-----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, AfJI8SEQWUcjI6LMVJA1jZfuV8hHtlJlsn1HSc2JSswiDt1T6jS6JzNQqTPu7BU/ sDp5O+B6m9QCpmwg2Z3Dfg== 0000724024-99-000002.txt : 19990409 0000724024-99-000002.hdr.sgml : 19990409 ACCESSION NUMBER: 0000724024-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 29 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990407 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN PHYSICIANS SERVICE GROUP INC CENTRAL INDEX KEY: 0000724024 STANDARD INDUSTRIAL CLASSIFICATION: 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: 99584217 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 1998 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, 1998 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 25, 1999: $12,499,479 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 25, 1999 -------------------- ---------------- Common Stock, $.10 par value 4,153,683 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, 1998 is incorporated by reference. ============================================================================ AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 PART I ITEM 1. BUSINESS GENERAL American Physicians Service Group, Inc. (the "Company"), through its subsidiaries, provides 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 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 Prime Medical, Syntera and Uncommon Care). INVESTMENT SERVICES APS Investment Services, Inc. ("Investment Services"), is a wholly-owned subsidiary of the Company. Through its subsidiaries, APS Financial Corporation ("APS Financial"), and APS Asset Management, Inc. (Asset Management"), Investment Services provides investment and investment advisory services to institutions and individuals throughout the United States. Revenues from this segment were 60%, 44% and 32% of Company revenues in 1998, 1997 and 1996, respectively. 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 portfolio accounting, analysis, and other services, to insurance companies, banks, and public funds. APS Financial has its main office in Austin, with a branch office in Houston. 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 45 states. Commissions are charged on both exchange and over-the-counter ("OTC") transactions in accordance with industry practice. When OTC transactions are executed by APS Financial as a dealer, APS Financial receives, in lieu of commissions, markups or markdowns. 1 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 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 February 28, 1999, APS Financial was in compliance with all net capital requirements. APS Financial clears 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. Asset Management, a Registered Investment Adviser, was formed and registered with the Securities and Exchange Commission in 1998. Asset Management was organized to manage fixed income and equity assets for institutional and individual clients on a fee basis. Asset Management's mission is to provide clients with investment results within specific client-determined risk parameters. INSURANCE SERVICES APS Insurance Services, Inc., ("Insurance Services"), an 80% owned subsidiary of the Company through its wholly-owned subsidiaries APS Facilities Management, Inc. ("FMI") and American Physicians Insurance Agency, Inc. ("Agency"), provides management and agency services to medical malpractice insurance companies. Revenues from this segment contributed 34%, 48% and 57% of Company revenues in 1998, 1997 and 1996, respectively. Substantially all of the revenue was attributable to American Physicians Insurance Exchange ("APIE") 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. Termination of the agreement with APIE would have a material adverse effect on the Company. 2 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, 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 for $4,146,000. 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 one of the largest medical professional liability insurance companies in the State of Texas. APIE is the only insurance company based in Texas that is wholly-owned by its subscriber physicians. Florida Physicians, together with its affiliates, insures over 6,800 physicians nationwide. Florida Physicians is rated A- (Excellent) by AM Best. 3 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 that occur and are reported 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 reimbursement (fees and profit sharing) do not exceed a cap based on premium levels. In 1998, 1997, 1996, 1995, and 1994, management fees attributable to profit sharing were $1,750,000, $1,961,000, $1,191,000, $700,000, and $1,107,000, respectively. (In thousands, except for number of insureds)
Years Ended December 31, 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Earned premiums before reinsurance premiums $22,931 $25,899 $28,754 $30,857 $30,261 Total assets 75,173 81,594 90,193 101,251 98,302 Total surplus 13,592 11,854 10,017 9,402 9,315 Management fees (including profit sharing) and commissions to FMI and Agency 4,835 (3) 5,854 (3) $5,281 (3) $5,010 (3) $4,703 (1) Number of insureds 2,743 2,629 (2) 3,019 3,226 3,216 (2) - - ----------------
(1) Gross fee of $5,193 less tax credit of $490 attributable to APIE's association with FMI. (2) The decrease was the result of APIE's decision to raise premiums and lose members on certain unprofitable specialties. Included in the totals are doctors for which APIE provides reinsurance through a relationship with another malpractice insurance company. (3) Includes commissions of $835, $1,214, $860 and $676 in 1998, 1997, 1996 and 1995, respectively, from Florida Physicians and other carriers directly related to APIE's controlled business. 4 REAL ESTATE APS Realty, Inc., ("APS Realty"), a wholly-owned subsidiary of the Company 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 affiliates. The remainder is leased to unaffiliated parties. OTHER INVESTMENTS The Company owns 3,064,000 shares of common stock of Prime Medical Services, Inc. ("Prime Medical"), representing at March 15, 1999 approximately 18% of the outstanding shares of common stock of Prime Medical. Two of Prime Medical's seven directors are members of the Company's four 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 January 1, 1998 the Company invested approximately $2,000,000 in the Convertible Preferred Stock of Uncommon Care, Inc. ("Uncommon Care"). The Company also made available to Uncommon Care a $2,400,000 line of credit. The loan is at ten percent interest, payable quarterly until January 1, 2003, at which time the outstanding principal and any accrued but unpaid interest are due and payable. Uncommon Care is a developer and operator of dedicated Alzheimer's care facilities. The preferred shares owned by the Company are convertible into approximately a 34% interest in the equity of Uncommon Care. Two of Uncommon Care's five directors are members of the Company's board of directors. The Company records its investment at cost. 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. All of Syntera's directors are officers of the Company. The Company expects its ownership interest in 5 Syntera (62% as of March 15, 1999) to be reduced to a minority level as Syntera exchanges its stock for assets of additional physician practices. Due 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. 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 renegotiations, 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. The Company subsequently declared Con-Eco in default under the new promissory note and related security agreements. In March, 1999 the Company entered into a comprehensive Restructuring Agreement pursuant to which the Company retained its interest in all of its existing collateral, obtained additional collateral in the form of stock of two more of Con-Eco's subsidiaries and obtained the highest priority security interest available in the assets of such subsidiaries as well as the assets of a third subsidiary. Under the Restructuring Agreement, the Company agreed to refinance the existing obligations of Con-Eco on more favorable terms in the future, provided the Company receives certain minimum payments from Con-Eco or from the operations of a subsidiary of Con-Eco that may be acquired by the Company through the enforcement of its security interest. Con-Eco also agreed to make specified minimum payments to the Company upon the favorable resolution by Con-Eco of certain existing litigation or upon the sale of Con-Eco or of Con-Eco's or its subsidiaries' assets. The Company has established a reserve of $392,000 related to the principal amount of the Con-Eco receivable and has reserved all accrued but unpaid interest related to the note. The Company may be required to establish additional reserves in the future depending on the Company's ongoing evaluation of its collateral position and its estimates of Con-Eco's future cash flows. 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 reflected the expected financial impact of discontinuing this segment in the 1997 financial statements. 6 COMPETITION APS Financial and Asset Management are both engaged in a highly competitive business. Their competitors include, with respect to one or more aspects of 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's. 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. 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, Texas Medical Liability Trust, Medical Interinsurance Exchange Group of New Jersey and PHICO Insurance. 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. REGULATION APS Financial and Asset Management are subject to extensive regulation under both federal and state laws. The SEC is the federal agency charged with administration of the federal securities and investment advisor 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. 7 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, members are required to pay annual assessments in varying amounts not to exceed .5% of their adjusted gross revenues to restore the fund. The last assessment was in 1995 and amounted to approximately $7,300. 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. 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. EMPLOYEES At March 1, 1999, the Company employed, on a full time basis, approximately 112 persons, including 49 by Insurance Services, 46 by APS Financial, 4 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. 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 affiliates 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 approximately 90% occupied as of March 24, 1999. The lease of the largest third party tenant, (11,000 square feet), expires in April 1999 and it is unknown how long will be required to re-let the space. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various claims and legal actions that have arisen in the ordinary course of business. Management believes that any liabilities arising from these actions will not have a significant adverse effect on the financial condition of the Company. 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting was held June 11, 1998. The agenda items were the election of directors and approval of an amendment to the stock option plan. Voting results follow: BOARD ELECTION Nominee For Against Abstain ------- --- ------- ------- Jack Murphy 3,392,847 301,516 -- Robert L. Myer 3,393,217 301,146 -- William A. Searles 3,393,217 301,146 -- Kenneth S. Shifrin 3,393,217 301,146 -- STOCK OPTION PLAN AMENDMENT 2,122,854 799,372 9,842 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, 1998 and 1997. On March 1, 1999, the Company had approximately 500 holders of record of its common stock. 1998 1997 ------------------ ------------------- High Low High Low First Quarter $ 7 5/8 $ 6 7/8 $7 5/8 $6 3/8 Second Quarter $ 7 1/2 $ 6 5/8 $6 7/8 $ 4 3/4 Third Quarter $ 7 1/4 $ 4 7/8 $8 7/8 $5 7/8 Fourth Quarter $ 5 1/2 $ 3 1/4 $8 $6 9 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 (In thousands, except per share data)
SELECTED FINANCIAL DATA 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Selected income statement data: Revenues $16,403 13,065 10,437 16,124 12,333 Earnings from continuing operations before income taxes and minority interests $2,255 5,984 3,006 3,007 1,784 Net earnings $1,545 2,538 1,924 2,024 1,254 Per share amounts - diluted: Net earnings $.31 .59 .46 .53 .36 Diluted weighted average shares outstanding 4,692 4,241 4,219 3,798 3,488 Selected balance sheet data: Total assets $32,914 30,737 24,468 23,740 19,918 Long-term obligations -- -- -- 574 878 Total liabilities $8,259 7,458 4,086 6,146 4,927 Minority interests $53 175 -- -- -- Total equity $24,602 23,104 20,382 17,594 14,991 Book value per share $5.91 5.55 5.03 4.80 4.47
10 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 1998 Compared to 1997 Revenues from continuing operations increased 26% in 1998 compared to 1997. Net income decreased 39% and diluted earnings per share decreased 48%. The reasons for these changes are described below. Investment Services Investment services' revenues increased 73% in 1998 compared to 1997. The increase resulted from volatility in world bond markets which caused clients to realign portfolios. This activity created more transactions and thus more commissions. Also contributing to the increase was the full development of a 11 second office, which opened in 1997. Revenues at this office increased approximately 90% over 1997. Investment services' expenses increased 71% from 1997. 94% of the increase was at the broker/dealer and was volume-related. The large increase in revenues resulted in proportionately greater sales commission expense, support personnel expense, transaction charges and financial information services expense. Lower legal fees partially offset these increases. Greater profits in 1998 also increased expenses under the incentive compensation plan. The remainder of the increase in expenses was the result of starting Asset Management in 1998. Results in this segment can vary from year to year. 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. In an effort to add to the segment's overall profitability, and to add stability from year to year, the Company entered the asset management business in 1998. As a registered investment advisor, Asset Management, seeks to manage the portfolios of institutions and high net worth individuals. Asset management is a competitive business and the Company cannot say with certainty when or if it will achieve profitability. Insurance Services Insurance Service's revenues decreased 10% in 1998 compared to 1997. The loss of a large client by the managed insurance company caused most of the variance. The client purchased extended reporting period or "tail" coverage, which increased premiums in 1997. 1998 was lower by both the standard premium and the extra tail premium. The Company's premium-based management fee was proportionately lower. The remainder of the decrease was related to profit sharing. The insurance management fee contract contains a provision to share in the profits of the managed insurance exchange. Due to the loss of the client mentioned above and an overall increase in competition in medical professional liability insurance in Texas, profits, and consequently, profit sharing, were lower in 1998. Insurance Services' expenses increased 8% over 1997. The increase was in the area of commission expense and was due to the greater utilization of commissioned outside sales agents, compared to salaried internal personnel in prior years. Lower salary expense, primarily due to lower incentive payments, partially offset the increased commissions. Due to the profit sharing provision in this segment's major contract, results can vary from year to year. In the last five years under the contract, profit sharing has ranged from 12% to 31% of the segment's revenues. Real Estate Revenue increased 1% compared to 1997. The increase reflects higher lease rates, partially offset by a higher vacancy rate. The 5% increase in real estate expenses resulted from increased property taxes due to higher real estate values. 12 Investment and Other The decline in investment and other income was primarily due to lower interest income, a result of available cash being fully invested in new start-up companies, which yielded no current return. General and Administrative Expenses General and administrative expenses increased 37% over 1997. The increases resulted from recognizing bad debt expense related to the impairment of the Con-Eco note receivable and from expenses related to guaranteeing an individual investor's investment return. The Company had agreed to the guaranteed return to settle a dispute on the customer's account in 1995. The portfolio under-performed in 1998 and additional funds were contributed by the Company. Lower management incentive expenses partially offset these increases in 1998. Interest expense increased from $21,000 in 1997 to $59,000 in 1998. The increase reflects funds borrowed under the line of credit to fund the Company's investments Syntera and Uncommon Care. Affiliates The Company has two affiliates accounted for on the equity basis, Prime Medical Services, Inc. and Syntera HealthCare Corporation. Prime's operating income increased in 1998 but net earnings were reduced by non-recurring financing and development costs. This resulted in a 23% decrease in equity earnings compared to 1997. Syntera, which was started in 1997, continued in the development phase and reported a loss in 1998. The Company's share of Syntera's loss increased approximately 5% in 1998. Prime had issued additional shares in 1996 reducing the Company's ownership from 21% to 16%. In 1998 Prime established a stock repurchase plan and reduced its shares outstanding, increasing the Company's ownership percentage to approximately 18%. 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. 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. INVESTMENT SERVICES Investment Services' revenues increased 73% in 1997 compared to 1996. Approximately 71% of the increase was attributable to expanding the broker/dealer 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. 13 Investment Services' expenses increased 38% 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 SERVICES Revenues increased 6% as a result of a higher contingent fee, which was based on improved profits at the managed insurance company. Expenses decreased 11% from 1996. Decreases in legal and professional fees and lower allocated corporate overhead were the significant areas of expense reduction. 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 rental 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 the Con-Eco note receivable being on non-accrual during all of 1997. GENERAL AND ADMINISTRATIVE EXPENSES The 800% increase in expenses was a result of changes in accounting estimates rather than fundamental changes in 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. 14 LIQUIDITY AND CAPITAL RESOURCES Net working capital was $503,000 and $3,360,000 at December 31, 1998 and 1997, respectively. The decrease in working capital reflects the Company's cash investment of approximately $2,000,000 in new business opportunities during 1998. Also reducing working capital was the reclassification of short-term notes receivable to long-term upon the maker's default on the notes. 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. In 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 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 December 31, 1998. At March 25, 1999 $1,600,000 had been advanced. Capital expenditures for equipment were $148,000, $312,000, and $123,000, in 1998, 1997, and 1996, respectively. In addition, the Company improved office space in 1998 and 1996 for $58,000 and $21,000, respectively. The Company expects capital expenditures in 1999 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. 15 YEAR 2000 PROJECT The Company formed a Year 2000 Committee in mid 1998. The Committee was charged with examining (1) internal hardware and software systems; (2) physical facilities; and (3) outside suppliers, as these items relate to potential problems that could be caused by the inability to process dates beyond December 31, 1999. The Committee divided its task into four parts - assessment, remediation planning, implementation and testing and contingency planning. Assessment and remediation planning have been completed for all three phases of the project. Implementation and testing and contingency planning are discussed below. Internal hardware and software systems: The Company has completed substantially all of the needed upgrades to its hardware and software systems. Software testing is expected to be complete by April 30, 1999 and remaining hardware purchases are expected to be complete by June 30, 1999. Physical facilities: The Committee has evaluated its non-computer equipment and has determined that, except for its telephone system, there are no devices whose failure would materially affect the ability to carry out the business of the Company. A compliant telephone system is expected to be installed by June 30, 1999. The outside managers of the Company's office buildings have reported that all aspects of the physical facilities - elevators, fire and security systems, etc. are compliant. Their further inquiry of those supplying public utilities have produced assurances of best efforts but no guarantee of performance. Outside suppliers: The Company has inquired about the state of Year 2000 readiness of those outside suppliers who were determined to be critical to the Company's ability to carry out its business. One services supplier has been identified as being behind in its readiness. The services are not of an exclusive nature and alternative suppliers are being evaluated. A switch to an alternative would be made on September 1, 1999 if the current supplier remains non-compliant. Contingency planning: The Company cannot be certain that it has identified and will be successful in bringing into compliance all Year 2000 issues within its control. It can be even less certain of critical services being supplied by third parties beyond its control. Upon completion of the testing phase of the plan, the Company will formalize plans for carrying on its business in the event of unanticipated Year 2000-related failures. Presently, the Company believes that the most reasonably likely worst case scenario would be a failure of relatively short duration of basic third party services such as the power grid. With such a failure the Company's planning will be directed toward a temporary suspension of operations followed by plans for resumption and catch up operations. Due to the magnitude of the uncertainties related to Year 2000 issues, the Company is unable to fully assess the consequences of Year 2000 failures and, consequently, there could be a material adverse effect on the Company's results of operations, financial position and cash flows. Year 2000 costs: The Company estimates that total expenditures to address Year 2000 issues will be $350,000, of which approximately 60% will be for capitalized hardware purchases. The remainder of the expenditures are labor costs. Approximately 40% of the expenditures have been 16 made to date. Since the Company is in a constant state of upgrading its technology and since all labor costs involve existing in- house staff, few of the costs incurred are incremental. Extensive use of in-house MIS personnel for Year 2000 issues has delayed implementation of other work designed to improve user productivity and the value of information provided. The Company does not believe such delays will have a material adverse effect on the results of operations, financial position, or cash flows. ITEM 7. (a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has some exposure to cash flow and fair value risk from changes in interest rates, which may affect its financial position, results of operation and cash flows. The Company does not use financial instruments for speculative purposes, but does maintain a trading account inventory to facilitate the business of its broker/dealer subsidiary. At the end of 1998 the inventory balance was $535,000. Historically, the Company has turned this inventory rapidly and has neither significant realized gains nor losses. The Company has notes receivable, the largest of which is described in Item 1 and is currently in default. The fair value of this defaulted note is determined by collateral and cash flows of the maker and is influenced little, if any, by interest rate changes. The other notes receivable are in the form of lines of credit to related companies and are at fixed 10% rates. Their fair value will increase and decrease inversely with interest rates. The Company had no debt at December 31, 1998, but has a $10 million line of credit with a floating interest rate. For each $1 million that the Company should borrow in 1999, a 1 1/2 % increase in interest rate would result in a $15,000 annual increase in interest expense. 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, 1998 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. 17 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 1999 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 15, 1999, the executive officers of the Company are as follows: Name Age Position Kenneth S. Shifrin 49 Chairman of the Board, President and Chief Executive Officer Duane K. Boyd, Jr. 54 Senior Vice President - Insurance William H. Hayes 51 Senior Vice President - Finance and Secretary George S. Conwill 42 Vice President - Investment Services Thomas R. Solimine 40 Controller All officers serve until the next annual meeting of directors and until their successors are 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 has been President and a Director of Syntera since October 1997 and has been a member of the Board of Directors of Uncommon Care since January 1998. 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 has been a Director of Syntera since October 1997 and a Director of Uncommon Care since January 1998. Mr. Boyd is a Certified Public Accountant and was with KPMG LLP from 1974 to June 1991. He was a partner specializing in the insurance industry prior to joining the Company. 18 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. Conwill has been Vice President - Investment Services since June 1998. He has served as Chief Operating Officer of APS Financial since May 1995, and as President and Chief Operating Officer since March 1998. In May 1998 he assumed responsibility as President of APS Investment Services. 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 1999 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 1999 annual meeting of shareholders, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is contained in the definitive proxy statement of the Company to be filed in connection with its 1999 annual meeting of shareholders, which information is incorporated herein by reference. 19 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. (5) 3.2 Amended and Restated Bylaws of the Company. (5) 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. (6) *10.7 Form of Non-Employee Directors Stock Option Agreement. (6) *10.8 1995 Incentive and Non-Qualified Stock Option Plan of American Physicians Service Group, Inc. (6) *10.9 Form of Stock Option Agreement (ISO). (6) 20 *10.10 Form of Stock Option Agreement (Non-Qualified). (6) 10.11 Management Agreement of Attorney-in-Fact, dated August 13, 1975, between FMI 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. (4) *10.14 Profit Sharing Plan or Trust, effective December 1, 1984, of the Company. (3) 10.17 Stock Purchase Agreement dated September 30, 1996 between the Company and Exsorbet Industries, Inc. (7) 10.18 Stock Put Agreement dated September 30, 1996 between the Company and Exsorbet Industries, Inc. (7) 10.19 Shareholder Rights Agreement dated September 30, 1996 between the Company and Exsorbet Industries, Inc. (7) 10.20 Warrant dated September 30, 1996 for shares of common stock issued to the Company by Exsorbet Industries, Inc. (7) 10.21 Contingent Warrant Agreement dated September 30, 1996 for shares of common stock issued to the Company by Exsorbet Industries, Inc. (7) 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. (7) 10.23 Agreement dated September 30, 1996 with Exsorbet Industries, Inc. related to options issued by officers and directors of Exsorbet. (7) 10.24 Guaranty Agreements dated September 30, 1996 between the Company and subsidiaries of Exsorbet Industries, Inc. (7) 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. (7) 10.26 Stock Purchase Agreement dated October 1, 1997 between the Company, APS Practice Management, Inc., Michael Beck, John Hendrick, and et al. (8) 21 10.27 Bylaws of APS Practice Management, Inc., (8) 10.28 Amended and Restated Articles of Incorporation APS Practice Management, Inc., (8) 10.29 APS Practice Management, Inc., Certificate of Designation of Rights and Preferences Series A Serial Founder's Common Stock dated September 30, 1997. (8) 10.30 Resolutions to organizational matters concerning Syntera, Inc. dated October 1, 1997. (8) 10.31 Master Refinancing Agreement dated November 6, 1997 between the Company and Consolidated Eco-Systems, Inc. (8) 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. (8) 10.33 Assignment and Security Agreement dated November 6, 1997 between the Company and Consolidated Eco-Systems, Inc. (8) 10.34 Security Agreement dated November 6, 1997 between the Company and Consolidated Eco-Systems, Inc. (8) 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. (8) *10.36 First Amendment to 1995 Incentive and Non-Qualified Stock Option Plan of American Physicians Service Group, Inc. Dated December 10, 1997. (8) *10.37 First Amendment to 1995 Non-Employee Director Stock Option Plan of American Physicians Service Group, Inc. Dated December 10, 1997. (8) 10.38 Share Exchange Agreement dated February 16, 1998 between the Company and Michael T. Breen, M.D. (9) 10.39 Share Exchange Agreement dated April 1, 1998 between the Company and Antonio Cavazos, Jr., M.D. (9) 10.40 Share Exchange Agreement dated April 1, 1998 between the Company and Antonio Cavazos, III, M.D. (9) 22 10.41 Share Exchange Agreement dated May 18, 1998 between the Company and Jonathan B. Buten, M.D. (9) 10.42 Share Exchange Agreement dated June 30, 1998 between the Company and Gary R. Jones, M.D. (9) 10.43 Share Exchange Agreement dated July 31, 1998 between the Company and Joe R. Childress, M.D. (9) 10.44 Share Exchange Agreement dated August 1, 1998 between the Company and M. Reza Jafarnia, M.D. (9) 10.45 Share Exchange Agreement dated September 15, 1998 between the Company and Donald Columbus, M.D. (9) 10.46 Share Exchange Agreement dated December 31, 1998 between the Company and David L. Berry, M.D. (9) 10.47 Contribution and Stock Purchase Agreement dated January 1, 1998 between the Company, Additional Purchasers, Barton Acquisition, Inc., Barton House, Ltd., Barton House at Oakwell Farms, Ltd., Uncommon Care, Inc., George R. Bouchard, John Trevey, and Uncommon Partners, Ltd. (9) 10.48 Stock Transfer Restriction and Shareholders Agreement dated January 1, 1998 between the Company, Additional Purchasers, Barton Acquisition, Inc., Barton House, Ltd., Barton House at Oakwell Farms, Ltd., Uncommon Care, Inc., George R. Bouchard, John Trevey, and Uncommon Partners, Ltd. (9) 10.49 Loan Agreement dated January 1, 1998 between the Company and Barton Acquisition, Inc. (9) 10.50 Promissory Note (Line of Credit) dated January 1, 1998 between the Company and Barton Acquisition, Inc. in the amount of $2,400,000. (9) 10.51 Security Agreement dated January 1, 1998 between the Company and Barton Acquisition, Inc. (9) 10.52 Participation Agreement dated March 16, 1998 between the Company and Additional Purchasers referred to as Participants. (9) 23 10.53 Revolving Credit Loan Agreement dated February 10, 1998 between the Company and NationsBank of Texas, N.A. in an amount not to exceed $10,000,000. (9) 10.54 Revolving Credit Note dated February 10, 1998 between the Company and NationsBank of Texas, N.A. in the amount of $10,000,000. (9) 10.55 Pledge Agreement dated February 10, 1998 between the Company and NationsBank of Texas, N.A. (9) 10.56 Continuing and Unconditional Guaranty dated February 10, 1998 between the Company and NationsBank of Texas, N.A. (9) 10.57 Restructuring Agreement dated March 25, 1998 between the Company and Consolidated Eco-Systems, Inc., and all of the wholly or partially owned subsidiaries of Consolidated Eco-Systems, Inc. (except for 7-7, Inc.). (9) 10.58 Assignment and security Agreement dated March 25, 1998 between the Company and Consolidated Eco- Systems, Inc. (9) 10.59 Security Agreement dated March 25, 1998 between the Company and Consolidated Eco-Systems, Inc. (9) 10.60 Security Agreement dated March 25, 1998 between the Company and Eco-Acquisition, Inc. (9) 10.61 Security Agreement dated March 25, 1998 between the Company and Exsorbet Technical Services, Inc. (9) 10.62 Security Agreement dated March 25, 1998 between the Company and KR Industrial Service of Alabama, Inc. (9) 21.1 List of subsidiaries of the Company. (9) 23.1.1 Independent Auditors Consent of KPMG LLP. (9) 27.1 Financial Data Schedule (EDGAR filing). (*) Executive Compensation plans and arrangements. - - ----------------- 24 (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. (3) 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. (4) Filed as an Exhibit to the Current Report on Form 8-K of the Company dated September 5, 1989 and incorporated herein by reference. (5) 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. (6) 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. (7) 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. (8) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and incorporated herein by reference. (9) Filed herewith. 25 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 26, 1999 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 26, 1999 By: /s/ W. H. Hayes W. H. Hayes Senior Vice President - Finance, Secretary and Chief Financial Officer (Principal Financial Officer) Date: March 26, 1999 26 By: /s/ Thomas R. Solimine Thomas R. Solimine Controller (Principal Accounting Officer) Date: March 26, 1999 By: /s/ Robert L. Myer Robert L. Myer, Director Date: March 26, 1999 By: /s/ William A. Searles William A. Searles, Director Date: March 26, 1999 27 APPENDIX A INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Independent Auditors' Report A-2 Financial Statements Consolidated Statements of Earnings for the years ended December 31, 1998, 1997, and 1996 A-3 Consolidated Balance Sheets at December 31, 1998 and December 31, 1997 A-5 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 A-7 Consolidated Statements of Shareholders' Equity at December 31, 1998, 1997 and 1996 A-9 Notes to Consolidated Financial Statement 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP -------------------------- Austin, Texas March 9, 1999 A-2
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Year Ended December 31, 1998 1997 1996 ---- ---- ---- Revenues: Investment services $9,914 5,726 3,302 Insurance services (Note 2) 5,655 6,287 5,942 Real estate (Note 5) 713 704 717 Investments and other 121 348 476 -------- ------- ------- Total revenues 16,403 13,065 10,437 ------- ------- ------- Expenses: Investment services 9,039 5,299 3,828 Insurance services 4,129 3,819 4,289 Real estate 527 503 521 General and administrative 1,851 1,352 150 Interest 59 21 54 ------ ------ ------- Total expenses 15,605 10,994 8,842 ------ ------ ------- Operating income 798 2,071 1,595 Equity in earnings of unconsolidated affiliates (Note 13) 1,457 2,014 1,411 Gain on sale of interest in subsidiary -- 1,899 -- ------ ------- ------- Earnings from continuing operations before income taxes and minority interests 2,255 5,984 3,006 Income tax expense (Note 9) 863 2,341 1,058 Minority interests (178) (175) -- ------- -------- -------- Earnings from continuing operations 1,214 3,468 1,948 ------ ------ ------ Discontinued operations: Profit/(loss) from discontinued operations net of income tax expense/(benefit) of $171, (48) and ($19) in 1998, 1997 and 1996, respectively 331 (94) (24) Estimated loss on disposal of discontinued segment, net of income tax benefit of $431 in 1997 -- (836) -- ------ -------- -------- Net gain/(loss) from discontinued operations 331 (930) (24) ------- --------- -------- Net earnings $1,545 2,538 1,924 ====== ======= =======
See accompanying notes to consolidated financial statements. A-3 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS, continued (In thousands, except per share amounts)
Year Ended December 31, ------------------------------------- 1998 1997 1996 ---- ---- ------ Earnings per common share: Basic: Earnings from continuing operations $0.29 0.84 0.48 Discontinued operations 0.08 (0.22) -- ------ ----- ------ Net earnings $0.37 0.62 0.48 ====== ===== ====== Diluted: Earnings from continuing operations $0.24 0.81 0.46 Discontinued operations 0.07 (0.22) -- ----- ----- ------ Net earnings $0.31 0.59 0.46 ===== ===== ====== Basic weighted average shares outstanding 4,163 4,106 4,025 ===== ====== ======= Diluted weighted average shares outstanding 4,692 4,241 4,219 ===== ====== =======
See accompanying notes to consolidated financial statements. A-4 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) Year Ended December 31, ------------------------- 1998 1997 ASSETS Current assets: Cash and cash equivalents $3,214 5,188 Trading account securities 535 449 Management fees and other receivables (Note 2) 968 815 Notes receivable, net - current (Note 3) 196 1,157 Receivable from clearing broker 1,036 543 Prepaid expenses and other 339 508 Deferred income tax asset 1,279 1,336 ----- ------ Total current assets 7,567 9,996 Notes receivable, net less current portion (Note 3) 4,287 2,982 Property and equipment, net (Note 5) 1,653 1,830 Investment in affiliates (Note 13) 17,063 15,611 Preerred stock investment 2,078 -- Other assets 266 318 ------ ------ Total assets $32,914 30,737 ====== ====== See accompanying notes to consolidated financial statements. A-5 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, continued (In thousands, except share data) Year Ended December 31, ---------------------- 1998 1997 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade 910 901 Payable to clearing broker 487 441 Income taxes payable 292 226 Accrued compensation 823 446 Accrued expenses and other liabilities (Note 6) 3,273 3,286 ----- ------ Total current liabilities 5,785 5,300 Deferred income tax liability (Note 9) 2,474 2,158 ----- ------ Total liabilities 8,259 7,458 ------ ------ Minority interest 53 175 Shareholders' equity: Preferred stock, $1.00 par value, 1,000,000 shares authorized -- -- Common stock, $0.10 par value, 20,000,000 shares authorized; 4,160,083 issued at 12/31/98 and 4,160,861 at 12/31/97 416 416 Additional paid-in capital 5,481 5,528 Retained earnings 18,705 17,160 ------ ------ Total shareholders' equity 24,602 23,104 ------ ------- Commitments and contingencies (notes 5, 7, 8, 10, 11, 12) Total liabilities and shareholders' equity $32,914 30,737 ======= ====== See accompanying notes to consolidated financial statements. A-6 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Twelve Months Ended December 31, -------------------------------------- 1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Cash received from customers $ 16,017 13,080 11,123 Cash paid to suppliers and employees (14,390) (9,247) (11,064) Change in trading account securities (86) 250 315 Change in receivable from clearing broker (447) (177) 501 Interest paid (59) ( 21) ( 54) Income taxes paid (439) ( 772) ( 611) Interest, dividends and other investment proceeds 234 219 459 ------- -------- ------- Net cash provided by operating activities 830 3,332 669 ------- -------- ------- Cash flows from investing activities: Proceeds from the sale of property and equipment 13 55 -- Payments for purchase of property and equipment (206) ( 312) ( 144) Net decrease in marketable securities -- 5 2,045 Proceeds from equity owners in investment 259 -- -- Investment in preferred stock (2,073) (5,292) (244) Proceeds from sale of insurance exchange -- 1,000 -- Proceeds from sale of 20& of Insurance Services -- 2,000 -- Funds loaned to others (3,020) ( 834) (3,442) Collection of notes receivable 2,085 109 -- Discontinued operations 502 -- -- Other -- (82) -- ------- -------- ------ Net cash used in investing activities (2,440) ( 3,351) (1,785) ------- -------- ------ Cash flows from financing activities: Repayment of long-term obligations -- ( 542) ( 163) Proceeds from long-term obligations 8 -- -- Purchase/retire treasury stock (147) ( 337) ( 453) Exercise of stock options 75 316 704 Distributions to minority interest (300) -- -- ------- ------- ------ Net cash used in financing activities (364) (563) 88 ------- ------- ------ Net change in cash and cash equivalents (1,974) ( 582) (1,028) Cash and cash equivalents at beginning of period 5,188 5,770 6,798 ----- ----- ------ Cash and cash equivalents at end of period 3,214 5,188 5,770 ===== ======= ======
See accompanying notes to consolidated financial statements. A-7 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, continued (In thousands)
Twelve Months Ended December 31, --------------------------------------- 1998 1997 1996 ---- ---- ---- Reconciliation of net earnings to net cash from operating activities: Net earnings $ 1,545 2,538 1,924 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 618 436 324 (Earnings)/loss from discontinued operations (502) 200 -- Loss on disposal of discontinued operations -- 1,209 -- Minority interest in consolidated earnings 178 175 -- Undistributed earnings of affiliate (1,457) (2,014) (1,411) Provision for bad debts 361 -- -- Gain on sale of fixed assets (1) -- -- Gain on sale or disposition of assets -- (2,032) -- (Gain) loss on sale of securities -- 41 (82) Change in federal income tax payable 66 876 (584) Provision for deferred taxes 373 56 925 Change in trading securities (86) 250 315 Change in receivable from clearing broker (447) 177 501 Change in management fees and other receivable (153) (26) 17 Change in prepaids and other current assets 169 (191) 24 Change in long term assets 52 -- 265 Change in trade payable 9 90 53 Change in accrued expenses and other liabilities 105 1,547 (1,602) ------- ------ ------ Net cash from operating activities $ 830 3,332 669 ======= ====== ======
Summary of non-cash transactions: During 1998, 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 $25. 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. See accompanying notes to consolidated financial statements A-8 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity For the years ended December 31, 1998, 1997 and 1996 (In thousands, except share data)
Additional Unrealized Total Common Stock Paid-in Holding Retained Shareholders' Shares Amount Capital Gains Earnings Equity -------------- --------- ------------- ------------- ----------- -------------- Balance January 1, 1996 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 gain 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 Net earnings -- -- -- -- 1,545 1,545 Shares issued (Note 11) 25,833 3 72 -- -- 75 Shares repurchased & cancelled (26,611) (3) (144) -- -- (147) Income tax benefit of non- qualified option exercises -- -- 25 -- -- 25 -------------- ---------- ------------- ------------- ----------- -------------- Balance December 31, 1998 4,160,083 $416 5,481 -- 18,705 24,602 ============== ========== ============= ============= =========== ==============
See accompanying notes to consolidated financial statements. A-9 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (1) Summary of Significant Accounting Policies (a) General American Physicians Service Group, Inc. through its subsidiaries, provides financial services that include brokerage and asset management services to individuals and institutions, and insurance services that consist of management services for malpractice insurance companies. The financial services 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 47% of total revenues and insurance services generated 45%. American Physicians Services Group, Inc. has two affiliates; Prime Medical Services, Inc., of which it owns approximately 18%, and Syntera HealthCare Corporation, of which it owns approximately 62%. Prime Medical is the country's largest provider of lithotripsy (non-invasive kidney stone fracturing) services and Syntera is a physician practice management company. The Company also has a preferred stock investment in a company which develops and operates Alzheimer's care facilities. (b) Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires 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"), except for its investment in Syntera. Syntera is accounted for using the equity method, as the operating plan for Syntera will result in the Company diluting its ownership to a non controlling position as additional physician practices are acquired. Investments in affiliated companies and other entities in which the Company's investment is less than 50% of the common A-10 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (1) Summary of Significant Accounting Policies, continued 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 Investment services revenues related to securities transactions are recognized on a trade date basis. Insurance 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 company will have an annual profit, generally in the fourth quarter of each year. Real estate rental income is recognized monthly over the term of the lease. 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) 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 A-11 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (1) Summary of Significant Accounting Policies, continued The Company has included its marketable securities, held as inventory at its broker/dealer, in the trading securities category. (f) 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). (g) 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 asset. (h) 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. (i) Earnings Per Share Basic earnings per share is based on the weighted average shares outstanding without any diluted effects considered. Diluted earnings per share reflect dilution from all contingently issuable shares, including options. (j) Cash and Cash Equivalents Cash and cash equivalents include cash and highly liquid investments with an original maturity of 90 days or less. A-12 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (1) Summary of Significant Accounting Policies, continued (k) 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. The present value of the impaired loan will change with the passage of time and may change because of revised estimates of cash flows or timing of cash flows. Such value changes shall be reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that would be reported. (l) 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. (m) Reclassification Certain reclassifications have been made to amounts presented in previous years to be consistent with the 1998 presentation. (n) Other Comprehensive Income For the three years ended December 31, 1998, the Company has not had any significant other comprehensive income A-13 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (2) Management Fees and Other Receivables Management fees and other receivables consist of the following: December 31, 1998 1997 -------- ------- Management fees receivable $501,000 3,000 Trade accounts receivable 173,000 200,000 Less: allowance for doubtful accounts (8,000) (25,000) Accrued interest receivable 21,000 10,000 Other receivables 281,000 627,000 ------- ------- $968,000 815,000 ======== ======= 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 and other related income of $5,655,000, $6,287,000 and $5,942,000 and received expense reimbursements of $1,420,000, $664,000 and $346,000 for the years ended December 31, 1998, 1997 and 1996, respectively, related to these agreements. A-14 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (3) Notes Receivable Notes receivable consist of the following:
December 31, 1998 1997 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, and interest at the prime rate. The borrower defaulted in 1998 and the Company is in litigation to collect amounts owed. $156,000 176,000 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%. The Company declared the note in default in 1998 and entered into a Restructuring Agreement in March 1999. Under the agreement the Company obtained additional collateral and agreed to refinance the note on more favorable terms in the future, provided that certain minimum payments are received. 3,709,000 3,788,000 Uncommon Care, Inc. Term Note: This note was secured by land located in Fort Bend County, Texas. The note carried a 10% interest rate and was paid in full on January 31, 1998. Revolving Line of Credit: This note is secured by substantially all of the assets -- 300,000 of Uncommon Care and is subordinated to bank loans for various real estate purchases. The note is interest only at 10%, payable quarterly. Any outstanding principal is due June 30, 2005. 745,000 -- Syntera HealthCare Corporation This unsecured revolving line of credit bears interest at 10%. Payments are interest only, paid quarterly through November 1, 2001, at which time the outstanding principal balance is due. 580,000 -- 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. 437,000 528,000 ------- ------- 5,627,000 4,792,000 Less allowance for doubtful accounts (1,144,000) (653,000) ----------- --------- 4,483,000 4,139,000 Less current portion 196,000 1,157,00 ---------- --------- Long term portion $4,287,000 2,982,000 ========== =========
A-15 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (3) 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, 1998 and represents a concentration of credit risk. No interest income has been recognized by the Company. Following a renegotiation of the debt in November 1997, Con-Eco defaulted on the note. Con-Eco's stock was delisted during 1998 and has negligible value. The Company considers the loan to be impaired and has recorded the loan as follows: December 31, 1998 1997 ---- ---- Recorded loan amount $3,709,000 3,788,000 Less allowance for impairment 880,000 488,000 ---------- --------- $2,829,000 3,300,000 ========== ========= A reconciliation of the allowance for impairment follows: Year Ended December 31, 1998 1997 ------- ---------- Balance at beginning of the period 653,000 -- Additions charged to operations (100,000) (76,000) Deductions charged to allowance 591,000 729,000 ------- ---------- Balance at end of period $1,144,000 653,000 ========== ========== (4) Fair Value of Financial Instruments Statements 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, 1998 and 1997. For financial instruments the fair value equals the carrying value as presented in the consolidated balance sheets. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments. A-16 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (4) 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. Trading Account Securities The fair value of securities owned is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. 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. On notes determined to be impaired, the notes have been discounted based on the original interest rate of the note. 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. Preferred Stock Investment The fair value has been determined using discounted cash flows based on estimates of future earnings. 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. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (4) 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. (5) Property and Equipment Property and equipment consists of the following: December 31, ------------------------------------------ 1998 1997 ----------------- ---------------- Office condominium $1,796,000 1,847,000 Furniture and equipment 3,173,000 3,758,000 --------- --------- 4,969,000 5,605,000 Accumulated depreciation and amortization 3,316,000 3,775,000 --------- --------- $1,653,000 1,830,000 ========== ========= 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, 1998, 1997 and 1996 totaled approximately $355,000, $385,000 and $379,000 respectively. Future minimum lease payments to be received under the terms of the office condominium leases are as follows: 1999 - $206,000, 2000 - $114,000; 2001 - $92,000; 2002 - $44,000; and 2003 - $33,000. A-18 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (6) Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consists of the following: 1998 1997 ------------- -------------- APS Systems disposition costs (discontinued operations) $1,026,000 1,138,000 Taxes payable - other 115,000 96,000 Deferred income 740,000 280,000 Health insurance and other claims payable -- 59,000 Contractual/legal claims 1,096,000 1,461,000 Vacation payable 134,000 102,000 Funds held for others 20,000 58,000 Other 142,000 92,000 ------- ------ $3,273,000 3,286,000 ========== ========= (7) Notes Payable The Company has established a $10,000,000 line of credit with NationsBank of Texas, N. A. The Company will pledge shares of Prime Medical to the bank as funds are advanced under the line. No funds had been advanced at December 31, 1998. Funds advanced under the agreement will bear interest at the prime rate less 1/4 %. The unused portion of the line carries a 1/4 % commitment fee. All interest is to be paid quarterly. Any outstanding principal is to be paid at maturity in February 2001. In order to receive advances under the line, the Company must maintain certain levels of liquidity and net worth. In addition, the market value of the collateral must exceed a certain multiple of the funds advanced under the line and there must be no occurrence which would have a material adverse effect on the Company's ability to meet its obligations to the bank. A-19 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (8) Commitments and Contingencies The Company has extended a line of credit to Syntera HealthCare Corporation to a maximum amount of $3,000,000. The note is interest only at 10%, payable quarterly. The note matures November 1, 2001, at which time all principal and accrued but unpaid interest are due. Advances under the line are subject to Syntera meeting certain qualifications at the date of each advance request. The Company has extended a line of credit to Uncommon Care, Inc. to a maximum amount of $2,400,000. The note is interest only at 10%, payable quarterly. The note matures June 30, 2005, at which time all principal and accrued but unpaid interest are due. Advances under the line are subject to Uncommon Care meeting certain qualifications at the date of each advance request. 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, 1998, 1997 and 1996 was $44,000, $89,000 and $51,000 respectively. Future minimum payments for leases which extend for more than one year were $96,000 at December 31, 1998. The Company is involved in various claims and legal actions that have arisen in the ordinary course of business. Management believes that any liabilities arising from these actions will not have a significant adverse effect on the financial condition of the Company. A-20 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (9) Income Taxes Income tax expense (benefit) consists of the following: Year Ended December 31, ------------------------------------------ 1998 1997 1996 ---- ---- ---- Continuing Operations Federal Current $332,000 1,394,000 47,000 Deferred 399,000 777,000 938,000 State 132,000 170,000 73,000 Discontinued Operations 171,000 (479,000) (13,000) ------- --------- ------- $1,034,000 1,862,000 1,045,000 ========== ========= ========= 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 tax expense in the accompanying consolidated statements of earnings follows: Year Ended December 31, -------------------------------------------- 1998 1997 1996 ---- ---- ---- Expected federal income tax expense $877,000 1,556,000 972,000 State taxes 132,000 170,000 73,000 Other, net 25,000 136,000 -- -------- --------- ------- $1,034,000 1,862,000 1,045,000 ========== ========= ========= The tax effect of temporary differences that gives rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below: A-21 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 Year Ended December 31, ---------------------------- (9) Income Taxes, continued 1998 1997 ---- ---- Deferred tax assets: Net operating loss carryforwards $186,000 188,000 Accrued expenses 774,000 1,015,000 Accounts receivable, principally due to allowance for doubtful accounts 94,000 79,000 Deferred income 378,000 228,000 Market value allowance 17,000 -- Other 48,000 71,000 ------- --------- Total gross deferred tax assets 1,497,000 1,581,000 Less valuation allowance (186,000) (188,000) --------- --------- Net deferred tax assets 1,311,000 1,393,000 --------- --------- Deferred tax liabilities: Investment in Prime Medical Services, Inc. due to use of equity method for books (2,474,000) (2,158,000) Capitalized expenses, principally due to deductibility for tax purposes (32,000) (57,000) -------- -------- Total gross deferred tax liabilities (2,506,000) (2,215,000) ----------- ----------- Net deferred tax liability $(1,195,000) (822,000) =========== ========= 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, 1998 and 1997 was a (decrease)/increase of ($2,000) and $188,000, respectively. The Company believes that the valuation allowance at December 31, 1998 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, 1998, net operating loss carryforwards available to reduce future taxable income amounted to approximately $548,000 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 than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 1998. A-22 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (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 $10,000 in 1998) 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, 1998, 1997 and 1996, contributions by the Company aggregated, $126,000, $92,000 and $104,000, 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 Directors Plan is inactive and it is assumed the remaining 50,000 shares will not be issued. The Incentive Plan, as amended with shareholder approval in 1998, provides for the issuance of up to 1,200,000 share 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 has 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 approximately 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 1998, 1997 or 1996. 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: A-23 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (11) Stock Options, continued Year Ended December 31, ----------------------------------- 1998 1997 1996 ---- ---- ---- Pro forma net income $810,000 1,989,000 1,634,000 Pro forma earnings per share-basic 0.19 0.48 0.41 - diluted 0.16 0.46 0.39 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: 1998 1997 1996 ---- ---- ---- Risk-free interest rate 5.21% 6.16% 6.06% Expected holding period 3.90 years 3.90 years 3.75 years Expected volatility .401 .480 .692 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 non-vested 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, 1998, 1997 and 1996. Remaining options outstanding from the Company's previous 1983 plans are included.
