 58% of this space to the Company, its subsidiaries and Prime Medical. The remainder is leased to unaffiliated parties. COMPETITION APIE competes with numerous insurance companies in Texas and Arkansas, primarily Medical Protective Insurance Company, St. Paul Fire and Marine Insurance Company, State Volunteer Mutual Company, Frontier Insurance Group, Insurance Company of America, Texas Medical Liability Trust and CNA Insurance Company. Many of these firms have substantially greater resources than APIE. The primary competitive factor in selling insurance is a combination of price, terms of the policies offered, claims and other service and claims settlement philosophy. APS Financial is also engaged in a highly competitive business. Its competitors include, with respect to one or more aspects of its business, all of the member organizations of the New York Stock Exchange and other registered securities exchanges, all members of the NASD, registered investment advisors, members of the various commodity exchanges and commercial banks and thrift institutions. Many of these organizations are national rather than regional firms and have substantially greater personnel and financial resources than the Company. Discount brokerage firms oriented to the retail market, including firms affiliated with commercial banks and thrift institutions, are devoting substantial funds to advertising and direct solicitation of customers in order to increase their share of commission dollars and other securities-related income. In many instances APS Financial is competing directly with such organizations. In addition, there is competition for investment funds from the real estate, insurance, banking and thrift industries. 6 REGULATION FMI has received certificates of authority from the Texas and Arkansas insurance departments, licensing it on behalf of the subscribers of APIE. APIE, as an insurance company, is subject to regulation by the insurance departments of the States of Texas and Arkansas. These regulations strictly limit all financial dealings of a reciprocal insurance exchange with its officers, directors, affiliates and subsidiaries, including FMI. Premium rates, advertising, solicitation of insurance, types of insurance issued and general corporate activity are also subject to regulation by various state agencies. APS Financial is subject to extensive regulation under both federal and state laws. The SEC is the federal agency charged with administration of the federal securities laws. Much of the regulation of broker-dealers, however, has been delegated to self-regulatory organizations, principally the NASD and the national securities exchanges. These self-regulatory organizations adopt rules (subject to approval by the SEC) which govern the industry and conduct periodic examinations of member broker-dealers. APS Financial is also subject to regulation by state and District of Columbia securities commissions. The regulations to which APS Financial is subject cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, uses and safekeeping of customers' funds and securities, capital structure of securities firms, record-keeping and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and by self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules, may directly affect the method of operation and profitability of APS Financial. The SEC, self-regulatory organizations and state securities commissions may conduct administrative proceedings which can result in censure, fine, suspension or expulsion of APS Financial, its officers or employees. The principal purpose of regulation and discipline of broker-dealers is the protection of customers and the securities markets, rather than protection of creditors and shareholders of broker-dealers. APS Financial, as a registered broker-dealer and NASD member organization, is required by federal law to belong to the SIPC. When the SIPC fund falls below a certain minimum amount (as it did in 1995), members are required to pay annual assessments in varying amounts not to exceed .5% of their adjusted gross revenues to restore the fund. This assessment amounted to approximately $7,300 in 1995. The SIPC fund provides protection for customer accounts up to $500,000 per customer, with a limitation of $100,000 on claims for cash balances. EMPLOYEES At March 1, 1998, the Company employed, on a full time basis, approximately 128 persons, including 52 by Insurance Services, 45 by APS Financial, 18 by APS Systems and 13 directly by the Company. The Company considers its employee relations to be good. None of the Company's employees is represented by a labor union and the Company has experienced no work stoppages. 7 ITEM 2. PROPERTIES APS Realty owns approximately 53,000 square feet of condominium space in an office project in Austin, Texas. The Company, its subsidiaries and Prime Medical use approximately 31,000 square feet of this space as their principal executive offices, and APS Realty leases the remainder to third parties. The area available for lease to third parties is fully occupied as of March 20, 1998. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various claims and legal actions that have arisen in the ordinary course of business. The Company believes that the liability provision in its financial statements is sufficient to cover any unfavorable outcome related to lawsuits in which it is currently named. Management believes that liabilities, if any, arising from these actions will not have a significant adverse effect on the financial condition of the Company. However, due to the uncertain nature of legal proceedings, the actual outcome of these lawsuits may differ from the liability provision recorded in the Company's financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting was held June 19, 1997. The sole agenda item was the election of directors. Results of the election follow: Nominee For Against Abstain Broker Non-Vote Richard Clark 3,598,632 22,000 -- -- Jack Murphy 3,599,631 22,001 -- -- Robert L. Myer 3,598,632 22,000 -- -- William A. Searles 3,598,632 22,000 -- -- Kenneth S. Shifrin 3,598,632 22,000 -- -- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table represents the high and low prices of the Company's common stock in the over-the-counter market as reported by the National Association of Securities Dealers, Inc., Automated Quotations System for years ended December 31, 1997 and 1996. On March 1, 1998, the Company had approximately 500 holders of record of its common stock. 8 1997 1996 ----------------- ------------------ High Low High Low First Quarter $7 5/8 $6 3/8 $10 1/8 $5 1/4 Second Quarter 6 7/8 4 3/4 12 7/8 8 Third Quarter 8 7/8 5 7/8 10 5 7/8 Fourth Quarter 8 6 7 3/8 5 5/8 The Company has not declared any cash dividends on its common stock during the last two years and has no present intention of paying any cash dividends in the foreseeable future. It is the present policy of the Board of Directors to retain all earnings to provide funds for the growth of the Company. The declaration and payment of dividends in the future will be determined by the Board of Directors based upon the Company's earnings, financial condition, capital requirements and such other factors as the Board of Directors may deem relevant. ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA (In thousands, except per share data) For the Year Ended or At December 31, 1997 1996 1995 1994 1993 ---- ---- ------ -------- ----- Selected income statement data: Revenues $13,065 10,437 16,124 12,333 12,541 Earnings from continuing operations before income taxes, minority interests and accounting changes $ 5,984 3,006 3,007 1,784 1,471 Net earnings $ 2,538 1,924 2,024 1,254 1,086 Per share amounts - diluted: Net earnings $ .59 .46 .53 .36 .31 Diluted weighted average shares outstanding 4,241 4,219 3,798 3,488 3,549 Selected balance sheet data: Total assets $29,401 24,468 23,740 19,918 18,326 Long-term obligations $ -- -- 574 878 1,215 Total liabilities $ 6,122 4,086 6,146 4,927 4,562 Minority interests $ 175 -- -- -- 76 Total equity $23,104 20,382 17,594 14,991 13,688 Book value per share $ 5.59 5.03 4.80 4.47 4.15
9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY FORWARD-LOOKING STATEMENTS The statements contained in this Report on Form 10-K that are not purely historical are forward- looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, intentions or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Company's actual results could differ materially from those in such forward-looking statements. In addition to any risks and uncertainties specifically identified in the text surrounding such forward-looking statements, the reader should consult the Company's reports on Forms 10-Q and other filings under the Securities Act of 1933 and the Securities Exchange Act of 1934, for factors that could cause actual results to differ materially from those presented. The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors and legislative, judicial and other governmental authorities and officials. Assumptions relating to the foregoing involve judgements with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Any such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Report on Form 10-K will prove to be accurate. RESULTS OF OPERATIONS 1997 COMPARED TO 1996 Revenues from continuing operations increased 25% in 1997 compared to 1996. Net income increased 32% and diluted earnings per share increased 28%. The reasons for these changes are described below. Financial Services Financial services revenues increased 30% in 1997 compared to 1996. Insurance management operations were up by 6% as a result of a higher contingent fee, which was based on improved profits at the managed insurance company. Broker dealer revenues increased 73%. 10 Approximately 71% of the increase was attributable to expanding the sales force with the opening of an additional office location. The balance of the increase was primarily a result of lower interest rates creating more activity in the bond market. Financial services expenses increased 12% from 1996. The increase reflects increased sales and expanded office operations at the broker/dealer with the resultant higher commissions and payroll expense. Better control of legal costs and a lower allocation of corporate overhead partially offset the increases. Insurance mangement expenses decreased 9%, again in the areas of legal and professional fees and allocated corporate overhead. Results in this segment can vary from year to year. Insurance management has a provision in its contract whereby it receives a portion of the managed insurance company's profits. In the eight years under the contract, profit-sharing has ranged from zero to 16% of the segment's revenues. The broker dealer, primarily a provider of fixed income securities, is subject to general market conditions as well as interest rates and is in an industry characterized by competition for top producing brokers. The broker/dealer continually seeks quality brokers and has opened an office in another city in an effort to expand its recruiting and sales base. REAL ESTATE Revenue decreased 2% compared to 1996. The small decrease reflects greater utilization of the office building by the Company and affiliates at lower rates than outside tenants. The 3% decrease in real estate expenses in 1997 reflects lower corporate overhead allocations. INVESTMENT AND OTHER The decline in investment and other income was primarily due to lower interest income, the result of a note receivable being on non-accrual during all of 1997. On October 31, 1996, the Company invested $3,300,000 in the common stock of Con-Eco with a put option. On November 26, 1996, the Company exercised its put in exchange for a note receivable from Con-Eco. The Company renegotiated the debt with Con-Eco in November 1997. In connection with the renegotiation, the Company extended the debt for two years and refinanced unpaid accrued interest, resulting in a new promissory note for $3,788,000. No interest income has been recognized by the Company. Payments under the new note were scheduled to begin on January 1, but were delayed until March 1998 with the Company's consent. The March 1998 payment has been received; however, it is anticipated that Con-Eco will be required to sell certain assets in order to meet its obligations to the Company. The Company has declared Con-Eco in default for failure to comply with certain non-payment obligations, but believes its collateral position is sufficient to allow ultimate repayment of the debt. General and Administrative Expenses The 800% increase in expenses was a result of changes in accounting estimates rather than fundamental changes in 11 operations. 1996's expenses reflected favorable adjustments to a contingency provision related to a guarantee, as well as favorable adjustments to allowances for doubtful accounts, a result of collecting the accounts. No such adjustments were required in 1997. Interest expense declined 61% primarily due to paying off the Company's real estate loan early in 1997. AFFILIATES Earnings from affiliates increased 43% compared to 1996. Prime Medical continued to grow and did not have the substantial offering and acquisition expenses it incurred in 1996. As a result, the Company's equity in earnings grew 67% in 1997. Partially offsetting this increase was a loss in equity earnings of Syntera. Syntera was established in 1997 and the loss reflects start-up and development costs incurred in this early phase. Prime had issued additional shares in 1996 reducing the Company's ownership from 21% to 16%. The Company, through its status as Prime's largest shareholder and through its representation on Prime's board, continues to have significant influence at Prime and accounts for its investment using the equity method. 1996 COMPARED TO 1995 Revenues from continuing operations decreased 35% in 1996 compared to 1995. Net income decreased 5% and diluted earnings per share decreased 13%. The reasons for these changes are described below. FINANCIAL SERVICES Financial services revenues declined 35% in 1996 compared to 1995. Insurance management operations were up by 5% as a result of a higher contingent fee, which was based on improved profits at the managed insurance company. Broker dealer revenues declined 61%. Approximately 60% of the decline was from not being able to replace the sales of a key broker who left at the beginning of 1996. The balance of the decline was primarily attributed to higher interest rates, which reduced activity in the bond market. Financial services expenses declined 32% from 1995. The decline reflects lower activity at the broker/dealer where lower commissions, payroll, legal and office operations expenses combined for a 51% decline compared to 1995. Insurance management expenses increased 7%, primarily in the areas of employment taxes and benefits and state taxes. REAL ESTATE Revenue increased 7% over 1995. The increase reflects rising lease rates in Austin, Texas. 12 The 2% increase in real estate expenses reflects overall inflation from 1995 to 1996. INVESTMENT AND OTHER The decline in investment and other income was primarily in the "other" category, where 1995 results included a favorable settlement of prior litigation. No similar benefit was received in 1996. GENERAL AND ADMINISTRATIVE EXPENSES The 93% decline in expenses was primarily a result of timing rather than fundamental changes in operations. 1995's expenses included a contingency provision established to guarantee a future yield on an account. In 1996, this contingency provision was adjusted downward as a result of the account's actual performance. Approximately 72% of the change between 1996 and 1995 resulted from this contingency provision. Additionally, the successful collection of certain accounts receivable in 1996 caused the reversal in 1996 of an allowance for doubtful accounts, established in 1995, and accounts for approximately 16% of the change between 1996 and 1995. Approximately 9% of the decrease in 1996 expenses was from lower payroll costs. Costs were lower due to reduced performance-based incentives, which are based on the Company's pretax income and market price. Interest expense declined 56% primarily due to reduced inventories at the broker/dealer and the resultant reduction in margin borrowing. AFFILIATES Earnings from affiliates decreased 6% compared to 1995. Prime Medical grew dramatically in 1996, but costs associated with acquisitions and a stock offering reduced the impact of the growth in 1996. Prime Medical's issuance of additional shares in 1996 reduced the Company's ownership from 21% to 16%. LIQUIDITY AND CAPITAL RESOURCES Net working capital was $3,360,000 and $8,305,000 at December 31, 1997 and 1996, respectively. The decrease in working capital resulted from current notes receivable being moved to long term, as a result of amended terms, and a significant increase in accrued liabilities related to the estimated disposal cost of the computer software segment. Equally significant, the Company's $4.6 million investment in Syntera was funded from working capital and current operations. Historically, the Company has maintained a strong working capital position and, using that base, has been able to satisfy its operational and capital expenditure requirements with cash generated from its operating and investing activities. These same sources of funds have also allowed the Company to pursue investment and expansion opportunities consistent with its growth plans. 13 In February 1998, the Company entered into a three year $10,000,000 revolving credit agreement with NationsBank of Texas, N.A. Funds advanced under the agreement will bear interest at the prime rate less 1/4%, such interest to be payable quarterly. The Company will pledge shares of Prime Medical to the bank as funds are advanced under the line. No funds had been advanced as of the date of this report. Capital expenditures for equipment were $312,000, $123,000 and $419,000, in 1997, 1996, and 1995, respectively. In addition, the Company improved or purchased office space in 1996 and 1995 for $21,000 and $64,000, respectively. The Company expects capital expenditures in 1998 to be within the range of the prior three years. The Company's ability to make scheduled payments of principal of, or to pay the interest on, or to refinance, its indebtedness, or to fund planned capital expenditures will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. Based upon the current level of operations and anticipated revenue growth, management believes that cash flow from operations and available cash, together with available borrowings under its bank line of credit, will be adequate to meet the Company's future liquidity needs for at least the next several years. However, there can be no assurance that the Company's business will generate sufficient cash flow from operations, that anticipated revenue growth and operating improvements will be realized or that future borrowings will be available under the line of credit in an amount sufficient to enable the Company to service its indebtedness or to fund its other liquidity needs. INFLATION The operations of the Company are not significantly affected by inflation because, having no manufacturing operations, the Company is not required to make large investments in fixed assets. However, the rate of inflation will affect certain of the Company's expenses, such as employee compensation and benefits. YEAR 2000 COMPLIANCE The Company is aware of the issues associated with the programming code in existing computer systems as the year 2000 approaches. The "year 2000 problem" is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems will properly recognize data sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company anticipates that necessary actions to be year 2000 compliant will be performed internally in the ordinary course of business at a cost not expected to exceed $100,000. However, significant uncertainty exists concerning the potential costs and effects associated with any year 2000 compliance. Any year 2000 compliance problem of either the Company or its vendors, third party payors or customers could have a material adverse effect on the Company's business, results of operations, 14 financial condition and prospects. ITEM 7.(a) Quantitative and Qualitative Disclosures about Market Risk. Not required for 1997. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is contained in Appendix A attached hereto. Financial information and schedules relating to Prime Medical Services, Inc. are contained in Item 14(a) of the Annual Report on Form 10-K for the year ended December 31, 1997 of Prime Medical Services, Inc., which Item 14(a) is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is contained in the definitive proxy material of the Company to be filed in connection with its 1998 annual meeting of shareholders, except for the information regarding executive officers of the Company which is presented below. The information required by this item contained in such definitive proxy material is incorporated herein by reference. As of March 1, 1998, the executive officers of the Company are as follows: Name Age Position Kenneth S. Shifrin 48 Chairman of the Board, President and Chief Executive Officer Duane K. Boyd, Jr. 53 Senior Vice President - Insurance William H. Hayes 50 Senior Vice President - Finance and Secretary Thomas R. Solimine 39 Controller All officers serve until the next annual meeting of directors and until their successors are 15 elected and qualified. Mr. Shifrin has been Chairman of the Board since March 1990. He has been President and Chief Executive Officer since March 1989 and was President and Chief Operating Officer from June 1987 to February 1989. He has been a Director of the Company since February 1987. From February 1985 until June 1987, Mr. Shifrin served as Senior Vice President - Finance and Treasurer. He has been Chairman of the Board of Prime Medical since October 1989. Mr. Shifrin is a Certified Public Accountant and is a member of the Young Presidents Organization. Mr. Boyd has been Senior Vice President - Insurance since July 1991 and has also been President and Chief Operating Officer of FMI since July 1991. Mr. Boyd is a Certified Public Accountant and was with KPMG Peat Marwick from 1974 to June 1991. He was a partner specializing in the insurance industry prior to joining the Company. Mr. Hayes has been the Senior Vice President - Finance since June 1995. Mr. Hayes was Vice President from June 1988 to June 1995 and was Controller from June 1985 to June 1988. He has been Secretary of the Company since February 1987 and Chief Financial Officer since June 1987. Mr. Hayes is a Certified Public Accountant. Mr. Solimine has been Controller since June 1994. He has served as Secretary for APS Financial since February 1995. From July 1989 to June 1994, Mr. Solimine served as Manager of Accounting for the Company. There are no family relationships, as defined, between any of the above executive officers, and there is no arrangement or understanding between any of the above executive officers and any other person pursuant to which he was selected as an officer. Each of the above executive officers was elected by the Board of Directors to hold office until the next annual election of officers and until his successor is elected and qualified or until his earlier resignation or removal. The Board of Directors elects the officers in conjunction with each annual meeting of the stockholders. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is contained in the definitive proxy statement of the Company to be filed in connection with its 1998 annual meeting of shareholders, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is contained in the definitive proxy statement of the Company to be filed in connection with its 1998 annual meeting of shareholders, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 16 The information required by this item is contained in the definitive proxy statement of the Company to be filed in connection with its 1998 annual meeting of shareholders, which information is incorporated herein by reference. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The information required by this item is contained in Appendix A attached hereto. 2. Financial Statement Schedules All schedules are omitted because they are not applicable or not required or because the required information is not material or is presented in the Consolidated Financial Statements and related notes. (b) Reports on Form 8-K None. (c) Exhibits (1) 3.1 Restated Articles of Incorporation of the Company, as amended.(6) 3.2 Amended and Restated Bylaws of the Company.(6) 4.1 Specimen of Common Stock Certificate.(2) *10.1 American Physicians Service Group, Inc. Employees Stock Option Plan.(2) *10.2 Form of Employees Incentive Stock Option Agreement.(2) *10.3 Form of Employees Non-Qualified Stock Option Agreement.(2) *10.4 American Physicians Service Group, Inc. Directors Stock Option Plan.(2) *10.5 Form of Directors Stock Option Agreement.(2) *10.6 1995 Non-Employee Directors Stock Option Plan of American Physicians Service Group, Inc.(8) 17 *10.7 Form of Non-Employee Directors Stock Option Agreement.(8) *10.8 1995 Incentive and Non-Qualified Stock Option Plan of American Physicians Service Group, Inc.(8) *10.9 Form of Stock Option Agreement (ISO).(8) *10.10 Form of Stock Option Agreement (Non-Qualified).(8) *10.11 Management Agreement of Attorney-in-Fact, dated August 13, 1975, between the Company and American Physicians Insurance Exchange.(2) 10.12 Rights Agreement dated August 16, 1989 between the Company and Texas American Bridge Bank N.A., as rights agent, and letter to the Company stockholders, dated August 16, 1989.(5) 10.13 Stock Purchase Agreement dated October 11, 1989 between the Company and Texas American Energy Corporation ("TAE"), Standstill Agreement dated October 11, 1989 among the Company, TAE, Shamrock Associates and Paul O. Koether, and Agreement dated October 11, 1989 among the Company, Prime Medical and Shamrock Associates.(3) *10.14 Profit Sharing Plan or Trust, effective December 1, 1984, of the Company.(4) 10.15 Loan Agreement dated April 7, 1992, among the Company, APS Realty and NationsBank of Texas, N.A.(7) 10.16 Promissory Note dated April 7, 1992, executed by APS Realty in the principal amount of $1,000,000 payable to NationsBank of Texas, N.A.(7) 10.17 Stock Purchase Agreement dated September 30, 1996 between the Company and Exsorbet Industries, Inc.(9) 10.18 Stock Put Agreement dated September 30, 1996 between the Company and Exsorbet Industries, Inc.(9) 10.19 Shareholder Rights Agreement dated September 30, 1996 between the Company and Exsorbet Industries, Inc.(9) 10.20 Warrant dated September 30, 1996 for shares of common stock issued 18 to the Company by Exsorbet Industries, Inc.(9) 10.21 Contingent Warrant Agreement dated September 30, 1996 for shares of common stock issued to the Company by Exsorbet Industries, Inc.(9) 10.22 Option Agreements dated September 30, 1996 for shares of Exsorbet common stock issued to the Company by officers and directors of Exsorbet Industries, Inc.(9) 10.23 Agreement dated September 30, 1996 with Exsorbet Industries, Inc. related to options issued by officers and directors of Exsorbet.(9) 10.24 Guaranty Agreements dated September 30, 1996 between the Company and subsidiaries of Exsorbet Industries, Inc.(9) 10.25 Promissory Note dated November 26, 1996 executed by Exsorbet Industries, Inc. and payable to the Company in the amount of $3,300,000.(9) 10.26 Stock Purchase Agreement dated October 1, 1997 between the Company, APS Practice Management, Inc., Michael Beck, John Hendrick, et al.(10) 10.27 Bylaws of APS Practice Management, Inc.(10) 10.28 Amended and Restated Articles of Incorporation APS Practice Management, Inc.(10) 10.29 APS Practice Management, Inc. Certificate of Designation of Rights and Preferences Series A Serial Founder's Common Stock dated September 30, 1997.(10) 10.30 Resolutions to organizational matters concerning APS Practice Management, Inc. dated October 1, 1997 (10) 10.31 Master Refinancing Agreement dated November 6, 1997 between the Company and Consolidated Eco-Systems, Inc.(10) 10.32 Promissory Note dated November 6, 1997 executed by Consolidated Eco-Systems, Inc. and payable to the Company in the amount of $3,788,580.(10) 10.33 Assignment and Security Agreement dated November 6, 1997 between the Company and Consolidated Eco-Systems, Inc.(10) 19 10.34 Security Agreement dated November 6, 1997 between the Company and Consolidated Eco-Systems, Inc.(10) 10.35 Share Exchange Agreements dated October 31, 1997 between the Company and Devin Garza, M.D., Robert Casanova, M.D. and Shelley Nielsen, M.D.(10) 10.36 First Amendment to 1995 Incentive and Non-Qualified Stock Option Plan of American Physicians Service Group, Inc. Dated December 10, 1997.(10) 10.37 First Amendment to 1995 Non-Employee Director Stock Option Plan of American Physicians Service Group, Inc. Dated December 10, 1997.(10) 21.1 List of subsidiaries of the Company.(10) 23.1 Independent Auditors Consent of KPMG Peat Marwick LLP.(10) 27.1 Financial Data Schedule (EDGAR filing). - ---------------- (*) Executive Compensation plans and arrangements. (1) The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, files reports, proxy statements and other information with the Commission. Reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such reports, proxy statements and other information concerning the Company are also available for inspection at the offices of The Nasdaq National Market, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at "http://www.sec.gov" and makes available the same documents through Disclosure, Inc. at 800-638-8241. (2) Filed as an Exhibit to the Registration Statement on Form S-1, Registration No. 2-85321, of the Company, and incorporated herein by reference. 20 (3) Filed as an Exhibit to the Current Report on Form 8-K of the Company dated October 20, 1989 and incorporated herein by reference. (4) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1984 and incorporated herein by reference. (5) Filed as an Exhibit to the Current Report on Form 8-K of the Company dated September 5, 1989 and incorporated herein by reference. (6) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1990 and incorporated herein by reference. (7) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1992 and incorporated herein by reference. (8) Filed as an Exhibit to the Annual Report on Form 10-KSB of the Company for the year ended December 31, 1995 and incorporated herein by reference. (9) Filed as an Exhibit to the Annual Report on Form 10-KSB of the Company for the year ended December 31, 1996 and incorporated herein by reference. (10) Filed herewith. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN PHYSICIANS SERVICE GROUP, INC. By: /s/ Kenneth S. Shifrin Kenneth S. Shifrin, Chairman of the Board and Chief Executive Officer Date: March 27, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Kenneth S. Shifrin Kenneth S. Shifrin Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: March 27, 1998 By: /s/ W. H. Hayes W. H. Hayes Senior Vice President - Finance, Secretary and Chief Financial Officer (Principal Financial Officer) Date: March 27, 1998 By: /s/ Thomas R. Solimine Thomas R. Solimine Controller (Principal Accounting Officer) 22 Date: March 27, 1998 By: /s/ Richard J. Clark Richard J. Clark, Director Date: March 27, 1998 By: /s/ Jack Murphy Jack Murphy, Director Date: March 27, 1998 By: /s/ Robert L. Myer Robert L. Myer, Director Date: March 27, 1998 By: /s/ William A. Searles William A. Searles, Director Date: March 27, 1998 23 APPENDIX A INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Independent Auditors' Report A-2 Financial Statements Consolidated Statements of Earnings for the years A-3 ended December 31, 1997, 1996 and 1995. Consolidated Balance Sheets at December 31, 1997 A-5 and December 31, 1996. Consolidated Statements of Cash Flows for the years A-7 ended December 31, 1997, 1996 and 1995. Consolidated Statements of Shareholders' Equity A-9 at December 31, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. A-10 A-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders American Physicians Service Group, Inc.: We have audited the accompanying consolidated financial statements of American Physicians Service Group, Inc. and subsidiaries ("Company") as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Physicians Service Group, Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Austin, Texas March 6, 1998 A-2 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data)
Year Ended December 31, 1997 1996 1995 ---- ---- ---- Revenues: Financial services (Note 3) $12,013 9,244 14,134 Real estate (Note 6) 704 717 668 Investments and other (Note 2) 348 476 1,322 -------- ------- ------- Total revenues 13,065 10,437 16,124 ------- ------- ------- Expenses: Financial services 9,118 8,117 11,954 Real estate 503 521 510 General and administrative 1,352 150 2,037 Interest 21 54 124 ------ ------ ------- Total expenses 10,994 8,842 14,625 ------ ------ ------- Operating income 2,071 1,595 1,499 Equity in earnings of unconsolidated affiliates (Note 13) 2,014 1,411 1,508 Gain on sale of interest in subsidiary 1,899 -- -- ------ ------- ------- Earnings from continuing operations before income taxes and minority interests 5,984 3,006 3,007 Income tax expense (Note 9) 2,341 1,058 946 Minority interests (175) -- -- ------- -------- -------- Earnings from continuing operations 3,468 1,948 2,061 ------ ------ ------ Discontinued operations: Loss from operations of discontinued segment, net of income tax benefit of $48, $13 and $19 in 1997, 1996 and 1995, respectively (94) (24) (37) Estimated loss on disposal of discontinued segment, net of income tax benefit of $431 in 1997 (836) -- -- ------ -------- -------- Net loss from discontinued operations (930) (24) (37) ------- --------- -------- Net earnings $2,538 1,924 2,024 ====== ======= =======
See accompanying notes to consolidated financial statements. A-3 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF EARNINGS, continued (In thousands, except per share amounts)
1997 1996 1995 ---- ---- ------ Earnings per common share: Basic: Earnings from continuing operations $0.84 0.48 0.59 Discontinued operations (0.22) -- (0.01) ------ ----- ------ Net earnings $0.62 0.48 0.58 ====== ===== ====== Diluted: Earnings from continuing operations $0.81 0.46 0.54 Discontinued operations (0.22) -- (0.01) ----- ----- ------ Net earnings $0.59 0.46 0.53 ===== ===== ====== Basic weighted average shares outstanding 4,106 4,025 3,480 ===== ====== ======= Diluted weighted average shares outstanding 4,241 4,219 3,798 ===== ====== =======
See accompanying notes to consolidated financial statements. A-4 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31, 1997 1996 ASSETS Current assets: Cash and cash equivalents $5,188 5,770 Marketable securities (Note 2) -- 29 Trading account securities 449 699 Management fees and other receivables (Note 3) 815 512 Income tax receivable -- 650 Notes receivable - current (Note 4) 1,157 3,447 Receivable from clearing broker 543 279 Prepaid expenses and other 508 239 ----- ------ Total current assets 8,660 11,625 Notes receivable, less current portion (Note 4) 2,982 179 Property and equipment, net (Note 6) 1,830 1,781 Investment in affiliates (Note 13) 15,611 9,657 Other assets 318 1,226 ------ ------ Total assets $29,401 24,468 ====== ====== See accompanying notes to consolidated financial statements. A-5 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED BALANCE SHEETS, continued (In thousands, except share data) December 31, 1997 1996 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long term obligations (Note 6) $ -- 542 Accounts payable - trade 614 382 Payable to clearing broker 441 -- Accrued compensation 446 252 Accrued expenses and other liabilities (Note 7) 3,573 2,144 Income taxes payable 226 -- ----- ------ Total current liabilities 5,300 3,320 Net deferred income tax liability (Note 9) 822 766 ----- ------ Total liabilities 6,122 4,086 ------ ------ Minority interest 175 -- Shareholders' equity: Preferred stock, $1.00 par value, 1,000,000 shares authorized -- -- Common stock, $0.10 par value, 20,000,000 shares authorized; 4,160,861 issued at 12/31/97 and 4,049,195 at 12/31/96 416 405 Additional paid-in capital 5,528 5,366 Unrealized holding losses -- ( 11) Retained earnings 17,160 14,622 ------ ------ Total shareholders' equity 23,104 20,382 ------ ------- Commitments and contingencies (notes 6, 8, 10, 11 and 12) Total liabilities and shareholders' equity $29,401 24,468 ======= ====== See accompanying notes to consolidated financial statements. A-6 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31, -------------------------------------- 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Cash received from customers $ 13,080 11,123 21,068 Cash paid to suppliers and employees (9,247) (11,064) (17,860) Change in trading account securities 250 315 ( 353) Change in receivable from clearing broker (177) 501 ( 289) Interest paid (21) ( 54) ( 124) Income taxes paid (772) ( 611) ( 494) Interest, dividends and other investment proceeds 219 459 1,322 ------- -------- ------- Net cash provided by operating activities 3,332 669 3,270 ------- -------- ------- Cash flows from investing activities: Payments for purchase of property and equipment (312) ( 144) ( 483) Net decrease (increase) in marketable securities 5 2,045 ( 530) Investment in affiliates (5,292) ( 244) -- Proceeds from sale of fixed assets 55 -- 47 Funds loaned to others (834) ( 3,442) -- Proceeds from the sale of discontinued operation -- -- 67 Collection of notes receivable 109 -- 1,119 Proceeds from disolution of entity 1,000 -- -- Proceeds from sale of 20% of subsidiary 2,000 -- -- Other (82) -- -- Net cash provided by (used in) investing ------- -------- ------ activities (3,351) ( 1,785) 220 ------- -------- ------ Cash flows from financing activities: Repayment of long-term obligations (542) ( 163) ( 332) Acquisition of treasury stock (337) ( 453) ( 125) Proceeds from exercise of stock options 316 704 499 ------- ------- ------ Net cash provided by (used in) financing activities (563) 88 42 ------- ------- ------ Net change in cash and cash equivalents (582) ( 1,028) 3,532 Cash and cash equivalents at beginning of period 5,770 6,798 3,266 ----- ----- ------ Cash and cash equivalents at end of period 5,188 5,770 6,798 ===== ======= ======
See accompanying notes to consolidated financial statements. A-7 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, continued (In thousands)
Year Ended December 31, --------------------------------------- 1997 1996 1995 ---- ---- ---- Reconciliation of net earnings to net cash from operating activities: Net earnings $ 2,538 1,923 2,024 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 436 324 399 Minority interest in consolidated earnings 175 -- -- Undistributed earnings of affiliate (2,014) (1,411) (1,508) Gain on sale or disposition of assets (2,032) -- (72) (Gain) loss on sale of securities 41 ( 81) ( 50) Change in federal income tax payable 876 (584) 301 Provision for deferred income tax 56 925 27 Change in trading securities 250 315 (353) Change in receivable from clearing broker 177 501 (289) Change in management fees and other receivable ( 26) 17 1,183 Change in prepaids and other current assets ( 191) 24 493 Change in long-term assets -- 265 -- Change in trade payable 90 53 ( 456) Change in accrued expenses and other liabilities 1,547 (1,602) 1,571 Loss from discontinued operations 1,409 -- -- ------- ------ ------ Net cash from operating activities $ 3,332 669 3,270 ======== ====== ======
Summary of non-cash transactions: During 1997, non-qualified employee stock options were exercised which resulted in a reduction of income tax payable and a corresponding addition to paid-in-capital of $194. During 1996, non-qualified employee stock options were exercised which resulted in a reduction of income tax payable and a corresponding addition to paid-in capital of $624. During the third quarter, 1995, the investment in the Company by the Company's affiliate, Prime Medical Services, Inc., became immaterial. Consequently, Reciprocal Stockholdings fell to zero while the Company's investment in affiliate increased by $543. The Company acquired $294,000 in treasury stock by exchanging $294,000 in Prime Medical Services, Inc. Common stock during 1995. In 1995, the Company sold APS Communications in a non-cash transaction as follows: Note received $ 183 ====== Fixed assets sold ( 48) Deferred income (135) $ (183) See accompanying notes to consolidated financial statements. A-8 AMERICAN PHYSICIANS SERVICE GROUP, INC. Consolidated Statements of Shareholders' Equity For the years ended December 31, 1997, 1996 and 1995 (In thousands, except share data)
Additional Unrealized Total Common Stock paid-in holding Retained Reciprocal shareholders' Shares Amount capital gains earnings stockholdings equity -------------- --------- ------------- ------------- ----------- -------------- ------------- Balance January 1, 1995 3,471,684 $347 4,469 44 10,647 (543) 14,991 Net earnings -- -- -- -- 2,024 -- 2,024 Unrealized gains on securities available for sale, net of tax -- -- -- (44) -- -- (44) Shares issued (Note 11) 314,333 31 468 -- -- -- 499 Shares repurchased & cancelled (Note 13) (122,146) (12) (407) -- -- -- (419) Pro rata portion of Company common stock held by affiliate (Note 13) -- -- -- -- -- 543 543 -------------- --------- ------------- ------------- ----------- -------------- ------------- Balance December 31, 1995 3,663,871 366 4,530 -- 12,698 -- 17,594 Net earnings -- -- -- -- 1,924 -- 1,924 Unrealized loss on securities available for sale, net of tax -- -- -- (11) -- -- (11) Shares issued (Note 11) 450,000 45 659 -- -- -- 704 Shares repurchased & cancelled (64,676) (6) (447) -- -- -- (453) Income tax benefit of non- qualified option exercises -- -- 624 -- -- -- 624 -------------- --------- ------------- ------------- ----------- -------------- ------------- Balance December 31, 1996 4,049,195 405 5,366 (11) 14,622 -- 20,382 Net earnings -- -- -- -- 2,538 -- 2,538 Unrealized loss on securities available for sale, net of tax -- -- -- 11 -- -- 11 Shares issued (Note 11) 164,666 16 300 -- -- -- 316 Shares repurchased & cancelled ( 53,000) ( 5) (332) -- -- -- (337) Income tax benefit of non-qualified option exercises -- -- 194 -- -- -- 194 -------------- ---------- ------------- ------------- ----------- -------------- ------------- Balance December 31, 1997 4,160,861 416 5,528 -- 17,160 -- 23,104 ============== ========== ============= ============= =========== ============== =============
See accompanying notes to consolidated financial statements. A-9 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (1) Summary of Significant Accounting Policies (a) General American Physicians Service Group, Inc. through its subsidiaries, provides financial services that include management of malpractice insurance companies and brokerage and investment services to individuals and institutions. The brokerage business has clients nationally. Insurance management is a service provided primarily in Texas, but is available to clients nationally. American Physicians Service Group, Inc. also owns space in the office building which serves as its headquarters. Through its real estate subsidiary it leases space that is surplus to its needs. During the three years presented in the financial statements, financial services generated approximately 89% of total revenues. The Company entered the physician practice management business in the fourth quarter of 1997. Operations for 1997 are not significant. (b) Estimates The preparation of financial statements in conformity with generally accepted accounting principles required management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) Principles of Consolidation The consolidated financial statements include the accounts of American Physicians Service Group, Inc. and of subsidiary companies more than 50% owned ("Company"). Investments in affiliated companies and other entities in which the Company's investment is less than 50% of the common shares outstanding and where the Company exerts significant influence, are accounted for by the equity method. All significant intercompany transactions and balances have been eliminated from the accompanying consolidated financial statements. (d) Revenue Recognition Financial services revenues related to management fees are recognized monthly as a percentage of the earned premiums of the managed company. The profit sharing component of these fees is recognized when it is reasonably certain that the managed A-10 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (1) Summary of Significant Accounting Policies, continued company will have an annual profit. Revenues related to securities transactions are recognized on a trade date basis. Real estate rental income is recognized monthly based on lease agreements. Costs of leasehold improvements are capitalized and amortized monthly over the term of the lease. Investment revenues are recognized as accrued on highly-rated investments and as received on lesser grades. (e) Broker, Dealer and Securities Transactions Securities transactions are recorded in the accounts on a trade date basis. (f) Marketable Securities The Company's investments in debt and equity securities are classified in three categories and accounted for as follows: Classification Accounting ----------------- ------------------------------- Held to maturity Amortized cost Trading securities Fair value, unrealized gains and losses included in earnings Available for sale Fair value, unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of applicable income taxes The Company has included its marketable securities in the available for sale category. (g) Property and Equipment Property and equipment are stated at cost. Property and equipment and rental property are depreciated using the straight-line method over the estimated useful lives of the respective assets (3 to 40 years). (h) Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized if there is a difference between the fair value and carrying value of the A-11 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (1) Summary of Significant Accounting Policies, continued asset. (i) Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (j) Earnings Per Share Basic earnings per share is based on the weighted average shares outstanding without any diluted effects considered. Diluted earnings per share reflects dilution from all contingently issuable shares, including options. (k) Cash and Cash Equivalents Cash and cash equivalents include cash and highly liquid investments with an original maturity of 90 days or less. (l) Notes Receivable Notes receivable are recorded at cost, less allowances for doubtful accounts when deemed necessary. Management, considering current information and events regarding the borrowers ability to repay their obligations, considers a note to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the note agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the note's effective interest rate. Impairment losses are included in the allowance for doubtful accounts through a charge to bad debt expense. Cash receipts on impaired notes receivable are applied to reduce the principal amount of such notes until the principal has been recovered and are recognized as interest income, thereafter. A-12 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (m) Stock-Based Compensation The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"), but applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its stock option plans. (n) Reclassification Certain reclassifications have been made to amounts presented in previous years to be consistent with the 1997 presentation. (2) Marketable Securities The Company holds various marketable securities as short-term investments. At December 31, 1997 and 1996, these marketable securities consisted of: December 31, 1997 1996 ------- ------- Equity securities, at cost $ -- 45,000 Debt securities, at cost -- -- -------- -------- Less: adjustment to fair value $ -- ( 16,000) -------- -------- Total marketable securities at fair value $ -- 29,000 ======== ======== At December 31, 1996 there were $16,000 in gross unrealized losses. There were no unrealized gains or losses at December 31, 1997 or 1995. Investment income includes the following: 1997 1996 1995 --------- ---------- -------- Interest $ 219,000 367,000 243,000 Realized gains -- 81,000 50,000 Realized losses ( 41,000) -- -- --------- ---------- -------- $ 178,000 448,000 293,000 ========= ======== ======== A-13 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (2) Marketable Securities, continued No individual issuer exceeded 10% of shareholders' equity at December 31, 1997 or 1996. (3) Management Fees and Other Receivables Management fees and other receivables consist of the following: December 31, 1997 1996 ---- ---- Management fees receivable $ 3,000 256,000 Trade accounts receivable 200,000 16,000 Less: allowance for doubtful accounts (25,000) -- Accrued interest receivable 10,000 12,000 Other receivables 627,000 228,000 ------- ------- $815,000 512,000 ======== ======= The Company earns management fees by providing for the full management of American Physicians Insurance Exchange ("APIE") under the direction of APIE's doctor Board of Directors. Subject to the direction of this Board, FMI sells and issues policies, investigates, settles and defends claims, and otherwise manages APIE's affairs. The Company has previously managed other insurance companies. The Company earned management fees of $6,287,000, $5,942,000 and $5,660,000 and received expense reimbursements of $664,000, $346,000 and $355,000 for the years ended December 31, 1997, 1996 and 1995, respectively, related to these agreements. A-14 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (4) Notes Receivable Notes receivable consists of the following: December 31, 1997 1996 ----- ----- Reagan Publishing Company This unsecured note had an original rate of 7% and a maturity of December 31, 1997. During 1997, the terms were renegotiated with a payment schedule based on the sales volume of the borrower, with certain annual minimums. The note bears interest at the prime rate (8.5% at December 31, 1997). $176,000 183,000 Consolidated Eco-Systems, Inc. This note is secured by 1,200,000 shares of Consolidated Eco-Systems, Inc. common stock and stock and certain assets of Con-Eco subsidiaries. The note bears interest at 15%. Principal payments are monthly through October 1, 1999 at which time all remaining principal and accrued interest are due. 3,788,000 3,300,000 Uncommon Care, Inc. This note is secured by land located in Fort Bend County, Texas. The note bears interest at 10% and is due January 31, 1998. 300,000 -- Employees Four employees have loans from the Company as employment inducements.The notes are non- interest bearing and are being forgiven and amortized monthly over three to four year periods. The notes are due and payable should the employees terminate employment. 528,000 143,000 ---------- --------- 4,792,000 3,626,000 Less allowance for doubtful accounts (653,000) -- ---------- --------- 4,139,000 3,626,000 Less current portion 1,157,000 3,447,000 --------- --------- Long term portion $2,982,000 179,000 ========== ========== A-15 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (4) Notes Receivable, continued The Company's note receivable from Consolidated Eco-Systems, Inc. (formerly Exsorbet Industries, Inc.) ("Con-Eco") (NASDAQ:EXSO), a diversified environmental and technical services company, is in excess of 10% of stockholder's equity at December 31, 1997 and represents a concentration of credit risk. Con-Eco's common stock sales price was $0.115 per share on the basis of the average high and low sales price of the stock on March 17, 1998. The Company renegotiated the debt with Con-Eco in November 1997. In connection with the renegotiation, the Company extended the debt for two years and rolled all accrued interest into the note, resulting in a total note for $3,788,000. No interest income has been recognized by the Company. Con-Eco provided additional collateral to the Company in the form of stock of two additional subsidiaries, and a second lien on all assets of one of these subsidiaries. Payments under the new note were scheduled to begin on January 1, but were delayed until March 1998 with the Company's consent. It is anticipated that Con-Eco will be required to sell certain assets in order to meet its obligations to the Company. However, the Company believes its collateral position is more than sufficient to ensure ultimate repayment of the debt. (5) Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" (Statement 107), requires that the Company disclose estimated fair values for its financial instruments as of December 31, 1997 and 1996: 1997 1996 --------------------- -------------------- Carrying Fair Carrying Fair Amount Value Amount Value Cash and cash equivalents $5,188 5,188 5,770 5,770 Marketable securities and trading account securities 449 449 728 728 Management fees and other receivables 815 815 512 512 Notes receivable 4,139 4,119 3,626 3,594 Receivable from clearing broker 543 543 279 279 Debt -- -- 542 542 Accounts payable 614 614 382 382 Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments. A-16 AMERICAN PHYSICIANS SERVICE GROUP, INC. Notes to Consolidated Financial Statements, Continued (5) Fair Value of Financial Instruments, continued Cash and Cash Equivalents The carrying amounts for cash and cash equivalents approximate fair value because they mature in less than 90 days and do not present unanticipated credit concerns. Marketable Securities and Trading Account The fair value of securities owned is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The carrying values of marketable securities are adjusted to market since such securities are in the available for sale category. Trading account securities are carried at market value. Management Fees and Other Receivables The fair value of these receivables approximates the carrying value due to their short-term nature and historical collectibility. Notes Receivable The fair value of notes has been determined using discounted cash flows based on management's estimate of current interest rates for notes of similar credit quality. Receivable from Clearing Broker The carrying amounts approximate fair value because the funds can be withdrawn on demand and there is no unanticipated credit concern. Debt The fair market value of debt approximates carrying value since it is primarily floating rate debt based on current market rates. Accounts Payable The fair value of the payable approximates carrying value due to the short-term nature of the obligation. A-17 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (5) Fair Value of Financial Instruments, continued Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include the deferred tax assets, property and equipment, investment in affiliates, other assets, accrued expenses and income tax payable. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the aforementioned estimates. (6) Property and Equipment Property and equipment consists of the following: December 31, 1997 1996 ---- ---- Office condominium $1,847,000 1,870,000 Furniture and equipment 3,758,000 2,386,000 ---------- --------- 5,605,000 4,256,000 Accumulated depreciation and amortization 3,775,000 2,475,000 ---------- --------- $1,830,000 1,781,000 The Company owns approximately 53,000 square feet in the condominium building in which its principal offices are located. The Company, its subsidiaries and affiliates occupy approximately 31,000 square feet and the remainder is leased to third parties. Rental income received from third parties during the years ended December 31, 1997, 1996 and 1995 totaled approximately $385,000, $379,000 and $348,000, respectively. Future minimum lease payments to be received under the terms of the office condominium leases are as follows: 1998 - $314,000; 1999 - $59,000 and none thereafter. At December 31, 1996 the office building was security for a short term note payable in the amount of $542,000 due April 1997 with interest at the prime rate. The note was paid in full in January 1997. A-18 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (7) Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consists of the following: 1997 1996 ---- ---- APS Systems disposition costs (discontinued operations) $1,138,000 -- Taxes payable - other 96,000 74,000 Commissions payable 287,000 18,000 Deferred income 280,000 339,000 Health insurance and other claims payable 59,000 87,000 Contractual/legal claims 1,461,000 1,352,000 Vacation payable 102,000 77,000 Funds held for others 58,000 63,000 Other 92,000 134,000 ---------- ---------- $3,573,000 2,144,000 (8) Commitments and Contingencies The Company has guaranteed the future yield of a customer's investment portfolio beginning in January 1995 for up to a five and one-half year period. Management believes that the Company's financial statements adequately provide for any loss that might occur under this agreement; however, as defined in AICPA Statement of Position 94-6, it is reasonably possible that the Company's estimate of loss could change over the remaining term of the agreement. Management is unable to determine the range of potential adjustment since it is based on securities markets, which are beyond its ability to control. The Company has guaranteed a loan in the amount of $85,000 for one of its directors. The guarantee is collateralized by securities the Company believes sufficient to cover its potential liability. Rent expense under all operating leases for the years ended December 31, 1997, 1996 and 1995 was $89,000, $51,000 and $103,000, respectively. Future minimum payments for leases which extend for more than one year were $134,000 at December 31, 1997. The Company is involved in various claims and legal actions that have arisen in the ordinary course of business. The Company believes that the liability provision in its financial statements A-19 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued is sufficient to cover any unfavorable outcome related to lawsuits in which it is currently named. Management believes that additional liabilities, if any, arising from these actions will not have a significant adverse effect on the financial condition of the Company. However, due to the uncertain nature of legal proceedings, the actual outcome of these lawsuits may differ from the liability provision recorded in the Company's financial statements. (9) Income Taxes Income tax expense (benefit) consists of the following: Year Ended December 31, 1997 1996 1995 ----- ----- ---- Continuing Operations Federal Current $1,394,000 47,000 795,000 Deferred 777,000 938,000 46,000 State 170,000 73,000 105,000 Discontinued Operation (479,000) (13,000) (19,000) --------- -------- -------- $1,862,000 1,045,000 927,000 ========= ========= ======= A reconciliation of expected income tax expense (computed by applying the United States statutory income tax rate of 34% to earnings before income taxes) to total income tax expense in the accompanying consolidated statements of earnings follows: Year Ended December 31, 1997 1996 1995 ----- ----- ----- Expected federal income tax expense $ 1,556,000 972,000 1,003,000 State taxes 170,000 73,000 105,000 Other, net 136,000 -- (181,000) ---------- -------- --------- $1,862,000 1,045,000 927,000 ========== ========= ======== Deferred tax assets are primarily the result of temporary differences related to accounting for reserves for losses, amounts expensed for financial purposes not deductible currently for tax purposes, fixed assets (primarily differences in methods of depreciation) and investments (primarily related to valuation allowances) for tax and book purposes. The tax effect of temporary differences that gives rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are presented below: A-20 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (9) Income Taxes, continued 1997 1996 ----- ----- Deferred tax assets: Net operating loss carryforwards $ 188,000 -- Marketable securities write downs not taken for tax purposes -- 13,000 Accrued expenses 1,015,000 676,000 Accounts receivable, principally due to allowance for doubtful accounts 79,000 60,000 Deferred income 228,000 30,000 Other 71,000 19,000 --------- -------- Total gross deferred tax assets 1,581,000 798,000 Less valuation allowance (188,000) -- --------- -------- Net deferred tax assets 1,393,000 798,000 --------- -------- Deferred tax liabilities: Investment in Prime Medical Services, Inc. due to use of equity method for books (2,158,000) (1,512,000) Capitalized expenses, principally due to deductibility for tax purposes ( 57,000) ( 52,000) ---------- ---------- Total gross deferred tax liabilities ( 2,215,000) (1,564,000) ---------- ---------- Net deferred tax liability ($ 822,000) ( 766,000) ========== ========== The valuation allowance for deferred tax assets as of January 1, 1997 was $0. The net change in the total valuation allowance for the years ended December 31, 1997 and 1996 was an increase of $188,000 and $0, respectively. The Company believes that the valuation allowance at December 31, 1997 is necessary due to uncertainties regarding the use of the net operating loss carryforwards from separate return years of a subsidiary acquired in 1997. At December 31, 1997, net operating loss carryforwards available to reduce future taxable income amounted to approximately $554,000 and expire from years 2011 to 2012. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely A-21 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 1997. (10) Employee Benefit Plans The Company has an employee benefit plan qualifying under Section 401(k) of the Internal Revenue Code for all eligible employees. Employees become eligible upon meeting certain service and age requirements. Employees may defer up to 15% (not to exceed $9,500 in 1997) of their annual compensation under the plan. The Company, at its discretion, may contribute up to 200% of the employees' deferred amount. For the years ended December 31, 1997, 1996 and 1995, contributions by the Company aggregated $92,000, $104,000, and $100,000, respectively. (11) Stock Options The Company has adopted, with shareholder approval, the "1995 Non-Employee Directors Stock Option Plan" ("Directors Plan") and the "1995 Incentive and Non-Qualified Stock Option Plan" ("Incentive Plan"). The Directors Plan provides for the issuance of up to 200,000 shares of common stock to non-employee directors who serve on the Compensation Committee. The Incentive Plan provides for the issuance of up to 800,000 shares of common stock to directors and key employees. The exercise price for each non-qualified option share is determined by the Compensation Committee of the Board of Directors ("the Committee"). The exercise price of a qualified incentive stock option had to be at least 100% of the fair market value of such shares on the date of grant of the option. Under the Plans, option grants are limited to a maximum of ten year terms, however, the Committee has issued all currently outstanding grants with five year terms. The Committee also determines vesting for each option grant and all outstanding options vest in three equal annual installments beginning one year from the date of grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"), but applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its stock option plans. No cost from stock-based compensation awards was recognized in 1997, 1996 or 1995. If the Company had elected to recognize compensation cost of options granted based on the fair value at the grant dates, consistent with Statement 123, net income and earnings per share would have changed to the pro forma amounts indicated below: Year Ended December 31, 1997 1996 1995 ----- ----- ----- Pro forma net income $1,989,000 1,634,000 1,991,000 A-22 AMERICAN PHYSICIANS SERVICE GROUP, INC. Notes to Consolidated Financial Statements, Continued (11) Stock Options, continued Pro forma earnings per share - basic $0.48 0.41 0.57 - diluted $0.46 0.39 0.52 The fair value of the options used to compute the pro forma amounts is estimated using the Black- Scholes option pricing model with the following assumptions: 1997 1996 1995 ---- ---- ---- Risk-free interest rate 6.16% 6.06% 6.41% Expected holding period 3.90 years 3.75 years 3.75 years Expected volatility .480 .692 .590 Expected dividend yield -0- -0- -0- Statement 123 calls for a prospective application of compensation relating to the grant of stock options and, consequently pro-forma financial information may not be indicative of future amounts until the new rules are applied to all outstanding nonvested awards. Presented below is a summary of the stock options held by the Company's employees and directors and the related transactions for the years ended December 31, 1997, 1996 and 1995. Remaining options outstanding from the Company's previous 1983 plans are included.