Year Ended December 31, -------------------------------------------------------------------------------- 1998 1997 1996 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Balance at January 1 774,000 $6.60 651,000 $5.64 837,000 $2.18 Options granted 597,000 5.92 293,000 9.32 295,000 9.32 Options exercised 26,000 2.90 165,000 1.92 450,000 1.56 Options forfeited/expired -- -- 5,000 7.13 31,000 6.16 Balance at December 31 1,345,000 6.36 774,000 6.60 651,000 5.64 ========= ==== ======= ==== ======= ==== Options exercisable 460,000 $6.44 244,000 $5.84 258,000 $2.22 ======= ===== ======= ===== ======= =====
A-24 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (11) Stock Options, continued The weighted average fair value of Company stock options, calculated using the Black Scholes option pricing model, granted during the years ended December 31, 1998, 1997 and 1996 is $2.33, $2.68 and $5.15 per option, respectively. The following table summarizes the Company's options outstanding and exercisable options at December 31, 1998:
Stock Options Stock Options Exercisable Outstanding -------------------------------------------- ----------------------------- Average Weighted Weighted Remaining Average Average Range of Contractual Exercise Exercise Exercise Prices Shares Life Price Shares Price $2.25 to $5.00 390,000 3.4 years $3.65 159,000 $3.12 $5.01 to $7.75 722,000 3.8 years $6.65 149,000 $6.95 $7.76 to $10.50 233,000 2.5 years $10.00 152,000 $10.05 --------- ------- Total 1,345,000 460,000 ========= =======
(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 originally assumed that all clients would have migrated to other software products by the end of 1999 and reflected the expected financial impact of discontinuing this segment on that date in the 1997 financial statements. The measurement date for determining expected losses from the disposal was May 15, 1997. Termination of support for one client, whose contract runs until 2002, may now extend past December 31, 1999. Consequently, the Company has adjusted its loss allowance and believes that such allowance is adequate to cover potential future obligations. A-25 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (12) Discontinued Operations, continued Net assets/(liabilities) of the discontinued computer systems and software segment as of December 31, 1998 consisted of the following: Cash and cash investments $31,000 Trade accounts receivable 126,000 Other receivables 14,000 Prepaid and other current assets 13,000 Fixed assets, net of depreciation 22,000 Intercompany receivables 1,118,000 Trade accounts payable (3,000) Accrued expenses (1,066,000) ----------- Net assets $255,000 ======== Summary operating data for the year ended December 31, 1998 is as follows: Total revenue $2,039,000 Cost of sales (310,000) Other operating expenses (1,038,000) Allowance for future client support (189,000) Income taxes (171,000) -------- Net income $331,000 ======== (13) Investments 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 seven 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, the sale of Prime Medical shares owned by the Company under an option agreement, and the repurchase by Prime Medical of its own shares, in the aggregate, have reduced the Company's ownership to 18% 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 $22,409,000 (carrying amount of $13,089,000) at December 31, 1998 based on the market closing price of $7.3125 per share. A-26 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (13) Investments in Affiliates, continued At December 31, 1998 and 1997, the Company's retained earnings included undistributed earnings, net of deferred tax, of Prime Medical totaling $5,583,000 and $4,379,000, respectively. The condensed balance sheet and statement of operations for Prime Medical follows: Condensed balance sheet at December 31, 1998 and 1997 1998 1997 ---- ---- Current assets $70,006,000 47,542,000 Long-term assets 171,320,000 178,284,000 ----------- ----------- Total assets $241,326,000 225,826,000 ============ =========== Current liabilities $28,465,000 37,383,000 Long-term liabilities 123,111,000 96,379,000 Shareholders' equity 89,750,000 92,064,000 ---------- ---------- Total liabilities and equity $241,326,000 225,826,000 ============ =========== Condensed statement of operations for the years ended December 31, 1998 and 1997 1998 1997 ---- ---- Total revenue $104,636,000 95,979,000 ============ ========== Net income $10,794,000 14,856,000 =========== ========== 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 62%) 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 1998 and 1997. A-27 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (13) Investments in Affiliates, continued The condensed balance sheet and statement of operations for Syntera follows: Condensed balance sheet at December 31, 1998 and 1997 1998 1997 ---- ---- Current assets $2,350,000 4,563,000 Long-term assets 5,431,000 1,664,000 --------- --------- Total assets $7,781,000 6,227,000 ========== ========= Current liabilities $593,000 $505,000 Long-term liabilities 580,000 -- Shareholders' equity 6,608,000 5,722,000 --------- --------- Total liabilities and equity $7,781,000 6,227,000 ========== ========= Condensed statement of operations for the years ended December 31, 1998 and 1997 1998 1997 ---- ---- Total revenue $4,640,000 297,000 ========== ======= Net loss $537,000 460,000 ======== ======= (14) Segment Information The Company's segments are distinct by type of service provided. Each segment has its own management team and separate financial reporting. The Company's Chief Executive Officer allocates resources and provides overall management based on the segments' financial results. The Company's investment services segment includes brokerage and asset management services to individuals and institutions. The insurance services segment includes financial management for an insurance company that provides professional liability insurance to doctors. Real Estate income is derived from the leasing of office space. Corporate is the parent company and derives its income from interest and investments. Discontinued operations include medical software sales. A-28 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (14) Segment Information, continued 1998 1997 1996 ---- ---- ---- Operating Revenues: Investment services $9,914,000 5,726,000 3,302,000 Insurance services 5,655,000 6,287,000 5,942,000 Real estate 865,000 867,000 828,000 Corporate 1,721,000 982,000 2,376,000 --------- ------- --------- $18,155,000 13,862,000 12,448,000 =========== ========== ========== Reconciliation to Consolidated Statement of Earnings: Total segment revenues 18,155,000 13,862,000 12,448,000 Less: intercompany profits (152,000) (163,000) (111,000) intercompany dividends (1,600,000) (634,000) (1,900,000) ---------- --------- ----------- Total Revenues $16,403,000 13,065,000 10,437.000 =========== ========== ========== Operating Profit (Loss): Investment services $810,000 372,000 (559,000) Insurance services 1,437,000 2,385,000 1,591,000 Real estate 338,000 362,000 258,000 Corporate (189,000) (389,000) 2,214,000 --------- --------- --------- $2,398,000 2,930,000 3,504,000 ========= ========= ========= Reconciliation to Consolidated Statement of Earnings: Total segment operating profits 2,398,000 2,730,000 3,504,000 Less: intercompany dividends (1,600,000) (634,000) (1,900,000) other -- (25,000) (10,000) ---------- ---------- --------- Operating Income $798,000 2,091,000 1,595,000 Equity in earnings of affiliates 1,457,000 2,014,000 1,411,000 Gain on sale of interest in subsidiary -- 1,899,000 -- --------- --------- --------- Earnings from continuing operations before income taxes and minority interests 2,255,000 5,984,000 3,006,000 Income tax expense 863,000 2,341,000 1,058,000 Minority interests (178,000) (175,000) -- --------- --------- -------- Earnings from continuing operations 1,214,000 3,468,000 1,948,000 --------- --------- --------- Net profit(loss) from discontinued operations, net of income tax 331,000 (930,000) (24,000) ------- --------- -------- A-29 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (14) Segment Information, continued 1998 1997 1996 ---- ---- ---- Net earnings $1,545,000 2,538,000 1,924,000 ========== ========= ========= Identifiable assets: Investment Services $3,752,000 2,346,000 1,618,000 Insurance Services 1,640,000 2,585,000 1,144,000 Real Estate 1,324,000 1,283,000 1,476,000 Corporate: Investment in equity method investees 17,064,000 15,606,000 8,905,000 Other 8,928,000 8,561,000 12,071,000 Discontinued Operations 206,000 356,000 -- ------- ------- ---------- $32,914,000 30,737,000 25,214,000 ========== ========== ========== Capital expenditures: Investment Services $55,000 154,000 33,000 Insurance Services 44,000 33,000 55,000 Real Estate 58,000 -- 21,000 Corporate 49,000 26,000 17,000 Discontinued Operations -- 99,000 18,000 -------- ------ ------ $206,000 312,000 144,000 ======== ======= ======= Depreciation/amortization expenses: Investment Services $279,000 118,000 33,000 Insurance Services 90,000 90,000 125,000 Real Estate 107,000 110,000 129,000 Corporate 78,000 62,000 13,000 Discontinued Operations 64,000 56,000 24,000 ------ ------ ------ $618,000 436,000 324,000 ======== ======= ======= Revenues attributable to customers generating greater than 10% of the consolidated revenues of the Company: Insurance services Company A 3,970,000 4,659,000 4,412,000 ========= ========= ========= A-30 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (14) Segment Information, continued At December 31, 1998 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. 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, notes receivable and investments in affiliates and preferred stock. (15) Earning Per Share Basic earnings per share are 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 convertible 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, 1998 -------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ---------- ----------- -------- Earnings from continuing operations $1,214,000 Basic EPS Income available to common stockholders 1,214,000 4,163,000 $.29 ==== Effect of Dilutive Securities Options -- 74,000 Contingently issuable shares (76,000) 456,000 -------- ------- Diluted EPS Income available to common stockholders and assumed conversions $1,138,000 4,692,000 $.24 ========== ========= ==== A-31 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (15) Earning Per Share, continued 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 ========== ========= ==== 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 $1,948,000 4,219,000 $.46 ========== ========= ==== A-32 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (15) Earning Per Share, continued At December 31, 1998 the Company's affiliate, Syntera, had issued 620,000 shares which are convertible into 724,000 of the Company's common shares in the event that the Syntera shares are not publicly tradable after a future date. Such conversion rights are in varying amounts beginning in October 1999 and extending through January 2002. Unexercised employee stock options to purchase 295,000, 295,000 and 244,000 shares of the Company's common stock as of December 31, 1998, 1997 and 1996, 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. A-33 EX-10 2 SHARE EXCHANGE AGREEMENT Exhibit 10.38 SHARE EXCHANGE AGREEMENT This Share Exchange Agreement (this "Agreement") is made and entered into as of the 16th day of February, 1998, by and between American Physicians Service Group, Inc., a Texas corporation ("APS") and Michael T. Breen, 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 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 has acquired or will acquire 75,000 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 are 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 two (2) years following the date hereof (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 2 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 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, 55,000 of the PM Shares shall be eligible for conversion as provided in this Agreement; and the remaining 20,000 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 $450,000 during any twelve (12) consecutive calendar monthly period ending on or prior to the Determination Date, then no portion of the 20,000 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 $450,000, then the percentage of the 20,000 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 20,000 by a fraction, the numerator of which is the amount by which Clinic PAE exceeds $400,000 (but not greater than $100,000 in any event), and the denominator of which is $100,000. 4 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 $450,000 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 65,000 determined as follows: $450,000 - $400,000 x 20,000 = 10,000 ------------------- $100,000 55,000 ------ 65,000 (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 5 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 6 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. 7 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 8 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: Michael T. Breen, M.D. 3100 Above Stratford Place Austin, Texas 78746 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/ William H. Hayes ---------------------- Printed Name: William H. Hayes ---------------------- Title: Sr. VP Finance SHAREHOLDER: /s/ Michael T. Breen, M.D. ---------------------------- 9 EX-10 3 SHARE EXCHANGE AGREEMENT Exhibit 10.39 SHARE EXCHANGE AGREEMENT This Share Exchange Agreement (this "Agreement") is made and entered into as of the 1st day of April, 1998, by and between American Physicians Service Group, Inc., a Texas corporation ("APS") and Antonio Cavazos, Jr., 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 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 has acquired or will acquire 30,276 shares (the "PM Shares") of the $0.001 par value per share common stock of APS Practice Management, Inc., a Texas corporation ("Practice Management"); 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 are 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 March 31, 2000 (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 2 (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. Shareholder's right to exchange its PM Shares hereunder shall apply as to all, but not less than all, of the PM Shares. 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 3 Expiration Date. For purposes hereof, any additional shares of Practice Management stock of any class which Shareholder obtains pursuant 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 written above shall also be considered to be included in the PM Shares; however, no adjustment or modification will be made to the per share price hereunder of Practice Management stock as a result of any such transaction. At the Closing, Shareholder shall be entitled to receive such shares of APS Common as is determined by dividing $5.00 per share (the "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. At the Closing, Shareholder shall tender its share certificate(s) for all of the 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 PM Shares and that the 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 4 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, at its expense, 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 5 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. Except as otherwise herein provided, 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 6 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: Antonio Cavazos, Jr., M.D. 8235 Fredericksburg Road San Antonio, Texas 78229 Any party may change its address for purposes of this Agreement by proper notice to the other party. 7 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/ William H. Hayes ------------------------ Printed Name: William H. Hayes ------------------------ Title: Sr. VP Finance ------------------------ SHAREHOLDER: /s/ Antonio Cavazos, Jr., M.D. ------------------------------ 8 EX-10 4 SHARE EXCHANGE AGREEMENT Exhibit 10.40 SHARE EXCHANGE AGREEMENT This Share Exchange Agreement (this "Agreement") is made and entered into as of the 1st day of April, 1998, by and between American Physicians Service Group, Inc., a Texas corporation ("APS") and Antonio Cavazos, III, M.D. (the "Shareholder"). R E C I T A L S: WHEREAS, pursuant to that certain Asset Purchase Agreement (the "Purchase Agreement") entered into by Shareholder of even date herewith and the other contracts and agreements to which Shareholder was, or was to be, a party as contemplated in the Purchase Agreement (the Purchase Agreement and all such other contracts and agreements are hereinafter referred to collectively as the "Acquisition Documents"), Shareholder has acquired or will acquire 70,000 shares (the "PM Shares") of the $0.001 par value per share common stock of APS Practice Management, Inc., a Texas corporation ("Practice Management"); 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 are 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 March 31, 2000 (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 2 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 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, 30,000 of the PM Shares shall be eligible for conversion as provided in this Agreement; and the remaining 40,000 PM Shares, or a portion thereof, will only be eligible for an exchange hereunder in the event there is consummation of a transaction between Practice Management and one or more physicians (or their professional associations) in Bexar County, Texas, save and except for those physicians set forth on Exhibit A attached hereto and incorporated herein for all purposes, whereby each such physician enters into binding and enforceable agreements with Practice Management of the type and nature ordinarily relied upon by Practice Management in its dealings with physicians on or before the Determination Date. In the event that there is a consummation of any such transaction on or before the Determination Date, then the portion of the 40,000 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 5,000 by the number of physicians in Bexar County, Texas, save and except for those physicians set forth on Exhibit A attached hereto and incorporated herein for all purposes, consummating such transactions. Notwithstanding the above or any other provision in this Agreement, (i) the Shareholder shall not benefit from, and the above provisions shall not apply to, any such 4 transaction between Practice Management and any of the physicians set forth on Exhibit A attached hereto and (ii) any portion of the 40,000 PM Shares which have not, as of the Determination Date, become eligible for exchange hereunder (pursuant to the above provisions) shall no longer be eligible for exchange under any circumstances. (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 $5.00 per share (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. 5 (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 at its expense 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). 6 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. Except as otherwise herein provided, 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 7 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: Antonio Cavazos, III, M.D. 4499 Medical Drive, Suite 102 San Antonio, Texas 78229 8 Any party may change its address for purposes of this Agreement by proper notice to the other party. 9 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/ William H. Hayes ---------------------- Printed Name: William H. Hayes ---------------------- Title: Sr. VP Finance ---------------------- SHAREHOLDER: /s/ Antonio Cavazos, III, M.D. ------------------------------- 10 EX-10 5 SHARE EXCHANGE AGREEMENT Exhibit 10.41 SHARE EXCHANGE AGREEMENT This Share Exchange Agreement (this "Agreement") is made and entered into as of the 18th day of May 1998, by and between American Physicians Service Group, Inc., a Texas corporation ("APS") and Jonathan B. Buten, 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 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 has acquired or will acquire 68,250 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 are 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 May 19, 2000 (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 2 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 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, 47,250 of the PM Shares shall be eligible for conversion as provided in this Agreement; and the remaining 21,000 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 $315,000 during any twelve (12) consecutive calendar monthly period ending on or prior to the Determination Date, then no portion of the 21,000 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 $315,000, then the percentage of the 21,000 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 21,000 by a fraction, the numerator of which is the amount by which Clinic PAE exceeds $280,000 (but not greater than $70,000 in any event), and the denominator of which is $70,000. 4 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 $315,000 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 57,750 determined as follows: $315,000- $280,000 x 21,000 = 10,500 ------------------ $70,000 + 47,250 ------- 57,750 ======= (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 5 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 6 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. 7 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 8 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: 9 APS: American Physicians Service Group, Inc. 1301 Capital of Texas Highway, Suite C-300 Austin, Texas 78746-6550 Attn: President Shareholder: Jonathan B. Buten, M.D. 5801 Round Table Cove Austin, Texas 78746 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/ William H Hayes --------------------- Printed Name: William H Hayes --------------------- Title: Sr. VP Finance --------------------- SHAREHOLDER: /s/ Jonathan B. Buten, M.D. ------------------------------ EX-10 6 SHARE EXCHANGE AGREEMENT Exhibit 10.42 SHARE EXCHANGE AGREEMENT This Share Exchange Agreement (this "Agreement") is made and entered into as of the 30th day of June, 1998, by and between American Physicians Service Group, Inc., a Texas corporation ("APS") and Gary R. Jones, 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 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 has acquired or will acquire 33,934 shares (the "PM Shares") of the $0.001 par value per share common stock of Syntera HealthCare Corporation, a Texas corporation ("Syntera") for a consideration of $5 per PM Share (in aggregate, 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 are 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 July 1, 2000 (the "Determination Date"), any registered public offering of the common stock of Syntera, or any other transaction or event pursuant to which shares of Syntera of the same class as the PM Shares shall have become publicly traded at a per share price of greater than $5; 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"), materially in breach of, or default under, this Agreement, any of the Acquisition Documents or any other contract or agreement to which Shareholder and Syntera and/or APS are parties, and Shareholder shall not have threatened to materially 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 2 (d) At or before the Closing Date, Syntera shall not be, or have been, a party to any merger, consolidation or similar transaction, or agreement with respect thereto, pursuant to 3 which Syntera 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 his right to exchange his 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. Shareholder's right to exchange his PM Shares hereunder shall apply as to all, but not less than all, of the PM Shares. 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 later of (i) the Expiration Date, or (ii) in the event a Lock-Up Period (as hereinafter defined) is imposed pursuant to Section 4 hereof, the day on which such Lock-Up Period ends.. For purposes hereof, any additional shares of Syntera stock of any class which Shareholder obtains 4 pursuant to stock dividends, stock splits, reverse stock splits or recapitalizations to which Syntera or the PM Shares are subject after the date this Agreement was 5 originally entered into as first written above shall also be considered to be included in the PM Shares; however, no adjustment or modification will be made to the Exchange Value as a result of any such transaction. At the Closing, Shareholder shall be entitled to receive such shares of APS Common as is determined by dividing the 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. At the Closing, Shareholder shall tender his share certificate(s) for all of the 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 PM Shares and that the 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 6 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 (the "Lock-Up Period"). 7 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 Travis County, 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. 8 (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: Gary R. Jones, M.D. 1500 W. 38th Street, Suite 25 Austin, Texas 78731 Any party may change its address for purposes of this Agreement by proper notice to the other party. 9 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/ William H Hayes -------------------- Printed Name: William H Hayes -------------------- Title: Sr. VP Finance -------------------- SHAREHOLDER: /s/ Gary R. Jones, M.D. ----------------------- 10 EX-10 7 SHARE EXCHANGE AGREEMENT Exhibit 10.43 SHARE EXCHANGE AGREEMENT This Share Exchange Agreement (this "Agreement") is made and entered into as of the 31st day of July, 1998, by and between American Physicians Service Group, Inc., a Texas corporation ("APS") and Joe R. Childress, 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 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 has acquired or will acquire 55,200 shares (the "PM Shares") of the $0.001 par value per share common stock of Syntera HealthCare Corporation, f.k.a. APS Practice Management, Inc., a Texas corporation ("Syntera"); 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 are 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 July 31st, 2000 (the "Determination Date"), any registered public offering of the common stock of Syntera, or any other transaction or event pursuant to which shares of Syntera of the same class as the PM Shares shall have become publicly traded; provided that Syntera shall not go public at a per share price of less than $5; 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 Syntera 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 2 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, Syntera shall not be, or have been, a party to any merger, consolidation or similar transaction, or agreement with respect thereto, pursuant to which Syntera 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. Shareholder's right to exchange its PM Shares hereunder shall apply as to all, but not less than all, of the PM Shares. In the event Shareholder has complied with all of the conditions allowing for an exchange pursuant to this Agreement, the closing of 3 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 later of (i) the Expiration Date, or (ii) in the event a Lock-Up Period (as hereinafter defined) is imposed pursuant to Section 4 hereof, the day on which such Lock-Up Period ends. For purposes hereof, any additional shares of Syntera stock of any class which Shareholder obtains pursuant to stock dividends, stock splits, reverse stock splits or recapitalizations to which Syntera or the PM Shares are subject after the date this Agreement was originally entered into as first written above shall also be considered to be included in the PM Shares; however, no adjustment or modification will be made to the per share price hereunder of Syntera stock as a result of any such transaction. At the Closing, Shareholder shall be entitled to receive such shares of APS Common as is determined by multiplying the number of PM Shares referred to in the Recitals to this Agreement by $5, and dividing such amount (the "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. At the Closing, Shareholder shall tender its share certificate(s) for all of the 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 4 in and to the PM Shares and that the 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, at its expense, 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 5 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 (the "Lock-Up Period"). 5. MISCELLANEOUS. (a) FEES AND EXPENSES. Except as otherwise herein provided, 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. 6 (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: Joe R. Childress, M.D. 8601 Village Drive, Suite 118 San Antonio, Texas 78217 Any party may change its address for purposes of this Agreement by proper notice to the other party. 7 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/ William H Hayes --------------------- Printed Name: William H Hayes --------------------- Title: Sr VP Finance --------------------- SHAREHOLDER: /s/ Joe R. Childress, M.D. -------------------------- 8 EX-10 8 SHARE EXCHANGE AGREEMENT Exhibit 10.44 SHARE EXCHANGE AGREEMENT This Share Exchange Agreement this "Agreement") is made and entered into as of the 1st day of August, 1998, by and between American Physicians Service Group, Inc., a Texas corporation ("APS") and M. Reza Jafarnia, M.D. (the "Shareholder"). R E C I T A L S: WHEREAS, pursuant to that certain Asset Purchase Agreement (the "Asset Purchase Agreement") entered into by Shareholder of even date herewith and the other contracts and agreements to which Shareholder was, or was to be, a party as contemplated in the Asset Purchase Agreement (the Asset Purchase Agreement and all such other contracts and agreements are hereinafter referred to collectively as the "Acquisition Documents"), Shareholder has acquired or will acquire 92,557 shares (the "PM Shares") of the $0.001 par value per share common stock of Syntera HealthCare Corporation, a Texas corporation ("Syntera") for a consideration of $5 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 are 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 June 30, 2000 (the "Determination Date"), any registered public offering of the common stock of Syntera, or any other transaction or event pursuant to which shares of Syntera of the same class as the PM Shares shall have become publicly traded, at a per share price of greater than $5; and (b) Shareholder shall not be, on 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 Syntera and/or APS are parties; 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 2 (d) At or before the Closing Date, Syntera shall not be, or have been, a party to any merger, consolidation or similar transaction, or agreement with respect thereto, pursuant to which Syntera 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. Shareholder's right to exchange its PM Shares hereunder shall apply as to all, but not less than all, of the PM Shares. 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 later 3 of (i) the Expiration Date, or (ii) in the event a Lock-Up Period (as hereinafter defined) is imposed pursuant to Section 4 hereof, the day on which such Lock-Up Period ends. For purposes hereof, any additional shares of Syntera stock of any class which Shareholder obtains pursuant to stock dividends, stock splits, reverse stock splits or recapitalizations to which Syntera or the PM Shares are subject after the date this Agreement was originally entered into as first written above shall also be considered to be included in the PM Shares; however, no adjustment or modification will be made to the Exchange Value as a result of any such transaction. At the Closing, Shareholder shall be entitled to receive such shares of APS Common as is determined by dividing the 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. At the Closing, Shareholder shall tender its share certificate(s) for all of the 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 PM Shares and that the 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 4 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 5 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 (the "Lock-Up Period"). 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 6 their respective heirs, legal representatives, successors and permitted assigns. Except for a one-time transfer to Shareholder's estate upon the death of Shareholder, 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: M. Reza Jafarnia, M.D. 9041 Briar Forrest Drive Houston, TX 77024 Any party may change its address for purposes of this Agreement by proper notice to the other party. 7 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/ William H Hayes --------------------- Printed Name: William H Hayes --------------------- Title: Sr. VP Finance --------------------- SHAREHOLDER: /s/ M. Reza Jafarnia, M.D. -------------------------- 8 EX-10 9 SHARE EXCHANGE AGREEMENT Exhibit 10.45 SHARE EXCHANGE AGREEMENT This Share Exchange Agreement (this "Agreement") is made and entered into as of the 15th day of September, 1998, by and between American Physicians Service Group, Inc., a Texas corporation ("APS") and Donald Columbus, 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 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 has acquired or will acquire Seventy Four Thousand Four Hundred Forty Eight (74,448) shares (the "PM Shares") of the $0.001 par value per share common stock of Syntera HealthCare Corporation, a Texas corporation ("Syntera") for a consideration of $5 per PM Share (in aggregate, 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 are 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 September 1, 2000 (the "Determination Date"), any registered public offering of the common stock of Syntera, or any other transaction or event pursuant to which shares of Syntera of the same class as the PM Shares shall have become publicly traded, at a per share price of greater than $5; and (b) Shareholder shall not be, on 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 Syntera and/or APS are parties; 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 2 (d) At or before the Closing Date, Syntera shall not be, or have been, a party to any merger, consolidation or similar transaction or agreement with respect thereto, pursuant to which (i) Syntera was not, or would not be, the named surviving entity after such merger, consolidation or other transaction and (ii) dissenting shareholders have a legal right of redemption or appraisal. 2. EXCHANGE NOTICE. In the event the conditions described in subsections (a) and (d) of 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 subsections (a) and (d) of Section 1 above, fail to be satisfied on or prior to the Determination Date, or (ii) any of the conditions specified in subsections (b) or (c) of Section 1 fail to be satisfied on 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. Shareholder's right to exchange its PM Shares hereunder shall apply as to all, but not less than all, of the PM Shares. 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 3 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 later of (i) the Expiration Date, or (ii) in the event a Lock-Up Period (as hereinafter defined) is imposed pursuant to Section 4 hereof, the day on which such Lock-Up Period ends. For purposes hereof, any additional shares of Syntera stock of any class which Shareholder obtains pursuant to stock dividends, stock splits, reverse stock splits or recapitalizations to which Syntera or the PM Shares are subject after the date this Agreement was originally entered into as first written above shall also be considered to be included in the PM Shares; however, no adjustment or modification will be made to the Exchange Value as a result of any such transaction. At the Closing, Shareholder shall be entitled to receive such shares of APS Common as is determined by dividing Three Hundred Seventy Two Thousand Two Hundred Forty Dollars ($372,240) 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. At the Closing, Shareholder shall tender its share certificate(s) for all of the 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 PM Shares and that the PM Shares are being transferred to APS free and clear of all liens, claims or encumbrances of any kind whatsoever. 4 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 5 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 ( the "Lock-Up Period"). 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. 6 (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: Donald Columbus, M.D. 2400 Highway 365, Suite 101 Nederland, Texas 77627-6268 Any party may change its address for purposes of this Agreement by proper notice to the other party. 7 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/ William H Hayes ------------------- Printed Name: William H Hayes ------------------- Title: Sr. VP Finance ------------------- SHAREHOLDER: /s/ Donald G. Columbus, M.D. ---------------------------- 8 EX-10 10 SHARE EXCHANGE AGREEMENT Exhibit 10.46 SHARE EXCHANGE AGREEMENT This Share Exchange Agreement (this "Agreement") is made and entered into as of the 31st day of December, 1998, by and between American Physicians Service Group, Inc., a Texas corporation ("APS") and David L. Berry, 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 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 has acquired or will acquire 64,642 shares (the "PM Shares") of the $0.001 par value per share common stock of Syntera HealthCare Corporation, a Texas corporation ("Syntera") for a consideration of $7.70 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 are 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 December 1, 2001 (the "Determination Date"), any registered public offering of the common stock of Syntera, or any other transaction or event pursuant to which shares of Syntera of the same class as the PM Shares shall have become publicly traded at a per share price of greater than $7.70 (as adjusted for stock splits, stock dividends, combinations and other recapitalizations); 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 Syntera 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, Syntera shall not be, or have been, a party to any merger, consolidation or similar transaction, or agreement with respect thereto, pursuant to which Syntera 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 2 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, 35,422 of the PM Shares shall be eligible for conversion as provided in this Agreement; and the remaining 29,220 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 $450,000 during any twelve (12) consecutive calendar monthly period ending on or prior to the Determination Date, then no portion of the 29,220 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 $450,000, then the percentage of the 29,220 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 29,220 by a fraction, the numerator of which is the amount by which Clinic PAE exceeds $400,000 (but not greater than $100,000 in any event), and the denominator of which is $100,000. 3 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 $475,000 for the 12 months ended December 31, 1999, 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 determined as follows: $475,000 - $400,000 x 29,220 = 21,915 ------------------- $100,000 + 35,422 ------ 57,337 ====== (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 later of (i) the Expiration Date, or (ii) if a Lock-Up Period (as hereinafter defined) is imposed pursuant to Section 4 hereof, the day on which such Lock-Up Period ends. 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 Syntera 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 4 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 5 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 (the "Lock-Up Period"). 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. 6 (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: David L. Berry, M.D. 1111 West 34th Street, Suite 301 Austin, Texas 78705 Any party may change its address for purposes of this Agreement by proper notice to the other party. [Signature page follows] 7 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/ William H Hayes -------------------- Printed Name: William H Hayes -------------------- Title: Sr VP Finance -------------------- SHAREHOLDER: /s/ David L. Berry, M.D. ------------------------ 8 EX-10 11 CONTRIBUTION AND STOCK PURCHASE AGREEMENT Exhibit 10.47 CONTRIBUTION AND STOCK PURCHASE AGREEMENT This Contribution and Stock Purchase Agreement (this "Agreement"), dated as of January 1, 1998 (the "Effective Time"), by and among American Physicians Service Group, Inc., a Texas corporation ("APS"), those individuals or entities set forth on Appendix I attached hereto (individually an "Additional Purchaser" and collectively the "Additional Purchasers"), Barton Acquisition, Inc., a Texas corporation ("Newco"), Barton House, Ltd., a Texas limited partnership ("Barton House"), Barton House at Oakwell Farms, Ltd., a Texas limited partnership ("Oakwell"), Uncommon Care, Inc., a Texas corporation (the "General Partner"), George R. Bouchard ("Bouchard"), John H. Trevey ("Trevey") and Uncommon Partners, Ltd., a Texas limited partnership (the "Limited Partner"). Barton House and Oakwell are sometimes collectively referred to herein as the "Partnerships." PRELIMINARY STATEMENTS The General Partner is the sole general partner of each of the Partnerships, and the Limited Partner, Bouchard and Trevey are the only limited partners of each of the Partnerships. Bouchard and Trevey own one hundred percent (100%) of the issued and outstanding capital stock of the General Partner. The parties desire for Newco to acquire substantially all of the business and assets of the Partnerships and certain of the business and assets of the General Partner, and to assume certain liabilities of the Partnerships and the General Partner, on the terms and subject to the conditions contained herein. STATEMENT OF AGREEMENT NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I AGREEMENT OF PURCHASE AND SALE Section 1.1 CONTRIBUTION OF ASSETS OF PARTNERSHIPS. Upon the basis of the representations and warranties, for the consideration and subject to the terms and conditions set forth in this Agreement, (a) Barton House agrees to contribute, as of the Effective Time, 100% of its Assets (as hereinafter defined) to Newco in exchange for 520,000 shares of Newco's $0.001 par value per share common stock (the "Common Stock") and $384,400 and (b) Oakwell agrees to contribute, as of the Effective Time, 100% of its Assets to Newco in exchange for 520,000 shares of Common Stock and $106,000. 2 Section 1.2 CONTRIBUTION OF ASSETS OF THE GENERAL PARTNER. Upon the basis of the representations and warranties, for the consideration and subject to the terms and conditions set forth in this Agreement, the General Partner agrees to contribute to Newco, as of the Effective Time, those assets (including contracts and rights thereunder) listed or described on Schedule 1.2 attached hereto in exchange for 200,000 shares of Common Stock . Section 1.3 CONTRIBUTION OF CASH BY APS. Upon the basis of the representations and warranties, for the consideration and subject to the terms and conditions set forth in this Agreement, APS agrees to purchase, as of the Effective Time, from Newco 677,920 shares of Newco's $0.001 par value per share Convertible Preferred Stock (the "Preferred Stock") for $1,962,400 (the "APS Cash Contribution"). The Preferred Stock shall have such rights and preferences as provided in the organizational documents of Newco, the form of which is attached hereto as Exhibit A (the "Organizational Documents"). Section 1.4 CONTRIBUTION OF CASH BY ADDITIONAL PURCHASERS. Upon the basis of the representations and warranties, for the consideration and subject to the terms and conditions set forth in this Agreement, each Additional Purchaser agrees to purchase, as of the Effective Time, from Newco that specific number of shares of Common Stock as set forth on Appendix I attached hereto for that specific price as set forth on Appendix I attached hereto (the "Additional Purchasers' Cash Contribution"). 3 Section 1.5 ASSETS. The term "Assets" shall include (a) those specific assets of the General Partner listed or described on Schedule 1.2 attached hereto and (b) except for those assets disposed of in the ordinary course of the Partnerships' business in a transaction or series of related transactions not exceeding $5,000 in value occurring between the Effective Time and the Closing, all of the business and assets, tangible or intangible, wherever situated, of the Partnerships as of the Effective Time, such assets to include, without limitation: all real property, buildings, furniture, fixtures, equipment, accounts receivable, inventory, work in process, prepaid expenses, supplies, vehicles, all cash and cash equivalents, all securities or other investment property, any cash or other property or amounts received for services rendered on or after the Effective Time, all contract rights, all licenses, certificates and permits, the telephone number(s), the names of Barton House, Ltd., Barton House at Oakwell Farms, Ltd. and all patents, tradenames, registered or unregistered trademarks and servicemarks, copyrights and other intellectual property (and all goodwill associated with any such patents, tradenames, trademarks, servicemarks, copyrights or other intellectual property), all rights under or to computer software licensed, owned or used by either of the Partnerships in their operations, all rights under or to leasehold improvements and other fixed assets owned or leased by either of the Partnerships and all items of personal property owned or leased by either of the Partnerships including, without limitation, all the assets specifically set out on Schedule 1.5 attached hereto. Notwithstanding the foregoing or any other provision of this Agreement, the following shall not be Assets and shall be retained by the General Partner or the Partnerships, as the case may be: 4 (a) the books of account and record books of the General Partner and the Partnerships (complete and accurate copies of which shall be provided to APS on or before the Closing Date (as hereinafter defined)); (b) their respective rights under this Agreement; and (c) their respective consideration for the Assets as described in Section 1.1 and Section ----------- -------- 1.2. - - --- Section 1.6 ASSUMED LIABILITIES. At the Closing (as hereinafter defined), Newco shall only assume (a) the obligations of the General Partner or Partnerships specifically described on Schedule 1.6 hereto, (b) those trade payables on open account incurred by the Partnerships in the ordinary course of the Partnerships' business from unrelated parties and (c) that certain note dated June 1, 1997 in the original principal amount of $100,000, including interest thereon at the rate of 12% per annum arising out of a loan by the Limited Partner to the General Partner (the "Limited Partners' Note). Such limited assumption shall be pursuant to that certain general conveyance, assignment and transfer of assets and assumption of liabilities, in the form attached hereto as Exhibit B (the "Assignment and Assumption Agreement") to be executed by the parties hereto at the Closing, effective as of the Effective Time. With respect to any lease or other contract obligations reflected on Schedule 1.6 or otherwise described in the first sentence of this Section, it is agreed that Newco will have no responsibility whatsoever for any breaches or defaults which occurred prior to the Effective Time. Except for (a) those liabilities and obligations specifically assumed by Newco as provided above and (b) the obligations of makers 5 or guarantors on the notes described on Schedule 1.6, any and all debts, liabilities and obligations of the Partnerships, the General Partner and/or any other parties hereto, whether known or unknown, absolute, contingent or otherwise (including, but not limited to, federal, state and local taxes, any sales taxes, use taxes and property taxes, any taxes arising from the transactions contemplated by this Agreement and any liabilities arising from any litigation or civil, criminal or regulatory proceeding involving or related to the parties hereto or their business) shall remain the sole responsibility of the party or parties responsible therefor prior to the execution of this Agreement. At the Closing, the Limited Partners' Note (including interest thereon) will be paid in full by Newco, or funds sufficient in an amount to fully pay the Limited Partners' Note will be placed in escrow with an escrow agent mutually acceptable to APS and the Limited Partner, and such funds will be used to pay in full the Limited Partners' Note within three (3) days from the Closing Date. Section 1.7 CONVEYANCE OF NAME. The General Partner and each of the Partnerships hereby transfer and convey to Newco all right, title and interest in and to the corporate and business name of the General Partner, the name "Uncommon Care" and the name "Barton House." Each party agrees that, after the Closing, only Newco shall have the right to use "Uncommon Care" and/or "Barton House," the names of the Partnerships and all other names included in the Assets. All parties (other than Newco) covenant and agree not to use those names (or any portion thereof) or any names similar thereto, alone or in combination with other words or phrases. The General Partner covenants and agrees to, promptly after Closing, change its name to a name that does not contain the terms "Uncommon", "Care", "Barton", or "House", or 6 any names similar thereto, alone or in combination with other words or phrases or any names included in the Assets. Section 1.8 RELEASE OF GUARANTEES. After the Closing, Newco shall use its reasonable best efforts to relieve Trevey and Bouchard of any and all responsibility or liability under or pursuant to those personal guaranty obligations and obligations as makers, listed and described on Schedule 1.8 attached hereto, which Trevey and Bouchard hereby represent and warrant (a) are directly related to one or more specific liabilities assumed by Newco pursuant to Section 1.6, or (b) arose out of, or in connection with, the purchase of Assets conveyed to Newco hereunder. Section 1.9 STOCK TRANSFER RESTRICTION AND SHAREHOLDERS AGREEMENT. All parties hereto agree, at the Closing, to execute that certain Stock Transfer Restriction and Shareholders Agreement in the form attached hereto as Exhibit C (the "Shareholders Agreement"). Section 1.10 TRANSFER OF REAL PROPERTY. The Partnerships and the General Partner will be contributing certain real property interests (the "Real Property") which are included in the Assets. Each such contributor of Real Property is also referred to in this Section as the "Previous Owner." With regard to each such contribution of Real Property, and on the Closing Date of this Agreement, the Previous Owner shall execute, acknowledge and deliver or cause to be delivered to Newco such documents of title and conveyance relating to the Real Property as APS may request; provided that those liens on the Real Property securing the mortgage indebtedness reflected on Schedule 1.6 and those title exceptions reflected on Schedule 4.6-A may remain on the Real Property after the Closing. 7 Section 1.11 CLOSING. The closing of the transactions contemplated in this Agreement (the "Closing") shall take place at the offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P., 1900 Frost Bank Plaza, 816 Congress Avenue, Austin, Texas 78701, or at such other location as the parties may agree. The date on which the Closing occurs is referred to herein as the "Closing Date." Section 1.12 PAYMENT OF PURCHASE PRICE. The cash payments from Newco to the Partnerships as described in Section 1.1, the APS Cash Contribution and the Additional Purchasers Cash Contribution may be paid by regular check at the Closing; provided that any payments due the Limited Partner hereunder will be made by wire transfer of immediately available funds, or by cashier's check, at the Closing. ARTICLE II REPRESENTATIONS AND WARRANTIES OF APS AND ADDITIONAL PURCHASERS APS and each Additional Purchaser (as to itself only and not as to any other party) represents and warrants to each of the other parties hereto that each of the following matters is true and correct in all respects as of the Effective Time and the Closing Date (with the understanding that each of the other parties hereto is relying materially on such representations and warranties in entering into and performing this Agreement): 8 Section 2.1 DUE ORGANIZATION AND PRINCIPAL EXECUTIVE OFFICE. APS is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas. APS's principal executive offices are located at 1301 Capital of Texas Highway, Austin, Texas 78746. APS and such Additional Purchaser, as the case may be, has all necessary power and authority to carry on its business as now conducted and as it is proposed to be conducted in the future Section 2.2 DUE AUTHORIZATION. APS and such Additional Purchaser, as the case may be, has all necessary power and authority to enter into and perform this Agreement and each other agreement, instrument and document required to be executed by such party in connection herewith. This Agreement and each other agreement, instrument and document required herein to be executed by APS or such Additional Purchaser have been duly and validly authorized, executed and delivered by such party and constitute the valid and binding obligations of such party 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. The execution, delivery and performance of this Agreement and each other agreement, instrument and document required herein to be executed by APS or such Additional Purchaser will not (a) violate any federal, state, county or local law, rule or regulation applicable to APS, such Additional Purchaser or their respective properties, (b) violate or conflict with, or permit the cancellation of, any agreement to which APS or such Additional Purchaser is a party or by which it or its 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 any indebtedness secured by the property of, APS or such Additional Purchaser or (d) violate or conflict with any provision of the certificate of 9 incorporation or bylaws of APS or such Additional Purchaser. No action, consent or approval of, or filing with, any federal, state, county or local governmental authority is required of APS or such Additional Purchaser in connection with the execution, delivery or performance of this Agreement (or any agreement, instrument or other document executed in connection herewith by APS or such Additional Purchaser). Section 2.3 BROKERS AND FINDERS. Neither APS nor such Additional Purchaser has engaged, or caused to be incurred any liability to, any finder, broker or sales agent in connection with the execution, delivery or performance of this Agreement or the transactions contemplated hereby. Section 2.4 CLAIMS AND PROCEEDINGS. Neither APS nor such Additional Purchaser is a party to any claims, actions, suits, proceedings or investigations, at law or in equity, before or by any court, municipal or other governmental department, commission, board, agency or instrumentality which seeks to restrain or prohibit the carrying out of the transactions contemplated by this Agreement or to challenge the validity of such transactions or any part thereof or seeking damages on account thereof; and, to the knowledge of APS and each Additional Purchaser, no such claim, action, suit, proceeding or investigation is threatened. Section 2.5 INVESTMENT INTENT. APS and such Additional Purchaser (a) is acquiring the Preferred Stock and Common Stock, as applicable, for its own account for investment and not with a view to, or in connection with, a distribution thereof, within the meaning of the Securities Act of 1933, as amended (the "Act"), (b) is an "accredited investor" within the meaning of Rule 10 501 under the Act, (c) will not sell or transfer such stock unless (i) such transfer is provided for, or pursuant to, the provisions of the Shareholders Agreement and (ii) such stock is registered under the Act or such sale or transfer is exempt from such registration requirements, (d) is able to bear the economic risk of its acquisition of such stock and (e) 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 such stock. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE LIMITED PARTNER The Limited Partner represents and warrants to each of the other parties hereto that each of the following matters is true and correct in all respects as of the Effective Time and the Closing (with the understanding that each of the other parties hereto is relying materially on such representations and warranties in entering into and performing this Agreement): Section 3.1 DUE ORGANIZATION AND PRINCIPAL EXECUTIVE OFFICE. The Limited Partner is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Texas and has all necessary power and authority to carry on its business as now conducted and as proposed to be conducted. The Limited Partner's principal executive offices are located at 808 W. 10th Street, Austin, Texas 78701. Section 3.2 DUE AUTHORIZATION. The Limited Partner has all necessary power and authority to enter into and perform this Agreement and each other agreement, instrument and 11 document required to be executed by the Limited Partner in connection herewith. This Agreement and each other agreement, instrument and document required herein to be executed by the Limited Partner have been duly and validly authorized, executed and delivered by the Limited Partner and constitute the valid and binding obligations of the Limited Partner enforceable against it in accordance with its terms. The execution, delivery and performance of this Agreement and each other agreement, instrument and document required herein to be executed by the Limited Partner will not (a) violate any federal, state, county or local law, rule or regulation applicable to the Limited Partner or its properties, (b) violate or conflict with, or permit the cancellation of, any agreement to which the Limited Partner is a party or by which it or its properties are bound, (c) permit the acceleration of the maturity of any indebtedness of, or any indebtedness secured by the property of, the Limited Partner or (d) violate or conflict with any provision of the certificate of incorporation or bylaws of the Limited Partner. No action, consent or approval of, or filing with, any federal, state, county or local governmental authority is required of the Limited Partner in connection with the execution, delivery or performance of this Agreement (or any agreement, instrument or other document executed in connection herewith by the Limited Partner). Section 3.3 BROKERS AND FINDERS. The Limited Partner has not engaged, or caused to be incurred any liability to, any finder, broker or sales agent in connection with the execution, delivery or performance of this Agreement or the transactions contemplated hereby. Section 3.4 CLAIMS AND PROCEEDINGS. The Limited Partner is not a party to any claims, actions, suits, proceedings or investigations, at law or in equity, before or by any court, 12 municipal or other governmental department, commission, board, agency or instrumentality which seeks to restrain or prohibit the carrying out of the transactions contemplated by this Agreement or to challenge the validity of such transactions or any part thereof or seeking damages on account thereof; and, to the knowledge of the Limited Partner, no such claim, action, suit, proceeding or investigation is threatened. Section 3.5 INVESTMENT INTENT. With respect to any Common Stock acquired, or to be acquired, by the Limited Partner in a distribution pursuant to the liquidation of the Partnerships, the Limited Partner (a) is acquiring the Common Stock for its own account for investment and not with a view to, or in connection with, a distribution thereof (other than as permitted and contemplated in this Agreement and the Shareholders Agreement), within the meaning of the Act, (b) is an "accredited investor" within the meaning of Rule 501 under the Act, (c) will not sell or transfer the Common Stock unless (i) such transfer is provided for, or pursuant to, the provisions of the Shareholders Agreement and (ii) such Common Stock is registered under the Act or such sale or transfer is exempt from such registration requirements, (d) is able to bear the economic risk of its acquisition of the Common Stock and (e) 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 Common Stock. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIPS, THE GENERAL PARTNER, TREVEY AND BOUCHARD 13 The Partnerships, the General Partner, Trevey and Bouchard (each of which is sometimes referred to in this Agreement as a "Control Party" and collectively, jointly and severally, as the "Control Parties") each hereby, jointly and severally, represents and warrants to each of the other parties hereto that each of the following matters is true and correct in all respects as of the Closing (with the understanding that each of the other parties hereto is relying materially on each such representation and warranty in entering into and performing this Agreement); provided, however, that (i) any of the following representations and warranties which refer specifically to the Assets will be deemed to only be made, jointly and severally, by the General Partner, Trevey and Bouchard, with respect to those Assets contributed by the General Partner under Section 1.2 hereof and (ii) in no event shall any of the Control Parties have any liability (whether based on contract or tort) to any other party hereto for any negligent misrepresentation or breach of any warranty with respect to any title defect to any Real Property included in the Assets, or with respect to any claims or losses attributable to, or arising from, any contamination of any such Real Property with any hazardous waste, hazardous substances or other hazardous or toxic materials (whether in violation of environmental laws or otherwise). Section 4.1 DUE ORGANIZATION. The General Partner 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. Trevey and Bouchard are the only shareholders of the General Partner. Barton House is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Texas and has all necessary power and authority to carry on its business as now conducted and as proposed to be conducted. Oakwell is a limited partnership duly organized, validly existing and in good 14 standing under the laws of the State of Texas and (except as disclosed on Schedule 4.6-B) has all necessary power and authority to carry on its business as now conducted and as proposed to be conducted. The Limited Partner, Trevey and Bouchard are the only limited partners of each of the Partnerships, and the General Partner is the sole general partner of each of the Partnerships. Complete and correct copies of the Articles of Limited Partnership, Certificates of Limited Partnership and other organizational documents of the Partnerships, and all amendments thereto, are attached hereto as Schedule 4.1. The General Partner, Barton House and Oakwell are each qualified to do business, and each is in good standing, in Texas, which represents the only jurisdiction where such qualification is required for the conduct of any of the Control Parties' business as conducted on or prior to the Closing Date. Section 4.2 SUBSIDIARIES. Each of the Partnerships does not directly or indirectly have (or possess any options or other rights to acquire) any subsidiaries or any direct or indirect ownership interests in any person, business, corporation, partnership, association, joint venture, trust or other entity. Section 4.3 DUE AUTHORIZATION. Each Control Party has all necessary power and authority to enter into and perform this Agreement and each other agreement, instrument and document required to be executed by it in connection herewith. This Agreement and each other agreement, instrument and document required herein to be executed by any Control Party have been duly and validly authorized, executed and delivered by such party and constitute the valid and binding obligations of such party enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, conservatorship, receivership and other similar laws of general 15 application affecting the rights and remedies of creditors. Except as disclosed on Schedule 4.21 attached hereto, the execution, delivery and performance of this Agreement and each other agreement, instrument and document required herein to be executed by any or all of the Control Parties will not (a) violate any federal, state, county or local law, rule or regulation applicable to the respective Control Party or its Assets, (b) violate or conflict with, or permit the cancellation of, any agreement to which any Control Party is a party, or by which any Control Party or its 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 any indebtedness secured by the property of, any Control Party or (d) violate or conflict with any provision of the organizational documents of any Control Party. Except as disclosed on Schedule 4.21 attached hereto, no action, consent or approval of, or filing with, any federal, state, county or local governmental authority is required of any Control Party in connection with the execution, delivery or performance of this Agreement (or any agreement or other document executed in connection herewith by such Control Party). Section 4.4 FINANCIAL STATEMENTS. The unaudited balance sheet and income statement of each of the Partnerships and the General Partner as of and for the year ended December 31, 1997, (collectively, the "Financial Statements") are attached hereto as Schedule 4.4. The Financial Statements have been prepared from the books and records of the Partnerships and the General Partner, respectively, on a basis consistent with the cash basis of accounting used in preparation of the Partnerships' and General Partner's tax returns and represent actual, bona fide transactions. The Financial Statements reflect, on a cost basis, all assets owned by the Partnerships and the General Partner (and do not include any assets not owned by the Partnerships or the General 16 Partner), and reflect all liabilities for money borrowed. The representations contained in the immediately preceding sentence are qualified in that (i) the Financial Statements include no footnotes; (ii) the Financial Statements may exclude accrued liabilities not yet due and amounts representing trade payables incurred in the ordinary course of business, and (iii) no representation is made with respect to the appropriateness or accuracy of methods of depreciation, with respect to the existence or adequacy of any depreciation or other valuation reserve, or with respect to the occurrence or non-occurrence of any event that could, in accordance with generally accepted accounting principles, result in a reduction in the carrying value of any asset. Except (a) for the obligations in the amounts disclosed on Schedule 1.6 attached hereto, (b) to the extent reflected in the Financial Statements, exclusive of any notes thereto and (c) for obligations arising in the ordinary course of the Partnerships' and General Partner's business in a transaction or related series of transactions not exceeding $5,000 in value, the Partnerships and the General Partner had, as of December 31, 1997, no liabilities of a type that would be required to be reflected as such in the Financial Statements, exclusive of any notes thereto. Except as set forth in Schedule 4.4 hereto, and except for increases in cost of sales and expenses resulting from the operations of the Partnerships and the General Partner in the ordinary course of its business consistent with past practice, since December 31, 1997 there has been no material adverse change in the financial position, assets, results of operations or business of the Partnerships or the General Partner. Section 4.5 CONDUCT OF BUSINESS; CERTAIN ACTIONS. Except as set forth on Schedule 4.5-A attached hereto (or such other Schedules as are specifically referred to below in this Section 4.5), since December 31, 1997, each of the Partnerships has conducted its business and operations in 17 the ordinary course and consistent with its past practices and has not (a) increased the compensation of any of its employees, or, except for wage and salary increases made in the ordinary course of business and consistent with its past practices, increased the compensation of any other employees, (b) made capital expenditures exceeding $2,500 individually or $2,500 in the aggregate, except for those expenditures made directly and solely in connection with the Austin II project, located at 3706 Adelphi Lane, Austin, Texas 78727, (c) sold any asset (or any group of related assets) in any transaction (or series of related transactions) in which the purchase price for such asset (or group of related assets) exceeded $2,500 (other than sales of inventory in the ordinary course of business), (d) discharged or satisfied any lien or encumbrance or paid any obligation or liability, absolute or contingent, other than current liabilities incurred and paid in the ordinary course of business, (e) made or guaranteed any loans or advances to any party whatsoever, (f) suffered or permitted any lien, security interest, claim, charge or other encumbrance to arise or be granted or created against or upon any of its assets, real or personal, tangible or intangible, (g) canceled, waived or released any of its debts, rights or claims against third parties, (h) except as set forth on Schedule 4.5-B attached hereto, amended the Articles of Limited Partnership, Certificate of Limited Partnership or any other organizational document of the Partnerships, (i) made or paid any severance or termination payment to any employee or consultant in excess of $2,500, (j) made any change in its method of accounting, (k) made any investment or commitment therefor in any person, business, corporation, association, partnership, joint venture, trust or other entity, (l) except as set forth on Schedule 4.11 and Schedule 4.15, made, entered into, amended or terminated any written employment contract, created, made, amended or terminated any bonus, stock option, pension, retirement, profit sharing or other employee benefit plan or arrangement or withdrawn from any "multi-employer plan" (as defined 18 in the Internal Revenue Code of 1986, as amended (the "Code")) so as to create any liability under ERISA (as hereinafter defined) to any entity, (m) amended, terminated or experienced a termination of any material contract, agreement, lease, franchise or license to which it is a party, (n) entered into any other material transactions except in the ordinary course of business, (o) except for such fees and expenses of the General Partner as have been approved in advance in writing by APS and as are reflected on Schedule 4.5-C attached hereto, distributed any cash or property of the Partnerships, directly or indirectly, to any partner (including, without limitation, any party hereto) in any capacity, (p) entered into any contract, commitment, agreement or understanding to do any acts described in the foregoing clauses (a)-(o) of this Section, (q) suffered any material damage, destruction or loss (whether or not covered by insurance) to any assets, (r) experienced any strike, slowdown or demand for recognition by a labor organization by or with respect to any of its employees, or (s) experienced or effected any shutdown, slow-down or cessation of any operations conducted by, or constituting part of, its business. Section 4.6 OWNERSHIP OF ASSETS: LICENSES, PERMITS, ETC. The General Partner and each of the Partnerships, as applicable, has good and indefeasible title to all of the Assets being contributed by it hereunder, subject only to the liens, security interests, claims and encumbrances specifically described on Schedule 4.6-A. Except as disclosed on Schedule 4.6-B attached hereto, each of the Partnerships has such property and assets, real, personal and mixed, tangible and intangible, including leases and other contracts, which are required for, or used in connection with, the operation of its business as currently conducted. The Assets are in good operating condition and repair, subject to ordinary wear and tear, taking into account the respective ages of the properties involved and are adequate for the conduct of the business of each 19 of the Partnerships or, in the case of Assets contributed by the General Partner, for their intended use. Attached hereto as Schedule 4.6-B is a list of all material federal, state, county and local governmental licenses, certificates and permits held or applied for by the General Partner and each of the Partnerships. The General Partner and each of the Partnerships has complied in all material respects, and each is in compliance in all material respects, with the terms and conditions of any such licenses, certificates and permits. Except as disclosed on Schedule 4.6-B attached hereto, no additional license, certificate or permit is required from any federal, state, county or local governmental agency or body thereof in connection with the conduct of the business of the General Partner and each of the Partnerships. Except as disclosed on Schedule 4.6-B attached hereto, no claim has been made by any governmental authority (and, to the knowledge of each of the Control Parties, no such claim has been threatened) to the effect that a license, permit, certificate or order not possessed by either of the Partnerships or the General Partner is necessary in respect of the business conducted by it. Except as disclosed on Schedule 4.6-B attached hereto, all of the licenses, permits and certificates noted on the attached Schedule 4.6-B are freely assignable to Newco and are included in the Assets. Section 4.7 ENVIRONMENTAL ISSUES. (a) For purposes of this Agreement, the term "environmental laws" shall mean all laws relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling, or the emission, discharge or release, of any pollutant, contaminant, chemical or industrial toxic or hazardous substance or waste and any order related thereto. 20 (b) Each of the Partnerships and the General Partner has complied in all material respects with and obtained all authorizations and made all filings required by all applicable environmental laws. The properties occupied or used by each of the Partnerships and/or the General Partner, as the case may be, and the Sugarland Property (as hereinafter defined) have not been contaminated with any hazardous wastes, hazardous substances or other hazardous or toxic materials in violation of any applicable environmental law, the violation of which could have a material adverse impact on its business or financial position. (c) Neither of the Partnerships nor the General Partner has received (i) any notice, whether actual or constructive, formal or informal, official or unofficial, from the United States Environmental Protection Agency, that it is a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund Notice"), as amended, (ii) any citation from any federal, state or local governmental authority for non-compliance with its requirements with respect to air, water or environmental pollution, or the improper storage, use or discharge of any hazardous waste, other waste or other substance or other material pertaining to its business ("Citations") or (iii) any written notice from any private party alleging any such non-compliance; and there are no pending or unresolved Superfund Notices, Citations or written notices from private parties alleging any such non-compliance. Section 4.8 INTELLECTUAL PROPERTY RIGHTS. Except for the trademarks "Barton House" and "Uncommon Care", there are no patents, trademarks, tradenames or copyrights, and no applications therefor, owned by or registered in the name of either of the Partnerships or the General Partner or in which either of the Partnerships or the General Partner has any right, 21 license or interest. Schedule 4.8 lists all jurisdictions in which applications for registration of the registered trademarks have been made by either of the Partnerships or the General Partner, and describes the status of such applications. Except for software licenses included in the Assets, neither of the Partnerships nor the General Partner is a party to any license agreements, either as licensor or licensee, with respect to any patents, trademarks, tradenames or copyrights. Neither of the Partnerships nor the General Partner has received any notice that it is infringing any patent, trademark, tradename or copyright of others. Section 4.9 COMPLIANCE WITH LAWS. Except as disclosed on Schedule 4.6-B attached hereto, each of the Partnerships and the General Partner has complied in all material respects, and each of such parties is in compliance in all material respects, with all federal, state, county and local laws, rules, regulations and ordinances currently in effect and applicable to its business. No claim has been made by any governmental authority (and, to the knowledge of each of the Control Parties, no such claim has been threatened) against either of the Partnerships or the General Partner to the effect that the business conducted by either of the Partnerships or the General Partner fails to comply with any law, rule, regulation or ordinance. Section 4.10 INSURANCE. Attached hereto as Schedule 4.10 is a list of all policies of fire, liability, business interruption and other forms of insurance and all fidelity bonds currently held by or applicable to either of the Partnerships or the General Partner, which schedule sets forth in respect of each such policy the policy name, policy number, carrier, term, type of coverage, deductible amount or self-insured retention amount, limits of coverage and annual premium. To the knowledge of each of the Control Parties, no event directly relating to either of the 22 Partnerships or the General Partner has occurred which will result in a retroactive upward adjustment of premiums under any such policies or which is likely to result in any prospective upward adjustment in such premiums. There have been no material changes in the type of insurance coverage maintained by either of the Partnerships or the General Partner during the past three (3) years, including, without limitation, any change which has resulted in any period during which either of the Partnerships had no insurance coverage. Excluding insurance policies which have expired and been replaced, no insurance policy of either of the Partnerships or the General Partner has been canceled within the last three (3) years and, to the knowledge of each of the Control Parties, no threat has been made to cancel any insurance policy of either of the Partnerships or the General Partner within such period. Section 4.11 EMPLOYEE BENEFIT MATTERS. Except as set forth on Schedule 4.11, neither of the Partnerships maintains, contributes to, nor is required to contribute to any "employee welfare benefit plan" (as defined in section 3(1) of the Employee Retirement Income Security Act of 1974 (and any sections of the Code amended by it) and all regulations promulgated thereunder, as the same have from time to time been amended ("ERISA")) or any "employee pension benefit plan" (as defined in ERISA). Neither of the Partnerships presently maintains, has ever maintained, or had any obligation of any nature to contribute to, a "defined benefit plan" within the meaning of the Code. Section 4.12 CONTRACTS AND AGREEMENTS. Attached hereto as Schedule 4.12 is a list of all written or oral contracts, commitments, leases and other agreements (including, without limitation, promissory notes, loan agreements and other evidences of indebtedness) to which 23 each of the Partnerships is a party or by which each of the Partnerships or their respective properties are bound, pursuant to which the obligations thereunder of any party thereto are, or are contemplated as being, in respect of any such individual contracts, commitments, leases or other agreements during any year during the term thereof, $2,500 or greater, or which are otherwise material to the business of either of the Partnerships (including, without limitation, all mortgages, deeds of trust, security agreements, pledge agreements, service agreements and similar agreements and instruments and all confidentiality agreements). Neither of the Partnerships, and to the best knowledge of each of the Control Parties, no other party thereto, is in default (and no event has occurred which, with the passage of time or the giving of notice, or both, would constitute a default by either of the Partnerships or, to the best knowledge of each of the Control Parties, by any other party thereto) under any such contracts, commitments, leases or other agreements. Neither of the Partnerships has waived any material right under any such contracts, commitments, leases or other agreements. Neither of the Partnerships has guaranteed any obligations of any other person. Section 4.13 CLAIMS AND PROCEEDINGS. Attached hereto as Schedule 4.13 is a list and description of all claims, actions, suits, proceedings and investigations pending or, to the knowledge of each of the Control Parties, threatened against either of the Partnerships or the General Partner or affecting any of such respective entity's properties or assets, at law or in equity, or before or by any court, municipal or other governmental department, commission, board, agency or instrumentality. Except as set forth on Schedule 4.13 attached hereto, none of such claims, actions, suits, proceedings or investigations will result in any liability or loss to either of the Partnerships or the General Partner which (individually or in the aggregate) is 24 material, and neither of the Partnerships nor the General Partner has been, and neither of the Partnerships nor the General Partner is now, subject to any order, judgment, decree, stipulation or consent of any court, governmental body or agency. No inquiry, action or proceeding has been asserted, instituted or, to the best knowledge of each of the Control Parties, threatened against any of the Control Parties to restrain or prohibit the carrying out of the transactions contemplated by this Agreement or to challenge the validity of such transactions or any part thereof or seeking damages on account thereof. Section 4.14 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 either of the Partnerships on or before the date hereof have been filed within the time (including any applicable extensions) and in the manner provided by law, and all such Returns are true and correct in all material respects and accurately reflect the Tax liabilities of each of the respective Partnerships. All Taxes, assessments, penalties and interest which have become due pursuant to such Returns have been paid or adequately accrued in the Financial Statements. As of the Closing Date, neither of the Partnerships will owe any taxes for any period prior to the Closing Date which are not fully reflected, by type and amount, on Schedule 4.14 attached hereto. As of the Closing Date, neither of the Partnerships will owe any Taxes for any period prior to the Closing which are not reflected on the Financial Statements or on Schedule 4.14 attached hereto, except for Taxes attributable to the respective operations of each of the Partnerships between the Effective Time and the Closing Date. Neither of the Partnerships has executed any presently effective waiver or extension of any statute of limitations against assessments and 26 collection of Taxes. There are no pending or, to the best knowledge of each of the Control Parties, threatened claims, assessments, notices, proposals to assess, deficiencies or audits, other than those disclosed on Schedule 4.13, (collectively, "Tax Actions") against either of the Partnerships with respect to any Taxes owed or allegedly owed by it. Otherwise, neither of the Partnerships' Returns have been audited. Except for any statutory liens for taxes not yet due, there are no tax liens on any of the assets of either of the Partnerships. Proper and accurate amounts have been withheld and remitted by each of the Partnerships from and in respect of all persons from whom it is required by applicable law to withhold for all periods in compliance with the tax withholding provisions of all applicable laws and regulations. Neither of the Partnerships is a party to any tax sharing agreement. Section 4.15 PERSONNEL. Attached hereto as Schedule 4.15 is a list of names and current annual rates of compensation of the employees of each of the Partnerships whose rates of compensation, on an annualized basis, during calendar year 1997 (including base salary, bonus, commissions and incentive pay) are expected to exceed $25,000. Except as set forth on Schedule 4.15, there are no bonus, profit sharing, percentage compensation, company automobile, club membership and other like benefits, if any, paid or payable by either of the Partnerships to such employees from December 31, 1997 through the Closing Date. Schedule 4.15 attached hereto also contains a brief description of all material terms of employment agreements and confidentiality agreements to which either of the Partnerships is a party and all severance benefits which any director, officer, employee, agent or sales representative of either of the Partnerships is or may be entitled to receive. Each of the Partnerships has delivered to APS accurate and complete copies of all such employment 26 agreements, confidentiality agreements and all other agreements, plans and other instruments to which it is a party and under which its employees are entitled to receive benefits of any nature. There is no pending or, to the best knowledge of each of the Control Parties, threatened (a) labor dispute or union organization campaign relating to either of the Partnerships, (b) claims against either of the Partnerships or any of the Control Parties by any employees of either of the Partnerships (other than Workers' Compensation claims specifically described on Schedule 4.13) or (c) terminations, resignations or retirements of any employees of either of the Partnerships. None of the employees of either of the Partnerships are represented by any labor union or organization. There is no unfair labor practice claim against either of the Partnerships before the National Labor Relations Board or any strike, labor dispute, work slowdown or work stoppage pending or, to the best knowledge of each of the Control Parties, threatened against or involving either of the Partnerships. Section 4.16 BUSINESS RELATIONS. None of Control Parties has been notified that any supplier or customer of either of the Partnerships (other than those listed in Schedule 4.16 attached hereto) will cease or refuse to do business with either of the Partnerships or Newco in the same manner as previously conducted with each of such entities as a result of or after the consummation of the transactions contemplated hereby. Neither of the Partnerships has received any notice of any disruption (including delayed deliveries or allocations by suppliers) in the availability of the materials or products used by it. 27 Section 4.17 ACCOUNTS RECEIVABLE. Except as set forth on Schedule 4.17 attached hereto, all of the accounts, notes and loans receivable that have been recorded on the books of each of the Partnerships are bona fide and represent amounts validly due. Section 4.18 AGENTS. Except as set forth on Schedule 4.18 attached hereto, neither of the Partnerships has designated or appointed any person (except for the General Partner, solely in its capacity as the general partner of the Partnership) or other entity to act for it or on its behalf pursuant to any power of attorney or any agency which is presently in effect. Section 4.19 INDEBTEDNESS TO AND FROM PARTNERS AND EMPLOYEES. Except as set forth on Schedule 4.19 attached hereto, neither of the Partnerships owes any indebtedness to any of its partners or employees or has indebtedness owed to it from any of its partners or employees, excluding indebtedness for travel advances or similar advances for expenses incurred on behalf of and in its ordinary course of business and consistent with its past practices. As of the Effective Time and the Closing Date all amounts due either of the Partnerships from any partner or employee of it (or any of their family members) shall have been repaid in full. Section 4.20 COMMISSION SALES CONTRACTS. Except as disclosed in Schedule 4.20 attached hereto, neither of the Partnerships employs or has any relationship with any individual, corporation, partnership or other entity whose compensation from either of the respective Partnerships is in whole or in part determined on a commission basis. 28 Section 4.21 CERTAIN CONSENTS. Except as set forth on Schedule 4.21 attached hereto, there are no consents, waivers or approvals required to be executed and/or obtained by any of the Control Parties from third parties (including, without limitation, the spouse of Trevey or Bouchard) in connection with the execution, delivery and performance of this Agreement. Section 4.22 BROKERS. No Control Party has engaged, or caused any liability to be incurred to, any finder, broker or sales agent in connection with the execution, delivery or performance of this Agreement or the transactions contemplated hereby. Section 4.23 INTEREST IN COMPETITORS, SUPPLIERS AND CUSTOMERS. Except as set forth on Schedule 4.23 attached hereto, no Control Party or any affiliate of any Control Party, and to the knowledge of each of the Control Parties no employee of either of the Partnerships or any affiliate of any employee of either of the Partnerships, has any ownership interest in any competitor, customer or supplier of either of the respective Partnerships or any property used in the operation of the business of either of the respective Partnerships. Section 4.24 WARRANTIES. Except as set forth on Schedule 4.24, neither of the Partnerships has made any contractual warranties or guarantees (other than warranties arising purely by operation of law), whether written or oral, to third parties with respect to any products sold or services rendered by it. Except as set forth on Schedule 4.24 attached hereto, no claims for breach of product or service warranties have been made against either of the Partnerships. 29 Section 4.25 NO DEFAULTS. No Control Party is aware of any breach or default by any other Control Party of any of the representations, warranties, covenants or agreements contained herein. Section 4.26 INVESTMENT INTENT. Each of the Control Parties who shall receive Common Stock of Newco pursuant to this Agreement or any other transaction contemplated by this Agreement or the Shareholders Agreement (whether or not such receipt occurs subsequent to execution of this Agreement or the Shareholders Agreement) (a) is acquiring the Common Stock for its own account for investment and not with a view to, or in connection with, a distribution thereof, within the meaning of the Act, (b) is an "accredited investor" within the meaning of Rule 501 under the Act, (c) will not sell or transfer the Common Stock unless (i) such transfer is provided for, or pursuant to, the provisions of the Shareholders Agreement and (ii) such Common Stock is registered under the Act or such sale or transfer is exempt from such registration requirements, (d) is able to bear the economic risk of its acquisition of the Common Stock and (e) 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 Common Stock. ARTICLE V COVENANTS Section 5.1 EXECUTION OF DOCUMENTS. Each and every party to this Agreement agrees that it will execute, as necessary, or cause to be executed, at or before the Closing Date, the 30 Organizational Documents, the Shareholders Agreement, the Assignment and Assumption Agreement, and the respective Employment Agreement, as well as all other agreements, documents or instruments contemplated in this Agreement or relating to such agreements, documents or instruments contemplated by this Agreement. Section 5.2 COOPERATION RELATING TO FINANCIAL STATEMENTS. Each of the parties hereto agrees to cooperate with APS, solely at the expense of Newco, in the preparation of any financial statements of Newco which APS may be required by any applicable law to prepare; provided, however, that APS shall pay, or reimburse Newco, for any such financial statements prepared at the request of APS or its affiliates and which Newco would not otherwise have been required to prepare pursuant to any contractual agreements or other law. The parties agree that the Limited Partner's obligations hereunder will be limited to providing such information as is within its or its underlying partners' actual knowledge without any obligation of inquiry. Section 5.3 SHAREHOLDER AND DIRECTOR ACTION. Each of the parties hereto (other than Newco) hereby expressly acknowledges and agrees that Newco has been properly and lawfully formed, and that Newco possesses all necessary power and authority to perform all of its obligations under this Agreement, the Organizational Documents and all other agreements, documents and instruments executed by Newco in connection herewith, including, without limitation, the execution, acknowledgment and delivery of all agreements, documents and instruments necessary to provide for a secured line of credit to Newco by APS in the amount of $2.4 million and under the terms and conditions as set forth in the documentation therefor, attached hereto as Exhibit D (the "Line of Credit"). Each party agrees, upon the request of any 31 other party hereto, to execute and deliver such resolutions, written consents, documents and instruments, and take such other actions, as necessary or convenient in order to more fully evidence the authority of Newco hereunder and under such other agreements and the binding and enforceable nature of Newco's commitment as a party hereunder and under such other agreements, notwithstanding the official date of Newco's creation. Section 5.4 CAPITAL CONTRIBUTIONS; LINE OF CREDIT. Except as provided in Article I, no party hereto shall be obligated to contribute or provide for any additional debt or equity capital to Newco; provided, however, APS shall comply with its obligations arising under the Line of Credit. Section 5.5 PROPERTY DISTRIBUTIONS. Except for such fees and expenses of the General Partner as have been approved in advance in writing by APS and as are reflected on Schedule 4.5-C attached hereto, each of the parties hereto agrees that neither of the Partnerships shall make any distributions prior to the Closing Date, whether in cash or other property, directly or indirectly, to any partner (including, without limitation, any of the parties hereto) in any capacity. Each party hereto agrees that it shall not accept any such distribution and warrants that it has no knowledge, actual or constructive, of any such distribution, except as disclosed on Schedule 4.5-C attached hereto. Section 5.6 CONTINUED EXISTENCE OF PARTNERSHIPS. The Partnerships, the General Partner, the Limited Partner, Trevey and Bouchard each hereby covenants and agrees that they will take such actions as necessary to continuously maintain the lawful existence of each of the 32 Partnerships until December 31, 1998, including, without limitation, all such actions reasonably necessary to prevent the dissolution, liquidation or termination of either of the Partnerships. Notwithstanding the foregoing, the Partnerships, the General Partner, the Limited Partner, Trevey or Bouchard shall each be entitled to cause the Partnerships and/or the General Partner to distribute the proceeds received by the Partnerships and General Partner pursuant to Section 1.1 and Section 1.2 hereof. ARTICLE VI CONDITIONS TO CLOSING Section 6.1 APS'S CLOSING OBLIGATIONS. At the Closing, subject to the terms and conditions set forth in this Agreement, APS shall execute, acknowledge and deliver or cause to be delivered, to the other parties, where required: (a) the APS Cash Contribution to Newco; (b) the Line of Credit, the Assignment and Assumption Agreement, the Organizational Documents and the Shareholders Agreement; and (c) such good standing certificates, officer certificates and similar documents and certificates as counsel for any of the parties hereto may reasonably require. Section 6.2 ADDITIONAL PURCHASERS' CLOSING OBLIGATIONS. At the Closing, subject to the terms and conditions set forth in this Agreement, each Additional Purchaser shall execute, acknowledge and deliver or cause to be delivered, to the other parties, where required: (a) the Additional Purchaser's Cash Contribution; (b) the Shareholders Agreement; and (c) such good standing 33 certificates, officer and/or partnership certificates and similar documents and certificates as counsel for any of the parties may reasonably require. Section 6.3 PARTNERSHIPS' CLOSING OBLIGATIONS. At the Closing, subject to the terms and conditions set forth in this Agreement, each of the Partnerships shall execute, acknowledge and deliver or cause to be delivered, to the other parties, where required: (a) the Assignment and Assumption Agreement, the Shareholders Agreement and the Organizational Documents; and (b) such good standing certificates, officer and/or partnership certificates and similar documents and certificates as counsel for any of the parties may reasonably require. Section 6.4 GENERAL PARTNER'S CLOSING OBLIGATIONS. At the Closing, subject to the terms and conditions set forth in this Agreement, the General Partner shall execute, acknowledge and deliver or cause to be delivered, to the other parties, where required: (a) the Assignment and Assumption Agreement, the Shareholders Agreement and the Organizational Documents; and (b) such good standing certificates, officer and/or partnership certificates and similar documents and certificates as counsel for any of the parties may reasonably require. Section 6.5 THE LIMITED PARTNER'S CLOSING OBLIGATIONS. At the Closing, subject to the terms and conditions set forth in this Agreement, the Limited Partner shall execute, acknowledge and deliver or cause to be delivered, to the other parties, where required: (a) the Assignment and Assumption Agreement, the Shareholders Agreement and the Organizational Documents; and (b) such good standing certificates, officer and/or partnership certificates and similar documents and certificates as counsel for any of the parties may reasonably require. 34 Section 6.6 TREVEY'S CLOSING OBLIGATIONS. At the Closing, subject to the terms and conditions set forth in this Agreement, Trevey shall execute, acknowledge and deliver or cause to be delivered, to the other parties, where required: (a) the Shareholders Agreement and the Organizational Documents; and (b) such good standing certificates, officer and/or partnership certificates and similar documents and certificates as counsel for APS may reasonably require. Section 6.7 BOUCHARD'S CLOSING OBLIGATIONS. At the Closing, subject to the terms and conditions set forth in this Agreement, Bouchard shall execute, acknowledge and deliver or cause to be delivered, to the other parties, where required: (a) the Shareholders Agreement and the Organizational Documents; and (b) such good standing certificates, officer and/or partnership certificates and similar documents and certificates as counsel for any of the parties may reasonably require. ARTICLE VII INDEMNIFICATION OF APS, LIMITED PARTNER AND NEWCO Section 7.1 INDEMNIFICATION BY THE CONTROL PARTIES. The Control Parties, each jointly and severally, agree to indemnify and hold harmless APS, the Limited Partner and, following the Closing, Newco, and each officer, director, partner, employee and affiliate of APS, the Limited Partner and, following the Closing, Newco (collectively, the "APS 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 35 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 APS Indemnified Parties may sustain, arising out of (a) any breach or default by any Control Party of any of its representations, warranties, covenants or agreements contained in this Agreement or any agreement or document executed in connection herewith (including, without limitation, the Organizational Documents), (b) any obligation or liability of either of the Partnerships or any of the Control Parties not assumed by Newco pursuant to Section 1.6 of this Agreement and/or (c) any obligations or liabilities with respect to any claims (including, without limitation, claims for failure to be properly licensed) asserted before or after the Closing based on the business, acts or omissions of the General Partner or either of the Partnerships that occurred prior to the Closing. Notwithstanding the foregoing or any other provision of this Agreement, (i) an obligation of the Control Parties shall arise under this Section only if and to the extent that Indemnified Costs owed to all APS Indemnified Parties hereunder, in the aggregate, exceed $100,000, (ii) Trevey and Bouchard shall have no indemnity obligation hereunder with respect to any title defect to any Real Property included in the Assets, and the Control Parties shall have no indemnity obligation hereunder with respect to any claims or losses attributable to, or arising from, any contamination of any such Real Property with any hazardous waste, hazardous substances or other hazardous or toxic materials (whether in violation of environmental laws or otherwise), and (iii) the Control Parties shall have no indemnity obligation hereunder with respect to any claims or causes of action which ultimately (x) are dismissed "with prejudice" without any judgment having been entered against any of the APS Indemnified Parties or any Control Parties, or (y) are resolved in 36 a final, nonappealable judicial determination of no liability on the part of any APS Indemnified Parties or any Control Parties. The combined indemnity obligation of Trevey or Bouchard arising from the provisions of this Section for any one or more claimed losses or events of damage, whether directly or by reason of their ownership of or receipt of distributions from the General Partner or either Partnership, shall not exceed an amount equal to the value, as of the time for payment of the indemnity obligation in question and before taking into account the effect, if any, on such value of the loss, claim or damage giving rise to the indemnity obligation in question and any other alleged or asserted indemnity obligations then outstanding, of an interest in Newco corresponding to an aggregate ownership interest in Newco of 1,100,000 shares of Common Stock, reduced by the number of shares of Common Stock previously transferred by Bouchard or Trevey to any party hereto pursuant to the indemnity provisions hereof (as the same may be adjusted for stock splits and stock dividends occurring after the date hereof). The indemnity obligation of each of Trevey and Bouchard taken separately arising from the provisions of this Section for any one or more claimed losses or events of damage, whether directly or by reason of his ownership of or receipt of distributions from the General Partner or either Partnership, shall not exceed an amount equal to one-half the amount calculated pursuant to the preceding sentence. Neither Trevey nor Bouchard shall be obligated to pay any cash or property other than Newco Common Stock on account of any indemnity obligation accruing hereunder unless, in violation of any term or provision of the Shareholders Agreement, he has previously transferred (other than in connection with the payment of an indemnity obligation) any of the shares of Common Stock issued to him at the Closing (including shares of Common Stock transferred to him by the General Partner or the Partnerships from the shares initially received by the General 37 Partner or the Partnerships at the Closing) or any shares of Common Stock issued without consideration in respect of any such shares; if either Trevey or Bouchard has made such a transfer, he shall be liable to pay cash in respect of any indemnity obligation arising hereunder only to the amount of the value of such shares of Common Stock so transferred (calculated in accordance with the first sentence of this paragraph), subject to the limits on aggregate liability set forth in this paragraph. Any indemnity obligation owed by either Trevey or Bouchard hereunder shall be payable first, and to the extent possible, by transfer by Trevey and/or Bouchard to the appropriate APS Indemnified Parties of that number of shares of Common Stock of Newco equal in value (with value determined before taking into account the effect, if any, on such value of the loss, claim or damage giving rise to the indemnity obligation in question and any other alleged or asserted indemnity obligations then outstanding) to the indemnified loss. Any actual recovery by the APS Indemnified Parties from any other Control Party shall first be deducted in arriving at the remaining aggregate indemnity obligations of Trevey and Bouchard. Any shares of Newco Common Stock transferred by Trevey or Bouchard under the provisions of this Section shall be distributed pro rata to each of the APS Indemnified Parties based upon the proportionate share of Indemnified Costs incurred by each such party. In the event that Newco shall receive, as an APS Indemnified Party, shares of stock forfeited by Trevey or Bouchard hereunder, such stock shall be recorded on Newco's books and held by Newco as treasury stock. In determining the value of Common Stock for purposes of this Section, the methodology specified for determining "Appraised Value" under the provisions of Section 5.2 of the Shareholders Agreement shall be utilized. The APS Indemnified Parties and all parties claiming under the APS Indemnified Parties waive any right of subrogation with respect to any matter indemnified hereunder to the extent of insurance actually in force which provides coverage with respect to such indemnified event. Furthermore, the APS 38 Indemnified Parties and all parties claiming under the APS Indemnified Parties agree not to assign or transfer (by subrogation or otherwise) to any insurance carrier or any third-party claiming under any insurance carrier, any right of recovery under this Agreement. Notwithstanding the foregoing or any other provision of this Agreement, any obligations arising in connection with a breach, or threatened breach, by Trevey and/or Bouchard, as the case may be, of the provisions of Section 10.3 or Article 9 hereof shall not be subject to the foregoing limitations or manner of payment provisions, or any other limitations or qualifications, and in the event of any such breach, or threatened breach, of any such provisions, the parties seeking relief related thereto shall have all remedies available to them at law, in equity, or otherwise. Section 7.2 DEFENSE OF THIRD-PARTY CLAIMS. An APS Indemnified Party shall give prompt written notice to each of the Control Parties of the commencement or assertion of any third party action in respect of which such APS Indemnified Party shall seek indemnification hereunder. Any failure so to notify the Control Parties shall not relieve the Control Parties from any liability that they may have to such APS Indemnified Party under this Article unless the failure to give such notice materially and adversely prejudices the Control Parties. The Control Parties shall have the right to assume control of the defense of, settle or otherwise dispose of such third-party action on such terms as it deems appropriate; provided, however, that: (a) The APS Indemnified Party shall be entitled, at his, her, or its own expense, to participate in the defense of such third-party action; (b) The Control Parties shall obtain the prior written approval of the APS Indemnified Party, which approval shall not be unreasonably withheld, before entering into or making any settlement, 39 compromise, admission or acknowledgment of the validity of such third-party action or any liability in respect thereof if, pursuant to or as a result of such settlement, compromise, admission or acknowledgment, injunctive or other equitable relief would be imposed against the APS Indemnified Party; (c) None of the Control Parties shall consent to the entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the execution and delivery of a release from all liability in respect of such third-party action by each claimant or plaintiff to, and in favor of, each APS Indemnified Party; and (d) None of the Control Parties shall be entitled to control (but shall be entitled to participate at their own expense in the defense of), and the APS Indemnified Party shall be entitled to have sole control over, the defense or settlement, compromise, admission or acknowledgment of any third-party action as to which the Control Parties fail to assume the defense within thirty (30) days; provided, however, that the APS Indemnified Party shall make no settlement, compromise, admission or acknowledgment which would give rise to liability on the part of the Control Parties, without the prior written consent of the Control Parties. (e) The Control Parties shall make payments of all amounts required to be made pursuant to the foregoing provisions of this Article to or for the account of the APS Indemnified Party from time to time promptly upon receipt of bills or invoices relating thereto or when otherwise due and payable, provided that the APS Indemnified Party has agreed in writing to reimburse the Control Parties for the full amount of such payments if the APS Indemnified Party is ultimately determined not to be entitled to such indemnification. If the Control Parties fail to timely remit payments of amounts owed hereunder, such amounts 40 shall accrue interest at the maximum rate of interest permissible under applicable state or federal law. (f) The parties hereto shall extend reasonable cooperation in connection with the defense of any third-party action pursuant to this Article and, in connection therewith, shall furnish such records, information and testimony and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested. ARTICLE VIII INDEMNIFICATION OF THE CONTROL PARTIES Section 8.1 Indemnification by APS. APS agrees to indemnify and hold harmless the Control Parties and the Limited Partner (collectively, the "Indemnified Control Parties") from and against any and all Indemnified Costs in connection with the commencement or assertion of any third party action which any of the Indemnified Control Parties may sustain, arising out of any breach or default by APS of any of its representations, warranties, covenants or agreements contained in this Agreement or any agreement or document executed in connection herewith (including, without limitation, the Organizational Documents). Notwithstanding the foregoing or any other provision of this Agreement, an obligation of APS shall arise under this Section only if and to the extent that Indemnified Costs owed to all Indemnified Control Parties hereunder, in the aggregate, exceed $100,000. The Indemnified Control Parties and all parties claiming under the Indemnified Control Parties waive any right of subrogation with respect to any matter indemnified hereunder to the extent of insurance actually in force which provides coverage with respect to such indemnified event. Furthermore, the Indemnified Control 41 Parties and all parties claiming under the Indemnified Control Parties agree not to assign or transfer (by subrogation or otherwise) to any insurance carrier or any third-party claiming under any insurance carrier, any right of recovery under this Agreement. Section 8.2 INDEMNIFICATION BY THE LIMITED PARTNER. The Limited Partner agrees to indemnify and hold harmless the Control Parties and APS from and against any and all Indemnified Costs in connection with the commencement or assertion of any third party action which any Control Party or APS may sustain, arising out of any breach or default by the Limited Partner of any of its representations, warranties, covenants or agreements contained in this Agreement or any agreement or document executed in connection herewith. Notwithstanding the foregoing or any other provision of this Agreement, an obligation of the Limited Partner shall arise under this Section only if and to the extent that Indemnified Costs owed to all the Control Parties and APS hereunder, in the aggregate, exceed $100,000. Section 8.3 INDEMNIFICATION BY NEWCO. Newco agrees to indemnify and hold harmless APS, the Control Parties and the Limited Partner from and against any and all Indemnified Costs arising from, or in connection with, (a) any of the liabilities specifically assumed by Newco at Closing pursuant to Section 1.6 hereof, (b) any demands made against Trevey and Bouchard under the terms of the personal guaranty and/or maker obligations described in Section 1.8 hereof, and/or (c) any obligations or liabilities with respect to any claims asserted based on the business of Newco conducted after the Closing. Notwithstanding the foregoing or any other provision of this Agreement, an obligation of Newco shall arise under this Section only if and to the extent that Indemnified Costs owed to all the Control Parties and the Limited Partner hereunder (other than obligations arising pursuant to subsection (b) above), in the aggregate, exceed $100,000. 42 Section 8.4 DEFENSE OF THIRD-PARTY CLAIMS. The indemnified party or parties (both individually and collectively, the "indemnified party") under the foregoing provisions of this Article shall give prompt written notice to the indemnifying party or parties (both individually and collectively, the "indemnified party") under the foregoing provisions of this Article of the commencement or assertion of any third party action in respect of which such indemnified party shall seek indemnification hereunder. Any failure to so notify the indemnifying party shall not relieve such indemnifying party from any liability that it may have to such indemnified party under this Article unless the failure to give such notice materially and adversely prejudices the indemnifying party. The indemnifying party shall have the right to assume control of the defense of, settle or otherwise dispose of such third-party action on such terms as it deems appropriate; provided, however, that: (a) The indemnified party shall be entitled, at his, her or its own expense, to participate in the defense of such third-party action; (b) The indemnifying party shall obtain the prior written approval of the indemnified party, which approval shall not be unreasonably withheld, before entering into or making any settlement, compromise, admission or acknowledgment of the validity of such third-party action or any liability in respect thereof if, pursuant to or as a result of such settlement, compromise, admission or acknowledgment, injunctive or other equitable relief would be imposed against the indemnified party; (c) The indemnifying party shall not consent to the entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the execution and delivery of a release from all liability in respect of such third-party action by each claimant or plaintiff to, and in favor of, each indemnified party; and 43 (d) The indemnifying party shall not be entitled to control (but shall be entitled to participate at its own expense in the defense of), and the indemnified party shall be entitled to have sole control over, the defense or settlement, compromise, admission or acknowledgment of any third-party action as to which the indemnifying party fails to assume the defense within thirty (30) days; provided, however, that the indemnified party shall make no settlement, compromise, admission or acknowledgment which would give rise to liability (other than liability to the indemnified party under this Agreement) on the part of the indemnifying party without the prior written consent of such indemnifying party. (e) The indemnifying party shall make payments of all amounts required to be made pursuant to the foregoing provisions of this Article to or for the account of the indemnified party from time to time promptly upon receipt of bills or invoices relating thereto or when otherwise due and payable, provided that the indemnified party has agreed in writing to reimburse the indemnifying party for the full amount of such payments if the indemnified party is ultimately determined not to be entitled to such indemnification. If the indemnifying party fails to timely remit payments of amounts owed hereunder, such amounts shall accrue interest at the maximum rate of interest permissible under applicable state or federal law. (f) The parties hereto shall extend reasonable cooperation in connection with the defense of any third-party action pursuant to this Article and, in connection therewith, shall furnish such records, information and testimony and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested. 44 ARTICLE IX RESTRICTIVE COVENANTS Section 9.1 RELEASE OF PARTNERSHIP PROVISIONS. Each of the Partnerships, the General Partner, the Limited Partner, Trevey and Bouchard hereby covenant and agree that the General Partner, Trevey and Bouchard are hereby released from any restrictive agreements, covenants, provisions or conditions contained in the Articles of Limited Partnership, Certificate of Limited Partnership or other organizational documents entered into with respect to the Partnerships. Without limiting the foregoing, it is specifically acknowledged and agreed that the provisions of ARTICLE XIII (Right of First Refusal) of the Amended and Restated Articles of Limited Partnership of Barton House, and the provisions of ARTICLE XIII (Right of First Refusal) of the Articles of Limited Partnership of Oakwell, are hereby waived and released in all respects and shall hereafter be null and void. It is expressly agreed and understood that the provisions of this Section in no way modify, limit or otherwise affect any obligations of the parties contained in this Article, or elsewhere in this Agreement, or in any other contract or agreement entered into pursuant to the transactions contemplated by this Agreement. Section 9.2 NON-DISCLOSURE OF PROPRIETARY INFORMATION. Each party hereto agrees that through its relationship and dealings with Newco, it will be exposed to confidential information and trade secrets ("Proprietary Information") pertaining to, or arising from, the business of Newco or Newco's affiliates, that such Proprietary Information is unique and valuable and that Newco or Newco's affiliates would suffer irreparable injury if this information were divulged to those in 45 competition with Newco or Newco's affiliates. Therefore, each party agrees to keep in strict secrecy and confidence, both during and after the period of its relationship or business dealings with Newco, any and all information which it acquires, or to which it has access during such relationship or through such dealings, that has not been publicly disclosed by Newco or Newco's affiliates or that is not a matter of common knowledge by their respective competitors. The Proprietary Information covered by this Agreement shall include, but shall not be limited to, information relating to any inventions, processes, software, formulae, plans, devices, compilations of information, technical data, mailing lists, management strategies, business distribution methods, names of suppliers (of both goods and services) and customers, names of employees and terms of employment, arrangements entered into with suppliers and customers, including, but not limited to, proposed expansion plans of Newco, marketing and other business and pricing strategies and trade secrets of Newco and Newco's affiliates; provided, however, that Proprietary Information shall not include any such information which has become generally known to the public or in the relevant trade or industry by means other than as a result of unauthorized disclosure by or at the direction of the party relying on this exception. At all times after the Closing, except with prior written approval by the Board of Directors of Newco (pursuant to Article VIII, subsection (t) of the Shareholders Agreement and Article 3, Section 8(t) of Newco's Bylaws), in each instance, no party shall: (a) directly or indirectly, disclose any Proprietary Information to any person except authorized personnel of Newco, or (b) use Proprietary Information in any way not related solely to the business of Newco. If such party is an employee of Newco or Newco's affiliates, upon termination of employment, whether voluntary or involuntary, within forty-eight (48) hours of termination, such employee will deliver to Newco 46 (without retaining copies thereof) all documents, records or other memorializations including copies of documents and any notes which such employee has prepared, that contain Proprietary Information or relate to Newco's or Newco's affiliates' business, all other tangible Proprietary Information in such party's possession or control and all of Newco's and Newco's affiliate's credit cards, keys, equipment, vehicles, supplies and other materials that are in possession or under such employee's control. Notwithstanding the foregoing or any other provision of this Agreement, any party shall be entitled to divulge or disclose Proprietary Information (x) to its accountants, attorneys, bankers or financial advisors (its "Representatives") for the sole purpose of representing it in connection with the business of Newco, (y) in the event that it or its Representatives are requested or required during or through legal proceedings by oral questions, interrogatories, requests for information or documents, subpoenas, or other similar legal process to disclose any of the Proprietary Information, but only after such party provides the other parties hereto ten (10) days, following written notice of any such request or requirement, to seek a protective order or other appropriate remedy, or waive compliance with the provisions of this subsection, (z) it or its Representatives are, in the written opinion of qualified legal counsel addressed and delivered to the other parties hereto not less than ten (10) days prior to any disclosure, legally compelled to disclose Proprietary Information to any tribunal, agency or governmental regulatory body or else stand liable for contempt or suffer other censure or penalty, but only to the extent required under the circumstances. Section 9.3 NON-COMPETITION. Each party to this Agreement (other than Newco) hereby agrees that, such party will not directly or indirectly, either through any kind of ownership 47 (other than ownership of securities of a publicly held corporation, or other entity, of which it owns less than five percent (5%) of any class of outstanding securities), or as a principal, shareholder, agent, employer, advisor, consultant, co-partner or in any individual or representative capacity whatever, either for its own benefit or for the benefit of any other person, corporation or other entity, without the prior written consent of all other parties hereto, commit any of the following acts, which acts shall be considered violations of this covenant not to compete: (a) Directly or indirectly (other than through Newco), anywhere within any state of the United States in which, at the time such party's employment relationship with Newco, if applicable, terminates, Newco owns, operates, or has specific plans to acquire, develop or operate, a business location providing, or to provide, any Covered Services (as herein defined), engage in, or provide any services related to the provision of assisted living services to senior citizens with dementia, or any related services. For purposes of this Agreement, "Covered Services" means any services related to the provision of assisted living services to senior citizens with dementia or any related services. Notwithstanding the foregoing or any other provision of this Agreement, (A) the restrictions contained in this subsection (a) shall lapse with respect to Trevey on the later of (x) the fifth anniversary of the Closing Date and (y) the second anniversary of the date that Trevey voluntarily terminates his employment with Newco, (B) the restrictions contained in this subsection (a) shall lapse with respect to Bouchard on the later of (x) the fifth anniversary of the Closing Date and (y) the second anniversary of the date that Bouchard voluntarily terminates his employment with Newco, and (C) if Newco terminates the employment of either Bouchard or 48 Trevey, the restrictions contained in this subsection (a) shall lapse with respect to the terminated party on the first anniversary of such termination. The restrictions contained in this subsection (a) shall cease to be effective with respect to all parties hereto at any time that both Bouchard and Trevey are not longer bound by such restrictions. Furthermore, in no event shall any party be bound by the provisions of this subsection (a) after the earlier to occur of (i) the expiration of five years from the date the common stock of Newco becomes publicly traded pursuant to an underwritten registered public offering, or (ii) the expiration of ten years after the Closing Date. (b) Directly or indirectly, for such party's own account or otherwise, 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 Newco or Newco's affiliates, any client, account or location of Newco or Newco's affiliates with which such party has had any contact as a result of its relationship and business dealings with Newco hereunder. (c) Directly or indirectly request or advise any person, firm, physician, corporation or other entity having a business relationship with Newco or any affiliate of Newco, to withdraw, curtail or cancel its business with Newco or such affiliate. (d) Directly or indirectly hire any employee of Newco or any affiliate of Newco, or induce or attempt to influence any employee or independent contractor of Newco or any such affiliate to terminate or modify his or her employment or contractual arrangement with Newco or any such affiliate. 49 Section 9.4 AGREEMENT OF THE PARTIES. Each party hereto has reviewed and carefully considered the provisions of this Article and, having done so, agrees that the restrictions applicable to them as set forth herein (a) are fair and reasonable with respect to time, geographic area and scope, (b) are not unduly burdensome to them and (c) are reasonably required for the protection of the interests of the other parties hereto for whose benefit such restrictions were agreed upon. Section 9.5 REMEDIES. Each party hereto understands, acknowledges and agrees that a violation on its part of any applicable covenant contained in this Article will cause the other parties hereto for whose benefit such restrictions were agreed upon irreparable damage for which remedies at law alone will be insufficient, and for that reason, each party hereto agrees that the other parties shall be entitled as a matter of right, upon application to a court of competent jurisdiction, to equitable remedies in the event of any such violation, 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 the other parties may have, including, specifically, recovery of additional damages. ARTICLE X POST CLOSING AGREEMENTS Section 10.1 Transition of Business. Each of the Control Parties agrees to cooperate fully with Newco in transitioning the business conducted, and business relationships maintained 50 by each of the Partnerships (and by the General Partner as to the Assets contributed to Newco by the General Partner) prior to the Closing, to Newco after the Closing (including, without limitation, the re-registration in all applicable jurisdictions, under the name of Newco, of all registered trademarks or servicemarks included in the Assets); APS and each Control Party agree not to take any action or make any disclosure, including disclosures related to the transactions contemplated by this Agreement, which might alter or impair any relationship with any customer, or other service recipient, person or entity which did business with either of the Partnerships prior to the Closing. Each Control Party agrees to promptly remit to Newco any payments received by any Control Party for services provided by either of the Partnerships after the Effective Time and before the Closing, or by Newco after the Closing. Furthermore, each of the Control Parties agrees to deposit any such payments received directly to a deposit account designated and controlled by Newco or to take such other action as may be requested by APS to implement and maintain a system for remitting payments due Newco which come into the possession or control of any Control Party. The provisions of this Section shall not require any party hereto to incur out-of-pocket costs unless Newco pays for, or agrees to reimburse, such costs. Section 10.2 RATIFICATION BY NEWCO. Each and every party to this Agreement hereby expressly agrees that it will not challenge or contest, on legal grounds or otherwise, Newco's execution of, and power and authority to perform its obligations under, this Agreement, notwithstanding the official date of Newco's creation. 