Year ended December 31 ----------------------------------------------------------------------------- 1997 1996 1995 --------------------- ----------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Balance at January 1 651,000 $5.64 837,000 $2.18 921,000 $1.57 Options granted 293,000 9.32 295,000 9.32 235,000 3.82 Options exercised 165,000 1.92 450,000 1.56 314,000 1.59 Options forfeited/expired 5,000 7.13 31,000 6.16 5,000 2.45 ------- ----- ------- ------ -------- ------ Balance at December 31 774,000 6.60 651,000 5.64 837,000 2.18 ======= ====== ======= ===== ======= ------ Options exercisable 244,000 $5.84 258,000 $2.22 550,000 $1.48 ======= ===== ======= ===== ======= =====
The weighted average fair value of Company stock options, calculated using the Black Scholes option pricing model, granted during the years ended December 31, 1997, 1996 and 1995 is $2.68, $5.15 and $1.75 per option, respectively. A-23 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (11) Stock Options, continued The following table summarizes the Company's options outstanding and exercisable options at December 31, 1997:
Stock Options Stock Options Outstanding Exercisable -------------------------------------------- ----------------------------- Average Weighted Weighted Remaining Average Average Range of Contractual Exercise Exercise Exercise Prices Shares Life Price Shares Price ------ --------- -------- ------- --------- $2.25 to $5.00 185,000 2.2 years 3.09 142,000 3.01 $5.01 to $7.75 356,000 4.3 years 6.19 26,000 6.73 $7.76 to $10.50 233,000 3.5 years 10.00 76,000 10.05 ------- --------- ----- ------- ----- Total 774,000 244,000 ======= =======
(12) Discontinued Operations The Company, through its wholly owned subsidiary, APS Systems, Inc. ("APS Systems"), had previously developed software and marketed it to medical clinics and medical schools. This business segment became unprofitable in 1996. A joint venture with a software developer was formed in 1996 with a plan to develop new products, but was discontinued in 1997 when it was determined that the high cost of developing competitive products precluded an adequate return on investment. Subsequently, the Company ceased marketing the software and reduced the scope of APS Systems' operations to a level adequate to service existing clients through the terms of their contracts. The Company has assumed that all clients will have migrated to other software products by the end of 1999 and has reflected the expected financial impact of discontinuing this segment on that date in the current financial statements. The measurement date for determining expected losses from the disposal was May 15, 1997. Net assets/(liabilities) of the discontinued computer systems and software segment as of December 31, 1997 consisted of the following: Cash and cash investments $ 25,000 Trade accounts receivable 174,000 Other receivables 2,000 Prepaid and other current assets 61,000 Fixed assets, net of depreciation 93,000 Intercompany receivables 769,000 Trade accounts payable (5,000) Accrued expenses (1,195,000) ----------- Net liabilities ($ 76,000) =========== A-24 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (12) Discontinued Operations, continued On October 23, 1995 the Company sold substantially all of the assets of APS Communications Corporation, a publisher of Spanish language directories of U. S. businesses. The Company received cash, a note (see Note 4) and had certain liabilities assumed by the purchaser. The gain on the sale, to be recognized on the installment basis as note payments are received, will not be material to the Company's operations. No gain has been recognized through 1997. Historical results from the operation are presented in the Consolidated Statements of Earnings as "Loss from discontinued operations." (13) Investment in Affiliates On October 12, 1989, the Company purchased for cash 3,540,000 shares (42%) of the common stock of Prime Medical Services, Inc. ("Prime Medical"). Members of the Company's Board currently serve as two of the eight directors of Prime Medical. Prime Medical provides non-medical management services to lithotripsy centers. In conjunction with the acquisition of additional lithotripsy operations in June 1992, October 1993, and May 1996, the outstanding shares of Prime Medical increased. These increases plus the sale of Prime Medical shares owned by the Company under an option agreement reduced the Company's ownership to 16% of the outstanding common stock of Prime Medical. The Company's investment in Prime Medical is accounted for using the equity method. The 3,064,000 shares of Prime Medical common stock held by the Company had an approximate market value of $42,328,000 (carrying amount of $11,266,000) at December 31, 1997 based on the market closing price of $13.8125 per share. At December 31, 1997 and 1996, the Company's retained earnings included undistributed earnings, net of deferred tax, of Prime Medical totaling $4,379,000 and $2,821,000, respectively. The condensed balance sheet and statement of operations for Prime Medical follow: CONDENSED BALANCE SHEET AT DECEMBER 31, 1997 AND 1996 1997 1996 ---- ---- Current assets $ 47,542,000 40,073,000 Long-term assets 178,284,000 157,680,000 ----------- ----------- Total assets $225,826,000 197,753,000 ============ =========== Current liabilities $ 37,383,000 31,555,000 Long-term liabilities 96,379,000 89,771,000 Shareholders' equity 92,064,000 76,427,000 ---------- ----------- Total liabilities and equity $225,826,000 197,753,000 ============ =========== A-25 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (13) Investment in Affiliates, continued CONDENSED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 1997 1996 ---- ---- Total revenue $ 95,979,000 72,404,000 ============ ========== Net income $ 14,856,000 8,961,000 ============ ========== The Company exchanged 575,000 shares of Prime stock for notes payable from Prime amounting to $593,750, one half in April 1993 and the other half in July 1995. The gain resulting from the difference between the market value of the Prime stock and the Company's carrying basis of the stock was not significant. The Company subsequently exchanged the notes for 87,000 shares in 1995 and 90,000 shares in 1993 of its own common stock (at current market value at exchange date) which was owned by Prime. On October 1, 1997, the Company formed Syntera HealthCare Corporation ("Syntera") with an initial ownership of 85%. Syntera specializes in the management of OB/GYN and related medical practices. In a typical transaction, Syntera acquires the non-medical assets of a physician's practice, signs a long-term management contract with the physician to provide all of the non-medical requirements of the practice, including personnel, office space, billing and collection, and other day-to-day operating functions. In turn, Syntera is paid a variable management fee that rewards the efficient operation and the expansion of the practice. The Company expects to reduce its ownership (currently 74%) to a minority level as it exchanges stock for practice assets. Due to the short time frame anticipated for this change in ownership to occur, the Company has accounted for its ownership on the equity basis in 1997. The condensed balance sheet and statement of operations for Syntera follows: Condensed balance sheet at December 31, 1997 Current assets $4,563,000 Long-term assets 1,664,000 ---------- Total assets $6,227,000 ========== Current liabilities $ 505,000 Long-term liabilities -- Shareholders' equity 5,722,000 ---------- Total liabilities and equity $6,227,000 ========== A-26 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (13) Investment in Affiliates, continued Condensed statement of operations for the year ended December 31, 1997 Total revenue $ 297,000 ========= Net loss $ 460,000 ========= (14) Segment Information The Company's financial services segment includes financial management for an insurance company that provides insurance coverage to doctors and hospitals, and brokerage and investment services to individuals and institutions. Real Estate income is derived from the leasing of office space. 1997 1996 1995 ---- ---- ---- Operating Revenues: Financial services $12,013,000 9,244,000 14,134,000 Real estate 704,000 717,000 668,000 ---------- --------- ---------- $12,717,000 9,961,000 14,802,000 =========== ========= ========== Operating Profit (Loss): Financial services $2,877,000 1,122,000 2,118,000 Real estate 198,000 147,000 96,000 --------- --------- ----------- 3,075,000 1,269,000 2,214,000 --------- --------- ----------- Corporate investment and other income 348,000 476,000 1,322,000 Corporate expenses (1,352,000) (150,000) (2,037,000) Equity in earnings of affiliates 2,014,000 1,411,000 1,508,000 Gain on sale of interest in subsidiary 1,899,000 -- -- --------- ---------- --------- Earnings from continuing operations before income taxes and minority interests 5,984,000 3,006,000 3,007,000 Income tax expense 2,341,000 1,058,000 946,000 --------- --------- --------- Minority interests (175,000) -- -- --------- --------- --------- Earnings from continuing operations 3,468,000 1,948,000 2,061,000 --------- --------- --------- A-27 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 1997 1996 1995 ---- ---- ---- Net loss from discontinued operations, net of income tax benefit (930,000) (24,000) ( 37,000) -------- ------- -------- Net earnings $ 2,538,000 1,924,000 2,024,000 =========== ========== ========= Identifiable assets: Financial services $20,984,000 11,667,000 11,816,000 Real estate 1,283,000 1,476,000 1,578,000 Corporate 6,778,000 11,325,000 8,614,000 Discontinued Operations 356,000 -- 1,732,000 ---------- ---------- --------- $29,401,000 24,468,000 23,740,000 =========== ========== ========== Capital expenditures: Financial service $ 187,000 88,000 262,000 Real estate -- 21,000 64,000 Corporate 26,000 17,000 73,000 Discontinued operations 99,000 18,000 84,000 -------- ------- ------- $ 312,000 144,000 483,000 ======== ======= ======= Depreciation/amortization expenses: Financial services $ 150,000 164,000 164,000 Real estate 110,000 129,000 126,000 Corporate 62,000 13,000 9,000 Discontinued operations 56,000 24,000 100,000 ------- ------- ------- $ 378,000 330,000 399,000 ======= ======= ======= Revenues attributable to customers generating greater than 10% of the revenues of each segment: Financial services Company A 49% 61% 35% Company B -- -- 10% Company C -- -- 11% ------ ----- ---- 49% 61% 57% === === === At December 31, 1997 the Company had long-term contracts with company A and was therefore not vulnerable to the risk of a near-term severe impact from a reasonably possible loss of the revenue. A-28 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (14) Segment Information, continued Operating profit is operating revenues less related expenses and is all derived from domestic operations. Identifiable assets are those assets that are used in the operations of each business segment (after elimination of investments in other segments). Corporate assets consist primarily of cash and cash investments, marketable securities and notes receivable. (15) Earnings per Share Statement of Financial Accounting Standards No. 128, "Earnings per Share", specifies new measurement, presentation and disclosure requirements for earnings per share and is required to be applied retroactively upon initial adoption. The Company has adopted SFAS No. 128 effective with the release of December 31, 1997 earnings data, and accordingly, has restatated herein all previously reported earnings per share data. Basic earnings per share is based on the weighted average shares outstanding without any dilutive effects considered. Diluted earnings per share reflects dilution from all contingently issuable shares, including options and covertible debt. A reconciliation of income and average shares outstanding used in the calculation of basic and diluted earnings per share from continuing operations follows: For the Year Ended December 31, 1997 Income Shares Per-Share (Numerator) (Denominator) Amount ---------- ----------- --------- Earnings from continuing operations $3,468,000 Basic EPS Income available to common stockholders 3,468,000 4,106,000 $.84 === Effect of Dilutive Securities Options -- 114,000 Contingently issuable shares ( 18,000) 21,000 ---------- ------- Diluted EPS Income available to common stockholders and assumed conversions $3,450,000 4,241,000 $.81 ========== ========= === A-29 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (15) Earnings per Share, continued For the Year Ended December 31, 1996 Income Shares Per-Share (Numerator) (Denominator) Amount ---------- ----------- --------- Earnings from continuing operations $1,948,000 Basic EPS Income available to common stockholders 1,948,000 4,025,000 $.48 === Effect of Dilutive Securities Options -- 194,000 --------- -------- Diluted EPS Income available to common stockholders and assumed conversions $1,948,000 4,219,000 $.46 ========== ========== ==== For the Year Ended December 31, 1995 Income Shares Per-Share (Numerator) (Denominator) Amount --------- ----------- --------- Earnings from continuing operations $2,061,000 Basic EPS Income available to common stockholders 2,061,000 3,480,000 $.59 ==== Effect of Dilutive Securities Options -- 318,000 --------- --------- Diluted EPS Income available to common stockholders $2,061,000 3,798,000 $.54 ========= ========= ==== At December 31, 1997 the Company's affiliate Syntera had issued 166,000 shares which are convertible into 122,000 of the Company's common shares in the event that the Syntera shares are not publicly- tradeable by May 1, 1999. A-30 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (15) Earnings per Share, continued Unexercised employee stock options to purchase 304,500, 282,000 and 10,000 shares of the Company's common stock as of December 31, 1997, 1996 and 1995, respectively, were not included in the computations of diluted EPS because the options'exercise prices were greater than the average market price of the Company's common stock during the respective periods. (16) Subsequent Events On March 20, 1998 the Company purchased non-voting convertible preferred stock of Uncommon Care, Inc. ("Uncommon Care"). Uncommon Care is a developer and operator of dedicated Alzheimer's care facilities. The shares, purchased for approximately $2,000,000, are convertible into approximately 34% of Uncommon Care's equity. The Company has also agreed to provide a line of credit to Uncommon Care in the amount of $2,400,000. The loan will bear interest at 10%, payable quarterly, and is due in March 2003. A-31 EX-10 2 STOCK PURCHASE AGREEMENT Exh. 10.26 STOCK PURCHASE AGREEMENT With Respect to Common Stock of APS PRACTICE MANAGEMENT, INC. Effective Date: October 1, 1997 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (this Agreement") is entered into effective as of the close of business on October 1, 1997 (the Effective Time), between APS Practice Management, Inc., a Texas corporation (Seller), MichaelR. Beck (Beck), John R. Hedrick (Hedrick) and those persons and entities listed on Exhibit-A hereto (such persons and entities are hereinafter collectively referred to as the Purchasers and individually as a Purchaser). Beck and Hedrick are also each referred to herein as a Shareholder and collectively as the Shareholders. The parties hereto agree as follows: ARTICLE I Agreement of Purchase and Sale and Closing TC "ARTICLE I - Agreement of Purchase and Sale and Closing" 1.1 PURCHASE AND SALE. Upon the basis of the representations and warranties,for the consideration, and subject to the terms and conditions set forth in this Agreement, Seller agrees to sell to Purchasers and Purchasers agree to purchase from Seller, in the aggregate, two million (2,000,000) shares of common stock, $0.001 par value per share, (collectively, the Shares) of Seller, allocated among Purchasers as set forth on Exhibit-A. 1.2 PURCHASE PRICE. The aggregate purchase price (the Purchase Price) for the Shares shall be five million dollars ($5,000,000) to be paid in cash or wired funds at the Closing (the Closing Payment), by the applicable Purchasers as described on Exhibit-A. 1.3 CLOSING. The closing of the transactions contemplated by this Agreement (the Closing) shall take place at the offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P., 816Congress Avenue, Suite 1900, Austin, Texas 78701, and shall be effective as of the Effective Time. The date on which the Closing occurs is hereinafter referred to as the Closing Date. ARTICLE II REPRESENTATIONS AND WARRANTIES OF APSG Each Purchaser (as to themselves only and not as to any other Purchaser) represents and warrants to the Sellers that each of the following matters is true and correct in all respects as of the Closing Date (with the understanding that Seller and the Shareholders are relying materially on such representations and warranties in entering into and performing this Agreement), which representations and warranties shall also be deemed made as of the Effective Time and which shall survive the Closing and not be merged therein: 2.1 DUE ORGANIZATION AND AUTHORIZATION . Such Purchaser has all necessary power and authority to carry on its business as now conducted and to enter into and perform this Agreement and each other agreement, instrument and document required to be executed by such Purchaser in connection herewith. This Agreement and each other agreement, instrument, and document required herein to be executed by such Purchaser have been duly and validly authorized, executed and delivered by such Purchaser and constitute the valid and binding obligations of such Purchaser enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, conservatorship, receivership and other similar laws of general application affecting the rights and remedies of creditors. 2.2 INVESTMENT INTENT. Such Purchaser (a) is acquiring the Shares for its own account for investment and not with a view to or in connection with a distribution, within the meaning of the Securities Act of1933, as amended (the Act) thereof, (b) will not sell or transfer the Shares unless such Shares are registered under the Act or such sale or transfer is exempt from such registration requirements, (c) is able to bear the economic risk of its acquisition of the Shares and (d) has such knowledge and experience in financial and business matters that it is capable of evaluating the merits of, and protecting its interests with respect to, its acquisition of the Shares. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER Seller and each of the Shareholders, jointly and severally, hereby represent and warrant to each Purchaser that the following matters are true and correct in all respects as of the Closing Date (with the understanding that each Purchaser is relying materially on each such representation and warranty in entering into and performing this Agreement), which representations and warranties shall also be deemed made as of the Effective Time and which shall survive the Closing and not be merged therein: 3.1 DUE ORGANIZATION. Seller is a corporation duly organized, validly existing, and in good standing under the laws of the State of Texas and has full power and authority to carry on its business as now conducted and as proposed to be conducted. Complete and correct copies of Sellers current Certificate and Articles of Incorporation and Bylaws are attached hereto as Exhibit-B. Seller is qualified to do business and is in good standing in Texas, and in no other state. 3.2 SUBSIDIARIES Seller does not directly or indirectly have, or possess any options or other rights to acquire, any subsidiaries, or any direct or indirect ownership interest, in whole or in part, in any person, business, corporation, partnership, limited liability company, association, joint venture, trust, or other entity. 3.3 DUE AUTHORIZATION. Each Shareholder and Seller represents and warrants that (i)they have full power and authority to enter into and perform this Agreement and each other agreement, instrument, and document required to be executed by them in connection herewith; (ii)the execution, delivery, and performance of this Agreement and such other agreements, instruments, and documents have been duly authorized by all necessary action of Seller; (iii)this Agreement has been duly and validly executed and delivered by the Seller and the Shareholders, and constitutes a valid and binding obligation of Seller and the Shareholders enforceable against them in accordance with its terms, subject to bankruptcy, insolvency, conservatorship, receivership and other similar laws of general application affecting the rights and remedies of creditors; (iv)the execution, delivery, and performance of this Agreement, and each other agreement, instrument and document required herein to be executed by Seller and/or the Shareholders does not (a) cause any of them to violate any federal, state, county, or local law, rule, or regulation applicable to them, (b)cause Seller or any Shareholder to violate, or conflict with or permit the cancellation of, any agreement to which Seller or Shareholder is a party, or by which they or any of their respective properties are bound, or result in the creation of any lien, security interest, charge, or encumbrance upon any of such properties, (c) permit the acceleration of the maturity of any indebtedness of, or indebtedness secured by the property of, any Shareholder or Seller, or (d) cause Seller or any Shareholder to violate, or conflict with any provision of, the documents creating or governing the Shareholder; and (v) no action, consent, waiver or approval of, or filing with, any governmental authority is required by any Shareholder or Seller in connection with the execution, delivery, or performance of this Agreement (or any agreement or other document executed in connection herewith by such Shareholder or Seller). Notwithstanding anything in this Agreement to the contrary, each Shareholder is making the representations in this Section 3.3 as to themselves only (and as to Seller where applicable) and is not making any representation or warranty with respect to any of the matters addressed in this Section 3.3 relating to any other Shareholder. 3.4 CAPITAL STOCK . The authorized shares of all classes of capital stock of Seller consist of fifty-one million two hundred twenty-two thousand two hundred twenty-four (51,222,224) shares, consisting of and divided into: (i) On class of fifty million (50,000,000) shares of common stock, $0.001 par value per share; (ii) One class of two hundred twenty-two thousand two hundred twenty-four (222,224) shares of serial founders common stock, $0.001 par value per share (the Serial Founders Common Stock); and (iii) One class of one million (1,000,000) shares of serial senior preferred stock, $0.001 par value per share. All shares of the Serial Founders Common Stock have been validly issued to the Shareholders, consisting of 111,112 shares of Serial Founders Common Stock issued to Beck and 111,112 shares of Serial Founders Common Stock issued to Hedrick. No other shares of any class of Sellers capital stock are issued or outstanding. All shares of Serial Founders Common Stock are duly authorized, validly issued, outstanding, fully paid, and non-assessable, and all such shares are owned beneficially and of record by the Shareholders, free and clear of all liens. There are no outstanding securities, obligations, conversion or other rights, subscriptions, warrants, options, phantom stock rights, or (except for this Agreement) other contracts of any kind that give any person or entity the right to (a)purchase or otherwise receive or be issued any shares of capital stock of Seller or any security or obligation of any kind convertible into or exchangeable for any shares of capital stock of Seller, or (b) receive any benefits or rights that are similar to those enjoyed by or accruing to any holder of any of the Shares or the Serial Founders Common Stock, or that entitle the holder to participate in the equity, income or election of directors or officers of Seller. Notwithstanding the foregoing sentence, the parties hereto acknowledge that the rights and preferences of the holders of the Serial Founders Common Stock, as set forth in that certain designation of rights, a complete and correct copy of which is attached hereto as Exhibit-C (the Designation of Rights) confers upon the holders of the Serial Founders Common Stock certain rights and obligations as therein provided. The Designation of Rights have been duly authorized by all necessary corporate action on the part of the shareholders and directors of Seller and have been validly filed in the office of the Secretary of State of Texas. There have been no amendments or modifications to the Designation of Rights, and Exhibit-C hereto contains a complete and accurate copy thereof. Upon the Closing, Purchasers will own one hundred percent (100%) of each and every share of outstanding capital stock of Seller (except for the Serial Founders Common Stock), subject to no liens, claims or encumbrances whatsoever (other than restrictions on transfer imposed by Federal and applicable state securities laws). 3.5 CONDUCT OF BUSINESS . Seller was incorporated in the state of Texas on March26,1996, as Sun Valley Physician Management Corporation, and has engaged in no business operations since the date of incorporation. There have never been any shareholders of Seller, other than the Shareholders. A complete and correct copy of all minutes, resolutions and consents adopted by the shareholders and directors of Seller since its creation ar attached hereto as ExhibitD, and such minutes, resolutions and consents are complete and correct in all respects, and contain an accurate representation of all activities undertaken by the shareholders and directors of Seller on behalf of Seller since Sellers creation. 3.6 LIABILITIES AND OBLIGATIONS. There are no liabilities against, owed by, relating to or affecting Seller as of the Closing Date. Except for obligations created pursuant to this Agreement, Seller has no contractual obligations whatsoever, and has never incurred or discharged any such obligation since its creation. 3.7 COMPLIANCE WITH LAWS. Seller has complied in all respects, and is in compliance in all respects, with all federal, state, county, and local laws, rules, regulations and ordinances currently in effect and applicable to Seller. No claim has been made or threatened by any governmental authority against Seller. 3.8 CLAIMS AND PROCEEDINGS. There are no (and since Sellers creation, there have been no) claims, actions, suits, proceedings, or investigations pending or threatened against Seller, or affecting Seller, at law or in equity, or before or by any court, municipal or other governmental department, commission, board, agency, or instrumentality. 3.9 TAXES. All federal, foreign, state, county, and local income, gross receipts, excise, property, franchise, license, sales, use, withholding, and other tax (collectively, Taxes) returns, reports, and declarations of estimated tax (collectively, Returns) which were required to be filed by Seller on or before the Closing Date hereof have been filed within the time and in the manner provided by law, and all such Returns are true and correct and accurately reflect the Tax liabilities of Seller. Complete and correct copies of all such Returns have been provided to Purchasers. All Taxes, assessments, penalties, and interest which have become due pursuant to such Returns have been paid. Seller does not owe any federal income Taxes for any period prior to the Closing Date Closing Date, and has never owed or paid any federal income Taxes. Seller has not executed any presently effective waiver or extension of any statute of limitations against assessments and collection of Taxes. There are no pending or threatened claims, assessments, notices, proposals to assess, deficiencies, or audits against Seller with respect to any Taxes owed or allegedly owed by Seller. No federal income tax return of Seller has ever been filed. There are no tax liens applicable to Seller. 3.10 PERSONNEL. Seller has never had any employees. Seller has never designated or appointed any person or other entity to act for it or on its behalf pursuant to any power of attorney or any agency. 3.11 INDEBTEDNESS TO AND FROM SHAREHOLDERS . Seller does not owe any indebtedness to any of the Shareholders and, Seller does not have any indebtedness owed to it from any of the Shareholders. 3.12 CERTAIN CONSENTS. There are no consents, waivers, or approvals required to be executed and/or obtained by Seller or any Shareholder in connection with the execution, delivery , and performance of this Agreement. 3.13 BROKERS. Neither Seller nor any Shareholder has engaged, or caused any liability to be incurred to, any finder, broker, or sales agent (or has paid, or will pay, any finders fee or similar fee or commission to any person) in connection with the execution, delivery, or performance of this Agreement or the transactions contemplated hereby. 3.14 No Known Breaches. Neither of the Shareholders has knowledge of any breach or default by the other Shareholder of their respective representations and warranties, covenants or other agreements made in this Agreement. ARTICLE IV COVENANTS AND AGREEMENTS 4.1 VOTING AGREEMENT. From and after the Closing Date, Shareholders agree to exercise such voting rights as they may have as shareholders of Seller to elect to the Board of Directors of Seller such person or persons as may be designated by American Physicians Service Group, Inc., a Texas corporation (APSG). The Shareholders each further agree to so vote any capital stock they own or may own in Seller until such time as APSG (or its assignees) no longer owns at least fifty percent (50%) of all the then issued and outstanding shares (of each and every class) of common stock of Seller. Furthermore, each Shareholder covenants and agrees to exercise its voting rights as a shareholder of Seller to accomplish the consummation of the transactions contemplated by this Agreement. 4.2 EMPLOYMENT OF SHAREHOLDERS. Effective immediately after the Closing, each of the Shareholders shall become at-will employees of Seller and shall devote their full business time and attention to the affairs of Seller pursuant to the direction of, and at the leisure of, the Board of Directors of Seller. Seller shall have no obligation to increase the salaries, or to grant any bonuses to either of the Shareholders, or to employ additional persons, except as may be determined by the Board of Directors of Seller at its sole discretion, and without implying any obligation whatsoever with respect thereto. Each of the Shareholders acknowledges and agrees that they shall be at-will employees of Seller and may be terminated by Seller at any time for any or no reason, at the discretion of the Board of Directors. APSG agrees that, promptly after the Closing Date, APSG will vote its shares to elect Hedrick as Senior Vice President and General Counsel of Seller and to elect Beck as Senior Vice President of Seller. 4.3 REIMBURSEMENT OF EXPENSES. All parties hereto covenant and agree that, promptly after the Closing Date, Seller shall reimburse APSG in full for all expenses incurred by APSG in the negotiation, preparation and entering into of this Agreement, and in investigating, organizing, planning and conducting negotiations with respect to, the business to be conducted by Seller after the Closing. Without limiting the generality of the foregoing, all parties hereto covenant and agree that APSG shall be entitled to prompt reimbursement after the Closing Date of any and all amounts paid by APSG or its affiliates pursuant to that certain letter dated February19,1997, from APSG to Beck and Hedrick (the Letter Agreement). All parties hereto further agree that the Letter Agreement is hereby declared void in all respects, is of no further force or effect, and each of Beck, Hedrick and Seller hereby fully release and discharge APSG and APSGs affiliates, shareholders, directors, officers and employees, from and against any and all obligations, claims, and causes of action which exist, or may exist, known or unknown, with respect to the Letter Agreement. 4.4 NO IMPLIED OBLIGATIONS. The parties hereto acknowledge and agree that none of Seller, any Purchaser, or any director of Seller designated by or elected by any Purchaser shall be obligated in any respect to consider or approve any transaction whatsoever that may be presented to, or come before, Seller or its Board of Directors. At all times after the Closing, the Board of Directors of Seller shall have sole, complete and independent discretion as to whether to approve, disapprove,consider or not to consider any acquisition or other transaction by Seller, and nothing contained in this Agreement or the conduct of the parties hereto is intended, or should be construed, to indicate or imply otherwise. ARTICLE V CLOSING OBLIGATIONS 5.1 PURCHASERS CLOSING OBLIGATIONS. At the Closing, each Purchaser shall: (a) pay their respective portion of the Closing Payment (as described on Exhibit-A); and (b) deliver such good standing certificates and similar documents and certificates as Seller or the Shareholders may reasonably require. 5.2 SELLERS AND THE SHAREHOLDERS CLOSING OBLIGATIONS. At the Closing, Seller and the Shareholders shall: (a) deliver the original certificates representing the Shares to the Purchasers, and execute and deliver such other documents as the Purchasers may request in order to evidence the ownership of the Shares on the books of Seller; (b) deliver such good standing certificates, officer certificates, and similar documents and certificates as counsel for the Purchasers may reasonably require; and (c) cause every director and officer of Seller (including, without limitation, the Shareholders) to tender to the Purchasers written resignations from such positions which are effective as of the Closing Date and which contain releases of all claims, known or unknown, which such former directors and officers have or might have against Seller. ARTICLE VI INDEMNIFICATION OF PURCHASERS Each of the Shareholders, jointly and severally, agrees to indemnify and hold harmless each Purchaser and each officer, director, employee, and affiliate (including without limitation, Seller) of each Purchaser (collectively, the Purchaser Indemnified Parties) from and against any and all damages, losses, claims, liabilities, demands, charges, suits, penalties, costs, and expenses (including court costs and attorneys fees and expenses incurred in investigating and preparing for any litigation or proceeding) (collectively, Indemnified Costs) in connection with the commencement or assertion of any action, proceeding, demand, or claim by a third party (collectively, a third-party action) which any of the Purchaser Indemnified Parties may sustain, arising out of or relating to (a) any breach or default by any Shareholder of any of their representations, warranties, covenants or agreements contained in this Agreement or in any agreement or document executed in connection herewith, or (b) any liability, direct or contingent, known or unknown, of Seller which arises from or is based on facts, acts or omissions occurring at or prior to the Closing Date. ARTICLE VII NONCOMPETITION Each of the Shareholders hereby agrees that until the expiration of six(6) months after any termination of such Shareholders employment with Seller, whether terminated by either the Seller or the Shareholder, such Shareholder will not, directly or indirectly, either through any kind of ownership (other than ownership of securities of a publicly held corporation of which it owns less than five percent (5%) of any class of outstanding securities), or as a principal, agent, employer, employee, advisor, consultant, copartner or in any individual or representative capacity whatever, either for its own benefit or for the benefit of any other person, firm or corporation, without the prior written consent of APSG, commit any of the following acts, which acts shall be considered violations of this covenant not to compete: (a) Solicit business from, divert business from, or attempt to convert to other methods of using the same or similar products or services as provided by Seller, APSG or their affiliates, any client, account, or location of the Seller , APSG or their affiliates, or any potential client, account or location which Seller or Sellers affiliates are then pursuing, considering or negotiating with; or (b) Directly or indirectly solicit for employment or employ any employee of APSG, Seller or any affiliate or entity related to any of them, or induce or attempt to influence any employee of APSG, Seller or any such affiliate or related entity to terminate his or her employment with APSG, Seller or any such affiliate or related entity; or (c) Provide physician practice management services, or engage in the physician practice management business, or the business of acquiring physician practices, with respect to any physicians or physician group, entity or organization, whose primary specialty is obstetrics and/or gynecology (OB/GYN) anywhere within 100 miles of (i) any physician practice then managed or otherwise serviced by Seller or Sellers affiliates, or (ii) any physician practice which Seller or Sellers affiliates is then pursuing, considering or negotiating with for services, acquisition or other business; or (d) Directly or indirectly request or advise any patient or physician or any other person, firm, corporation or other entity having a business relationship with Seller or APSG or any affiliate or related entity, to withdraw, curtail or cancel its business with Seller or such affiliate or related entity. In addition to the foregoing, after the expiration of the six (6) month post-employment termination period described above, and during the second six (6) month period after any termination of a Shareholders employment with Seller, whether terminated by either the Seller or the Shareholder, the terminated Shareholder will provide Seller with a right-of-first refusal for all transactions which such Shareholder may in any way be involved in or with, concerning the providing of physician practice management services, the physician practice management business, or the business of acquiring physician practices, involving physicians or practices whose primary specialty isOB/GYN. Pursuant to such right-of-first refusal, the applicable Shareholder shall, prior to entering into any binding agreements with respect to the subject transaction, provide written details concerning such transaction, and the terms thereof, to Sellers Board of Directors, and provide Seller with at least thirty (30) days thereafter to exercise its right of first refusal and engage in such transaction on the same proposed terms and conditions. If Seller fails to exercise its right of first refusal during such thirty (30) day period, same shall be deemed a refusal to exercise its right of first refusal. Each of the Shareholders has reviewed and carefully considered the provisions of this ARTICLE and, having done so, each agrees that the restrictions set forth herein (a) are fair and reasonable with respect to time, geographic area and scope, (b)are not unduly burdensome to any of the Shareholders, and (c) are reasonably required for the protection of the interests of APSG, Seller and their affiliates. Each of the Shareholders agrees that a violation on its part of any covenant contained in this ARTICLE will cause APSG and Seller irreparable damage for which remedies at law may be insufficient, and for that reason, each of the Sellers agrees that APSG and Seller shall be entitled as a matter of right to equitable remedies, including specific performance and injunctive relief, therefor. The right to specific performance and injunctive relief shall be cumulative and in addition to whatever other remedies, at law or in equity, that APSG or Seller may have, including, specifically, recovery of additional damages. ARTICLE VIII REGISTRATION RIGHTS 8.1 Incidental Registration Rights. For purposes of this ARTICLE VIII, the Purchasers and the Shareholders are collectively referred to as the Covered Parties and individually as a Covered Party. Each of the Covered Parties shall have the incidental registration rights and other rights provided under this ARTICLEVIII. The incidental registration rights described in this ARTICLE VIII shall only apply with respect to shares of the Sellers common stock, $0.001 par value per share, owned by any of the Covered Parties, and shall not apply with respect to any other form of capital stock of Seller owned by any of the Covered Parties including, without limitation, any Serial Founders common stock or any preferred stock; and any reference in this ARTICLE VIII to Shares shall be deemed to refer to the Shares of the Purchasers (as defined in Section1.1 above) and to any shares of the $0.001 par value common stock of Seller which may hereafter become owned by either of the Shareholders. If Seller at any time proposes to register any of its common stock under the Act for sale to the public, whether for its own account or for the account of other security holders or both (except with respect to registration statements on FormsS-4 or S-8 or another form not available for registering the Shares for sale to the public or in connection with mergers, acquisitions, exchange offers, dividend reinvestment plans or stock option or other employee benefit plans of the Seller), it will give written notice to the Covered Parties of its intention so to do, which notice shall include a list of the jurisdictions in which the Seller intends to attempt to qualify the common stock under the applicable state securities laws. Upon the written request of one or more Covered Parties, given within 10 days after receipt of any such notice, to register any of their Shares, Seller will, subject to the limitations and conditions contained herein, use its best efforts to cause the Shares as to which registration shall have been so requested (Covered Shares), pro rata between the Covered Parties in a ratio equal to the respective number of Shares then owned and requested to be registered by them, or such other ratio as may have been agreed upon among the Covered Parties, to be included in the securities to be covered by the registration statement proposed to be filed by the Seller, all to the extent requisite to permit the sale or other disposition by the Covered Parties; provided, however, that: (i) Each Covered Party shall each have the right to request inclusion of its Shares (and have such Shares included) in two registration statements that are declared effective by the Securities and Exchange Commission (the Commission). (ii) If, at any time after giving such written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Seller shall determine for any reason not to register any securities at all (and in fact does not do so), the Seller may, at its election, give written notice of such determination to the Covered Parties who made a request as hereinabove provided and thereupon the Seller shall be relieved of its obligation to register any Shares in connection with that proposed registration. (iii) If such registration involves an underwritten offering, the Covered Parties requesting to be included in the Seller's registration must sell their Covered Shares to the underwriters selected by the Seller on the same terms and conditions as apply to the Seller and other selling parties under the registration statement (except as otherwise set forth herein). The number of Covered Shares to be included in such an offering may be reduced if and to the extent that the managing underwriter, if any, shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by Seller therein (pro rata between the Covered Parties in a ratio equal to the respective amounts of Covered Shares held by each.) Notwithstanding anything to the contrary contained in this Section, in the event that there is an underwritten public offering of securities of the Seller pursuant to a registration covering Shares and a Covered Party does not elect to sell its Covered Shares to the underwriters of the Seller's securities in connection with such offering, such Covered Party shall refrain from selling such Covered Shares during the period of distribution of the Sellers securities by such underwriters, the period in which the underwriting syndicate participates in the after market and during any lock-up period requested by such underwriters; provided, however, that the Covered Parties shall, in any event, be entitled to sell their Shares commencing on the 180th day after the effective date of such registration statement. 8.2 REGISTRATION PROCEDURES. If and whenever the Seller is required by the provisions of this ARTICLE to effect the registration of any of the Covered Shares under the Act, Seller will, as expeditiously as possible: (i) prepare and file with the Commission a registration statement (which, in the case of an underwritten public offering shall be on such form of general applicability as may be satisfactory to the managing underwriter) with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (determined as hereinafter provided); (ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus filed in connection therewith as may be necessary to keep such registration statement effective for the period of distribution and as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement in accordance with the Sellers intended method of disposition set forth in such registration statement for such period; (iii) furnish to the Covered Parties, as applicable, and each underwriter such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as they may reasonably request in order to facilitate the public sale or other disposition of the Covered Shares covered by such registration statement; (iv) use its best efforts to register or qualify the Covered Shares covered by such registration statement under the securities or blue sky laws of such jurisdictions as the Covered Parties, as applicable, or, in the case of an underwritten public offering, the managing underwriter, shall reasonably request (provided that the Seller will not be required to (1) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subsection, (2) subject itself to taxation in any such jurisdiction or (3) consent to general service of process in any such jurisdiction); (v) promptly notify the Covered Parties, as applicable, under such registration statement and each underwriter, at any time when a prospectus relating thereto is required to be delivered under the Act when it becomes aware of the happening of any event as a result of which the prospectus contained in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements contained therein not misleading in light of the circumstances then existing; (vi) use its best efforts (if the offering is underwritten) to furnish, at the request of the Covered Parties, as applicable, on the date that the Covered Shares are delivered to the underwriters for sale pursuant to such registration: (1) an opinion dated such date of counsel representing the Seller for the purposes of such registration, addressed to the underwriters and in customary form and covering such matters as are customarily covered by opinions of counsel in similar registrations and as may be required in the underwriting agreement relating thereto, as may reasonably be requested by the underwriters or by the Covered Parties, as applicable; and (2) a comfort letter dated such date from the independent public accountants retained by the Seller, addressed to the underwriters, in customary form and covering such matters as are customarily covered by such comfort letters in similar registrations and as may be required in the underwriting agreement relating thereto, as such underwriters or the Covered Parties, as applicable, may reasonably request; and (vii) make available for inspection by the Covered Parties, any underwriter participating in any distribution pursuant to such registration statement, and any attorney, accountant, or other agent retained by the Covered Parties, or underwriter, all financial and other records, pertinent corporate documents, and properties of the Seller, and cause the Seller's officers, directors, and employees to supply all information reasonably requested by any such Covered Party, underwriter, attorney, accountant, or agent in connection with such registration statement. For purposes of paragraphs (i) and (ii) above, the period of distribution of Covered Shares in an underwritten public offering shall be deemed to extend until each underwriter has completed the distribution of all securities purchased by it, and the period of distribution of Covered Shares in any other registration shall be deemed to extend until the earlier of the sale of all Covered Shares or 180 days after the effective date thereof. In connection with each registration hereunder, the Covered Parties, as applicable, will furnish to the Seller in writing such information with respect to themselves and the proposed distribution by them as shall be requested by the Seller in order to assure compliance with federal and applicable state securities laws. In connection with each registration covering an underwritten public offering, Seller agrees to enter into a written agreement with the managing underwriter selected in the manner herein provided in such form and containing such provisions as are customary in the securities business for such an arrangement between major underwriters and companies of the Sellers size and investment stature; provided that such agreement shall not contain any such provision applicable to the Seller that is inconsistent with the provisions hereof and, further, provided that the time and place of the closing under such agreement shall be as mutually agreed upon between the Seller and such managing underwriter. The Seller will not be obligated to include any Shares owned by the Covered Parties requesting that a proposed registration include such Shares if the Seller delivers to the requesting Covered Parties the opinion of the Sellers counsel (such counsel and the form of such opinion having been approved by the Covered Parties in their reasonable discretion) to the effect that the requested registration is not required to permit the proposed disposition or any resale of such Shares, without restrictions on subsequent transfer, under the Act, which opinion may be furnished to and relied upon by any broker through which the Covered Parties may elect to sell any Shares. 