51 Section 10.3 EMPLOYMENT WITH NEWCO. Trevey and Bouchard each agree to enter into an Employment Agreement in the form attached hereto as Exhibit E (collectively, the "Employment Agreements") at the Closing. Trevey and Bouchard each agree (a) to comply with the terms of his respective Employment Agreement and (b) not to terminate his employment with Newco for so long as Newco complies with the terms of the Employment Agreement. Section 10.4 DISPOSITION OF SUGARLAND PROPERTY. After Closing, upon maturity of that certain promissory note dated December 2, 1997 in the original principal amount of $300,000, arising out of a loan by APS to the General Partner, (the "Sugarland Note"), and secured by that certain real property located at 3050 and 3060 Edgewater Boulevard, Sugarland, Texas 77479 (the "Sugarland Property"), Newco agrees to purchase, and the General Partner agrees to sell, the Sugarland Property to Newco (free of all liens, claims and encumbrances) in exchange for Newco's paying to the General Partner, in immediately available funds, an amount of money equal to all amounts due under the Sugarland Note. The General Partner shall execute, acknowledge and deliver or cause to be delivered to Newco and APS such documents of title and conveyance relating to the Sugarland Property as Newco, APS or their counsel may request. All such documents must be reasonably acceptable in both form and substance to Newco and APS and their counsel, and Newco agrees to reimburse the General Partner for reasonable and necessary out-of-pocket costs incurred in obtaining or providing such documents. Section 10.5 FORM D FILING. Following the Closing, Newco shall properly and timely file with the Securities and Exchange Commission a Form D, and all parties agree to cooperate, as necessary, to facilitate such filing. 52 ARTICLE XI MISCELLANEOUS Section 11.1 COLLATERAL AGREEMENTS, AMENDMENTS AND WAIVERS. This Agreement (together with all documents delivered pursuant hereto, executed in connection herewith, or contemplated herein) supersedes all other documents, understandings and agreements, oral or written 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 or contemplated herein, unless otherwise expressly provided therein) may be made only by an instrument in writing executed by each party thereto. Section 11.2 SUCCESSORS AND ASSIGNS. No party's rights or obligations under this Agreement may be assigned, transferred, conveyed or otherwise disposed of except pursuant to that certain Shareholders Agreement executed in connection with this Agreement. Upon any such permitted assignment, the assignee shall execute the Shareholders Agreement, or a counterpart thereof, and the assignor and the assignee shall thereafter be jointly and severally responsible for the obligations of assignor hereunder. Furthermore, no assignment, of any type, of rights or obligations under this Agreement shall in any way limit, modify or otherwise affect the obligations of the remaining parties to this Agreement. 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 53 delivered pursuant to this Agreement or contemplated herein) shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. Notwithstanding the foregoing or any other provision of this Agreement, the parties hereto acknowledge and agree that APS shall have unrestricted rights, upon written notice to the other parties hereto, to freely assign its rights under this Agreement and the other contracts or agreements entered into by APS pursuant hereto, to any entity, the majority of whose voting equity securities is then owned directly or indirectly by APS; provided, however, that APS shall remain fully liable for all its obligations hereunder or under such other contracts or agreements after any such assignment. Section 11.3 EXPENSES. Except as set forth in the following sentence, regardless of whether the transactions contemplated hereby are consummated, each party hereto shall pay all of the costs and expenses incurred by it in connection with this Agreement, including the fees and disbursements of its legal counsel and accountants. In the event the transactions contemplated herein are consummated, Newco will pay, or promptly reimburse, all parties hereto for the reasonable fees and disbursements of its legal counsel incurred in connection with the negotiation and entering into of this Agreement and the other contracts and agreements entered into in connection with the Closing. Furthermore, Newco agrees to reimburse the General Partner for the ordinary and necessary out-of-pocket costs incurred in preparing the 1997 and 1998 federal income tax return of the Partnerships and the General Partner. 54 Section 11.4 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 as if there was substituted in place thereof a provision which parallels as closely as allowed by law the severed provision, 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. Section 11.5 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. Section 11.6 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 delivered personally or by courier service 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: 55 APS, NEWCO OR American Physicians Service Group, Inc. THE ADDITIONAL 1301 Capital of Texas Highway, Suite C-300 PURCHASERS: Austin, Texas 78746 Attention: President Fax: (512) 314-4301 with a copy to: Timothy L. LaFrey Akin, Gump, Strauss, Hauer & Feld, L.L.P. 816 Congress Avenue, Suite 1900 Austin, Texas 78701 Fax: (512) 499-6290 LIMITED PARTNER: Uncommon Partners, Ltd. 808 West 10th Street Austin, Texas 78701 Attn: Matt Mathias Fax: (512) 469-0928 with a copy to: J. Bradley Greenblum Jenkens & Gilchrist 2200 One American Center 600 Congress Avenue Austin, Texas 78701 Fax: (512) 404-3520 56 CONTROL PARTIES: Uncommon Care 101 W. 6th Street, Suite 330 Austin, Texas 78701 with a copy to: Bret Van Earp 100 Congress Avenue, Suite 1800 Austin, Texas 78701 Fax: (512) 469-3724 Each party may change its address for purposes of this Section by proper notice to the other parties. Section 11.7 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, indemnity obligations, representations and warranties made or agreed to hereunder, pursuant hereto or in connection with the transactions contemplated hereby, shall survive the Closing. Section 11.8 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 to more effectively to consummate the transactions contemplated hereby, consistent with the terms hereof. 57 Section 11.9 CONSTRUCTION AND KNOWLEDGE. 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. Section 11.10 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. Section 11.11 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. Section 11.12 POST EFFECTIVE TIME ADJUSTMENTS. The parties acknowledge and agree that each of the Partnerships has, prior to the Closing Date, been receiving revenues, making disbursements and incurring payables and receivables pursuant to its operations in the ordinary course since the Effective Time, including, without limitation, paying payroll, payroll taxes, trade vendors and other expenses. Each of the Partnerships will promptly account for all such activity and will remit to Newco any net profits made and other amounts, if any, 58 due Newco with respect to such post-Effective Time activity. Furthermore, Newco shall reimburse the General Partner, the Limited Partner, Trevey and Bouchard for any cash contributions made by them to the Partnerships between the Effective Time and the Closing Date made on account of any cash basis net operating losses incurred by the Partnerships in the ordinary course of business between the Effective Time and the Closing Date. [Signature pages follow] 59 SIGNATURE PAGES CONTRIBUTION AND STOCK PURCHASE AGREEMENT IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered on the day and year first above written. APS: AMERICAN PHYSICIANS SERVICE GROUP, INC. By: /s/ Duane K. Boyd, Jr. Print Name: Duane K. Boyd, Jr. Print Title: Senior VP NEWCO: BARTON ACQUISITION, INC. By: _____________________________________ Print Name: ___________________________ Print Title: ___________________________ S-1 BARTON HOUSE: BARTON HOUSE, LTD. By: Uncommon Care, Inc., its General Partner By: /s/ George R. Bouchard Print Name: George R. Bouchard Print Title: President OAKWELL: BARTON HOUSE AT OAKWELL FARMS, LTD. By: Uncommon Care, Inc., its General Partner By: /s/ George R. Bouchard Print Name: George R. Bouchard Print Title: President S-2 GENERAL PARTNER: UNCOMMON CARE, INC. By: Uncommon Care, Inc., its General Partner By: /s/ George R. Bouchard Print Name: George R. Bouchard Print Title: President BOUCHARD: /s/ George R. Bouchard ----------------------- George R. Bouchard TREVEY: /s/ John H. Trevey ----------------------- John H. Trevey S-3 LIMITED PARTNER: UNCOMMON PARTNERS, LTD. By: LTZ, Inc., its General Partner By: /s/ Matt Mathias Matt Mathias, President [Signature pages for Additional Purchasers follow] S-4 SIGNATURE PAGES CONTRIBUTION AND STOCK PURCHASE AGREEMENT ADDITIONAL PURCHASERS: /s/ Richard J. Clark ---------------------- Richard J. Clark DUANE K. BOYD, JR. TRUST By /s/ Duane K. Boyd, Jr. Trustee ------------------------------- Duane K. Boyd, Jr., Trustee /s/ Robert L. Myer --------------------------- Robert L. Myer J. A. MURPHY DESCENDANTS' TRUST By BANK OF BERMUDA, TRUSTEE By /s/ R.H. Masters Name Robert H. Masters Title Trust Manager /s/ William A. Searles ------------------------ William A. Searles /s/ Kenneth S. Shifrin ------------------------ Kenneth S. Shifrin /s/ Samuel Granett ----------------------- Samuel Granett S-5 /s/ W. H. Hayes -------------------------- W. H. Hayes /s/ H.J. Howard. III -------------------------- H. J. Howard, III S-6 APPENDIX I ADDITIONAL PURCHASERS Name Number of Shares Purchase Price Richard J. Clark 3,800 $11,000 Duane K. Boyd, Jr. Trust 19,000 55,000 Robert L. Myer 17,100 49,500 J. A. Murphy Descendants' Trust 7,600 22,000 William A. Searles 9,880 28,600 Kenneth S. Shifrin 11,400 33,000 Samuel Granett 3,800 11,000 W. H. Hayes 7,600 22,000 H. J. Howard, III 1,900 5,500 ------- -------- Totals 82,080 $237,600 ====== ======= EX-10 12 STOCK TRANSFER RESTRICTION AND S/H AGREEMENT Exhibit 10.48 STOCK TRANSFER RESTRICTION AND SHAREHOLDERS AGREEMENT This Stock Transfer Restriction and Shareholders Agreement (this "Agreement") dated as of January 1, 1998, by and among American Physicians Service Group, Inc., a Texas corporation ("APS"), Barton Acquisition, Inc., a Texas corporation (the "Corporation"), Barton House, Ltd., a Texas limited partnership ("Barton House"), Barton House at Oakwell Farms, Ltd., a Texas limited partnership ("Oakwell"), Uncommon Care, Inc., a Texas corporation (the "General Partner"), George R. Bouchard ("Bouchard"), John H. Trevey ("Trevey"), Uncommon Partners, Ltd., a Texas limited partnership (the "Limited Partner") and the additional parties listed on Appendix I hereto (each an "Additional Purchaser" and collectively the "Additional Purchasers"). Barton House and Oakwell are sometimes collectively referred to herein as the "Partnerships." PRELIMINARY STATEMENT The parties hereto desire to enter into this Agreement to control the distribution of ownership interests in the Corporation and to promote the harmonious management of the Corporation's affairs. STATEMENT OF AGREEMENT NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I DEFINITIONS; PERMISSIBLE TRANSFERS For purposes of this Agreement, each party hereto, other than the Corporation, is hereinafter sometimes referred to as a "Shareholder" and collectively as the "Shareholders." For purposes of this Agreement all issued and outstanding capital stock of the Corporation, together with any hereafter acquired, whether common, preferred or otherwise, is hereinafter referred to as the "Shares." The parties hereto acknowledge and agree that, as of the date this Agreement is initially entered into, the General Partner, Bouchard, Trevey and the Limited Partner do not own any Shares of the Corporation. However, all parties hereto agree that any and all Shares which either of the Partnerships obtains, either directly or indirectly, pursuant to the transactions consummated in connection with the execution of this Agreement, that certain Contribution and Stock Purchase Agreement dated effective January 1, 1998 (the "Contribution Agreement") or any other document, agreement or instrument executed in connection with or contemplated 2 by the Contribution Agreement, shall be promptly transferred to the General Partner, Bouchard, Trevey and/or the Limited Partner, as the case may be, and that neither of the Partnerships shall continue to own any Shares as a result of this Agreement, the Contribution Agreement or such other agreements. All parties hereto agree that such transfer of Shares by either of the Partnerships to the General Partner, Bouchard, Trevey and/or the Limited Partner, in a single transaction, shall be a permissible transfer for purposes of this Agreement. However, except for the transfer of Shares by Trevey or Bouchard to any of the APS Indemnified Parties (as defined in the Contribution Agreement) in payment of an indemnity obligation under the Contribution Agreement (which shall also be a permissible transfer for purposes hereof), any other or further transfer, assignment, pledge, hypothecation or other alienation of any Shares or any interest therein, shall in every respect be subject to the terms and conditions of this Agreement. The parties hereto further acknowledge and agree that if, upon the permissible transfer of all Shares owned by the Partnerships to the other parties hereto as described above, so that neither of the Partnerships own any Shares or any interest therein, each of the Partnerships shall no longer be bound by the terms of this Agreement and shall no longer have any rights hereunder. The parties hereto further acknowledge and agree that APS shall have unrestricted rights to freely assign or transfer any of its Shares to any entity, the majority of whose voting equity securities is then owned directly or indirectly by APS (an "APS Entity"); provided, however, that such entity must sign a counterpart of this Agreement, and provided further such entity must transfer any Shares transferred to it (and may do so without any consent or option arising hereunder) back to APS or another APS Entity (who must then sign a counterpart hereof) in the event, but prior to, such entity no longer being majority owned, directly or indirectly, by APS. 3 ARTICLE II RESTRICTIONS AGAINST TRANSFER Except as otherwise provided in this Agreement, a Shareholder shall not transfer, assign, pledge, hypothecate or in any way alienate any Shares, or any interest therein, whether voluntarily or by operation of law, or by gift or otherwise, without (a) the prior unanimous written consent of APS, Bouchard and Trevey or (b) in the case of a pledge or hypothecation, the written acknowledgment of the lender, in form and substance reasonably acceptable to APS, Bouchard and Trevey, that the lender will hold such Shares (or interest therein) subject to all of the terms and provisions of this Agreement, and will not foreclose upon or otherwise transfer any such Shares, or interest therein, without complying with the provisions hereof, including those relating to options to purchase the Shares by the other parties hereto. Any purported transfer in violation of any provision of this Agreement shall be void and ineffectual, shall not operate to transfer any interest or title to the purported transferee and shall give the Corporation and the other Shareholders options to purchase such Shares in the manner and on the conditions hereinafter provided. 4 ARTICLE III OPTIONS Section 3.1 Option Upon Voluntary Transfer. (a) Notice of Intention to Transfer. Subject to (e) below and except for a transfer of Shares by APS pursuant to Article I hereof, no voluntary transfer of any Shares or any interest therein, shall, without the prior unanimous written consent of APS, Trevey and Bouchard in each instance, be allowed for a period of two (2) years after the date of this Agreement. Thereafter, if a Shareholder intends to voluntarily transfer any of its Shares to any person other than the Corporation and does not obtain the written consents required in Article II hereof, the Shareholder shall give written notice to the Corporation and the other Shareholders stating (i) the intention to transfer Shares, (ii) the number of Shares to be transferred, (iii) the name, business and residence address of the proposed transferee, (iv) the nature and amount of the consideration and (v) the other terms of the proposed sale. (b) Option to Purchase. The Corporation shall have, and may exercise within 60 days after receipt of the notice of intent to transfer, an option to purchase all or any portion of the Shares owned by the transferring Shareholder for the price and upon the other terms stated in the notice of intent to transfer. If the Corporation elects not to purchase all or any portion of such Shares, it shall, prior to the expiration of said 60-day period, notify the other Shareholders in writing of its election, and the other Shareholders shall have, and may exercise within 30 days of 5 receipt of the Corporation's notice of election, an option to purchase such unpurchased Shares upon the same terms and conditions. (c) Death Before Closing. If a Shareholder who proposed to transfer Shares dies prior to the closing of the sale and purchase contemplated by this Section, the Shares of such deceased Shareholder shall be the subject of sale and purchase under Section 3.3 hereof. (d) Allowable Consideration. All parties hereto acknowledge and agree that it would be impractical to exercise an option to purchase arising pursuant to this Section whenever the proposed consideration to be received by the transferring Shareholder is other than cash, cash equivalents or an obligation to pay cash by a person whose credit worthiness and financial status is such that performance of the payment obligation would be reasonably assured. Therefore, the parties agree that no transfer shall be permitted and no option shall arise pursuant to this Section whenever the consideration to be received from the proposed transferee is other than cash, cash equivalents or an obligation to pay cash by a person whose credit worthiness and financial status is such that performance of the payment obligation would be reasonably assured. (e) Certain Exempted Voluntary Transfers. Notwithstanding the foregoing or any other provision of this Agreement, upon providing written notice (and without any requirement of consent), as provided for herein, to the Corporation and all other Shareholders: (i) any Shareholder may transfer Shares to any other Shareholder, at any time, without obtaining the written consent hereunder and without giving rise to any Options provided for hereunder; (ii) Bouchard, Trevey and the Limited Partner Permitted Assigns (as hereinafter defined) may transfer 6 their Shares to their spouse, children, siblings, parents or trust(s) created exclusively for the benefit of their spouse, children, siblings or parents, but only to the extent of, and subject to, the provisions described below; and (iii) the Limited Partner may transfer its Shares to the following parties (but only to the extent of, and subject to, the provisions described below): LTZ, Inc., Lebermann Investment, J.V., Roger Minard, William Greehey, Stan McLelland, and Matt Mathias (the "Limited Partner Permitted Assigns"). For purposes of this subsection (e), "trust" shall be deemed to include a family limited partnership, joint venture or other entity, as long as all of the equity interests of such family limited partnership, joint venture or other entity are owned by the transferring Shareholder's spouse, children, siblings or parents. The transfer rights of Trevey and Bouchard described in clause (ii) above may only be made as follows: (A) prior to January 1, 2000, no such transfer shall be allowed and (B) during each calendar year beginning January 1, 2000, Trevey and Bouchard shall each be entitled to transfer the number of Shares, whether received directly or indirectly, representing up to twenty five percent (25%) of his initial proportionate ownership interest in the Corporation as determined immediately following the consummation of all transactions contemplated in connection with this Agreement (including the permissible transfers from the Partnerships under Article I hereof) and the Contribution Agreement, on a cumulative basis. Furthermore, the transferee receiving such Shares as described in clause (ii) of the first sentence of this Section, whether an individual or trust, (X) shall grant (and maintain in place thereafter) an irrevocable proxy to the transferring Shareholder in form and substance reasonably acceptable to APS, (Y) shall execute and deliver a counterpart of this Agreement, and (Z) shall not receive by reason of such transfer any rights to benefits from, or under, the provisions for registration rights contained in Article X of this Agreement; provided, however, that the original transferring Shareholder (either Trevey, Bouchard or any of the Limited Partner Permitted 7 Assigns, as the case may be), in their sole discretion, may elect (by notifying the Corporation to that effect in writing during the 10-day period for giving notice of intent to include Covered Shares in a registration as contemplated in Section 10.1) to allow the transferee hereunder to assume such registration rights, but only with respect to such Shares described in clause (ii) above and only as, and to the extent, otherwise provided in Article X. Each of the Limited Partner Permitted Assigns which may receive Shares described in clause (iii) above, whether an individual or other entity, shall execute and deliver a counterpart of this Agreement and shall receive, by reason of such transfer, registration rights pursuant to Article X of this Agreement. Section 3.2 Option Upon Certain Involuntary Transfers. (a) Exercise Event and Notice. The filing of a voluntary or involuntary petition of bankruptcy by or on behalf of a Shareholder, an assignment by a Shareholder of any of its Shares, or of any right or interest therein, for the benefit of creditors, or the voluntary transfer, transfer by law or any other transfer, of any Shares, or of any right or interest therein (other than transfers governed by Article I, Article II, Section 3.1, Section 3.3 or Section 3.4 hereof), shall give the Corporation and the other Shareholders the option to purchase the Shares of such bankrupt Shareholder or such transferred Shares as provided herein. Upon the filing of a voluntary or involuntary petition of bankruptcy by or on behalf of a Shareholder or an assignment by Shareholder of any of its Shares, or of any right or interest therein, for the benefit of creditors, the Shareholder or its personal representative shall promptly give written notice of 8 such occurrence to the Corporation and to the other Shareholders. In the event of a transfer of Shares, as described above, the Shareholder transferring such Shares shall promptly give written notice of such transfer to the Corporation and to the other Shareholders. (b) Option to Purchase. The Corporation shall have, and may exercise within 60 days after receipt of the notice of the applicable exercise event, an option to purchase all or any portion of the Shares owned by the bankrupt or transferring Shareholder for the price and upon the other terms hereinafter provided. If the Corporation elects not to purchase all or any portion of such Shares, it shall, prior to the expiration of said 60-day period, notify the other Shareholders in writing of its election. The other Shareholders shall have, and may exercise within thirty (30) days of receipt of the notice of election, an option to purchase such unpurchased Shares for the price and upon the other terms hereinafter provided. Section 3.3 Transfer of Shares Upon Death. Upon the death of a Shareholder, any transfer of Shares of the deceased Shareholder pursuant to the Shareholder's last will or the laws of descent and distribution shall be a permitted transfer for purposes of this Agreement and shall not give rise to any option to purchase or require the acquiror to execute a counterpart of this Agreement. Section 3.4 Option Upon Death of a Shareholder's Spouse, Termination of Marital Relationship or Partition of Community Property. (a) Death of Shareholder's Spouse. Each Shareholder and each 9 Shareholder's spouse agree that in the event the spouse of a Shareholder predeceases such Shareholder and such Shareholder does not succeed by the spouse's last will and testament or by operation of law to any interest (including, without limitation, a community property interest) of the spouse in the Shares, such Shareholder shall have, and may exercise within 60 days after the death of the spouse, an option to purchase all or any portion of the spouse's interest for the price and upon the other terms hereinafter provided. If the Shareholder spouse elects not to purchase all or any portion of the deceased spouse's interest, it shall, prior to expiration of said 60-day period, notify the Corporation and the other Shareholders in writing of its election. The Corporation shall then have, and may exercise within 30 days of receipt of the election, an option to purchase the unpurchased, deceased spouse's interest for the price and upon the other terms hereinafter provided. If the Corporation elects not to purchase all or any portion of the deceased spouse's interest, it shall, prior to expiration of said 30-day period, notify the other Shareholders in writing of its election and the other Shareholders shall have, and may exercise within 30 days of receipt of election, an option to purchase the unpurchased, deceased spouse's interest for the price and upon the other terms hereinafter provided. (b) Termination of Marital Relationship or Partition of Community Property. In the event a divorce, annulment or other proceeding for termination of the marital relationship is filed by or against a Shareholder, or upon the initiation of any voluntary or involuntary attempt to partition the community property estate between a Shareholder and such Shareholder's spouse for any reason, the Shareholder shall promptly give written notice to the Corporation and the other Shareholders of such event. The Shareholder shall have, and may exercise within sixty (60) days of giving of such notice, an option to purchase all or any portion of the spouse's right to or 10 interest in such Shares (including without limitation any community property interest), for the price and upon the other terms hereinafter provided. If the Shareholder elects not to purchase all or any portion of the spouse's interest, it shall, prior to expiration of said 60-day period, notify the Corporation in writing of its election and the Corporation shall have, and may exercise within thirty (30) days of receipt of such election, an option to purchase the unpurchased spouse's interest for the price and upon the other terms hereinafter provided. If the Corporation elects not to purchase all or any portion of the spouse's interest, it shall, prior to expiration of said 30-day period, notify the other Shareholders in writing of its election and the other Shareholders shall have, and may exercise within thirty (30) days of receipt of such election, an option to purchase the unpurchased spouse's interest for the price and upon the other terms hereinafter provided. Section 3.5 Alternate Notices. The failure of any person, whether a party to this Agreement or otherwise, to give notice of the occurrence of an Exercise Event (as defined in Section 5.3 hereof) as contemplated herein shall not operate to prevent the creation of any option which would otherwise arise pursuant to this Article. Any party to this Agreement who has actual knowledge of the occurrence of an Exercise Event may give the required written notice of the occurrence of an Exercise Event, and upon the giving of such written notice the options shall be created and become exercisable to the same extent as if such notice was given by the party initially contemplated above. 11 ARTICLE IV EXERCISE OF OPTIONS; EFFECT OF NON-EXERCISE; CO-SALE RIGHTS Section 4.1 Manner of Exercise of Options. All options granted in, or arising pursuant to, Article III hereof shall be exercised by a written notice to that effect delivered within the time provided for the exercise of the option. Section 4.2 Complete Exercise of Options. The holders of options granted in, or arising pursuant to, Article III hereof must, either alone or in the aggregate, exercise the options in such a manner as to purchase all of the Shares (or interest therein) subject to such options, and failure to do so shall cause a forfeiture of the options. Where one or more Shareholders elect not to exercise such options, the other Shareholders shall be entitled to assume the options not exercised on a pro rata basis pursuant to Section 4.3. Section 4.3 Multiple Option Holders. In cases where an option is held by more than one Shareholder, each purchasing Shareholder shall be entitled to purchase his or her proportionate share of the Shares subject to the option. A Shareholder's proportionate share shall equal the total number of Shares subject to the option multiplied by a fraction the numerator of which is the number of Shares held by such Shareholder and the denominator of which shall be the number of Shares held by all Shareholders electing to exercise the option. 12 Section 4.4 Effect of Non-Exercise of Options. If the holders of options granted or arising pursuant to this Agreement do not exercise their options, or such options are forfeited, as provided herein, the person or persons acquiring the Shares (or interest therein) that were the subject of the options shall execute a counterpart of this Agreement and become a party hereto and shall hold such Shares subject to all the terms and conditions provided herein, and any transfer of such Shares (or interest therein) shall only be made in accordance with the terms and conditions provided herein. In the event the person or persons acquiring the Shares (or interest therein) fail to execute a counterpart of this Agreement and become a party hereto, such transfer shall be void and ineffectual and shall not operate to transfer any interest or title to the purported transferee, and such Shares shall thereafter be subject to cancellation and extinguishment by the Corporation, without consideration therefor. In addition, in the event of a transfer subject to the provisions of Article III hereof, upon the lapse or forfeiture of all the options arising pursuant to that Article, the transferor shall have the right to effectuate the transfer of Shares in accordance with the terms stated in the notice of intent to transfer or notice of Exercise Event (as applicable), and the transferee of such Shares shall execute and become a party to this Agreement and shall hold such Shares subject to all of its terms and conditions. Provided further, however, any such transfer of Shares shall be void and ineffectual and shall not operate to transfer any interest or title to the purported transferee, if (a) for voluntary transfers under Section 3.1 hereof, the transfer is not upon the terms or is not to the transferee stated in the notice of intent to transfer or (b) for all transfers giving rise to options pursuant hereto, the transfer is not closed within thirty (30) days of receipt of written notice of the election not to exercise, or the forfeiture of, all applicable options; and upon the occurrence of events or conditions described in (a) or (b) the transferor 13 desiring to effect such transfer must again comply with the notice, option and other requirements of this Agreement prior to any transfer of any Shares or interest therein. Section 4.5 Co-Sale Rights. In the event of a voluntary transfer pursuant to the provisions of Section 3.1 (except for transfers pursuant to subsection (e) of Section 3.1) by Bouchard, Trevey, APS or the Limited Partner, the holders not exercising their options granted pursuant to Section 3.1 shall be entitled to include, upon the same terms and conditions as provided in the notice required by Section 3.1(a), their Shares in such voluntary transfer, on a pro rata basis based on the ratio of total Shares owned by those having these co-sale rights and the Shareholder receiving the voluntary transfer offer. ARTICLE V PURCHASE PRICE Section 5.1 Purchase Price. The purchase price of Shares to be purchased pursuant to options granted, held or exercised pursuant to Section 3.2 and Section 3.4 hereof, shall be the amount calculated in accordance with Section 5.2 hereof. Section 5.2 Calculation of Purchase Price. When determined in accordance with this Section, the purchase price for Shares or any portion thereof or spouse's interest therein shall be equal to an amount agreed upon by the seller and the buyer or buyers electing to purchase such Shares hereunder. In the event that no such agreement is reached within thirty (30) days prior to the closing of such purchase and sale, the purchase price per Share shall equal the Book Value 14 (as hereinafter defined) of the Shares to be transferred determined as of the Valuation Date (as hereinafter defined). However, at the written request of either the seller or any of the proposed purchasers, the purchase price shall equal the Appraised Value (as hereinafter defined) of the Shares as of the Valuation Date, reduced when necessary to reflect the purchase of less than a one hundred percent (100%) interest in each of the Shares to be transferred (for example: reduced by one-half when a spouse's interest is only an undivided one-half community property interest in each of the Shares of a Shareholder spouse). For purposes of this Agreement, the "Book Value" per Share shall be determined by subtracting the total liabilities of the Corporation as of the Valuation Date from the total assets of the Corporation as of the Valuation Date, and dividing such amount by the aggregate number of Shares issued and outstanding as of the Valuation Date. Book Value per Share shall be determined using the Corporation's unaudited, internally generated financial statements prepared on the accrual basis of accounting consistent with past practices. The Book Value per Share so computed shall be reduced when necessary to reflect the purchase of less than a one hundred percent (100%) interest in each of the Shares to be transferred. For purposes of this Agreement, the "Appraised Value" per Share shall be the fair market value per Share which a willing buyer would pay a willing seller for all issued and outstanding shares of capital stock of the Corporation where neither is under any compunction to act (without any premium or discount for controlling interests, or lack thereof, or lack of established market for such capital stock). The Appraised Value shall be determined by a certified business appraiser, selected by the Corporation, that is a member of either the American Society of Appraisers or the Institute of Business Appraisers; but if a Shareholder disagrees with such determination that Shareholder may, at its expense, have another certified business appraiser that is a member of one or both of the above named professional organizations 15 determine the value, and if the two appraisers cannot agree upon a value, they shall mutually select a third certified business appraiser (that meets the above described membership requirements) who shall, together with the first two appraisers, determine the value of the Shares by majority vote. The combined expenses of all appraisals shall be paid solely by the party or parties requesting to utilize such method of determining the purchase price. Section 5.3 Certain Definitions. As used herein, the term "Valuation Date" shall mean and refer to the end of the calendar quarter preceding the Exercise Event. As used herein, the term "Exercise Event" shall mean and refer to the event or circumstance described in Article III hereof, as a result of which the Corporation or a Shareholder, as the case may be in the first instance, become entitled to exercise a purchase option hereunder. ARTICLE VI PAYMENT OF THE PURCHASE PRICE Section 6.1 Payment. Except as otherwise provided in this Agreement, including Section 3.1 hereof, the purchase price for Shares to be purchased from a selling party shall either: (a) be paid in cash at the closing; or (b) at the option of the purchasing party, up to seventy percent (70%) of the purchase price may be deferred with the remainder paid in cash at the closing. However, option (b) of the foregoing sentence shall not be available if the selling Shareholder is the Limited Partner or any of the Limited Partner Permitted Assigns. 16 Section 6.2 Promissory Note. If the purchasing party elects to defer part of the purchase price by the execution and delivery of a promissory note, the deferred portion of the price shall be evidenced by the promissory note of the purchasing party to the order of the selling party payable in sixty (60) equal monthly installments of principal and interest on or before the first day of each month beginning the month next following the date of closing. The interest rate for such installment promissory note shall be equal to the prime or base rate on corporate loans at large U.S. money center commercial banks as published in the "Money Rates" column of the Wall Street Journal on the date of exercise of the option to purchase (or, if such option is not exercised on a date on which such rate is published, the next following date on which such rate is published). In no event shall the interest rate exceed the maximum legal interest rate then prevailing for such obligations in the state of Texas. The note shall be secured by a first lien security interest in the Shares transferred and the purchasing party shall deliver certificates evidencing the Shares to the selling party and take such further action as is reasonably necessary to perfect the security interest. ARTICLE VII THE CLOSING Unless otherwise agreed by the parties, the closing of the sale and purchase of Shares shall take place at the principal offices of the Corporation within sixty (60) days after the exercise of any option provided by this Agreement. Each party hereto (including the spouses of the Shareholders) shall bear its own transaction costs, including legal and accounting fees, if any, attributable to any transfer of Shares, or any interest therein, pursuant to this Agreement. Upon 17 the closing, the selling party shall deliver its Shares to the purchaser free and clear of all liens and encumbrances, and shall deliver to the Corporation its resignation and that of all of its nominees, if any, as officers and directors of the Corporation and any of the Corporation's subsidiaries. The selling party shall deliver to the purchasing party at closing, all appropriate documents of transfer, including without limitation bills of sale, assignments or other instruments of conveyance. As a condition to any closing of the sale and purchase of Shares (or any interest therein) pursuant to this Agreement: (a) the selling party shall be indemnified by the purchasing party (in a form reasonably satisfactory to the selling party) for all the Corporation's liabilities, whether fixed or contingent, to lenders and others, incurred prior to the closing of the transaction, (b) the purchasing party and/or the Corporation shall cause the release of any personal guaranties, either directly incurred or assumed, (i) which may have been granted by the selling party to the Corporation's lenders or other creditors or the lenders or other creditors of the Partnerships or the General Partner whose obligations where assumed by the Corporation or (ii) which may have otherwise been provided by the selling party for the benefit of the Corporation, and (c) if the selling party is a creditor of the Corporation, the purchasing party shall unconditionally guarantee the debt of the Corporation to the selling party and execute such documents and instruments of guarantee as may be necessary in connection therewith. Furthermore, and as a condition to closing, in the event the selling party owes any amounts to the Corporation at the time of closing, such indebtedness shall be paid in full by the selling party at or prior to the closing, or may be deducted from and offset against the purchase price by the purchasing party, in the purchasing party's sole discretion. In the event of a failure to close as a result of the non-satisfaction of the conditions to closing set forth herein, this Agreement shall remain in full force and effect and all Shares shall remain subject to the restrictions contained herein and, in addition, the parties hereto 18 shall be entitled to such other remedies as may be available in the event the failure to close constitutes a breach hereof. ARTICLE VIII STRUCTURE OF BOARD OF DIRECTORS; MAJOR DECISIONS Each of the parties hereto agrees to vote their Shares as necessary to provide for the following. The number of directors of the corporation shall be no fewer than four (4) and no more than seven (7), two (2) of which (the "BT Designees") shall be designated by George R. Bouchard ("Bouchard") and John H. Trevey ("Trevey"), and two (2) of which (the "APS Designees") shall be designated, subject to the provisions contained in the Corporation's Bylaws regarding the rights of the holders of Preferred Stock, by APS. The initial directors shall be four (4), comprised of the initial BT Designees and the initial APS Designees. Any increase in the number of directors shall require the unanimous consent of all directors, and shall be effected only be means of an increase in the number of directors from four to seven. The additional three directors (the "Group Designees") shall initially be unanimously agreed upon by Bouchard, Trevey and APS. Upon written notice from both Bouchard and Trevey (acting jointly) to the Corporation and other Shareholders, Bouchard and Trevey shall be entitled to replace any two (2) members of the Group Designees with persons mutually acceptable to both Bouchard and Trevey, as indicated in the written notice (but who may not be officers or employees of the Corporation), and the Shareholders agree to vote their Shares to accomplish such replacement. The parties all agree to vote their Shares, and to take such other and further action (including, without limitation, the removal of Board members they may designate pursuant hereto and replacement thereof) as 19 necessary to amend the Bylaws to increase the size of the Board of Directors to allow the addition of the Group Designees, and to elect (or remove) the Group Designees as provided herein. Until February 1, 2001, and upon written notice from APS to the Corporation and other Shareholders, APS shall be entitled to designate any member of the Board of Directors as Chairman of the Board, and the Shareholders agree to vote their Shares and to take such other actions as necessary (including, without limitation, the removal and replacement of any other existing Chairman of the Board and any directors they may designate pursuant hereto) to cause the election and retention in office of such designee of APS. The following acts or transactions by the Corporation will require, in addition to the approval of a majority of the Board of Directors of the Corporation, the approval of at least three (3) members from among the BT Designees and the APS Designees: (a) amending the Corporation's Articles of Incorporation or the Corporation's Bylaws; (b) causing a merger, consolidation or combination of the Corporation with another corporation or entity, or engaging in any stock splits, reverse stock splits or recapitalizations; (c) purchase by the Corporation of any interest in the Corporation irrespective of the source of such interest; 20 (d) disposition, sale, assignment or other transfer by the Corporation of any interest it owns in the Corporation, except that such interest may be extinguished without the approval required under this Article; (e) sale or issuance of any additional equity ownership interests of the Corporation, including any instrument or security convertible into, or exchangeable or exercisable for, any equity ownership interest of the Corporation; (f) dissolving, liquidating or filing bankruptcy or seeking relief under any debtor relief law; (g) election or removal of officers and establishing or changing the compensation for officers; (h) making any distributions, whether in cash or property, including dividends, to any of the directors or Shareholders with respect to the their ownership interests; (i) selling, leasing or otherwise transferring all or substantially all of the Corporation's assets, or any asset(s) with a fair market value exceeding $10,000 in a single transaction or series of related transactions; (j) initiating or settling any litigation or regulatory proceeding , or confessing any judgment; 21 (k) hiring or changing the Corporation's auditors, accountants or primary legal counsel; (l) hiring, contracting with, terminating (with or without cause) and setting and/or modifying the compensation of any employees or consultants of the Corporation whose annualized rate of compensation would exceed $65,000, including without limitation, Bouchard and Trevey (provided that Bouchard and Trevey may vote in their capacity as director, if applicable, in any such employment related decision, only with respect to one another, whether or not such decision affects or relates to either or both of Bouchard or Trevey); (m) borrowing or incurring any indebtedness or granting any collateral or security (by way of guaranty or otherwise) for any indebtedness or obligation, other than (i) open accounts payable to unaffiliated third parties in the ordinary course of the Corporation's business, (ii) in connection with that certain Line of Credit, as defined in the Contribution Agreement and (iii) any first-lien mortgages to unaffiliated third parties, or purchase money security interests in favor of unaffiliated vendors or unaffiliated lenders, for (x) the acquisition and/or construction of real property or fixtures purchased as a site for the operation of residences to provide assisted living services to senior citizens with dementia, and directly related services, or (y) fixed assets or personal property to be located at, and used in connection with the operation of, such residences; 22 (n) engaging in any transaction or line of business other than investments in the ownership and/or operation of residences to provide assisted living services to senior citizens with dementia, and directly related services; (o) purchasing or leasing assets or property, or entering into any contract or obligation, which obligates the Corporation to pay in excess of $10,000 in the aggregate in one or any series of related installments, except for the purchase of real property, acquired as a site for the operation of residences to provide assisted living services to senior citizens with dementia, and directly related services and fixed assets or personal property to be located at, and used in connection with the operation of, such residences; (p) causing a change in the nature of the business or the legal name of the Corporation; (q) engaging in any transaction with any relative, affiliate or related party of any equity owner, director, officer or other member of the Corporation's management body, including without limitation the employment of any such party; (r) except as otherwise expressly provided in the Contribution Agreement, paying or reimbursing the legal fees and costs incurred by any of the parties hereto or to the Contribution Agreement (and any of the transactions contemplated by, or consummated pursuant to, the Contribution Agreement), including any such costs associated with any dissolution, liquidation or distribution of shares of capital stock of the Corporation, by the Partnerships; 23 (s) acting (or failing or refusing to act) in contravention of, amending or waiving any rights granted to any party pursuant to this Agreement, the Corporation's Bylaws, the Contribution Agreement (and any agreement executed by the Corporation in connection therewith), or any other governance document of the Corporation, and any rights under such documents; (t) authorizing any party to disclose, divulge, reveal or use, pursuant to the provisions of Section 9.2 of the Contribution Agreement, any Proprietary Information (as defined therein); (u) altering, changing or amending, or not renewing, any directors and officers insurance policy of the Corporation; and (v) adopting, creating, altering or amending any stock option plan or issuing stock options or other rights under any such plan, in each instance. Each director may, with respect to any vote, consent, or approval that it is entitled to grant pursuant to this Agreement, grant or withhold such vote, consent, or approval in its sole discretion. Notwithstanding the foregoing or any other provision of this Agreement, the conversion of Preferred Stock by any holder thereof pursuant to the Articles of Incorporation of the Corporation shall not require action by the Board of Directors or other shareholders or consents by any party, in any capacity, and the Corporation shall be, and hereby is, fully authorized to take any and all action required to effect such a conversion. 24 ARTICLE IX PREFERRED RETURN For purposes hereof, the parties acknowledge and agree that APS and the Additional Purchasers, in the aggregate, initially acquired their Shares for $2,200,000 (the "Initial Capital Contribution"), allocated amongst them as provided in the Contribution Agreement. All parties hereto acknowledge and agree that upon any dissolution or liquidation of the Corporation, APS and the Additional Purchasers (or their successors in interest or assigns pursuant to any transfers permitted pursuant to this Agreement), in the aggregate, will receive from the Corporation in respect of the 760,000 shares of Preferred Stock and Common Stock issued to them at the Closing and any shares of Common Stock issued without consideration in respect of any such shares, to the extent the Corporation has funds legally available therefor, an amount equal to the greater of (a) that percentage (the "Applicable Percentage") of the cash and fair market value of property and other assets owned by the Corporation at that time determined by dividing the sum of (i) 760,000 plus the number of shares of Preferred Stock and Common Stock issued without consideration in respect of any of the 760,000 shares of Preferred Stock and Common Stock issued to APS and the Additional Purchasers at the Closing by (ii) the total number of shares of Preferred Stock and Common Stock outstanding, with the amount of assets and property so determined reduced by the amount of all liquidated liabilities of the Corporation and all reasonable amounts (the "Contingency Funds") held back to make provision for unliquidated liabilities (excluding the amount of any indebtedness assumed by, or assigned to, APS and the Additional Purchasers in connection with such dissolution or liquidation) or (b) an amount equal to the 25 Initial Capital Contribution plus interest on the weighted average unreturned balance of their Initial Capital Contribution at the rate of twelve percent (12%) per annum, compounded annually, from the Closing Date; provided, however, that all distributions made to APS, the Additional Purchasers and their successors in interest, with respect to their ownership interests in the Corporation, shall be deducted in calculating the amount of dissolution and liquidation proceeds due such parties under the preferred return provisions described above and shall be considered in calculating the weighted average unreturned balance of their Initial Capital Contribution. Upon satisfaction of all liabilities for which the Contingency Funds were reserved, or upon any other release of the Contingency Funds no longer reserved for unliquidated liabilities, APS and the Additional Purchasers shall receive the Applicable Percentage of the Contingency Funds not expended, if any, in satisfaction of liabilities that were unliquidated when the Contingency Funds were originally reserved, but only if all such payments from the Contingency Funds would cause the aggregate amount due under clause (a) above to exceed the aggregate amount due under clause (b) above. All proceeds payable under this Article shall be allocated amongst APS and Additional Purchasers, and their successors and assigns, pro rata, based on their respective percentage ownership of Shares originally acquired under the Contribution Agreement. All parties hereto agree to vote their Shares and execute and deliver such additional documents and instruments as may be necessary to cause the foregoing preferred return to be paid by the Corporation to APS and the Additional Purchasers as contemplated above. Provided, nothing contained in this Section shall require that any party make any payment to the Corporation, or execute any note, to enable the Corporation to make any payments required under this Section. 26 All parties hereto acknowledge and agree that the Corporation shall not make any distributions, whether in cash or property, including dividends, to any of the directors, shareholders or parties hereto unless such distributions are made in strict compliance with the terms of this Agreement, the Bylaws and the Contribution Agreement. ARTICLE X REGISTRATION RIGHTS Section 10.1 Incidental Registration Rights. Only the original parties to this Agreement (other than the Corporation) shall have the registration rights granted pursuant to this Article, and it is expressly understood and agreed that no Shareholder who subsequently executes this Agreement, and no permitted transferee of any Shareholder (other than (i) transferees of transfers expressly provided for pursuant to Article I hereof, (ii) transferees permitted pursuant to the prior written consent contemplated in Article II hereof wherein such written consent also extends expressly to the registration rights included in this Article X hereof, (iii) transferees of Trevey, Bouchard and the Limited Partner Permitted Assigns permitted pursuant to clause (ii) of the first sentence of Section 3.1(e) hereof, if Trevey, Bouchard or the Limited Partner Permitted Assigns, as applicable, give the written authorization to extend registration rights as contemplated in Section 3.1(e), and (iv) the Limited Partner Permitted Assigns expressly named in Section 3.1(e) hereof) shall have any of the registration rights provided by this Article, regardless of whether they execute and become bound by a counterpart of this Agreement. For purposes of this Article X hereof, the above described 27 persons and entities having the registration rights described herein 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 Article. The incidental registration rights described in this Article shall apply with respect to any and all shares owned by any of the Covered Parties; and any reference in this Article to "Shares" shall be deemed to refer to the Shares of the Covered Parties only (including any Shares subsequently acquired by any Covered Parties). If the Corporation 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 Forms S-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 Corporation), 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 Corporation 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, the Corporation 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 Corporation, all to the 28 extent requisite to permit the sale or other disposition by the Covered Parties; provided, however, that: (a) Each Covered Party shall each have the right to request inclusion of its Shares (and have such Shares included) in two (2) registration statements that are declared effective by the Securities and Exchange Commission (the "Commission"). (b) 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 Corporation shall determine for any reason not to register any securities at all (and in fact does not do so), the Corporation may, at its election, give written notice of such determination to the Covered Parties who made a request as hereinabove provided and thereupon the Corporation shall be relieved of its obligation to register any Shares in connection with that proposed registration; provided, however, that any election by the Corporation and the exercise of its rights pursuant to this subsection shall not otherwise affect the rights granted herein as to future registrations. (c) If such registration involves an underwritten offering, the Covered Parties requesting to be included in the Corporation's registration must sell their Covered Shares to the underwriters selected by the Corporation on the same terms and conditions as apply to the Corporation and other selling parties under the registration statement (except as otherwise set forth herein). 29 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 the Corporation 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 Corporation pursuant to a registration covering Shares, and a Covered Party does not elect to sell its Covered Shares to the underwriters of the Corporation's securities in connection with such offering, such Covered Party shall refrain from selling such Covered Shares during the period of distribution of the Corporation's 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. Section 10.2 Registration Procedures. If and whenever the Corporation is required by the provisions of this Article to effect the registration of any of the Covered Shares under the Act, the Corporation will, as expeditiously as possible: (a) 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); 30 (b) 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 Corporation's intended method of disposition set forth in such registration statement for such period; (c) 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; (d) 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 Corporation will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subsection, (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction); (e) 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 31 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; (f) 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: (i) an opinion dated such date of counsel representing the Corporation 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 (ii) a comfort letter dated such date from the independent public accountants retained by the Corporation, 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 (g) 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 Corporation, and cause the Corporation's 32 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 (a) and (b) 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 Corporation in writing such information with respect to themselves and the proposed distribution by them as shall be requested by the Corporation in order to assure compliance with federal and applicable state securities laws. In connection with each registration covering an underwritten public offering, the Corporation 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 Corporation's size and investment stature; provided that such agreement shall not contain any such provision applicable to the Corporation 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 Corporation and such managing underwriter. 33 The Corporation will not be obligated to include any Shares owned by the Covered Parties requesting that a proposed registration include such Shares if the Corporation delivers to the requesting Covered Parties the opinion of the Corporation's 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. Section 10.3 Conditions to Obligation to Register Shares. The Corporation's obligations under this Article shall be subject to the following limitations and conditions: (a) The Corporation shall have received from the Covered Parties, as applicable, all such information as the Corporation may reasonably request from the Covered Parties concerning each of them and each of their methods of distribution of the Covered Shares to enable the Corporation 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 34 effective; (iii) agrees, if the offering is at the market, to give the Corporation 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 the Corporation 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. Section 10.4 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. Section 10.5 Expenses. All expenses incurred by the Corporation 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 Corporation, the reasonable fees and expenses of one law firm serving as legal counsel for the participating Covered 36 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 Corporation 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. Section 10.6 Indemnification. In the event of a registration of any of the Covered Shares under the Securities Act, the Corporation 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 the Corporation of any rule or regulation promulgated under the Act applicable to the Corporation and relating to action or inaction by 36 the Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation, 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 37 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 Corporation 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 38 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. Section 10.7 Limitation on Subsequent Registration Rights. From and after the date of this Agreement, the Corporation shall not, without the unanimous written consent of APS, Trevey and Bouchard in each instance, enter into any agreement with any holder or prospective holder of any securities of the Corporation (nor shall the Corporation, 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. 39 ARTICLE XI LEGEND ON CERTIFICATES All Shares now or hereafter owned by the Shareholders shall be subject to the provisions of this Agreement, and the certificates representing same shall bear the following legend: "THE SHARES REPRESENTED HEREBY AND THE VOTING, SALE, ASSIGNMENT, TRANSFER, PLEDGE OR OTHER DISPOSITION THEREOF ARE SUBJECT TO CERTAIN RESTRICTIONS CONTAINED IN A STOCK TRANSFER RESTRICTION AND SHAREHOLDERS AGREEMENT AMONG THE CORPORATION AND ITS SHAREHOLDERS, AND ANY AMENDMENT THERETO. THE AGREEMENT LIMITS THE USE OF THIS STOCK AS COLLATERAL FOR ANY LOAN WHETHER BY PLEDGE, HYPOTHECATION OR OTHERWISE. A COPY OF THE STOCK TRANSFER RESTRICTION AGREEMENT AND ALL APPLICABLE AMENDMENTS THERETO WILL BE FURNISHED BY THE CORPORATION TO THE HOLDER HEREOF WITHOUT CHARGE UPON WRITTEN REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE." 40 ARTICLE XII TERMINATION OF AGREEMENT This Agreement and all restrictions on stock transfer created hereby shall terminate on the occurrence of any of the following events: (a) The bankruptcy or dissolution of the Corporation. (b) The ownership by one person of all of the Shares of the Corporation which are then subject to this Agreement. (c) The execution of a written instrument by APS, Bouchard and Trevey which terminates the same. (d) The date twenty-one (21) years after the death of the last survivor of all individuals who are parties to this Agreement. (e) The occurrence of an underwritten, registered public offering of the common stock of the Corporation. 41 ARTICLE XIII FUTURE EQUITY FINANCINGS Section 13.1 Right of First Refusal. Each party to this Agreement shall be entitled to a right of first refusal in the event that APS, Trevey or Bouchard participate in any future equity financing by the Corporation, including any instrument or security convertible into, or exchangeable or exercisable for, any equity ownership interest of the Corporation. The Corporation shall, not less than 30 days prior to the consummation of such equity financing, notify the Shareholders in writing of the contemplated transaction, including the terms and conditions of the issuance of capital stock contemplated thereunder. Each Shareholder shall have, and may exercise within 15 days of receipt of such notice, a right to purchase, upon the same terms and conditions, that proportion of such capital stock equal to its proportionate ownership of the Corporation as determined on the date of dispatch of notice of such transaction. Each Shareholder choosing to participate in such equity financing must exercise to the fullest extent the rights granted pursuant to this Section. The exercise or non-exercise of any rights arising pursuant to this Section shall be governed by (and treated in a like manner to options under) the provisions of Article IV hereof. Payment for any shares of capital stock purchased pursuant to this Section shall be in cash at the closing. Section 13.2 Limitations on Right of First Refusal. The provisions of this Article shall not apply to (a) any issuance of stock or options pursuant to any stock option or stock purchase plan properly adopted and administered by the Corporation pursuant to this Agreement and the Corporation's Bylaws, (b) any issuance of stock, stock purchase rights, options, stock warrants or similar 42 rights validly issued by the Corporation to any party hereto as compensation for services, for providing guarantees of Corporation obligations, or otherwise not in connection with the Corporation raising additional cash through the sale of equity interests, or (c) any transaction by the Corporation entirely with unrelated third parties. ARTICLE XIV BOARD MEETING ATTENDANCE RIGHTS Section 14.1 Observer. According to the terms of and subject to the conditions contained in this Article, the Limited Partner shall be entitled to designate not more than one individual (the "Observer") who shall be allowed to attend meetings of the Board of Directors of the Corporation (or listen in the case of telephonic meetings). The Limited Partner must select the Observer from the following individuals: Lowell Lebermann, Roger Minard, William Greehey, Stan McLelland or Matt Mathias. Section 14.2 Conditions, Terms and Limitations. The Limited Partner's and the Observer's rights under this Article shall be conditional upon, qualified by, or subject to the following: (a) the Observer shall not, on account of being the Observer or attending any meeting of the Board of Directors, be entitled to compensation, reimbursement, or indemnification of any kind from the Corporation or any party; 43 (b) the Observer shall use his best efforts to comply with any reasonable demand or directive of the Chairman of the Board or other officer who shall preside at and govern meetings of the Board of Directors; (c) the Observer shall not be entitled to any vote on any matter and shall comply with the rules of order and decorum as established by the presiding officer, which may be Robert's Rules of Order, and which are generally applicable to all parties at such meeting; (d) the Observer shall not be entitled to delay any meeting regardless of circumstances, and the presiding officer shall have no obligation to accommodate or consider any such request; and (e) in the event the Observer fails to comply with all of the conditions, terms and qualifications hereunder, the Observer may be required, upon request from the presiding officer, to leave or not attend the meeting. Section 14.3 Confidentiality. Prior to attending any meeting of the Board of Directors, the Observer must execute, in his or her individual capacity, a confidentiality agreement in form and substance reasonably acceptable to Corporation and its counsel. Pursuant to such agreement, the Observer shall be prohibited from disclosing, divulging, revealing or using any Proprietary Information (as defined in the Contribution Agreement) except for the sole purpose of informing the Limited Partner and the Limited Partner Permitted Assigns of the Corporation's affairs and of the activities occurring during the meetings observed or pursuant to one of the exceptions set forth in 44 the Contribution Agreement. All of the rights granted pursuant to this Article XIV shall be forever forfeited in the event that (a) any Observer breaches any of the conditions of this Article XIV, or (b) any Observer breaches any provision of the confidentiality agreement entered into pursuant to this Section. Any breach by any Observer of the confidentiality agreement required under this Section shall also constitute a breach by the Limited Partner of its obligations with respect to confidentiality arising under the Contribution Agreement. Section 14.4 Notice. On or before January 1 of each year, the Corporation will, in writing, provide the Limited Partner with the anticipated dates (subject to change) of the regular meetings, if any, of the Board of Directors for the following year (the "Annual Meeting Notice"). Within thirty (30) days after receipt of the Annual Meeting Notice, the Limited Partner must notify the Corporation of the name, address, facsimile number and phone number of the designated Observer, and only such designated Observer shall be permitted to attend any meeting of the Board of Directors during such following year, without exception. For all meetings not set forth in the Annual Meeting Notice, the Limited Partner shall be given notice at the same time and manner as notice is provided generally to the members of the Board of Directors, but in no event less than one (1) hour preceding such meeting. Section 14.5 Exception Upon Opinion of Counsel. Upon obtaining a reasoned opinion of counsel for the Corporation (or any Shareholder) which advises that only members of the Board of Directors should attend a specified meeting or meetings or portion of a meeting, the Chairman of the Board, at his sole discretion, may notify the Observer that the Observer shall be excluded 45 from such meeting or meetings whereupon the attendance rights under this Article with respect thereto shall not apply and the Observer shall not be allowed to attend. ARTICLE XV GENERAL PROVISIONS Section 15.1 Financial Statements. Each of the parties hereto hereby agrees that the Corporation, at its sole cost and expense, shall (a) be audited every calendar year-end by a national CPA firm and (b) prepare unaudited quarterly financial statements. In addition, the audited annual financial statements shall be due not later than ninety (90) days following year-end, and the unaudited quarterly financial statements shall be due not later than forty-five (45) days following quarter-end. All financial statements required by this Section shall be prepared in accordance with generally accepted accounting principles consistently applied. The Corporation shall, promptly upon receipt, deliver to each party hereto full and complete copies of such annual and quarterly financial statements. Each of the parties hereto hereby agrees that KPMG shall serve as the auditor of the Corporation until such time as a successor auditor has been elected pursuant to Article VIII hereof and the Corporation's Bylaws. Section 15.2 Directors and Officers Insurance. During the term of this Agreement, the Corporation shall purchase and maintain directors and officers liability insurance providing coverage of at least Three Million Dollars ($3,000,000) for each director and officer of the Corporation. 46 Section 15.3 Remedies for Breach. The Shares are unique chattels, and each party to this Agreement shall have the remedies which are available to him, her or it for the violation of any of the terms of this Agreement, including, but not limited to, the equitable remedy of specific performance. Section 15.4 Binding Effect. This Agreement is binding upon and inures to the benefit of the Corporation, its successors and permitted assigns and to the Shareholders and their respective heirs, personal representatives, successors and permitted assigns. This Agreement may not be assigned, in whole or in part, by any party hereto without the express written consent of all parties hereto. Section 15.5 Collateral Agreements and Waivers. This Agreement (together with all documents delivered pursuant hereto, executed in connection herewith, or contemplated herein) supersedes all other documents, understandings and agreements, oral or written and constitutes the entire understanding among the parties with respect to the subject matter hereof. Section 15.6 Governing Laws. This Agreement is executed under, and in conformity with, the laws of the State of Texas and shall be governed thereby. If any provision of this Agreement shall be determined to be invalid or unenforceable or prohibited by the laws of the State of Texas, this Agreement shall be considered divisible as to such provisions and such provisions shall be inoperative and shall not be a part of the consideration moving from any party to another party and there shall be substituted in place thereof a provision which parallels, as closely as allowed by law, the invalid, unenforceable or prohibited provision, and the remaining 47 provisions shall be valid and binding upon the parties and be of like effect as though such invalid, unenforceable or prohibited provisions were not included herein. Section 15.7 Amendment. This Agreement may be amended in whole or in part only by the written consent of all the parties. Such amendment shall be effective as of the date then determined by the parties and shall supersede any provisions herein contained which are in conflict. Section 15.8 Captions and Gender. The captions and titles herein are for convenience only and are not intended to include or conclusively define the subject matter of the text. All pronouns and references thereto shall refer to the masculine, feminine and neuter genders, singular or plural, as the identification of the persons, entities and corporations may require. The term "person" as used in this Agreement shall include natural persons, corporations, partnerships, trusts, estates and any other form of entity. Section 15.9 Notices. All notices required to be given hereunder shall be deemed to be duly given by personally delivering such notice or by mailing it by certified mail, to the Corporation and to the Shareholders at the following addresses (which may be changed by giving written notice of such change to all other parties hereto): 48 To the Corporation, APS or American Physicians Service Group, Inc. the Additional Purchasers: 1301 Capital of Texas Highway, Suite C-300 Austin, Texas 78746 Attention: President Fax: (512) 314-4301 with a copy to: Timothy L. LaFrey Akin, Gump, Strauss, Hauer & Feld, L.L.P. 816 Congress Avenue, Suite 1900 Austin, Texas 78701 Fax: (512) 499-6290 To the Partnerships, Uncommon Care the General Partner, 101 W. 6th Street, Suite 330 Bouchard or Trevey: Austin, Texas 78701 with a copy to: Bret Van Earp 100 Congress Avenue, Suite 1800 Austin, Texas 78701 Fax: (512) 469-3724 49 To Limited Partner: Uncommon Partners, Ltd. 808 West 10th Street Austin, Texas 78701 Attn: Matt Mathias Fax: (512) 469-0928 With a copy to: J. Bradley Greenblum Jenkens & Gilchrist 2200 One American Center 600 Congress Avenue Austin, Texas 78701 Fax: (512) 404-3520 Section 15.10 Binding Effect of this Agreement on Additional Shares Acquired By a Shareholder. In the event a Shareholder acquires, contracts to acquire or receives any Shares of the Corporation's capital stock which are not subject to this Agreement at the time of acquisition, such additional Shares of the Shareholder shall be automatically subject to this Agreement and the certificates representing such Shares shall bear the legend prescribed herein and this Agreement shall be amended, if necessary, to reflect the acquisition of such Shares by the Shareholder. Section 15.11 Execution of Documents. Whenever Shares are to be 50 purchased by the Corporation or a Shareholder pursuant to this Agreement, the transferor shall do all things and execute and deliver all documents and make all transfers as may be necessary to consummate such purchase. In the event that the transferor refuses to abide by the terms and conditions specified herein, the purchaser(s) may tender payment for such Shares by mailing payment to the transferor's attention at the address of the Corporation's registered office on file at the office of the Texas Secretary of State. After payment is tendered accordingly, the Corporation shall be entitled to cancel such Shares on its books, and reissue such Shares to the purchaser(s) or, if the purchaser is the Corporation, the Corporation may hold such Shares as treasury stock or cancel such Shares. [Signature pages follow] 51 SIGNATURE PAGES STOCK TRANSFER RESTRICTION AND SHAREHOLDERS AGREEMENT IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered on the day and year first written above. CORPORATION: BARTON ACQUISITION, INC. By: /s/ John H Trevey Print Name: John H Trevey Print Title: CEO APS: AMERICAN PHYSICIANS SERVICE GROUP, INC. By: /s/ Duane K. Boyd, Jr. Print Name: Duane K. Boyd, Jr. Print Title: Senior VP S-1 BARTON HOUSE: BARTON HOUSE, LTD. By: Uncommon Care, Inc., its General Partner By: /s/ George R. Bouchard Print Name: George R. Bouchard Print Title: President OAKWELL: BARTON HOUSE AT OAKWELL FARMS, LTD. By: Uncommon Care, Inc., its General Partner By: /s/ George R. Bouchard Print Name: George R. Bouchard Print Title: President S-2 GENERAL PARTNER: UNCOMMON CARE, INC. By: /s/ George R. Bouchard Print Name: George R. Bouchard Print Title: President BOUCHARD: /s/ George R. Bouchard TREVEY: /s/ John H. Trevey S-3 LIMITED PARTNER: UNCOMMON PARTNERS, LTD. By: LTZ, Inc., its General Partner By: /s/ Matt Mathias ------------------------------- Matt Mathias, President [Signature pages for Additional Purchasers follow] S-4 ADDITIONAL PURCHASERS: Richard J. Clark DUANE K. BOYD, JR. TRUST By /s/ Duane K. Boyd., Jr. Trustee ------------------------------- Duane K. Boyd, Jr., Trustee /s/ Robert L. Myer ---------------------- Robert L. Myer J. A. MURPHY DESCENDANTS' TRUST By BANK OF BERMUDA, TRUSTEE By /s/ Robert CH Masters Name Robert C. H. Masters Title Trust Manager /s/ William A. Searles ------------------------- William A. Searles /s/ Kenneth S. Shifrin ------------------------- Kenneth S. Shifrin /s/ Samuel Granett ------------------------- Samuel Granett S-5 /s/ W. H. Hayes ------------------------- H. J. Howard, III [Signature pages for spouses of Additional Purchasers follow] S-6 SIGNATURE PAGES STOCK TRANSFER RESTRICTION AND SHAREHOLDERS AGREEMENT SPOUSES: The undersigned spouse of Richard J. Clark hereunto subscribes her name in evidence of her agreement and consent to the disposition made of any interest she may have, including any community property interests, in the capital stock of Barton Acquisition, Inc., referred to in the foregoing Agreement, and to all other provisions of such Agreement. /s/ Janey E. Clark -------------------- Janet E. Clark The undersigned spouse of Robert L. Myer hereunto subscribes her name in evidence of her agreement and consent to the disposition made of any interest she may have, including any community property interests, in the capital stock of Barton Acquisition, Inc., referred to in the foregoing Agreement, and to all other provisions of such Agreement. /s/ Sharon K. Myer ------------------ Sharon K. Myer The undersigned spouse of Kenneth S. Shifrin hereunto subscribes her name in evidence of her agreement and consent to the disposition made of any interest she may have, including any community property interests, in the capital stock of Barton Acquisition, Inc., referred to in the foregoing Agreement, and to all other provisions of such Agreement. /s/ Yvonne Shifrin ------------------- Yvonne Shifrin The undersigned spouse of Samuel Granett hereunto subscribes her name in evidence of her agreement and consent to the disposition made of any interest she may have, including any community property interests, in the capital stock of Barton Acquisition, Inc., referred to in the foregoing Agreement, and to all other provisions of such Agreement. /s/ Barbara A. Granett --------------------- Barbara A. Granett S-8 The undersigned spouse of W. H. Hayes hereunto subscribes her name in evidence of her agreement and consent to the disposition made of any interest she may have, including any community property interests, in the capital stock of Barton Acquisition, Inc., referred to in the foregoing Agreement, and to all other provisions of such Agreement. /s/ Tiffany J. Hayes -------------------- Tiffany J. Hayes The undersigned spouse of H. J. Howard, III hereunto subscribes her name in evidence of her agreement and consent to the disposition made of any interest she may have, including any community property interests, in the capital stock of Barton Acquisition, Inc., referred to in the foregoing Agreement, and to all other provisions of such Agreement. /s/ Cynthia Howard -------------------- Cynthia Howard S-8 APPENDIX I ADDITIONAL PURCHASERS Richard J. Clark Duane K. Boyd, Jr. Trust Robert L. Myer J. A. Murphy Descendants' Trust William A. Searles Kenneth S. Shifrin Samuel Granett W. H. Hayes H. J. Howard, III A-1 EX-10 13 LOAN AGREEMENT Exhibit 10.49 LOAN AGREEMENT This Loan Agreement (this "Agreement") is entered into as of the day of January, 1998, by and between Barton Acquisition, Inc., a Texas corporation, and American Physicians Service Group, Inc., a Texas corporation. DEFINITIONS: EFFECTIVE DATE: January 1, 1998 BORROWER: Barton Acquisition, Inc., a Texas corporation BORROWER'S ADDRESS: 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746; Fax: (512) 314-4559 LENDER: American Physicians Service Group, Inc., a Texas corporation LENDER'S ADDRESS: 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746, Fax: (512) 314-4398 NOTE: Promissory Note (Line of Credit) in the maximum principal amount of $2,400,000, (the "Maximum Principal Amount") dated January 1, 1998, executed by Borrower, and payable to the order of Lender as provided therein (the "Note") COLLATERAL: The following described Land and personal property: 1. Tract 1: A 0.8800 acre tract now known as Lot 4, Block B, New City Block 17305, OAKWELL FARMS, UNIT 7B, PLANNED UNIT DEVELOPMENT, City of San Antonio, Bexar County, Texas, according to plat thereof recorded in Volume 9535, Page 203, Deed and Plat Records of Bexar County, Texas. Tract 2: All that certain tract or parcel of land, containing 1.6756 acres, more or less, being out of the Elijah Alcorn Survey, Abstract No. l, situated in Fort Bend County, Texas. Said 1.6756 acres being all of Commercial Reserve "F" and part of Commercial Reserve "D" of the Replat of the Amending Plat for Edgewater, Section Two (2), according to the map or plat thereof recorded in Slide No. 1353/A of the Plat Records of Fort Bend County, Texas. Said 1.6756 acres being more particularly described by metes and bounds in Exhibit "A" attached hereto and made a part hereof; together with those nonexclusive easement rights described in that Ingress and Egress Easement, recorded in Volume 2364, Page 1480 of the County Clerk Official Records of Fort Bend County, Texas, and those easement rights reserved in that deed recorded in Volume 2364, Page 1452 of the County Clerk Official Records of Fort Bend County, Texas. Tract 3: A tract or parcel of land being 0.2008 acres, more or less, located in the Elijah Alcorn League Survey, Abstract No. l, being out of Commercial Reserve "D" of the Replat of the Amending Plat for Edgewater, Section Two (2), according to the map or plat thereof recorded in Slide No. 1353/A of the Plat Records of Fort Bend County, Texas. Said 0.2008 acres being more particularly described by metes and bounds in Exhibit "B" attached hereto and made a part hereof. Tract 4: Lot 2A, Block "B", of RESUBDIVISION OF LOT 2, BLOCK "B" MILWOOD SECTION SIX, a subdivision in Travis County, Texas, according to the map or plat, of record in Volume 95, Page 231, of the Plat Records of Travis County, Texas. Tract 5: Lot 2B, Block "B", of RESUBDIVISION OF LOT 2, BLOCK "B" MILWOOD SECTION SIX, a subdivision in Travis County, Texas, according to the map or plat, of record in Volume 95, Page 231, of the Plat Records of Travis County, Texas. All other real property and improvements now owned or hereafter acquired by Borrower. 2. All of Borrower's assets, including without limitation all accounts, chattel paper, contract rights, equipment, inventory, fixtures, general intangibles, and investment property, as more particularly described in Exhibit "C" attached to and incorporated herein by reference. LOAN DOCUMENTS: This Agreement, the Note, the Security Agreement, the Deeds of Trust (Security Agreement, Assignment of Leases and Rents and Financing Statement) ("Deeds of Trust"), and all other documents, agreements, and instruments now or hereafter existing, evidencing, securing, or otherwise relating to this Agreement and any transactions contemplated by this Agreement, as any of the foregoing items may be modified or supplemented from time to time. INDEBTEDNESS: All present and future indebtedness, obligations and liabilities of Borrower to Lender, and all renewals, extensions and modifications thereof, arising pursuant to any of the Loan Documents and all interest accruing thereon, and all other fees, costs, expenses, charges and attorneys' fees payable, and covenants performable, under any of the Loan Documents (including without limitation this Agreement). Agreement: Borrower has requested from Lender the credit accommodations described below, and Lender has agreed to provide such credit accommodations to Borrower on the terms and conditions contained herein. Therefore, for good and valuable consideration, the receipt and sufficiency of which Lender and Borrower acknowledge, Lender and Borrower hereby agree as follows: ARTICLE I THE LOANS 1.1 THE LOANS. Lender agrees to lend and Borrower agrees to borrow an amount not to exceed the Maximum Principal Amount (the "Loans") on the terms and conditions set forth herein. The Loans will be evidenced by the Note. 1.2 SECURITY. Borrower will grant to Lender a lien and security interest in the Collateral and agrees to do all things necessary to perfect the liens and security interests of Lender in such Collateral. ARTICLE II DESCRIPTION OF CREDIT FACILITIES; ADVANCES 2.1 REVOLVING LINE OF CREDIT. Subject to and in reliance upon the terms, conditions, representations and warranties hereinafter set forth, Lender agrees to make advances (an "Advance") to 2 Borrower from time to time during the period from the date hereof to and including January 1, 2003 ("Maturity Date") in an aggregate amount not to exceed the Maximum Principal Amount of the Note. Each Advance must be either $1,000.00 or a higher integral multiple of $1,000.00. Funds borrowed and repaid may be reborrowed, so long as all conditions precedent to Advances are met. The purpose of the Advances is to provide funds to Borrower for working capital and for other general business purposes of Borrower. 2.2 INTEREST AND REPAYMENT. Borrower shall pay the aggregate unpaid principal amount of all Advances in accordance with the terms of the Note, evidencing the indebtedness resulting from such Advances. Interest on the Advances shall be due and payable in the manner and at the times set forth in the Note, with final maturity of the Note being on or before January 1, 2003. 2.3 MAKING ADVANCES. Each Advance shall be made within two business days of written notice (or telephonic notice confirmed in writing) given by noon (Austin, Texas time) on a business day of Lender by Borrower to Lender specifying the amount and date thereof (which may be the same business day) and if sent by wired funds, at Lender's option, the wiring instructions of the deposit account of Borrower to which such Advance is to be deposited. 2.4 PAYMENTS AND COMPUTATIONS. Borrower shall make each payment hereunder and under the Note on the day when due in lawful money of the United States of America to Lender at Lender's Address for Payment in same day funds. All repayments of principal on the Note shall be in a minimum amount of $1,000.00, or a higher integral multiple of $1,000.00. All computations of interest shall be made by Lender on the basis of the actual number of days (including the first day but excluding the last day) in the year (365 or 366, as the case may be) elapsed, but in no event shall any such computation result in an amount of interest that would cause the interest contracted for, charged or received by Lender to be in excess of the amount that would be payable at the Highest Lawful Rate, as herein defined. ARTICLE III CONDITIONS TO ADVANCES 3.1 CONDITION PRECEDENT TO INITIAL ADVANCE. The obligation of Lender to make its initial Advance is subject to the condition precedent that Lender shall have received on or before the day of such Advance the following, each in form and substance satisfactory to Lender and properly executed by Borrower or other appropriate parties: (a) the Note duly executed by Borrower; (b) a copy of Borrower's articles of incorporation, together with all amendments, certified by the secretary of Borrower; (c) a corporate resolution executed by the Secretary of Borrower authorizing execution of the Loan Documents and the borrowing of funds hereunder; (d) the Security Agreement covering the Collateral is executed and all necessary financing statements covering the Collateral in favor of Lender have been filed with the Texas Secretary of State; (e) the Deeds of Trust (Security Agreement, Assignment of Rents and Leases and Financing Statements) are executed and recorded in the appropriate counties; and (f) such other documents, opinions, certificates and evidences as Lender may reasonably request. 3.2 CONDITIONS PRECEDENT TO EACH ADVANCE. In addition to the conditions precedent stated elsewhere herein, Lender shall not be obligated to make any Advance unless: (a) the representations and warranties contained in Article IV are true and correct in all material respects on and as of the date of such Advance as though made on and as of such date with such changes therein as have occurred without breach of that certain Contribution and Stock Purchase Agreement (the "Contribution Agreement") dated as of January 1, 1998, by and among Lender, Borrower, Barton House, Ltd., a Texas limited partnership, Barton House at Oakwell Farms, Ltd., a Texas limited partnership, Uncommon Care, Inc., a Texas corporation, George R. Bouchard, John H. Trevey, Uncommon Partners, Ltd., a Texas limited partnership and the additional parties listed on Appendix I thereto, Stock Transfer Restriction and Shareholders Agreement dated as of January 1, 1998, by and among Lender, Borrower, Barton House, Ltd., a Texas limited partnership, Barton House at Oakwell Farms, Ltd., a Texas limited partnership, Uncommon Care, Inc., a Texas corporation, George R. Bouchard, John H. Trevey, Uncommon Partners, Ltd., a Texas limited partnership and the additional parties listed on Appendix I thereto, or this Agreement; (b) on the 3 date of the Advance, no Event of Default, and no event which, with the lapse of time or notice or both, could become an Event of Default, has occurred and is continuing; (c) there shall have been no material adverse change, as determined by Lender in its reasonable judgment, in the financial condition or business of Borrower; and (d) Lender shall have received such other approvals, opinions, documents, certificates or evidences as Lender may reasonably request (in form and substance reasonably satisfactory to Lender). Each request for an Advance shall be deemed a representation by Borrower that the conditions of this Section 3.2 have been met. ARTICLE IV BORROWER'S REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to Lender as follows: 4.1 GOOD STANDING. Borrower is a duly formed corporation, duly organized and in good standing, under the laws of Texas and has the power to own its property and to carry on its business in each jurisdiction in which Borrower operates. 4.2 AUTHORITY AND COMPLIANCE. Borrower has full power and authority to enter into this Agreement, to make the borrowing hereunder, to execute and deliver the Note and to incur the indebtedness described in this Agreement, all of which has been duly authorized by all proper and necessary corporate action. No further consent or approval of any public authority is required as a condition to the validity of this Agreement or the Note, and Borrower is in compliance with all laws and regulatory requirements to which it is subject. 4.3 BINDING AGREEMENT. This Agreement constitutes, and the Note and other Loan Documents when issued and delivered pursuant hereto for value received will constitute, valid and legally binding obligations of Borrower in accordance with their terms. 4.4 LITIGATION. There are no proceedings pending or, to the knowledge of Borrower, threatened before any court or administrative agency which will or may have a material adverse effect on the financial condition or operations of Borrower or any subsidiary, except as disclosed to Lender in writing prior to the date of this Agreement. 4.5 NO CONFLICTING AGREEMENTS. There are no charter, bylaw or stock provisions of Borrower and no provisions of any existing agreement, mortgage, indenture or contract binding on Borrower or affecting its property, which would conflict with or in any way prevent the execution, delivery, or carrying out of the terms of this Agreement and the Note. 4.6 OWNERSHIP OF ASSETS. Borrower has good title to the Collateral, and the Collateral is owned free and clear of liens except as provided in the Deeds of Trust and Security Agreement and as permitted by the Shareholders Agreement, Contribution Agreement and this Agreement. Borrower will at all times maintain its tangible property, real and personal, in good order and repair taking into consideration reasonable wear and tear. 4.7 TAXES. All income taxes and other taxes due and payable through the date of this Agreement have been paid prior to becoming delinquent. 4.8 PLACE OF BUSINESS. Borrower's principal place of business is in Austin, Travis County, Texas. 4.9 LEASES. Borrower is not the lessee of any real or personal property except as has been disclosed in writing to Lender in Exhibit "D" attached to this Agreement. 4 ARTICLE V BORROWER'S AFFIRMATIVE COVENANTS So long as Borrower may borrow under this Agreement and until payment in full of the Note and performance of all other obligations of Borrower hereunder, Borrower will: 5.1 FINANCIAL STATEMENTS. Maintain a system of accounting satisfactory to Lender and in accordance with generally accepted accounting principles consistently applied, and will permit Lender's officers or authorized representatives to visit and inspect Borrower's books of account and other records at such reasonable times and as often as Lender may desire during office hours and after reasonable notice to Borrower, and will pay the reasonable fees and disbursements of any accountants or other agents of Lender selected by Lender for the foregoing purposes. Unless written notice of another location is given to Lender, Borrower's books and records will be located at Borrower's Address. (a) Furnish to Lender year end financial statements to include balance sheet, operating statement and surplus reconciliation, together with an officer's certificate of compliance with this Agreement including computations of all quantitative covenants, within 90 days after the end of each annual accounting period. (b) Furnish to Lender quarterly financial statements, to include balance sheet and profit and loss statement, together with an officer's certificate of compliance with this Agreement including computations of all quantitative covenants, within 45 days of the end of each such accounting period. (c) With each balance sheet delivered under subsections (a) or (b) of this Section 5.1, an aging of all Accounts Receivable. (d) Promptly provide Lender with such additional information, reports or statements respecting its business operations and financial condition as Lender may reasonably request from time to time. 5.2 INSURANCE. 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 Lender and to contain a mortgage clause naming Lender as its interest may appear. Evidence of such insurance will be supplied to Lender. 5.3 EXISTENCE AND COMPLIANCE. Maintain its corporate existence in good standing and comply with all laws, regulations and governmental requirements applicable to it or to any of its property, business operations and transactions. Borrower further agrees to provide Lender with copies of all instruments filed with the Texas Secretary of State amending and/or renewing its articles of incorporation. 5.4 ADVERSE CONDITIONS OR EVENTS. Promptly advise Lender in writing of any condition, event or act which comes to its attention that would or might materially affect Borrower's financial condition, Lender's rights in or to the Collateral under this Agreement or the loan documents, and of any litigation filed against Borrower. 5.5 TAXES. Pay all taxes as they become due and payable. 5.6 MAINTENANCE. 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 its business. 5 ARTICLE VI BORROWER'S NEGATIVE COVENANTS So long as Borrower may borrow under this Agreement and until payment in full of the Note and performance of all other obligations of Borrower hereunder, Borrower will not, without the prior written consent of Lender: 6.1 TRANSFER OF ASSETS. Enter into any merger or consolidation, or sell, lease, assign, or otherwise dispose of or transfer any assets 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. From and after the date hereof and except as permitted by the Shareholders Agreement and Contribution Agreement, knowingly grant, suffer, or permit liens on or security interests in Borrower's 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 obligations of Lender or U.S. Government obligations or the purchase of federally-insured certificates of deposit. 6.5 BORROWINGS. Except as reflected in the Deeds of Trust, Security Agreement and herein and except for borrowing or incurring any indebtedness or granting any collateral or security (by way of guaranty or otherwise) for any indebtedness or obligation, with respect to (i) open accounts payable to unaffiliated third parties in the ordinary course of Borrower's business, (ii) any first lien mortgages to unaffiliated third parties, or purchase money security interests in favor of unaffiliated vendors or unaffiliated lenders, for (x) the acquisition and/or construction of real property or fixtures purchased as a site for the operation of residences to provide assisted living services to senior citizens with dementia, and directly related services, or (y) fixed assets or personal property to be located at, and used in connection with the operation of, such residences; 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 Lender in excess of $25,000 without Lender's prior written consent. 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 DIVIDENDS. Declare any dividends (other than dividends payable in capital stock of Borrower) 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 of Borrower or in any way amend its capital structure. 6.8 EXECUTIVE PERSONNEL. Substantially change its present executive or management personnel. 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. 6 ARTICLE VII EVENTS OF DEFAULT; NOTICE; ACCELERATION 7.1 EVENTS OF DEFAULT. If one or more of the following events of default shall occur and continue after thirty (30) days' written notice to Borrower, all outstanding principal plus unpaid interest of the Loans and any other indebtedness of Borrower to Lender shall automatically be due and payable immediately and Lender shall have no further obligation to fund under this Agreement unless and until all events of default have been cured but so long as Lender has not begun any legal proceedings to enforce its remedies hereunder or has foreclosed the Property: (a) Default shall be made in the payment of any installment of principal or interest upon the Note, when due and payable, whether at maturity or otherwise; or (b) Default shall be made in the performance of any term, covenant or agreement contained herein or in any of the Deeds of Trust or the Security Agreement; or (c) Any representation or warranty herein contained or in any financial statement, certificate, report or opinion submitted to Lender in connection with the Loans or pursuant to the requirements of this Agreement excluding, however, any representation or warranty in the Contribution Agreement and Shareholders Agreement, shall prove to have been incorrect or misleading in any material respect when made; or (d) Any judgment against Borrower or any attachment or other levy against the property of Borrower with respect to a claim materially affecting Borrower's financial status remains unpaid, unstayed on appeal, undischarged, not bonded or not dismissed for a period of 30 days; or (e) The bankruptcy, death, or dissolution of any guarantor of the Indebtedness; or (f) Borrower makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts generally as they become due, files a petition in bankruptcy, is adjudicated insolvent or bankrupt, petitions or applies to any tribunal for any receiver or any trustee of Borrower or any substantial part of its property, commences any action relating to Borrower under any reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, or if there is commenced against Borrower any such action, or Borrower by any act indicates its consent to or approval of any trustee for Borrower or any substantial part of its property, or suffers any such receivership or trustee to continue undischarged. 7.2 LENDER'S REMEDIES. Upon the occurrence of an Event of Default and while it may continue uncured, Lender, without notice of any kind, except for any notice required under this Agreement or any other Loan Document, may, at Lender's option: (i) by notice to Borrower, terminate its obligation to fund Advances hereunder; (ii) declare the Indebtedness, in whole or in part, immediately due and payable; and/or (iii) exercise any other rights and remedies available to Lender under this Agreement, any other Loan Document, or applicable laws; except that upon the occurrence of an Event of Default described in subsection 7.1(f), all the Indebtedness shall automatically be immediately due and payable, and Lender's obligation to fund Advances hereunder shall automatically terminate, without notice of any kind (including without limitation notice of intent to accelerate and notice of acceleration) to Borrower or to any guarantor, or to any surety or endorser of the Note, or to any other person. Borrower and each guarantor, surety, and endorser of the Note, and any and all other parties liable for the Indebtedness or any part thereof, 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. 7 7.3 RIGHT OF SET-OFF. Borrower hereby authorizes Lender, to the maximum extent permitted under and in accordance with applicable laws, at any time after the occurrence of an Event of Default which continues uncured, to set-off and apply any and all deposits, funds or assets at any time held and any and all other indebtedness at any time owing by Lender to or for the credit or the account of Borrower against any and all Indebtedness, whether or not Lender exercises any other right or remedy hereunder and whether or not such Indebtedness are then matured. ARTICLE VIII GENERAL TERMS AND CONDITIONS 8.1 NOTICES. All notices, demands, requests, approvals and other communications required or permitted hereunder shall be in writing and shall be deemed to have been given when (a) presented personally, or (b) three (3) days after deposited in a regularly maintained mail receptacle of the United States Postal Service, postage prepaid, certified, return receipt requested, or (c) upon receipt of confirmation after sending by facsimile transmission, addressed to Borrower or Lender, as the case may be, at the respective addresses or facsimile number for notice set forth on the first page of this Agreement, or such other address or facsimile number as Borrower or Lender may from time to time designate by written notice to the other. 8.2 ENTIRE AGREEMENT AND MODIFICATIONS. The Loan Documents constitute the entire understanding and agreement between the undersigned with respect to the transactions arising in connection with the Loans and supersede all prior written or oral understandings and agreements between the undersigned in connection therewith. No provision of this Agreement or the other Loan Documents may be modified, waived, or terminated except by instrument in writing executed by the party against whom a modification, waiver, or termination is sought to be enforced, and, in the case of Lender, executed by a Vice President or higher level officer of Lender. 8.3 SEVERABILITY. In case any of the provisions of this Agreement shall for any reason be held to be invalid, illegal, or unenforceable, such invalidity, illegality, or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been contained herein. 8.4 CUMULATIVE RIGHTS AND NO WAIVER. Lender shall have all of the rights and remedies granted in the Loan Documents and available at law or in equity, and these same rights and remedies shall be cumulative and may be pursued separately, successively, or concurrently against Borrower, or the Collateral or any part thereof, at the sole discretion of Lender. Lender's delay in exercising any right shall not operate as a waiver thereof, nor shall any single or partial exercise by Lender of any right preclude any other or future exercise thereof or the exercise of any other right. Any of Borrower's covenants and agreements may be waived by Lender but only in writing signed by an authorized officer of Vice President level or higher of Lender or any subsequent owner or holder of the Note. Except as otherwise expressly provided in this Agreement and in the Note, Deed of Trust and Security Agreement, Borrower expressly waives any presentment, demand, protest, notice of default, notice of intent to accelerate, notice of acceleration, notice of intent to demand payment, or other notice of any kind. No notice to or demand on Borrower in any case shall, of itself, entitle Borrower to any other or further notice or demand in similar or other circumstances. No delay or omission by Lender in exercising any power or right hereunder shall impair any such right or power or be construed as a waiver thereof, or the exercise of any other right or power hereunder. 8.5 FORM AND SUBSTANCE. All documents, certificates, insurance policies, and other items required under this Agreement to be executed and/or delivered to Lender shall be in form and substance reasonably satisfactory to Lender. 8.6 LIMITATION ON INTEREST: MAXIMUM RATE. Lender and Borrower intend to contract in strict compliance with applicable usury law from time to time in effect. To effectuate this intention, Lender and 8 Borrower stipulate and agree that none of the terms and provisions of the Note and any other agreement among such parties, whether now existing or arising hereafter, shall ever be construed as a contract to pay interest for the use, forbearance or detention of money in excess of the Maximum Rate. If, from any possible construction of any document, interest would otherwise be payable to Lender in excess of the Maximum Rate, any such construction shall be subject to the provisions of this Section and such document shall be automatically reformed and the interest payable to Lender shall be automatically reduced to the Maximum Rate permitted under applicable law, without the necessity of the execution of any amendment or new document. Neither Borrower, endorsers or other persons now or hereafter becoming liable for payment of any portion of the principal or interest of the Note shall ever be liable for any unearned interest on the principal amount or shall ever be required to pay interest thereon in excess of the Maximum Rate that may be lawfully charged under applicable law from time to time in effect. Lender and any subsequent holder of the Note expressly disavows any intention to charge or collect unearned or excessive interest or finance charges in the event the maturity of the Note, is accelerated. If the maturity of the Note is accelerated for any reason, whether as a result of a default under the Note, or by voluntary prepayment, or otherwise, any amounts constituting interest, or adjudicated as constituting interest, which are then unearned and have previously been collected by Lender or any subsequent holder of the Note shall be applied to reduce the principal balance thereof then outstanding, or if such amounts exceed the unpaid balance of principal, the excess shall be refunded to Borrower. In the event Lender or any subsequent holder of the Note ever receives, collects or applies as interest any amounts constituting interest or adjudicated as constituting interest which would otherwise increase the interest to an amount in excess of the amount permitted under applicable law, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of the Note, and, if the principal balances of the Note is paid in full, any remaining excess shall be paid to Borrower. In determining whether or not the interest paid or payable under the specific contingencies exceeds the Maximum Rate allowed by applicable law, Borrower and Lender shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment as an expense, fee or premium, rather than as interest; (ii) exclude voluntary prepayments and the effect thereof; (iii) amortize, prorate, allocate and spread, in equal parts, the total amount of interest throughout the entire contemplated term of the applicable Note (as it may be renewed and extended) so that the interest rate is uniform throughout the entire term of the Note. The terms and provisions of this section shall control and supersede every other provision of all existing and future agreements between Lender and Borrower. As used in this Agreement, "Maximum Rate" means the maximum non-usurious interest rate that at any time or from time to time may be contracted for, taken, reserved, charged or received on the unpaid principal or accrued past due interest under applicable law and may be greater than the applicable rate, the parties hereby stipulating and agreeing that Lender may contract for, take, reserve, charge or receive interest up to the Maximum Rate without penalty under any applicable law; and "applicable law" means the laws of the State of Texas or the laws of the United States of America, whichever laws allow the greater interest, as such laws now exist or may be changed or amended or come into effect in the future. In the event applicable law provides for an interest ceiling under Chapter One of Title 79, Texas Revised Civil Statutes Annotated, as amended, that ceiling shall be the indicated rate ceiling, subject to any right Lender may have in the future to change the method of determining the Maximum Rate. 8.7 NO THIRD PARTY BENEFICIARY. This Agreement is for the sole benefit of Lender and Borrower and is not for the benefit of any third party. 8.8 BORROWER IN CONTROL. In no event shall Lender's rights and interests under the Loan Documents be construed to give Lender the right to, or be deemed to indicate that Lender is in control of the business, management or properties of Borrower or has power over the daily management functions and operating decisions made by Borrower. 8.9 USE OF FINANCIAL AND OTHER INFORMATION. Borrower agrees that Lender shall be permitted to investigate and verify the accuracy of any and all information furnished to Lender in connection with the Loan Documents, including without limitation financial statements, and to disclose such information, or provide copies of such information, to representatives appointed by Lender, including independent 9 accountants, agents, attorneys, asset investigators, appraisers and any other persons deemed necessary by Lender to such investigation. 8.10 PARTICIPATION OR SALE OF LOAN. Lender shall have the right to sell the Note, or participation interests in the Note to any entity, the majority of whose voting equity securities is then owned directly or indirectly by Lender, or by Lender and any of the parties listed on Appendix I to the Shareholders Agreement ("Lender Parties") or to any Lender Parties. Borrower shall execute, acknowledge and deliver any and all instruments requested by Lender to satisfy such purchasers or participants that the unpaid indebtedness evidenced by the Note is outstanding upon the terms of the provisions set out in the Loan Documents. Lender shall have the right to disclose in confidence such financial information regarding Borrower or the Collateral as may be necessary to complete any sale or attempted sale of the Note or participations or attempted participations in the Loans, including without limitation all Loan Documents, financial statements, projections, internal memoranda, audits, reports, payment history, appraisals and any and all other information and documentation in Lender's files relating to Borrower and the Collateral. This authorization shall be irrevocable in favor of Lender, and Borrower waives any claims that they may have against Lender or the party receiving information from Lender regarding disclosure of information in Lender's files, and further waive any alleged damages which they may suffer as a result of such disclosure. 8.11 FURTHER ASSURANCES. Borrower agrees to execute and deliver to Lender, promptly upon request from Lender, such other and further documents as may be reasonably necessary or appropriate to consummate the transactions contemplated herein or to perfect the liens and security interests covering the Collateral. 8.12 NUMBER AND GENDER. Whenever used herein, the singular number shall include the plural and the plural the singular, and the use of any gender shall be applicable to all genders. The duties, covenants, obligations, and warranties of Borrower in this Agreement shall be joint and several obligations of Borrower and of each Borrower if more than one. 8.13 CAPTIONS. The captions, headings, and arrangements used in this Agreement are for convenience only and do not in any way affect, limit, amplify, or modify the terms and provisions hereof. 8.14 CONTINUING AGREEMENT. This is a continuing agreement and all rights, powers, and remedies of Lender under this Agreement and the other Loan Documents shall continue in full force and effect until the Note is paid in full as the same becomes due and payable and all other Indebtedness is paid and discharged, until Lender has no further obligation to advance moneys to Borrower under this Agreement, and until Lender, upon request of Borrower, has executed a written termination statement. Furthermore, the parties contemplate that there may be times when no Indebtedness is owing, but notwithstanding such occurrence, this Agreement (and all other Loan Documents) shall remain valid and shall be in full force and effect as to subsequent Indebtedness and Advances, provided that Lender has not executed a written termination statement. 8.15 Applicable Law. THIS AGREEMENT AND THE LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES APPLICABLE TO TRANSACTIONS WITHIN SUCH STATE. 8.16 REQUIRED CONSENTS AND APPROVALS. Any consent or approval of Lender required hereunder or under any other Loan Document executed in connection herewith shall not be required, or shall be deemed satisfied, in the event (a) approval is required of at least one of the APS Designees (as defined in the Shareholders Agreement) under the Shareholders Agreement, and such approval, together with the overall approval of the Board of Directors of Borrower, has been so obtained, or (b) such action, inaction or request by Borrower is expressly permitted, without any requirement of approval of Lender or any APS Designee, under the Shareholders Agreement. 10 8.17 NO ORAL AGREEMENTS. THE WRITTEN LOAN AGREEMENT REPRESENTS 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 16th day of March, 1998, to be effective January 1, 1998. BORROWER: BARTON ACQUISITION, INC., a Texas corporation By: /s/ John H. Trevey Name: John H. Trevey Title: CEO LENDER: AMERICAN PHYSICIANS SERVICE GROUP, INC., a Texas corporation By: /s/ Duane K. Boyd, Jr. Name: Duane K. Boyd, Jr. Title: Senior VP 11 EXHIBIT C Borrower's Personal Property (a) all equipment, fixtures, furnishings, inventory, building materials, and articles of personal property (the "Personalty") now or hereafter owned by Borrower, including, but not limited to the Personalty attached to or used in or on the Land or in or about the Improvements or that are necessary or useful for the complete and comfortable use and occupancy of the Improvements for the purposes for which they were or are to be attached, placed, erected, constructed or developed, or which Personalty is or may be used in or related to the planning, development, financing or operation of the Improvements, and all renewals of or replacements or substitutions for any of the foregoing, whether or not the same are or shall be attached to the Land or Improvements; (b) all water and water rights, timber, crops, and mineral interests pertaining to the Land; (c) all plans and specifications for the Improvements and for any future development of or construction on the Land; (d) all accounts, deposits (including tenant or resident security deposits), patient records, personnel files, provider agreements, records of inspections by governmental agencies, receivables from Medicare, Medicaid, the State of Texas, any health insurance carrier, or any governmental agency, bank accounts, funds, instruments, notes or chattel paper arising from or by virtue of any transactions or operations related to the Land, the Improvements, the Personalty, the Leases, or the Rents; (e) all Borrower's rights (but not Borrower's obligations) under any documents, contracts, contract rights, accounts, commitments, construction contracts (and all payment and performance bonds, statutory or otherwise, issued by any surety in connection with any such construction contracts, and the proceeds of such bonds), architectural contracts, engineering contracts, and general intangibles (including without limitation trademarks, trade names, and symbols) arising from or by virtue of any transactions related to the Land, the Improvements, or the Personalty; (f) all permits, licenses, franchises, certificates, accreditation, registrations and authorizations of all federal, state and local governmental or regulatory authority, and other rights and privileges obtained in connection with the Land, the Improvements, or the Personalty and the operation thereof; (g) all development rights, utility commitments, water and wastewater taps, living unit equivalents, capital improvement project contracts, letters of credit, and utility construction agreements with any governmental authority, including municipal utility districts, or with any utility companies (and all refunds and reimbursements thereunder) relating to the Land or the Improvements; (h) all proceeds arising from or by virtue of the sale, lease or other disposition of the Land, the Improvements, or the Personalty; (i) all proceeds (including premium refunds) of each policy of insurance relating to the Land, the Improvements, or the Personalty; (j) all proceeds from the taking of any of the Land, the Improvements, the Personalty, or any rights appurtenant thereto by right of eminent domain or by private or other purchase in lieu thereof, including change of grade of streets, curb cuts or other rights of access, for any public or quasi-public use under any law; (k) all right, title, and interest of Borrower in and to all streets, roads, public places, easements, and rights-of-way, existing or proposed, public or private, adjacent to or used in connection with, belonging, or pertaining to the Land; (l) all of Borrower's rights (but not Borrower's obligations) under existing and future residency or occupancy agreements, licenses, leases, including subleases, concession agreements, management agreements and any and all extensions, renewals, modifications, and replacements of such agreements, upon or of any part of the Land or Improvements, including cash or securities deposited and guaranties to secure performance by the tenants of their obligations thereunder (the "Leases"); (m) all of the rents, receipts, royalties, bonuses, issues, profits, revenues, or other benefits of the Land, the Improvements, the Leases, or the Personalty, including those now due or to become due by virtue of any Lease or other agreement for the occupancy or use of all or any part of the Land or Improvements (the "Rents"); (n) all consumer goods located in, on, or about the Land or the Improvements or used in connection with the use or operation thereof; however, neither the term "consumer goods" nor the term "Personalty" includes clothing, furniture, appliances, linens, china, crockery, kitchenware, inventory, medicines, drugs or personal effects used primarily for the operation of the Property; (o) all other interests of every kind and character that Borrower now has or at any time hereafter acquires in and to the Land, Improvements, Personalty, Leases, and Rents and all property that is used or useful in connection therewith, including rights of ingress and egress and all reversionary rights or interests of Borrower with respect to such property and all of Borrower's rights (but not Borrower's obligations) under any covenants, conditions, and restrictions for the Land, as the same may be amended from time to time, including Borrower's rights, title, and interests thereunder as declarant or developer, if applicable; and (p) all products and proceeds of the Personalty. 2 EXHIBIT D LIST OF BORROWER'S LEASES EX-10 14 PROMISSORY NOTE (LINE OF CREDIT) Exhibit 10.50 PROMISSORY NOTE Austin, Texas (LINE OF CREDIT) January 1, 1998 PROMISE TO PAY: For value received, the undersigned Borrower (whether one or more) promises to pay to the order of Lender the Principal Amount, to the extent advanced by Lender, together with interest on the unpaid balance of such amount, in lawful money of the United States of America, in accordance with all the terms, conditions, and covenants of this Note and the Loan Documents identified below. BORROWER: Barton Acquisition, Inc., a Texas corporation BORROWER'S ADDRESS FOR NOTICE: 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746, Attention: John H. Trevey LENDER: American Physicians Service Group, Inc., a Texas corporation LENDER'S ADDRESS FOR PAYMENT: 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746 PRINCIPAL AMOUNT: Two Million Four Hundred Thousand Dollars and No/100 Dollars ($2,400,000.00) INTEREST RATE: Ten Percent (10.0%) PAYMENT TERMS: Interest only on the unpaid balance of this Note is due and payable quarterly, beginning June 1, 1998, and continuing regularly and quarterly thereafter on or before the first day of March, June, September and December of each year, until January 1, 2003 (the "Maturity Date"), when the outstanding principal balance and all accrued interest shall be due and payable in full. Interest will be calculated on the unpaid principal balance. Each payment will be credited first to the accrued interest and then to the reduction of principal. REVOLVING LINE OF CREDIT: This Note evidences a revolving line of credit. Subject to the terms of the Loan Agreement between Borrower and Lender of even date herewith, all or any portion of the Principal Amount of this Note may be borrowed, paid, prepaid, repaid, and reborrowed, from time to time prior to the Maturity Date and in accordance with the Loan Documents. Each borrowing and repayment hereunder will be (i) endorsed on an attachment to this Note, or (ii) entered in the books and records of Lender. The books and records of Lender shall be prima facie evidence of all sums due Lender. If an event of default exists under this Note or any Loan Document, then Lender shall be under no obligation to make any advance under this Note. LOAN AGREEMENT: This Note is executed pursuant to and is governed by the terms of the Loan Agreement of even date herewith, executed by Borrower and Lender, as amended (collectively, the "Loan Agreement"). 1. INTEREST PROVISIONS: (a) RATE: The principal balance of this Note from time to time remaining unpaid prior to maturity shall bear interest at the Interest Rate per annum stated above. Interest shall be calculated on the amount of each advance of the Principal Amount of this Note from the date of each such advance. (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 is permissible under applicable state or federal law for the type of loan evidenced by this Note and the other Loan Documents. 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 or premature payment, the total interest that will accrue under this Note cannot be determined in advance. Lender 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 Lender and Borrower agree that all amounts of interest, whenever contracted for, charged, or received by Lender, 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 Lender 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, Lender shall compute the total amount of interest that has been contracted for, charged, or received by Lender or payable by Borrower under this Note and compare such amount to the Maximum Lawful Amount that could have been contracted for, charged, or received by Lender. If such computation reflects that the total amount of interest that has been contracted for, charged, or received by Lender or payable by Borrower exceeds the Maximum Lawful Amount, then Lender 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 Borrower. This provision concerning the crediting or refund of excess interest shall control and take precedence over all other agreements between Borrower and Lender so that under no circumstances shall the total interest contracted for, charged, or received by Lender exceed the Maximum Lawful Amount. (e) INTEREST AFTER DEFAULT: At Lender'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 Lender's option, (i) the Maximum Lawful Rate, if such Maximum Lawful Rate is established by applicable law; or (ii) the Interest Rate stated on the first page of this Note plus five (5) percentage points, if no Maximum Lawful Rate is established by applicable law; or (iii) eighteen percent (18%) per annum; or (iv) such lesser rate of interest as Lender 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 Lender to exceed the Maximum Lawful Amount. (f) DAILY COMPUTATION OF INTEREST: To the extent permitted by applicable law, Lender at its option will 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. In no event shall Lender compute the interest in a manner that would cause Lender to contract for, charge, or receive interest that would exceed the Maximum Lawful Rate or the Maximum Lawful Amount. 2 2. DEFAULT PROVISIONS: (a) EVENTS OF DEFAULT AND ACCELERATION OF MATURITY: LENDER MAY, AFTER THIRTY (30) DAYS' WRITTEN NOTICE TO BORROWER AND BORROWER'S FAILURE TO CURE WITHIN SUCH 30-DAY PERIOD AND WITHOUT FURTHER NOTICE OR DEMAND, (except as otherwise required by statute), ACCELERATE THE MATURITY OF THIS NOTE AND DECLARE THE ENTIRE UNPAID PRINCIPAL BALANCE AND ALL ACCRUED INTEREST AT ONCE DUE AND PAYABLE IF: (i) There is default in the payment of any installment of principal, interest, or any other sum required to be paid under the terms of this Note or any of the Loan Documents; or (ii) There is default in the performance of any covenant, condition, or agreement contained in this Note or any of the Loan Documents, including any instrument securing the payment of this Note or any loan agreement relating to the advance of loan proceeds. (b) WAIVER BY BORROWER: EXCEPT AS PROVIDED IN PARAGRAPH 2(a) HEREOF AND IN ANY OTHER LOAN DOCUMENT, BORROWER 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 OR 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) NON-WAIVER BY LENDER: Any previous extension of time, forbearance, failure to pursue some remedy, acceptance of late payments, or acceptance of partial payment by Lender, before or after maturity, does not constitute a waiver by Lender of its subsequent right to strictly enforce the collection of this Note according to its terms. (d) OTHER REMEDIES NOT REQUIRED: Lender 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. (e) JOINT AND SEVERAL LIABILITY: Each Borrower 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 Lender requires the services of an attorney to enforce the payment of this Note or the performance of the other Loan Documents, or if this Note is collected through any lawsuit, probate, bankruptcy, or other judicial proceeding, Borrower agrees to pay Lender 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. 