8.3 CONDITIONS TO OBLIGATION TO REGISTER SHARES. The Sellers obligations under this ARTICLE shall be subject to the following limitations and conditions: (a) Seller shall have received from the Covered Parties, as applicable, all such information as the Seller may reasonably request from the Covered Parties concerning each of them and each of their methods of distribution of the Covered Shares to enable Seller to include in the registration statement all material facts required to be disclosed therein. (b) Any request by the Covered Parties pursuant to this Agreement for registration of the offering, sale and delivery of Shares shall provide that each Covered Party, as applicable, (i)has a present intention to sell such Shares; (ii) agrees to execute all consents, powers of attorneys and other documents required in order to cause such registration statement to become effective; (iii) agrees, if the offering is at the market, to give the Seller written notice of the first bona fide offering of such Shares and to use the prospectus forming a part of such registration statement only for a period of 180 days after the effective date of the registration statement unless the offering is pursuant to a continuous registration pursuant to Rule 415 promulgated under the Act; (iv) subject to adverse events regarding the selling price of the Shares, agrees to utilize its proposed method of distribution of the registered securities; and (v) agrees to promptly notify Seller and each underwriter, if any, with regard to any registration statement, at any time when it becomes aware of the happening of any event as a result of which any prospectus contained in such registration statement that has been provided to the Covered Party includes an untrue statement of a material fact regarding the Covered Party or omits to state a material fact regarding the Covered Party required to be stated therein or necessary to make the statements contained therein regarding such Covered Party not misleading in light of the circumstances then existing. 8.4 DISTRIBUTION ARRANGEMENTS. Each Covered Party, as applicable, agrees that, in disposing of its Shares in the registered public offering, such Covered Party will comply with applicable rules promulgated by the Commission. 8.5 EXPENSES. All expenses incurred by the Seller in preparing and complying with a registration covering any Shares, including, without limitation, all registration, qualification, and filing fees, blue sky fees and expenses, printing expenses, fees and disbursements of legal counsel and independent public accountants for the Seller, the reasonable fees and expenses of one law firm serving as legal counsel for the participating Covered Parties, fees of the National Association of Securities Dealers, Inc., transfer taxes, escrow fees, fees of transfer agents and registrars, and costs of insurance, but excluding any Selling Expenses, are herein called Registration Expenses. All underwriting discounts, and selling commissions applicable to the sale of Covered Shares are herein called Selling Expenses. The Seller shall pay all Registration Expenses in connection with any registration statement. All Selling Expenses in connection with any registration statement shall be borne by each participating Covered Party in proportion to the number of Covered Shares sold by each. 8.6 INDEMNIFICATION. In the event of a registration of any of the Covered Shares under the Securities Act, the Seller shall indemnify and hold harmless the Covered Party, as applicable, thereunder and each underwriter and each associate, if any, of the Covered Parties, or underwriter, against any losses, claims, damages, or liabilities, joint or several, to which the Covered Parties, or underwriter or associate thereof may become subject under the Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Covered Shares were registered under the Act, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by Seller of any rule or regulation promulgated under the Act applicable to Seller and relating to action or inaction by Seller in connection with any such registration, and shall reimburse the Covered Parties, each underwriter and/or associate thereof for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the Seller will not be liable in any such case if and to the extent that any such loss, claim, damage, or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in conformity with information furnished by the Covered Parties, each underwriter and/or associate thereof in writing specifically for use in such registration statement or prospectus. In the event of a registration of any of the Covered Shares under the Act, each of the Covered Parties, as applicable, severally and not jointly, will indemnify and hold harmless the Seller and its affiliates, if any, and each underwriter and each associate of any underwriter against all losses, claims, damages or liabilities, joint or several, to which the Seller or such underwriter or associate may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which such Covered Shares were registered under the Act, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Seller, each underwriter and/or associate thereof for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that a Covered Party will be liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to such Covered Party, furnished in writing to the Seller by that Covered Party specifically for use in such registration statement or prospectus; and provided further, however, that the liability of any Covered Party hereunder shall be limited to the proportion of any such loss, claim, damage, liability or expense that is equal to the proportion that the public offering price of Covered Shares sold by such Covered Party, under such registration statement bears to the total public offering price of all securities sold thereunder, but not to exceed the proceeds received by such Covered Party from the sale of Covered Shares covered by such registration statement. Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability it may have to any indemnified party other than under this Section. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so elected; provided, however that, if the defendants in any such action include both the indemnified party and the indemnifying party and if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified party shall have the right to select separate counsel and to assume its defense and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. The indemnifying party will not be subject to any settlement made without its consent, which consent shall not be unreasonably withheld. The indemnifying party will pay to the indemnified party all sums due hereunder within 10 days of a final non-appealable judgment or pursuant to the terms of a settlement agreement. 8.7 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. From and after the date of this Agreement, the Seller shall not enter into any agreement with any holder or prospective holder of any securities of the Seller (nor shall the Seller, in the absence of any such prior agreement, permit any such holder or prospective holder) to include such securities in any registration contemplated by this Agreement other than incidental (non-demand) registration rights that are expressly subordinate to those granted the Covered Parties in this Agreement. ARTICLE IX MISCELLANEOUS 9.1 COLLATERAL AGREEMENTS, AMENDMENTS, AND WAIVERS. This Agreement (together with the documents delivered pursuant hereto) supersedes all prior documents, understandings, and agreements, oral or written (including without limitation, the Letter Agreement), relating to the transactions contemplated herein and constitutes the entire understanding among the parties with respect to the subject matter hereof. Any modification or amendment to, or waiver of, any provision of this Agreement (or any document delivered pursuant to this Agreement unless otherwise expressly provided therein) may be made only by an instrument in writing executed by each party thereto. 9.2 SUCCESSORS AND ASSIGNS. None of the parties rights or obligations under this Agreement may be assigned without the prior written consent of all parties hereto, except that APSG may assign its rights and obligations hereunder to any entity, at least a majority of whose voting equity ownership interests is at the time owned, directly or indirectly, by APSG. Any assignment in violation of the foregoing shall be null and void. Subject to the preceding sentences of this Section, the provisions of this Agreement (and, unless otherwise expressly provided therein, of any document delivered pursuant to this Agreement) shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors, and permitted assigns. 9.3 EXPENSES. Except as provided in Section 4.3, and regardless of whether the transactions contemplated hereby are consummated, each party hereto shall pay all of its costs and expenses incurred by it in connection with this Agreement, including the fees and disbursements of its counsel. 9.4 INVALID PROVISIONS. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws, such provision shall be fully severable, this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. 9.5 INFORMATION AND CONFIDENTIALITY. Each party hereto agrees that such party shall hold in strict confidence all information and documents received from any other party hereto, and if the Closing does not occur, each such party shall return to the other parties hereto all such documents then in such receiving partys possession without retaining copies; provided, however, that each partys obligations under this Section shall not apply to (a) any information or document required to be disclosed by law, (b)any information or document in the public domain, or (c)any information or document that APSG discloses to any potential lender to or investor in APSG or any of its affiliates. 9.6 WAIVER. No failure or delay on the part of any party in exercising any right, power, or privilege hereunder or under any of the documents delivered in connection with this Agreement shall operate as a waiver of such right, power, or privilege; nor shall any single or partial exercise of any such right, power, or privilege preclude any other or future exercise thereof or the exercise of any other right, power or privilege. 9.7 NOTICES. Any notices required or permitted to be given under this Agreement (and, unless otherwise expressly provided therein, under any document delivered pursuant to this Agreement) shall be given in writing and shall be deemed received (a) when personally delivered to the relevant party at its address as set forth below or (b) if sent by mail, on the third day following the date when deposited in the United States mail, certified or registered mail, postage prepaid, to the relevant party at its address indicated below: Any Purchaser: American Physicians Service Group, Inc. 1301 Capital of Texas Highway Austin, Texas 78746 Attention: President with a copy to: Mr. Timothy L. LaFrey Akin, Gump, Strauss, Hauer & Feld, L.L.P. 816 Congress Avenue, Suite 1900 Austin, Texas 78701 Seller and Michael R. Beck Shareholders: 1450 Preston Forest Square, Suite 210 Dallas, Texas 75230-2731 John R. Hedrick 2415 Trail of the Madrones Austin, Texas 78746-2338 Each party may change its address for purposes of this Section by proper notice to the other parties. 9.8 SURVIVAL OF REPRESENTATIONS, WARRANTIES, AND COVENANTS. Regardless of any investigation at any time made by or on behalf of any party hereto or of any information any party may have in respect thereof, all covenants, agreements, representations, and warranties made hereunder or pursuant hereto or in connection with the transactions contemplated hereby shall survive the Closing. 9.9 FURTHER ASSURANCES. At, and from time to time after, the Closing, each party shall, at the request of another party, but without further consideration, execute and deliver such other instruments of conveyance, assignment, assumption, transfer and delivery and take such other action as such party may reasonably request in order more effectively to consummate the transactions contemplated hereby. 9.10 CONSTRUCTION. This Agreement and any documents or instruments delivered pursuant hereto or in connection herewith shall be construed without regard to the identity of the person who drafted the various provisions of the same. Each and every provision of this Agreement and such other documents and instruments shall be construed as though all of the parties participated equally in the drafting of the same. Consequently, the parties acknowledge and agree that any rule of construction that a document is to be construed against the drafting party shall not be applicable either to this Agreement or such other documents and instruments. 9.11 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 9.12 COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. Any party hereto may execute this Agreement by signing any one counterpart. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. SIGNATURE PAGE TO APS PRACTICE MANAGEMENT, INC. STOCK PURCHASE AGREEMENT Seller: APS PRACTICE MANAGEMENT, INC. By: Printed Name: Title: Beck: /s/ Michael R. Beck Michael R. Beck Hedrick: /s/ John R. Hedrick John R. Hedrick Purchasers: AMERICAN PHYSICIANS SERVICE GROUP, INC. By: Printed Name: Title: DUANE K. BOYD, JR. TRUST By /s/ Duane K. Boyd, Jr. Trustee Duane K. Boyd, Jr. Trustee /s/ Kenneth S. Shifrin Kenneth S. Shifrin /s/ Robert L. Myer Robert L. Myer SIGNATURE PAGE TO APS PRACTICE MANAGEMENT, INC. STOCK PURCHASE AGREEMENT J. A. MURPHY DESCENDANTS TRUST By /s/ Jack Murphy, Grantor Jack Murphy, Grantor /s/ William H. Hayes William H. Hayes /s/ Thomas R. Solimine Thomas R. Solimine /s/ Samuel R. Granett Samuel R. Granett /s/ Maury Magids Maury Magids EXHIBIT-A LIST OF PURCHASERS Name of Purchaser Number of Shares Closing Payment Obligation American Physicians Service Group, Inc. 1,874,600 $4,686,500 Kenneth S. Shifrin 30,000 $ 75,000 Duane K. Boyd, Jr. Trust 12,000 $ 30,000 Robert L. Myer 40,000 $100,000 J. A. Murphy Descendants Trust 20,000 $50,000 Samuel R. Granett 4,000 $10,000 William H. Hayes 2,400 $6,000 Maury Magids 4,000 $10,000 Paul Schilder 10,000 $25,000 Thomas R. Solimine 3,000 $7,500 TOTALS 2,000,000 $5,000,000 EX-10 3 BYLAWS OF APS PRACTICE MANAGEMENT , INC. Exh. 10-27 BYLAWS OF SUN VALLEY PHYSICIAN MANAGEMENT CORPORATION ARTICLE I OFFICES AND AGENT The Corporation may have such offices, either within or without the State of Texas, as the Board of Directors may designate or as the business of the Corporation may require from time to time. The registered office of the Corporation required by the Texas Business Corporation Act to be maintained in the State of Texas may be, but need not be, identical with the principal office in the State of Texas, as designated by the Board of Directors. The address of the registered office or the identity of the registered agent may be changed from time to time by the Board of Directors. The address of the initial registered office of the Corporation and the name of the initial registered agent of the Corporation at such address are set out in the Articles of Incorporation of the Corporation. ARTICLE II SHAREHOLDERS SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders shall be held on such date in each year and at such time and place as may be determined by the Board of Directors, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the election of directors shall not be held on the day designated for any annual meeting of the shareholders or at any adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of the shareholders as soon thereafter as may be convenient. SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders, for any purpose or purposes, may be called by the President or by the Board of Directors, and shall be called by the President at the request of the holders of not less than 25% of the outstanding shares of the Corporation entitled to vote at the meeting. SECTION 3. PLACE OF MEETING. The Board of Directors may designate any place, either within or without the State of Texas, as the place of meeting for any annual or special meeting called by the Board of Directors. If no designation is made, or if a special meeting be called otherwise than by the Board of Directors, the place of meeting shall be the registered office of the Corporation in the State of Texas. SECTION 4. NOTICE OF MEETING. Written or printed notice stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the President, the Secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his address as it appears on the stock transfer books of the Corporation, with postage thereon prepaid. Attendance by a shareholder, whether in person or by proxy, at a shareholder's meeting shall constitute a waiver of notice of such meeting of which he has had no notice. SECTION 5. CLOSING OF TRANSFER BOOKS AND FIXING OF RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any distribution, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the Corporation may provide that the stock transfer books shall be closed for a stated period no to exceed sixty (60) days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of closing the stock transfer books, the Board of Directors may, by resolution, fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty (60) days and, in case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action, regarding such determination of shareholders, is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a distribution, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof except where the determination has been made through the closing of the stock transfer books and the stated period of closing has expired. SECTION 6. FIXING RECORD DATES FOR CONSENTS TO ACTION. Unless a record date shall have previously been fixed or determined pursuant to Section 5 of this Article II, whenever action by shareholders is proposed to be taken by consent in writing without a meeting of shareholders, the Board of Directors may fix a record date for the purpose of determining shareholders entitled to consent to that action, which record date shall not precede, and shall not be more than ten (10) days after, the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors and the prior action of the Board of Directors is not required by the Texas Business Corporation Act, the record date for determining shareholders entitled to consent to action in writing without a meeting shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office, its principal place of business, or an officer or agent of the Corporation having custody of the books in which proceedings of meetings of shareholders are recorded. Delivery shall be by hand or by certified or registered mail, return receipt requested. Delivery to the Corporation's principal place of business shall be addressed to the President or the principal executive officer of the Corporation. If no record date shall have been fixed by the Board of Directors and prior action of the Board of Directors is required by the Texas Business Corporation Act, the record date for determining shareholders entitled to consent to action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts a resolution taking such prior action. SECTION 7. VOTING LISTS. The officer or agent having charge of the stock transfer books of the Corporation shall make, at least ten (10) days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting, or any adjournment thereof, complete list of the shareholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address and the number of shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept on file at the registered office of the Corporation, and shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and opened at the time and place of the meeting and shall be subject to the inspection by any shareholder during the whole time of the meeting. The original stock transfer book shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote at any meeting of the shareholders. SECTION 8. QUORUM. A majority of the outstanding shares of the Corporation entitled to vote, and represented in person or by proxy, shall constitute a quorum at a meeting of shareholders unless otherwise provided in the Articles of Incorporation of the Corporation. If less than a quorum is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjournment meeting at which a quorum shall be present or represented, any business may be transacted that might have been transacted as originally notified. The shareholders present at duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. SECTION 9. PROXIES. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. A telegram, telex, cablegram or similar transmission by the shareholder or his duly authorized attorney in fact, or a photographic, photostatic, facsimile or similar reproduction of a writing executed by the shareholder or his duly authorized attorney in fact shall be treated as an execution in writing for purposes of this section. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. Each proxy shall be revocable before it has been voted unless the proxy form conspicuously states that the proxy is irrevocable and the proxy is coupled with an interest, including the appointment as proxy of (a) a pledgee, (b) a person who purchased or agreed to purchase, or owns or holds an option purchase, the shares, (c) a creditor of the corporation who extends its credit under terms requiring the appointment, (d) an employee of the corporation whose employment contract requires the appointment, (d) an employee of the corporation whose employment contract requires the appointment, or (e) a party to a voting agreement created under the Texas Business Corporation Act. A revocable proxy shall be deemed to have been revoked if the Secretary of the Corporation shall have received at or before the meeting instructions of revocation or a proxy bearing a later date, which instructions or proxy shall have been duly executed and dated in writing by the shareholder. SECTION 10. VOTING OF SHARES. Except as otherwise provided by the Texas Business Corporation Act, and unless otherwise expressly provided in the Articles of Incorporation of the Corporation or in any resolution of the board of directors adopted with regard to a class or series of preferred stock authorized by the Articles of Incorporation of the Corporation, each outstanding share entitled to vote shall be entitled to one (1) vote on each matter submitted to a vote at a meeting of shareholders. SECTION 11. ACTIONS WITHOUT A MEETING. Any action required or permitted by the Texas Business Corporation Act to be taken at any annual or special meeting of shareholders, may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were presented and voted. such writing, which may be in counterparts, shall be manually executed if practicable; provided, however, that if circumstances so require, effect shall be given to written consent transmitted by telegraph, telex, telecopy or similar means of visual data transmission. Every written consent shall bear the date of signature of each shareholder who signs the consent. No written consent shall be effective to take the action that is the subject of the consent unless, within sixty (60) days after the date of the earliest dated consent delivered to the Corporation in the manner required by this Section 11, a consent or consents signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take the action that is the subject of the consent are delivered to the Corporation by delivery to its registered office, its principal place of business, or an officer or agent of the Corporation having custody of the books in which proceedings of meetings of shareholders are recorded. Delivery shall be by hand or by certified or registered mail, return receipt requested. Delivery to the Corporation's principal place of business shall be addressed to the President or principal executive officer of the Corporation. Prompt notice of the taking of any action by shareholders without a meeting by less than unanimous written consent shall be given to those shareholders who did not consent in writing to the action. SECTION 12. TELEPHONE MEETINGS. Subject to the provisions required by the Texas Business Corporation Act for notice of meetings, meetings of the shareholders of the Corporation may be conducted by means of conference telephone or similar communications equipment whereby all persons participating in the meeting can hear and speak to each other. ARTICLE III BOARD OF DIRECTORS SECTION 1. GENERAL POWER. The powers of the Corporation shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed by its Board of Directors except as the Board of Directors shall delegate the power to so manage to the Executive Committee or other committee. SECTION 2. NUMBER, TENURE AND QUALIFICATIONS. The number of initial directors comprising the Board of Directors shall be as set forth in the Articles of Incorporation. Upon resolution of the Board of Directors the number of directors may increased or decrease, but no decrease shall have the effect of shortening the term of any incumbent director. Each director shall office until the next annual meeting of the shareholders, unless earlier removed, and until his successor shall have been elected and qualified. A director need not be a resident of the State of Texas or a shareholder of the Corporation. SECTION 3. REGULAR MEETINGS. A regular meeting of the Board of Directors shall be held without notice other than this bylaw immediately after, and at the same place as, the annual meeting of shareholders. The Board of Directors may provide, by resolution, the time and place, wither within or without the State of Texas, for the holding of additional regular meetings without notice other than such resolution. SECTION 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the President or a majority of the elected and acting directors from time to time. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Texas, as the place for holding any special meeting called by them. SECTION 5. NOTICE. Written notice of any special meeting shall be delivered personally to each director or by mail or telegram, telecopy or similar means of visual data transmission to each director at his business address, in all cases at least one (1) day prior to such meeting. If mailed, such notice shall be deemed to be delivered two (2) days after such notice has been deposited in the United States mail so addressed, with postage thereon prepaid. If notice is given by telegram, telex, telecopy or similar means of visual data transmission, such notice shall be deemed to be delivered when transmitted for delivery to the recipient at such address. Any director may waive notice of any meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because that meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of any regular or special meeting of the Board of Directors need be specified in the notice, or waiver of notice of such meeting. SECTION 6. QUORUM. A majority of the number of directors fixed in accordance with Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. SECTION 7. MANNER OF ACTING. (a) ACTIONS AT A MEETING. Except as provided in Paragraph (b) of this Section 7, the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. (b) ACTIONS WITHOUT A MEETING. Any action required or permitted to be taken at a meeting of the Board of Directors or any committee may be taken without a meeting, if a consent in writing, setting forth the action so taken, is signed by all of the members of the Board of Directors, Executive Committee or other committee, as the case may be. Such consent shall have the same force and effect as a unanimous vote at a meeting. Such writing, which may be in counterparts, shall be manually executed if practicable; provided, however, that if circumstances so require, effect shall be given to written consent transmitted by telegraph, telex, telecopy, or other similar means of visual data transmission. (c) TELEPHONE MEETINGS. Subject to the provisions required by the Texas Business Corporation Act for notice of meetings, meetings of the Board of Directors of the Corporation or any committee may be conducted by means of conference telephone or similar communications equipment whereby all persons participating in the meeting can hear and speak to each other. SECTION 8. VACANCIES. Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of (a) the holders of a majority of the outstanding shares entitled to vote thereon at an annual or special meeting of shareholders called for that purpose, or (b) a majority of the remaining directors though less than a quorum of the Board of Directors. A person elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. A vacancy shall be deemed to exist by reason of the death or resignation of the person elected, or upon the failure of shareholders to elect directors to fill the unexpired term of directors removed in accordance with the provisions of Section 9 of this Article III. A directorship to be filled by reason of an increase in the number of directors may be filled by (a) the affirmative vote of the holders of a majority of the outstanding shares entitled to vote thereon at an annual or special meeting of shareholders called for that purpose or (b) the board of directors for a term of office continuing only until the next election of one or more directors by the shareholders; provided, that the board of directors may not fill more than two such directorships during the period between any two successive annual meetings of shareholders. SECTION 9. REMOVAL. At any meeting of shareholders called expressly for the purpose of removal, any director or the entire Board of Directors may be removed, with or without cause, by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. Removal of directors with or without cause may also be accomplished by unanimous written consent of the shareholders without a meeting. In case the entire board or any one or more of the directors are so removed, new directors may be elected at the same meeting, or by the same written consent, for the unexpired term of the director or directors so removed. Failure to elect directors to fill the unexpired term of the directors so removed shall be deemed to create a vacancy or vacancies in the Board of Directors. SECTION 10. COMPENSATION. By resolution of the Board of Directors, the directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors, and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. SECTION 11. PRESUMPTION OF ASSENT. A director of the Corporation who is present at a meeting of the Board of Directors in which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent to such action with the person acting as Secretary of the meeting before the adjournment thereof, or shall forward such dissent by registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 12. EXECUTIVE AND OTHER COMMITTEES. There may be established an Executive Committee, and on or more other committees, composed of one or more directors designated by resolution adopted by a majority of the full number of directors of the Board of Directors as fixed in accordance with Section 2 of this Article III. The Executive Committee or such other committees may met at stated times, or on notice to all members by any one member. Vacancies in the membership of the Executive Committee or such other committees shall be filled by a majority vote of the full number of directors on the Board of Directors at a regular meeting or at a special meeting called for that purpose. During the intervals between meetings of the Board, the Executive Committee, if it shall have been established, may advise and aid the officers of the Corporation in all matters concerning its interest and the management of its business, and shall generally perform such duties and exercise such powers as may be directed or delegated by the Board of Directors from time to time. The Board of Directors may delegate to the Executive Committee or such other committees the authority to exercise all the powers of the Board of Directors, except the power to declared dividends or to authorize the issuance of shares of the Corporation, and where action of the full Board of Directors is required by the Texas Business Corporation Act. The designation of and delegation of power to the Executive Committee shall not operate to relieve the Board of Directors, or any members thereof, of any responsibility imposed upon it or him by law. ARTICLE IV OFFICERS SECTION 1. NUMBER. The officers of the Corporation shall be a President, one or more Vice-Presidents (the number and specific titles thereof to be determined by the Board of Directors), a Secretary, and a Treasurer, each of whom shall be elected by the Board of Directors. Such other officers and assistant officers as may be deemed necessary may be elected or appointed by the Board of Directors. Any two or more offices may be held by the same person. SECTION 2. ELECTION AND TERM OF OFFICE. the officers of the Corporation shall be elected annually by the Board of Directors at the regular meeting of the Board of Directors held after each annual meeting of the shareholders. If the election shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his successor shall have been duly elected or until his death, or until he shall resign or shall have been removed in the manner hereinafter provided. SECTION 3. REMOVAL. Any officer may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. SECTION 4. VACANCIES. A vacancy in any office, because of death, resignation, removal, disqualification or otherwise, may be filled by the Board of Directors for the unexpired portion of the term. SECTION 5. PRESIDENT. The President shall be the chief executive officer of the Corporation and, subject to the control of the Board of Directors , shall in general supervise and control all of the day to day business and affairs of the Corporation. He shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time. SECTION 6. THE VICE PRESIDENTS. In the absence of the President or in the event of his death, inability or refusal to act, the Vice President (or should there be more than one Vice President, the Vice Presidents in the order designated at the time of their election, or in the absence of any designation then in the order of their election) shall perform the duties of President, and when so acting, shall have all the powers of an be subject to all the restrictions upon the President. He shall perform such other duties as from time to time may be assigned to him by the President or the Board of Directors. SECTION 7. THE SECRETARY. The Secretary shall: (a) keep the minutes of the shareholders' and the Board of Directors' meetings in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws, or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation, and see that the seal of the Corporation is affixed to all documents as may be necessary or appropriate; (d) keep a register of the post office address of each shareholder which shall be furnished to the Secretary of such shareholder; (e) have general charge of the stock transfer books of the Corporation; and (f) in general, perform all duties incident to the office of Secretary, and such other duties as from time to time may be designated to him by the President or the Board of Directors. SECTION 8. THE TREASURER. If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his duties in such sum , and with such surety or sureties, as the Board of Directors shall determine. He shall: (a) have charge and custody of, and be responsible for, all funds and securities of the Corporation from any source whatsoever, and deposit all such moneys in the name of the Corporation in such banks, trust companies, or other depositories as shall be selected by the Board of Directors; and (b) in general perform all of the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the President or by the Board of Directors. SECTION 9. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The Assistant Secretaries when authorized by the Board of Directors may sign with the President, or a Vice President, certificates for shares of the Corporation the issuance of which shall have been authorized by a resolution of the Board of Directors. The Assistant Treasurers shall, respectively, if required by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. The Assistant Secretaries and Assistant Treasurers, in general, shall perform such duties as shall be assigned to them by the Secretary or the Treasurer, respectively, or by the President or the Board of Directors. SECTION 10. SALARIES. The salaries, if any, of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Corporation. ARTICLE V CERTIFICATES FOR SHARES, TRANSFER AND REPLACEMENT SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares of the Corporation shall be in such form as shall be determined by the Board of Directors. Such certificates shall be signed by the President or a Vice President, and by the Secretary or an Assistant Secretary. If such certificates are signed or countersigned by a transfer agent or registrar, other than the Corporation, such signature of the President or a Vice President and Secretary or Assistant Secretary, and the seal of the Corporation, or any of them, may be executed in facsimile, engraved or printed. If any officer who has signed or whose facsimile signature has been place on any certificate shall have ceased to be such officer before the certificate is issued, it may be issued by the Corporation with the same effect as if the officer has not ceased to be such at the date of issue. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. All certificates surrendered to the Corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in case of a lost, stolen or destroyed a new one may be issued therefor provided in Section 3 of this Article V. SECTION 2. TRANSFER OF SHARES. Transfer of shares of the Corporation shall be made only on the stock transfer books of the Corporation upon surrender for cancellation of the certificate for such shares together with a request to transfer and such other documents and opinion as counsel to the Corporation may require. The person in whose name shares stand on the books of the Corporation shall be deemed by the Corporation to be the owner thereof for all purposes. SECTION 3. LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation shall issue a new certificate in place of any certificate for shares previously issued if the registered owner of the certificate: (a) makes proof in affidavit form that it has been lost, destroyed or wrongfully taken; (b) requests the issuance of a new certificate before the Corporation has notice that the certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim; (c) gives a bond in such form, and with such surety or sureties, with fixed or open penalty, as the Corporation may direct, or indemnifies the Corporation (and its transfer agent and registrar, if any) against any claim that may be made on account of the alleged loss, destruction or theft of the certificates; and (d) satisfies any other reasonable requirements imposed by the Corporation. When a certificate has been lost, apparently destroyed or wrongfully taken, and the holder of record fails to notify the Corporation within a reasonable time after he has notice of it, and the Corporation registers a transfer of the shares represented by the certificate before receiving such notification, the holder of record is precluded from making any claim against the Corporation for the transfer or for new certificate. ARTICLE VI FISCAL YEAR The Board of Directors shall, by resolution, fix the fiscal year of the Corporation. ARTICLE VII DISTRIBUTIONS The Board of Directors may from time to time make distributions in the manner provided by law. ARTICLE VIII SEAL The Board of Directors may provide a corporate seal, which shall be circular in form and shall have inscribed thereon the name of the Corporation, the State of incorporation, and the five-pointed Texas star. ARTICLE IX WAIVER OF NOTICE Whenever any notice is required to be given to any shareholder or director of the Corporation under the provisions of these Bylaws, the Articles of Incorporation or the Texas Business Corporation Act, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent of the giving of such notice. ARTICLE X PROCEDURE Meetings of the shareholders and of the Board of Directors shall be conducted in accordance with the procedure as contained in Robert's Rules of Order, to the extent applicable. ARTICLE XI PARTICIPATION OF DIRECTORS AND OFFICERS IN RELATED BUSINESS Unless otherwise provided by contract, officers and directors of this Corporation may hold positions as officers and directors of other corporations, in related businesses, and their efforts to advance the interest of those corporations will not create a breach of fiduciary duty to this Corporation in the absence of bad faith. ARTICLE XII AMENDMENTS The Board of Directors shall have the exclusive power to alter, amend or repeal these Bylaws or adopt new Bylaws, subject to amendment, repeal or adoption of new bylaws by action of the shareholders and unless the shareholders in amending, repealing or adopting a new Bylaw expressly provide that the Board of Directors may not amend or repeal that Bylaw. The Board of Directors may exercise this power at any regular or special meeting at which a quorum is present by the affirmative vote of a majority of the Directors present at the meeting and without any notice of the action taken with respect to the Bylaws having been contained in the notice of waiver of notice of such meeting. EX-10 4 AMENDED ARTICLES OF INCORPORATION Exh. 10-28 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF SUN VALLEY PHYSICIAN MANAGEMENT CORPORATION ARTICLE ONE Pursuant to the provisions of Article 4.07 of the Texas Business Corporation Act (the Act), Sun Valley Physician Management Corporation (the Corporation), adopts these Amended and Restated Articles of Incorporation and all amendments in effect to date and as further amended by such Amended and Restated Articles of Incorporation as hereinafter set forth and which contain no other change in any provision thereof. ARTICLE TWO The Articles of Incorporation of the Corporation are amended by the Amended and Restated Articles of Incorporation as follows: The amendments alter or change and/or renumber Articles One, Four, Six, Eight, Nine and Twelve of the original Articles of Incorporation and the full text of each provision altered is as follows: ARTICLE ONE The name of the corporation is APS Practice Management, Inc. ARTICLE TWO The name of the registered agent of the Corporation is CT Corporation System. The address of the registered office of the Corporation in the State of Texas is 811 Dallas Avenue, Houston, Texas 77002. ARTICLE FOUR Section 4.1 AUTHORIZED SHARES. The aggregate number of shares of all classes of stock that the Corporation shall have authority to issue is Fifty-one Million Two Hundred Twenty-Two Thousand Two Hundred and Twenty-four (51,222,224), consisting of and divided into: (i) One class of Fifty Million (50,000,000) shares of Common , $0.001 par value per share; (ii) One class of Two Hundred Twenty-two Thousand Two Hundred Two Hundred and Twenty-four (222,224) shares of Serial Founders Common Stock, $0.001 par value per share, as may be divided into and issued in Series as hereinafter provided; and (iii) One class of One Million (1,000,000) shares of Serial Senior Preferred Stock, $0.001 par value per share, as may be divided into and issued in Series as hereinafter provided. Section 4.2 SERIAL FOUNDERS COMMON STOCK: ISSUANCE IN SERIES. The Board of Directors is authorized from time to time, acting by resolutions duly adopted by two-thirds of the full Board of Directors to divide the Serial Founders Common Stock into Series, to designate each Series, to fix and determine separately for each Series any one or more of the rights and preferences described in subsections (a) through (d) of this Section 4.2, to amend the Certificates of Designation of Rights and Preferences, if any, setting forth the relative rights and preferences of any such Series consistent with the authority to fix and determine such rights and preferences as set forth in this Section 4.2 of Article Four, and to issue shares of any Series then or previously designated, fixed and determined. Notwithstanding the foregoing, the Board of Directors may not take any action that would serve to deny, amend or limit (i) the voting rights, including but not limited to the right to vote as a class, of the Serial Founders Common Stock or (ii) the right of the holders of Serial Founders Common Stock to receive dividends or distributions, unless such changes result in rights that are identical to that of the holders of Common Stock of the Corporation, without the written consent of all of the holders of the Serial Founders Common Stock. Except as provided herein, the rights of the holders of Serial Founders Common Stock shall be the same as that of the holders of the Common Stock. (a) rights in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation; (b) sinking fund provisions for the redemption or purchase of shares (c) the price at which, and the terms and conditions on which, shares may be redeemed; (d) the terms and conditions on which shares may be issued with the privilege or obligation of conversion into shares of Common Stock, but in no event shall the holders of the Serial Founders Common Stock receive less than one (1) share of Common Stock for each one (1) share of Serial Founders Common Stock so converted without the written consent of all the holders of the Serial Founders Common Stock. Shares of Serial Founders Common Stock of a particular series that are redeemed or converted under a privilege or obligation to so redeem or convert, shall be canceled and shall cease to be part of the authorized shares of the Company. Section 4.3 SERIAL PREFERRED STOCK: ISSUANCE IN SERIES. The Board of Directors is authorized from time to time, acting by resolutions duly adopted by two-thirds of the full Board of Directors to divide the Serial Preferred Stock into Series, to designate each Series, to fix and determine separately for each Series any one or more of the rights and preferences described in subsections (a) through (h) of this Section 4.3, to amend the Certificates of Designation of Rights and Preferences, if any, setting forth the relative rights and preferences of any such Series consistent with the authority to fix and determine such rights and preferences as set forth in this Section 4.3 of Article Four, and to issue shares of any Series then or previously designated, fixed and determined. (a) rights to receipt of dividends (which may be cumulative or non-cumulative) at such rate or rates, on such conditions, from such date or dates, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or series of stock as shall be fixed by the Board of Directors; (b) rights in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation; (c) sinking fund provisions for the redemption or purchase of shares; (d) the price at which, and the terms and conditions on which, shares may be redeemed; (e) the terms and conditions on which shares may be issued with the privilege or obligation of conversion into or exchange for shares of any other class or classes or of any other series of the same or any other class or classes of stock of the Corporation at such price or prices or at such rates of exchange and with such adjustments as shall be fixed by the Board of Directors; (f) voting rights (including the number of votes per share, the matters on which the shares can vote and the contingencies or events that make the voting rights effective); (g) conditions and restrictions upon the creation of indebtedness of the Corporation or any subsidiary upon the issue of any additional stock (including additional shares of such series or any other series) and upon the payment of dividends or the making of other distributions on, and the purchase, redemption or any other acquisition by the Corporation or any subsidiary of any outstanding stock of the Corporation; and (h) such other preferences and relative, participating, optional and other special rights and qualifications, limitations or restrictions thereof as shall be fixed by the Board of Directors, so far as not inconsistent with the provisions of this Article Four and to the full extent now or hereinafter permitted by Texas law. Shares of Serial Preferred Stock of a particular series that are redeemed or converted under a privilege or obligation to so redeem or convert, shall be canceled and shall cease to be part of the authorized shares of such Series, but shall be restored to the status of authorized, but unissued, shares of the Corporations Serial Preferred Stock, without designation. Section 4.4 COMMON STOCK. (a) The Common Stock is subject and subordinate to any and all of the rights, privileges, preferences and priorities of the Serial Preferred Stock of the Corporation as set forth in this Article Four. All shares of Common Stock shall be of equal rank and shall be identical in all respects. All shares of Common Stock shall be of equal rank to the shares of the Serial Founders Common Stock, except as expressly provided for herein. (b) LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation and after the holders of Serial Preferred Stock shall have received payment for any liquidation preferences therefor, or a sum sufficient for such payment in full shall have been set aside, the remaining assets of the Corporation shall be divided and distributed among the holders of the Common Stock based on the ratio which the number of shares of Common Stock owned by each such holder bears to the aggregate number of issued and outstanding shares of Common Stock. (c) VOTING. Subject to any voting rights of holders of Serial Preferred Stock, the holders of shares of Common Stock shall possess full voting power in the election of directors and for all other purposes, and each holder of Common Stock shall at every meeting of the shareholders be entitled to one (1) vote for each share of Common Stock held by such holder on the record date for determining shareholders entitled to vote at such meeting. (d) DIVIDENDS. Subject to any prior dividend rights of the holders of the Serial Preferred Stock, the holders of Common Stock shall be entitled to receive, on a share for share basis, such dividends as may be declared from time to time by the Board of Directors. (e) REDEMPTION. The shares of Common Stock shall not be subject to redemption or repurchase by the Corporation except pursuant to a written agreement between the Corporation and the holder. Section 4.5 ISSUANCE AND SALE OF STOCK. The Board of Directors shall have the power and authority at any time and from time to time to issue, sell or otherwise dispose of any authorized and unissued shares of any class of stock of the Corporation to such persons or parties, including the holders of any class of stock, for such consideration (not less than the par value, if any, thereof) and upon such terms and conditions as the Board of Directors in its discretion may deem to be in the best interests of the Corporation. ARTICLE SIX Section 6.1 BALLOT. Election of directors need not be ballot unless the Bylaws of the Corporation so provide. Section 6.2 NO CUMULATIVE VOTING. At each election for directors of the Corporation, each shareholder entitled to vote at such election shall have the right to vote, in person or by proxy, only the number of shares owned by them for as many persons as there are directors to be elected, and no shareholder shall ever have the right or be permitted to cumulate their votes on any basis, any and all rights of cumulative voting being hereby expressly denied. Section 6.3 VACANCY. So long as at least one of the directors of the Corporation continues to serve as a director of the Corporation, any vacancy on the Corporations Board of Directors, whether arising through death, resignation or removal of a director, or through an increase in the number of directors of any class, shall be filled by a majority of the directors then in office, although less than a quorum, or by the sole remaining director, and shall not be filled by a vote of the shareholders of the Corporation. Section 6.4 NUMBER. The number of directors, constituting the Board of Directors shall be fixed as specified in the Bylaws of the Corporation, but shall not be less than one (1) nor more than nine (9). No more than forty percent (40%) of the directors shall be physicians actively engaged substantially full time in the practice of medicine. Section 6.5 TERM AND ELECTION. Each director shall be elected to serve for one (1) year and until their successors are elected and qualified or until their earlier death, resignation, removal or retirement. Any director elected or appointed to fill a vacancy shall hold office for the remaining term. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. The Bylaws may contain any provisions regarding classification of the Corporations directors not inconsistent with the terms hereof. Section 6.6 REMOVAL. Any director or the entire Board of Directors of the Corporation may be removed with or without cause by the affirmative vote of the holders of a majority of the outstanding shares of stock, regardless of class. ARTICLE SEVEN In furtherance and not in limitation of the powers conferred by the laws of the State of Texas, but subject to the provisions of the Articles of Incorporation, the Board of Directors is expressly authorized to adopt, amend or repeal the Bylaws of the Corporation. The Bylaws of the Corporation may also be amended, altered or repealed by the affirmative vote of the holders of a majority of the outstanding shares of stock, regardless of class. ARTICLE NINE A former, future or current director of the Corporation shall not be personally liable to the Corporation, any of its shareholders or any other director or third party, for monetary damages for breach of fiduciary duty as a director of the Corporation, except for liability for (i) any breach of the directors duty of loyalty to the Corporation or its shareholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law or (iii) any transaction from which the director derived an improper personal benefit. It is the intent of the Corporation to exempt the persons referred to in this Article Nine from personal liability to the fullest extent permitted by law. The following amendments are added to the original Articles of Incorporation and the full text of each new provision is as follows: ARTICLE EIGHT Meetings of the shareholders may be held within or without the State of Texas, as the Bylaws of the Corporation may provide. The books of the Corporation may be kept outside the State of Texas at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of Incorporation. ARTICLE TEN Section 10.1 Indemnification. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, or appeals therefrom, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that they are or were a director, officer, employee or agent of the Corporation, or are or were serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys fees) damages, judgments, fines, amounts paid in settlement and other liabilities actually and reasonably incurred by them in connection with such action, suit or proceeding, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which they reasonably believed to be in or not opposed to the best interest of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Section 10.2 Indemnification from Corporate Proceedings. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that they are or were a director, officer, employee or agent of the Corporation, or are or were serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership joint venture, trust or other enterprise, against expenses (including attorneys fees) actually and reasonably incurred by them in connection with the defense or settlement of such action or suit if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses such court shall deem proper. Section 10.3 MANDATORY INDEMNIFICATION. To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 10.1 and 10.2 of this Article Ten, or in defense of any claim, issue or matter therein, they shall be indemnified against expenses (including attorneys fees) actually and reasonably incurred by them in connection therewith. In the event a determination is made under Section 10.4 that a director, officer, employee or agent of the Corporation has met the applicable standard of conduct as to some matters, but no such determination has been made as to others, the amount to be indemnified may be reasonably prorated. Section 10.4 DETERMINATION OF INDEMNIFICATION. Any indemnification under Sections 10.1 and 10.2 of this Article Ten (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because they have met the applicable standard of conduct set forth in Sections 10.1 and 10.2 of this Article Ten. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, (ii) if such a quorum is not obtainable, or, even, if obtainable, a quorum of two or more disinterested directors so directs, by independent legal counsel (selected in accordance with subsection (i)) in a written opinion or (iii) by a majority vote of the shareholders. Section 10.5 EXPENSES. Expenses incurred in defending a civil action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding within thirty (30) days of receipt of (i) a written affirmation by such director, officer, employee or agent of his good faith belief that he has met the standard of conduct necessary for indemnification by the Corporation set forth in this Article Ten and (ii) a written undertaking by or on behalf of the director, officer, employee or agent incurring such expense to repay such amount if it shall ultimately be determined that they are not entitled to be indemnified by the Corporation as authorized in this Article Ten. Article 10.6 CUMULATIVE RIGHTS. The indemnification and advancement of expenses provided by, or granted pursuant to, the other Sections of this Article Ten shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any Bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Article 10.7 INSURANCE. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against them and incurred by them in any such capacity, or arising out of their status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article Ten. Article 10.8 CONSTITUENT CORPORATIONS. For purposes of this Article Ten, references to the Corporation shall include, in addition to the resulting Corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article Ten with respect to the resulting or surviving corporation as they would have with respect to such constituent corporation if its separate existence had continued. Section 10.9 CERTAIN DEFINITIONS. For purposes of this Article Ten, references to other enterprises shall include employee benefit plans; references to fines shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to serving at the request of the Corporation shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interests of the Corporation as referred to in this Article Ten. Section 10.10 HEIRS, ETC. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article Ten shall unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 10.11 SEVERABILITY. The exemption from personal liability and indemnification provided in this Article Ten shall be subject to all valid and applicable laws, and, in the event this Article Ten or any of the provisions hereof or the exemption from personal liability of the indemnification contemplated hereby are found to be inconsistent with or contrary to any such valid laws, the latter shall be deemed to control and this Article Ten shall be regarded as modified accordingly, and, as so modified, to continue in full force and effect. ARTICLE ELEVEN Except as may be otherwise provided in the Act, or other applicable Texas law, no contract, act or transaction of the Corporation with any person, persons, firm, trust, association or any other corporation shall be affected or invalidated by the fact that any director, officer or shareholder of this Corporation is a party to , or is interested in, such contract, act or transaction, or in any way connected with any such person, persons, firm, trust or association, or is a director, officer or shareholder of or otherwise interested in, any such other corporation, nor shall any duty to pay damages on account of this Corporation be imposed upon such director, officer or shareholder of this Corporation solely by reason of such fact, regardless of whether the vote, action or presence of any such director, officer or shareholder may be, or may have been, necessary to obligate this Corporation on, or in connection with such contract, act or transaction, provided that if such vote, action or presence is, or shall have been necessary, such interest or connection (other than an interest solely as a non-controlling shareholder of any such other corporation) shall have been known by or disclosed to the Board of Directors of this Corporation. ARTICLE TWELVE The Corporation reserves the right to amend, alter, change or repeal any provision, save and except for Sections 4.2 and 6.4 of these Articles of Incorporation, contained in these Articles of Incorporation. The Corporation may amend, alter, change or repeal Sections 4.2 or 6.4 of these Articles of Incorporation with the affirmative vote or written consent of the holders of at least two-thirds (2/3) of the outstanding shares of each class of stock, voting on a class basis. ARTICLE THREE Each such amendment made by the Amended and Restated Articles of Incorporation has been effected in conformity with the provisions of the Act (the Act) and such Amended and Restated Articles of Incorporation and each such amendment made by the Amended and Restated Articles of Incorporation were duly adopted by the shareholders of the Corporation on the 1st day of August, 1997. ARTICLE FOUR The 1,000 shares of $1.00 par value common stock outstanding immediately prior to this amendment will be canceled immediately after the filing of this amendment in exchange for all 222,224 shares of the $0.001 par value per share Serial Founders Common Stock authorized hereby. No additional consideration will be given or received in connection with such exchange. Accordingly, a reduction in stated capital from $1,000 to $222.22 will be necessary, which will be effected by a transfer of $777.78 from stated capital to additional paid in capital on the books of the Corporation. ARTICLE FIVE The number of shares outstanding was one thousand (1,000), and the number of shares entitled to vote on the Amended and Restated Articles of Incorporation as so amended was one thousand (1,000). All of the shareholders have signed a written consent to the adoption of such Amended and Restated Articles of Incorporation as so amended pursuant to Article 9.10 of the Act and any written notice required by Article 9.10 of the Act has been given. ARTICLE SIX The Articles of Incorporation and all amendments and supplements thereto are hereby superseded by the following Amended and Restated Articles of Incorporation which accurately copy the entire text thereof and as amended as set forth above: AMENDED AND RESTATED ARTICLES OF INCORPORATION ARTICLE ONE The name of the Corporation is APS Practice Management, Inc. ARTICLE TWO The name of the registered agent of the Corporation is CT Corporation System. The address of the registered office of the Corporation in the State of Texas is 811 Dallas Avenue, Houston, Texas 77002. ARTICLE THREE The purpose of the Corporation is to buy, sell and deal in personal property, real property and services and any other activities for which corporations may be organized under the Act. No shareholder or other person shall have any preemptive rights whatsoever. ARTICLE FOUR Section 4.1 AUTHORIZED SHARES. The aggregate number of shares of all classes of stock that the Corporation shall have authority to issue is Fifty-one Million Two Hundred Twenty-Two Thousand Two Hundred and Twenty-four (51,222,224), consisting of and divided into: (i) One class of Fifty Million (50,000,000) shares of Common, $0.001 par value per share; (ii) One class of Two Hundred Twenty-two Thousand Two Hundred Two Hundred and Twenty-four (222,224) shares of Serial Founders Common Stock, $0.001 par value per share, as may be divided into and issued in Series as hereinafter provided; and (iii) One class of One Million (1,000,000) shares of Serial Senior Preferred Stock, $0.001 par value per share, as may be divided into and issued in Series as hereinafter provided. Section 4.2 SERIAL FOUNDERS COMMON STOCK: Issuance in Series. The Board of Directors is authorized from time to time, acting by resolutions duly adopted by two-thirds of the full Board of Directors to divide the Serial Founders Common Stock into Series, to designate each Series, to fix and determine separately for each Series any one or more of the rights and preferences described in subsections (a) through (d) of this Section 4.2, to amend the Certificates of Designation of Rights and Preferences, if any, setting forth the relative rights and preferences of any such Series consistent with the authority to fix and determine such rights and preferences as set forth in this Section 4.2 of Article Four, and to issue shares of any Series then or previously designated, fixed and determined. Notwithstanding the foregoing, the Board of Directors may not take any action that would serve to deny, amend or limit (i) the voting rights, including but not limited to the right to vote as a class, of the Serial Founders Common Stock or (ii) the right of the holders of Serial Founders Common Stock to receive dividends or distributions, unless such changes result in rights that are identical to that of the holders of Common Stock of the Corporation, without the written consent of all of the holders of the Serial Founders Common Stock. Except as provided herein, the rights of the holders of Serial Founders Common Stock shall be the same as that of the holders of the Common Stock. (a) rights in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation; (b) sinking fund provisions for the redemption or purchase of shares; (c) the price at which, and the terms and conditions on which, shares may be redeemed; (d) the terms and conditions on which shares may be issued with the privilege or obligation of conversion into shares of Common Stock, but in no event shall the holders of the Serial Founders Common Stock receive less than one (1) share of Common Stock for each one (1) share of Serial Founders Common Stock so converted without the written consent of all the holders of the Serial Founders Common Stock. Shares of Serial Founders Common Stock of a particular series that are redeemed or converted under a privilege or obligation to so redeem or convert, shall be canceled and shall cease to be part of the authorized shares of the Company. Section 4.3 SERIAL PREFERRED STOCK: Issuance in Series. The Board of Directors is authorized from time to time, acting by resolutions duly adopted by two-thirds of the full Board of Directors to divide the Serial Preferred Stock into Series, to designate each Series, to fix and determine separately for each Series any one or more of the rights and preferences described in subsections (a) through (h) of this Section 4.3, to amend the Certificates of Designation of Rights and Preferences, if any, setting forth the relative rights and preferences of any such Series consistent with the authority to fix and determine such rights and preferences as set forth in this Section 4.3 of Article Four, and to issue shares of any Series then or previously designated, fixed and determined. (a) rights to receipt of dividends (which may be cumulative or non-cumulative) at such rate or rates, on such conditions, from such date or dates, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or series of stock as shall be fixed by the Board of Directors; (b) rights in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation; (c) sinking fund provisions for the redemption or purchase of shares; (d) the price at which, and the terms and conditions on which, shares may be redeemed; (e) the terms and conditions on which shares may be issued with the privilege or obligation of conversion into or exchange for shares of any other class or classes or of any other series of the same or any other class or classes of stock of the Corporation at such price or prices or at such rates of exchange and with such adjustments as shall be fixed by the Board of Directors; (f) voting rights (including the number of votes per share, the matters on which the shares can vote and the contingencies or events that make the voting rights effective); (g) conditions and restrictions upon the creation of indebtedness of the Corporation or any subsidiary upon the issue of any additional stock (including additional shares of such series or any other series) and upon the payment of dividends or the making of other distributions on, and the purchase, redemption or any other acquisition by the Corporation or any subsidiary of any outstanding stock of the Corporation; and (h) such other preferences and relative, participating, optional and other special rights and qualifications, limitations or restrictions thereof as shall be fixed by the Board of Directors, so far as not inconsistent with the provisions of this Article Four and to the full extent now or hereinafter permitted by Texas law. Shares of Serial Preferred Stock of a particular series that are redeemed or converted under a privilege or obligation to so redeem or convert, shall be canceled and shall cease to be part of the authorized shares of such Series, but shall be restored to the status of authorized, but unissued, shares of the Corporations Serial Preferred Stock, without designation. Section 4.4 COMMON STOCK. (a) The Common Stock is subject and subordinate to any and all of the rights, privileges, preferences and priorities of the Serial Preferred Stock of the Corporation as set forth in this Article Four. All shares of Common Stock shall be of equal rank and shall be identical in all respects. All shares of Common Stock shall be of equal rank to the shares of the Serial Founders Common Stock, except as expressly provided for herein. (b) LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation and after the holders of Serial Preferred Stock shall have received payment for any liquidation preferences therefor, or a sum sufficient for such payment in full shall have been set aside, the remaining assets of the Corporation shall be divided and distributed among the holders of the Common Stock based on the ratio which the number of shares of Common Stock owned by each such holder bears to the aggregate number of issued and outstanding shares of Common Stock. (c) VOTING. Subject to any voting rights of holders of Serial Preferred Stock, the holders of shares of Common Stock shall possess full voting power in the election of directors and for all other purposes, and each holder of Common Stock shall at every meeting of the shareholders be entitled to one (1) vote for each share of Common Stock held by such holder on the record date for determining shareholders entitled to vote at such meeting. (d) DIVIDENDS. Subject to any prior dividend rights of the holders of the Serial Preferred Stock, the holders of Common Stock shall be entitled to receive, on a share for share basis, such dividends as may be declared from time to time by the Board of Directors. (e) REDEMPTION. The shares of Common Stock shall not be subject to redemption or repurchase by the Corporation except pursuant to a written agreement between the Corporation and the holder. Section 4.5 ISSUANCE AND SALE OF STOCK. The Board of Directors shall have the power and authority at any time and from time to time to issue, sell or otherwise dispose of any authorized and unissued shares of any class of stock of the Corporation to such persons or parties, including the holders of any class of stock, for such consideration (not less than the par value, if any, thereof) and upon such terms and conditions as the Board of Directors in its discretion may deem to be in the best interests of the Corporation. ARTICLE FIVE The Corporation shall have perpetual existence. ARTICLE SIX Section 6.1 BALLOT. Election of directors need not be ballot unless the Bylaws of the Corporation so provide. Section 6.2 NO CUMULATIVE VOTING. At each election for directors of the Corporation, each shareholder entitled to vote at such election shall have the right to vote, in person or by proxy, only the number of shares owned by them for as many persons as there are directors to be elected, and no shareholder shall ever have the right or be permitted to cumulate their votes on any basis, any and all rights of cumulative voting being hereby expressly denied. Section 6.3 VACANCY. So long as at least one of the directors of the Corporation continues to serve as a director of the Corporation, any vacancy on the Corporations Board of Directors, whether arising through death, resignation or removal of a director, or through an increase in the number of directors of any class, shall be filled by a majority of the directors then in office, although less than a quorum, or by the sole remaining director, and shall not be filled by a vote of the shareholders of the Corporation. Section 6.4 NUMBER. The number of directors, constituting the Board of Directors shall be fixed as specified in the Bylaws of the Corporation, but shall not be less than one (1) nor more than nine (9). No more than forty percent (40%) of the directors shall be physicians actively engaged substantially full time in the practice of medicine. Section 6.5 TERM AND ELECTION. Each director shall be elected to serve for one (1) year and until their successors are elected and qualified or until their earlier death, resignation, removal or retirement. Any director elected or appointed to fill a vacancy shall hold office for the remaining term. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. The Bylaws may contain any provisions regarding classification of the Corporations directors not inconsistent with the terms hereof. Section 6.6 REMOVAL. Any director or the entire Board of Directors of the Corporation may be removed with or without cause by the affirmative vote of the holders of a majority of the outstanding shares of stock, regardless of class. ARTICLE SEVEN In furtherance and not in limitation of the powers conferred by the laws of the State of Texas, but subject to the provisions of the Articles of Incorporation, the Board of Directors is expressly authorized to adopt, amend or repeal the Bylaws of the Corporation. The Bylaws of the Corporation may also be amended, altered or repealed by the affirmative vote of the holders of a majority of the outstanding shares of stock, regardless of class. ARTICLE EIGHT Meetings of the shareholders may be held within or without the State of Texas, as the Bylaws of the Corporation may provide. The books of the Corporation may be kept outside the State of Texas at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. ARTICLE NINE A former, future or current director of the Corporation shall not be personally liable to the Corporation, any of its shareholders or any other director or third party, for monetary damages for breach of fiduciary duty as a director of the Corporation, except for liability for (i) any breach of the directors duty of loyalty to the Corporation or its shareholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law or (iii) any transaction from which the director derived an improper personal benefit. It is the intent of the Corporation to exempt the persons referred to in this Article Nine from personal liability to the fullest extent permitted by law. ARTICLE TEN Section 10.1 INDEMNIFICATION. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, or appeals therefrom, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that they are or were a director, officer, employee or agent of the Corporation, or are or were serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys fees) damages, judgments, fines, amounts paid in settlement and other liabilities actually and reasonably incurred by them in connection with such action, suit or proceeding, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which they reasonably believed to be in or not opposed to the best interest of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Section 10.2 INDEMNIFICATION FROM CORPORATE PROCEEDINGS. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that they are or were a director, officer, employee or agent of the Corporation, or are or were serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership joint venture, trust or other enterprise, against expenses (including attorneys fees) actually and reasonably incurred by them in connection with the defense or settlement of such action or suit if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses such court shall deem proper. Section 10.3 MANDATORY INDEMNIFICATION. To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 10.1 and 10.2 of this Article Ten, or in defense of any claim, issue or matter therein, they shall be indemnified against expenses (including attorneys fees) actually and reasonably incurred by them in connection therewith. In the event a determination is made under Section 10.4 that a director, officer, employee or agent of the Corporation has met the applicable standard of conduct as to some matters, but no such determination has been made as to others, the amount to be indemnified may be reasonably prorated. Section 10.4 DETERMINATION OF INDEMNIFICATION. Any indemnification under Sections 10.1 and 10.2 of this Article Ten (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because they have met the applicable standard of conduct set forth in Sections 10.1 and 10.2 of this Article Ten. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, (ii) if such a quorum is not obtainable, or, even, if obtainable, a quorum of two or more disinterested directors so directs, by independent legal counsel (selected in accordance with subsection (i)) in a written opinion or (iii) by a majority vote of the shareholders. Section 10.5 EXPENSES. Expenses incurred in defending a civil action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding within thirty (30) days of receipt of (i) a written affirmation by such director, officer, employee or agent of his good faith belief that he has met the standard of conduct necessary for indemnification by the Corporation set forth in this Article Ten and (ii) a written undertaking by or on behalf of the director, officer, employee or agent incurring such expense to repay such amount if it shall ultimately be determined that they are not entitled to be indemnified by the Corporation as authorized in this Article Ten. Article 10.6 CUMULATIVE RIGHTS. The indemnification and advancement of expenses provided by, or granted pursuant to, the other Sections of this Article Ten shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any Bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Article 10.7 INSURANCE. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against them and incurred by them in any such capacity, or arising out of their status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article Ten. Article 10.8 CONSTITUENT CORPORATIONS. For purposes of this Article Ten, references to the Corporation shall include, in addition to the resulting Corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article Ten with respect to the resulting or surviving corporation as they would have with respect to such constituent corporation if its separate existence had continued. Section 10.9 CERTAIN DEFINITIONS. For purposes of this Article Ten, references to other enterprises shall include employee benefit plans; references to fines shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to serving at the request of the Corporation shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interests of the Corporation as referred to in this Article Ten. Section 10.10 HEIRS, ETC. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article Ten shall unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 10.11 SEVERABILITY. The exemption from personal liability and indemnification provided in this Article Ten shall be subject to all valid and applicable laws, and, in the event this Article Ten or any of the provisions hereof or the exemption from personal liability of the indemnification contemplated hereby are found to be inconsistent with or contrary to any such valid laws, the latter shall be deemed to control and this Article Ten shall be regarded as modified accordingly, and, as so modified, to continue in full force and effect. ARTICLE ELEVEN Except as may be otherwise provided in the Act, or other applicable Texas law, no contract, act or transaction of the Corporation with any person, persons, firm, trust, association or any other corporation shall be affected or invalidated by the fact that any director, officer or shareholder of this Corporation is a party to , or is interested in, such contract, act or transaction, or in any way connected with any such person, persons, firm, trust or association, or is a director, officer or shareholder of or otherwise interested in, any such other corporation, nor shall any duty to pay damages on account of this Corporation be imposed upon such director, officer or shareholder of this Corporation solely by reason of such fact, regardless of whether the vote, action or presence of any such director, officer or shareholder may be, or may have been, necessary to obligate this Corporation on, or in connection with such contract, act or transaction, provided that if such vote, action or presence is, or shall have been necessary, such interest or connection (other than an interest solely as a non-controlling shareholder of any such other corporation) shall have been known by or disclosed to the Board of Directors of this Corporation. ARTICLE TWELVE The Corporation reserves the right to amend, alter, change or repeal any provision, save and except for Sections 4.2 and 6.4 of these Articles of Incorporation, contained in these Articles of Incorporation. The Corporation may amend, alter, change or repeal Sections 4.2 or 6.4 of these Articles of Incorporation with the affirmative vote or written consent of the holders of at least two-thirds (2/3) of the outstanding shares of each class of stock, voting on a class basis. IN WITNESS WHEREOF, these Amended and Restated Articles of Incorporation have been executed effective as of the 1st day of August, 1997. SUN VALLEY PHYSICIAN MANAGEMENT CORPORATION By: /s/ John R. Hedrick ------------------- John R. Hedrick, Vice President EX-10 5 CERTIF OF DESIGNATION OF RIGHTS AND PREFERENCES Exh. 10-29 APS Practice Management, Inc. Certificate of Designation of Rights and Preferences Series A Serial Founders Common Stock By joint unanimous written consent of the directors and shareholders dated September 30, 1997, the directors and shareholders of APS Practice Management, Inc., a Texas corporation (the Corporation) created a Series A of the Corporations authorized Serial Founders Common Stock, designated the Series A Serial Founders Common Stock (hereinafter the Series A Common), and, in accordance with the Articles of Incorporation of the Corporation, adopted and established the following as the rights and preferences of the Series A Common: 1. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporations affairs, the holders of the Series A Common shall only be entitled to be paid, with respect to each Series A Common share then held, an amount equal to the par value thereof, and to no other payment or distribution whatsoever, regardless of the amount which may be paid or distributable to holders of the Corporations other classes and series of capital stock. 2. The holders of the Series A Common shares shall have no right to receive or participate in any dividends or other distributions by the Corporation whatsoever, whether in cash, stock, property or otherwise, regardless of the amount of any dividends or other distributions that may be declared or paid with respect to any other classes or series of the Corporations capital stock. 3. Any issued and outstanding Series A Common shares may be redeemed, in whole or in part, at the Corporations sole option, by a vote of a majority of its board of directors, at a redemption price equal to the par value of the Series A Common shares redeemed, and no more, upon any of the following conditions or events: (a) In the event more than 111,111 shares of Series A Common are issued and outstanding on or after September 1, 1999; (b) In the event any of the Series A Common shares are issued and outstanding on or after September 1, 2001; or (c) In the event the employment of either John R. Hedrick (Hedrick) or Michael R. Beck (Beck) with the Corporation ceases or terminates for any reason, except upon a termination by the Corporation other than for cause (as herein defined). For purposes hereof, the termination of the employment of Hedrick or Beck by the Corporation for any of the following reasons shall be deemed termination for cause: (i) violation of any rule, regulation, practice or policy of the Corporation; (ii) any violation, breach or default under any provision of that certain Stock Purchase Agreement dated effective October 1, 1997 between the purchasers identified therein, the Corporation, Beck and Hedrick; (iii)conviction of an offense constituting a felony or involving moral turpitude; (iv) material dishonesty in the performance of employment duties or engaging in a material conflict of interest with the Corporation that is not fully disclosed to and approved by the board of directors of the Corporation; (v) failure to follow reasonable instructions or directions from the board of directors of the Corporation, or any other person authorized by the board of directors of the Corporation to give such instructions or directions, or other failure to perform his duties as an employee or officer (if elected) of the Corporation; or (vi) the commission of any other act or the existence of any state of facts which would legally justify an employer in terminating a contract of employment (regardless of whether, in fact, there is a contract of employment at such time). The Corporation will mail notice of any proposed redemption, not fewer than five(5) days before the date fixed for redemption, to each record holder of the Series A Common shares to be redeemed at the shareholders address as it appears on the Corporations stock records. Such redemption notice will indicate the shares to be redeemed, the date fixed for redemption and the place where shareholders may obtain payment of their redemption price upon surrendering their share certificates. The board of directors shall be authorized, by majority vote, to establish such other procedures to consummate the redemption of Series A Common shares as it deems reasonable, necessary or convenient. On and after the date fixed for redemption, any holder of SeriesA Common shares to be redeemed shall have no further rights with respect to, or by virtue of, such Series A Common shares, except the right to be paid the redemption price therefor upon compliance with the procedures for redemption. 4. The holders of the Series A Common shares shall be entitled to convert, on a share-for-share basis, up to that percentage (as reflected in the table below) of their shares of Series A Common into shares of common stock of the Corporation, based on the aggregate dollar volume of acquisitions of businesses or practices by the Corporation, as set forth in the following table: Percentage of Amount of Aggregate Series A share holdings Acquisition Purchase Price of that may be converted Business or Practices ----------------------- ----------------------------- up to 50% at least $20,000,000 an additional 25% at least $30,000,000 the remaining 25% At least $40,000,000 The conversion rights, and any convertibility features, of the Series A Common, shall automatically and completely expire on September 1, 2001, regardless of whether there were ever sufficient acquisitions to allow any conversion rights to become exercisable. Thereafter, there shall be no right to convert any shares of Series A Common into common stock or any other class or series of the Corporations capital stock. The Corporation will at all times reserve out of its authorized but unissued common stock, the full number of common stock shares that would be deliverable on converting all SeriesA Common shares from time to time outstanding that have remaining conversion rights. In the event a holder of Series A Common shares that are then eligible for conversion elects to exercise such conversion right, such shareholder shall submit share certificates evidencing the SeriesA Common shares to be converted to the Corporation, and shall provide such other documentation and comply with such other procedural requirements for conversion as shall be reasonably required by the board of directors of the Corporation. Upon any such conversion, any holder of Series A Common shares being converted shall be entitled to receive one (1) share of the Corporations common stock in exchange for each share of Series A Common being converted, and no more. No additional payments or consideration whatsoever shall be paid upon the conversion of any Series A Common shares. 5. Except for such rights and preferences as are expressly provided herein or expressly provided in the Articles of Incorporation of the Corporation, the holders of the SeriesA Common shares shall be entitled to no rights or preferences whatsoever with respect to the shares of Series A Common held by them. In the event of any conflict between the rights and preferences provided for in the Articles of Incorporation and those provided for in this Certificate of Designation of Rights and Preferences, those provided for herein shall control in all respects. In no event shall the sale, conveyance or other transfer of any Series A Common shares that, at any time, may be owned by Hedrick or Beck, operate to limit, modify, suspend or otherwise affect any of the rights, preferences or obligations of any of the holders of the Series A Common shares as provided herein. The foregoing constitutes a true and correct copy of the Certificate of Designation of Rights and Preferences of the Series A Serial Founders Common Stock, the filing of which has been duly authorized by the Board of Directors and Shareholders of the Corporation on September 30, 1997. /s/ John R. Hedrick ------------------------------------ John R. Hedrick, Senior Vice President EX-10 6 RESOLUTIONS TO ORGANIZATIONAL MATTERS Exh. 10-30 JOINT UNANIMOUS CONSENT OF SHAREHOLDERS AND DIRECTORS OF SUN VALLEY PHYSICIAN MANAGEMENT CORPORATION Pursuant to Article 9.10 of the Texas Business Corporation Act, the undersigned, being all of the Shareholders and Directors of Sun Valley Physician Management Corporation (hereinafter referred to as the Corporation), do hereby adopt the following resolutions by execution of this Consent, and such Consent shall have the same force and effect as a vote by the undersigned at a properly called meeting of the Shareholders and Directors of the Corporation: AMENDMENT OF ARTICLES OF INCORPORATION WHEREAS, the Articles of Incorporation of the Corporation were duly filed with the Secretary of State of the State of Texas on March 26, 1996, and the Certificate of Incorporation issued on the same date; and WHEREAS, the Board of Directors has determined that it is in the best interests of the Corporation to amend and restate the Articles of Incorporation of the Corporation and does hereby recommend that such Restated Articles of Incorporation be adopted by the shareholders of the Corporation; NOW THEREFORE BE IT RESOLVED, that the Articles of Incorporation are hereby superseded and amended in their entirety to read as set forth on Restated Articles of Incorporation, which are attached hereto, marked as Exhibit A and incorporated herein for all purposes as though fully recited; RESOLVED FURTHER, that the President (or any Vice President) and the Secretary (or any Assistant Secretary) of the Corporation be, and they hereby are, authorized, empowered and directed to execute the Restated Articles of Incorporation and to file the same in the office of the Secretary of State of the State of Texas and to do any and all acts and things necessary or appropriate to effectuate such amendments and to carry out, perform and consummate such action. IN WITNESS WHEREOF, the undersigned have executed this Joint Unanimous Written Consent effective as of the 29th day of September, 1997. /s/ Michael R. Beck -------------------------------- Michael R. Beck Director and Shareholder /s/ John R. Hedrick -------------------------------- John R. Hedrick Director and Shareholder JOINT UNANIMOUS WRITTEN CONSENT OF SHAREHOLDERS AND DIRECTORS OF APS PRACTICE MANAGEMENT, INC. The undersigned, being all of the shareholders and all of the directors of APS Practice Management, Inc., a Texas corporation (the Corporation) hereby adopt the following resolutions on behalf of the Corporation: RESOLVED, that pursuant to the Articles of Incorporation of the Corporation, all shares of the Corporations serial founders common stock, $0.001 par value per share, which the Corporation is hereby authorized to issue shall be designated as a single series to be designated the Series A Serial Founders Common Stock (hereinafter the Series A Stock), and that the rights and preferences of each shares of the Series A Stock shall be as set forth on the Certificate of Designation of Rights and Preferences, attached as ExhibitA hereto and incorporated by reference herein for all purposes, which is hereby adopted in all respects. Hereafter, there shall be no shares of the serial founders common stock of the Corporation that is not contained within the Series A Stock, or which does not have the rights and preferences described on ExhibitA hereto. The officers of the Corporation are authorized and directed to file the Certificate of Designation of Rights and Preferences, in the form attached hereto as ExhibitA, with the Secretary of State of the State of Texas and to take such other action as may be required by law, or which they may deem necessary, to fully establish such designation of rights and preferences, to be fully binding and enforceable on all holders of any shares of the Series A Stock. RESOLVED FURTHER, that each share of the Corporations common stock outstanding as of the date hereof held by Michael R. Beck (Beck) and John R. Hedrick (Hedrick), which is acknowledged as being 500 shares each, shall be, and is hereby, converted to Series A Stock at the rate of 222.224 shares of SeriesA Stock for each share of common stock held by Beck and Hedrick, such conversion to be deemed for all purposes to have occurred as of the effective date of this Joint Unanimous Written Consent reflected below. No other payment or consideration shall be paid or payable to Beck or Hedrick with respect to such conversion. The undersigned agree to such conversion and all other matters contained herein in their individual capacities, and acknowledge and agree that as a result of the conversion of the shares of Beck and Hedrick as provided herein, upon execution of this Joint Unanimous Written Consent, the holdings of all issued and outstanding shares of all classes of the Corporations capital stock are as follows: Hedrick - 111,112 shares of Series A Stock Beck - 111,112 shares of Series A Stock RESOLVED FURTHER, that for all purposes of the Corporations Articles of Incorporation, any requirements of law and any applicable contract or agreement, wherein the written approval, consent or authorization of Hedrick or Beck (in any capacity), or of all holders of the Series A Stock, are required to approve any of the matters contemplated herein, including without limitation the establishment of the rights and preferences of the SeriesA Stock as provided in ExhibitA hereto, the execution of Hedrick and Beck hereof in their capacities as directors and shareholders of the Corporation shall also be deemed sufficient for purposes of giving such written approval, consent or authorization. IN WITNESS WHEREOF, the undersigned have executed this Joint Unanimous Written Consent to be effective for all purposes on and after the 30th day of September, 1997. /s/ Michael R. Beck ----------------------- Michael R. Beck Director and Shareholder /s/ John R. Hedrick ----------------------- John R. Hedrick Director and Shareholder JOINT UNANIMOUS WRITTEN CONSENT OF SHAREHOLDERS AND DIRECTORS OF APS PRACTICE MANAGEMENT, INC. The undersigned, being all of the shareholders and all of the directors of APS Practice Management, Inc., a Texas corporation (the Corporation) hereby adopt the following resolutions on behalf of the Corporation: RESOLVED, that the Corporation is authorized to enter into and perform that certain Stock Purchase Agreement (the Stock Purchase Agreement) dated effective October 1, 1997 between the Corporation, American Physicians Service Group, Inc., a Texas corporation (APSG), MichaelR. Beck (Beck) and John R. Hedrick (Hedrick), the form of which has been reviewed and approved by the directors and shareholders, pursuant to which APSG will purchase from the Corporation two million (2,000,000) shares of the Corporations common stock, $0.001 par value per share, for an aggregate purchase price of $5,000,000. The officers of the Corporation are authorized and directed to execute and deliver the Stock Purchase Agreement, as a valid and binding obligation of the Corporation, enforceable in accordance with its terms, and to take such further action and to execute and deliver such further documents and instruments as may be necessary to consummate the transactions contemplated by the Stock Purchase Agreement. RESOLVED FURTHER, that the undersigned acknowledge and agree that immediately upon consummation of the transactions contemplated by the Stock Purchase Agreement, the holdings of all issued and outstanding shares of all classes of the Corporations capital stock will be as follows: Hedrick - 111,112 shares of Series A Serial Founders Common Stock Beck - 111,112 shares of Series A Serial Founders Common Stock The following holders of the following shares of $0.001 par value common stock: American Physicians Service Group, Inc. 1,874,600 Kenneth S. Shifrin 30,000 Duane K. Boyd, Jr. Trust 12,000 Robert L. Myer 40,000 J. A. Murphy Descendants Trust 20,000 Samuel R. Granett 4,000 William H. Hayes 2,400 Maury Magids 4,000 Paul Schilder 10,000 Thomas R. Solimine 3,000 IN WITNESS WHEREOF, the undersigned have executed this Joint Unanimous Written Consent to be effective for all purposes on and after the 1st day of October, 1997. /s/ Michael R. Beck ----------------------- Michael R. Beck Director and Shareholder /s/ John R. Hedrick ----------------------- John R. Hedrick Director and Shareholder JOINT UNANIMOUS WRITTEN CONSENT OF SHAREHOLDERS AND DIRECTORS OF APS PRACTICE MANAGEMENT, INC. The undersigned, being all of the shareholders and all of the directors of APS Practice Management, Inc., a Texas corporation (the Corporation) hereby adopt the following resolutions on behalf of the Corporation: RESOLVED, that Kenneth S. Shifrin is hereby elected as a member of the Corporations board of directors, such election to be effective immediately upon execution of this Joint Unanimous Written Consent by all signatories hereto. RESOLVED FURTHER, that effective for all purposes immediately upon the execution of this Joint Unanimous Written Consent by all signatories hereto, John R. Hedrick and Michael R. Beck resign as directors of the Corporation with the affect that, hereafter, Kenneth S. Shifrin shall be the only director of the Corporation until such time as additional directors may be elected by the shareholders pursuant to the Articles of Incorporation and Bylaws of the Corporation. RESOLVED FURTHER, that effective for all purposes immediately upon the execution of this Joint Unanimous Written Consent by all signatories hereto, all officers of the Corporation are hereby removed from office and the following persons are elected as the officers of the Corporation, with their titles shown opposite their names, to serve until their successors have been duly elected and qualified or their earlier resignation, removal or death: Name Title Kenneth S. Shifrin President William H. Hayes Secretary and Treasurer John R. Hedrick Senior Vice President and General Counsel Michael R. Beck Senior Vice President Paul Schilder Senior Vice President of Operations RESOLVED FURTHER, that all acts of the Corporation and its representatives in opening that certain account in the name of the Corporation with NationsBank, and a brokerage account through APS Financial Corporation, and establishing signature withdrawal and other authority in connection therewith are hereby ratified in all respects. IN WITNESS WHEREOF, the undersigned have executed this Joint Unanimous Written Consent to be effective for all purposes on and after the 3rd day of October, 1997. SIGNATURE PAGE TO JOINT UNANIMOUS WRITTEN CONSENT OF SHAREHOLDERS AND DIRECTORS /s/ Michael R. Beck - ----------------------- Michael R. Beck Shareholder and Director /s/ John R. Hedrick - ----------------------- John R. Hedrick Shareholder and Director AMERICAN PHYSICIANS SERVICE GROUP, INC., Shareholder By Name_______________________________ Title________________________________ J. A. MURPHY DESCENDANTS TRUST, Shareholder By /s/ Jack Murphy, Grantor ------------------------------- Jack Murphy, Grantor DUANE K. BOYD, JR. TRUST, Shareholder By /s/ Duane K. Boyd, Jr., Trustee -------------------------------- Duane K. Boyd, Jr., Trustee /s/ Robert L. Myer - ------------------------------------ Robert L. Myer, Shareholder /s/ Kenneth S. Shifrin - ------------------------------------ Kenneth S. Shifrin, Shareholder SIGNATURE PAGE TO JOINT UNANIMOUS WRITTEN CONSENT OF SHAREHOLDERS AND DIRECTORS /s/ William H. Hayes - ------------------------------------ William H. Hayes, Shareholder /s/ Maury Magids - ------------------------------------ Maury Magids, Shareholder /s/ Thomas R. Solimine - ------------------------------------ Thomas R. Solimine, Shareholder /s/ Samuel R. Granett - ------------------------------------ Samuel R. Granett, Shareholder EX-10 7 MASTER REFINANCING AGREEMENT Exh. 10-31 MASTER REFINANCING AGREEMENT This Master Refinancing Agreement (this "Agreement") is made and entered into as of the 6th day of November, 1997 (the "Effective Date") between and among Consolidated Eco-Systems, Inc., an Idaho corporation formerly known as Exsorbet Industries, Inc. ("Consolidated"), all of the wholly or partially owned subsidiaries of Consolidated, and American Physicians Service Group, Inc., a Texas corporation ("APS"). R E C I T A L S: WHEREAS, Consolidated executed and delivered that certain Promissory Note dated November 26, 1996 (the "Original Note") in the original principal amount of Three Million Three Hundred Thousand Dollars ($3,300,000) payable to the order of APS; and WHEREAS, the Original Note was secured pursuant to the following agreements, all for the benefit of APS: (i) that certain Security Agreement dated December 12, 1996 entered into by 7-7, Inc., an Arkansas corporation ("7-7"), formerly known as 7-7 Merger, Inc.; (ii) that certain Security Agreement dated September 30, 1996 entered into by 7-7; (iii) that certain Assignment and Security Agreement dated September 30, 1996 entered into by Consolidated; and (iv) those certain Guaranty Agreements dated September 30, 1996 entered into by each of the following entities: a. Consolidated Environmental Services, Inc., an Arkansas corporation ("CES"); b. Cierra, Inc., an Arkansas corporation ("Cierra"); c. Larco Environmental Services, Inc., a Louisiana corporation ("Larco"); d. KR Industrial Services of Alabama, Inc., an Alabama corporation ("KR Industrial"); e. Exsorbet Technical Services, Inc., an Arkansas corporation ("Exsorbet Technical") doing business as SpilTech Services, Inc.; f. Eco Acquisition, Inc. ("Acquisition"), an Arkansas corporation also known as Eco-Systems, Inc.; and g. 7-7 (all of the agreements described in (i) through (iv) above are collectively referred to herein as the "Original Security Documents"); and WHEREAS, Consolidated has executed and delivered a new note of even date herewith in the original principal amount of $3,788,580 (the "New Note") in renewal, replacement and extension of the Original Note, which New Note is secured pursuant to the Original Security Documents and the additional Security Documents described below; and WHEREAS, in addition to the Original Security Documents, the New Note and the indebtedness and obligations evidenced thereby are further secured pursuant to (i) that certain Security Agreement of even date herewith entered into for the benefit of APS by Larco; and (ii) that certain Assignment and Security Agreement of even date herewith entered into for the benefit of APS by Consolidated (both of which agreements described in (i) and (ii) of this sentence, together with the Original Security Documents, are collectively referred to herein as the "Security Documents"); and WHEREAS, for purposes hereof, 7-7, CES, Cierra, Larco, KR Industrial, Exsorbet Technical, and Acquisition, together with any future corporations or other entities, wholly or partially, directly or indirectly, owned or controlled by Consolidated, are collectively referred to herein as the "Subsidiaries" and individually as a "Subsidiary"; and WHEREAS, in addition to the covenants and agreements contained in the New Note and the Security Documents, Consolidated, the Subsidiaries and APS desire to memorialize certain other understandings and agreements between them as provided herein. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound hereby, agree as follows: 1. REGISTRATION OF COLLATERAL SHARES. Consolidated agrees to, within thirty (30) days after the execution and delivery of this Agreement, file for, and use its best efforts to effect, the registration under the Securities Act of 1933, as amended (the "Securities Act"), and the qualification under applicable state securities laws (the "State Laws"), of all of the shares of common stock of Consolidated in which APS has a security interest under the Security Documents, including without limitation those certain One Million Two Hundred Thousand (1,200,000) shares of common stock of Consolidated, and such additional shares as may be executed or issuable upon any stock dividend, stock split, reverse stock split, reclassification or other similar act or transaction (all of which shares of Consolidated common stock in which APS has a security interest are hereinafter referred to as the "Collateral Shares"). Consolidated agrees that, in addition to such other obligations and restrictions as may be set forth in the Security Documents, Consolidated will not engage in any stock split, stock dividend, reclassification or other similar act or transaction regarding its capital stock unless the Collateral Shares are included in such act or transaction and effected thereby in all respects the same as any other class or share of Consolidated's capital stock. Consolidated will use its best efforts to effect the registration under the Securities Act and the qualification under the State Laws of the Collateral Shares, to the extent required to permit the disposition thereof in any manner, or combinations of manners, which APS may select, at APS' sole discretion. APS agrees that Consolidated may utilize Form S-3 to register the Collateral Shares unless APS determines, in good faith, that Form S-3 would not accomplish the best disposition of the Collateral Shares for APS' benefit (or another form is required by applicable regulations or regulatory authorities). Consolidated agrees to maintain such registration statement under the Securities Act and the qualification under the State Laws to be maintained in effect until such time as all Collateral Shares have been sold at the direction and under the control of APS, and the gross proceeds from such sales have been remitted directly to APS for repayment of Consolidated's indebtedness under the New Note, or until all indebtedness due APS under and pursuant to the New Note has been repaid in full, whichever occurs first. Alternatively, but only upon the written request of APS and in APS' sole discretion, Consolidated will promptly take such steps (at Consolidated's sole cost) as necessary to allow APS to cause a sale of some or all of the Collateral Shares pursuant to an exception to the registration requirements of the Securities Act and the State Laws. However, if APS does not, in writing, elect the alternative described in the preceding sentence as to all Collateral Shares, Consolidated shall be deemed to be in default hereunder and under the New Note and the Security Documents in the event Consolidated has failed or refused, for any or no reason, to effect the registration under the Securities Act and the qualification under the State Laws of all the Collateral Shares in accordance with this Section 1 on or before May 1, 1998. Consolidated agrees to cooperate fully with APS, and to take such steps and execute and deliver such documents and instruments, as APS may request or as may otherwise be necessary, in order to allow APS, from time-to-time, to sell, or cause the sale of, the Collateral Shares, or any portion thereof. Any and all proceeds from any sale of the Collateral Shares shall be retained by, or remitted directly to, APS and shall be applied to the indebtedness of Consolidated to APS in the order provided in the New Note and the Security Documents pursuant to which APS acquired its security interest in the Collateral Shares. APS shall be entitled to cause a sale of the Collateral Shares and remittance of the proceeds therefrom to APS regardless of whether any particular installment of principal and/or interest is then due under the New Note, and any such payments accomplished through the sale of Collateral Shares shall not affect Consolidated's monthly or final payment obligations under the New Note, except to the extent the application of the sales proceeds from Collateral Shares causes an early pay-off, in full, of all amounts due under and pursuant to the New Note in compliance with the terms of the New Note and the Security Documents. Consolidated will bear all costs and expenses (including without limitation brokerage costs, legal fees and expenses and printing fees and expenses) incurred in connection with, or related to, the registration and sale of the Collateral Shares and the remittance of, or retention by, APS of the proceeds from such sales. In connection with the registration, qualification and/or sale of Collateral Shares pursuant to this Agreement, APS shall provide such information to Consolidated concerning APS as may be required by law, but APS shall not be required to undertake any indemnity obligation or other contractual obligations, and Consolidated covenants and agrees to comply fully and continually with all applicable federal and state laws. Consolidated hereby agrees to indemnify and hold APS, and all of APS' affiliates, subsidiaries, employees, officers, directors, shareholders and representatives (collectively, the "APS Indemnified Parties"), harmless from and against all losses, claims, damages, liabilities and expenses (including but not limited to expenses incurred in the investigation of, preparing for, and defending against, any claim) to which APS or any of the other APS Indemnified Parties may become subject under the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the State Laws, or otherwise, insofar as (i) any such losses, claims, damages, liabilities or expenses arise out of or are based upon or caused by, in whole or in part, any untrue statement or alleged untrue statement of fact contained in any registration statement or prospectus (or any amended or supplemented registration statement or prospectus), or (ii) the same arise out of or are based upon or are caused by any omission or alleged omission to state therein a fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) the same arise out of or are based upon any violation by Consolidated or Consolidated's employees, officers, directors, Subsidiaries or representatives, of the Securities Act or the Exchange Act, any rule or regulation thereunder, or any State Laws. 2. POTENTIAL GLOBAL REFINANCING. The parties acknowledge and agree that Consolidated is considering a global refinancing of all the secured indebtedness of the Subsidiaries (other than 7-7) to banks, which would require the approval of APS pursuant to the Security Documents. For purposes of this Agreement, such refinancing is hereby referred to as the "Global Refinancing"). If all of the following terms and conditions are satisfied at the time of any such Global Refinancing, APS agrees that it will give its written consent to the Global Refinancing at such time: a. Neither Consolidated nor any of the Subsidiaries shall be in default, and no event of default shall have occurred, under any of the Security Documents or the New Note; and b. As a result of any Global Refinancing or otherwise, (i) there shall be no increase in the gross amount of indebtedness (as of the Effective Date) secured by liens on the assets of 7-7 which are superior or equal (as of the Effective Date) to the liens of APS, and (ii) there shall be no increase greater than $1,000,000 in the gross amount of indebtedness (as of the Effective Date) secured by liens on the assets of Larco which are superior or equal (as of the Effective Date) to the liens of APS. Consolidated and the Subsidiaries represent and warrant that the amount of their gross aggregate indebtedness (as of the Effective Date) that are secured by liens on the assets of Larco which are superior or equal (as of the Effective Date) to the liens of APS is $3,181,562; and c. The aggregate amount of indebtedness of Consolidated and the Subsidiaries incurred as a result of the Global Refinancing may not exceed $21,613,000; and d. APS must receive at least thirty percent (30%) of the proceeds (the "APS Payment") received or receivable by Consolidated as a result of the Global Refinancing, after deduction of only the amount, if any, distributed to other unrelated, secured creditors of Consolidated or the Subsidiaries at or immediately after the closing of any Global Refinancing. The APS Payment must be received by APS in immediately available funds directly from the lender(s) at the closing of the Global Refinancing as payment on the indebtedness evidenced by the New Note. All parties hereto acknowledge and agree that such payment shall not in any respect affect Consolidated's monthly or final payment obligations under the New Note, except to the extent the final payment obligation amount is reduced as a result of the special payment received pursuant to this provision. The APS Payment is to be applied first to any interest accrued and unpaid under the New Note, with any balance to be applied to principal; and e. APS shall have been given at least ten (10) days opportunity prior to the closing of any Global Refinancing and after receipt by APS of all documents, instruments and agreements, to review all documents, instruments and agreements entered into, or to be entered into at any such closing, in connection with such Global Refinancing, and as may otherwise be necessary for APS to ensure compliance with the conditions for any APS consent to a Global Refinancing as contained herein. Furthermore, Consolidated agrees to cooperate with APS and to provide APS access to, and participation in, the closing of any such Global Refinancing and the interaction with the lenders involved therein, as APS shall request in order for APS to ensure compliance with the conditions to any APS consent to a Global Refinancing as contained herein. APS shall not be required to provide its written consent to any Global Refinancing until the closing of any Global Refinancing, and any such consent may be conditioned expressly upon compliance with the terms and conditions provided herein. 3. IMPLEMENTATION OF CONVERSION FEATURE. Consolidated agrees to use its best efforts to obtain the approval of Consolidated's shareholders (the "Shareholder Approval") for an increase in the authorized number of shares of common stock of Consolidated as necessary to provide APS with the right to convert any or all indebtedness of Consolidated to APS into common stock of Consolidated at a conversion rate to be mutually agreed upon in writing by APS and Consolidated (the "Conversion Price Agreement"). Consolidated's shareholder proxy solicitation will designate a specific item, which will have been approved by, and will be expressly recommended for approval by, the Board of Directors of Consolidated, seeking approval of an increase in the number of authorized shares of common stock of Consolidated solely as security for the New Note and other indebtedness secured by the Security Documents, or to satisfy the obligations owed by Consolidated and the Subsidiaries to APS, or in such other form as APS may require, provided that Consolidated or its management can lawfully solicit such proxy item. If Shareholder Approval is obtained, Consolidated agrees to reserve such shares of its common stock for issuance as may be necessary in order for APS to have the right to convert any or all of the outstanding principal amount and accrued interest due under the New Note into common stock of Consolidated at any time thereafter at the price agreed in the Conversion Price Agreement. APS shall be required to obtain the prior written consent of Consolidated, which shall not unreasonably be withheld, prior to any such conversion, provided that upon any default, or event of default, under the New Note or any of the Security Documents, the consent of Consolidated shall no longer be necessary to effect any conversions. Consolidated agrees to, promptly after obtaining Shareholder Approval, effect the registration under the Securities Act, and the registration and/or qualification under the State Laws, of such shares of common stock of Consolidated as may be obtainable, from time-to-time, by APS through any conversions as contemplated in this Section (the "Conversion Shares"). Consolidated will effect the registration under the Securities Act and the registration and/or qualification under the State Laws, if the Conversion Shares, to the extent required to permit the disposition thereof by APS, immediately upon acquisition by APS (if APS were to so choose), in any manner, or combination of manners, which APS may select, at APS' sole discretion. Consolidated agrees to maintain such registration in effect for so long as necessary for APS to sell any or all of the shares of Consolidated acquired pursuant to such conversion without restriction. Consolidated agrees that Consolidated will have all of the obligations with respect to the registration and sale of Conversion Shares as Consolidated has pursuant to the registration and sale of Collateral Shares under Section 1 of this Agreement. Furthermore, APS shall have all rights related to the registration and sale of Conversion Shares as APS has with respect to the registration and sale of Collateral Shares pursuant to Section 1 of this Agreement. The parties hereto acknowledge and agree that failure to reach a Conversion Price Agreement prior to December 15, 1997, or to obtain Shareholder Approval on or before April 1, 1998 will result in an acceleration of certain payment obligations under and pursuant to the New Note as provided in Section 5 below. 4. MATTERS CONCERNING ACQUISITION. The parties acknowledge and agree that Consolidated is considering the sale of the Houston division (the "Houston Division") of Acquisition, and possibly also the other divisions of Acquisition (the "Other Divisions"), which sales would require the prior written consent of APS pursuant to the Security Documents. APS will give its written consent for a reorganization of Acquisition into two (2) separate corporations to facilitate a sale of each, one (1) owning all the assets of the Houston Division (the "Houston Sub") and one (1) owning all the assets of the Other Divisions (the "Other Sub") provided (i) each of the Houston Sub and the Other Sub execute and deliver to APS a payment and performance guaranty agreement for the benefit of APS covering all payment and performance obligations of Consolidated, in substantially the same form of the guaranty agreements executed by the Subsidiaries that are included in the Security Documents, (ii) Consolidated grants APS a first lien, perfected security interest in and to all of the capital stock of the Houston Sub and the Other Sub, and (iii) APS is reasonably satisfied, after a full opportunity to engage in sufficient due diligence, that the division of assets between the Houston Sub and the Other Sub reflects a commercially reasonable division to each new Subsidiary of assets applicable to that Subsidiary's operations as previously conducted. If all of the following terms and conditions are satisfied, APS agrees that at the time of any sale of the Houston Division or the Houston Sub, APS will give its written consent to the sale at such time: a. Neither Consolidated nor any of the Subsidiaries shall be in default, and no event of default shall have occurred, under any of the Security Documents or the New Note; and b. APS must receive at least Seven Hundred Fifty Thousand Dollars ($750,000) in immediately available funds, from the funds received directly from the purchaser of the Houston Division at any closing of the sale thereof, as payment on the indebtedness evidenced by the New Note. All parties hereto acknowledge and agree that such payment shall not in any respect affect Consolidated's monthly or final payment obligations under the New Note, except to the extent the final payment obligation amount is reduced as a result of the special payment received pursuant to this provision. The Seven Hundred Fifty Thousand Dollars ($750,000), or more if more is paid, is to be applied first to any interest accrued and unpaid under the New Note, with any balance to be applied to principal; and c. The Houston Division or Houston Sub must be sold to a purchaser who is not related to, or affiliated with, Consolidated or any of the Subsidiaries or any of the shareholders, directors or officers of Consolidated or any of the Subsidiaries; and d. APS shall have been given at least ten (10) days opportunity prior to the closing of any sale of the Houston Division or Houston Sub and after receipt by APS of all documents, instruments and agreements, to review all documents, instruments and agreements entered into, or to be entered into at any such closing, in connection with such sale and as may otherwise be necessary for APS to ensure compliance with the conditions for any APS consent to the sale as contained herein. Furthermore, Consolidated agrees to cooperate with APS and to provide APS access to, and participation in, the closing of any such sale, as APS shall request in order for APS to ensure compliance with the conditions to any APS consent as provided herein. APS shall not be required to provide its written consent to any sale of the Houston Division or Houston Sub until the closing of any such sale, and any such consent may be conditioned expressly upon compliance with the terms and conditions provided herein. Upon a sale of the Houston Division or Houston Sub on the terms and conditions provided herein, and upon APS receiving at least the Seven Hundred Fifty Thousand Dollars ($750,000) minimum payment required as a condition to it giving its consent to such sale, APS will release its security interest in the stock of Acquisition and the Houston Sub (if applicable) and return the certificates evidencing such stock to Consolidated and will release the Houston Sub from its guaranty agreement. However, Acquisition and any Other Sub will continue to be bound by their guaranty agreements and such guaranty agreements shall remain binding and enforceable in accordance with their terms. APS will give its written consent to a sale of the Other Divisions or the Other Sub in the event each of the conditions for a sale of the Houston Division or the Houston Sub described in paragraphs a., c. and d. are satisfied as to the sale of the Other Divisions or Other Sub, and provided APS receives a payment directly from the purchaser of an amount, in immediately available funds, equal to at least thirty percent (30%) of the cash and fair market value of other property or assets received or receivable by Consolidated as a result of any such sale, after deducting only the amount, if any, paid to secured creditors of Acquisition or the Other Sub. Upon any such sale of the Other Divisions or the Other Sub, and upon APS receiving the minimum thirty percent (30%) payment described above, APS will release any security interest it has in the capital stock of the Other Sub, and will release the guaranty agreements of Acquisition and the Other Sub (if applicable). 5. New Note Modifications. The parties hereto agree that, notwithstanding the terms of the New Note, in the event (i) APS and Consolidated are unable to enter into a mutually agreeable written Conversion Price Agreement as described in Section 3 above on or prior to December 15, 1997, or (ii) Shareholder Approval of the necessary increase in the authorized number of shares of common stock of Consolidated as contemplated pursuant to Section 3 above is not obtained on or prior to April 1, 1998, then, in either event, the monthly installments of $85,000 that would otherwise be due beginning October 1, 1998 will, instead, be required to begin April 1, 1998 (or on December 15, 1997, in the event of failure to enter into a written Conversion Price Agreement on or prior to December 15, 1997), and Consolidated shall be in default (notwithstanding any terms of the New Note to the contrary) under the New Note and the Security Documents if Consolidated thereafter fails to make any such $85,000 monthly payment. The parties hereto agree that notwithstanding any terms of the New Note to the contrary, in the event APS gives its written consent to the Global Refinancing pursuant to Section 2 hereof, and receives the APS Payment, and the Global Refinancing is closed prior to January 1, 1998, then the $40,000 monthly payments due under the New Note which would otherwise begin January 1, 1998 pursuant to the terms of the New Note, will, instead, begin on the earlier of (i) the first day of the calendar month following the month in which the Global Refinancing is closed, or (ii) January 1, 1998, and Consolidated shall be in default (notwithstanding any terms of the New Note to the contrary) under the New Note and the Security Documents if Consolidated fails thereafter to make a payment of at least $40,000 on or before the first day of each month through and including September 1, 1998. The parties hereto agree that, in the event, on October 1, 1999 Consolidated tenders to APS all outstanding principal and accrued interest due under and pursuant to the New Note, and there has not theretofor been any default, or event of default, under the New Note or any of the Security Documents, then APS will agree to accept, in lieu of the fifteen percent (15%) per annum interest due from and after the Effective Date under the terms of the New Note, interest after the Effective Date on the principal amount due under the New Note calculated at the rate of twelve percent (12%) per annum. Notwithstanding the foregoing, nothing contained in this paragraph, or otherwise in this Agreement, is intended to modify, limit or otherwise affect any of Consolidated's obligations with respect to the repayment of (i) any principal amount of the New Note, or (ii) any principal or interest accrued under the Original Note that was refinanced into the principal of the New Note. 6. No Additional Financings. The parties acknowledge and agree that certain of the Security Documents provide that, without the prior consent of APS, neither Consolidated nor any of the Subsidiaries will create, incur, assume or become liable in any manner for any indebtedness (for borrowed money, deferred payment for the purchase of assets, lease payments, as surety or guaranty of the debt of another, or otherwise) other than to APS, except trade debts incurred in the ordinary course of business. The parties hereto covenant and agree that such provisions of the Security Documents remaining binding and enforceable in all respects, are to be broadly construed for the benefit of APS, and that the prohibitions on creating, incurring, assuming or becoming liable for, any indebtedness, etc., shall be deemed to preclude, without limitation, not only traditional methods of financing, but also financings in the form of factoring, assets securitizations, sale and lease backs, financings through the issuance of equity securities, debt securities or convertible securities, debenture or bond financings and all other forms of financing and borrowing, except for open account trade payables incurred in the ordinary course of business; provided, however that factoring transactions that occurred prior to October 15, 1997, will not be deemed to constitute a violation of the foregoing so long as there is no increase after October 15, 1997, in the amounts due or involved in such factoring relationships. 7. Financial Reporting Requirements. In additional to such financial and other reporting requirements as may be provided pursuant to the Security Documents, Consolidated covenants and agrees that it will provide to APS, within thirty (30) days of the end of each month, beginning with the month of September, 1997, consolidated financial statements for Consolidated and all of the Subsidiaries, together with separate supporting Subsidiary financial statements and statements of consolidation, as of and for the month and year to date period ended on the last day of each calendar month. Each such set of financial statements shall be presented on a comparative basis for the periods and dates in the preceding year and shall include detailed narrative analysis by the management of Consolidated, addressed to the attention of the board of directors of APS, of the financial position and results of operations reflected therein as of and for the periods covered by the financial statements, together with an assessment of future operating results (on a consolidated basis, and for each Subsidiary). Furthermore, each set of monthly financial statements and associated management analysis shall contain a written statement signed by the Chief Financial Officer of Consolidated to the effect that (i) the financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, and are a fair and accurate presentation of the financial position and results of operations of Consolidated, each of the Subsidiaries, and the consolidated group as of the date and for the periods covered by the financial statements, and (ii) the Chief Financial Officer has no reason to believe that the narrative management analysis accompanying such financial statements contains any misleading facts or statements, or omits any fact or statement, the omission of which would make the statements contained therein materially misleading. 8. Prohibition on Sale of Assets. Consolidated and each of the Subsidiaries covenants and agrees with APS that neither Consolidated nor any of the Subsidiaries shall sell, transfer, assign or otherwise convey any of their assets, properties or rights or enter into any agreement with respect to any of the foregoing, in any one transaction or a series of related transactions, involving an aggregate consideration, in cash or the fair market value of other property or consideration, in excess of Fifty Thousand Dollars ($50,000) without the express prior written consent of APS in each instance; provided such consent shall not be withheld if there has been no default, or event of default, under the New Note or any of the Security Documents, and APS receives, directly from the purchaser at the closing of any such sale, a payment in immediately available funds, equal to at least thirty percent (30%) of the net cash and fair market value of other property or assets received or receivable by Consolidated or the applicable selling Subsidiary as a result of such sale, after deducting only the amount, if any, paid to secured creditors having liens on the assets sold. APS must receive the ten (10) day opportunity, as described in paragraph d. of Section 4, with respect to each such sale and any payments received by APS upon any asset sale shall be treated as described in paragraph b. of Section 4. The parties further acknowledge and agree, that once the total accrued interest and principal remaining due under and pursuant to the New Note is, in the aggregate, less than Nine Hundred Thousand Dollars ($900,000), then no consent shall be required from APS for purposes of any of the asset sale transactions described in this Section 8 provided APS receives the minimum thirty percent (30%) payment described above and Consolidated and the Subsidiaries complies with the other provisions of this Section 8 with respect to any such asset sale, transfer, assignment or conveyance. Notwithstanding the foregoing (but subject to the provisions of Section 4 regarding Acquisition), the provisions for APS granting consent (or not needing to grant consent) for the transactions described in this Section 8 shall not apply to sales of divisions, operating units, business lines, departments or other businesses, and APS' prior written consent for any sale, transfer, assignment or other conveyance thereof shall be required in each instance (which consent APS shall be under no obligation to grant or not withhold). 9. INSURANCE COVERAGE. Consolidated and the Subsidiaries each covenant and agree that APS has received, prior to or simultaneously upon the execution of this Agreement, written agreements from all of Consolidated's and the Subsidiaries' current insurance carriers or insurance brokers (i) acknowledging the existence and terms of coverage of all policies of insurance owned or maintained by Consolidated or any of the Subsidiaries, and (ii) expressly agreeing with APS that each carrier or broker will notify APS in writing simultaneously whenever a cancellation notice is sent to Consolidated or any of the Subsidiaries with respect to any of the policies of insurance. Furthermore, Consolidated and each of the Subsidiaries covenants and agrees that, as a condition to obtaining or renewing any policies of insurance, they will obtain from the applicable insurance carriers or brokers written agreements acknowledging the existence and terms of coverage of the subject policies of insurance and expressly agreeing with APS that each carrier or broker will notify APS in writing simultaneously whenever a cancellation notice is sent to Consolidated or any of the Subsidiaries with respect to any of the policies of insurance. 10. INTERCOMPANY INDEBTEDNESS. Consolidated and each of the Subsidiaries agrees that for so long as any indebtedness from Consolidated or any of the Subsidiaries, to APS remains unpaid, neither Larco nor 7-7 shall have any payment obligation, shall make any payments, or shall forego, waive or release any amount due to Larco or 7-7, with respect to any intercompany or affiliate indebtedness, and neither Consolidated nor any of the Subsidiaries shall (i) fail to pay any amounts due Larco or 7-7, or (ii) demand, receive or accept any payments from either Larco or 7-7 except for (X) charges to Larco used solely to satisfy payroll, administrative, debt or other legitimate and commercially reasonable obligations of Larco arising in the ordinary course of business consistent with past practices, or (Y) short term advances repaid to Larco within ten (10) days after being made by Larco. Furthermore, Consolidated and each of the Subsidiaries agrees that upon any default, or event of default, under the New Note or any of the Security Documents, Consolidated and each of the Subsidiaries will be deemed, automatically and without the requirement of any further action on their part, to have forgiven, waived and released any indebtedness or obligations owed to them by Larco or by 7-7, and will not thereafter demand, receive or accept any payments, properties or other amounts from Larco or 7-7, and Larco and 7-7 will not thereafter pay or tender any amounts to any Subsidiary. Consolidated and each of the Subsidiaries agrees that, upon request of APS, they will execute such acknowledgments, documents and other instruments or agreements as APS shall request to evidence the matters described in this Section 10. 11. REPRESENTATIONS AND WARRANTIES. Consolidated and each of the Subsidiaries hereby, jointly and severally, represents and warrants to APS, and covenants with APS, as follows: (a) Consolidated and each of the Subsidiaries is a corporation duly organized, validly existing, and in good standing under the laws of the state of their incorporation, and has full corporate power and authority to carry on its business as now conducted, to enter into and perform this Agreement, and to perform all of its obligations under and pursuant to each and every of the Security Documents to which it is a party. This Agreement has been duly and validly authorized, executed and delivered by Consolidated and each of the Subsidiaries, and constitutes the valid and binding obligation of Consolidated and each of the Subsidiaries, enforceable against them in accordance with its terms. (b) There is only one class of common stock of Consolidated outstanding. (c) Consolidated has made available to APS copies of Consolidated's annual report on Form 10-K for the year ended December 31, 1996, and its quarterly reports on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997, (collectively, the "Periodic Reports"), in the form filed with the Commission pursuant to the requirements of the Exchange Act. The Periodic Reports were appropriately responsive to the requirements of the Exchange Act, were complete and proper in form and did not contain an untrue statement of a fact or omit to state a fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Since June 30, 1997, and through the Effective Date, no event has occurred as a consequence of which Consolidated would be required to file, on or before the Effective Date, a current report on Form 8-K pursuant to the requirements of the Exchange Act, except for the Form 8-K filed prior to the Effective Date to report that Consolidated's stock is no longer traded on the Nasdaq Stock Market, Inc. SmallCap Market. (d) No default, or event of default, has occurred under any of the Security Documents, and each of the parties to the Security Documents is in compliance with its obligations thereunder. (e) Consolidated's and each of the Subsidiaries' representations and warranties under each of the Security Documents to which they are parties was true and correct when made, and remains true and correct as of the Effective Date of this Agreement. (f) The entering into and performance of their obligations under the Security Documents, and the execution and delivery by Consolidated of the New Note (and the performance of Consolidated's and the Subsidiaries' obligations thereunder), does not conflict with or constitute a breach of, or default under, any organizational document, bylaw, contract, agreement or obligation applicable to Consolidated or any of the Subsidiaries. 12. EFFECT OF AGREEMENT. The parties hereto acknowledge and agree that this Agreement does not constitute an amendment, modification, replacement or limitation on any of APS' rights under and pursuant to any of the Security Documents, and all of the Security Documents are intended to be, and remain, binding and enforceable in accordance with their terms. The Security Documents are intended to be construed consistently with this Agreement. However, in the event of a direct conflict between the terms of any of the Security Documents and this Agreement, the terms of this Agreement shall control. Consolidated and each of the Subsidiaries represents, warrants, covenants and agrees that (i) APS has not breached or defaulted under any contractual obligations to any of them, and (ii) there are no defenses available to Consolidated or any of the Subsidiaries against the enforceability of each and every of their obligations under the Security Documents. Consolidated and each of the Subsidiaries does hereby forever release and discharge APS and APS' shareholders, directors, officers, affiliates, agents, attorneys and employees, from any and all claims, demands, causes of action, obligations, debts or other rights, whether arising from the law of contract, tort, property, common law, constitutional law or statutory law, known or unknown, which it may have or could assert, including but not limited to any claims or causes of action relating to the Original Note, the Security Documents, the New Note or any transactions with APS (including without limitation the purchase by APS, and sale back to Consolidated, of the stock of Consolidated pursuant to which the Original Note was executed and delivered by Consolidated to APS). The foregoing is not intended to release APS from any of its executory obligations under this Agreement. Without limiting the foregoing, Consolidated and each of the Subsidiaries expressly acknowledge and agree that APS is not relinquishing, waiving or otherwise modifying any right, claim or cause of action it has or may have, against Consolidated or any of the Subsidiaries or any of their affiliates, directors, officers, shareholders or employees, including without limitation, any such claims, rights or causes of action related to (i) the negotiation and entering into the various agreements and transactions which give rise to the Original Note and Security Documents, or any misrepresentation made in connection therewith, or any breach or default thereunder, or (ii) the Original Note, the New Note, or any of the Security Documents, or any breach or default thereunder. 13. REIMBURSEMENT OF EXPENSES. Consolidated agrees to reimburse APS for all legal fees and associated expenses incurred by APS in negotiating, preparing and entering into this Agreement, the New Note and the Security Documents, and perfecting the various security interests granted pursuant thereto. APS acknowledges that Consolidated has prepaid Ten Thousand Dollars ($10,000) of such fees and expenses. Consolidated agrees to promptly reimburse any of the reimbursable fees and expenses described above in excess of Ten Thousand Dollars ($10,000) upon written request by APS, which request shall include reasonable supporting documentation for the reimbursement requested. In the event the reimbursable fees and expenses described above do not exceed Ten Thousand Dollars ($10,000), APS will reimburse any unutilized amount of the prepayment to Consolidated after a final accounting of the costs incurred by APS. 14. REMEDIES. This Agreement may be enforced at law or in equity, including, but not limited to, injunctive relief. In case any one or more of the provisions of this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, any other provision hereof in this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been contained herein. Such invalid, illegal or unenforceable provisions shall be given effect to the maximum extent then permitted by law. Consolidated and the Subsidiaries shall be deemed to be in joint and several default under this Agreement if there is any default (which is not cured after any required notices of default and opportunity to cure) under the New Note or any of the Security Documents. 15. GOVERNING LAW AND VENUE. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Texas (except the laws of Texas that would render such choice of law ineffective). Venue for any action relating to this Agreement shall be proper only in Texas. 16. COUNTERPARTS. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 17. INUREMENT. This Agreement shall be binding upon the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. This Agreement shall not be assignable by any party hereto (other than APS) without the express prior written consent of APS in each instance. Upon written notice to Consolidated, APS may assign its rights and obligations under this Agreement. Upon the creation or acquisition of any new Subsidiary, Consolidated and the Subsidiaries shall cause such new Subsidiary to promptly execute and be bound by, a counterpart of this Agreement. 18. NOTICES. Any notices required or permitted to be given under this Agreement shall be given in writing and shall be deemed received (a) when personally delivered to the relevant party at its address as set forth below or (b) if sent by mail, on the third day following the date when deposited in the United States mail, certified or registered mail, postage pre-paid to the relevant party at its address indicated below: APS: American Physicians Service Group, Inc. 1301 Capital of Texas Highway, Suite C-300 Austin, Texas 78746-6550 Attn: President Consolidated or the Subsidiaries: Consolidated Eco-Systems, Inc. 6807 West 12th Street Little Rock, AR 72204 Attn: President Any party may change its address for purposes of this Agreement by proper notice to the other party. [Remainder of this page left intentionally blank.] 043860.0002 Austin 32504 v04 SIGNATURE PAGES TO MASTER REFINANCING AGREEMENT IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the 6th day of November, 1997. CONSOLIDATED: Consolidated Eco-Systems, Inc. By: /s/ James J. Connors, Jr. Name: James J. Connors Title: President/CEO APS: American Physicians Service Group, Inc. By: /s/ Duane Boyd Name: Duane Boyd Title: Senior VP LARCO: Larco Environmental Services, Inc. By: /s/ James J. Connors, Jr. Name: James J. Connors, Jr. Title: President/CEO SIGNATURE PAGES TO MASTER REFINANCING AGREEMENT (continued) 7-7: 7-7, Inc. By: /s/ Sam M. Williams Name: Sam M. Williams Title: President CES: Consolidated Environmental Services, Inc. By: /s/ James J. Connors, Jr. Name: James J. Connors, Jr. Title: President/CEO CIERRA: Cierra, Inc. By: /s/ James J. Connors, Jr. Name: James J. Connors, Jr. Title: President/CEO KR INDUSTRIAL: KR Industrial Services of Alabama, Inc. By: /s/ James J. Connors, Jr. Name: James J. Connors, Jr. Title: President/CEO SIGNATURE PAGES TO MASTER REFINANCING AGREEMENT (continued) EXSORBET TECHNICAL: Exsorbet Technical Services, Inc. By: /s/ James J. Connors, Jr. Name: James J. Connors, Jr. Title: President/CEO ACQUISITION: Eco Acquisition, Inc. By: /s/ James J. Connors, Jr. Name: James J. Connors, Jr. Title: President/CEO EX-10 8 PROMISSORY NOTE BY CESI Exh. 10-32 PROMISSORY NOTE Austin, Texas November 6, 1997 For Value Received, the undersigned, CONSOLIDATED ECO-SYSTEMS, Inc., an Idaho corporation formerly known as Exsorbet Industries, Inc. (the Maker) promises to pay to the order of American Physicians Service Group, Inc., a Texas corporation (the Payee), at1301Capital of Texas Hwy., Suite C-300, Austin, Texas, 78746 (Payees Address), the principal amount of Three Million Seven Hundred Eighty Eight Thousand Five Hundred Eighty and 00/100 Dollars ($3,788,580) (the Principal Amount), together with interest on the unpaid balance of such amount as provided herein, in lawful money of the United States of America, in accordance with all the terms, conditions, and covenants of this Note and the Security Documents identified below. 1. PAYMENTS. Beginning on January 1, 1998, and continuing through September1,1998, a payment of$40,000 shall be due each month on or before the 1st day of the month; beginning October1,1998, a payment of $85,000 shall be due each month on or before the 1st day of the month, until October 1, 1999, when the principal balance of this Note and all accrued and unpaid interest shall be due and payable in full. All payments shall be applied first to interest accrued under this Note, then to principal. Until such time as all amounts due and payable under and pursuant to this Note have been paid in full, the foregoing monthly payments required in each of the months beginning January 1, 1998 through the payment due on September1, 1999, will be due and payable, notwithstanding that prepayments of principal or interest may have been made in the interim. Any and all amounts due under and pursuant to this Note may be prepaid at any time prior to the Maturity Date without penalty. 2. REFINANCING TRANSACTION. This Note is given in renewal, extension and replacement of that certain promissory note dated November 26, 1996, executed by Maker to the order of Payee in the original principal amount of Three Million Three Hundred Thousand Dollars ($3,300,000). Maker and Makers subsidiaries have executed a Master Refinancing Agreement of even date herewith (the Master Agreement), and this Note and the obligations of Maker hereunder are secured by the Security Documents described in the Master Agreement. This Note, the Security Documents (as defined in the Master Agreement) and the Master Agreement, and all the documents evidencing, securing, governing, guaranteeing and/or pertaining to this Note, are sometimes collectively referred to as the Transaction Documents. Payee and any subsequent owner or holder of this Note is entitled to the benefits and security provided in the Transaction Documents. 3. INTEREST PROVISIONS. (a) RATE. The principal balance of this Note from time to time remaining unpaid prior to maturity shall bear interest at a fixed rate per annum equal to fifteen percent(15%) (the Note Rate), but never greater than the Maximum Lawful Rate, as that term is defined in this Note. (b) MAXIMUM LAWFUL INTEREST. The term Maximum Lawful Rate means the maximum rate of interest, and the term Maximum Lawful Amount means the maximum amount of interest that are permissible under applicable state or federal law for the type of loan evidenced by this Note and the other Transaction Documents. If Article 1.04 of the Texas Credit Code is applicable to this Note, and applicable state or federal law does not permit a higher interest rate, the Indicated (Weekly) Ceiling (as defined in Article 1.04(a)(1) of the Texas Credit Code) shall be the Interest Rate Ceiling applicable to this Note and shall be the basis for determining the Maximum Lawful Rate in effect from time to time during the term of this Note, unless a different Interest Rate Ceiling is designated on the first page of this Note. If applicable state or federal law allows a higher interest rate or federal law preempts the state law limiting the rate of interest, then the foregoing Interest Rate Ceiling shall not be applicable to this Note. If the Maximum Lawful Rate is increased by statute or other governmental action subsequent to the date of this Note, then the new Maximum Lawful Rate shall be applicable to this Note from the effective date thereof, unless otherwise prohibited by applicable law. (c) SPREADING OF INTEREST. Because of the possibility of irregular periodic balances of principal and premature payment, the total interest that will accrue under this Note cannot be determined in advance. Payee does not intend to contract for, charge, or receive more than the Maximum Lawful Rate or Maximum Lawful Amount permitted by applicable state or federal law, and to prevent such an occurrence Payee and Maker agree that all amounts of interest, whenever contracted for, charged, received by Payee, with respect to the loan of money evidenced by this Note, shall be spread, prorated, or allocated over the full period of time this Note is unpaid, including the period of any renewal or extension of this Note. If demand for payment of this Note is made by Payee prior to the full stated term, the total amount of interest contracted for, charged, or received to the time of such demand shall be spread, prorated, or allocated along with any interest thereafter accruing over the full period of time that this Note thereafter remains unpaid for the purpose of determining if such interest exceeds the Maximum Lawful Amount. (d) EXCESS INTEREST. At maturity (whether by acceleration or otherwise) or on earlier final payment of this Note, Payee shall compute the total amount of interest that has been contracted for, charged, or received by Payee or payable by Maker under this Note and compare such amount to the Maximum Lawful Amount that could have been contracted for, charged, or received by Payee. If such computation reflects that the total amount of interest that has been contracted for, charged, or rece by Payee or payable by Maker exceeds the Maximum Lawful Amount, then Payee shall apply such excess to the reduction of the principal balance and not to the payment of interest; or if such excess interest exceeds the unpaid principal balance, such excess shall be refunded to Maker. This provision concerning the crediting or refund or excess interest shall control and take precedence over all other agreements between Maker and Payee so that under no circumstances shall the total interest contracted for, charged, or received by Payee exceed the Maximum Lawful Amount. (e) INTEREST AFTER DEFAULT. At Payee's option, the unpaid principal balance shall bear interest after maturity (whether by acceleration or otherwise) at the Default Interest Rate. The Default Interest Rate shall be, at Payee's option, (i) the Maximum Lawful Rate, if such Maximum Lawful Rate is established by applicable law; or (ii) the Note Rate plus five (5) percentage points, if no Maximum Lawful Rate is established by applicable law; or (iii) eighteen percent (18%) per annum; or (i such lesser rate of interest as Payee in its sole discretion may choose to charge; but never more than the Maximum Lawful Rate or at a rate that would cause the total interest contracted for, charged, or received by Payee to exceed the Maximum Lawful Amount. (f) DAILY COMPUTATION OF INTEREST. To the extent permitted by applicable law, Payee at its option may either (i) calculate the per diem interest rate or amount based on the actual number of days in the year (365 or 366, as the case may be), and charge that per diem interest rate or amount each day, or (ii) calculate the per diem interest rate or amount as if each year has only 360 days, and charge that per diem interest rate or amount each day for the actual number of days of the year or 366 as the case may be). If this Note calls for monthly payments, Payee at its option may determine the payment amount based on the assumption that each year has only 360 days and each month has 30 days. In no event shall Payee compute the interest in a manner that would cause Payee to contract for, charge, or receive interest that would exceed the Maximum Lawful Rate or the Maximum Lawful Amount. 