3. MISCELLANEOUS PROVISIONS: (a) SUBSEQUENT HOLDER: All references to Lender in this Note shall also refer to any subsequent owner or holder of this Note by transfer, assignment, endorsement, or otherwise. 3 (b) TRANSFER: Borrower acknowledges and agrees that Lender may transfer this Note or partial interests in the Note to one or more transferees or participants. Borrower authorizes Lender to disseminate any information it has pertaining to the loan evidenced by this Note, including, without limitation, credit information on Borrower 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 Borrower 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) 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 Lender and Borrower. (e) NO DUTY OR SPECIAL RELATIONSHIP: Borrower acknowledges that Lender has no duty of good faith to Borrower, and Borrower acknowledges that no fiduciary, trust, or other special relationship exists between Lender and Borrower. (f) MODIFICATIONS: Any modifications agreed to by Lender 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. (g) ENTIRE AGREEMENT. Borrower warrants and represents that the Loan Documents constitute the entire agreement between Borrower and Lender with respect to the loan evidenced by this Note and agrees that no modification, amendment, or additional agreement with respect to such loan or the advancement of funds thereunder will be valid and enforceable unless made in writing signed by both Borrower and Lender. (h) BORROWER'S ADDRESS FOR NOTICE: All notices required to be sent by Lender to Borrower shall be sent by U.S. Mail, postage prepaid, to Borrower's Address for Notice stated on the first page of this Note, until Lender shall receive written notification from Borrower of a new address for notice. (i) LENDER'S ADDRESS FOR PAYMENT: All sums payable by Borrower to Lender shall be paid at Lender's Address for Payment stated on the first page of this Note, or at such other address as Lender shall designate from time to time. (j) BUSINESS USE: Borrower warrants and represents to Lender that the proceeds of this Note will be used solely for business or commercial purposes, and in no way will the proceeds be used for personal, family, or household purposes. (k) CHAPTER 15 NOT APPLICABLE: It is understood that Chapter 15 of the Texas Credit Code relating to certain revolving credit loan accounts and tri-party accounts is not applicable to this Note. (l) APPLICABLE LAW: THIS NOTE HAS BEEN EXECUTED AND DELIVERED IN TEXAS AND 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. 4 4. LOAN DOCUMENTS: (a) This Note consisting of this page and the preceding 4 pages. (b) The Loan Agreement of even date. (c) The Deed of Trust (Security Agreement, Assignment of Leases and Rents and Financing Statement) securing this Note. (d) The Security Agreement securing this Note. (e) All other documents signed in connection with the loan evidenced by this Note. EXECUTED this 16th day of March, 1998. BORROWER: BARTON ACQUISITION, INC., a Texas corporation By: /s/ John H. Trevey Name: John H. Trevey Title: CEO 5 EX-10 15 SECURITY AGREEMENT Exhibit 10.51 SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Agreement") is entered into this 1st day of January, 1998, by and between Barton Acquisition, Inc., a Texas corporation ("Debtor"), whose address is 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746, and American Physicians Service Group, Inc., a Texas corporation ("Secured Party"), whose address is 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746, who, for good and valuable consideration, 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 to Secured Party, (excluding, however, any preferred rights under that certain Stock Transfer Restriction and Shareholders Agreement (the "Shareholders Agreement") dated as of January 1, 1998, by and among Secured Party, Debtor, Barton House, Ltd., a Texas limited partnership, Barton House at Oakwell Farms, Ltd., a Texas limited partnership, Uncommon Care, Inc., a Texas corporation, George R. Bouchard, John H. Trevey, Uncommon Partners, Ltd., a Texas limited partnership and the additional parties listed on Appendix I thereto) now or hereafter existing, arising directly between Debtor 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 the Promissory Note (Line of Credit) in the maximum original principal amount of $2,400,000, executed by Barton Acquisition, Inc., a Texas corporation, and payable to the order of Secured Party, and all renewals, extensions, modifications, or rearrangements of any of the foregoing. (b) 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 attorney's fees and legal expenses, feed, rent, storage costs, and expenses of sale. (c) 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 Debtor's 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, manufacturer's 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 property described above and any other collateral fitting within any of the foregoing classifications hereafter acquired by Debtor. (f) All products and proceeds of the items described in subsections (a) through (e) of this Section 2.1. 2.2 After Acquired Consumer Goods. The Security Interest shall attach to after acquired consumer goods only to the extent permitted by Section 9.204(b) of the Texas Business and Commerce Code (Texas UCC). ARTICLE III DEBTOR'S WARRANTIES Debtor represents and warrants to Secured Party as follows: 3.1 Financing Statements. No financing statement covering the Collateral is or will be on file in any public office, except the financing statements relating to this Security Interest, those described in Exhibit "C", those expressly permitted under the Shareholders Agreement and that certain Contribution and Stock Purchase Agreement (the "Contribution Agreement) dated as of January 1, 1998, by and among Secured Party, Debtor, Barton House, Ltd., a Texas limited partnership, Barton House at Oakwell Farms, Ltd., a Texas limited partnership, Uncommon Care, Inc., a Texas corporation, George R. Bouchard, John H. Trevey, Uncommon Partners, Ltd., a Texas limited partnership and the additional parties listed on Appendix I thereto. In the past five (5) years, Debtor has not used or done business under any name other than its legal name set forth on the first page of this Agreement. 3.2 Ownership. Debtor owns the Collateral free from any setoff, claim, restriction, lien, security interest, or encumbrance except liens for taxes not yet due, the Security Interest and those described in Exhibit "C". 3.3 Fixtures and Accessions. 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. In such case of the Collateral's being or becoming affixed, the Deed of Trust (Security Agreement, Assignment of Leases and Rents, and Financing Statement) executed by Debtor shall cover such fixtures. 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 Accuracy of Financial Statements. All representations and warrants made by Debtor in the Contribution Agreement with respect to its financial data are true in all material respects. 3.6 Power and Authority. Debtor has full power and authority to make this Agreement. 2 3.7 Principal Place of Business. Debtor's principal place of business and chief executive office is at Debtor's address stated above in Austin, Travis County, Texas, and such address is also where Debtor keeps its books and records. 3.8 Location of Collateral. All of Debtor's inventory and equipment is located at the real properties described in Exhibit "B" attached hereto and incorporated herein by reference or at its principal place of business. Debtor has exclusive possession and control of its inventory and equipment. None of Debtor's inventory or equipment is evidenced by a document (as defined in the Texas UCC). All instruments, chattel paper, securities, and certificates of title comprising any part of the Collateral have been delivered to Secured Party. Before Debtor shall acquire additional inventory and equipment subject to this Agreement and store or use such property at a location other than the real properties described in Exhibit "B" or remove existing inventory and equipment to a location other than the real properties described in Exhibit "B", Debtor shall first notify Lender of such location and comply with Section 4.7 hereof. 3.9 Perfection. Upon the filing of the UCC financing statements with the Office of the Texas Secretary of State and in the offices of the County Clerks of Bexar, Fort Bend and Travis Counties, Texas, and upon Secured Party's obtaining possession of all Debtor's documents, instruments, chattel paper, securities, and certificates of title, and upon Secured Party's obtaining control of Debtor's Investment Property, the Security Interest will constitute a valid and perfected lien upon and security interest in the Collateral, subject only to those liens and security interests expressly permitted under the Shareholders Agreement or Contribution Agreement ("Permitted Security Interests"). In the event another secured party has possession of Debtor's assets for perfection purposes, such secured party's possession shall be deemed possession on behalf of Secured Party to the extent of Secured Party's subordinate security interest, and when possession is no longer required for any Permitted Security Interest, then possession shall be transferred to Secured Party. 3.10 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, 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 DEBTOR'S COVENANTS Debtor covenants and agrees that: 4.1 Indebtedness and This Agreement. Debtor shall pay 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 and shall have the right to grant such security interest. Debtor shall defend the Collateral against all claims and demands of all persons, other than persons holding a Permitted Security Interest, 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, Security Interest and the Permitted Security Interests. 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 3 Secured Party. All policies of insurance shall provide for written notice to Secured Party at least 10 days prior to cancellation. Risk of loss or damage is Debtor's to the extent of any deficiency in any effective insurance coverage. Secured Party is appointed Debtor's 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 Party's 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 attorney's fees and legal expenses, feed, rent, storage costs, and expenses of sales. Whether Collateral is or is not in Secured Party's possession, and without any obligation to do so and without waiving Debtor's 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 Debtor's business as soon as available, and any information with respect to the Collateral reasonably requested by Secured Party; (ii) allow Secured Party to inspect the Collateral, at any reasonable 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 reasonably 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. Secured Party's rights hereunder shall be subordinate to and not interfere with persons holding a Permitted Security Interest. 4.7 Additional Documents. Debtor shall sign any papers furnished by Secured Party which are necessary in the reasonable 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 Party's 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, will preserve the priority of all security therefor, and will deliver to Secured Party the original certificates of title on all motor vehicles included in the Collateral. Secured Party shall have no duty to preserve such liability or security, but may do so at the expense of Debtor, without waiving Debtor's 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. During the continuance of an Event of 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. During the continuance of an Event of Default under this Agreement, 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 4 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 paper. 4.13 Disposition of Collateral. 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. No Collateral may be sold, leased, manufactured, processed, or otherwise disposed of by Debtor in any manner without the prior written consent of Secured Party, except inventory sold, leased manufactured, processed, or consumed in the ordinary course of business. 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. Debtor will not permit any of the Collateral to be removed from the locations specified herein or between locations without the written consent of Secured Party. 5 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 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 or any change in its corporate structure. 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. Except as otherwise provided in this Agreement or by law, 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, 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 6 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 5.1 General. Secured Party before 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; 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; release Collateral in its possession to any Debtor temporarily or otherwise; 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; and at any time transfer any of the Collateral or evidence thereof into its own name of that of its nominee. Secured Party, during the continuance of an Event of Default without liability to Debtor, may: (a) require Debtor to give possession or control of any Collateral to Secured Party; (b) take control of proceeds; (c) require additional collateral; (d) 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; and (e) 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 after thirty (30) days' written notice to Debtor ("Events of Default"): (a) default in the timely payment of any part of the Indebtedness or in performance or observance of the terms and conditions herein or the Loan Agreement between Debtor and Secured Party; 7 (b) any warranty, representation, or statement made or furnished to Secured Party by Debtor proves to have been false in any material respect when made or furnished; (c) acceleration of the maturity of debt of Debtor to any other person; (d) sale, encumbrance, or transfer which is not permitted by the Contribution Agreement or the Shareholders Agreeement; or loss, theft, destruction which is not covered by Debtor's insurance, of any Collateral in violation hereof, or substantial damage to any Collateral; (e) 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; (f) levy on, seizure, or attachment of any property of Debtor in excess of $50,000; or (g) a judgment against Debtor in excess of $250,000 becomes final and is not covered by Debtor's insurance. 6.2 Remedies of Secured Party Upon Default. When an Event of Default occurs, and at any time thereafter so long as the Event of Default is not cured, Secured Party without notice or demand, except as otherwise provided herein, 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 8 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. 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 Texas Uniform Commercial Code [Texas Business and Commerce Code ' 1.01, et seq. ("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. 9 EXECUTED this 16th day of March, 1998. DEBTOR: BARTON ACQUISITION, INC., a Texas corporation By: /s/ John Trevey Name: John Trevey Title: CEO SECURED PARTY: AMERICAN PHYSICIANS SERVICE GROUP, INC., a Texas corporation By: /s/ Duane K. Boyd, Jr. Name: Duane K. Boyd, Jr. Title: Senior VP 10 EXHIBIT "A" List of Debtor's Assets (a) all equipment, fixtures, furnishings, inventory, building materials, and articles of personal property (the "Personalty") now or hereafter owned by Debtor, including but not limited to the Personalty attached to or used in or on the Land or in or about the Improvements more fully described in the Exhibit B hereafter or that are necessary or useful for the complete and comfortable use and occupancy of the Improvements for the purposes for which they were or are to be attached, placed, erected, constructed or developed, or which Personalty is or may be used in or related to the planning, development, financing or operation of the Improvements, and all renewals of or replacements or substitutions for any of the foregoing, whether or not the same are or shall be attached to the Land or Improvements; (b) all water and water rights, timber, crops, and mineral interests pertaining to the Land; (c) all plans and specifications for the Improvements and for any future development of or construction on the Land; (d) all accounts, deposits (including tenant or resident security deposits), patient records, personnel files, provider agreements, records of inspections by governmental agencies, receivables from Medicare, Medicaid, the State of Texas, any health insurance carrier, or any governmental agency, bank accounts, funds, instruments, notes or chattel paper arising from or by virtue of any transactions or operations related to the Land, the Improvements, the Personalty, the Leases, or the Rents; (e) all Debtor's rights (but not Debtor's obligations) under any documents, contracts, contract rights, accounts, commitments, construction contracts (and all payment and performance bonds, statutory or otherwise, issued by any surety in connection with any such construction contracts, and the proceeds of such bonds), architectural contracts, engineering contracts, and general intangibles (including without limitation trademarks, trade names, and symbols) arising from or by virtue of any transactions related to the Land, the Improvements, or the Personalty; (f) all permits, licenses, franchises, certificates, accreditation, registrations and authorizations of all federal, state and local governmental or regulatory authority, and other rights and privileges obtained in connection with the Land, the Improvements, or the Personalty and the operation thereof; (g) all development rights, utility commitments, water and wastewater taps, living unit equivalents, capital improvement project contracts, letters of credit, and utility construction agreements with any governmental authority, including municipal utility districts, or with any utility companies (and all refunds and reimbursements thereunder) relating to the Land or the Improvements; (h) all proceeds arising from or by virtue of the sale, lease or other disposition of the Land, the Improvements, or the Personalty; (i) all proceeds (including premium refunds) of each policy of insurance relating to the Land, the Improvements, or the Personalty; (j) all proceeds from the taking of any of the Land, the Improvements, the Personalty, or any rights appurtenant thereto by right of eminent domain or by private or other purchase in lieu thereof, including change of grade of streets, curb cuts or other rights of access, for any public or quasi-public use under any law; (k) all right, title, and interest of Debtor in and to all streets, roads, public places, easements, and rights-of-way, existing or proposed, public or private, adjacent to or used in connection with, belonging, or pertaining to the Land; (l) all of Debtor's rights (but not Debtor's obligations) under existing and future residency or occupancy agreements, licenses, leases, including subleases, concession agreements, management agreements and any and all extensions, renewals, modifications, and replacements of such agreements, upon or of any part of the Land or Improvements, including cash or securities deposited and guaranties to secure performance by the tenants of their obligations thereunder (the "Leases"); (m) all of the rents, receipts, royalties, bonuses, issues, profits, revenues, or other benefits of the Land, the Improvements, the Leases, or the Personalty, including those now due or to become due by virtue of any Lease or other agreement for the occupancy or use of all or any part of the Land or Improvements (the "Rents"); (n) all consumer goods located in, on, or about the Land or the Improvements or used in connection with the use or operation thereof; however, neither the term "consumer goods" nor the term "Personalty" includes clothing, furniture, appliances, linens, china, crockery, kitchenware, inventory, medicines, drugs or personal effects used primarily for the operation of the Property; (o) all other interests of every kind and character that Debtor now has or at any time hereafter acquires in and to the Land, Improvements, Personalty, Leases, and Rents and all property that is used or useful in connection therewith, including rights of ingress and egress and all reversionary rights or interests of Debtor with respect to such property and all of Debtor's rights (but not Debtor's obligations) under any covenants, conditions, and restrictions for the Land, as the same may be amended from time to time, including Debtor's rights, title, and interests thereunder as declarant or developer, if applicable; and (p) all products and proceeds of the Personalty. EXHIBIT "B" Description of the Land and Improvements Tract 1: A 0.8800 acre tract now known as Lot 4, Block B, New City Block 17305, OAKWELL FARMS, UNIT 7B, PLANNED UNIT DEVELOPMENT, City of San Antonio, Bexar County, Texas, according to plat thereof recorded in Volume 9535, Page 203, Deed and Plat Records of Bexar County, Texas. Tract 2: All that certain tract or parcel of land, containing 1.6756 acres, more or less, being out of the Elijah Alcorn Survey, Abstract No. l, situated in Fort Bend County, Texas. Said 1.6756 acres being all of Commercial Reserve "F" and part of Commercial Reserve "D" of the Replat of the Amending Plat for Edgewater, Section Two (2), according to the map or plat thereof recorded in Slide No. 1353/A of the Plat Records of Fort Bend County, Texas. Said 1.6756 acres being more particularly described by metes and bounds in Exhibit "A-1" attached hereto and made a part hereof; together with those nonexclusive easement rights described in that Ingress and Egress Easement, recorded in Volume 2364, Page 1480 of the County Clerk Official Records of Fort Bend County, Texas, and those easement rights reserved in that deed recorded in Volume 2364, Page 1452 of the County Clerk Official Records of Fort Bend County, Texas. Tract 3: A tract or parcel of land being 0.2008 acres, more or less, located in the Elijah Alcorn League Survey, Abstract No. l, being out of Commercial Reserve "D" of the Replat of the Amending Plat for Edgewater, Section Two (2), according to the map or plat thereof recorded in Slide No. 1353/A of the Plat Records of Fort Bend County, Texas. Said 0.2008 acres being more particularly described by metes and bounds in Exhibit "B-1" attached hereto and made a part hereof. Tract 4: Lot 2A, Block "B", of RESUBDIVISION OF LOT 2, BLOCK "B" MILWOOD SECTION SIX, a subdivision in Travis County, Texas, according to the map or plat, of record in Volume 95, Page 231, of the Plat Records of Travis County, Texas. Tract 5: Lot 2B, Block "B", of RESUBDIVISION OF LOT 2, BLOCK "B" MILWOOD SECTION SIX, a subdivision in Travis County, Texas, according to the map or plat, of record in Volume 95, Page 231, of the Plat Records of Travis County, Texas. All other real property and improvements now owned or hereafter acquired by Debtor. EXHIBIT "C" List of Prior Security Interests 1. Financing Statement No. 96-00239701 filed on December 4, 1996 with the Texas Secretary of State with Barton House At Oakwell Farms, Ltd. as Debtor and Bank One, Texas, N.A. as Secured Party. 2. Financing Statement No. 95-00212294 filed on November 1, 1995 with the Texas Secretary of State with Barton House, LTD as Debtor and Bank One, Texas, N.A. as Secured Party. 3. Financing Statement No. 96-00135820 filed on July 12, 1996 with the Texas Secretary of State with Barton House, LTD as Debtor and Small Business Administration as Secured Party. 4. Financing Statement No. 97-00192192 filed on September 15, 1997 with the Texas Secretary of State with Barton House, LTD as Debtor and Bank One, Texas, N.A. as Secured Party. 5. Financing Statement No. 1737 filed on September 12, 1997 in the UCC Records of Travis County, Texas with Barton House, LTD as Debtor and Bank One Texas, NA as Secured Party. 6. All financing statements filed with any county with respect to any of the promissory notes identified on Schedule 1.6 to the Contribution Agreement. EX-10 16 PARTICIPATION AGREEMENT Exhibit 10.52 PARTICIPATION AGREEMENT This PARTICIPATION AGREEMENT (this "Agreement") is made as of this 16th day of March, 1998, by and between American Physicians Service Group, Inc. , a Texas corporation ("Seller"), and the undersigned under the heading, "Purchaser" ("Purchaser"), (Seller and each Purchaser are referred to herein separately as a "Participant" and collectively, as "Participants"). W I T N E S S E T H : WHEREAS, Seller has made or will make a line of credit loan in the maximum principal amount of Two Million Four Hundred Thousand and No/100 DOLLARS ($2,400,000) to Barton Acquisition, Inc., a Texas corporation (the "Borrower"), which loan shall be secured by a lien on all Borrower's assets including certain real property located in Bexar, Fort Bend and Travis Counties, Texas, as more fully set forth on Exhibit "A" attached hereto, together with all equipment, fixtures and personal property located thereon (the "Property"); and WHEREAS, in connection with the making of the line of credit loan, Borrower has executed or will execute and deliver the loan documents set forth in the schedule attached hereto, marked Exhibit "B", and hereby made a part hereof (the "Loan Documents"); and WHEREAS, Seller is duly authorized to sell participation shares in loans originated by it and the participation created hereby is eligible for such sale; and WHEREAS, Purchaser further desires to participate in owning the evidences of the Loan and the security therefor, with Seller serving as agent and trustee for Purchaser in certain respects as hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. AGREEMENT FOR PURCHASE OF THE PARTICIPATION. a. By its execution of this Agreement and in consideration of the mutual covenants herein set forth, Purchaser does hereby purchase an undivided interest (the "Participation"), the percentage of which (the "Percentage Interest") shall be calculated as set forth in Section 2 hereof, in (i) all of Seller's loans and other extensions of credit to or for the benefit of Borrower under the Loan Documents (all loans and other extensions of credit are hereinafter referred to as the "Loan"), (ii) all existing and future real and personal property and interests therein securing the Loan, including the Property ("Collateral"), (iii) all existing and future claims against persons liable for the Loan ("Guaranty Claims"). The Participation includes a Percentage Interest in all amounts, other than those amounts, if any, which are to be retained by Seller or otherwise allocated to Purchaser or Seller pursuant to Sections 4, 5 and 13 hereof, which are received by Seller on account of the Loan ("Payments"), whether from (i) Borrower, (ii) the Collateral, (iii) guarantors or others obligated to Seller with respect to the Loan (an "Obligor"), or (iv) any other source, including, without limitation, recovery from litigation without limitation, recovery from any setoff of Borrower's accounts deposited with Seller, proceeds of title insurance claims, other insurance claims, condemnation awards or recovery from litigation. Purchaser acknowledges and understands the liens and security interests against the Collateral are secondary and inferior to other substantial loans to third party lenders. b. PARTICIPATION. Purchaser has advanced to Seller its respective Contribution Percentage, as defined in Section 2 hereof, of funds advanced, or to be advanced, by Seller to Borrower pursuant to the Loan. Seller shall deposit all Contribution Percentages, to the extent not initially advanced under the Loan, into an escrow account with Seller ("Escrow Account"). Seller shall invest the funds in the Escrow Account at its discretion and any interest earned thereon shall be held on each Purchaser's behalf in their respective Contribution Interest. Seller shall, from time to time, pay to Purchaser all amounts in which Purchaser has an interest in the manner herein provided. c. NATURE OF RELATIONSHIP. The relationship between Purchaser and Seller is and shall be that of a purchaser and seller of a property interest, respectively, (i.e., an outright purchase and sale of assets being an assignment of a partial interest in the Loan, the Collateral and the Guaranty Claims) and not a creditor-debtor, partner, or joint venture relationship provided that any documents, monies or other property received, retained or held by Seller for Purchaser shall be held by Seller in trust for Purchaser. d. SERVICING COMPENSATION. Seller shall receive no compensation for servicing the Loan. 2. PERCENTAGE INTEREST; CONTRIBUTION PERCENTAGE; MAXIMUM AMOUNT OF PURCHASER'S COMMITMENT. As used herein, the term "Percentage Interest", when used with respect to any Purchaser, shall mean the percentage by each Purchaser's name as set forth and described in Exhibit "D" attached hereto multiplied by the aggregate amount of principal advanced and outstanding at any particular time. As used herein, the term "Percentage Interest", when used with respect to Seller, shall mean the remaining percentage of eighty-nine and 20/100 percent (89.20%) of the aggregate amount of outstanding principal advanced and outstanding, and from time to time as each such respective Percentage Interest bears at such time to the aggregate principal balance of the Loan then outstanding. As used herein, the term "Contribution Percentage" of Purchaser shall mean the same as the Percentage Interest. 3. FUNDING CRITERIA. a. ESTABLISHMENT OF PARTICIPATION. Upon execution of the Loan Documents, Seller shall deliver to Purchaser a Participation Certificate executed by Seller evidencing Purchaser's contribution to the Loan, in the form attached hereto as Exhibit "C" and hereby made a part hereof. b. DEFAULT BY PURCHASER. Any failure by Purchaser to make any required advance when requested by Seller, shall constitute a default hereunder as of the day on which the payment was to be made by Purchaser. 4. ALLOCATION OF PAYMENTS. Distributions of principal and interest to Purchaser or to the Escrow Account on behalf of Purchaser with respect to its Participation Interest shall be made and payable only out of Payments. Payments shall be applied by Seller to the indebtedness owing by Borrower and distributed to the Participants in the following order: (i) to all Extraordinary Expenses, as hereinafter defined, to the extent thereof; (ii) to liquidated damages and late fees or charges (other than interest and loan fees) owing under the Loan Documents, to the extent thereof; (iii) to loan fees owing under the Loan Documents, to the extent thereof; (iv) to accrued interest, to the extent thereof; and (v) to unpaid principal of the Loan. Such Payments shall be allocated among the Participants on the basis of Sections 5 and 13 hereof. 5. PAYMENTS TO PARTICIPANTS. a. ALLOCATIONS. Subject to Sections 5(b), 5(c) and 13 hereof, each Participant shall be entitled to share in the following payments to the extent and in the manner hereinafter set forth: 2 (i) Extraordinary Expenses, to the extent advanced by the Participants, shall be reimbursed to the Participants on the basis which the amount of Extraordinary Expenses advanced by each Participant bears to the total Extraordinary Expenses advanced by all Participants. (ii) All liquidated damages, late fees or charges and other ancillary income (other than as provided herein) shall be paid solely to Seller; (iii) All loan, extension, prepayment charges and reconveyance fees received from Borrower shall be distributed to the Participants in accordance with their respective Percentage Interests; (iv) All interest payments received from Borrower, excluding interest paid at the "Default Interest Rate," as defined in the Note, shall be paid first to each Participant, or the Escrow Account at Seller's election, on the basis of such Participant's respective Percentage Interest, to the extent the interest accrued at the rate set forth in the Note on amounts advanced by such Participant from the date that such amounts were disbursed to Borrower; and interest payments received by Seller from Borrower at the Default Interest Rate shall be paid to the Participants, or the Escrow Account at Seller's election, on the basis of their Percentage Interests, net of a 25 basis point servicing override to be allocated to Seller and paid to Seller after the Participants have received their respective allocations of Default Interest Rate interest payment due and payable under the Note in accordance with the foregoing Default Interest Rate distribution; and (v) All Payments in respect of and applied to principal of the Loan received by Seller from Borrower shall be paid to the Escrow Account on behalf of each Participant in accordance with their respective Percentage Interests. b. RIGHTS TO FUNDS IN THE EVENT OF DEFAULT BY PURCHASER. Notwithstanding the provisions of Section 5(a) hereof, following any default by Purchaser and in the event Payments are insufficient to pay the Participant's their respective Percentage Interests under both Sections 5(a)(iv) and 5(a)(v), each Participant, or the Escrow Account on behalf of each Participant, shall receive its prorata share, and only to the extent Seller accepts, in its sole discretion, partial Payments. c. EFFECTIVE DATE; RETURNED FUNDS. For purposes of the calculations of amounts due to or from Purchaser, Payments allocated to principal and interest of the Loan shall be apportioned between the Participants as of the time such Payments are received by Seller. If any Payment received by Seller and distributed or credited to Purchaser is later returned or repaid by Seller to Borrower or its representative or successor in interest because of the legal obligation of Seller to do so, Purchaser shall, upon notice by Seller, immediately pay to Seller Purchaser's pro rata share of such Payment so returned or repaid. All funds held in the Escrow Account shall be distributed in a time and manner as reasonably determined by Seller, but in no event will Payments in respect of interest or principal payments be held in the Escrow Account for more than sixty (60) days after the Termination Date. All interest or dividends earned on the Escrow Account shall be distributed sixty (60) days after each quarterly Payment under the Loan by Seller to Purchaser in accordance with their respective Percentage Interest. d. FORM OF PAYMENTS TO PURCHASER. Amounts payable to Purchaser hereunder shall be made by Seller to the account of Purchaser. Payments or credits in accordance with Sections 5(a), 5(b) and 13 hereof shall be made by check, and, made on or before the 60th calendar day after Seller receives such amounts. 3 6. ACCESS TO INFORMATION; INDEPENDENT INVESTIGATION. Seller shall make its files relating to Borrower available for review by Purchaser. Purchaser acknowledges that prior to its execution hereof it will have independently, and without reliance upon any representations of Seller, and based on (i) the financial information referred to or set forth in the Loan Documents, (ii) various information provided to Purchaser by Borrower, (iii) its prior experience and communications with Borrower and the Collateral, and (iv) such other financial statements, documents and information as Purchaser deemed appropriate, made and relied upon its own credit analysis and judgment to execute this Agreement. Seller shall use its best efforts to give prompt notice to Purchaser as to any default of which it has actual knowledge under the terms of any Loan Document, or of any other matter which materially affects the interest of Purchaser in the Loan. 7. DOCUMENTS AND OTHER AGREEMENTS REGARDING ADMINISTRATION OF THE LOAN. To facilitate Seller's administration and enforcement of the Loan on its own behalf, and as agent and as applicable, trustee for Purchaser, and to induce Seller to enter into this Agreement, Purchaser acknowledges and agrees that it is in Purchaser's best interest that (i) Seller hold for itself, and as trustee for Purchaser, all executed original copies of the Loan Documents, at its office at 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746; and (ii) Seller shall not be required to segregate from its own funds Payments allocable to Purchaser hereunder. Upon written notice from Purchaser, Seller will permit Purchaser's agents, at any reasonable time during business hours, to examine the originals and/or copies of the Loan Documents which are in Seller's possession and Seller's books and records relating to the Loan; Seller will, upon Purchaser's request, and at Purchaser's expense, furnish to Purchaser copies of such documents and agreements relating to the Loan as Seller may have in its possession; and Seller will use its best efforts, at no expense to Seller, to obtain such other documents and information from or concerning Borrower as Purchaser may reasonably request. 8. SELLER'S REPRESENTATIONS, DUTY OF CARE AND RESPONSIBILITY TO PURCHASER. a. LIMITED WARRANTIES AND REPRESENTATIONS. Seller hereby represents and warrants to Purchaser that, at the time of closing the Loan, (i) to the best of Seller's knowledge, information and belief, no condition or fact exists which would permit Seller to accelerate the Loan under the Loan Documents and (ii) the Loan conforms in all respects to the requirements of the Loan Documents. Notwithstanding the foregoing, to the extent of its Contribution Interest, each party accepts the full risk of non-payment of the Loan by Borrower. Seller shall not be responsible for the performance or observance by Borrower or any Obligor of any of the terms, covenants or conditions of the Loan Documents or for the inspection or policing of the Collateral. Purchaser specifically acknowledges that Seller has made no warranty or representation to Purchaser with respect to the collectibility of the Loan or with respect to the solvency, financial condition or future financial condition of Borrower or any Obligor or the genuineness, existence or value of the Collateral. b. DUTY OF CARE. Seller shall manage and service the Loan and Escrow Account in accordance with prudent practices, modified from time to time as it deems appropriate under the circumstances on its behalf and as independent contractor and trustee on behalf of Purchaser, and, except as expressly set forth in Section 10 hereof, Seller shall be entitled to take all actions with respect to the Loan as if there were no other Participant and as if Seller were solely involved in making the Loan. Seller may act upon any notice, consent, certificate, cable, telex or other instrument or writing believed by Seller to be genuine, and Seller may consult with legal counsel, independent accountants, appraisers and other experts selected by Seller, and provided that Seller has not breached any duty of care as set forth in this Section 8(b), Seller shall not be liable for any action taken or omitted to be taken in good faith by Seller in accordance with the advice of such counsel, accountants, appraisers or experts. Seller shall not be liable to Purchaser under any circumstances except for actual losses, if any, suffered by Purchaser hereunder which are proximately caused either by Seller's negligence, gross negligence, willful misconduct or bad faith or by Seller's violation of the provisions of Section 10 hereof. 4 9. WAIVERS AND RELEASE OF RIGHTS UNDER LOAN DOCUMENTS. Subject to the affirmative obligations imposed on Seller in Section 10 hereof, Seller reserves the right, in its sole discretion, at any time or times hereafter, upon reasonable prior notice to Purchaser, (i) to release any of the Collateral in a manner which would not materially and adversely impair the value of the Loan, (ii) to modify, waive or release any of the terms of the Loan Documents, but only if such modification, waiver or release does not materially and adversely increase risks relating to the Loan, (iii) to exercise or refrain from exercising any powers or rights which Seller may have as a matter of law, or under, or in respect of the Loan Documents, including, without limitation, the right to enforce the obligations of Borrower or any Obligor, and (v) to take any other action allowed under the Loan Documents or applicable law; provided, however, that Seller shall not have the power or authority hereunder, without the prior written consent of Purchaser, to waive any rights against or release the Obligors. Seller shall not settle any judicial proceeding between it and any Borrower without obtaining the prior consent of Purchaser, which consent shall not be unreasonably withheld or delayed. 10. RESTRICTIONS ON CHANGES IN FUNDAMENTAL TERMS OF LOAN DOCUMENTS. Unless previously accomplished, Seller shall at closing on the Loan execute and deliver and cause Borrower and each Obligor to execute and deliver those Loan Documents required to be filed, recorded or otherwise perfected in such manner as shall be necessary and appropriate to fully secure the real and personal property securing the Loan, the rights, privileges, powers and benefits which such Loan Documents are intended to confer upon Seller and Purchaser. In addition, Seller shall not, without the written consent of Purchaser, which consent shall not be unreasonably withheld or delayed, take any of the following actions: (i) waive any default by Borrower involving the payment of money to Seller pursuant to the Loan Documents; (ii) extend the time of payment of any of Borrower's obligations with respect to the Loan for more than 60 days after any due date; (iii) agree to any change in the rate of interest payable by Borrower with respect to the Loan (except for reductions which are contemplated by the Loan Documents); (iv) release any liens or security interests which secure the Loan and relate to equipment, fixtures or real estate if such release will have a materially adverse impact on the Collateral; or (v) terminate any financing statements filed with respect to any of the Collateral. 11. EXPENSES. Except as set forth herein, all normal costs and expenses of monitoring and collecting the Loan shall be borne by Seller. Upon demand by Seller, Purchaser shall pay its share of all Extraordinary Expenses, as hereinafter defined, incurred by Seller in connection with the Loan based on its Percentage Interest. The term "Extraordinary Expenses" means all costs, expenses (including, without limitation, attorneys' fees and legal expenses), taxes, costs and expenses of appeals, and out-of-pocket advances (not including ordinary overhead expenses or salary expenses for Seller's clerical or supervisory personnel) which are incurred by Seller at any time or times hereafter, in connection with (i) the collection or enforcement of the Loan; (ii) the acquisition and preservation of the Collateral; (iii) the collection or enforcement of Borrower's liabilities to Seller, or the liabilities of any Obligor liable with respect to the Loan; (iv) the operation, sale, disposition or other realization upon or the recovery of possession of the Collateral (including the collection of loss proceeds for destruction thereof and collection of awards for the condemnation thereof); (v) the filing and prosecution of a complaint with respect to any of the above matters; or (vi) the defense of any claim, actual or threatened by Borrower, a receiver or trustee in bankruptcy for Borrower, any Obligor or third party, for, or on account of, or with respect to the Loan, or the Loan Documents, whether to recover damages for business interference, for liabilities for debts of Borrower, including, but not limited to, taxes, for alleged preferences or fraudulent conveyances or transfers received or alleged to have been received from Borrower or any such Obligor as a result of the Loan or in connection with any Payments, otherwise, and shall include the amount of any recovery from Seller in such litigation or proceeding, whether by settlement or pursuant to a judgment (except for any such recovery resulting from the gross negligence or willful misconduct of Seller about which Purchaser had no actual knowledge or, if known by Purchaser, about which Purchaser objected by giving written notice to Seller). 5 12. SELLER'S BOOKS AND RECORDS CORRECT. Seller's books and records and all entries thereon, and statement received by Purchaser from Seller with respect to the Loan, will at all times (i) evidence both Purchaser's interest and Seller's interest in the Loan; and, (ii) identify the same as such. 13. DEFAULT BY BORROWER. a. In the event default occurs in the payment to Seller of principal or interest on the Loan, Seller at its option, but without obligation to do so, may re-purchase any or all Purchasers' interests in the Loan. b. In the event Seller is unable to collect any sums when due on the Loan, after exercising reasonable efforts to do so, Seller shall give notice thereof to Purchaser, and, Seller may, if it determines it is in the best interest of the Participants, proceed to foreclose upon the Collateral securing the Loan by appropriate proceedings, or sale in lieu of foreclosure. Seller shall in no way be required to take title to the Collateral in its own name. If Seller determines necessary, Seller may create a separate entity as an Extraordinary Expense to take title to the Collateral. c. If Seller or another designated entity shall acquire title to any of the Property or Collateral covered by the Loan Documents after, or in lieu of, foreclosure, all monies received or collected by it (including, but not limited to, proceeds of title insurance claims) from the operation of or sale of such property shall be applied in the following order of priority: (i) First, to the reimbursement of Extraordinary Expenses to the extent advanced by the Participants on the basis of their respective Percentage Interests; (ii) Second, to the payment of any reconveyance fees, prepayment penalties on the basis set forth in clause (iii) of Section 5(a) hereof; (iii) Third, to the payment of the entire amount then due and payable under the Loan Documents for accrued interest in accordance with the terms thereof, on the basis and in the manner required by clause (iv) of Section 5(a) hereof (subject to the provisions of Section 5(b) hereof); (iv) Fourth, to the payment of the outstanding principal balance of the Loan in the manner required by clause (v) of Section 5(a) hereof (subject to the provisions of Section 5(b) hereof); (v) Fifth, to the payment of all accrued but unpaid liquidated damages and late fees or charges (other than interest and loan fees) which shall be paid solely to Seller; and (vi) Sixth, any surplus shall be paid to Seller and Purchaser in accordance with their respective Percentage Interests provided that no Participant which is then in default of its obligations hereunder shall in any event receive more than the unpaid principal balance it has advanced in respect of the Loan. d. In the event any or all of the Collateral encumbered by the Loan Documents, including the Property, are acquired by foreclosure, or by deed in lieu of foreclosure, at a time when both Seller and Purchaser have an interest in the Loan, they shall have an undivided interest in such Collateral equal to the amount of their then respective Percentage Interests as tenants in common. 6 e. In the event Seller shall purchase the interest of Purchaser pursuant to the provisions of this Section 13, the purchase price shall be equal to the sum of: (i) all accrued but unpaid interest in respect of principal advanced by the selling party to which such party is entitled and such other amounts accrued but unpaid to the selling party pursuant to Section 5 hereof through the date of such purchase, and, (ii) all principal advanced by the selling party and subtracting from the foregoing sum unreimbursed Extraordinary Expenses advanced by the purchasing party. 14. SHARING OF SETOFFS AND COLLATERAL. Neither Seller nor Purchaser shall set-off against the amount of its Percentage Interest or other claims against Borrower, any of Borrower's accounts or funds now or hereafter received. If Purchaser shall receive possession of any of the Collateral for any reason whatsoever, such Collateral shall be held by Purchaser as Seller's agent and shall, on demand, be delivered to Seller. Any security interest granted by Borrower to Purchaser, or Seller at any time or times hereafter in all or any part of the Collateral described in the Loan Documents shall be subordinate in all respects to the interest of Purchaser and Seller created by this Agreement or the Loan Documents, regardless of the actual date or order of filing of any financing statements or other means of perfection under applicable law, or the date of any loan or advance by Seller under the Loan Documents, and if Seller or Purchaser shall at any time hereafter hold any lien or security interest other than the Collateral, then neither shall not commence or take any action to enforce that lien or security interest without giving the other thirty (30) days prior written notice. Seller and Purchaser each hereby appoints the other as their agent for the purpose of perfecting a security interest in any of the Collateral which may at any time come into the possession of Seller or Purchaser. 15. PURCHASER'S COMPLIANCE WITH LAW; RESALE OR ASSIGNMENT OF PARTICIPATION; SALE OF ADDITIONAL PARTICIPATIONS. Purchaser hereby warrants and represents to Seller that (i) Purchaser's execution and delivery of this Agreement and purchase of the Participation does not constitute a violation by Purchaser of any agreement, law, statute, decree or decisions (including any legal lending limits) which is binding on Purchaser; and (ii) Purchaser is acquiring the Participation for its own account and will not sell, pledge, encumber or assign its Participation, or any part thereof, to any person without Seller's prior written consent. Purchaser may, without further consent of Seller, and without releasing Purchaser from liability hereunder, assign its Participation to a parent or a wholly owned subsidiary of Purchaser. Any prohibited transfer of an interest in the Participation shall be void if attempted without Seller's written consent. Purchaser may at any time, and from time to time, enter into one or more agreements with other financial institutions to reparticipate its Participation; provided, however, that (i) any such reparticipation shall not be deemed to be an assignment or transfer of Purchaser's Participation to such financial institution, (ii) any such financial institution shall not be and shall not be deemed to be a party hereto or a third party beneficiary hereof and Seller shall have no duty or liability to such financial institution whatsoever, (iii) neither Seller's nor Purchaser's duties hereunder may be assigned or transferred hereunder, (iv) such reparticipation shall not in any manner whatsoever relieve Purchaser from any of its obligations or liabilities hereunder, (v) such reparticipation shall not involved more than one financial institution, which shall have previously engaged in the purchase or sale of participations and to all of which full, true and complete information concerning the Loan and Borrower shall have been provided, and (vi) Purchaser and each of its participants shall each have equal shares with one another. Seller may participate, reparticipate, sell, pledge or assign its interest in the Loan or its Participation to any other person without Purchaser's consent. A Participation shall not be, and shall not be construed to be, a "security" under any federal or state securities law. 16. CERTAIN REPRESENTATIONS AND WARRANTIES. a. By Seller. Seller represents and warrants that it is duly organized and validly existing as a Texas corporation; that it has all power and authority and has taken all actions necessary to execute and deliver this 7 Agreement, the Loan Documents, and each document required hereunder; and that this Agreement, the Loan Documents and each document required hereunder; and that this Agreement, the Loan Documents and each document required hereunder, when executed and delivered by it, shall constitute the legal, valid and binding act of Seller, enforceable, each in accordance with its respective terms, except as limited by bankruptcy, insolvency, moratorium, reorganization and other similar laws affecting the rights of creditors or depositors of Seller generally, and by the exercise of judicial discretion in accordance with general principles of equity. b. BY PURCHASER. Purchaser represents and warrants that is has all power and authority and has taken all actions necessary to execute and deliver this Agreement and each document required hereunder, when executed and delivered by it, shall constitute the legal, valid and binding act of Purchaser, enforceable, each in accordance with its respective terms, except as limited by bankruptcy, insolvency, moratorium, reorganization and other similar laws affecting the rights of creditors or depositors of Purchaser generally, and by the exercise of judicial discretion in accordance with general principles of equity. 17. DEFAULTS. a. BY SELLER. It shall be an event of default on the part of Seller if: (i) Seller has failed to observe and perform each and every one of the terms, covenants, promises and agreements on its part to be observed and performed under this Agreement; or (ii) any representation or warranty made by Seller shall prove untrue in any material respect; or (iii) there shall be a filing by or against Seller of a petition in bankruptcy or insolvency or reorganization or the appointment of a receiver or trustee due to insolvency, or the making by Seller of any assignment for the benefit of creditors, or the filing of a petition or arrangement by Seller, or in the event of any similar act or occurrence, Seller admits in writing its inability to pay its debts as they mature; or (iv) Seller shall fail to promptly remit pursuant to Sections 4, 5 and 13 all sums payable hereunder. b. BY PURCHASER. It shall be an event of default on the part of Purchaser if: (i) Purchaser shall have failed to observe and perform each and every one of the terms, covenants, promises and agreements on its part to be observed and performed under this Agreement; or (ii) any representation or warranty made by Purchaser shall prove untrue in any material respect; or (iii) there shall be a filing by or against Purchaser of a petition in bankruptcy or insolvency or reorganization or the appointment of a receiver or trustee due to insolvency, or the making by Purchaser of an assignment for the benefit of creditors, or the filing of a petition or arrangement by Purchaser, or in the event of any similar act or occurrence, Purchaser admits in writing its inability to pay its debts as they mature; or (iv) Purchaser shall fail to promptly remit pursuant to Sections 3(a) or 11 all sums payable hereunder. 18. REMEDIES. a. BY PURCHASER. Upon the occurrence of any event of default by Seller, Purchaser shall give Seller notice thereof and Seller shall have (A) with respect to a default arising under clause (i) or (ii) of Section 17(a) hereof thirty (30) days within which to cure such default or within which to commence such judicial or other appropriate action as will efficiently and effectively remedy such default; and (B) with respect to a default arising under clause (iv) of Section 17(a) hereof ten (10) days within which to cure such default; and (C) with respect to a default arising under clause (iii) of Section 17(a) hereof, sixty (60) days within which to obtain the dismissal or discharge of any such proceeding. Upon failure by Seller to timely cure any event of default by it, any and all Purchasers shall have the option to: (i) purchase the interest of Seller at the purchase price set forth in Section 13(e) in their prorata share; (ii) with respect to (C) of this Section 18(a) above, after expiration of the sixty day period, any and all Purchasers shall automatically succeed to all rights, titles, status and responsibilities which Seller may have regarding the holding and servicing of the Loan, may exercise all of the powers 8 hereinabove granted to Seller, have the option to designate any one Purchaser on behalf of all Purchasers or any person or firm in its discretion to exercise such powers on behalf of all Purchasers and, in such event, the Loan and all books and records thereof shall be delivered to a Purchaser or its designee, as applicable, together with necessary or proper assignments, transfers and documents of authority; and/or (iii) exercise any and all of the remedies to which Purchaser may be entitled at law or equity. Seller hereby indemnifies Purchaser from any and all loss, damage or expenses (including, but not limited to reasonable attorneys' fees) which Purchaser may sustain or incur by reason of or in consequence of the exercise of its remedies upon any event of default by Seller pursuant to this Section 18(a) other than direct costs incurred in connection with any purchase of Seller's interest. b. BY SELLER. Upon the occurrence of any event of default by Purchaser, Seller shall give Purchaser notice thereof and Purchaser shall have (A) with respect to a default arising under clause (i) or (ii) of Section 17(b) hereof thirty (30) days within which to cure such default or within which to commence such judicial or other appropriate action as will efficiently and effectively remedy such default; and (B) with respect to a default arising under clause (iv) of Section 17(b) hereof ten (10) days within which to cure such default; and (C) with respect to a default arising under clause (iii) of Section 17(b) hereof, sixty (60) days within which to obtain the dismissal or discharge of any such proceeding. Upon failure by Purchaser to timely cure any event of default by it, Seller shall have the option to: (i) purchase the interest of Purchaser at the purchase price set forth in Section 13(e); (ii) with respect to (C) of this Section 18(b) above, after expiration of the sixty day period, Seller shall automatically succeed to all rights, titles, status and responsibilities which Purchaser may have regarding the holding and servicing of the Loan, may exercise all of the powers hereinabove granted to Purchaser, have the option to designate itself or any person or firm in its discretion to exercise such powers and, in such event, the Loan and all books and records thereof shall be delivered to Seller or its designee, as applicable, together with necessary or proper assignments, transfers and documents of authority; and/or (iii) exercise any and all of the remedies to which Seller may be entitled at law or equity. Purchaser hereby indemnifies Seller from any and all loss, damage or expenses (including, but not limited to reasonable attorneys' fees) which Seller may sustain or incur by reason of or in consequence of the exercise of its remedies upon any event of default by Purchaser pursuant to this Section 18(b) other than direct costs incurred in connection with any purchase of Purchaser's interest. 19. NO WAIVER OR AMENDMENT UNLESS IN WRITING. No waiver or modification of any provision of this Agreement nor any termination of this Agreement shall be effective unless in writing and signed by the party against which the waiver, modification or termination is sought to be enforced, nor shall any waiver be applicable except in the specific instance for which it is given. 20. NOTICE. All notices, demands, requests, consents, approvals or other communications (collectively, "Notices") desired or required to be given under this Agreement shall be in writing, and, any law or statute to the contrary notwithstanding, shall be effective for any purpose if given or served by prepaid certified or registered mail, return receipt requested, addressed as follows. If to Purchaser to: to the address shown on the signature page hereto. If to Seller, to: American Physicians Service Group, Inc., 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746, Attention: Duane Boyd. All Notices shall be deemed given or served on the earlier to occur of actual receipt or the second business day after being deposited in the United States mail, postage prepaid in the manner previously specified. Any party to this Agreement may change the address to which Notice shall be delivered to him or it and his or its representatives by notice in accordance with this Section 20. As used in this Agreement, the term "business day" shall mean any day on which Seller is open for business with the general public. 9 21. DESCRIPTIVE HEADINGS. The descriptive headings of the several Articles and Sections of this Agreement are inserted for convenience only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. 22. EXPENSES OF ENFORCEMENT. In the event this Agreement is placed in the hands of an attorney for enforcement, the prevailing party shall reimburse the non-prevailing party for all reasonable expenses incurred thereby, including reasonable costs and attorneys' fees. 23. ENTIRE UNDERSTANDING; COUNTERPARTS. This Agreement constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and may be executed by one or more of the parties in several counterparts, each of which shall be deemed an original with respect to the party so signing, but all of which together shall constitute one and the same instrument. 24. SUCCESSORS; GOVERNING LAW. This Agreement shall be binding upon and shall inure to the benefit of the legal representatives, successors and assigns of the respective parties hereto and shall be governed by and interpreted in accordance with the law of the State of Texas. 