4. DEFAULT PROVISIONS. (a) EVENTS OF DEFAULT AND ACCELERATION OF MATURITY. Maker agrees that an event of default shall exist under this Note and the other Transaction Documents if: (i) Maker fails to fully pay any installment of principal, interest, or any other sum required to be paid under the terms of this Note or any of the Transaction Documents within fifteen(15) calendar days after such installment or other sum is due; or (ii) there is a default, which exists for fifteen (15) calendar days, in the performance of any covenant, condition, or agreement contained in this Note or any of the Transaction Documents, or an event of default or default otherwise exists, for fifteen (15) calendar days, under any of the other Transaction Documents; or (iii) the bankruptcy or insolvency of, the assignment for the benefit of creditors by, or the appointment of a receiver for any of the property of, or the liquidation, termination, dissolution or death or legal incapacity of, any party liable for the payment of this Note, whether as maker, endorser, guarantor, surety or otherwise. Maker agrees that if an event of default occurs, Payee may, without notice or demand, except as otherwise required by statute or otherwise specifically provided in this Note or any of the other Transaction Documents, accelerate the maturity of this Note and declare the entire unpaid principal balance and all accrued interest at once due and payable, foreclose all liens and security interests securing this Note, and exercise all other rights and remedies Payee may have under this Note and the other Transaction Documents, including any one or more of the foregoing remedies. (b) WAIVER BY MAKER. Maker And All Other Parties Liable For This Note Waive Demand, Notice Of Intent To Demand, Presentment For Payment, Notice Of Nonpayment, Protest, Notice Of Protest, Grace, Notice Of Dishonor, Notice Of Intent To Accelerate Maturity, Notice of Acceleration Of Maturity, And Diligence In Collection. Each Maker, Surety, Endorser, And Guarantor Of This Note Waives And Agrees To One Or More Extensions For Any Period Or Periods Of Time, And Any Partial Payments, Before After Maturity, Without Prejudice To The Holder Of This Note. Each Maker, Surety, Endorser, And Guarantor Waives Notice Of Any And All Renewals, Extensions, Rearrangements, And Modifications Of This Note. (c) NONWAIVER BY PAYEE. Any previous extension of time, forbearance, failure to pursue some remedy, acceptance of late payments, or acceptance of partial payment by Payee, before or after maturity, does not constitute a waiver by Payee of its subsequent right to strictly enforce the collection of this Note according to its terms. (d) REMEDIES. Payee shall not be required to first file suit, exhaust all remedies, or enforce its rights against any security in order to enforce payment of this Note. The rights, remedies, and recourses of Payee, as provided in this Note and in any of the other Transaction Documents, shall be cumulative and concurrent and may be pursued separately, successively or together as often as occasion therefore shall arise, at the sole discretion of Payee. (e) JOINT AND SEVERAL LIABILITY. Each Maker who signs this Note, and all of the other parties liable for the payment of this Note, such as guarantors, endorsers, and sureties, are jointly and severally liable for the payment of this Note. (f) ATTORNEY'S FEES. If Payee requires the services of an attorney to enforce the payment of this Note or the performance of the other Transaction Documents, or if this Note is collected through any lawsuit, probate, bankruptcy, or other judicial proceeding, Maker agrees to pay Payee an amount equal to its reasonable attorney's fees and other collection costs. This provision shall be limited by any applicable statutory restrictions relating to the collection of attorney's fees. 5. MISCELLANEOUS PROVISIONS. (a) SUBSEQUENT HOLDER. All references to Payee in this Note shall also refer to any subsequent owner or holder of this Note by transfer, assignment, endorsement, or otherwise. (b) TRANSFER. Maker acknowledges and agrees that Payee may transfer this Note or partial interests in the Note to one or more transferees or participants. Maker authorizes Payee to disseminate any information it has pertaining to the indebtedness evidenced by this Note, including, without limitation, credit information on Maker and any guarantor of this Note, to any such transferee or participant or prospective transferee or participant. (c) OTHER PARTIES LIABLE. All promises, waivers, agreements, and conditions applicable to Maker shall likewise be applicable to and binding upon any other parties primarily or secondarily liable for the payment of this Note, including all guarantors, endorsers, and sureties. (d) PAYMENT IN U.S. DOLLARS. All payments and prepayments of principal of or interest on this Note shall be made in lawful money of the United States of America in immediately available funds, at the address of Payee indicated above, or such other place as the holder of this Note shall designate in writing to Maker. The books and records of Payee shall be prima facie evidence of all outstanding principal of and accrued and unpaid interest on this Note. (e) PAYMENT ON BUSINESS DAYS. The term Business Day shall mean any day other than a Saturday, Sunday or any other day on which national banking associations are authorized to be closed. If any payment of principal of or interest on this Note shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and any such extension of time shall be included in computing interest in connection with such payment. (f) SUCCESSORS AND ASSIGNS. The provisions of this Note shall be binding upon and for the benefit of the successors, assigns, heirs, executors, and administrators of Payee and Maker. (g) NO DUTY OR SPECIAL RELATIONSHIP. Maker acknowledges that Payee has no duty of good faith to Maker, and Maker acknowledges that no fiduciary, trust, or other special relationship exists between Payee and Maker. If Payee and Maker are now engaged in or in the future engage in other business transactions, such other business transactions are independent of this Note and the indebtedness evidenced hereby and of the promises and covenants made by Maker in this Note, and vice versa. (h) MODIFICATIONS. Any modifications agreed to by Payee relating to the release of liability of any of the parties primarily or secondarily liable for the payment of this Note, or relating to the release, substitution, or subordination of all or part of the security for this Note, shall in no way constitute a release of liability with respect to the other parties or security not covered by such modification. (i) ENTIRE AGREEMENT. Maker warrants and represents that the Transaction Documents constitute the entire agreement between Maker and Payee with respect to the indebtedness evidenced by this Note and agrees that no modification, amendment, or additional agreement with respect to such indebtedness will be valid and enforceable unless made in writing signed by both Maker and Payee. (j) MAKER'S ADDRESS FOR NOTICE. All notices required to be sent by Payee to Maker shall be sent by U.S. Mail, postage prepaid, to Maker's Address stated next to Makers signature below, until Payee shall receive written notification from Maker of a new address for notice. (k) PAYEE'S ADDRESS FOR PAYMENT. All sums payable by Maker to Payee shall be paid at Payee's Address stated on the first page of this Note, or at such other address as Payee shall designate from time to time. (l) CHAPTER 15 NOT APPLICABLE. It is understood that Chapter 15 of the Texas Credit Code relating to certain revolving credit loan accounts and triparty accounts is not applicable to this Note. (m) STATUTORY REFERENCES. References herein to the Texas Credit Code mean and refer to such Code, as amended by the 75th Legislature, House Bill 1971 (1997). (n) APPLICABLE LAW. This Note Shall Be Construed In Accordance With The Applicable Laws Of The State Of Texas And The Laws Of The United States Of America Applicable To Transactions In Texas. EXECUTED this 6th day of November, 1997. Maker: Consolidated Eco-Systems, Inc. By: /s/ James J. Connors, Jr. Name: James J. Connors Title: President/CEO EX-10 9 ASSIGNMENT AND SECURITY AGREEMENT - CESI Exh. 10-33 ASSIGNMENT AND SECURITY AGREEMENT THIS ASSIGNMENT AND SECURITY AGREEMENT (this Agreement) is made and entered into as of the 6th day of November, 1997, by and between American Physicians Service Group, Inc., a Texas corporation (the Secured Party) and Consolidated Eco-Systems, Inc., an Idaho corporation formerly known as Exsorbet Industries, Inc. (the Debtor). RECITALS: A. Debtor executed and delivered that certain Promissory Note dated November 26, 1996 (the Original Note) in the original principal amount of Three Million Three Hundred Thousand Dollars ($3,300,000) payable to the order of Secured Party. B. The Original Note was secured pursuant to the following agreements, all for the benefit of Secured Party: (i) that certain Security Agreement dated December 12, 1996, entered into by7-7, Inc., an Arkansas corporation (7-7), formerly known as 7-7 Merger, Inc.; (ii) that certain Security Agreement dated September 30, 1996, entered into by 77; (iii) that certain Assignment and Security Agreement dated September 30, 1996, entered into by Debtor; and (iv) those certain Guaranty Agreements dated September 30, 1996, entered into by each of the following entities: a. Consolidated Environmental Services, Inc., an Arkansas corporation (CES); b. Cierra, Inc., an Arkansas corporation (Cierra); c. Larco Environmental Services, Inc., a Louisiana corporation (Larco); d. KR Industrial Services of Alabama, Inc., an Alabama corporation (KR Industrial); e. Exsorbet Technical Services, Inc., an Arkansas corporation (Exsorbet Technical) doing business as SpilTech Services, Inc.; f. Eco Acquisition, Inc., an Arkansas corporation (Acquisition), also known as Eco-Systems, Inc.; and g. 7-7 (all of the agreements described in (i) through (iv) above are collectively referred to herein as the Original Security Documents). C. Debtor has executed and delivered a new note of even date herewith, payable to the order of Secured Party, in the original principal amount of $3,788,580 (the New Note) in renewal and extension of the Original Note, which New Note is also secured pursuant to (i) the Original Security Documents, and (ii) that certain Security Agreement of even date herewith entered into for the benefit of Secured Party by Larco (the Larco Security Agreement) (the agreements described in (i) and (ii) of this sentence, together with the Refinancing Agreement described below and this Agreement, are collectively referred to herein as the Security Documents). D. Secured Party has requested that Debtor pledge the Collateral (as defined below) to secure certain obligations and liabilities, including without limitation (i) Debtors obligation to pay to Secured Party the New Note, (ii) Debtors performance of the covenants set forth in the Security Documents, (iii) Debtors and Debtors Subsidiaries (as hereinafter defined) performance of the covenants set forth in that certain Master Refinancing Agreement of even date herewith entered into for the benefit of Secured Party by Debtor and Debtors Subsidiaries (as hereinafter defined) (the Refinancing Agreement), and (iv) Debtors performance of the covenants more fully set forth herein. E. Reference is hereby made to Schedule I, attached hereto and incorporated herein by reference, for certain defined terms used in this Agreement. AGREEMENT: Now, Therefore, in consideration of the foregoing and the covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which Debtor acknowledges, Debtor and Secured Party agree as follows: ARTICLE I COLLATERAL AND SECURED OBLIGATIONS 1.1 GRANT OF SECURITY INTEREST. Debtor hereby assigns, transfers, and pledges to Secured Party, and Debtor hereby grants to Secured Party a security interest in, the following described collateral (collectively, the Collateral): (a) SHARES OF ACQUISITION AND LARCO. All issued and outstanding shares of common stock of Acquisition and Larco, including without limitation those shares evidenced by the certificates described in Schedule II attached hereto and incorporated herein, and any replacements, substitutions, or exchanges of such certificates; and any additional shares of common stock of Acquisition or Larco subsequently delivered or issued to Secured Party (the above described stock is sometimes collectively referred to as the Subsidiary Shares); and any options, rescission rights, registration rights, conversion rights, subscription rights, contractual or quasicontractual rights, warrants, redemption rights, redemption proceeds, calls, preemptive rights and all other rights and benefits pertaining to the Subsidiary Shares; (b) SHARES OF DEBTOR. 1,200,000 shares of the $.001 par value per share common stock of Consolidated (the Consolidated Shares), such Consolidated Shares being those certain shares of common stock of Consolidated purchased by Consolidated from Secured Party in November, 1996, for $3,300,000, and any replacements, substitutions, or exchanges of such certificates; and any options, rescission rights, registration rights, conversion rights, subscription rights, contractual or quasicontrac rights, warrants, redemption rights, redemption rights, redemption proceeds, calls, preemptive rights and all other rights and benefits pertaining to the Consolidated Shares (the Subsidiary Shares and the Consolidated Shares are sometimes collectively referred to as the Shares); (c) ACCOUNTS. All accounts and rights now or hereafter attributable to any of the Collateral described in (a) or (b) above, and all rights of Debtor now or hereafter arising under any agreement pertaining to the Collateral described in (a) or (b) above, including without limitation all distributions, proceeds, fees, dividends, preferences, payments or other benefits of whatever nature which Debtor are now or may hereafter become entitled to receive with respect to any Collateral described in (a) or (b) above; and (d) ADDITIONAL PROPERTY. Collateral shall also include the following property (collectively, the Additional Property) which Debtor becomes entitled to receive or shall receive in connection with any other Collateral: (i) any stock certificate, including without limitation, any certificate representing a stock dividend or any certificate in connection with any recapitalization, reclassification, merger, consolidation, conversion, sale of assets, combination of shares, stock split, reverse stock split or spinoff; (ii) any option, warrant, subscription or right, whether as an addition to or in substitution of any other Collateral; (iii) any dividends or distributions of any kind whatsoever, whether distributable in cash, stock or other property; (iv) any interest, premium or principal payments; and (v) any conversion or redemption proceeds. (e) PROCEEDS. All proceeds (cash and noncash) arising out of the sale, exchange, collection or other disposition of all or any portion of the Collateral described in (a), (b), (c), or (d) above, including without limitation proceeds in the form of stock, accounts, chattel paper, instruments, documents, goods, inventory and equipment. The security interest in the Collateral hereby granted by Debtor to Secured Party may sometimes be referred to in this Agreement as the Security Interest. 1.2 OBLIGATIONS. This Agreement and the Security Interest shall secure full and punctual payment and performance of the following indebtedness, duties and obligations (the Obligations): (a) All covenants, obligations, and liabilities of Debtor and Debtors Subsidiaries to Secured Party under the Security Documents; (b) All principal, interest, fees and other amounts payable to the Secured Party pursuant to the New Note, including all future advances, extensions, renewals, modifications, increases, or substitutions thereof; (c) All liabilities and obligations of Debtor to Secured Party under and pursuant to this Agreement and/or any other contract or agreement between Secured Party and Debtor or between Secured Party and any Subsidiary or affiliate of Debtor; and (d) (i)all indebtedness, obligations and liabilities of Debtor and/or Debtors Subsidiaries and affiliates to Secured Party of any kind or character, now existing or hereafter arising, whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several or joint and several, arising from, connected with, or related to the Security Documents, the New Note, or any other document, agreement, or instrument executed in connection therewith, (ii)all accr but unpaid interest on any of the indebtedness described in (i)above, (iii)all obligations of Debtor and/or Debtors Subsidiaries and affiliates to Secured Party under any documents evidencing, securing, governing and/or pertaining to all or any part of the indebtedness described in (i) and (ii) above, (iv)all costs and expenses incurred by Secured Party in connection with the collection and administration of all or any part of the indebtedness and obligations described in (i), (ii) and (iii) above or the protection or preservation of, or realization upon, the collateral securing all or any part of such indebtedness and obligations, including without limitation all reasonable attorneys fees, and (v)all renewals, extensions, modifications and rearrangements of the indebtedness and obligations described in (i), (ii), (iii) and (iv) above. (e) All sums expended or advanced by Secured Party pursuant to any term or provision of this Agreement (i) to collect and/or enforce the Obligations, (ii) to maintain, protect and preserve the Collateral, and (iii) all other sums now or hereafter loaned or advanced by Secured Party to Debtor, or expended by Secured Party for the account of Debtor or otherwise owing by Debtor to Secured Party, in respect to the Obligations. 1.3 VOTING RIGHTS. As long as no Event of Default shall have occurred hereunder, any voting rights incident to any stock or other securities pledged as Collateral may be exercised by Debtor; provided, however, that Debtor will not exercise, or cause to be exercised, any such voting rights, without the prior written consent of Secured Party, if the direct or indirect effect of such vote will result in an Event of Default hereunder ARTICLE II DEBTORS REPRESENTATIONS AND WARRANTIES WITH RESPECT TO COLLATERAL Debtor hereby represents and warrants to Secured Party as follows: 2.1 OWNERSHIP OF COLLATERAL. Debtor has good and marketable title to the Collateral free and clear of any liens, security interests, shareholders agreement, calls, charge, or encumbrance, except for this Security Interest. No financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except as may have been filed in favor of Secured Party relating to this Agreement. 2.2 POWER & AUTHORITY.Debtor has the lawful right, power, and authority to grant the Security Interest in the Collateral. This Agreement, together with all filings and other actions necessary or desirable to perfect and protect such security interest, which have been duly taken, create a valid and perfected first priority security interest in the Collateral securing the payment and performance of the Obligations. 2.3 NO AGREEMENTS. The Shares are not subject to any right of redemption by Acquisition, Larco, or Consolidated, as applicable, or any call or put options, voting trust, proxy, shareholders agreement, right of first refusal or any provision of the articles of incorporation or bylaws of Acquisition, Larco, or Debtor, as applicable, or any other document or agreement which would in any way impair or adversely affect this Security Interest or the rights of Secured Party under this Agreement. 2.4 LOCATION. Debtors principal place of business and chief executive office are located at 6807 West 12th Street, Little Rock, Arkansas, 72204. The office where the records concerning the Collateral are kept is located at Debtors principal place of business. 2.5 SOLVENCY OF DEBTOR AND THE SUBSIDIARIES. As of the date hereof, and after giving effect to this Agreement, the Security Documents and the New Note, and the completion of all other transactions contemplated by Debtor and the Subsidiaries at the time of the execution of this Agreement and the New Note, (i) Debtor and each Subsidiary (other than Cierra, CES and 77) is and will be solvent, (ii) the fair saleable value of Debtors assets exceeds and will continue to exceed Debtor's liabilities (both fixed and contingent), and (iii) Debtor has and will have sufficient capital to carry on Debtors businesses and all businesses in which Debtor is about to engage. 2.6 SECURITIES. Any certificates evidencing securities pledged as Collateral are valid and genuine and have not been altered. All securities pledged as Collateral have been duly authorized and validly issued, are fully paid and nonassessable, and were not issued in violation of the preemptive rights of any party or of any agreement by which Debtor or the issuer thereof is bound. No restrictions or conditions exist with respect to the transfer or voting of any securities pledged as Collateral. Debtor owns all of the issued and outstanding stock, of all classes, of Acquisition and Larco, and there are no outstanding stock rights, rights to subscribe, options, warrants or convertible securities outstanding or any other rights outstanding entitling any party, including Debtor, to obtain (through conversion or otherwise) any capital stock, of any class, of Acquisition or Larco. All issued and outstanding shares of common stock of Acquisition and Larco are evidenced by the certificates described in Schedule II attached hereto. 2.7 OWNERSHIP OF SHARES. Debtor is, as of the date hereof, the legal and beneficial owner of the Shares, and Debtor has paid the full purchase price or other consideration for the Shares on the date hereof. 2.8 SUBSIDIARY SHARES ISSUED AND PAID. All of the Subsidiary Shares are validly issued and outstanding shares of capital stock of Acquisition and Larco, as applicable, and are fully paid and nonassessable. 2.9 CONSOLIDATED SHARES ISSUED. All of the Consolidated Shares are validly issued to Debtor, and since being purchased by Debtor, have been held by Debtor and reflected on its books and in all filings with the Securities Exchange Commission and other regulatory bodies, as treasury shares, and have not been retired or otherwise transferred to the status of unissued shares. ARTICLE III DEBTORS OTHER REPRESENTATIONS AND WARRANTIES 3.1 GOODSTANDING - DEBTOR. Debtor is a duly formed Idaho corporation, duly organized and in good standing under the laws of Idaho, qualified to do business in and in good standing in each state or country in which such qualification is necessary for the conduct of its business, and has the power to own its property and to carry on its business in each jurisdiction in which Debtor operates. 3.2 GOODSTANDING - SUBSIDIARIES. Each Subsidiary (as more fully described below) is a duly formed corporation under the laws of the state of its incorporation, duly organized and in good standing under the laws of the state of its incorporation, qualified to do business in and in good standing in each state or country in which such qualification is necessary for the conduct of its business, and has the power to own its property and to carry on its business in each jurisdiction in which it operates. As of the date hereof, the Subsidiaries constitute all the subsidiaries of Debtor which generate revenue and/or own any assets and/or engage in any business activities. 3.3 AUTHORITY AND COMPLIANCE.Debtor has full power and authority toenter into this Agreement. Debtor and Debtors Subsidiaries, where applicable, have full power and authority to enter into and perform their obligations under the New Note, the Refinancing Agreement, and all other Security Documents governed by this Agreement and the Refinancing Agreement, all of which have been duly authorized by all proper and necessary corporate action. No further consent or approval is required as a condition to the validity of this Agreement, the New Note, or any other Security Documents. Debtor and each Subsidiary is in compliance with all Laws to which it is subject. 3.4 BINDING AGREEMENT. This Agreement, the Security Documents, and the New Note constitute valid and legally binding obligations of Debtor and, where applicable, the Subsidiaries, in accordance with their terms, subject to the applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors' rights generally. 3.5 LITIGATION. There are no proceedings pending or, to the knowledge of Debtor, threatened before any court or administrative agency which will or may have a material adverse effect on the financial condition or operations of Debtor or any Subsidiary or upon Debtors or any Subsidiarys ability to perform its obligations under the New Note, this Agreement, or the Security Documents. 3.6 NO CONFLICTING AGREEMENTS.There are no charter, bylaw or stock provisions of Debtor and no provisions of any existing agreement, mortgage, indenture or contract binding on Debtor or affecting its property, which would conflict with or in any way prevent the execution, delivery, or carrying out of the terms of the New Note, this Agreement or the Security Documents. There are no charter, bylaw or stock provisions of any Subsidiary and no provisions of any existing agreement, mortgage, indenture or contract binding on any Subsidiary or affecting its property, which would conflict with or in any way prevent the execution, delivery, or carrying out of the terms of any of the Security Documents to which such Subsidiary is a party. 3.7 OWNERSHIP OF ASSETS.Debtor has good and full title to the Collateral,and the Collateral is owned free and clear of liens, charges, claims, security interests, and other encumbrances. Debtor will at all times maintain its tangible property, real and personal, in good order and repair taking into consideration reasonable wear and tear. 3.8 TAXES. Debtor and each Subsidiary has filed all tax returns required to be filed and has paid taxes shown thereon to be due, including interest and penalties, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. The charges, accruals, and reserves on the books of Debtor or the Subsidiary in respect of any taxes or other governmental charges are, in the opinion of Debtor and such Subsidiary, adequate. 3.9 FINANCIAL STATEMENTS. The books and records of Debtor properly reflect Debtor's financial condition, and the financial statements of Debtor submitted to Secured Party properly reflect Debtor's financial condition as of such date and were prepared in accordance with generally accepted accounting principles, consistently applied. 3.10 ERISA PLAN. No Reportable Event or Prohibited Transaction (as those terms are defined by erisa) has occurred with respect to any employee benefit plan of Debtor or any Subsidiary which is subject to erisa. Neither Debtor nor any Subsidiary has incurred any material accumulated unfunded deficiency within the meaning of erisa, and neither Debtor nor any Subsidiary has incurred any material liability to the Pension Benefit Guaranty Corporation established under erisa (or any successor thereto under erisa) in connection with any such benefit plan. ARTICLE IV DEBTOR'S COVENANTS WITH RESPECT TO COLLATERAL Debtor covenants and agrees that from the date hereof and until the payment and performance in full of the Obligations unless Secured Party otherwise consents in writing: 4.1 DELIVERY OF INSTRUMENTS AND/OR CERTIFICATES. Contemporaneously herewith, Debtor covenants and agrees to deliver to Secured Party any certificates, documents, or instruments representing or evidencing the Collateral, with Debtors endorsement thereon and/or accompanied by property instruments of transfer and assignment duly executed in blank with, if requested by Secured Party, signatures guaranteed by a member or member organization in good standing of an authorized Securities Transfer Agents Medallion Program, all in form and substance satisfactory to Secured Party. 4.2 FURTHER ASSURANCES - All Shares. Debtor will contemporaneously with the execution hereof and from time to time thereafter at its expense promptly execute and deliver all further instruments and documents and take all further action necessary or appropriate or that Secured Party may request in order (i) to perfect and protect the security interest created or purported to be created hereby and the first priority of such security interest, (ii) to enable Secured Party to exercise and enforce its rights and remedies hereunder in respect of the Collateral, and (iii) to otherwise effect the purposes of this Agreement, including without limitation: (A) executing and filing any financing or continuation statements, or any amendments thereto; (B) obtaining written confirmation from the issuer of any securities pledged as Collateral of the pledge of such securities, in form and substance satisfactory to Secured Party; (C) cooperating with Secured Party in registering the pledge of any securities pledged as Collateral with the issuer of such securities; (D) delivering notice of Secured Partys security interest in any securities pledged as Collateral to any securities or financial intermediary, clearing corporation or other party required by Secured Party, in form and substance satisfactory to Secured Party; and (E) obtaining written confirmation of the pledge of any securities constituting Collateral from any securities or financial intermediary, clearing corporation or other party required by Secured Party, in form and substance satisfactory to Secured Party. If all or any part of the Collateral is securities issued by an agency or department of the United States, Debtor covenants and agrees, at Secured Partys request, to cooperate in registering such securities in Secured Partys name or with Secured Partys account maintained with a Federal Reserve Bank. 4.3 FURTHER ASSURANCES - CONSOLIDATED SHARES. Contemporaneously herewith, Debtor covenants and agrees to issue and deliver (unless already issued and delivered) to Secured Party a stock certificate evidencing the Consolidated Shares, with Debtors endorsement thereon, in form and substance satisfactory to Secured Party. Debtor further covenants and agrees that it will, at all times, except as may be consented to otherwise in writing by Secured Party in connection with any registration and sale of the Consolidated Shares for the benefit of Secured Party, maintain the Consolidated Shares as issued treasury shares, and will not retire or otherwise transfer the Consolidated Shares, on its books or to any third party. 4.4 ADDITIONAL PROPERTY. All Additional Property received by Debtor shall be received in trust for the benefit of Secured Party. All Additional Property and all certificates or other written instruments or documents evidencing and/or representing the Additional Property that is received by Debtor, together with such instruments of transfer as Secured Party may request, shall immediately be delivered to or deposited with Secured Party and held by Secured Party as Collateral under the terms of this Agreement. If the Additional Property received by Debtor shall be shares of stock or other securities, such shares of stock or other securities shall be duly endorsed in blank or accompanied by proper instruments of transfer and assignment duly executed in blank with, if requested by Secured Party, signatures guaranteed by a member or member organization in good standing of an authorized Securities Transfer Agents Medallion Program, all in form and substance satisfactory to Secured Party. Secured Party shall be deemed to have possession of any Collateral in transit to Secured Party or its agent. 4.5 SALE, TRANSFER, ENCUMBRANCE. Debtor will not sell, transfer, mortgage, or otherwise encumber any Collateral or impair the value thereof in any manner without Secured Partys prior written consent, including without limitation by purchase, lease, barter, trade, payment deferral, or the creation, assumption or guarantee of indebtedness or other lending of credit. Secured Partys written consent to any sale, mortgage, transfer, or encumbrance shall not be construed to be a waiver of this provision in respect to any subsequent proposed sale, mortgage, transfer, or encumbrance. 4.6 LIENS. Neither Debtor nor any person acting on Debtors behalf has, or shall have any right, power, or authority to and shall not create, incur, or permit to be placed or imposed, upon the Collateral, any lien of any type or nature whatsoever, other than the liens in favor of Secured Party. 4.7 MATTERS OR OCCURRENCES AFFECTING COLLATERAL OR THIS AGREEMENT. Debtor will promptly notify Secured Party of any and all matters or occurrences that may have a material adverse effect on the status or value of the Collateral or this Agreement, including without limitation the occurrence of an Event of Default, or an event which, with giving of notice or lapse of time, or both, would constitute an Event of Default. 4.8 AGREEMENTS PERTAINING TO COLLATERAL. Debtor will not enter into any type of contract or agreement pertaining to any of the Collateral or in any way transfer any voting rights pertaining to the Collateral to any person. 4.9 CHANGE OF NAME. Debtor shall not change its name (or any assumed name or other name under which Debtor does business) unless at least thirty (30) days prior to the effective date of any such name change, Debtor gives Secured Party written notice of such intended name change and the new name. Debtor shall execute all such documents and agreements (including without limitation security agreements, financing statements, and amendments to financing statements) as Secured Party may reasonably request in connection with any such name change. 4.10 DILUTION OF OWNERSHIP. As to any securities pledged as Collateral, Debtor will not consent to or approve of the issuance of (i) any additional shares of any class of securities of such issuer, (ii) any instrument convertible voluntarily by the holder thereof or automatically upon the occurrence or non-occurrence of any event or condition into, or exchangeable for, any such securities, or (iii) any warrants, options, contracts or other commitments entitling any third party to purchase or otherwise acquire any such securities. 4.11 RESTRICTIONS ON SECURITIES. Debtor will not enter into any agreement creating, or otherwise permit to exist, any restriction or condition upon the transfer, voting or control of any securities pledged as Collateral, except as consented to in writing by Secured Party. Debtor will not engage in any stock split, reverse stock split, stock dividend, reclassification, or other similar act or transaction regarding its capital stock unless the Consolidated Shares are included in such act or transaction and effected thereby in all respects the same as any other shares, or class of shares, of Debtors capital stock. ARTICLE V DEBTORS AFFIRMATIVE COVENANTS Until payment and performance of all Obligations, Debtor covenants and agrees as follows: 5.1 FINANCIAL STATEMENTS. Debtor and each Subsidiary shall maintain a system of accounting reasonably satisfactory to Secured Party and in accordance with generally accepted accounting principles consistently applied, and will permit Secured Party's officers or authorized representatives to visit and inspect Debtor's and Subsidiarys books of account and other records at such reasonable times and as often as Secured Party may desire during office hours and after reasonable notice to Debtor and the applicable Subsidiary. Unless written notice of another location is given to Secured Party, Debtor's books and records will be located at Debtor's address set forth above. Debtor and each Subsidiary further agree that Debtor and the Subsidiaries will promptly provide Secured Party with such additional information, reports or statements respecting their business operations and financial condition as Secured Party may reasonably request from time to time. Debtor shall deliver to Lender, within three (3) days after filing same, all annual, periodic, and other filings made by Debtor with the Securities and Exchange Commission. 5.2 INSURANCE. Debtor and each Subsidiary shall maintain insurance with responsible insurance companies on such of its properties, in such amounts and against such risks as is customarily maintained by similar businesses operating in the same vicinity, specifically to include a policy of fire and extended coverage insurance covering all assets, and liability insurance, all to be with such companies and in such amounts satisfactory to Secured Party and to contain a mortgage clause naming Secured Party as its interest may appear. Evidence of such insurance will be supplied to Secured Party. 5.3 EXISTENCE AND COMPLIANCE. Debtor and each Subsidiary shall maintain its corporate existence in good standing and comply with all Laws applicable to it or to any of its property, business operations and transactions. Debtor and each Subsidiary shall qualify as a foreign corporation in all jurisdictions wherein any property now or hereafter owned or any business now or hereafter transacted by Debtor or such Subsidiary makes such qualifications necessary. 5.4 ADVERSE CONDITIONS OR EVENTS. Debtor and the Subsidiaries shall promptly advise Secured Party in writing of any litigation filed against Debtor or any Subsidiary and of any condition, event or act which comes to its attention that would or might have a material adverse effect on Debtors or any Subsidiarys financial condition or on Debtors ability to perform the Obligations or any Subsidiarys ability to perform under its guaranty agreement executed in favor of Secured Party with respect to the Obligations, including without limitation any Environmental Condition that might have such a material adverse effect the financial condition of Debtor or any Subsidiary, any Reportable Event, or any event that could be the basis for institution of proceedings by the Pension Benefit Guaranty Corporation to terminate a plan subject to erisa. 5.5 TAXES. Debtor and each Subsidiary shall pay all taxes as they become due and payable. 5.6 MAINTENANCE. Debtor and each Subsidiary shall maintain all of its tangible property in good condition and repair, reasonable wear and tear excepted, and make all necessary replacements thereof, and preserve and maintain all licenses, privileges, franchises, certificates and the like necessary for the operation of their respective business. 5.7 ENVIRONMENTAL. Debtor and each Subsidiary shall promptly give Secured Party written notice of any investigation, claim, demand, lawsuit or other action by any governmental or regulatory agency or private party involving any property owned or leased by Debtor or any Subsidiary and any Hazardous Substance or Environmental Law of which Debtor or any Subsidiary has knowledge. If Debtor or any Subsidiary learns, or is notified by any governmental or regulatory authority, that any removal or other remediation of any Hazardous Substance affecting any property owned by Debtor or any Subsidiary is necessary, Debtor or such Subsidiary shall promptly take all necessary remedial actions in accordance with Environmental Law. 5.8 SUBSIDIARIES. Subsidiary means (a) CES; (b) Cierra; (c) Larco; (d) KR Industrial; (e) Exsorbet Technical; (f) Acquisition; and (g) 7-7. Debtor and Secured Party contemplate that, from time to time, additional subsidiaries, either directly or indirectly wholly-owned by Debtor, may be formed. Upon such formation, each such new subsidiary shall sign a Guaranty Agreement in the form substantially the same as those executed in connection with the Security Documents, and shall execute and be bound by the Refinancing Agreement. Each such new subsidiary shall be deemed a Subsidiary as defined in and used in this Agreement and shall be subject to the terms, conditions, and covenants of this Agreement. 5.9 DIVIDEND RIGHTS. Secured Party shall have the sole right to receive, hold and apply as Collateral any dividends or other distributions with respect to the Collateral, or any part thereof, in cash or in kind. All dividend and other distributions which are received by Debtor contrary to the provisions the preceding sentence shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Debtor, and shall be forthwith paid over to Secured Party in the exact form received (properly endorsed or assigned if requested by Secured Party), to be held by Secured Party as Collateral, or, in Secured Partys sole discretion, to be applied against payment of any Obligation. ARTICLE VI NEGATIVE COVENANTS Until payment and performance of all Obligations, Debtor covenants and agrees that Debtor and each of its Subsidiaries will not, without the prior written consent of Secured Party: 6.1 TRANSFE OF ASSETS. Enter into any merger or consolidation, or sell, lease, assign, or otherwise dispose of or transfer any assets having a book value or fair market value of greater than $50,000 except in the normal course of its business. 6.2 CHANGE IN OWNERSHIP OR STRUCTURE. Dissolve or liquidate; become a party to any merger or consolidation; reorganize as a professional corporation; acquire by purchase, lease or otherwise all or substantially all of the assets or capital stock of any corporation or other entity; or sell, transfer, lease, or otherwise dispose of all or any substantial part of its property or assets or business. 6.3 LIENS. Knowingly grant, suffer, or permit liens on or security interests in Debtor's or such Subsidiarys assets, or fail to promptly pay all lawful claims, whether for labor, materials, or otherwise, except for purchase money security interests arising in the ordinary course of business. 6.4 LOANS. Make any loans, advances or investments to or in any joint venture, corporation or other entity, except for the purchase of U.S. Government obligations or the purchase of Federally-insured certificates of deposit. 6.5 BORROWINGS. Create, incur, assume, or become liable in any manner for any indebtedness (for borrowed money, deferred payment for the purchase of assets, lease payments, as surety or guarantor of the debt of another, or otherwise) other than to Secured Party without Secured Party's prior written consent, except trade debts incurred in the ordinary course of business. 6.6 VIOLATE OTHER COVENANTS.Violate or fail to comply with any covenants or agreements regarding other debt which will or would with the passage of time or upon demand cause the maturity of any other debt to be accelerated. 6.7 ENVIRONMENTAL. Cause or permit the presence, use, disposal, storage, or release of any Hazardous Materials on or in any property owned by, leased by, or managed or operated by Debtor or any Subsidiary. Debtor and each Subsidiary shall not do, nor allow anyone else to do, any act that is in violation of any Environmental Law. 6.8 DIVIDENDS. Declare any dividends on any shares of any class of its capital stock, or apply any of its property or assets to the purchase, redemption or other retirement of any shares of any class of capital stock or in any way amend its capital structure. 6.9 CHARACTER OF BUSINESS. Change the general character of business as conducted at the date hereof, or engage in any type of business not reasonably related to its business as presently and normally conducted. ARTICLE VII DEFAULT AND REMEDIES 7.1 EVENTS OF DEFAULT. An Event of Default (herein so called) shall exist if any one or more of the following events shall occur: (a) The failure of Debtor to pay any amount of principal under and/or interest on the New Note, or any other amounts due under the New Note within fifteen (15) calendar days after such principal, interest or other amount is due; (b) Debtors breach of a covenant in this Agreement or any other failure to perform its obligations under this Agreement or any other Security Documents; (c) Any representation or warranty made in this Agreement or any other Security Documents shall be false or materially misleading, as determined in the reasonable discretion of Secured Party; (d) The occurrence of an Event of Default of any other Security Documents; (e) If Debtor or any other party obligated to pay any portion of the Obligations: (i) becomes insolvent (except for any insolvency, as of the date hereof, of CES, Cierra or 77), or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due; (ii) generally is not paying its debts as such debts become due and Secured Party, in good faith, determines that such event or condition could l to a material impairment of the Collateral, or any part thereof, or of any other payment security for any of the Obligations; (iii) has a receiver, trustee or custodian appointed for, or take possession of, all or substantially all of the assets of such party or any of the Collateral, either in a proceeding brought by such party or in a proceeding brought against such party and such appointment is not discharged or such possession is not terminated within sixty (60) days after the effective date thereof or such party consents to or acquiesces in such appointment or possession; (iv) files a petition for relief under the United States Bankruptcy Code or any other present or future federal or state insolvency, bankruptcy or similar laws (all of the foregoing hereinafter collectively called Applicable Bankruptcy Law) or an involuntary petition for relief is filed against such party under any Applicable Bankruptcy Law and such involuntary petition is not dismissed within sixty (60) days after the filing thereof, or an order for relief naming such party is entered under any Applicable Bankruptcy Law, or any composition, rearrangement, extension, reorganization or other relief of debtors now or hereafter existing is requested or consented to by such party; (v) fails to have discharged within a period of sixty (60) days any attachment, sequestration or similar writ levied upon any property of such party; or (vi) fails to pay within ninety(90) days any final money judgment against such party; or (f) The issuer of any securities constituting Collateral files a petition for relief under any Applicable Bankruptcy Law, an involuntary petition for relief is filed against any such issuer under any Applicable Bankruptcy Law and such involuntary petition is not dismissed within thirty (30) days after the filing thereof, or an order for relief naming any such issuer is entered under any Applicable Bankruptcy Law. 7.2 SECURED PARTYS REMEDIES. Upon the occurrence of an Event of Default: (a) Secured Party may declare the Obligations in whole or part immediately due and may enforce payment and performance of the same and exercise any rights under the Texas ucc, rights and remedies of Secured Party under this Agreement, or otherwise. (b) Secured Party may, at Secured Party's option and at the expense of Debtor, either in Secured Party's own right or in the name of Debtor and in the same manner and to the same extent that Debtor might reasonably so act if this Agreement had not been made: (i) do all things requisite, convenient, or necessary to enforce the performance and observance of all rights, remedies and privileges of Debtor arising from the Collateral, or any part thereof, including without limitation compromi waiving, excusing, or in any manner releasing or discharging any obligation of any party to or arising from the Collateral; (ii) take possession of the books, papers, chattel paper, documents of title, and accounts of Debtor, wherever located, relating to the Collateral; (iii) sue or otherwise collect and receive money attributable to the Collateral; and (iv) exercise any other lawfully available powers or remedies, and do all other things which Secured Party deems requisite, convenient or necessary or which the Secured Party deems proper to protect the Security Interest. (b) Secured Party may foreclose this Agreement in the manner now or hereafter provided or permitted by law and may upon such reasonable notification prior thereto as may be required by applicable law (Debtor hereby agreeing that ten days' notice is commercially reasonable), sell, assign, transfer, or otherwise dispose of the Collateral at public or private sale, in whole or in part, and Secured Party may, in its own name or as Debtors attorneyinfact effectively assign and transfer the Collateral, or any part thereof, absolutely, and execute and deliver all necessary assignments, conveyances, bills of sale, and other instruments with power to substitute one or more persons or corporations with like power. Any such foreclosure sale, assignment, transfer, or other disposition shall, to the extent permitted by law, be a perpetual bar, both at law and in equity, against Debtor and all persons and corporations lawfully claiming by or through or under Debtor. Any such foreclosure sale may be adjourned from time to time. Upon any sale, Secured Party may bid for and purchase the Collateral, or any part thereof, and upon compliance with the terms of sale may hold, retain, possess and dispose of the Collateral, in its absolute right without further accountability. Secured Party shall have the right to be credited on the amount of its bid a corresponding amount of the Obligations as of the date of such sale. (c) If, in the opinion of Secured Party, there is any question that a public sale or distribution of any Collateral will violate any state or federal securities law, Secured Party (i) may offer and sell securities privately to purchasers who will agree to take them for investment purposes and not with a view to distribution and who will agree to imposition of restrictive legends on the certificates representing the security, or (ii) may sell such securities in an intrastate offering und Section 3(a)(11) of the Securities Act of 1933, and no sale so made in good faith by Secured Party shall be deemed to be not commercially reasonable because so made. (d) Not in limitation of any other provision of this Agreement, Secured Party shall have all rights and remedies of a secured party under the Texas UCC. 7.3 APPLICATION OF PROCEEDS. Secured Party may apply the proceeds of any foreclosure sale hereunder or from any other permitted disposition of the Collateral or any part thereof as follows: (a)first, to the payment of all reasonable costs and expenses of any foreclosure and collection hereunder and all proceedings in connection therewith, including reasonable attorneys' fees; (b)then, to the reimbursement of Secured Party for all disbursements made by Secured Party for taxes, assessments or liens superior to the Security Interest and which Secured Party shall deem expedient to pay; (c)then, to the reimbursement of Secured Party of any other disbursements made by Secured Party in accordance with the terms hereof; (d) then, to or among the amounts of fees, interest and principal then owing and unpaid in respect of the Obligations, in such priority as Secured Party may determine in its discretion; and (e)the remainder of such proceeds, if any, shall be paid to Debtor. If such proceeds shall be insufficient to discharge the entire Obligations, Secured Party shall have any other available legal recourse against Debtor and all other persons obligated under, or for the performance of, the Security Documents and Refinancing Agreement, or on the New Note, for the deficiency, together with interest thereon at fifteen percent (15%) per annum. 7.4 ENFORCEMENT OF OBLIGATIONS. Nothing in this Agreement or in any other agreement shall affect or impair the unconditional and absolute right of the Secured Party to enforce the Obligations as and when the same shall become due in accordance with the terms of the New Note. 7.5 VOTING RIGHTS. Upon the occurrence of an Event of Default, Debtor will not exercise any voting rights with respect to securities pledged as Collateral. Debtor hereby irrevocably appoints Secured Party as Debtors attorneyinfact (such power of attorney being coupled with an interest) and proxy to exercise any voting rights with respect to Debtors securities pledged as Collateral upon the occurrence of an Event of Default. ARTICLE VIII RIGHTS OF SECURED PARTY 8.1 SUBROGATION. Upon the occurrence of an Event of Default, Secured Party, at its election, may subrogate to all of the interest, rights and remedies of the Debtor, in respect to any of the Collateral or agreements pertaining thereto. 8.2 SECURED PARTY APPOINTED ATTORNEYINFACT. Debtor hereby appoints Secured Party as attorneyinfact of Debtor, with full authority in the place and stead of Debtor and in the name of Debtor, Secured Party or otherwise, from time to time on Secured Party's discretion and upon the occurrence of an Event of Default, to take any action and to execute any instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (b) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) of this Section 8.2; (c) to file any claims or take any action or institute any proceeding which Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Secured Party against any of the Collateral; and (d) to assign and transfer the Collateral, or any part thereof, absolutely and to execute and deliver endorsements, assignments, conveyances, bills of sale and other instruments with power to substitute one or more persons or corporation with like power. 8.3 PERFORMANCE BY SECURED PARTY. If Debtor fails to perform any agreement contained herein, Secured Party may itself perform, or cause the performance of, such agreement, and the reasonable expenses of Secured Party incurred in connection therewith shall be payable by Debtor under Section 8.8. In no event, however, shall Secured Party have any obligation or duties whatsoever to perform any covenant or agreement of Debtor contained herein, and any such performance by Secured Party shall be wholly discretionary with Secured Party. 8.4 DUTIES OF SECURED PARTY. The powers conferred upon Secured Party hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for money actually received by it hereunder, Secured Party shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Without limiting the generality of the foregoing, Secured Party shall not have any obligation, duty or responsibility to do any of the following: (a) ascertain any maturities, calls, conversions, exchanges, offers, tenders or similar matters relating to the Collateral or informing Debtor with respect to any such matters; (b) fix, preserve or exercise any right, privilege or option (whether conversion, redemption or otherwise) with respect to the Collateral unless (i) Debtor makes written demand to Secured Party to do so, (ii) such written demand is received by Secured Party in sufficient time to permit Secured Party to take the action demanded in the ordinary course of its business, and (iii) Debtor provides additional collateral, acceptable to Secured Party in its sole discretion; (c) collect any amounts payable in respect of the Collateral (Secured Party being liable to account to Debtor only for what Secured Party may actually receive or collect thereon); (d) sell all or any portion of the Collateral to avoid market loss; (e) sell all or any portion of the Collateral unless and until (i) Debtor makes written demand upon Secured Party to sell the Collateral, and (ii) Debtor provides additional collateral, acceptable to Secured Party in its sole discretion; or (f) hold the Collateral for or on behalf of any party other than Debtor. 8.5 NO LIABILITY OF SECURED PARTY. Neither the acceptance of this Agreement by Secured Party, nor the exercise of any rights hereunder by Secured Party, shall be construed in any way as an assumption by Secured Party of any obligations, responsibilities, or duties of Debtor arising in connection with the Collateral assigned hereunder or otherwise bind Secured Party to the performance of any obligations respecting the Collateral, it being expressly understood that Secured Party shall not be obligated to perform, observe, or discharge any obligation, responsibility, duty, or liability of Debtor in respect of any of the Collateral, including without limitation appearing in or defending any action, expending any money or incurring any expense in connection therewith. 8.6 RIGHT OF SECURED PARTY TO DEFEND ACTION AFFECTING SECURITY. Secured Party may, at the expense of Debtor, appear in and defend any action or proceeding at law or in equity purporting to affect Secured Party's Security Interest under this Agreement. 8.7 RIGHT OF SECURED PARTY TO PREVENT OR REMEDY DEFAULT. If Debtor shall fail to perform any of the covenants, conditions and agreements required to be performed and observed by Debtor under the New Note, or any other instruments secured hereby, or in respect of the Collateral (subject to any applicable default cure period), Secured Party (a) may but shall not be obligated to take any action Secured Party deems necessary or desirable to prevent or remedy any such default by Debtor or otherwise to protect the Security Interest, and (b) shall have the absolute and immediate right to take possession of the Collateral or any part thereof (to the extent Secured Party has not previously taken possession) to such extent and as often as the Secured Party, in its sole discretion, deems necessary or desirable in order to prevent or to cure any such default by Debtor, or otherwise to protect the security of this Agreement. Secured Party may advance or expend such sums of money for the account of Debtor as Secured Party in its sole discretion deems necessary for any such purpose. 8.8 SECURED PARTY'S EXPENSES. All reasonable advances, costs, expenses, charges and attorneys' fees which Secured Party may make, pay or incur under any provision of this Agreement for the protection of its security or for the enforcement of any of its rights hereunder, or in foreclosure proceedings commenced and subsequently abandoned, or in any dispute or litigation in which Secured Party or the holder of any of the Obligations may become involved by reason of or arising out of the New Note, or the Collateral shall be a part of the Obligations and shall be paid by Debtor to Secured Party, upon demand, and shall bear interest until paid at the rate otherwise chargeable on the New Note, but not to exceed the maximum rate of interest permitted by applicable law, from the date of such payment until repaid by Debtor. 8.9. CONVERTIBLE COLLATERAL. Secured Party may present for conversion any Collateral which is convertible into any other instrument or investment security or a combination thereof with cash, but Secured Party shall not have any duty to present for conversion any Collateral unless it shall have received from Debtor detailed written instructions to that effect at a time reasonably far in advance of the final conversion date to make such conversion possible. 8.10 SECURED PARTY'S RIGHT OF SETOFF. Upon the happening of any event entitling Secured Party to pursue any remedy provided herein, or if Secured Party shall be served with garnishment process in which Debtor shall be named as defendant, whether or not Debtor shall be in default hereunder at the time, Secured Party may, but shall not be required to, setoff any indebtedness owing by Secured Party to Debtor against any of the Obligations without first resorting to the security hereunder and without prejudice to any other rights or remedies of Secured Party or its Security Interest. 8.11 REMEDIES. No right or remedy herein reserved to Secured Party is intended to be exclusive of any other right or remedy, but each and every such remedy shall be cumulative, not in lieu of, but in addition to any other rights or remedies given under this Agreement and all other security documents. Any and all of Secured Party's rights and remedies may be exercised from time to time and as often as such exercise as deemed necessary or desirable by Secured Party. 8.12 DEBTOR'S WAIVERS. Debtor waives notice of the creation, advance, increase, existence, extension, or renewal of, and of any indulgence with respect to, the Obligations; waives notice of intent to accelerate, notice of acceleration, notice of intent to demand, presentment, demand, notice of dishonor, and protest; waives notice of the amount of the Obligations outstanding at any time, notice of any change in financial condition of any person liable for the Obligations or any part thereof, notice of any Event of Default, and all other notices respecting the Obligations; and agrees that maturity of the Obligations and any part thereof may be accelerated, extended, or renewed one or more times by Secured Party in its discretion, without notice to Debtor. 8.13 OTHER PARTIES AND OTHER COLLATERAL. No renewal or extension of or any other indulgence with respect to the Obligations or any part thereof, no release of any security, no release of any person (including any maker, endorser, guarantor, or surety) liable on the Obligations, no delay in enforcement of payment, and no delay or admission or lack of diligence or care in exercising any right or power with respect to the Obligations or any security therefor or guaranty thereof or under this Agreement shall in other manner impair or affect the rights of Secured Party under the law, under this Agreement, or under any other agreement pertaining to the other security for the Obligations, before foreclosing upon the Collateral for the purpose of paying the Obligations. Debtor waives any right to the benefit of or to require or control application of any other security or proceeds thereof, and Debtor agrees that Secured Party shall have no duty or obligation to Debtor to apply to the Obligations any such other security or proceeds thereof. ARTICLE IX MISCELLANEOUS 9.1 TERMS COMMERCIALLY REASONABLE. The terms of this Agreement shall be deemed commercially reasonable within the meaning of the Texas ucc. 9.2 NOTICES. Any notices or demands required or permitted to be given hereunder shall be deemed sufficiently given if in writing and personally delivered or mailed (with all postage and charges prepaid), addressed to Secured Party or to Debtor their respective addresses set forth below, or at such other address as the above parties may from time to time designate by written notice to the other given in accordance with this Section 9.2. Any such notice, if personally delivered or transmitted by telex or telegram, shall be deemed to have been given on the date so delivered or transmitted or, if mailed, be deemed to have been given on the day after such notice is placed in the United States mail in accordance with this Section 9.2. Secured Party: 1301 Capital of Texas Hwy., Suite C-300 Austin, Travis County, Texas 78746 Attn: Mr. Duane K. Boyd, Jr. with copy to: Timothy L. LaFrey, Esq. Akin, Gump, Strauss, Hauer & Feld, L.L.P. 1900 Frost Bank Plaza 816 Congress Avenue Austin, Texas 78701 Debtor: 6807 West 12th Street Little Rock, Arkansas 72204 9.3 PARTIES BOUND. Secured Party's rights under this Agreement and the Security Interest shall inure to the benefits of its successors and assigns, and in the event of any assignment or transfer of any of the Obligations or the Collateral, Secured Party thereafter shall be fully discharged from any responsibility with respect to the Collateral so assigned or transferred, but Secured Party shall retain all rights and powers hereby given with respect to any of the Obligations or Collateral not so assigned or transferred. All representations, warranties, and agreements of Debtor if more than one are joint and several, and all shall be binding upon the personal representatives, heirs, successors, and assigns of Debtor. 9.4 WAIVER. No delay of Secured Party in exercising any power or right shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude other or further exercise thereof or the exercise of any other power or right. No waiver by Secured Party of any right hereunder of any default by Debtor shall be binding upon Secured Party unless in writing, and no failure by Secured Party to exercise any power or right hereunder or waiver of any default by Debtor shall operate as a waiver of any other or further exercise of such right or power of any further default. 9.5 AGREEMENT CONTINUING. This Agreement shall constitute a continuing agreement, applying to all future as well as existing transactions, whether or not of the character contemplated at the date of this Agreement, and if all transactions between Secured Party and Debtor shall be closed at any time, shall be equally applicable to any new transactions thereafter. Provisions of this Agreement, unless by their terms exclusive, shall be in addition to other agreements between the parties. 9.6 DEFINITIONS. Unless the context indicated otherwise, definitions in the Texas Business and Commerce Code (Texas ucc) apply to words and phrases in this Agreement; if Texas ucc definitions conflict, Chapter 9 definitions apply. 9.7 MISCELLANEOUS. In this Agreement, whenever the context so requires, the neuter gender includes the masculine and feminine, and the singular number includes the plural and vice versa. The headings of paragraphs herein are inserted only for convenience and shall in no way define, describe or limit the scope of intent of any provisions of this Agreement. No change, amendment, modification, cancellation, or discharge of any provision of this Agreement shall be valid unless consented to in writing by Secured Party. 9.8 ASSIGNMENT OF SECURED PARTY'S INTEREST. Secured Party shall have the right to assign all or any portion of its rights in this Agreement without approval or consent. Debtor may not assign this Agreement or any of its rights or obligations hereunder without the express prior written consent of Secured Party in each instance. 9.9 APPLICABLE LAWS. This Agreement Shall Be Governed By And Construed In Accordance With The Laws Of The State Of Texas And The Applicable Laws Of The United States Of America. 9.10 ENTIRE AGREEMENT. This Agreement, the Security documents and the New Note Represent The Final Agreement Between The Parties And May Not Be Contradicted By Evidence Of Prior, Contemporaneous, Or Subsequent Oral Agreements Of The Parties. There Are No Unwritten Oral Agreements Between The Parties. Executed this 6th day of November, 1997. Debtor: Consolidated Eco-Systems, Inc. By: /s/ James J. Connors, Jr. Name: James J. Connors, Jr. Title: President/CEO Secured Party: American Physicians Service Group, Inc. By: /s/ Duane Boyd Name: Duane Boyd Title: Senior VP SCHEDULE I TO ASSIGNMENT AND SECURITY AGREEMENT Environmental Laws means all Laws that relate to health, safety or environmental protection, including without limitation the (i) Resource Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal Act Amendments of 1980, and the Hazardous and Solid Waste Amendments of 1984; (ii) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986; (iii) the Toxic Substances Control Act; (iv) the Americans with Disabilities Act of 1990, and (iv) the Clean Air Act; all as amended from time to time and including all regulations promulgated pursuant to any one or more of them. erisa means the Employment Retirement Income Security Act of 1974, as amended, together with all rules and regulations issued pursuant thereto and all rulings or interpretations adopted by any Governmental Entity thereunder. Governmental Entity means any government (or any political subdivision or jurisdiction thereof), court, bureau, agency, or other governmental authority having jurisdiction over Debtor, any Subsidiary, or any of its or their respective businesses, operations, assets, or properties. Hazardous Material means those substances defined as toxic or hazardous substances by or under any Environmental Laws. Laws shall mean all applicable laws, ordinances, statutes, orders, regulations, judgments, writs, or decrees of any Governmental Entity. Schedule II 1. Certificate No. 1, dated January 24, 1997, for 1,000 shares of Eco Acquisition, Inc. $0.001 par value common stock, issued to Consolidated Eco-Systems, Inc. 2. Certificate No. 1, dated January 24, 1997, for 1,000 shares of Larco Environmental Services, Inc. common stock, issued to Consolidated Eco-Systems, Inc. EX-10 10 SECURITY AGREEMENT - CESI Exh. 10-34 SECURITY AGREEMENT This Security Agreement (this Agreement) is entered into this 6th day of November,1997, by and between Larco Environmental Services, Inc., a Louisiana corporation (the Debtor), whose address is 2208 Industrial Boulevard, Sulphur, Louisiana 70663, and American Physicians Service Group, Inc., a Texas corporation (the Secured Party), whose address is 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746. RECITALS: A. Consolidated Eco-Systems, Inc., an Idaho corporation formerly known as Exsorbet Industries, Inc. (Consolidated) executed and delivered that certain Promissory Note dated November 26, 1996 (the Original Note) in the original principal amount of Three Million Three Hundred Thousand Dollars ($3,300,000) payable to the order of Secured Party. B. The Original Note was secured pursuant to the following agreements, all for the benefit of Secured Party: (i) that certain Security Agreement dated December 12, 1996, entered into by7-7, Inc., an Arkansas corporation (7-7), formerly known as 7-7 Merger, Inc.; (ii) that certain Security Agreement dated September 30, 1996, entered into by 77; (iii) that certain Assignment and Security Agreement dated September 30, 1996, entered into by Consolidated; and (iv) those certain Guaranty Agreements dated September 30, 1996, entered into by each of the following entities: a. Consolidated Environmental Services, Inc., an Arkansas corporation (CES); b. Cierra, Inc., an Arkansas corporation (Cierra); c. Debtor; d. KR Industrial Services of Alabama, Inc., an Alabama corporation (KR Industrial); e. Exsorbet Technical Services, Inc., an Arkansas corporation (Exsorbet Technical) doing business as SpilTech Services, Inc.; f. Eco Acquisition, Inc., an Arkansas corporation (Acquisition), also known as Eco-Systems, Inc.; and g. 7-7 (all of the agreements described in (i) through (iv) above are collectively referred to herein as the Original Security Documents). C. Consolidated has executed and delivered a new note of even date herewith, payable to the order of Secured Party, in the original principal amount of $3,788,580 (the New Note), in renewal and extension of the Original Note, which New Note is also secured pursuant to (i) the Original Security Documents, and (ii) that certain Assignment and Security Agreement of even date herewith entered into for the benefit of Secured Party by Consolidated (the Consolidated Security Agreement). D. Debtor has received, and will continue to receive, valuable consideration as a result of the transactions evidenced by, or related to, the Original Note, the New Note, and the Security Documents (as hereinafter defined). Accordingly, Secured Party has requested that Debtor pledge the Collateral (as defined below) to secure certain obligations and liabilities, including without limitation (i) Consolidateds obligations to Secured Party under the New Note, (ii) Debtors, Consolidateds and all of Consolidateds subsidiaries, obligations under, and performance of the covenants set forth in, the Original Security Documents, (iii) Consolidateds obligations under, and performance of the covenants set forth in, the Consolidated Security Agreement, (iv) Consolidateds, Debtors and all of Consolidateds subsidiaries, obligations under, and performance of the covenants set forth in, that certain Master Refinancing Agreement of even date herewith entered into for the benefit of Secured Party by Debtor, Consolidated and all of Consolidateds subsidiaries (the Refinancing Agreement), and (v) Debtors performance of the covenants more fully set forth herein. The Original Security Documents, the Refinancing Agreement, the Consolidated Security Agreement, and this Agreement are collectively referred to herein as the Security Documents. AGREEMENTS: Now, Therefore, in consideration of the foregoing and the covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which Debtor acknowledges, Debtor and Secured Party agree as follows: ARTICLE I AGREEMENT; INDEBTEDNESS 1.1 SECURITY INTEREST. Subject to the applicable terms of this Agreement, for good and valuable consideration, the receipt and sufficiency of which Debtor acknowledges, Debtor assigns and transfers to Secured Party, and grants to Secured Party a continuing security interest in and lien upon, the Collateral (as defined in Article II below) to secure the payment and the performance of the Indebtedness (the Security Interest). 1.2 INDEBTEDNESS. The following indebtedness and obligations (the Indebtedness) are secured by this Agreement: (a) All debt, obligations, liabilities, and agreements of Debtor and/or Consolidated to Secured Party, now or hereafter existing, arising directly between Debtor and Secured Party and/or Consolidated and Secured Party or acquired outright, conditionally, or as collateral security from another by Secured Party, absolute or contingent, joint or several, secured or unsecured, due or not due, contractual or tortious, liquidated or unliquidated, arising by operation of law or otherwise, including, without limitation, all obligations and amounts due under the New Note, the Security Documents, and all renewals, extensions, modifications, or rearrangements of any of the foregoing. (b) Secured Partys participation in any debt of Debtor to another person. (c) All costs incurred by Secured Party to obtain, preserve, perfect, and enforce this Agreement and the Security Interest, to collect the Indebtedness, and to maintain, preserve, collect, and enforce the Collateral, including but not limited to taxes, assessments, insurance premiums, repairs, reasonable attorneys fees and legal expenses, feed, rent, storage costs, and expenses of sale. (d) Interest on the above amounts as agreed between Secured Party and Debtor, or if there is no agreement, at the highest lawful rate. ARTICLE II COLLATERAL 2.1 DESCRIPTION OF COLLATERAL. The Security Interest is granted in the following (the Collateral): (a) All of Debtors assets, including without limitation all accounts, chattel paper, contract rights, equipment, inventory, fixtures, general intangibles, and investment property, as more particularly described in Exhibit-A attached to and incorporated herein by reference. (b) All substitutes and replacements for, accessions, attachments and other additions to, tools, parts and equipment used in connection with, and proceeds and products of, the above Collateral (including all income and benefits resulting from any of the above), all certificates of title, manufacturers statements of origin, other documents, accounts, and chattel paper arising from or related to the above Collateral, and returned or repossessed Collateral, any of which, if received by Debtor, shall be delivered immediately to Secured Party. (c) All policies of insurance covering the Collateral and proceeds thereof. (d) All security for the payment of any of the Collateral, and all goods which gave or will give rise to any of the Collateral or are evidenced, identified, or represented therein or thereby. (e) All property similar to the above hereafter acquired by Debtor. (f) All proceeds of the items described in subsections (a) through (e) of this Section 2.1. ARTICLE III DEBTORS WARRANTIES Debtor represents and warrants to Secured Party as follows: 3.1 FINANCING STATEMENTS. No statement covering the Collateral is or will be on file in any public office, except the financing statements relating to this Security Interest and those relating to the Prior Liens (as hereinafter defined). In the past five (5) years, Debtor has not used or done business under any name other than its legal name which is set forth on the first page of this Agreement. 3.2 OWNERSHIP. Debtor owns, or will use the proceeds of any loans by Secured Party to become the owner of, the Collateral free from any setoff, claim, restriction, lien, security interest, or encumbrance except liens for taxes not yet due, the Security Interest, and the Prior Liens. 3.3 FIXTURES AND ACCESSIONS. Except for Collateral of nominal value, none of the Collateral is affixed to real estate or is an accession to any goods, or will become a fixture or accession, except as expressly set out herein. 3.4 CLAIMS OF DEBTORS ON COLLATERAL. No account debtors and other obligors whose debts or obligations are part of the Collateral have any right to setoffs, counterclaims, or adjustments, or any defenses in connection therewith. 3.5 LIENS. Neither Debtor nor any person acting on Debtors behalf has, or shall have any right, power, or authority to and shall not create, incur, or permit to be placed or imposed upon the Collateral, any lien of any type or nature whatsoever superior to the liens in favor of Secured Party provided herein, except only the liens in favor of Dimmitt & Owens Financial, Inc. (the Prior Liens). As to the Prior Liens, neither Debtor nor any person acting on Debtors behalf shall have any right, power, or authority to and shall not increase the amount of indebtedness secured by the Prior Liens or the Collateral. No item of Collateral is subject to more than one(1) of the Prior Liens. 3.6 ACCURACY OF FINANCIAL STATEMENTS. All balance sheets, earnings statements, and other financial data which have been or hereafter may be furnished to Secured Party to induce it to permit the Indebtedness or to make this Agreement or in conjunction herewith truly represent or shall truly represent the financial condition and operations of Debtor as of the dates and for the periods shown thereon; and all other information, reports, papers, and data furnished to Secured Party are or shall be, at the time furnished, accurate and correct in all respects and complete insofar as necessary to give Secured Party a true and accurate knowledge of the subject matter. 3.7 POWER AND AUTHORITY. Debtor has full power and authority to make this Agreement. 3.8 PRINCIPAL PLACE OF BUSINESS. Debtors chief executive office is at Debtors address stated above in Sulphur, Calcasieu Parish, Louisiana, and such address is also where Debtor keeps its books and records. 3.9 LOCATION OF COLLATERAL. All of Debtors Inventory and Equipment is located at Debtors principal place of business located at 2208 Industrial Boulevard, Sulphur, Louisiana. Debtor has exclusive possession and control of its Inventory and Equipment. 3.10 PERFECTION. Upon the filing of the UCC financing statements with the Office of the Louisiana Secretary of State and the Office of the Arkansas Secretary of State, the Security Interest will constitute a valid and perfected lien upon and security interest in the Collateral superior to all other liens, claims or encumbrances except only the Prior Liens. 3.11 SOLVENCY. As of the date hereof, and after giving effect to this Agreement and the completion of all other transactions contemplated by Debtor at the time of the execution of this Agreement, (i) Debtor is and will be solvent, (ii) the fair saleable value of Debtor's assets exceeds and will continue to exceed Debtor's liabilities (both fixed and contingent), (iii) Debtor is paying and will continue to be able to pay its debts as they mature or within forty-five(45) days thereafter, and (iv) if Debtor is not an individual, Debtor has and will have sufficient capital to carry on Debtor's businesses and all businesses in which Debtor is about to engage. ARTICLE IV DEBTORS COVENANTS Debtor covenants and agrees that: 4.1 INDEBTEDNESS AND THIS AGREEMENT. Debtor shall pay, or cause the payment of, the Indebtedness in accordance with its terms and shall promptly perform all of his (or its) agreements herein and in any other agreements between him (or it) and Secured Party. 4.2 OWNERSHIP OF COLLATERAL. At the time Debtor grants to Secured Party a security interest in any Collateral, Debtor shall be the absolute owner thereof (subject only to the Prior Liens) and shall have the right to grant such security interest. Debtor shall defend the Collateral against all claims and demands of all persons at any time claiming any interest therein adverse to Secured Party. Debtor shall keep the Collateral free from all liens and security interests except those for taxes not yet due, the Security Interest, and the Prior Liens. 4.3 INSURANCE. Debtor shall insure the Collateral with companies acceptable to Secured Party against such casualties and in such amounts as Secured Party shall require. All insurance policies shall be written for the benefit of Debtor and Secured Party as their interests may appear, or in other form satisfactory to Secured Party, and such policies or certificates evidencing the same shall be furnished to Secured Party. All policies of insurance shall provide for written notice to Secured Party simultaneously with any notice of cancellation or other termination being given to Debtor, and in any event at least 10 days prior to cancellation or other termination. Risk of loss or damage is Debtors to the extent of any deficiency in any effective insurance coverage. Secured Party is appointed Debtors attorney-in-fact to collect any return or unearned premiums or the proceeds of such insurance and to endorse any draft or check payable to Debtor therefor. 4.4 MAINTENANCE. Debtor shall keep and maintain the Collateral in good condition, reasonable wear and tear excepted. 4.5 SECURED PARTYS COSTS. Debtor shall pay all costs necessary to obtain, preserve, perfect, defend, and enforce this Security Interest, collect the Indebtedness, and preserve, defend, enforce, and collect the Collateral, including but not limited to taxes, assessments, insurance premiums, repairs, reasonable attorneys fees and legal expenses, feed, rent, storage costs, and expenses of sales. Whether Collateral is or is not in Secured Partys possession, and without any obligation to do so and without waiving Debtors default for failure to make any such payment, Secured Party at its option may pay any such costs and expenses, discharge encumbrances on the Collateral, and pay for insurance of Collateral, and such payment shall be a part of the Indebtedness. Debtor agrees to reimburse Secured Party on demand for any costs so incurred. 4.6 INFORMATION AND INSPECTION. Debtor shall (i) furnish Secured Party any financial statements of Debtor or reports to Debtor by accountants or others pertaining to Debtors business as soon as available, and any information with respect to the Collateral requested by Secured Party; (ii) allow Secured Party to inspect the Collateral, at any time and wherever located, and to inspect and copy, or furnish Secured Party with copies of, all records relating to the Collateral and the Indebtedness; (iii) furnish Secured Party such information as Secured Party may request to identify inventory, accounts, and general intangibles in Collateral, at the time and in the form requested by Secured Party; and (iv) deliver upon request to Secured Party shipping and delivery receipts evidencing the shipment of goods and invoices evidencing the receipt of, and the payment for, inventory in Collateral. 4.7 ADDITIONAL DOCUMENTS. Debtor shall sign any papers furnished by Secured Party which are necessary in the judgment of Secured Party to obtain, maintain, and perfect the Security Interest and to enable Secured Party to comply with the Federal Assignment of Claims Act or any other federal or state law in order to obtain or perfect Secured Partys interest in collateral or to obtain proceeds of collateral. 4.8 PARTIES LIABLE ON COLLATERAL. Debtor will preserve the liability of all obligors on any Collateral and will preserve the priority of all security therefor. Secured Party shall have no duty to preserve such liability or security, but may do so at the expense of Debtor, without waiving Debtors default. 4.9 MODIFICATION OF COLLATERAL. Without the written consent of Secured Party, which consent shall not be unreasonably withheld, Debtor shall not agree to any modification of any of the terms of any accounts, contracts, chattel paper, general intangibles, or instruments constituting part of the Collateral. 4.10 RIGHT OF SECURED PARTY TO NOTIFY DEBTORS. At any time, whether Debtor is or is not in default under this Agreement, Secured Party may notify persons obligated on any Collateral to make payments directly to Secured Party and Secured Party may take control of all proceeds of any Collateral. Until Secured Party elects to exercise such rights, Debtor, as agent of Secured Party, shall collect and enforce all payments owed on Collateral. 4.11 DELIVERY OF RECEIPTS OF SECURED PARTY; REJECTED GOODS. Upon Secured Party's demand, Debtor shall deposit, upon receipt and in the form received, with any necessary endorsement, all payments received as proceeds of Collateral, in a special bank account in a bank of Secured Party's choice over which Secured Party alone shall have power of withdrawal. The funds in said account shall secure the Indebtedness. Secured Party is authorized to make any endorsement in Debtor's name and behalf. Pending such deposit, Debtor shall not mingle any such payments with any of Debtor's other funds or property, but will hold them separate and upon an express trust for Secured Party. Secured Party may from time to time apply the whole or any part of the funds in the special account against the Indebtedness. Unless Secured Party notifies Debtor in writing that it dispenses with any one or more of the following requirements, Debtor shall: (a) inform Secured Party immediately of the rejection of goods, delay in delivery or performance, or claim made, in regard to any Collateral; (b) keep returned goods segregated from Debtor's other property, and hold the goods as trustee for Secured Party until it has paid Secured Party the amount loaned against the related account or chattel paper and deliver the goods on demand to Secured Party; and (c) pay Secured Party the unpaid amount of any account in Collateral (i) if the account is not paid when due; (ii) if purchaser rejects the goods or services covered by the account; or (iii) if Secured Party shall at any time reject the account as unsatisfactory. Secured Party may retain the account in Collateral. Secured Party may charge any deposit amount of Debtor with any such amounts. 4.12 RECORDS OF COLLATERAL. Debtor at all times will maintain accurate books and records covering the Collateral. Debtor immediately will mark all books and records with an entry showing the absolute assignment of all accounts in Collateral to Secured Party and Secured Party is hereby given the right to audit the books and records of Debtor relating to Collateral at any time and from time to time. The amounts shown as owed to Debtor on Debtor's books and on any assignment schedule will be the undisputed amounts owing and unpaid. Debtor shall disclose to Secured Party all agreements modifying any account, instrument, or chattel pater. 4.13 DISPOSITION OF COLLATERAL. Debtor will not sell, transfer, mortgage, or otherwise encumber any Collateral or impair the value thereof in any manner without Secured Party's prior written consent, which Debtor is under no obligation whatsoever to give, including without limitation by purchase, lease, barter, trade, payment deferral, or the creation, assumption or guarantee of indebtedness or other lending of credit; provided, however, the foregoing shall not be applicable to Debtor with respect to (i) inventory sold, leased, manufactured, processed, or consumed in the ordinary course of business, and (ii) unsecured open account trade debts to unrelated parties incurred by Debtor in the ordinary course of business, not to exceed, cumulatively, $50,000 over the aggregate amount of such debts as of October 15, 1997. Secured Party's written consent to any sale, mortgage, transfer, or encumbrance shall not be construed to be a waiver of this provision in respect to any subsequent proposed sale, mortgage, transfer, or encumbrance. If disposition of any Collateral gives rise to an account, chattel paper, or instrument, Debtor immediately shall notify Secured Party, and upon request of Secured Party shall assign or endorse the same to Secured Party. 4.14 ACCOUNTS RECEIVABLE. Each account receivable constituting Collateral will represent the valid and legally enforceable obligation of third parties and shall not be evidenced by any instrument or chattel paper. In the event any account shall give rise to any instrument or chattel paper, Debtor shall immediately endorse the same to Secured Party and deliver all original such instruments and chattel paper to Secured Party. 4.15 LOCATION OF ACCOUNTS AND INVENTORY. Debtor shall give Secured Party written notice of each office of Debtor in which records of Debtor pertaining to accounts in Collateral are kept, and each location at which inventory in Collateral is or will be kept, and of any change of any such location. If no such notice is given, all records of Debtor pertaining to accounts and all inventory are and shall be kept at Debtor's address shown above. 4.16 NOTICE OF CHANGES. Debtor will notify Secured Party immediately of any material change in the Collateral, of a change in Debtor's residence or location, of a change in any matter warranted or represented by Debtor in this Agreement or furnished to Secured Party, and of any Event of Default. 4.17 USE AND REMOVAL OF COLLATERAL. Debtor will not use the Collateral illegally nor, except for Collateral of nominal value, permit the Collateral to be affixed to real or personal property without the prior written consent of Secured Party. Debtor will not permit any of the Collateral to be removed from the locations specified herein without the written consent of Secured Party, except for equipment used in Texas, Louisiana or Alabama in the ordinary course of Debtor's business as previously conducted. 4.18 POSSESSION OF COLLATERAL. If the Collateral is chattel paper, documents, instruments, or investment securities or other instruments, Secured Party may deliver a copy of this Agreement to the broker or seller thereof, or any person in possession thereof, and such delivery shall constitute notice to such person of Secured Party's security interest therein and shall constitute Debtor's instruction to such person to deliver to Secured Party certificates or other evidence of the same as soon as available. Debtor will deliver all investment securities, other instruments, documents, and chattel paper which are part of the Collateral and in Debtor's possession to the Secured Party immediately, or if hereafter acquired, immediately following acquisition, appropriately endorsed to Secured Party's order, or with appropriate, executed powers. Debtor waives presentment, demand, notice of dishonor, protest, and all other notices with respect thereto. 4.19 CHATTEL PAPER. Debtor has perfected or will perfect a security interest by means satisfactory to Secured Party in goods covered by chattel paper in Collateral. 4.20 CONSUMER CREDIT. If any Collateral or proceeds includes obligations of third parties to Debtor, the transactions giving rise to the Collateral shall conform in all respects to the applicable state or federal consumer credit law. DEBTOR SHALL HOLD HARMLESS AND INDEMNIFY SECURED PARTY AGAINST ANY COST, LOSS, OR EXPENSE INCLUDING ATTORNEY'S FEES, ARISING FROM DEBTOR'S BREACH OF THIS COVENANT. 4.21 CHANGE OF NAME. Debtor shall not change its name (or any assumed name or other name under which Debtor does business) or its corporate structure without Secured Party's prior written consent, which shall not be unreasonably withheld. Debtor will not change its principal place of business, chief executive office, or the place where it keeps its books and records unless Debtor (i) shall have given Secured Party thirty (30) days prior written notice thereof, and (ii) shall have taken all action deemed necessary or desirable by Secured Party to cause the Security Interest to be and remain perfected with the priority required by this Agreement. Debtor shall execute all such documents and agreements (including without limitation security agreements, financing statements, and amendments to financing statements) as Secured Party may reasonably request in connection with any such name change. 4.22 NOTATION ON TITLE CERTIFICATES. If certificates of title are issued or outstanding with respect to any of the Collateral, Debtor will cause the Security Interest to be properly noted therein. 4.23 POWER OF ATTORNEY. Debtor appoints Secured Party as Debtor's attorney-in-fact with full power in Debtor's name and behalf to do every act which Debtor is obligated to do or may be required to do hereunder; however, nothing in this section shall be construed to obligate Secured Party to take any action hereunder. 4.24 DEBTOR'S WAIVERS. Debtor waives notice of the creation, advance, increase, existence, extension, or renewal of, and of any indulgence with respect to, the Indebtedness; waives notice of intent to accelerate, notice of acceleration, notice of intent to demand, presentment, demand, notice of dishonor, and protest; waives notice of the amount of the Indebtedness outstanding at any time, notice of any change in financial condition of any person liable for the Indebtedness or any part thereof, notice of any Event of Default, and all other notices respecting the Indebtedness; and agrees that maturity of the Indebtedness and any part thereof may be accelerated, extended, or renewed one or more times by Secured Party in its discretion, without notice to Debtor. 4.25 OTHER PARTIES AND OTHER COLLATERAL. No renewal or extension of or any other indulgence with respect to the Indebtedness or any part thereof, no release of any security, no release of any person (including any maker, endorser, guarantor, or surety) liable on the Indebtedness, no delay in enforcement of payment, and no delay or admission or lack of diligence or care in exercising any right or power with respect to the Indebtedness or any security therefor or guaranty thereof or under this Agreement shall in other manner impair or affect the rights of Secured Party under the law, under this Agreement, or under any other agreement pertaining to the other security for the Indebtedness, before foreclosing upon the Collateral for the purpose of paying the Indebtedness. Debtor waives any right to the benefit of or to require or control application of any other security or proceeds thereof, and Debtor agrees that Secured Party shall have no duty or obligation to Debtor to apply to the Indebtedness any such other security or proceeds thereof. ARTICLE V RIGHTS AND POWERS OF SECURED PARTY Secured Party, after default, without liability to Debtor, may: obtain from any person information regarding Debtor or Debtor's business, which information any such person also may furnish without liability to Debtor; require Debtor to give possession or control of any Collateral to Secured Party; endorse as Debtor's agent any instruments, documents, or chattel paper in Collateral or representing proceeds of Collateral; contact account debtors directly to verify information furnished by Debtor; take control of proceeds; release Collateral in its possession to any Debtor temporarily or otherwise; require additional collateral; reject as unsatisfactory any property hereafter offered by Debtor as Collateral; set standards from time to time to govern what may be used as after-acquired collateral; designate, from time to time, a certain percent of the Collateral as the loan value and require Debtor to maintain the Indebtedness at or below such figure; take control of funds generated by the Collateral, such as cash dividends, interest, and proceeds or refunds from insurance, and use same to reduce any part of the Indebtedness and exercise all other rights which an owner of such Collateral may exercise, except the right to vote or dispose of Collateral before an Event of Default; at any time transfer any of the Collateral or evidence thereof into its own name of that of its nominee; and demand, collect, convert, redeem, receipt for, settle, compromise, adjust, sue for, foreclose, or realize upon Collateral, in its own name or in the name of Debtor, as Secured Party may determine in its sole and absolute discretion. Secured Party shall not be liable for failure to collect any account or instrument, or for any act or omission on the part of the Secured Party, its officers, agents, or employees, except willful misconduct. The foregoing rights and powers of Secured Party will be in addition to, and not a limitation upon, any rights and powers of Secured Party given by law, elsewhere in this Agreement, or otherwise. If Debtor fails to maintain any required insurance, to the extent permitted by applicable law Secured Party may (but is not obligated to) purchase single interest insurance coverage for the Collateral which insurance may at Secured Party's option (i) protect only Secured Party and not provide any remuneration or protection for Debtor directly and (ii) provide coverage only after the Indebtedness has been declared due as herein provided. The premiums for any such insurance purchased by Secured Party shall be a part of the Indebtedness and shall bear interest as provided in Section 1.2(d) above. ARTICLE VI DEFAULT 6.1 Events of Default. The following are events of default under this Agreement ("Events of Default"): (a) default, which exists for longer than fifteen (15) calendar days, in the timely payment of any part of the New Note or other Indebtedness or in performance or observance of the terms and conditions herein, in any of the other Security Documents, or in any other agreement between Debtor and Secured Party; (b) any warranty, representation, or statement made or furnished to Secured Party by Debtor, Consolidated, or any of Consolidated's subsidiaries proves to have been false in any material respect when made or furnished; (c) acceleration of the maturity of debt of Debtor, Consolidated, or any of Consolidated's subsidiaries to any other person; (d) substantial change in any fact warranted or represented in this Agreement or in any other agreement between Debtor and Secured Party or in any statement, schedule, or other writing furnished in connection therewith; (e) sale, loss, theft, destruction, encumbrance, or transfer of any Collateral in violation hereof, or substantial damage to any Collateral; (f) belief by Secured Party that the prospect of payment of the Indebtedness or performance of this Agreement is impaired; (g) death, incapacity, dissolution, merger, or consolidation, termination of existence, insolvency or business failure of Debtor or any person liable on the Indebtedness; commencement of proceedings for the appointment of a receiver for any property of Debtor; commencement of any proceeding under any bankruptcy or insolvency law by or against Debtor (or any corporate action shall be taken to effect same), or any partnership of which Debtor is a partner, or by or against any person liable upon the Indebtedness or any part thereof, or liable upon Collateral; (h) levy on, seizure, or attachment of any property of Debtor, Consolidated, or any of Consolidated's subsidiaries; (i) a judgment against Debtor in excess of $1,000 becomes final and remains unsatisfied and unappealed for thirty (30) calendar days; or (j) any liability or agreement of third parties to Debtor or on the Collateral shall not be paid or performed in accordance with the terms thereof. 6.2 REMEDIES OF SECURED PARTY UPON DEFAULT. When an Event of Default occurs, and at any time thereafter, Secured Party without notice or demand may declare the Indebtedness in whole or part immediately due and may enforce payment of the same and exercise any rights under the Texas UCC, rights and remedies of Secured Party under this Agreement, or otherwise. Secured Party may require Debtor to assemble the Collateral and make it available to Secured Party at a place which is reasonably convenient to both parties. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Secured Party will give Debtor reasonable notice of the time and place of any public sale thereof or of the time after which any private sale or other intended disposition thereof is to be made. Expenses of retaking, holding, preparing for sale, selling, leasing, or the like shall include Secured Party's reasonable attorney's fees and legal expenses. Secured Party shall be entitled to immediate possession of all books and records evidencing any accounts or general intangibles or pertaining to chattel paper covered by this Agreement and shall have the authority to enter upon any premises upon which any of the same, or any Collateral, may be situated and remove the same therefrom without liability. Secured Party may surrender any insurance policies in Collateral and receive the unearned premium thereon. Debtor shall be entitled to any surplus after payment of the Indebtedness and shall be liable to Secured Party for any deficiency. The process of any disposition after default available to satisfy the Indebtedness shall be applied to the Indebtedness in such order and in such manner as Secured Party in its discretion shall decide. If, in the opinion of Secured Party, there is any question that a public sale or distribution of any Collateral will violate any state or federal securities law, Secured Party (i) may offer and sell securities privately to purchasers who will agree to take them for investment purposes and not with a view to distribution and who will agree to imposition of restrictive legends on the certificates representing the security, or (ii) may sell such securities in an intrastate offering under Section 3(a)(11) of the Securities Act of 1933, and no sale so made in good faith by Secured Party shall be deemed to be not "commercially reasonable" because so made. ARTICLE VII GENERAL 7.1 PARTIES BOUND. Secured Party's rights under this Agreement and the Security Interest shall inure to the benefits of its successors and assigns, and in the event of any assignment or transfer of any of the Indebtedness or the Collateral, Secured Party thereafter shall be fully discharged from any responsibility with respect to the Collateral so assigned or transferred, but Secured Party shall retain all rights and powers hereby given with respect to any of the Indebtedness or Collateral not so assigned or transferred. All representations, warranties, and agreements of Debtor if more than one are joint and several, and all shall be binding upon the personal representatives, heirs, successors, and assigns of Debtor. Debtor may not assign this Agreement or any of its rights or obligations hereunder without the express prior written consent of Secured Party in each instance. 