10 SIGNATURE PAGES PARTICIPATION AGREEMENT IN WITNESS WHEREOF, the parties have executed this Participation Agreement as of the date first set forth herein. "Seller" AMERICAN PHYSICIANS SERVICE GROUP, INC., a Texas corporation By: Name: Title: "Purchaser" Address for Notice c/o American Physicians Service Group, Inc. /s/ Richard J. Clark 1301 Capital of Texas Hwy. --------------------- Suite C-300 Richard J. Clark Austin, Texas 78746 Address for Notice: DUANE K. BOYD, JR. TRUST c/o American Physicians Service Group, Inc. 1301 Capital of Texas Hwy. Suite C-300 By /s/ Dunane K. Boyd, Jr. --------------------------- Austin, Texas 78746 Duane K. Boyd, Jr., Trustee Address for Notice: c/o American Physicians Service Group, Inc. /s/ Robert L. Myer 1301 Capital of Texas Hwy. ------------------- Suite C-300 Robert L. Myer Austin, Texas 78746 Address: J. A. MURPHY DESCENDANTS' TRUST c/o American Physicians Service Group, Inc. 1301 Capital of Texas Hwy. By: Bank of Bermuda, Trustee Suite C-300 Austin, Texas 78746 By: /s/ Robert C H Masters Name: Robert C.H. Masters Title: Trust Manager S-1 Address: c/o American Physicians Service Group, Inc. /s/ William A. Searles 1301 Capital of Texas Hwy. ----------------------- Suite C-300 William A. Searles Austin, Texas 78746 Address: c/o American Physicians Service Group, Inc. /s/ Kenneth S. Shifrin 1301 Capital of Texas Hwy. ----------------------- Suite C-300 Kenneth S. Shifrin Austin, Texas 78746 Address: c/o American Physicians Service Group, Inc. /s/ Samuel Granett 1301 Capital of Texas Hwy. ------------------- Suite C-300 Saumel Granett Austin, Texas 78746 Address: c/o American Physicians Service Group, Inc. /s/ William H. Hayes 1301 Capital of Texas Hwy. --------------------- Suite C-300 William H. Hayes Austin, Texas 78746 Address: c/o American Physicians Service Group, Inc. /s/ H. J. Howard III 1301 Capital of Texas Hwy. --------------------- Suite C-300 H. J. Howard III Austin, Texas 78746 S-2 EXHIBIT A REAL PROPERTY Tract 1: A 0.8800 acre tract now known as Lot 4, Block B, New City Block 17305, OAKWELL FARMS, UNIT 7B, PLANNED UNIT DEVELOPMENT, City of San Antonio, Bexar County, Texas, according to plat thereof recorded in Volume 9535, Page 203, Deed and Plat Records of Bexar County, Texas. Tract 2: All that certain tract or parcel of land, containing 1.6756 acres, more or less, being out of the Elijah Alcorn Survey, Abstract No. l, situated in Fort Bend County, Texas. Said 1.6756 acres being all of Commercial Reserve "F" and part of Commercial Reserve "D" of the Replat of the Amending Plat for Edgewater, Section Two (2), according to the map or plat thereof recorded in Slide No. 1353/A of the Plat Records of Fort Bend County, Texas. Said 1.6756 acres being more particularly described by metes and bounds in Exhibit "A-1" attached hereto and made a part hereof; together with those nonexclusive easement rights described in that Ingress and Egress Easement, recorded in Volume 2364, Page 1480 of the County Clerk Official Records of Fort Bend County, Texas, and those easement rights reserved in that deed recorded in Volume 2364, Page 1452 of the County Clerk Official Records of Fort Bend County, Texas. Tract 3: A tract or parcel of land being 0.2008 acres, more or less, located in the Elijah Alcorn League Survey, Abstract No. l, being out of Commercial Reserve "D" of the Replat of the Amending Plat for Edgewater, Section Two (2), according to the map or plat thereof recorded in Slide No. 1353/A of the Plat Records of Fort Bend County, Texas. Said 0.2008 acres being more particularly described by metes and bounds in Exhibit "B-1" attached hereto and made a part hereof. Tract 4: Lot 2A, Block "B", of RESUBDIVISION OF LOT 2, BLOCK "B" MILWOOD SECTION SIX, a subdivision in Travis County, Texas, according to the map or plat, of record in Volume 95, Page 231, of the Plat Records of Travis County, Texas. Tract 5: Lot 2B, Block "B", of RESUBDIVISION OF LOT 2, BLOCK "B" MILWOOD SECTION SIX, a subdivision in Travis County, Texas, according to the map or plat, of record in Volume 95, Page 231, of the Plat Records of Travis County, Texas. EXHIBIT B 1. Promissory Note (Line of Credit) 2. Deed of Trust (Security Agreement, Assignment of Leases and Rents and Financing Statement) 3. Security Agreement 4. Financing Statement EXHIBIT C PARTICIPATION CERTIFICATE This Participation Certificate certifies that ("Participant") has an interest of the following percentage and equal to the given amount in the subject loan which has a principal balance as shown, made by American Physicians Service Group, Inc., a Texas corporation ("Seller") which is described in a certain Participation Agreement between Participant and Seller dated March , 1998 ("Agreement"). Percentage Interest Participant's Loan Amount Current Principal Balance The Participant shall receive for its Percentage Interest in the Loan, the Percentage Amount listed above of any principal paid or prepaid pursuant to the Agreement. Dated: American Physicians Service Group, Inc., a Texas corporation By: Name: Title: EXHIBIT D PURCHASER PERCENTAGE SCHEDULE Purchaser's Name Percentage Interest Richard J. Clark .50% Duane K. Boyd, Jr. Trust 2.50% Robert L. Myer 2.25% J. A. Murphy Descendants' Trust 1.00% William A. Searles 1.30% Kenneth S. Shifrin 1.50% Samuel Granett .50% William H. Hayes 1.00% H. J. Howard III .25% EX-10 17 REVOLVING CREDIT LOAN AGREEMENT Exhibit 10.53 REVOLVING CREDIT LOAN AGREEMENT between AMERICAN PHYSICIANS SERVICE GROUP, INC., as Borrower and NATIONSBANK OF TEXAS, N.A., as Lender February 10, 1998 REVOLVING CREDIT LOAN AGREEMENT Table of Contents Page SECTION 1 DEFINITION OF TERMS 1 1.01. Definitions 1 1.02 Time References 7 1.03 Other References 7 1.04 Accounting Principles 7 SECTION 2 THE REVOLVING CREDIT LOAN 7 2.01. The Revolving Credit Loan and Revolving Credit Commitment 7 2.02. Manner of Borrowing 8 2.03. Fees 8 2.04. Notes and Note Payments 8 2.05. Interest 9 2.06. Taxes 10 2.07. Capital Adequacy 10 SECTION 3 CONDITIONS PRECEDENT 10 3.01. Initial Borrowing 10 3.02. All Borrowings 11 SECTION 4 REPRESENTATIONS AND WARRANTIES 11 4.01. Corporate Existence, Good Standing, and Authority 11 4.02 Subsidiaries and Names 11 4.03. Authorization and Contravention 11 4.04. Enforceable Obligations 11 4.05. Financial Condition 12 4.06. No Default 12 4.07. Material Agreements 12 4.08. No Litigation 12 4.09. Use of Proceeds; Margin Stock 12 4.10. Taxes 12 4.11. Environmental Matters 12 4.12. Employee Plans 12 4.13. Properties; Liens 13 4.14. Government Regulations 13 4.15. Transactions with Affiliates 13 4.16. Debt 13 4.17. Leases 13 4.18. Insurance 13 4.19. Labor Matters 13 4.20. Intellectual Property 14 4.21. Pledged Shares 14 4.22. Full Disclosure 14 4.23. Representations and Warranties 14 SECTION 5 AFFIRMATIVE COVENANTS 14 i 5.01. Financial Statements, Reports and Documents 14 5.02. Use of Credit 16 5.03. Payment of Taxes and Other Indebtedness 16 5.04. Books and Records; Access 16 5.05. Compliance with Law 16 5.06. Payment of Obligations 16 5.07. Expenses 16 5.08. Maintenance of Existence, Assets, and Business 16 5.09. Insurance 17 5.10. Environmental Matters 17 5.11. Further Assurances 17 5.12. INDEMNITY BY BORROWER 17 SECTION 6 NEGATIVE COVENANTS 18 6.01. Limitation on Sale; Negative Pledge18 6.02. Limitation on Indebtedness18 6.03. Limitation on Disposition of Assets18 6.04. Liquidity Maintenance 19 6.05. Distributions 19 6.06. Net Worth 19 6.07. Repurchase of Borrower Stock 19 6.08. Transaction with Affiliates 20 6.09 Mergers, Consolidations, and Dissolutions 20 SECTION 7 EVENTS OF DEFAULT 20 7.01. Events of Default 20 7.02. Remedies Upon Event of Default 21 7.03. Performance by Lender 22 SECTION 8 MISCELLANEOUS 22 8.01. Accounting Reports 22 8.02. Waiver 22 8.03. Notices 22 8.04. Governing Law 22 8.05. Invalid Provisions 22 8.06. Maximum Interest Rate 23 8.07. Nonliability of Lender 23 8.08. Offset 23 8.09. Successors and Assigns 23 8.11. Headings 23 8.12. Survival 23 8.13. Participations 23 8.14. No Third Party Beneficiary24 8.15. Waiver of Jury Trial 24 8.16. Multiple Counterparts 24 8.17. Arbitration 24 8.18 Limitation on Damages 25 ii Schedules Schedule 3.01 Closing Conditions Schedule 4.01 Jurisdiction Where Doing Business Schedule 4.02 Subsidiaries Schedule 4.11 Environmental Matters Schedule 4.12 Employee Plans Schedule 4.13 Liens Schedule 4.15 Transactions With Affiliates Schedule 4.16 Debt Schedule 4.17 Leases Schedule 4.20 Intellectual Property Exhibits Exhibit A Form of Revolving Credit Note Exhibit B Form of Pledge Agreement Exhibit C Notice of Borrowing iii REVOLVING CREDIT LOAN AGREEMENT This Revolving Credit Loan Agreement is entered into as of the day of February, 1998 by and between AMERICAN PHYSICIANS SERVICE GROUP, INC., a Texas corporation ("Borrower"), and NATIONSBANK OF TEXAS, N.A., a national banking association ("Lender"). W I T N E S S E T H: WHEREAS, Borrower has requested that Lender provide Borrower with a revolving credit loan facility to fund potential acquisitions, investments, and stock repurchases and Lender is willing to provide such a facility to Borrower upon the terms and subject to the conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual promises herein contained and for other valuable consideration, the parties hereto agree as follows: SECTION 1 DEFINITION OF TERMS 1.01. DEFINITIONS . As used in this Agreement, all exhibits and schedules attached and in any note, certificate, report or other Loan Documents made or delivered pursuant to this Agreement, the following terms shall have the respective meanings assigned to them in this Section 1 or in the section or recital referred to below (unless otherwise specifically defined in such Loan Document): "Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by, or under common control with, such Person. "Agreement" means this Revolving Credit Loan Agreement, including the schedules and exhibits hereto, as the same may be renewed, extended, amended, restated, or modified from time to time. "Base Rate" means the variable rate of interest established from time to time by Lender as its general reference rate of interest (which rate of interest may not be the lowest rate charged by Lender on similar loans). Each change in the Base Rate shall become effective without prior notice to Borrower automatically as of the opening of business on the date of such change in the Base Rate. "Borrower" is defined in the preamble of this Agreement and includes any successor or assign consented to by Lender. "Borrowing" means any amount disbursed under the Loan Documents by Lender to or on behalf of Borrower. "Borrowing Date" means the date on which a Borrowing is to be disbursed under Sections 2.01. "Business Day" means any day other than a Saturday, Sunday or day on which national banks are authorized to be closed under the laws of the State of Texas. "Capital Lease" means any lease or sublease that is required by GAAP to be capitalized on a balance sheet. 1 "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. ss.ss.9601 et seq. " Code" means the Internal Revenue Code of 1986, as amended, and all regulations promulgated and rulings issued thereunder. "Collateral" is defined in the Pledge Agreement. "Company" means Borrower and each of its Subsidiaries. "Collateral Documents" means all security agreements, guaranties, pledge agreements, and other agreements or documents executed or delivered to secure repayment of all or any part of the Obligation. "Consolidated Net Worth" means, at any time and for any Person, the sum of its stockholder's equity. "Current Financials" means, unless otherwise specified, either: (a) Except as provided in clause (b) below, the (i) Companies' consolidated Financials for the year ended December 31, 1996, and (ii) Companies' consolidated Financials for the nine months ended September 30, 1997; or (b) At any time after annual Financials are first delivered under Section 5.01, the (i) Companies' annual Financials then most recently delivered to Lender under Section 5.01(a) and (ii) Companies' quarterly Financials then most recently delivered to Lender under Section 5.01(b). "Debt" means, for any Person, at any time, and without duplication, the sum of (a) all obligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes, or similar instruments, (c) all obligations to pay the deferred purchase price of property or services except trade accounts payable arising in the ordinary course of business, (d) all obligations arising under acceptance facilities or facilities for the discount or sale of accounts receivable, (e) all direct or contingent obligations in respect of letters of credit, (f) liabilities secured (or for which the holder of the Debt has an existing Right, contingent or otherwise, to be so secured) by any Lien existing on property owned or acquired by that Person, (g) Capital Leases, plus (h) all guaranties, endorsements, and other contingent obligations for Debt of others. "Debtor Laws" means all applicable liquidation, conservatorship, bankruptcy, arrangement, receivership, insolvency, reorganization or similar laws from time to time in effect affecting the rights of creditors generally. "Default" means the occurrence of any event set forth in Section 7.01 which, upon expiration of the applicable grace period set forth therein, would constitute an Event of Default. "Distribution" means, with respect to any shares of any capital stock or other equity securities issued by a Person (a) the retirement, redemption, purchase, or other acquisition for value of those securities, (b) the declaration or payment of any dividend on or with respect to those securities, (c) any loan or advance by that Person to, or other investment by that Person in, the holder of any of those securities, and (d) any other payment by that Person with respect to those securities. 2 "Environmental Investigation" means any environmental site assessment, investigation, audit, compliance audit, or compliance review conducted at any time or from time to time whether at the request of Lender, upon the order or request of any Governmental Authority, or at the voluntary instigation of any Company concerning any Real Property or the business operations or activities of any Company, including, without limitation (a) air, soil, groundwater, or surface-water sampling and monitoring, and (b) preparation and implementation of any closure or remedial plans. "Environmental Law" means any applicable Governmental Requirement that relates to protection of the environment or to the regulation of any Hazardous Substances, including, without limitation, CERCLA, the Hazardous Materials Transportation Act (49 U.S.C. ss. 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. ss. 6901 et seq.), the Clean Water Act (33 U.S.C. ss. 1251 et seq.), the Clean Air Act (42 U.S.C. ss. 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. ss. 2601 et seq.), the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. ss. 136 et seq.), the Emergency Planning and Community Right-to-Know Act (42 U.S.C. ss. 11001 et seq.), the Safe Drinking Water Act (42 U.S.C. ss. 201 and ss. 300f et seq.), the Rivers and Harbors Act (33 U.S.C. ss. 401 et seq.), the Oil Pollution Act (33 U.S.C. ss. 2701 et seq.), analogous state, local, and foreign Governmental Requirements, and any analogous future enacted or adopted Governmental Requirement. "Environmental Liability" means any liability, loss, fine, penalty, charge, lien, damage, cost, or expense of any kind to the extent that it results (a) from the violation of any Environmental Law, (b) from the Release or threatened Release of any Hazardous Substance, or (c) from actual or threatened damages to natural resources. "Environmental Permit" means any permit, or license, from any Governmental Authority that is required under any Environmental Law for the lawful conduct of any business, process, or other activity. "ERISA" means the Employee Retirement Income Security Act of 1974. "ERISA Affiliate" means any Person that, for purposes of Title IV of ERISA, is a member of either Borrower's controlled group or is under common control with that Borrower within the meaning of Section 414 of the Code (which provisions are deemed by this agreement to apply to Foreign Persons). "Event of Default" is defined in Section 7.01. "Excess Interest Amount" is defined in Section 2.05(d). "Financials" of a Person means balance sheets, profit and loss statements, reconciliations of capital and surplus, and statements of cash flow prepared (a) according to GAAP (subject to year-end audit adjustments with respect to interim Financials) and (b) in comparative form to prior year-end figures or corresponding periods of the preceding fiscal year or other relevant period, as applicable. "GAAP" means those generally accepted accounting principles and practices, applied on a consistent basis, which are recognized as such by the American Institute of Certified Public Accountants acting through its Accounting Principles Board and the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date the applicable Financials were prepared. 3 "Governmental Authority" means any government (or any political subdivision or jurisdiction thereof), court, bureau, agency or other governmental authority having jurisdiction over any Company or any of its business, operations or properties. "Governmental Requirements" means all applicable statutes, laws, treaties, ordinances, rules, regulations, orders, writs, injunctions, decrees, and judgments and legally binding opinions and interpretations of any Governmental Authority. "Guarantors" means APS Realty, Inc., a Texas corporation and Syntera Technologies, Inc., a Delaware corporation, together with their respective successors and assigns, and any other Person who may from time to time guarantee the Obligation, or any part thereof. "Hazardous Substance" means any substance that is designated, defined, classified, or regulated as a hazardous waste, hazardous material, pollutant, contaminant, explosive, corrosive, flammable, infectious, carcinogenic, mutagenic, radioactive, or toxic or hazardous substance under any Environmental Law, including, without limitation, any hazardous substance within the meaning of ss. 101(14) of CERCLA. "Lien" means any lien, mortgage, security interest, tax lien, pledge, encumbrance or title retention arrangement, or any other interest in property designed to secure the repayment of Debt, whether arising by agreement or under any statute or law. "Loan Documents" means this Agreement, the Note, the Collateral Documents, and any agreements, documents (and with respect to this Agreement, and such other agreements and documents, any renewals, extensions, amendments or supplements thereto) or certificates at any time executed or delivered pursuant to the terms of this Agreement. "Material Adverse Event" means any circumstance or event that, individually or collectively, is reasonably expected to result in any (a) material impairment of (i) the ability of any Company to perform its payment or other obligations under any Loan Document, or (ii) the ability of Lender to enforce any of those obligations or any of its Rights under the Loan Documents, (b) material and adverse effect on the business, assets, operations, financial or other condition, or prospects of any Company (individually) or of the Companies (as a whole), or (c) Event of Default or Potential Default; provided that any default by Consolidated Eco-Systems, Inc. (formerly known as Exsorbet Industries, Inc. or its subsidiaries) under any of their agreements with Borrower shall not be a Material Adverse Event. "Maximum Rate" means the highest nonusurious rate of interest (if any) permitted from day to day by applicable law. Lender hereby notifies and discloses to Borrower that, for purposes of Tex. Rev. Civ. Stat. Ann. art. 5069, as it may from time to time be amended, the "applicable rate ceiling" shall be the "weekly" ceiling from time to time in effect as limited by article 5069(b); provided, however, that to the extent permitted by applicable law, Lender reserves the right to change the "applicable rate ceiling" from time to time by further notice and disclosure to Borrower. "Multiemployer Plan" means a multiemployer plan as defined in Sections 3(37) or 4001(a)(3) of ERISA or Section 414(f) of the Code (or any similar type of plan established or regulated under the laws of any foreign country) to which any Company or any ERISA Affiliate is making, or has made, or is accruing, or has accrued, an obligation to make contributions. "Note" means the Revolving Credit Note, substantially in the form of Exhibit A attached, executed by Borrower and delivered pursuant to the terms of this Agreement, together with any renewals, extensions or modifications. "Notice of Borrowing" is defined in Section 2.02. 4 "Obligation" means all present and future indebtedness, obligations, and liabilities and all renewals and extensions thereof, or any part thereof, now or hereafter owed to Lender by Borrower, whether arising pursuant to any of the Loan Documents, or otherwise, and all renewals and extensions thereof, together with all interest accruing thereon and costs, expenses and attorneys' fees incurred in the enforcement or collection thereof. "OSHA" means the Occupational Safety and Health Act of 1970, 29 U.S.C. ss. 651 et seq. "Permitted Debt" means each of the following;: (a) The existing Debt that is described on Schedule 4.17 and all renewals, extensions, amendments, modifications, and refinancings of (but not any principal increases after the date of this agreement to) any of that Debt. (b) The Obligation and any guaranties of it delivered under this agreement. (c) Debt and Capital Lease obligations incurred by any Company to acquire, construct, or improve assets that never exceed $500,000 total principal amount outstanding for all of the Companies together with any guaranties of such obligations given by any Company, and renewals, extensions, amendments, modifications, and refinancings of that Debt and those obligations or guaranties subject to the foregoing limitations of this clause (c). (d) Trade payables, accrued taxes, and other liabilities that do not constitute Debt; and endorsements of negotiable instruments in the ordinary course of business. "Permitted Liens" means, at any time, the following: (a) The existing Liens that are described on Schedule 4.14 (to the extent that such schedule does not indicate they are to be extinguished as a condition precedent to extensions of credit under this agreement) and all renewals, extensions, amendments, and modifications of any of them to the extent that the total principal amount each individually secures never exceeds the total principal amount secured by it on the date of this agreement. (b) Liens in favor of Lender. (c) Any interest or title of a lessor in assets being leased under an operating lease that does not constitute Debt. (d) Rights of setoff or recoupment and banker's Liens. (e) Pledges or deposits (that shall not cover any Collateral) made to secure payment of workers' compensation, unemployment insurance, or other forms of governmental insurance or benefits or to participate in any fund in connection with workers' compensation, unemployment insurance, pensions, or other social security programs. (f) Good-faith pledges or deposits (that shall not cover any Collateral) (i) for 10% or less of the amounts due under (and made to secure) any Company's performance of bids, tenders, contracts (except for the repayment of borrowed money), or leases, or (ii) made to secure statutory obligations, surety or appeal bonds, indemnity, performance, or other similar bonds, or customs or brokers liens benefitting any Company in the ordinary course of its business. 5 (g) Zoning and similar restrictions on the use of (and easements, restrictions, covenants, title defects, and similar encumbrances on) real property that do not materially impair the use of the real property and that are not violated by existing or proposed structures or land use. (h) If no Lien has been filed in any jurisdiction or agreed to (i) claims and Liens for Taxes not yet due and payable, (ii) mechanic's Liens and materialman's Liens for services or materials (real or personal) and similar Liens incident to construction and maintenance of real property, in each case for which payments is not yet due and payable, (iii) landlord's Liens for rental not yet due and payable, and (iv) Liens of warehousemen, carriers, and vendors and similar Liens securing obligations that are not yet due and payable. (i) Any of the following to the extent that the validity or amount is being properly contested in good faith, reserve or other appropriate provision (if any) required by GAAP has been made, levy and execution has not issued or continues to be stayed, they do not individually or collectively detract materially from the value of the property of the Person in question or materially impair the use of that property in the operation of its business, and (other than any such Liens given statutory priority) they do not cover any Collateral: (i) claims and Liens for Taxes; (ii) claims and Liens upon, and defects of title to, real or personal property, including any attachment of personal or real property or other legal process before adjudication of a dispute on the merits; (iii) claims and Liens of mechanics, materialmen, warehousemen, carriers, landlords, vendors, or other like Liens; (iv) Liens incident to construction and maintenance of real property; and (v) adverse judgments, attachments, or orders on appeal for the payment of money. (j) Liens that secure any of the Debt described in Schedule 4.16 and any renewal, extension, amendment, or modification of those Liens so long as those Liens, renewals, extensions, amendments, and modifications never cover any Collateral. "Person" means any individual, entity, or Governmental Authority. "Pledge Agreement" means that certain Pledge Agreement, substantially in the form of Exhibit B attached hereto, executed by Borrower in favor of Lender, and any renewals, extensions, amendments, modifications or restatements thereof. "Pledged Shares" is defined in the Pledge Agreement. "Prime" means Prime Medical Services, Inc., a Delaware corporation. "Principal Debt" means, at any time, the unpaid principal balance of Borrowings. "Real Property" means any land, buildings, fixtures, and other improvements to land now or in the future directly or indirectly owned by any Company, leased to or otherwise operated by any Company, or subleased by any Company to any other Person. "Revolving Credit Commitment" is defined in Section 2.01. "Rights" mans rights, remedies, powers, privileges, and benefits. "Solvent" means, as to any Person, that (a) the total fair market value of its assets exceeds its liabilities, (b) it has sufficient cash flow to enable it to pay its Debts as they mature, and (c) it does not have unreasonably small capital to conduct its businesses. 6 "Subsidiary" of any Person means any corporation, partnership, or other entity of which 50% or more (in number of votes) of the stock (or equivalent interests) is owned of record or beneficially, directly or indirectly, by that Person. "Taxes" means all present and future taxes (including, without limitation, gross receipts, sales, use, consumption, property, income, franchise, capital, occupational, value added and excise taxes), withholdings, assessments, levies, imposts, customs, and other duties, fees or charges, of any nature whatsoever, together with any penalties, fines or interest thereon or other additions thereto imposed, withheld, levied or assessed by any taxing authority or Governmental Authority or by any international authority, and "Tax," "Taxation," and cognate expressions shall be construed accordingly. "Termination Date" means the earlier of (i) February , 2001 or (ii) the date Lender's commitment to fund Borrowings is terminated pursuant to Section 7.02. 1.02 TIME REFERENCES . Time references (e.g., 9:30 a.m.) are to time in Austin, Texas. In calculating a period from one date to another, the word "from" means "from and including" and the word "to" or "until" means "to but excluding." 1.03 OTHER REFERENCES . Where appropriate, the singular includes the plural and vice versa, and words of any gender include each other gender. Heading and caption references may not be construed in interpreting provisions. Monetary references are to currency of the United States of America. Section, paragraph, annex, schedule, exhibit, and similar references are to the particular Loan Document in which they are used. References to "telecopy," "facsimile," "fax," or similar terms are to facsimile or telecopy transmissions. References to any Person include that Person's heirs, personal representatives, successors, trustees, receivers, and permitted assigns. References to any law include every amendment or supplement to it, rule and regulation adopted under it, and successor or replacement for it. References to any Loan Document or other document include every renewal and extension of it, amendment and supplement to it, and replacement or substitution for it. 1.04 ACCOUNTING PRINCIPLES . GAAP determines all accounting and financial terms and compliance with financial reporting covenants. GAAP in effect on the date of this agreement determines compliance with financial covenants. Otherwise, all accounting principles applied in a current period must be comparable in all material respects to those applied during the preceding comparable period other than changes concurred in by the Companies' independent public accountants. SECTION 2 THE REVOLVING CREDIT LOAN 2.01. THE REVOLVING CREDIT LOAN AND REVOLVING CREDIT COMMITMENT . (a) COMMITMENT AND BORROWINGS. Subject to the terms and conditions of this Agreement, including the conditions precedent in Sections 2.01(b), 3.01 and 3.02, Lender agrees to extend to Borrower, from the date hereof through the Termination Date, a revolving line of credit which shall not exceed at any one time outstanding the sum of $10,000,000 (the "Revolving Credit Commitment"). Within the limits of this Section 2.01, during such period, Borrower may borrow, repay and reborrow in accordance with this Agreement. Each advance hereunder is called a "Borrowing" and all borrowings hereunder are collectively referred to as the "Loan." Borrower shall have the right, upon three (3) Business Days' prior written notice to Lender, to permanently reduce the unutilized portion of the Revolving Credit Commitment. 7 (b) LIQUIDITY REQUIREMENTS. As a condition to Lender's obligation to advance any Borrowing hereunder, Borrower must be in compliance with the requirements of Section 6.04 hereof related to maintenance of liquidity and the Collateral Maintenance provisions of the Pledge Agreement. (c) USE OF PROCEEDS. Borrower shall use the proceeds of the Loan to fund potential acquisitions and investments, to repurchase up to $1,000,000 market value of its stock, for general corporate purposes, and to guarantee a loan from Lender to William A. Searles, not to exceed $85,000 outstanding principal amount. Borrower shall not use proceeds of any Borrowing (i) to purchase or carry any "margin securities" (as such term is defined in Regulation U of the Board of Governors of the Federal Reserve System), (ii) for any unlawful purpose, or (iii) for the purpose of making any hostile tender offer to acquire shares of stock or other equity interests in another Person. 2.02. MANNER OF BORROWING . Borrower shall give Lender prior written notice on or before 10:00 a.m. (Austin, Texas time) on any day a Borrowing is requested (a "Notice of Borrowing") of each requested Borrowing in the form attached as Exhibit C and shall specify the aggregate amount and requested date of such Borrowing. Each Borrowing shall be in an amount of $100,000.00 or an integral multiple thereof. Not later than 2:00 p.m. on the date specified, subject to the terms and conditions of this Agreement, Lender shall make available to Borrower, at Lender's offices in Austin, Texas, the amount of such requested Borrowing in immediately available funds. 2.03. FEES . In connection with Lender's agreement to enter into this Agreement and fund the Loan hereunder, Borrower has committed to pay to Lender an up-front commitment fee in the amount of $37,500 which would be due and payable upon the execution of this Agreement. In addition, from and after the Closing Date, Borrower shall pay to Lender an unused fee, payable as it accrues on the last day of each March, June, September, and December (commencing on March 31, 1998) and on the Termination Date. Each payment of the unused fee is equal to the following, determined for the calendar quarter (or portion of the calendar quarters commencing on the date of this Agreement or ending on the Termination Date) preceding and including the date it is due: the product of (i) 1/4 of 1% per annum, times (ii) the amount by which the average daily Revolving Credit Commitment exceeds the sum of the average daily Principal Debt, times (iii) a fraction with the number of days in the applicable quarter or portion of it as the numerator and 360, as the denominator. Borrower acknowledges that the commitment fee payable hereunder is a bona fide commitment fee and is intended as reasonable compensation to Lender for committing to make funds available to Borrower as described herein and for no other purposes. 2.04. NOTES AND NOTE PAYMENTS . (a) NOTE. The Borrowings made under Section 2.01 by Lender shall be evidenced by the Note in form and substance satisfactory to Lender executed by Borrower, which Note shall (i) be dated the date hereof, (ii) be in the maximum amount of $10,000,000.00, (iii) be payable to the order of Lender, and (iv) bear interest in accordance with Section 2.05. (b) PAYMENTS. (1) PRINCIPAL AND INTEREST. The unpaid principal of the Note, and all accrued but unpaid interest thereon, shall be due and payable on the Termination Date. Interest shall also be due and payable quarterly on the last day of each March, June, September, and December, commencing March 31, 1998. 8 (2) OPTIONAL PREPAYMENTS. Borrower shall have the right, from time to time upon three (3) Business Days' written notice to Lender, and without penalty, to prepay the Note, in whole or in part upon the payment of accrued interest on the amount prepaid to and including the date of payment. (3) MANNER AND APPLICATION OF PAYMENTS. All payments and prepayments by Borrower on account of principal, interest, and fees hereunder shall be made in immediately available funds. All such payments shall be made to Lender at its office in Austin, Texas, not later than 12:00 noon, Austin, Texas time, on the date due and funds received after that hour shall be deemed to have been received by Lender on the next following Business Day. If any payment is scheduled to become due and payable on a day which is not a Business Day, such payment shall instead become due and payable on the immediately following Business Day and interest on the principal portion of such payment shall be payable at the then applicable rate during such extension. All payments made on the Note shall be credited, to the extent of the amount thereof, in the following manner: (i) first, against the amount of interest accrued and unpaid on the Note as of the date of such payment; and (ii) second, against all principal due and owing on the Note as of the date of such payment. 2.05. INTEREST . (a) INTEREST RATE. Subject to Section 2.05(b), the unpaid principal of each Borrowing shall bear interest from the date of advance until paid at a rate per annum that from day-to-day equals the lesser of (a) the Base Rate in effect from day-to-day minus 1/4 of 1% (the "Contract Rate"), or (b) the Maximum Rate. (b) DEFAULT RATE. All past due principal of, and to the extent permitted by applicable law, interest on, the Note shall bear interest until paid at the lesser of (i) the Base Rate from time-to-time in effect plus three percent (3%), or (ii) the Maximum Rate. (c) COMPUTATION OF INTEREST RATES. Subject to applicable usury laws, interest shall be computed at a daily rate equal to 1/360 of the applicable rate of interest per annum for all Borrowings, unless the Maximum Rate or Base Rate shall be in effect, in which case interest shall be computed at a daily rate equal to 1/365 or 1/366, as appropriate, of the applicable rate of interest per annum. (d) RECAPTURE RATE. If, on any interest payment date, Lender does not receive interest on the Note computed (as if no Maximum Rate limitations were applicable) at the Contract Rate pursuant to Section 2.05(a) because the Contract Rate exceeds or has exceeded the Maximum Rate, then Borrower shall, upon the written demand of Lender, pay to Lender, in addition to interest otherwise required hereunder, on each interest payment date thereafter, the Excess Interest Amount (hereinafter defined) calculated as of such later interest payment date; provided, however, that in no event shall Borrower be required to pay, for any appropriate computation period, interest at a rate exceeding the Maximum Rate effective during such period. The term "Excess Interest Amount" means, on any date, the amount by which (a) the amount of all interest that would have accrued before that date on the principal of the Note (had the applicable Contract Rate at all times been in effect, without limitation by the Maximum Rate) exceeds (b) the aggregate amount of interest actually paid to Lender on the Note on or before that date. 9 2.06. TAXES . Any and all payments by Borrower hereunder or under the Note shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto (hereinafter referred to as "Taxes"), excluding taxes imposed on Lender's income, and franchise taxes imposed on Lender, by the jurisdiction under the laws of which Lender is organized or is or should be qualified to do business or any political subdivision thereof and, taxes imposed on Lender's income, and franchise taxes imposed on Lender by the jurisdiction of Lender's lending office or any political subdivision thereof. If Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under the Note to Lender, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.06) Lender receives an amount equal to the sum it would have received had no such deductions been made, (ii) Borrower shall make such deductions and (iii) Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. Borrower will indemnify Lender for the full amount of Taxes (including, without limitation, any Taxes imposed by any jurisdiction on amounts payable under this Section 2.06) paid by Lender or any liability (including penalties and interest) arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally asserted. This indemnification shall be payable upon Lender making written demand therefor. 2.07. CAPITAL ADEQUACY . If, after the date hereof, Lender shall have reasonably determined that either (i) the adoption (after the date hereof) of any applicable law, rule, regulation or guideline regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or (ii) compliance by Lender (or any lending office of Lender) with any request or directive (issued after the date hereof) regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, and having general application to lenders such as Lender, has or would have the effect of reducing the rate of return on Lender's capital as a consequence of its or Borrower's obligations hereunder to a level below that which Lender could have achieved but for such adoption, change or compliance by an amount reasonably deemed by Lender to be material, then from time to time, within five (5) days after demand by Lender, Borrower shall pay to Lender such additional amount as will adequately compensate Lender for such reduction, provided that Borrower will not be required to pay any more than similarly situated customers of Lender. Lender will notify Borrower of any event of which it has actual knowledge, occurring after the date thereof, which will entitle Lender to compensation pursuant to this Section 2.07. No failure by Lender to immediately demand payment of any additional amounts payable hereunder shall constitute a waiver of Lender's right to demand payment of such amounts at any subsequent time. SECTION 3 CONDITIONS PRECEDENT 3.01. INITIAL BORROWING . The obligation of Lender to advance its initial Borrowing is subject to the conditions precedent that, on or before the date of such Borrowing, (a) Borrower shall have paid to Lender all fees to be received by Lender pursuant to this Agreement or any other Loan Document and (b) Lender shall have received duly executed copies of each of the documents listed on Schedule 3.01, each dated as of the date of such Borrowing, and each in form and substance satisfactory to Lender. 3.02. ALL BORROWINGS . The obligation of Lender to advance any Borrowing under this Agreement (including the initial Borrowing) shall be subject to the conditions precedent that, as of the date of such Borrowing and after giving effect thereto: (a) there exists no Default or Event of Default; (b) no change that would cause a Material Adverse Effect has occurred since the date of the Current 10 Financials referenced in Section 4.05; (c) Lender shall have received from Borrower a Notice of Borrowing dated as of the date of such Borrowing and all of the statements contained in such Notice of Borrowing shall be true and correct; (d) the representations and warranties contained in each of the Loan Documents shall be true in all respects as though made on the date of such Borrowing; (e) the Maximum Rate exceeds the Contract Rate; and (f) Borrower has satisfied the condition precedent contained in Section 2.01(b). SECTION 4 REPRESENTATIONS AND WARRANTIES To induce Lender to make the Loan hereunder, Borrower represents and warrants to Lender that: 4.01. CORPORATE EXISTENCE, GOOD STANDING, AND AUTHORITY . Each Company is duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation. Except where not a Material Adverse Event, each Company is duly qualified to transact business and is in good standing as a foreign corporation in each jurisdiction where the nature and extent of its business and properties require due qualification and good standing (each of which jurisdictions is identified on Schedule 4.01, as supplemented from time to time, by a supplement to that schedule that is dated, executed, and delivered by Borrower to Lender to reflect changes in that schedule as a result of transactions permitted by the Loan Documents). Each Company possesses all requisite authority and power to conduct its business as is now being conducted and as proposed under the Loan Documents to be conducted and to own and operate its assets as now owned and operated and as proposed to be owned and operated under the Loan Documents. 4.02 SUBSIDIARIES AND NAMES . Schedule 4.02 (as supplemented from time to time by a supplement to that schedule that is dated, executed, and delivered by Borrower to Lender to reflect changes in that schedule as a result of transactions permitted by the Loan Documents), describes (a) all of the Companies, (b) every name or trade name used by each Company during the five-year period before the date of this agreement, and (c) every change of each Company's name during the four month period before the date of this agreement. All of the outstanding shares of capital stock (or similar voting interests) of Borrower's Subsidiaries are duly authorized, validly issued, fully paid, and nonassessable, owned of record and beneficially as described in Schedule 4.02, free and clear of any Liens except Permitted Liens, and not subject to any warrant, option, or other acquisition Right of any Person or subject to any transfer restriction except restrictions described on Schedule 4.02 and those imposed by the Loan Documents and by securities and general corporate laws. 4.03. AUTHORIZATION AND CONTRAVENTION . The execution and delivery by each Company of each Loan Document to which it is a party and the performance by it of its obligations under those Loan Documents (a) are within its corporate power, (b) have been duly authorized by all necessary corporate action, (c) require no action by or filing with any Governmental Authority (except any action or filing that has been taken or made on or before the applicable Closing Date), (d) do not violate any provision of its charter or bylaws, and (e) do not violate any provision of law applicable to it or any material agreement to which it is a party except violations that individually or collectively are not a Material Adverse Event. 4.04. ENFORCEABLE OBLIGATIONS . The Loan Documents have been duly executed and delivered by each Company, as appropriate, and are the legal and binding obligations of each Company which is a party thereto, as appropriate, enforceable in accordance with their respective terms, except as limited by Debtor Laws. 11 4.05. FINANCIAL CONDITION . Borrower has delivered to Lender copies of the Current Financials of the Companies. The Current Financials of the Companies are true and correct, fairly represent the consolidated financial condition of Borrower and its Subsidiaries as of such date and have been prepared in accordance with GAAP. The Financials of the Companies contain no material inaccuracies. As of the date hereof, there are no obligations, liabilities or indebtedness (including contingent and indirect liabilities) of the Companies which are material and are not reflected in the Companies' Current Financials. No Material Adverse Effect has occurred since the date of such Current Financials. 4.06. NO DEFAULT . No event has occurred and is continuing which constitutes a Default or an Event of Default. 4.07. MATERIAL AGREEMENTS . No Company is in default in any material respect under any contract or agreement to which such Company is a party or by which any of its properties are bound. 4.08. NO LITIGATION . Except as disclosed in writing to Lender, there are no actions, suits or legal, equitable, arbitration or administrative proceedings pending, or to the knowledge of Borrower threatened, against any Company that could, if adversely determined, have a Material Adverse Effect. 4.09. USE OF PROCEEDS; MARGIN STOCK . The proceeds of the Loan will be used by Borrower solely for the purposes specified in Section 2.01(c). Borrower will furnish to Lender a statement in conformity with the requirements of the Federal Reserve Form U-1 referred to in Regulation U of the Board of Governors of the Federal Reserve System. No part of the proceeds of the Loan will be used for any purpose which violates, or is inconsistent with, the provisions of Regulations U or X of the Board of Governors of the Federal Reserve System. 4.10. TAXES . All tax returns required to be filed by any Company in any jurisdiction have been filed and all taxes (including mortgage recording taxes), assessments, fees and other governmental charges upon any Company or upon any of its properties, income or franchises have been paid except for taxes being contested in good faith by appropriate proceedings diligently projected. 4.11. ENVIRONMENTAL MATTERS . Except as disclosed on Schedule 4.11, as supplemented from time to time by a supplement to that schedule that is dated, executed, and delivered by Borrower to Lender to reflect changes in that schedule, and is acceptable to Lender, (a) no Company has received notice from any Governmental Authority that it has actual or potential Environmental Liability and no Company has knowledge that it has any Environmental Liability, which actual or potential Environmental Liability in either case constitutes a Material Adverse Event, and (b) no Company has received notice from any Governmental Authority that any Real Property is affected by, and no Company has knowledge that any Real Property is affected by, any Release of any Hazardous Substance which constitutes a Material Adverse Event. 4.12. EMPLOYEE PLANS . Except as disclosed on Schedule 4.12 or where not a Material Adverse Event (a) no Employee Plan subject to ERISA has incurred an "accumulated funding deficiency" (as defined in Section 302 of ERISA or Section 512 of the Code), (b) neither any Company nor any ERISA Affiliate has incurred liability, except for liabilities for premiums that have been paid or that are not past due, under ERISA to the PBGC in connection with any Employee Plan, (c) neither any Company nor any ERISA Affiliate have withdrawn in whole or in part from participation in a Multiemployer Plan in a manner that has given rise to a withdrawal liability under Title IV of ERISA, (d) neither Any Company nor any ERISA Affiliate have engaged in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code), (e) no "reportable event" (as defined in Section 4043 of ERISA) has occurred excluding events for which the notice requirement is waived under applicable 12 PBGC regulations, (f) neither any Company nor any ERISA Affiliate has any liability, or are subject to any Lien, under ERISA or the Code to or on account of any Employee Plan, (g) each Employee Plan subject to ERISA and the Code complies in all material respects, both in form and operation, with ERISA and the Code, and (h) no Multiemployer Plan subject to the Code is in reorganization within the meaning of Section 418 of the Code. None of the matters disclosed on Schedule 4.12 give rise to any other "reportable events," as defined above. 4.13. PROPERTIES; LIENS . Each Company has good and marketable title to all its property reflected on the Current Financials as being owned by it except for encumbrances described on Schedule 4.13 and property that is obsolete or that has been disposed of in the ordinary course of business between the date of the Current Financials and the date of this agreement or, after the date of this agreement, as permitted by Section 6.09 and otherwise as disclosed on Schedule 4.13. Except as described on Schedule 4.13 no Company owns any Real Property. No Lien exists on any property of any Company (a) on the date of this agreement except the existing Liens described on Schedule 4.13 and (b) at anytime after the date of this agreement except Permitted Liens. Except as otherwise disclosed on Schedule 4.13, no Company is party or subject to any agreement, instrument, or order which in any way restricts its ability to allow Liens to exist upon any of its assets except the Loan Documents. 4.14. GOVERNMENT REGULATIONS . No Company is subject to regulation under the Investment Company Act of 1940 or the Public Utility Holding Company Act of 1935. 4.15. TRANSACTIONS WITH AFFILIATES . Except as otherwise disclosed on Schedule 4.15 or permitted by Section 6.08, no Company is a party to a material transaction with any of its Affiliates, which could reasonably be expected to have a Material Adverse Effect. 4.16. DEBT . No Company has any Debt (a) on the date of this agreement, except the existing Debt described on Schedule 4.16, and (b) at anytime after the date of this agreement, except Permitted Debt. 4.17. LEASES . Except where not a Material Adverse Event (a) each Company enjoys peaceful and undisturbed possession under all leases necessary for the operation of its properties and assets, none of which contains any unusual or burdensome provisions which might materially affect or impair the operation of those properties and assets, and (b) all material leases under which any Company is a lessee are in full force and effect. All leases of Real Property under which any Company is a lessee and where any of its inventory, equipment, or fixtures is located are described on Schedule 4.17 as supplemented from time to time by a supplement to that schedule that is dated, executed, and delivered by Borrower to Lender to reflect in that schedule. 4.18. INSURANCE . Each Company maintains with financially sound, responsible, and reputable insurance companies or associations (or, as to workers' compensation or similar insurance, with an insurance fund or by self-insurance authorized by the jurisdictions in which it operates) insurance concerning its properties and businesses against casualties and contingencies and of types and in amounts (and with co-insurance and deductibles) as is customary in the case of similar businesses. 4.19. LABOR MATTERS . Except where not a Material Adverse Event (a) no actual or, to the knowledge of either Borrower, threatened strikes, labor disputes, slow downs, walkouts, work stoppages, or other concerted interruptions of operations that involve any employees employed at any time in connection with the business activities or operations at the Real Property exist, (b) hours worked by and payment made to the employees of any Company or any predecessor have not been in violation of the Fair Labor Standards Act or any other applicable Governmental Requirements pertaining to labor matters, (c) all payments due from any Company for employee health and welfare insurance, including, without 13 limitation, workers compensation insurance, have been paid or accrued as a liability on its books, (d) the business activities and operations of each Company are in compliance with OSHA and other applicable health and safety laws. 4.20. INTELLECTUAL PROPERTY . Except as disclosed on Schedule 4.20 (none of which matters constitute a Material Adverse Event) (a) each Company owns or has the right to use all material licenses, patents, patent applications, copyrights, service marks, trademarks, trademark applications and trade names necessary to continue to conduct its businesses as presently conducted by it and proposed to be conducted by it immediately after the date of this agreement, (b) to the best of Borrowers' knowledge, each Company is conducting its business without infringement or claim of infringement of any license, patent, copyright, service mark, trademark, trade name, trade secret or other intellectual property right of others, and (c) no infringement or claim of infringement by others of any material license, patent, copyright, service mark, trademark, trade name, trade secret or other intellectual property of any Company exists. 4.21. PLEDGED SHARES . Borrower owns 3,064,503 total shares of Common Stock, $.01 par value of Prime, which represent approximately 15.9% of all of the issued and outstanding common shares of Prime. On the date hereof, Borrower has pledged to Lender 500,000 of those shares, which represent approximately 2.6% of all of the issued and outstanding common shares of Prime. 4.22. FULL DISCLOSURE . All written information previously furnished to Lender by or at the direction of the respective Company in connection with the Loan Documents was true and accurate in all material respects or based on reasonable estimates on the date the information is stated or certified. 4.23. REPRESENTATIONS AND WARRANTIES . Each Notice of Borrowing shall constitute, without the necessity of specifically containing a written statement, a representation and warranty by Borrower that no Default or Event of Default exists and that all representations and warranties contained in this Section 4 or elsewhere in this Agreement or in any other Loan Document are true and correct on and as of the date the requested Borrowing is to be made. SECTION 5 AFFIRMATIVE COVENANTS So long as Lender has any commitment to make Borrowings, hereunder, and until payment in full of the Obligation, Borrower agrees that (unless Lender shall otherwise consent in writing): 5.01. FINANCIAL STATEMENTS, REPORTS AND DOCUMENTS . Borrower shall deliver or cause to be delivered to Lender each of the following: (a) ANNUAL FINANCIALS. Promptly after preparation, but no later than 120 days after the last day of each fiscal year of the Companies, Financials showing the Companies' consolidated financial condition and results of operations as of, and for the year ended on, that last day, accompanied by (i) the opinion, without material qualification, of KMPG Peat Marwick, L.L.P. or other firm of nationally recognized independent certified public accountants reasonably acceptable to Lender, based on an audit using generally accepted auditing standards, that the consolidated portion of those Financials were prepared in accordance with GAAP and present fairly, in all material respects, the Companies' consolidated financial condition and results of operations, and (ii) a Compliance Certificate. 14 (b) QUARTERLY FINANCIALS. Promptly after preparation but no later than 45 days after the last day of each of the first three fiscal quarters of the Companies each year, unaudited Financials showing the Companies' consolidated financial condition and results of operations for that fiscal quarter and for the period from the beginning of the current fiscal year to the last day of that fiscal quarter, accompanied by a Compliance Certificate. (c) MANAGEMENT LETTERS. Promptly upon receipt thereof, a copy of any management letter or written report submitted to any Company by independent certified public accountants with respect to the business, condition (financial or otherwise), operations, or properties of any Company. (d) NOTICE OF LITIGATION. Promptly after the commencement thereof, notice of all actions, suits, and proceedings before any Governmental Authority or arbitrator affecting any Company which, if determined adversely to such Company, could have be a Material Adverse Event. (e) NOTICE OF DEFAULT. As soon as possible and in any event within five (5) days after Borrower knows of the occurrence of each Default, a written notice setting forth the details of such Default and the action that Borrower has taken and proposes to take with respect thereto. (f) ERISA REPORTS. Promptly after the filing or receipt thereof, copies of all reports, including annual reports, and notices which any Company files with or receives from the PBGC or the U.S. Department of Labor under ERISA; and as soon as possible and in any event within five (5) days after any Company knows or has reason to know that any reportable event or prohibited transaction has occurred with respect to any Plan or that the PBGC, or any Company has instituted or will institute proceedings under Title IV of ERISA to terminate any Plan, a certificate of the chief financial officer of Borrower setting forth the details as to such reportable event or prohibited transaction or Plan termination and the action that Borrower proposes to take with respect thereto. (g) REPORTS TO OTHER CREDITORS. Promptly after the furnishing thereof, copies of any statement or report furnished by any Company to any other creditor to which any Company owes $100,000.00 or more pursuant to the terms of any indenture, loan, or credit or similar agreement and not otherwise required to be furnished to the Lender pursuant to any other clause of this Section 5.01. (h) PROXY STATEMENTS, Etc. As soon as available, one (1) copy of each financial statement, report, notice or proxy statement sent by Borrower to its stockholders generally and one (1) copy of each regular, periodic or special report, registration statement, or prospectus filed by Borrower with any securities exchange or the Securities and Exchange Commission or any successor agency including, without limitation, all Forms 10-K, 10-Q and 8-K and all other periodic reports required to be filed under the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder. (i) GOVERNMENTAL AUTHORIZATIONS. Upon the request of Lender, but not more often than one (1) time during each fiscal year of Borrower, a complete and accurate list of each Governmental Authorization held by each of Companies or that otherwise relate to the business of, or to any of the assets owned or used by, each of the Companies. (j) QUARTERLY LIQUIDITY STATEMENTS. As soon as available and in any event, within twenty (20) days after the last day of each calendar quarter, a statement of Borrower's Unencumbered Liquid Assets (as defined in Section 6.04) in detail reasonably satisfactory to Lender. (k) GENERAL INFORMATION. Promptly, such other information concerning Borrower or any of its Subsidiaries as the Lender may from time to time reasonably request. 15 5.02. USE OF CREDIT . Borrower shall use proceeds of Borrowings only for the purposes represented in this agreement. 5.03. PAYMENT OF TAXES AND OTHER INDEBTEDNESS . Borrower shall and shall cause each Company to pay and discharge (i) all taxes, assessments and governmental charges or levies imposed upon it or upon its income, or upon any property belonging to it, before delinquent, (ii) all lawful claims (including claims for labor, materials and supplies), which, if unpaid, might give rise to a Lien upon any of its property, and (iii) all of its other indebtedness, except as prohibited under the Loan Documents; provided, however, that no Company shall be required to pay any such tax, assessment, charge or levy if and so long as the amount, applicability or validity thereof shall currently be contested in good faith by appropriate proceedings and appropriate accruals and cash reserves have been established in accordance with GAAP. 5.04. BOOKS AND RECORDS; ACCESS . Upon five (5) days notice from Lender, Borrower shall give any representative of Lender access during all business hours to, and permit such representative to examine, copy or make excerpts from, any and all books, records and documents in the possession of Borrower and relating to its affairs, and to inspect any of the properties of Borrower. Borrower shall maintain complete and accurate books and records of its transactions in accordance with good accounting practices. 5.05. COMPLIANCE WITH LAW . Borrower shall and shall cause each Company to comply with all applicable laws, rules, regulations, and all orders of any Governmental Authority. 5.06. PAYMENT OF OBLIGATIONS . Borrower shall and shall cause each Company to promptly pay (or renew and extend) all of its material obligations as they become due (unless the obligations are being properly contested in good faith). 5.07. EXPENSES . Within five Business Days after demand accompanied by an invoice describing the costs, fees, and expenses in reasonable detail, Borrowers shall, subject to the last sentence in this Section 5.07, pay (a) all reasonable costs, fees, and expenses paid or incurred by Lender incident to any Loan Document (including, without limitation, the reasonable fees and expenses of Lender's counsel in connection with the negotiation, preparation, delivery, and execution of the Loan Documents and any related amendment, waiver, or consent) and (b) all reasonable costs and expenses incurred by Lender in connection with the enforcement of the obligations of any Company under the Loan Documents or the exercise of any Rights under the Loan Documents, all of which are part of the Obligation, bearing interest, (if not paid within five Business Days after demand accompanied by an invoice describing the costs, fees, and expenses in reasonable detail) at the Default Rate until paid. 5.08. MAINTENANCE OF EXISTENCE, ASSETS, AND BUSINESS . Borrower agrees that it shall and shall cause each Company to (a) except in connection with dispositions permitted under Section 6.09 and mergers, consolidations, and dissolutions permitted under Section 6.09, maintain its corporate existence and good standing in its jurisdiction of incorporation, and (b) except where not a Material Adverse Event (i) maintain its authority to transact business and good standing in all other states where required, (ii) maintain all licenses, permits, and franchises (including, without limitation, Environmental Permits) necessary for its business, and (iii) keep all of its material assets that are useful in and necessary to its business in good working order and condition (ordinary wear and tear excepted) and make all necessary repairs and replacements. 5.09. INSURANCE . In addition to any other requirements set forth in other Loan Documents, Borrower shall and shall cause each Company at its cost and expense, to maintain with financially sound, 16 responsible, and reputable insurance companies or associations (or, as to workers' compensation or similar insurance, with an insurance fund or by self-insurance authorized by the jurisdictions in which it operates) insurance concerning its properties and businesses against casualties and contingencies and of types and in amounts (and with co-insurance and deductibles) as is customary in the case of similar businesses. 5.10. ENVIRONMENTAL MATTERS . Borrower shall and shall cause each Company to (a) operate and manage its businesses and otherwise conduct its affairs in compliance with all Environmental Laws and Environmental Permits except to the extent noncompliance does not constitute a Material Adverse Event, (b) promptly deliver to Lender a copy of any notice received from any Governmental Authority alleging that any Company is not in compliance with any Environmental Law or Environmental Permit if the allegation (if determined adversely) would constitute a Material Adverse Event, and (c) promptly deliver to Lender a copy of any notice received from any Governmental Authority alleging that any Company has any potential Environmental Liability if the allegation (if determined adversely) would constitute a Material Adverse Event. 5.11. FURTHER ASSURANCES . Borrower shall and shall cause each Company to make, execute and deliver or file or cause the same to be done, all such notices, additional agreements, mortgages, assignments, financing statements or other assurances, and take any and all such other action, as Lender may, from time to time, deem necessary or proper in connection with any of the Loan Documents, including actions necessary or proper to preserve or perfect Lender's security interest in Pledged Shares and other Collateral. 