7.2 WAIVER. No delay of Secured Party in exercising any power or right shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude other or further exercise thereof or the exercise of any other power or right. No waiver by Secured Party of any right hereunder of any default by Debtor shall be binding upon Secured Party unless in writing, and no failure by Secured Party to exercise any power or right hereunder or waiver of any default by Debtor shall operate as a waiver of any other or further exercise of such right or power of any further default. 7.3 AGREEMENT CONTINUING. This Agreement shall constitute a continuing agreement, applying to all future as well as existing transactions, whether or not of the character contemplated at the date of this Agreement, and if all transactions between Secured Party and Debtor shall be closed at any time, shall be equally applicable to any new transactions thereafter. Provisions of this Agreement, unless by their terms exclusive, shall be in addition to other agreements between the parties. 7.4 DEFINITIONS. Unless the context indicates otherwise, definitions in the Texas UCC apply to words and phrases in this Agreement; if Texas UCC definitions conflict, Chapter 9 definitions apply. 7.5 NOTICE. Notice shall be deemed reasonable if mailed postage prepaid at least 5 days before the related action (or if the Texas UCC elsewhere specifies a longer period, such longer period) to Debtor's address shown above. 7.6 INTEREST. No agreement relating to the Indebtedness shall be construed to be a contract for or to authorize charging or receiving, or require the payment or permit the collection of, interest at a rate or in an amount above that authorized by law. Interest payable under any agreement above that authorized by law shall be reduced automatically to the highest amount permitted by law. 7.7 MODIFICATIONS. No provision hereof shall be modified or limited except by a written agreement expressly referring hereto and to the provisions so modified or limited and signed by Debtor and Secured Party, nor by course of conduct, usage of trade, or by the law merchant. 7.8 SEVERABILITY. The unenforceability of any provision of this Agreement shall not affect the enforceability or validity of any other provision. 7.9 GENDER AND NUMBER. Where appropriate, the use of one gender shall be construed to include the others or any of them; and the singular number shall be construed to include the plural, and vice versa. 7.10 APPLICABLE LAW AND VENUE. THIS AGREEMENT SHALL BE CONSTRUED ACCORDING TO THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA APPLICABLE TO TRANSACTIONS IN THE STATE OF TEXAS. Except at otherwise stated, this Agreement and the Security Interest shall be construed in accordance with the Uniform Commercial Code as in effect in the State of Texas ("Texas UCC"). This Agreement is performable by Debtor in the county of Secured Party's address set out above. 7.11 FINANCING STATEMENT. A carbon, photographic, or other reproduction of this security agreement or any financing statement covering the Collateral shall be sufficient as a financing statement. 7.12 LIMITATIONS OF LAW. If any law prohibits or limits any charge or expense provided for in this Agreement in connection with any loan secured hereby, such charge or expense will not be made or incurred in connection with such loan beyond the limits permitted by such law. EXECUTED this 6th day of November, 1997. DEBTOR: LARCO ENVIRONMENTAL SERVICES, INC. By: /s/ James J. Connors, Jr. Name: James J. Connors, Jr. Title: President/CEO SECURED PARTY: AMERICAN PHYSICIANS SERVICE GROUP, INC. By: /s/ Duane Boyd Name: Duane Boyd Title: Senior VP EXHIBIT-A LIST OF ASSETS OF DEBTOR EX-10 11 SHARE EXCH AGREEMNT-CASANOVA, GARZA, NIELSON Exh. 10-35 SHARE EXCHANGE AGREEMENT This Share Exchange Agreement (this "Agreement") is made and entered into as of the ____ day of November, 1997, by and between American Physicians Service Group, Inc., a Texas corporation ("APS") and Robert Casanova, M.D. (the "Shareholder"). R E C I T A L S: WHEREAS, pursuant to that certain Agreement and Plan of Reorganization (the "Merger Agreement") entered into by Shareholder more or less of even date herewith and the other contracts and agreements to which Shareholder was, or was to be, a party as contemplated in the Merger Agreement (the Merger Agreement and all such other contracts and agreements are hereinafter referred to collectively as the "Acquisition Documents"), Shareholder acquired 78,750 shares (the "PM Shares") of the $0.001 par value per share common stock of APS Practice Management, Inc., a Texas corporation ("Practice Management") for a consideration of $5.00 per PM Share (the "Exchange Value"); and WHEREAS, APS has agreed, on the terms and subject to the conditions hereof, to exchange certain shares of its $0.10 par value per share common stock ("APS Common") for the PM Shares. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. CONDITIONS TO EXCHANGE RIGHT. In addition to the other terms and conditions contained in this Agreement, Shareholder shall only be entitled to exchange the PM Shares for shares of APS Common if each of the following conditions has been satisfied: (a) There shall not have been, on or before November 1, 1999 (the "Determination Date"), any registered public offering of the common stock of Practice Management, or any other transaction or event pursuant to which shares of Practice Management of the same class as the PM Shares shall have become publicly traded.; and (b) Shareholder shall not be, or have been, at any time on or prior to the date of the closing of any exchange of stock pursuant to this Agreement (the "Closing Date"), in breach of, or default under, this Agreement, any of the Acquisition Documents or any other contract or agreement to which Shareholder and Practice Management and/or APS are parties, and Shareholder shall not have threatened to breach or default under this Agreement, any of the Acquisition Documents or any such other contract or agreement; and (c) At the Closing Date, Shareholder has all requisite legal capacity and authority to engage in the transactions contemplated by this Agreement, is the owner of all the PM Shares, and the PM Shares are free of any and all liens, claims or encumbrances of any kind whatsoever; and (d) At or before the Closing Date, Practice Management shall not be, or have been, a party to any merger consolidation or similar transaction, or agreement with respect thereto, pursuant to which Practice Management was not or would not be, the named surviving entity after such merger, consolidation or other transaction. 2. EXCHANGE NOTICE. In the event all of the conditions described in Section 1 are satisfied as of the Determination Date and Shareholder elects to exercise its right to exchange its PM Shares for shares of APS Common, Shareholder shall provide written notice thereof (the "Exchange Notice") to APS, which Exchange Notice must be received by APS not later than the date (the "Expiration Date") which is ninety (90) calendar days after the Determination Date. In the event (i) any of the conditions required for an exchange to be permissible, as described in Section 1 above, fail to be satisfied on or prior to the Determination Date, or (ii) any of the conditions specified in subsections (b), (c) and (d) of Section 1 fail to be satisfied on or prior to the Closing Date, or (iii) APS fails to receive an Exchange Notice from Shareholder on or prior to the Expiration Date; then, in any such case, all of Shareholder's rights under this Agreement shall automatically terminate and be of no further force or effect whatsoever. 3. SHARE CONVERSION. (a) Shareholder's right to exchange its PM Shares hereunder shall apply as to all, but not less than all, of the PM Shares which are eligible for exchange as described in this paragraph (a) of Section 3. Assuming Shareholder has complied with all of the conditions allowing for an exchange pursuant to this Agreement, 55,417 of the PM Shares shall be eligible for conversion as provided in this Agreement; and the remaining 23,333 PM Shares, or a portion thereof, will only be eligible for an exchange hereunder in the event, and only to the extent, the Clinic (as hereinafter defined) achieves certain Practice Accrual Earnings (as hereinafter defined) levels prior to the Determination Date. For purposes of this Agreement, the terms "Clinic" and "Practice Accrual Earnings" shall have the meanings set forth in that certain Management Agreement which is one of the Acquisition Documents. The Practice Accrual Earnings of Clinic for any twelve (12) consecutive monthly period ending on or prior to the Determination Date is hereinafter referred to as the "Clinic PAE." The parties acknowledge and agree that in the event Clinic PAE does not exceed $933,333 during any twelve (12) consecutive calendar monthly period ending on or prior to the Determination Date, then no portion of the 23,333 PM Shares shall be subject to exchange pursuant to this Agreement. In the event that, during any twelve (12) consecutive calendar monthly period ending on or prior to the Determination Date, the Clinic PAE exceeds $933,333, then the percentage of the 23,333 PM Shares which will be eligible for exchange pursuant to this Agreement (assuming compliance with all other conditions provided for in this Agreement) will be determined by multiplying 23,333 by a fraction, the numerator of which is the amount by which Clinic PAE exceeds $816,666 (but not greater than $233,333 in any event), and the denominator of which is $233,333. EXAMPLE: The following is provided purely by way of example only, and illustrates the calculation of the number of PM Shares eligible for exchange under this Agreement, assuming satisfaction of all other conditions allowing for an exchange pursuant to this Agreement. Assume Clinic PAE is $933,333 for the 12 months ended December 31, 1998, which is the largest twelve (12) month level of Clinic PAE achieved in any period ended on or prior to the Determination Date. Total PM Shares eligible for exchange hereunder would be 67,084 determined as follows: $933,333 - $816,666 x 23,333 = 11,667 ------------------- $233,333 55,417 ------ 67,084 (b) In the event Shareholder has complied with all of the conditions allowing for an exchange pursuant to this Agreement, the closing of any such exchange (the "Closing") shall occur at the offices of APS in Austin, Texas, on such day and at such time as the parties hereto may mutually agree upon, or in the failure to so agree, at 10:00 a.m. Austin, Texas time on the first business day that falls thirty (30) days after the Expiration Date. The maximum number of PM Shares which Shareholder has the right to exchange pursuant to paragraph (a) of this Section are hereinafter referred to as the "Exchangeable PM Shares"; and the "Gross Exchange Value" for purposes of this Agreement is the gross dollar amount determined by multiplying the Exchangeable PM Shares by the Exchange Value. For purposes of determining the number of shares of APS Common which may be received upon any exchange, no consideration will be given to stock dividends, stock splits, reverse stock splits or recapitalizations to which Practice Management or the PM Shares are subject after the date this Agreement was originally entered into as first above written. At the Closing, Shareholder shall be entitled to receive such shares of APS Common as is determined by dividing the Gross Exchange Value by the average of the "bid" and "ask" prices for APS Common as quoted by the National Association of Securities Dealers Automated Quotation System at the close of trading on each of the last five (5) business days immediately preceding the Closing Date. (c) At the Closing, Shareholder shall tender its share certificate(s) for all of the Exchangeable PM Shares, duly endorsed in blank, to APS, and shall also provide APS with an executed blank stock power, in form and substance reasonably acceptable to APS, wherein Shareholder represents and warrants to APS (i) that Shareholder has all necessary legal capacity, power and authority to engage in the transactions contemplated hereby, and (ii) that Shareholder owns all interests in and to the Exchangeable PM Shares and that the Exchangeable PM Shares are being transferred to APS free and clear of all liens, claims or encumbrances of any kind whatsoever. The shares of APS Common that Shareholder receives in the exchange are hereinafter referred to as the "New APS Shares." The parties acknowledge and agree that Shareholder shall receive a whole number of shares of APS Common only, and that any fractional share amounts resulting from the foregoing conversion calculation shall be rounded up or down, as the case may be, to the next whole number of shares. APS shall be under no obligation to pay any cash or other amounts with respect to any fractional share amounts, or to issue any fractional share amounts to Shareholder. At the Closing, Shareholder shall either receive a share certificate for all its New APS Shares or, if APS' transfer agent is unable to produce such certificate by the Closing Date, will receive a copy of a registered letter sent from APS to the transfer agent instructing the transfer agent to deliver such certificate in the name of Shareholder directly to Shareholder or Shareholder's designee. 4. NEW APS SHARES TRANSFERABILITY. APS will have registered the New APS Shares with the Securities and Exchange Commission, and made such other filings and taken such other steps as necessary, so that Shareholder may immediately sell, or otherwise convey, the New APS Shares without restriction (except as otherwise provided below). Shareholder agrees to cooperate fully and in all respects with APS in connection with any such registration, whether such cooperation is requested before or after the Determination Date. Failure of Shareholder to cooperate fully, including without limitation, promptly providing complete and accurate information to APS, in connection with the registration of any APS Common shares, whether such cooperation and/or information is requested before or after the Determination Date or before or after Shareholder delivers any Exchange Notice, shall automatically terminate Shareholder's rights under this Agreement. Notwithstanding anything contained herein to the contrary, in the event that APS is in the process, either at the Closing Date or at the Determination Date, of registering and/or selling any of its capital stock in or pursuant to any underwritten public offering, upon the written request of the lead underwriter involved therein, Shareholder agrees, and shall then agree in writing in form and substance reasonably acceptable to APS, to not sell, attempt to sell, or solicit or accept any offers to sell or otherwise convey, any of the New APS Shares for such period of time (not to exceed one hundred eighty (180) days) as may be requested by such lead underwriter. 5. MISCELLANEOUS. (a) Fees and Expenses. Each party hereto agrees to bear all fees and expenses (including without limitation all fees and expenses for its legal counsel and any accountants or other professional advisors) incurred in connection with the transactions contemplated hereby. (b) Governing Law and Venue. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Texas (except the laws of Texas that would render such choice of law ineffective). Venue for any action relating to this Agreement shall be proper only in Texas. (c) Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. (d) Inurement. This Agreement shall be binding upon the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. No party hereto may assign this Agreement, or any of their rights or obligations hereunder, without the express prior written consent of all parties hereto in each instance. (e) Notices. Any notices required or permitted to be given under this Agreement shall be given in writing and shall be deemed received (a) when personally delivered to the relevant party at its address as set forth below or (b) if sent by mail, on the third day following the date when deposited in the United States mail, certified or registered mail, postage pre-paid to the relevant party at its address indicated below: APS: American Physicians Service Group, Inc. 1301 Capital of Texas Highway, Suite C-300 Austin, Texas 78746-6550 Attn: President Shareholder: Robert Casanova, M.D. 11111 Research Blvd., Suite 450 Austin, Texas 78759 Any party may change its address for purposes of this Agreement by proper notice to the other party. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, intending to be legally bound hereby, as of the date first above written. APS: AMERICAN PHYSICIANS SERVICE GROUP, INC. By: /s/ Ken Shifrin Printed Name: Kenneth S. Shifrin Title: SHAREHOLDER: /s/ Robert Casanova, M.D. Robert Casanova, M.D. SHARE EXCHANGE AGREEMENT This Share Exchange Agreement (this "Agreement") is made and entered into as of the ____ day of November, 1997, by and between American Physicians Service Group, Inc., a Texas corporation ("APS") and Devin Garza, M.D. (the "Shareholder"). R E C I T A L S: WHEREAS, pursuant to that certain Agreement and Plan of Reorganization (the "Merger Agreement") entered into by Shareholder more or less of even date herewith and the other contracts and agreements to which Shareholder was, or was to be, a party as contemplated in the Merger Agreement (the Merger Agreement and all such other contracts and agreements are hereinafter referred to collectively as the "Acquisition Documents"), Shareholder acquired 78,750 shares (the "PM Shares") of the $0.001 par value per share common stock of APS Practice Management, Inc., a Texas corporation ("Practice Management") for a consideration of $5.00 per PM Share (the "Exchange Value"); and WHEREAS, APS has agreed, on the terms and subject to the conditions hereof, to exchange certain shares of its $0.10 par value per share common stock ("APS Common") for the PM Shares. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. CONDITIONS TO EXCHANGE RIGHT. In addition to the other terms and conditions contained in this Agreement, Shareholder shall only be entitled to exchange the PM Shares for shares of APS Common if each of the following conditions has been satisfied: (a) There shall not have been, on or before November 1, 1999 (the "Determination Date"), any registered public offering of the common stock of Practice Management, or any other transaction or event pursuant to which shares of Practice Management of the same class as the PM Shares shall have become publicly traded.; and (b) Shareholder shall not be, or have been, at any time on or prior to the date of the closing of any exchange of stock pursuant to this Agreement (the "Closing Date"), in breach of, or default under, this Agreement, any of the Acquisition Documents or any other contract or agreement to which Shareholder and Practice Management and/or APS are parties, and Shareholder shall not have threatened to breach or default under this Agreement, any of the Acquisition Documents or any such other contract or agreement; and (c) At the Closing Date, Shareholder has all requisite legal capacity and authority to engage in the transactions contemplated by this Agreement, is the owner of all the PM Shares, and the PM Shares are free of any and all liens, claims or encumbrances of any kind whatsoever; and (d) At or before the Closing Date, Practice Management shall not be, or have been, a party to any merger consolidation or similar transaction, or agreement with respect thereto, pursuant to which Practice Management was not or would not be, the named surviving entity after such merger, consolidation or other transaction. 2. EXCHANGE NOTICE. In the event all of the conditions described in Section 1 are satisfied as of the Determination Date and Shareholder elects to exercise its right to exchange its PM Shares for shares of APS Common, Shareholder shall provide written notice thereof (the "Exchange Notice") to APS, which Exchange Notice must be received by APS not later than the date (the "Expiration Date") which is ninety (90) calendar days after the Determination Date. In the event (i) any of the conditions required for an exchange to be permissible, as described in Section 1 above, fail to be satisfied on or prior to the Determination Date, or (ii) any of the conditions specified in subsections (b), (c) and (d) of Section 1 fail to be satisfied on or prior to the Closing Date, or (iii) APS fails to receive an Exchange Notice from Shareholder on or prior to the Expiration Date; then, in any such case, all of Shareholder's rights under this Agreement shall automatically terminate and be of no further force or effect whatsoever. 3. SHARE CONVERSION. (a) Shareholder's right to exchange its PM Shares hereunder shall apply as to all, but not less than all, of the PM Shares which are eligible for exchange as described in this paragraph (a) of Section 3. Assuming Shareholder has complied with all of the conditions allowing for an exchange pursuant to this Agreement, 55,417 of the PM Shares shall be eligible for conversion as provided in this Agreement; and the remaining 23,333 PM Shares, or a portion thereof, will only be eligible for an exchange hereunder in the event, and only to the extent, the Clinic (as hereinafter defined) achieves certain Practice Accrual Earnings (as hereinafter defined) levels prior to the Determination Date. For purposes of this Agreement, the terms "Clinic" and "Practice Accrual Earnings" shall have the meanings set forth in that certain Management Agreement which is one of the Acquisition Documents. The Practice Accrual Earnings of Clinic for any twelve (12) consecutive monthly period ending on or prior to the Determination Date is hereinafter referred to as the "Clinic PAE." The parties acknowledge and agree that in the event Clinic PAE does not exceed $933,333 during any twelve (12) consecutive calendar monthly period ending on or prior to the Determination Date, then no portion of the 23,333 PM Shares shall be subject to exchange pursuant to this Agreement. In the event that, during any twelve (12) consecutive calendar monthly period ending on or prior to the Determination Date, the Clinic PAE exceeds $933,333, then the percentage of the 23,333 PM Shares which will be eligible for exchange pursuant to this Agreement (assuming compliance with all other conditions provided for in this Agreement) will be determined by multiplying 23,333 by a fraction, the numerator of which is the amount by which Clinic PAE exceeds $816,666 (but not greater than $233,333 in any event), and the denominator of which is $233,333. EXAMPLE: The following is provided purely by way of example only, and illustrates the calculation of the number of PM Shares eligible for exchange under this Agreement, assuming satisfaction of all other conditions allowing for an exchange pursuant to this Agreement. Assume Clinic PAE is $933,333 for the 12 months ended December 31, 1998, which is the largest twelve (12) month level of Clinic PAE achieved in any period ended on or prior to the Determination Date. Total PM Shares eligible for exchange hereunder would be 67,084 determined as follows: $933,333 - $816,666 x 23,333 = 11,667 ------------------- $233,333 55,417 ------ 67,084 (b) In the event Shareholder has complied with all of the conditions allowing for an exchange pursuant to this Agreement, the closing of any such exchange (the "Closing") shall occur at the offices of APS in Austin, Texas, on such day and at such time as the parties hereto may mutually agree upon, or in the failure to so agree, at 10:00 a.m. Austin, Texas time on the first business day that falls thirty (30) days after the Expiration Date. The maximum number of PM Shares which Shareholder has the right to exchange pursuant to paragraph (a) of this Section are hereinafter referred to as the "Exchangeable PM Shares"; and the "Gross Exchange Value" for purposes of this Agreement is the gross dollar amount determined by multiplying the Exchangeable PM Shares by the Exchange Value. For purposes of determining the number of shares of APS Common which may be received upon any exchange, no consideration will be given to stock dividends, stock splits, reverse stock splits or recapitalizations to which Practice Management or the PM Shares are subject after the date this Agreement was originally entered into as first above written. At the Closing, Shareholder shall be entitled to receive such shares of APS Common as is determined by dividing the Gross Exchange Value by the average of the "bid" and "ask" prices for APS Common as quoted by the National Association of Securities Dealers Automated Quotation System at the close of trading on each of the last five (5) business days immediately preceding the Closing Date. (c) At the Closing, Shareholder shall tender its share certificate(s) for all of the Exchangeable PM Shares, duly endorsed in blank, to APS, and shall also provide APS with an executed blank stock power, in form and substance reasonably acceptable to APS, wherein Shareholder represents and warrants to APS (i) that Shareholder has all necessary legal capacity, power and authority to engage in the transactions contemplated hereby, and (ii) that Shareholder owns all interests in and to the Exchangeable PM Shares and that the Exchangeable PM Shares are being transferred to APS free and clear of all liens, claims or encumbrances of any kind whatsoever. The shares of APS Common that Shareholder receives in the exchange are hereinafter referred to as the "New APS Shares." The parties acknowledge and agree that Shareholder shall receive a whole number of shares of APS Common only, and that any fractional share amounts resulting from the foregoing conversion calculation shall be rounded up or down, as the case may be, to the next whole number of shares. APS shall be under no obligation to pay any cash or other amounts with respect to any fractional share amounts, or to issue any fractional share amounts to Shareholder. At the Closing, Shareholder shall either receive a share certificate for all its New APS Shares or, if APS' transfer agent is unable to produce such certificate by the Closing Date, will receive a copy of a registered letter sent from APS to the transfer agent instructing the transfer agent to deliver such certificate in the name of Shareholder directly to Shareholder or Shareholder's designee. 4. NEW APS SHARES TRANSFERABILITY. APS will have registered the New APS Shares with the Securities and Exchange Commission, and made such other filings and taken such other steps as necessary, so that Shareholder may immediately sell, or otherwise convey, the New APS Shares without restriction (except as otherwise provided below). Shareholder agrees to cooperate fully and in all respects with APS in connection with any such registration, whether such cooperation is requested before or after the Determination Date. Failure of Shareholder to cooperate fully, including without limitation, promptly providing complete and accurate information to APS, in connection with the registration of any APS Common shares, whether such cooperation and/or information is requested before or after the Determination Date or before or after Shareholder delivers any Exchange Notice, shall automatically terminate Shareholder's rights under this Agreement. Notwithstanding anything contained herein to the contrary, in the event that APS is in the process, either at the Closing Date or at the Determination Date, of registering and/or selling any of its capital stock in or pursuant to any underwritten public offering, upon the written request of the lead underwriter involved therein, Shareholder agrees, and shall then agree in writing in form and substance reasonably acceptable to APS, to not sell, attempt to sell, or solicit or accept any offers to sell or otherwise convey, any of the New APS Shares for such period of time (not to exceed one hundred eighty (180) days) as may be requested by such lead underwriter. 5. MISCELLANEOUS. (a) Fees and Expenses. Each party hereto agrees to bear all fees and expenses (including without limitation all fees and expenses for its legal counsel and any accountants or other professional advisors) incurred in connection with the transactions contemplated hereby. (b) Governing Law and Venue. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Texas (except the laws of Texas that would render such choice of law ineffective). Venue for any action relating to this Agreement shall be proper only in Texas. (c) Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. (d) Inurement. This Agreement shall be binding upon the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. No party hereto may assign this Agreement, or any of their rights or obligations hereunder, without the express prior written consent of all parties hereto in each instance. (e) Notices. Any notices required or permitted to be given under this Agreement shall be given in writing and shall be deemed received (a) when personally delivered to the relevant party at its address as set forth below or (b) if sent by mail, on the third day following the date when deposited in the United States mail, certified or registered mail, postage pre-paid to the relevant party at its address indicated below: APS: American Physicians Service Group, Inc. 1301 Capital of Texas Highway, Suite C-300 Austin, Texas 78746-6550 Attn: President Shareholder: Devin Garza, M.D. 11111 Research Blvd., Suite 450 Austin, Texas 78759 Any party may change its address for purposes of this Agreement by proper notice to the other party. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, intending to be legally bound hereby, as of the date first above written. APS: AMERICAN PHYSICIANS SERVICE GROUP, INC. By: /s/ Ken Shifrin Printed Name: Kenneth S. Shifrin Title: SHAREHOLDER: /s/ Devin Garza, M.D. Devin Garza, M.D. SHARE EXCHANGE AGREEMENT This Share Exchange Agreement (this "Agreement") is made and entered into as of the ____ day of November, 1997, by and between American Physicians Service Group, Inc., a Texas corporation ("APS") and Shelley Nielson, M.D. (the "Shareholder"). R E C I T A L S: WHEREAS, pursuant to that certain Agreement and Plan of Reorganization (the "Merger Agreement") entered into by Shareholder more or less of even date herewith and the other contracts and agreements to which Shareholder was, or was to be, a party as contemplated in the Merger Agreement (the Merger Agreement and all such other contracts and agreements are hereinafter referred to collectively as the "Acquisition Documents"), Shareholder acquired 78,750 shares (the "PM Shares") of the $0.001 par value per share common stock of APS Practice Management, Inc., a Texas corporation ("Practice Management") for a consideration of $5.00 per PM Share (the "Exchange Value"); and WHEREAS, APS has agreed, on the terms and subject to the conditions hereof, to exchange certain shares of its $0.10 par value per share common stock ("APS Common") for the PM Shares. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. CONDITIONS TO EXCHANGE RIGHT. In addition to the other terms and conditions contained in this Agreement, Shareholder shall only be entitled to exchange the PM Shares for shares of APS Common if each of the following conditions has been satisfied: (a) There shall not have been, on or before November 1, 1999 (the "Determination Date"), any registered public offering of the common stock of Practice Management, or any other transaction or event pursuant to which shares of Practice Management of the same class as the PM Shares shall have become publicly traded.; and (b) Shareholder shall not be, or have been, at any time on or prior to the date of the closing of any exchange of stock pursuant to this Agreement (the "Closing Date"), in breach of, or default under, this Agreement, any of the Acquisition Documents or any other contract or agreement to which Shareholder and Practice Management and/or APS are parties, and Shareholder shall not have threatened to breach or default under this Agreement, any of the Acquisition Documents or any such other contract or agreement; and (c) At the Closing Date, Shareholder has all requisite legal capacity and authority to engage in the transactions contemplated by this Agreement, is the owner of all the PM Shares, and the PM Shares are free of any and all liens, claims or encumbrances of any kind whatsoever; and (d) At or before the Closing Date, Practice Management shall not be, or have been, a party to any merger consolidation or similar transaction, or agreement with respect thereto, pursuant to which Practice Management was not or would not be, the named surviving entity after such merger, consolidation or other transaction. 2. EXCHANGE NOTICE. In the event all of the conditions described in Section 1 are satisfied as of the Determination Date and Shareholder elects to exercise its right to exchange its PM Shares for shares of APS Common, Shareholder shall provide written notice thereof (the "Exchange Notice") to APS, which Exchange Notice must be received by APS not later than the date (the "Expiration Date") which is ninety (90) calendar days after the Determination Date. In the event (i) any of the conditions required for an exchange to be permissible, as described in Section 1 above, fail to be satisfied on or prior to the Determination Date, or (ii) any of the conditions specified in subsections (b), (c) and (d) of Section 1 fail to be satisfied on or prior to the Closing Date, or (iii) APS fails to receive an Exchange Notice from Shareholder on or prior to the Expiration Date; then, in any such case, all of Shareholder's rights under this Agreement shall automatically terminate and be of no further force or effect whatsoever. 3. SHARE CONVERSION. (a) Shareholder's right to exchange its PM Shares hereunder shall apply as to all, but not less than all, of the PM Shares which are eligible for exchange as described in this paragraph (a) of Section 3. Assuming Shareholder has complied with all of the conditions allowing for an exchange pursuant to this Agreement, 55,417 of the PM Shares shall be eligible for conversion as provided in this Agreement; and the remaining 23,333 PM Shares, or a portion thereof, will only be eligible for an exchange hereunder in the event, and only to the extent, the Clinic (as hereinafter defined) achieves certain Practice Accrual Earnings (as hereinafter defined) levels prior to the Determination Date. For purposes of this Agreement, the terms "Clinic" and "Practice Accrual Earnings" shall have the meanings set forth in that certain Management Agreement which is one of the Acquisition Documents. The Practice Accrual Earnings of Clinic for any twelve (12) consecutive monthly period ending on or prior to the Determination Date is hereinafter referred to as the "Clinic PAE." The parties acknowledge and agree that in the event Clinic PAE does not exceed $933,333 during any twelve (12) consecutive calendar monthly period ending on or prior to the Determination Date, then no portion of the 23,333 PM Shares shall be subject to exchange pursuant to this Agreement. In the event that, during any twelve (12) consecutive calendar monthly period ending on or prior to the Determination Date, the Clinic PAE exceeds $933,333, then the percentage of the 23,333 PM Shares which will be eligible for exchange pursuant to this Agreement (assuming compliance with all other conditions provided for in this Agreement) will be determined by multiplying 23,333 by a fraction, the numerator of which is the amount by which Clinic PAE exceeds $816,666 (but not greater than $233,333 in any event), and the denominator of which is $233,333. EXAMPLE: The following is provided purely by way of example only, and illustrates the calculation of the number of PM Shares eligible for exchange under this Agreement, assuming satisfaction of all other conditions allowing for an exchange pursuant to this Agreement. Assume Clinic PAE is $933,333 for the 12 months ended December 31, 1998, which is the largest twelve (12) month level of Clinic PAE achieved in any period ended on or prior to the Determination Date. Total PM Shares eligible for exchange hereunder would be 67,084 determined as follows: $933,333 - $816,666 x 23,333 = 11,667 ------------------- $233,333 55,417 ------ 67,084 (b) In the event Shareholder has complied with all of the conditions allowing for an exchange pursuant to this Agreement, the closing of any such exchange (the "Closing") shall occur at the offices of APS in Austin, Texas, on such day and at such time as the parties hereto may mutually agree upon, or in the failure to so agree, at 10:00 a.m. Austin, Texas time on the first business day that falls thirty (30) days after the Expiration Date. The maximum number of PM Shares which Shareholder has the right to exchange pursuant to paragraph (a) of this Section are hereinafter referred to as the "Exchangeable PM Shares"; and the "Gross Exchange Value" for purposes of this Agreement is the gross dollar amount determined by multiplying the Exchangeable PM Shares by the Exchange Value. For purposes of determining the number of shares of APS Common which may be received upon any exchange, no consideration will be given to stock dividends, stock splits, reverse stock splits or recapitalizations to which Practice Management or the PM Shares are subject after the date this Agreement was originally entered into as first above written. At the Closing, Shareholder shall be entitled to receive such shares of APS Common as is determined by dividing the Gross Exchange Value by the average of the "bid" and "ask" prices for APS Common as quoted by the National Association of Securities Dealers Automated Quotation System at the close of trading on each of the last five (5) business days immediately preceding the Closing Date. (c) At the Closing, Shareholder shall tender its share certificate(s) for all of the Exchangeable PM Shares, duly endorsed in blank, to APS, and shall also provide APS with an executed blank stock power, in form and substance reasonably acceptable to APS, wherein Shareholder represents and warrants to APS (i) that Shareholder has all necessary legal capacity, power and authority to engage in the transactions contemplated hereby, and (ii) that Shareholder owns all interests in and to the Exchangeable PM Shares and that the Exchangeable PM Shares are being transferred to APS free and clear of all liens, claims or encumbrances of any kind whatsoever. The shares of APS Common that Shareholder receives in the exchange are hereinafter referred to as the "New APS Shares." The parties acknowledge and agree that Shareholder shall receive a whole number of shares of APS Common only, and that any fractional share amounts resulting from the foregoing conversion calculation shall be rounded up or down, as the case may be, to the next whole number of shares. APS shall be under no obligation to pay any cash or other amounts with respect to any fractional share amounts, or to issue any fractional share amounts to Shareholder. At the Closing, Shareholder shall either receive a share certificate for all its New APS Shares or, if APS' transfer agent is unable to produce such certificate by the Closing Date, will receive a copy of a registered letter sent from APS to the transfer agent instructing the transfer agent to deliver such certificate in the name of Shareholder directly to Shareholder or Shareholder's designee. 4. New APS Shares Transferability. APS will have registered the New APS Shares with the Securities and Exchange Commission, and made such other filings and taken such other steps as necessary, so that Shareholder may immediately sell, or otherwise convey, the New APS Shares without restriction (except as otherwise provided below). Shareholder agrees to cooperate fully and in all respects with APS in connection with any such registration, whether such cooperation is requested before or after the Determination Date. Failure of Shareholder to cooperate fully, including without limitation, promptly providing complete and accurate information to APS, in connection with the registration of any APS Common shares, whether such cooperation and/or information is requested before or after the Determination Date or before or after Shareholder delivers any Exchange Notice, shall automatically terminate Shareholder's rights under this Agreement. Notwithstanding anything contained herein to the contrary, in the event that APS is in the process, either at the Closing Date or at the Determination Date, of registering and/or selling any of its capital stock in or pursuant to any underwritten public offering, upon the written request of the lead underwriter involved therein, Shareholder agrees, and shall then agree in writing in form and substance reasonably acceptable to APS, to not sell, attempt to sell, or solicit or accept any offers to sell or otherwise convey, any of the New APS Shares for such period of time (not to exceed one hundred eighty (180) days) as may be requested by such lead underwriter. 5. MISCELLANEOUS. (a) Fees and Expenses. Each party hereto agrees to bear all fees and expenses (including without limitation all fees and expenses for its legal counsel and any accountants or other professional advisors) incurred in connection with the transactions contemplated hereby. (b) Governing Law and Venue. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Texas (except the laws of Texas that would render such choice of law ineffective). Venue for any action relating to this Agreement shall be proper only in Texas. (c) Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. (d) Inurement. This Agreement shall be binding upon the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. No party hereto may assign this Agreement, or any of their rights or obligations hereunder, without the express prior written consent of all parties hereto in each instance. (e) Notices. Any notices required or permitted to be given under this Agreement shall be given in writing and shall be deemed received (a) when personally delivered to the relevant party at its address as set forth below or (b) if sent by mail, on the third day following the date when deposited in the United States mail, certified or registered mail, postage pre-paid to the relevant party at its address indicated below: APS: American Physicians Service Group, Inc. 1301 Capital of Texas Highway, Suite C-300 Austin, Texas 78746-6550 Attn: President Shareholder: Shelley Nielson, M.D. 11111 Research Blvd., Suite 450 Austin, Texas 78759 Any party may change its address for purposes of this Agreement by proper notice to the other party. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, intending to be legally bound hereby, as of the date first above written. APS: AMERICAN PHYSICIANS SERVICE GROUP, INC. By: /s/ Ken Shifrin Printed Name: Kenneth S. Shifrin Title: SHAREHOLDER: /s/ Shelley Nielson, M.D. Shelley Nielson, M.D. EX-10 12 1ST AMENDMENT 1995 INCENTIVE AND NQSO PLAN Exh. 10-36 FIRST AMENDMENT TO 1995 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN OF AMERICAN PHYSICIANS SERVICE GROUP, INC. American Physicians Service Group, Inc., a Texas corporation (the "Corporation"), hereby adopts this first amendment (this "Amendment") to its 1995 Incentive and Non-qualified Stock Option Plan, a copy of which is attached hereto as Exhibit A, (the "Plan") effective for all purposes as of December 10, 1997 (the "Effective Date"). R E C I T A L S WHEREAS, on June 13, 1996 the Corporation adopted the Plan; and WHEREAS, the Corporation's Board of Directors have approved an amendment to the Plan, as contained herein, pursuant to which (i) the Plan may be administered by either the Board of Directors or a committee of the Board duly appointed under the terms of the Plan and comprised solely of non-employee directors, and (ii) the holders of Non-Qualified Stock Options (as defined in the Plan) may, upon approval, assign or transfer such Options or their rights thereunder; and WHEREAS, the Corporation desires to amend the Plan to reflect the incorporation of this Amendment. NOW, THEREFORE, in consideration of, and pursuant to, the foregoing, the Corporation hereby adopts this Amendment to the Plan as follows: 1. Article II of the Plan is hereby amended to delete the first sentence which reads: This Plan shall be administered by a committee (the "Committee") composed of members selected by, and serving at the pleasure of, the Board of Directors of the Company (the "Board"). and to replace such sentence with the following text: This Plan shall be administered by an administrative body (the "Committee") designated by the Board of Directors of the Company (the "Board"). The Board may designate itself as the Committee or appoint two or more non-employee directors to a committee which shall serve as the Committee. Article II of the Plan is further amended to delete the sentence which reads: Consistent with Rule 16b-3 each committee member shall be a disinterested person, i.e., a person who has not been granted any equity security pursuant to a plan of the corporation or any of its affiliates during the one year prior to his becoming a committee member or during the period he serves as a committee member. 2. Article VII of the Plan is hereby amended to read in its entirety as follows: Incentive Stock Options and all rights granted thereunder shall not be transferable other than by will or the laws of descent and distribution. Non-Qualified Stock Options and all rights granted thereunder shall not be transferable other than by will or the laws or descent and distribution, or upon the express prior written consent of the Committee in each instance. All Incentive Stock Options shall be exercisable during the Optionee's lifetime, only by the Optionee or the Optionee's guardian or legal representative. 3. Except as specifically amended hereby, the Plan shall remain in full force and effect in accordance with its terms. The Corporation shall be entitled to amend and restate the Plan document to incorporate the foregoing and Exhibit A into a single document. IN WITNESS WHEREOF, the Board of Directors, acting pursuant to Article XI of the Plan, has approved and adopted this Amendment as of the Effective Date. AMERICAN PHYSICIANS SERVICE GROUP, INC. By: /s/ William Hayes ----------------- William Hayes Secretary EX-10 13 1ST AMENDMENT 1995 NON-EMPLOYEE DIRECTOR SO PLAN Exh. 10-37 FIRST AMENDMENT TO 1995 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN OF AMERICAN PHYSICIANS SERVICE GROUP, INC. American Physicians Service Group, Inc., a Texas corporation (the "Corporation"), hereby adopts this first amendment (this "Amendment") to its 1995 Non-Employee Director Stock Option Plan, a copy of which is attached hereto as Exhibit A, (the "Plan") effective for all purposes as of December 10, 1997 (the "Effective Date"). R E C I T A L S WHEREAS, on June 13, 1996 the Corporation adopted the Plan; and WHEREAS, the Corporation's Board of Directors have approved an amendment to the Plan, as contained herein, pursuant to which the holders of Options (as defined in the Plan) may, upon approval, assign or transfer such Options or their rights thereunder; and WHEREAS, the Corporation desires to amend the Plan to reflect the incorporation of this Amendment. NOW, THEREFORE, in consideration of, and pursuant to, the foregoing, the Corporation hereby adopts this Amendment to the Plan as follows: 1. Article VI of the Plan is hereby amended to read in its entirety as follows: Each Option and all rights granted thereunder shall not be transferable other than by will or the laws of descent and distribution, or upon the express prior written consent of the Committee in each instance. 2. Except as specifically amended hereby, the Plan shall remain in full force and effect in accordance with its terms. The Corporation shall be entitled to amend and restate the Plan document to incorporate the foregoing and Exhibit A into a single document. IN WITNESS WHEREOF, the Board of Directors, acting pursuant to Article X of the Plan, has approved and adopted this Amendment as of the Effective Date. AMERICAN PHYSICIANS SERVICE GROUP, INC. By:/s/ William Hayes ----------------- William Hayes Secretary EX-21 14 SUBSIDIARIES OF APS GROUP, INC. EXHIBIT 21.1 SUBSIDIARIES OF AMERICAN PHYSICIANS SERVICE GROUP, INC. AS OF MARCH 20, 1998 Name of Subsidiary State of Incorporation APS Communications Corporation Texas APS Facilities Management, Inc. Texas APS Financial Corporation Colorado APS Insurance Services, Inc. Delaware APS Realty, Inc. Texas American Physicians Insurance Agency, Inc. Texas EX-23 15 INDEPENDENT AUDITORS' CONSENT Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT - -------------------------------------------------------------------------------- We consent to incorporation by reference in the registration statements (Nos. 33-66308, 333-07425, 333-07427) on Form S-8 of American Physicians Service Group, Inc. of our report dated March 6, 1998, relating to the consolidated balance sheets of American Physicians Service Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997 which report appears in the Annual Report on Form 10-K of American Physicians Service Group, Inc. for the year ended December 31, 1997. Austin, Texas March 28, 1998 BY: /s/ KPMG Peat Marwick, LLP -------------------------------- EX-27 16 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1997 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS 12-MOS DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 DEC-31-1997 DEC-31-1996 5,188 5,770 0 728 2,194 4,249 222 290 15 0 8,660 11,625 5,605 4,256 3,775 2,475 29,401 24,468 5,300 3,320 0 0 0 0 0 0 416 405 22,688 19,977 29,401 24,468 0 0 13,065 11,646 0 365 10,467 9,908 506 198 0 0 21 54 5,984 2,969 2,341 1,045 3,468 1,924 930 0 0 0 0 0 2,538 1,924 0.62 0.48 0.59 0.46
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