5.12. INDEMNITY BY BORROWER . (a) AS USED IN THIS SECTION: (i) "INDEMNITOR" MEANS (SUBJECT TO CLAUSE (C) BELOW) BORROWER; (ii) "INDEMNITEE" MEANS LENDER, EACH PRESENT AND FUTURE AFFILIATE OF LENDER, EACH PRESENT AND FUTURE REPRESENTATIVE OF LENDER, OR ANY OF THOSE AFFILIATES, AND EACH PRESENT AND FUTURE SUCCESSOR AND ASSIGN OF LENDER, OR ANY OF THOSE AFFILIATES OR REPRESENTATIVES; AND (iii) "INDEMNIFIED LIABILITIES" MEANS ALL PRESENT AND FUTURE, KNOWN AND UNKNOWN, FIXED AND CONTINGENT, ADMINISTRATIVE, INVESTIGATIVE, JUDICIAL, AND OTHER CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, INVESTIGATIONS, SUITS, PROCEEDINGS, AMOUNTS PAID IN SETTLEMENT, DAMAGES, JUDGMENTS, PENALTIES, COURT COSTS, LIABILITIES, AND OBLIGATIONS, AND ALL PRESENT AND FUTURE COSTS, EXPENSES, AND DISBURSEMENTS (INCLUDING, WITHOUT LIMITATION, ALL REASONABLE ATTORNEYS' FEES AND EXPENSES WHETHER OR NOT ANY SUIT OR OTHER PROCEEDING EXISTS OR ANY INDEMNITEE IS PARTY TO ANY SUIT OR OTHER PROCEEDING) IN ANY WAY RELATED TO ANY OF THE FOREGOING, THAT MAY AT ANY TIME BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST ANY INDEMNITEE AND IN ANY WAY RELATING TO OR ARISING OUT OF ANY (A) LOAN DOCUMENT, TRANSACTION CONTEMPLATED BY ANY LOAN DOCUMENT, COLLATERAL UNDER ANY LOAN DOCUMENT, OR REAL PROPERTY, (B) ENVIRONMENTAL LIABILITY IN ANY WAY RELATED TO ANY COMPANY, PREDECESSOR, COLLATERAL UNDER ANY LOAN DOCUMENT, REAL PROPERTY, OR ACT, OMISSION, STATUS, OWNERSHIP, OR OTHER RELATIONSHIP, CONDITION, OR CIRCUMSTANCE CONTEMPLATED BY, CREATED UNDER, OR ARISING PURSUANT TO OR IN CONNECTION WITH ANY LOAN DOCUMENT, OR (C) INDEMNITEE'S SOLE OR CONCURRENT ORDINARY NEGLIGENCE. (b) EACH INDEMNITOR SHALL INDEMNIFY EACH INDEMNITEE FROM AND AGAINST, PROTECT AND DEFEND EACH INDEMNITEE FROM AND AGAINST, HOLD EACH 17 INDEMNITEE HARMLESS FROM AND AGAINST, AND ON DEMAND PAY OR REIMBURSE EACH INDEMNITEE FOR, ALL INDEMNIFIED LIABILITIES. (c) THE FOREGOING PROVISIONS (i) ARE NOT LIMITED IN AMOUNT EVEN IF THAT AMOUNT EXCEEDS THE OBLIGATION, (ii) INCLUDE, WITHOUT LIMITATION, REASONABLE FEES AND EXPENSES OF ATTORNEYS AND OTHER COSTS AND EXPENSES OF LITIGATION OR PREPARING FOR LITIGATION AND DAMAGES OR INJURY TO PERSONS, PROPERTY, OR NATURAL RESOURCES ARISING UNDER ANY STATUTORY OR COMMON LAW, PUNITIVE DAMAGES, FINES, AND OTHER PENALTIES, AND (iii) ARE NOT AFFECTED BY THE SOURCE OR ORIGIN OF ANY HAZARDOUS SUBSTANCE, AND (iv) ARE NOT AFFECTED BY ANY INDEMNITEE'S INVESTIGATION, ACTUAL OR CONSTRUCTIVE KNOWLEDGE, COURSE OF DEALING, OR WAIVER. (d) NOTWITHSTANDING ANYTHING TO THE CONTRARY, NO INDEMNITEE IS ENTITLED TO BE INDEMNIFIED UNDER THE LOAN DOCUMENTS FOR ITS OWN FRAUD, GROSS NEGLIGENCE, OR WILFUL MISCONDUCT. (e) THE PROVISIONS OF AND INDEMNIFICATION AND OTHER UNDERTAKINGS UNDER THIS SECTION SURVIVE THE FORECLOSURE OF ANY LENDER LIEN OR ANY TRANSFER IN LIEU OF THAT FORECLOSURE, THE SALE OR OTHER TRANSFER OF ANY COLLATERAL UNDER ANY LOAN DOCUMENT OR REAL PROPERTY TO ANY PERSON, THE SATISFACTION OF THE OBLIGATION, THE TERMINATION OF THE LOAN DOCUMENTS, AND THE RELEASE OF ANY OR ALL LIENS IN FAVOR OF LENDER. SECTION 6 NEGATIVE COVENANTS So long as Lender has any commitment to make Borrowings hereunder, and until payment in full of the Obligation, Borrower agrees that (unless Lender shall otherwise consent in writing): 6.01. LIMITATION ON SALE; NEGATIVE PLEDGE . Borrower shall not sell, assign or transfer, or create, incur, permit or suffer to exist any Lien upon, or grant options, warrants or rights in, any stock of Prime owned by Borrower, except for the (a) security interest in favor of Lender; and (b) up to 500,000 shares of Prime not subject to the Pledge Agreement. 6.02. LIMITATION ON INDEBTEDNESS . Borrower shall not and shall not permit the Companies to incur, permit or suffer to exist any Debt which causes the aggregate amount of all such Debt of the Companies to exceed $500,000. 6.03. LIMITATION ON DISPOSITION OF ASSETS . Borrower shall not and shall not permit any Company to sell, transfer, lease or otherwise dispose of any of its assets having a fair market value of more than $1,000 for less than fair market. 6.04. LIQUIDITY MAINTENANCE . Borrower shall not permit the aggregate market value of Borrower's Unencumbered Liquid Assets (as defined below), determined as of the end of each March, June, September, and December, to be less than the Interest Expense scheduled to be due and payable in the two succeeding fiscal quarters of Borrower. 18 As used in this Section 6.04, the term "Unencumbered Liquid Assets" means the following assets and rights owned or held by any Company to the extent that they are unrestricted, are not subject to any Lien, and may be converted to cash by sale or other means within ten days: (a) Cash; (b) Demand deposits or interest-bearing time and eurodollar deposits, certificates of deposit, or similar banking arrangements with banks that have capital and surplus of not less than $750,000,000; (c) Direct obligations of either the United States of America, in the form of United States Treasury obligations, or any governmental agency or instrumentality whose obligations constitute full faith and credit obligations of the United States of America, with maturities of ten years or less; (d) Commercial paper rated P-1 by Moody's Investors Services, Inc., or A-1 by Standard & Poor's Corporation; (e) Bonds and other fixed income instruments (including tax-exempt bonds) from companies or public entities rated investment grade, and mutual funds that invest substantially all of their assets in such bonds and other fixed income instruments, either owned directly by Borrower or managed on Borrower's behalf by any nationally recognized investment advisor with assets under management in excess of $250,000,000; (f) Common stocks and preferred stocks listed on the New York Stock Exchange or any other national exchange or sold over the counter, and which are subject to no legal or contractual restrictions on trading, either owned directly by Borrower or managed on Borrower's behalf by any nationally recognized investment advisor with assets under management in excess of $250,000,000; and (g) Mutual funds or money market funds that invest substantially all of their assets in instruments described in clauses (a), (b), (c), (d), (e), or (f) preceding. 6.05. DISTRIBUTIONS . Borrower shall not and shall not permit any Company to declare, make, or pay any Distribution except (i) Distributions paid in the form of additional equity that is not mandatorily redeemable, (ii) Distributions by any Company to Borrower and any other shareholder of such Company pro rata with Borrower, and (iii) payment of expenses to directors, officers, and employees of the Companies in the ordinary course of business. 6.06. NET WORTH . Borrower shall not permit the Companies' Net Worth, determined as of the end of each fiscal quarter of Borrower, to be less than $20,000,000. 6.07. REPURCHASE OF BORROWER STOCK . All repurchases of its stock by Borrower shall be done in compliance with all applicable laws, including, without limitation, Regulation U. Borrower agrees that it shall not repurchase stock having a fair market value exceeding $1,000,000 in the aggregate. All shares of Borrower's stock repurchased by Borrower shall be immediately cancelled and retired. 6.08. TRANSACTION WITH AFFILIATES . Borrower shall not and shall not permit any Company to enter into any material transaction with any of its Affiliates except (a) those described on Schedule 4.15, and (b) transactions in the ordinary course of business and upon fair and reasonable terms not 19 materially less favorable than it could obtain or could become entitle to in an arm's-length transaction with a Person that were not its Affiliate. 6.09 MERGERS, CONSOLIDATIONS, AND DISSOLUTIONS . Borrower shall not and shall not permit any Company to merge or consolidate with any other Person or dissolve or sell, transfer, or pledge all or substantially all of its assets, except, (i) if there is no related Default (a) any merger between Borrower and any other Company, so long as the Borrower is the survivor, and (b) between any Company (other than Borrower) and any other Company, provided that if any Guarantor merges with a Company which is not a Guarantor, the Guarantor must be the survivor; (ii) upon ten (10) Business Day's prior written notice, Syntera Technologies, Inc. may be dissolved; (iii) Borrower may transfer stock of APS Practice Management, Inc. ("Practice Management") or cause additional stock of Practice Management to be issued which would cause Practice Management to cease being a Subsidiary; and (iv) Borrower may transfer stock of APS Insurance Services, Inc. ("APS Insurance") to FPIC Insurance Group, Inc. pursuant to and in accordance with the Stock Purchase and Stock Option Agreement dated as of April 1, 1997 between Borrower and Florida Physicians Insurance Group, Inc. and the Shareholders Agreement dated as of June 30, 1997 between Borrower and Florida Physicians Insurance Group, Inc., as in effect on the date hereof. SECTION 7 EVENTS OF DEFAULT 7.01. EVENTS OF DEFAULT . An "Event of Default" shall exist if any one or more of the following events shall occur and be continuing: (a) Borrower fails to pay any principal or interest payment when due and such failure continues for five (5) days or Borrower fails to pay when due all or any part of any other portion of the Obligation; (b) any representation or warranty made under this Agreement or any of the other Loan Documents proves to be untrue or inaccurate in any material respect as of the date on which such representation or warranty is made; (c) default occurs in the performance of any of the covenants or agreements of any Company contained in this Agreement, or in any of the other Loan Documents, which default is not remedied within ten (10) days after written notice to Borrower from Lender; provided, that such ten (10) day grace period shall not apply to the obligations to make scheduled payments contained in Section 2 of this Agreement, or in Section 6 of the Pledge Agreement; (d) default shall occur in the payment of the unpaid balance of, or any installment of principal or interest of, indebtedness (other than the Obligation) having an aggregate principal balance exceeding the sum of $100,000 of any Company or default shall occur in respect of any note or credit agreement relating to any such indebtedness and such default shall continue for more than the period of grace, if any, specified therein; (e) any of the Loan Documents shall cease to be legal, valid and binding agreements enforceable against the Person executing the same in accordance with its terms, shall be terminated, become or be declared ineffective or inoperative or cease to provide the respective liens, security interests, rights, titles, interests, remedies, powers or privileges intended to be provided thereby; 20 (f) Any Company or Prime shall (i) apply for or consent to the appointment of a receiver, trustee, custodian, intervenor or liquidator of itself or of all or a substantial part of the Company's or Prime's assets, (ii) file a voluntary petition in bankruptcy, admit in writing the Company or Prime, as the case may be, is unable to pay its debts as they become due or generally not pay its debts as they become due, (iii) make a general assignment for the benefit of creditors, (iv) file a petition or answer seeking reorganization of an arrangement with creditors or to take advantage of any bankruptcy or insolvency laws, or (v) file an answer admitting the material allegations of, or consent to, or default in answering, a petition filed against the Company or Prime in any bankruptcy, reorganization or insolvency proceeding; or (g) An involuntary proceeding shall be commenced against any Company or Prime seeking bankruptcy or reorganization of any Company or Prime or the appointment of a receiver, custodian, trustee, liquidator or other similar official of any Company or Prime, or all or substantially all of the Company's or Prime's assets, and such proceeding shall not have been dismissed within ninety (90) days of the filing thereof; or an order, order for relief, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving a petition or complaint seeking reorganization of any Company or Prime, or appointing a receiver, custodian, trustee, liquidator or other similar official of any Company or Prime, or of all or substantially all of any Company's or Prime's assets; (h) any final judgment(s) for the payment of money in excess of the sum of $1,000,000 in the aggregate shall be rendered against any Company and such judgment(s) shall not be satisfied or discharged at least ten (10) days prior to the date on which any of such Company's assets could be lawfully sold to satisfy such judgment; 7.02. REMEDIES UPON EVENT OF DEFAULT . If any Event of Default shall occur Lender may, without notice, except as otherwise provided for herein, exercise any one or more of the following rights and remedies, and any other remedies provided in any of the Loan Documents, as Lender in its sole discretion may deem necessary or appropriate: (i) terminate Lender's commitment to lend, (ii) declare the Obligation or any part thereof to be forthwith due and payable, whereupon the same shall forthwith become due and payable without presentment, demand, protest, notice of default, notice of acceleration or of intention to accelerate or other notice of any kind, all of which Borrower hereby expressly waives, anything contained herein or in the Note to the contrary notwithstanding, (iii) reduce any claim to judgment, or (iv) pursue and enforce any of Lender's rights and remedies under the Loan Documents, or otherwise provided under or pursuant to any applicable law or agreement; provided, however, that if any specified in Sections 7.01(f) or (g) shall occur, the Obligation shall thereupon become due and payable concurrently therewith, and Lender's obligation to lend shall immediately terminate hereunder, without any further action by Lender and without presentment, demand, protest, notice of default, notice of acceleration or of intention to accelerate or other notice of any kind, all of which Borrower hereby expressly waives. 7.03. PERFORMANCE BY LENDER . Should Borrower fail to perform any covenant, duty or agreement contained in any of the Loan Documents, Lender may, after five (5) days written notice to Borrower, perform or attempt to perform such covenant, duty or agreement on behalf of Borrower. In such event, Borrower shall, at the request of Lender, promptly pay any amount expended by Lender in such performance or attempted performance to Lender at its office in Austin, Texas, together with interest thereon at the default rate of interest provided herein, from the date of such expenditure until paid. Notwithstanding the foregoing, it is expressly understood that Lender shall not assume any liability or responsibility for the performance of any duties of Borrower hereunder or under any of the Loan Documents and none of the covenants or other provisions contained in this Agreement shall, or shall be 21 deemed to, give Lender the right or power to exercise control over the management and affairs of Borrower. SECTION 8 MISCELLANEOUS 8.01. ACCOUNTING REPORTS . All financial reports or projections, furnished by any Person to Lender pursuant to this Agreement shall be prepared in such form and such detail as shall be satisfactory to Lender, shall be prepared on the same basis as those prepared by such Person in prior years. 8.02. WAIVER . No failure to exercise, and no delay in exercising, on the part of Lender, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. The rights of Lender under the Loan Documents shall be in addition to all other rights provided by law. No modification or waiver of any provision of any Loan Document, nor consent to departure therefrom, shall be effective unless in writing and no such consent or waiver shall extend beyond the particular case and purpose involved. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand. 8.03. NOTICES . Any communications required or permitted to be given by any of the Loan Documents must be (i) in writing and personally delivered or mailed by prepaid certified or registered mail, or (ii) made by facsimile transmission delivered or transmitted, to the party to whom such notice of communication is directed, to the address of such party shown opposite its name on the signature pages hereof. Any such communication shall be deemed to have been given (whether actually received or not) on the day it is personally delivered or, if transmitted by facsimile transmission, on the day that such communication is transmitted as aforesaid subject to telephone confirmation of receipt; provided, however, that any notice received by Lender after 10:00 a.m. Austin, Texas time on any day from Borrower pursuant to Section 2.02 (with respect to a Notice of Borrowing) shall be deemed for the purposes of such Section to have been given by Borrower on the next succeeding day, or if mailed, on the third day after it is marked as aforesaid. Any party may change its address for purposes of this Agreement by giving notice of such change to the other parties pursuant to this Section 8.03. 8.04. GOVERNING LAW . This Agreement has been prepared, is being executed and delivered, and is intended to be performed in the State of Texas and the substantive laws of such state and the applicable federal laws of the United States of America shall govern the validity, construction, enforcement and interpretation of this Agreement and all of the other Loan Documents. 8.05. INVALID PROVISIONS . Any provision of any Loan Document held by a court of competent jurisdiction to be illegal, invalid or unenforceable shall not invalidate the remaining provisions of such Loan Document which shall remain in full force and effect the effect thereof shall be confined to the provision held invalid or illegal. 8.06. MAXIMUM INTEREST RATE . Regardless of any provision contained in any of the Loan Documents, Lender shall never be entitled to receive, collect or apply as interest on the Note any amount in excess of interest calculated at the Maximum Rate, and, in the event that any Lender ever receives, collects or applies as interest any such excess, the amount which would be excessive interest shall be deemed to be a partial prepayment of principal and treated hereunder as such; and, if the principal amount of the Obligation is paid in full, any remaining excess shall forthwith be paid to Borrower. In determining whether or not the interest paid or payable under any specific contingency 22 exceeds interest calculated at the Maximum Rate, Borrower and Lender shall, to the maximum extent permitted under applicable law, (i) characterize any nonprincipal payment as an expense, fee or premium rather than as interest; (ii) exclude voluntary prepayments and the effects thereof; and (iii) amortize, prorate, allocate and spread, in equal parts, the total amount of interest throughout the entire contemplated term of the Note; provided that, if the Note is paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds interest calculated at the Maximum Rate, Lender shall refund to Borrower the amount of such excess or credit the amount of such excess against the principal amount of the Note and, in such event, Lender shall not be subject to any penalties provided by any laws for contracting for, charging, taking, reserving or receiving interest in excess of interest calculated at the Maximum Rate. 8.07. NONLIABILITY OF LENDER . The relationship between Borrower and Lender is, and shall at all times remain, solely that of Borrower and Lender and Lender has no fiduciary or other special relationship with Borrower. 8.08. OFFSET . Borrower hereby grants to Lender the right of offset, to secure repayment of the Obligation, upon any and all moneys, securities or other property of Borrower and the proceeds therefrom, now or hereafter held or received by or in transit to Lender or its agents, from or for the account of Borrower, whether for safe keeping, custody, pledge, transmission, collection or otherwise, and also upon any and all deposits (general or special) and credits of Borrower, and any and all claims of Borrower against Lender at any time existing. 8.09. SUCCESSORS AND ASSIGNS . The Loan Documents shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors, assigns and legal representatives; provided, however, that Borrower may not, without the prior written consent of Lender, assign any rights, powers, duties or obligations thereunder. 8.10. CHAPTER 346. The Borrower and Lender hereby agree that the provisions of Chapter 346 of the Finance Code of the State of Texas (regulating certain revolving credit loans and revolving triparty accounts) shall not apply to the Loan Documents. 8.11. HEADINGS . Section headings are for convenience of reference only and shall in no way affect the interpretation of this Agreement. 8.12. SURVIVAL . All representations and warranties made by Borrower herein shall survive delivery of the Note and the making of the Loan. 8.13. PARTICIPATIONS . Lender shall have the right to enter into participation agreements with other banks with respect to the Note, and grant participations in Loan Documents but such participation shall not affect the rights and duties of such Lender hereunder vis-a-vis Borrower. Each actual or proposed participant shall be entitled to receive from Lender all information received by Lender regarding the creditworthiness of Borrower, including, without limitation, information required to be disclosed to a participant pursuant to Banking Circular 181 (Rev., August 2, 1984), issued by the Comptroller of the Currency (whether the actual or proposed participant is subject to the circular or not). 8.14. NO THIRD PARTY BENEFICIARY . The parties do not intend the benefits of this Agreement to inure to any third party, nor shall any Loan Document or any course of conduct by any party hereto be construed to make or render Lender or any of its officers, directors, agents or employees liable (i) to any materialman, supplier, contractor, subcontractor, purchaser or lessee of any property owned by Borrower, or (ii) for debts or claims accruing to any such Persons against Borrower. 23 8.15. Waiver of Jury Trial . TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER HEREBY IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY OR THE ACTIONS OF LENDER IN THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF. 8.16. MULTIPLE COUNTERPARTS . This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. 8.17. Arbitration . ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY LOAN DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF JUDICIAL ARBITRATION AND MEDIATION SERVICES, INC. (J.A.M.S.), AND THE "SPECIAL RULES" SET FORTH IN SECTION 8.17A BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF THE BORROWER'S DOMICILE AT THE TIME OF THIS AGREEMENT'S EXECUTION AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN NINETY (90) DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL SIXTY (60) DAYS. B. RESERVATION OF RIGHTS. NOTHING IN THIS AGREEMENT SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS AGREEMENT; OR (II) BE A WAIVER BY LENDER OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C.SS. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF LENDER HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF OR THE APPOINTMENT OF A RECEIVER. LENDER MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS AGREEMENT. AT LENDER'S OPTION, FORECLOSURE UNDER A DEED OF TRUST OR MORTGAGE MAY BE ACCOMPLISHED BY ANY OF THE FOLLOWING: THE EXERCISE OF A POWER OF SALE UNDER A DEED OF TRUST OR MORTGAGE, OR BY JUDICIAL FORECLOSURE, PROVIDED THAT IF LENDER SHALL PETITION A COURT FOR SUCH RELIEF OR REMEDIES, THEN BORROWER SHALL BE ENTITLED TO ASSERT IN SUCH COURT ANY CLAIMS OR DEFENSES RELATED TO THE SUBJECT MATTER OF LENDER'S PETITION. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY 24 PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OF CLAIM OCCASIONING RESORT TO SUCH REMEDIES. 8.18 LIMITATION ON DAMAGES . NEITHER PARTY SHALL BE RESPONSIBLE FOR PUNITIVE, SPECIAL OR EXEMPLARY DAMAGES BY REASON OF CONTRACT OR TORT CLAIMS ARISING OUT OF THE TRANSACTION GOVERNED BY THIS AGREEMENT, EXCEPT FOR WILLFUL OR OUTRAGEOUS CONDUCT. THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENT OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. REMAINDER OF PAGE INTENTIONALLY BLANK. SIGNATURE PAGE FOLLOWS. 25 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and year first above written. Address for Notice: BORROWER: American Physicians Service Group, Inc. AMERICAN PHYSICIANS SERVICE 1301 Capital of Texas Highway GROUP, INC. C-300 Austin, Texas 78746 Telecopy #: (512) 314-4333 By: /s/ William H Hayes Name: William H Hayes Title: Sr VP Finance Address for Notice: LENDER: NationsBank of Texas, N.A. NATIONSBANK OF TEXAS, N.A. 515 Congress Avenue 11th Floor Austin, Texas 78702 Telecopy #: (512) 397-2052 By: /s/ Teena Belcik Vice President Copy to: Haynes and Boone, L.L.P. 3100 NationsBank Plaza 901 Main Street Dallas, TX 75202-3789 Attn: Sue P. Murphy Telecopy #: (214) 200-0565 26 SCHEDULE 3.01 CLOSING CONDITIONS Unless otherwise specified, all dated as of February 10, 1998, or a date (a "Current Date") within 30 days before the Closing Date. H&B [1.] REVOLVING CREDIT LOAN AGREEMENT (the "Loan Agreement") dated as of February , 1998, between AMERICAN PHYSICIANS SERVICE GROUP, INC. ("Borrower") and NATIONSBANK OF TEXAS, N.A. ("Lender"), all the terms of which or incorporated in which have the same meanings when used in this schedule, to which all schedules and exhibits must be attached. H&B [2.] REVOLVING CREDIT NOTE in the total stated principal amount of $10,000,000 executed by Borrower, payable to Lender, in substantially the form of Exhibit A to the Loan Agreement. H&B [3.] PLEDGE AGREEMENT executed by Borrower, substantially in the form of Exhibit B to the Loan Agreement, together with Stock Certificates and Blank Stock Powers. H&B [4.] GUARANTY executed by each of the Syntera Technologies, Inc. and APS Realty, Inc. (collectively, "Guarantors"). H&B [5.] NOTICE OF BORROWING executed by Borrower substantially in the form of Exhibit C to the Loan Agreement. [Only applicable if initial advance concurrent with closing] Borrower's [6.] OPINION OF COUNSEL for Borrower and Guarantors, in a form satisfactory to Lender, Counsel including Rule 144 opinion. H&B [7.] FINANCING STATEMENTS for Borrower, as debtor, to be filed in the Office of the Secretary of State of Texas. H&B [8.] NOTICE OF NO ORAL AGREEMENTS pursuant to Section 26.02 of Texas law. [9.] For Borrower and each Guarantor (a) Charter; (b) Bylaws; (c) Board of Directors Resolutions; (d) Incumbency Certificate; (e) Closing Certificate; [10.] Uniform Commercial Code Search in Texas for Borrower. [11.] CERTIFICATE regarding Pledge of APS Insurance Services, Inc. shares. 1 Borrower's [12.] For each of Borrower and the Guarantors Counsel (a) Certificate of Existence; (b) Certificate of Good Standing. [13.] Regulation U-1 Certificate. H&B [14.] Such other documents and items as Lender may reasonably request. EXHIBIT A REVOLVING CREDIT NOTE $10,000,000.00 Austin, Texas February 10, 1998 1. FOR VALUE RECEIVED, AMERICAN PHYSICIANS SERVICE GROUP, INC., a Texas corporation ("Maker"), hereby unconditionally promises to pay to the order of NationsBank of Texas, N.A. ("Payee"), at the address, severally reflected on the signature page of the Loan Agreement (as defined below), the sum of TEN MILLION AND NO/100 Dollars ($10,000,000.00) (or, if less, so much thereof as may be advanced and is outstanding), in lawful money of the United States of America. Capitalized terms not defined herein shall have the meaning assigned to those terms in the Loan Agreement. 2. The unpaid principal amount of, and accrued unpaid interest on, this Revolving Credit Note (this "Note") is payable in accordance with the Loan Agreement, but not later than the Termination Date. 3. The unpaid principal balance advanced and outstanding hereunder shall bear interest from the date of advance until maturity at the rate per annum provided in the Loan Agreement. The interest rate specified in this section is subject to adjustment under the circumstances described in the Loan Agreement. Interest shall be computed in the manner provided in the Loan Agreement. 4. Notwithstanding any provision contained in this Note or any other document executed or delivered in connection with this Note or in connection with the Loan Agreement, Payee shall never be deemed to have contracted for or be entitled to receive, collect or apply as interest on this Note, any amount in excess of the maximum rate of interest permitted to be charged by applicable law, and, if Payee ever receives, collects or applies as interest any such excess, then the amount that would be excessive interest shall be applied to reduce the unpaid principal balance of this Note, and, if the principal balance of this Note is paid in full by that application, then any remaining excess shall promptly be paid to Maker. In determining whether the interest paid or payable under any specific contingency exceeds the highest lawful rate, Maker and Payee shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment (other than payments expressly designated as interest payments hereunder) as an expense or fee rather than as interest, (ii) exclude voluntary prepayments and the effect thereof, and (iii) spread the total amount of interest throughout the entire contemplated term of this Note so that the interest rate is uniform throughout that term. 5. This Note has been executed and delivered pursuant to a Revolving Credit Loan Agreement (as modified, amended, or supplemented from time to time, the "Loan Agreement"), dated the date hereof, executed by and between Maker and Payee, and is the "Note" referred to therein, and the holder of this Note is entitled to the benefits provided in the Loan Agreement. Reference is hereby made to the Loan Agreement for a statement of (i) the obligation of Payee to advance funds hereunder, (ii) the prepayment rights and obligations of Maker and (iii) the events on which the maturity of this Note may be accelerated. 6. If the principal of, or any installment of interest on, this Note becomes due and payable on a day other than a Business Day, then the maturity thereof shall be extended to the next succeeding Business Day. If this Note, or any installment or payment due hereunder, is not paid when due, whether at maturity or by acceleration, or if it is collected through a bankruptcy, probate or other court, whether before or after maturity, then Maker shall pay all costs of collection, including, but not limited to, 1 attorney's fees incurred by the holder of this Note. All past due principal of, and to the extent permitted by applicable law, interest on this Note shall bear interest until paid at the rate provided in the Loan Agreement. 7. Maker and all sureties, endorsers, guarantors and other parties ever liable for payment of any sums payable pursuant to the terms of this Note, jointly and severally waive demand, presentment for payment, protest, notice of protest, notice of acceleration, notice of intent to accelerate, diligence in collection, the bringing of any suit against any party and any notice of or defense on account of any extensions, renewals, partial payments or changes in any manner of or in this Note or in any of its terms, provisions and covenants, or any releases or substitutions of any security, or any delay, indulgence or other act of any trustee or any holder hereof, whether before or after maturity. 8. All Borrowings made by Payee, the respective Interest Periods thereof (if applicable), and all repayments of the principal thereof may be recorded by Payee and, before any transfer hereof, endorsed by Payee on the schedule attached hereto, or on a continuation of the schedule attached to and a part hereof, provided that the failure of Payee to record any endorsement shall not affect the obligation of Maker hereunder or under the Loan Agreement. 9. This Note is being executed and delivered, and is intended to be performed in the State of Texas. Except to the extent that the laws of the United States may apply to the terms hereof, the substantive laws of the State of Texas shall govern the validity, construction, enforcement and interpretation of this Note. MAKER: AMERICAN PHYSICIANS SERVICE GROUP, INC. By: /s/ William H Hayes Name: William H Hayes Title: Sr VP Finance 2 - - -------- [ ] indicates items not complete at time of this draft of this schedule, together with names of individuals of parties or counsel with responsibility for each. EX-10 18 REVOLVING CREDIT CREDIT NOTE Exhibit 10.54 REVOLVING CREDIT NOTE $10,000,000.00 Austin, Texas February 10, 1998 1. FOR VALUE RECEIVED, AMERICAN PHYSICIANS SERVICE GROUP, INC., a Texas corporation ("Maker"), hereby unconditionally promises to pay to the order of NationsBank of Texas, N.A. ("Payee"), at the address, severally reflected on the signature page of the Loan Agreement (as defined below), the sum of TEN MILLION AND NO/100 Dollars ($10,000,000.00) (or, if less, so much thereof as may be advanced and is outstanding), in lawful money of the United States of America. Capitalized terms not defined herein shall have the meaning assigned to those terms in the Loan Agreement. 2. The unpaid principal amount of, and accrued unpaid interest on, this Revolving Credit Note (this "Note") is payable in accordance with the Loan Agreement, but not later than the Termination Date. 3. The unpaid principal balance advanced and outstanding hereunder shall bear interest from the date of advance until maturity at the rate per annum provided in the Loan Agreement. The interest rate specified in this section is subject to adjustment under the circumstances described in the Loan Agreement. Interest shall be computed in the manner provided in the Loan Agreement. 4. Notwithstanding any provision contained in this Note or any other document executed or delivered in connection with this Note or in connection with the Loan Agreement, Payee shall never be deemed to have contracted for or be entitled to receive, collect or apply as interest on this Note, any amount in excess of the maximum rate of interest permitted to be charged by applicable law, and, if Payee ever receives, collects or applies as interest any such excess, then the amount that would be excessive interest shall be applied to reduce the unpaid principal balance of this Note, and, if the principal balance of this Note is paid in full by that application, then any remaining excess shall promptly be paid to Maker. In determining whether the interest paid or payable under any specific contingency exceeds the highest lawful rate, Maker and Payee shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment (other than payments expressly designated as interest payments hereunder) as an expense or fee rather than as interest, (ii) exclude voluntary prepayments and the effect thereof, and (iii) spread the total amount of interest throughout the entire contemplated term of this Note so that the interest rate is uniform throughout that term. 5. This Note has been executed and delivered pursuant to a Revolving Credit Loan Agreement (as modified, amended, or supplemented from time to time, the "Loan Agreement"), dated the date hereof, executed by and between Maker and Payee, and is the "Note" referred to therein, and the holder of this Note is entitled to the benefits provided in the Loan Agreement. Reference is hereby made to the Loan Agreement for a statement of (i) the obligation of Payee to advance funds hereunder, (ii) the prepayment rights and obligations of Maker and (iii) the events on which the maturity of this Note may be accelerated. 6. If the principal of, or any installment of interest on, this Note becomes due and payable on a day other than a Business Day, then the maturity thereof shall be extended to the next succeeding Business Day. If this Note, or any installment or payment due hereunder, is not paid when due, whether at maturity or by acceleration, or if it is collected through a bankruptcy, probate or other court, whether before or after maturity, then Maker shall pay all costs of collection, including, but not limited to, attorney's fees incurred by the holder of this Note. All past due principal of, and to the extent permitted by applicable law, interest on this Note shall bear interest until paid at the rate provided in the Loan Agreement. 7. Maker and all sureties, endorsers, guarantors and other parties ever liable for payment of any sums payable pursuant to the terms of this Note, jointly and severally waive demand, presentment for payment, protest, notice of protest, notice of acceleration, notice of intent to accelerate, diligence in collection, the bringing of any suit against any party and any notice of or defense on account of any extensions, renewals, partial payments or changes in any manner of or in this Note or in any of its terms, provisions and covenants, or any releases or substitutions of any security, or any delay, indulgence or other act of any trustee or any holder hereof, whether before or after maturity. 8. All Borrowings made by Payee, the respective Interest Periods thereof (if applicable), and all repayments of the principal thereof may be recorded by Payee and, before any transfer hereof, endorsed by Payee on the schedule attached hereto, or on a continuation of the schedule attached to and a part hereof, provided that the failure of Payee to record any endorsement shall not affect the obligation of Maker hereunder or under the Loan Agreement. 9. This Note is being executed and delivered, and is intended to be performed in the State of Texas. Except to the extent that the laws of the United States may apply to the terms hereof, the substantive laws of the State of Texas shall govern the validity, construction, enforcement and interpretation of this Note. MAKER: AMERICAN PHYSICIANS SERVICE GROUP, INC. By: /s/ William H Hayes Name: William H Hayes Title: Sr VP Finance 2 EX-10 19 PLEDGE AGREEMENT Exhibit 10.55 NationsBank of Texas, N.A. Pledge Agreement =========================================================== ==================== BANK/SECURED PARTY: PLEDGOR(S)/DEBTOR(S): NationsBank of Texas, N.A., American Physicians Service Group, Inc., a national banking association a Texas corporation 515 Congress Avenue 1301 Capital of Texas Highway 11th Floor C-300 Austin, Texas 78701 Austin, Texas 78746 Travis County, Texas (Street address including county) (Name and street address including county) ================================================================================ Pledgor/Debtor is: [ ] Individual [X] Corporation [ ] Partnership [ ] Other Address is Pledgor's/Debtor's: [ ] Residence [ ] Place of Business [X] Chief Executive Office if more than one place of business ================================================================================ Capitalized terms not otherwise defined in this Pledge Agreement (this "Agreement") have the same meaning as assigned in the Loan Agreement (hereinafter defined). 1. SECURITY INTEREST. For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor/Debtor (hereinafter referred to as "Pledgor") pledges, assigns and grants to Bank a security interest and lien in the Collateral (hereinafter defined) to secure the payment and the performance of the Obligation (hereinafter defined). 2. 3. COLLATERAL. The security interest is granted in the following collateral (the "Collateral"): 4. A. DESCRIPTION OF COLLATERAL. B. C. SPECIFIC INVESTMENT PROPERTY/SECURITIES: The following investment property and/or securities, together with all investment property and/ or securities hereafter delivered to Bank in substitution therefor or in addition thereto: D. i. 500,000 shares of Common Stock, $.01 par value (together with any other shares of Common Stock of Prime pledged hereunder from time to time, the "Prime Pledged Shares") of Prime Medical Services, Inc., a Delaware corporation ("Prime"). ii. iii. a. 1,000 shares of Common Stock, $.10 par value of APS Financial Corporation, a Colorado corporation; iv. v. b. 800 shares of Common Stock, $.10 par value, APS Insurance Services, Inc., a Delaware corporation; vi. vii. c. 1,874,600 shares of Common Stock, $.001 par value of APS Practice Management, Inc., a Texas corporation; viii. ix. x. d. 1,000 shares of Common Stock, $.10 par value of Syntera Technologies, Inc., a Delaware corporation; and xi. xii. e. 1,000 shares of Common Stock, $1.00 par value of APS Realty, Inc., a Texas corporation (the Prime Pledged Shares and the shares described in this Subsection 2.A.ii are collectively referred to herein as the "Pledged Shares"). xiii. xiv. all cash, securities, dividends, increases, distributions and profits received from or on the Pledged Shares, including distributions or payments in partial or complete liquidation or redemption, or as a result of reclassifications, readjustments, reorganizations or changes in the capital structure of the Issuer and any other property at any time and from time to time received, receivable or otherwise distributed or delivered to Bank, and all rights and privileges pertaining thereto. xv. xvi. It is contemplated by the parties that Pledgor may provide additional collateral from time to time hereunder as additional security for the Obligation, and may from time to time with the prior written consent of Bank sell or otherwise dispose of any Collateral provided that Pledgor provides Bank with substitute collateral. At the time of each addition or substitution of Collateral, the securities added or substituted shall be identified on a Pledge Certificate, substantially in the form of Schedule II attached hereto (the "Pledge Certificate"), and delivered to Bank. Bank has no obligation to make any advances requested in connection therewith unless (i) such additional and/or substituted Collateral is satisfactory to Bank and (ii) the perfected security interest granted to Bank therein is completed to the satisfaction of Bank. All such additional and/or substituted Collateral shall be Collateral for purposes of this Agreement, and shall secure the Obligation in the same manner as the Collateral for which it is added to and/or substituted. xvii. E. PROCEEDS. All additions, substitutes and replacements for and proceeds of the above Collateral (including all income and benefits resulting from any of the above, such as dividends payable or distributable in cash, property or stock; interest, premium and principal payments; redemption proceeds and subscription rights; and shares or other proceeds of conversions or splits of any securities in the Collateral). Any investment property and/or securities received by Pledgor, which shall comprise such additions, substitutes and replacements for, or proceeds of, the Collateral, shall be held in trust for Bank and shall be delivered immediately to Bank. Any cash proceeds shall be held in trust for Bank and upon request shall be delivered immediately to Bank. F. G. DEPOSIT ACCOUNTS. The balance of every deposit account of Pledgor maintained with Bank and any other claim of Pledgor against Bank, now or hereafter existing, liquidated or unliquidated, and all money, instruments, investment property, securities, documents, chattel paper, credits, claims, demands, income, and any other property, rights and interests of Pledgor which at any time shall come into the possession or custody or under the control of Bank or any of its agents or affiliates, for any purpose, and the proceeds of any thereof. Bank shall be deemed to have possession of any of the Collateral in transit to or set apart for it or any of its agents or affiliates. 1. OBLIGATION. 2. A. DESCRIPTION OF OBLIGATION. The following obligations ("Obligation") are secured by this Agreement: i. ALL DEBT: All debts, obligations, liabilities and agreements of Pledgor to Bank, now or hereafter existing, arising directly or indirectly between Pledgor and Bank whether absolute or contingent, joint and several, joint or several, secured or unsecured, due or not due, liquidated or unliquidated, arising by operation of law or otherwise, and all renewals, extensions and rearrangements of any of the above; including, without limitation, all debts, obligations, liabilities and agreements of Pledgor now or hereafter arising under, or governed by, that certain Revolving Credit Loan Agreement dated as of the date 2 hereof, by and between Pledgor and Bank, and any renewal, extension, modification or restatement thereof or therefor (the "Loan Agreement"). ii. iii. PROMISSORY NOTE: All debt arising under that certain promissory note dated as of the date hereof in the principal face amount of $10,000,000 executed by Pledgor payable to the order of Bank, and any and all renewals, extensions, modifications and rearrangements thereof; iv. v. All costs and expenses incurred by Bank, including attorney's fees, to obtain, preserve, perfect, enforce and defend this Agreement and maintain, preserve, collect and realize upon the Collateral, together with interest thereon at the default rate provided in the Loan Agreement; and vi. vii. All amounts which may be owed to Bank pursuant to all other loan documents executed in connection with the indebtedness described in subpart i. above. viii. In the event any amount paid to Bank on any Obligation is subsequently recovered from Bank in or as a result of any bankruptcy, insolvency or fraudulent conveyance proceeding involving an obligor of the Obligation other than Pledgor, Pledgor shall be liable to Bank for the amounts so recovered up to the fair market value of the Collateral whether or not the Collateral has been released or the security interest terminated. In the event the Collateral has been released or the security interest terminated, the fair market value of the Collateral shall be determined, at Bank's option, as of the date the Collateral was released, the security interest terminated, or said amounts were recovered. A. USE OF PROCEEDS. The proceeds of any indebtedness or obligation secured by the Collateral will not be used directly or indirectly to purchase or carry any "margin stock" as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System, or extend credit to or invest in other parties for the purpose of purchasing or carrying any such "margin stock," or to reduce or retire any indebtedness incurred for such purpose or otherwise in a manner which would violate Regulations G, T or U. 1. PLEDGOR'S WARRANTIES. Pledgor hereby represents and warrants to Bank as follows: 2. A. Financing Statements. Except as may be noted by schedule attached hereto and incorporated herein by reference, no financing statement covering the Collateral is or will be on file in any public office, except the financing statements relating to this security interest, and no security interest, other than the one herein created, has attached or been perfected in the Collateral or any part thereof. B. C. OWNERSHIP. Pledgor owns the Collateral free from any setoff, claim, restriction, lien, security interest or encumbrance except liens for taxes not yet due and payable and the security interest hereunder, the applicability of certain federal and state securities laws, including Rule 144 of the General Regulations under the Securities Act of l933, and as to the common stock of APS Insurance Services, Inc., the agreements described in Section 6.E. below, and Pledgor represents and warrants that Pledgor has held the Prime Pledged Shares and any other Prime Shares which may from time to time be pledged hereunder free and clear of all liens (except for liens, encumbrances and debt held by Bank or described above), encumbrances and debt, and borne the full economic risk thereof since October 12, 1989. D. E. POWER AND AUTHORITY. Pledgor has full power and authority to make this Agreement, and all necessary consents and approvals of any persons, entities, governmental or regulatory authorities and securities exchanges have been obtained to effectuate the validity of this Agreement. 3 F. G. PLEDGED SHARE CHARACTERISTICS. The Pledged Shares which have been pledged by Pledgor to Bank under this Agreement, or may hereafter be pledged under this Agreement, satisfy and shall satisfy each of the requirements and characteristics set forth on Schedule I hereto. H. I. The delivery at any time by Pledgor to Bank of additional Pledged Shares shall constitute a representation and warranty by Pledgor that, with respect to such Pledged Shares, in each item thereof, the matters heretofore warranted in Clauses (A) through (D) immediately above are true and correct at, and as if they were made at, the date of such delivery. J. 3. PLEDGOR'S COVENANTS. Until full payment and performance of all of the Obligation and termination or expiration of any obligation or commitment of Bank to make advances or loans to Pledgor, unless Bank otherwise consents in writing: 4. A. OBLIGATION AND THIS AGREEMENT. Pledgor shall perform all of its agreements herein and in any other agreements between it and Bank. B. C. OWNERSHIP OF COLLATERAL. Pledgor shall defend the Collateral against all claims and demands of all persons at any time claiming any interest therein adverse to Bank. Pledgor shall keep the Collateral free from all liens and security interests except those for taxes not yet due and payable and the security interest hereby created. D. E. BANK'S COSTS. Pledgor shall pay all costs necessary to obtain, preserve, perfect, defend and enforce the security interest created by this Agreement, collect the Obligation, and preserve, defend, enforce and collect the Collateral, including but not limited to taxes, assessments, reasonable attorney's fees, legal expenses and expenses of sales. Whether the Collateral is or is not in Bank's possession, and without any obligation to do so and without waiving Pledgor's default for failure to make any such payment, Bank at its option may pay any such costs and expenses and discharge encumbrances on the Collateral, and such payments shall be a part of the Obligation and bear interest at the rate set out in the Obligation. Pledgor agrees to reimburse Bank on demand for any costs so incurred. F. G. INFORMATION AND INSPECTION. Pledgor shall (i) promptly furnish Bank any information with respect to the Collateral requested by Bank; (ii) allow Bank or its representatives to inspect and copy, or furnish Bank or its representatives with copies of, all records relating to the Collateral and the Obligation; and (iii) promptly furnish Bank or its representatives with any other information Bank may reasonably request. H. I. ADDITIONAL DOCUMENTS. Pledgor shall sign and deliver any papers furnished by Bank which are necessary or desirable in the judgment of Bank to obtain, maintain and perfect the security interest hereunder and to enable Bank to comply with any federal or state law in order to obtain or perfect Bank's interest in the Collateral or to obtain proceeds of the Collateral. J. K. NOTICE OF CHANGES. Pledgor shall notify Bank immediately of (i) any material change in the Collateral, (ii) a change in Pledgor's residence or location, (iii) a change in any matter warranted or represented by Pledgor in this Agreement, or in any of the Loan Documents relating to the Obligation or furnished to Bank pursuant to this Agreement, and (iv) the occurrence of an Event of Default under this Agreement or any other Loan Document. L. M.POSSESSION OF COLLATERAL. Pledgor shall deliver a copy of this Agreement (or other notice acceptable to Bank) to any Broker, financial intermediary, or any other person in possession of any of the Collateral or on whose books the interest of Pledgor in the Collateral appears, and such delivery shall constitute notice to such person of Bank's security interest in the Collateral and shall constitute Pledgor's 4 instruction to such person to note Bank's security interest on their books and records, or deliver to Bank certificates or other evidence of the Collateral promptly upon Bank's request. Pledgor shall deliver all investment securities and other instruments and documents which are a part of the Collateral and in Pledgor's possession to Bank immediately, or if hereafter acquired, immediately following acquisition, in a form suitable for transfer by delivery or accompanied by duly executed instruments of transfer or assignment in blank with signatures appropriately guaranteed in form and substance suitable to Bank. N. O. POWER OF ATTORNEY. Pledgor appoints Bank and any officer thereof as Pledgor's special attorney-in-fact with limited power in Pledgor's name and on Pledgor's behalf, to perform only those acts that Pledgor is obligated to do or may be required to do hereunder. Nothing in this paragraph shall be construed to obligate Bank to take any action hereunder nor shall Bank be liable to Pledgor for failure to take any action hereunder. This appointment shall be deemed a power coupled with an interest and shall not be terminable as long as the Obligation is outstanding and shall not terminate on the disability or incompetence of Pledgor. Without limiting the ability to perform any acts authorized by the foregoing, Bank shall have the right and power to receive, endorse and collect all checks and other orders for the payment of money made payable to Pledgor but only to the extent that such checks or payments represent any dividend, interest payment or other distribution payable in respect of the Collateral or any part thereof. Bank will notify Pledgor after Bank has exercised the power, and Bank shall deliver to Pledgor copies of any documents executed by Bank pursuant to the power. Upon payment of the entire Obligation, the power described in this Section shall be deemed to be terminated. P. Q. OTHER PARTIES AND OTHER COLLATERAL. No renewal or extensions of or any other indulgence with respect to the Obligation or any part thereof, no modification of the document(s) evidencing the Obligation, no release of any security, no release of any person (including any maker, indorser, guarantor or surety) liable on the Obligation, no delay in enforcement of payment, and no delay or omission or lack of diligence or care in exercising any right or power with respect to the Obligation or any security therefor or guaranty thereof or under this Agreement shall in any manner impair or affect the rights of Bank under any law, hereunder, or under any other agreement pertaining to the Collateral. Bank need not file suit or assert a claim for personal judgment against any person for any part of the Obligation or seek to realize upon any other security for the Obligation, before foreclosing or otherwise realizing upon the Collateral. Pledgor waives any right that can be waived to the benefit of or to require or control application of any other security or proceeds thereof, and agrees that Bank shall have no duty or obligation to Pledgor to apply to the Obligation any such other security or proceeds thereof. R. S. WAIVERS BY PLEDGOR. Pledgor waives notice of the creation, advance, increase, existence, extension or renewal of, and of any indulgence with respect to, the Obligation; waives presentment, demand, notice of dishonor, and protest; waives notice of the amount of the Obligation outstanding at any time, notice of any change in financial condition of any person liable for the Obligation or any part thereof, notice of any Event of Default, and all other notices respecting the Obligation; and agrees that maturity of the Obligation and any part thereof may be accelerated, extended or renewed one or more times by Bank in its discretion, without notice to Pledgor. Pledgor waives any right to require that any action be brought against any other person or to require that resort be had to any other security or to any balance of any deposit account. Pledgor further waives any right of subrogation or to enforce any right of action against any other pledgor until the Obligation is paid in full. T. U. RULE 144 RIDER. Pledgor acknowledges that the Collateral is, or may be in the future, comprised in whole or in part of control or restricted securities, which shall be subject to the additional terms and provisions described on the Rule 144 Rider attached hereto and made a part hereof for all purposes. V. 5. MAINTENANCE OF COLLATERAL. 6. 5 A. MAINTENANCE OF COLLATERAL. At all times during the term of this Agreement, Pledgor agrees to maintain as security for the Obligation, Prime Pledged Shares with an Adjusted Collateral Value (as determined herein) in excess of 182% of the unpaid principal balance of the Obligation (the "Maintenance Margin"). The Adjusted Collateral Value shall be determined by multiplying the number of Prime Pledged Shares (including any Additional Shares) by the per share price of such Prime stock at the most recent close of trading on a trading exchange for the Prime stock. In the event that Prime Pledged Shares are not traded on an exchange, the Adjusted Collateral Value of the Prime Pledged Shares shall be determined by obtaining the quoted value of such Prime Pledged Shares from a reputable brokerage firm selected by Bank. If no such quote is available, the value will be determined by Bank in its sole discretion. B. C. No Borrowing (as defined in the Loan Agreement) requested by Pledgor shall be made to Pledgor if the sum of (i) the outstanding principal balance of the Obligation plus (ii) the amount of the Borrowing requested, equals or exceeds 50% of the Adjusted Collateral Value (the "Original Advance Percentage"). D. E. BREACH OF COLLATERAL MAINTENANCE. Pledgor agrees that the failure to maintain Collateral with an Adjusted Collateral Value as set forth above shall constitute an Event of Default under this Agreement. In such event, the Pledgor shall have five Business Days (as defined in the Loan Agreement) from the date Pledgor is notified by Bank (in writing or orally) of such noncompliance, to either pledge additional shares of Prime stock satisfactory to Bank, in its sole discretion, or reduce the unpaid principal balance of the Obligation such that, in either case, the Adjusted Collateral Value shall be not less than the Maintenance Margin. In the event Pledgor fails to comply with the terms hereof, Bank may, without any further notice of any kind, exercise any of the following rights and remedies, at Bank's option: F. (a) The rights and remedies set out in Section 8.B. of this Agreement, including without limitation the right to accelerate the Obligation and liquidate the Collateral. (b) Sell all or any part of the Collateral and apply the proceeds of such sale to the Obligation to bring the Obligation back into compliance (that is, to reduce the unpaid principal of the Obligation such that the unpaid principal of the Obligation is less than Original Advance Percentage of the Prime Pledged Shares. If an Event of Default exists hereunder and the Collateral is declining in value or threatens to decline speedily in value, Bank shall have no obligation to notify Pledgor of the failure to maintain Prime Pledged Shares with an Adjusted Collateral Value as set forth in subparagraph A above or to provide Pledgor with an opportunity to cure such noncompliance, and in such case Pledgor agrees that Bank may immediately at Bank's sole option (i) declare amounts due under the Obligation to be immediately due and payable, and/or (ii) sell all or any part of the Collateral and apply the proceeds of such Collateral to the Obligation. A. ADDITIONAL PLEDGE PROVISION. Notwithstanding the provisions of 6A and 6B, in the event the per share price of the Prime Pledged Shares on any day is less than $8.25, than all shares of Prime owned by Pledgor (other than 500,000 shares of common stock of Prime which shall be excluded) (the "Prime Stock") shall become Additional Collateral hereunder, and Pledgor shall, immediately, upon demand of Bank, execute and deliver a Pledge Certificate covering such Prime Stock shares to Bank, together with the original stock certificates and blank stock powers. B. C. RELEASE OF PRIME PLEDGED SHARES. D. i. In the event the price per share of the Prime Pledged Shares increases so that the Adjusted Collateral Value is in excess of 250% of the Obligation, then upon receipt of Pledgor's written 6 request to Bank requesting release of certain Prime Pledged Shares, and provided no Default or Event of Default has occurred and is continuing under the Loan Agreement, Bank shall as soon as reasonably possible (but in any event no earlier than ten Business Days following receipt of the request) release certain Prime Pledged Shares, so long as the Adjusted Collateral Value of the remaining Prime Pledged Shares is not less than 200% of the Obligation. ii. iii. In the event Pledgor has pledged all of its Prime Stock shares to Bank as required pursuant to Section 6C above, then if the per share price of the Prime Pledged Shares exceeds $8.50 during any ninety (90) consecutive days, and Pledgor delivers a written request to Bank requesting release of certain Prime Pledged Shares, provided no Default or Event of Default has occurred and is continuing under the Loan Agreement, then Bank shall as soon as reasonably possible (but in any event no earlier than ten Business Days following receipt of the request) release certain Prime Pledged Shares, so long as the Adjusted Collateral Value of the remaining Prime Pledged Shares is not less than 200% of the Obligation. iv. v. Nothing in this Section 6D. shall relieve Pledgor of its continuing obligations under Sections 6A, 6B and 6D. vi. E. RELEASE OF OTHER COLLATERAL. F. i. In the event that FPIC Insurance Group, Inc. ("FPIC") exercises its option to purchase additional shares of common stock of APS Insurance Services, Inc., a Delaware corporation ("APS Insurance") as set forth in the Stock Purchase and Stock Option Agreement entered into as of April 6, 1997 and in the Shareholders Agreement entered into on June 30, 1997 among APS Insurance, Pledgor and FPIC, Bank shall release its lien and security interest in the Collateral consisting of the pledged shares of APS Insurance upon receipt by Bank of the purchase price therefor. ii. iii. The Bank also agrees that provided no Event of Default (hereinafter defined) has occurred and is continuing, shares of common stock of APS Practice Management, Inc. ("Practice Management") will be released from the lien and security interest of this Agreement upon not less than ten (10) Business Days written notice to the Bank, setting forth the number of shares to be released, the name of the purchaser to whom the shares are to be transferred and the reason therefor. iv. 2. RIGHTS AND POWERS OF BANK. 3. A. GENERAL. Bank, before or after default, without liability to Pledgor may: take control of proceeds, including stock received as dividends or by reason of stock splits; release the Collateral in its possession to any Pledgor, temporarily or otherwise; require additional Collateral; reject as unsatisfactory any property hereafter offered by Pledgor as Collateral; take control of funds generated by the Collateral, such as cash dividends, interest and proceeds, and use same to reduce any part of the Obligation and exercise all other rights which an owner of such Collateral may exercise, except the right to vote or dispose of the Collateral before an Event of Default; and at any time transfer any of the Collateral or evidence thereof into its own name or that of its nominee. Other than the exercise of reasonable care to ensure the safe custody of the Collateral in Bank's possession, Bank shall have no obligation, duty or responsibility for the Collateral and specifically, without limiting the foregoing, shall have no obligation, duty or responsibility to collect any amounts payable, or exercise any right or option, in respect of the Collateral or to sell all or any portion of the Collateral to avoid market loss. Bank shall not be liable for failure to collect any account or instruments, or for any act or omission on the part of Bank, its officers, agents or employees, except for its or their own willful misconduct or gross negligence. The foregoing rights and powers of Bank will be in addition to, and not a limitation upon, any rights and powers of Bank given by law, elsewhere in this Agreement, or otherwise. 7 B. C. CONVERTIBLE COLLATERAL. Bank may present for conversion any Collateral which is convertible into any other instrument or investment security or a combination thereof with cash, but Bank shall not have any duty to present for conversion any Collateral unless it shall have received from Pledgor detailed written instructions to that effect at a time reasonably far in advance of the final conversion date to make such conversion possible. D. E. VOTING RIGHTS. Subject to the following sentence, the Pledgor shall be entitled to exercise any and all voting and/or consensual rights and powers relating or pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement. Upon (i) the occurrence after the date hereof of an Event of Default and (ii) the giving of written notice by Bank to Pledgor of its intention to (A) foreclose upon or otherwise dispose of the Collateral or (B) exercise its voting rights pertaining to the Collateral, all rights of the Pledgor to exercise the voting and/or consensual rights and powers which it is entitled to exercise hereunder shall cease, at the option of Bank, and all such rights shall thereupon become vested in Bank who shall have the sole and exclusive right and authority to exercise such voting and/or consensual rights and powers. F. 4. DEFAULT. 5. A. EVENT OF DEFAULT. An event of default ("Event of Default") shall occur (a) if Pledgor or any other obligor on all or part of the Obligation shall fail to timely and properly pay or observe, keep or perform any term, covenant, agreement or condition in this Agreement or in any other agreement between Pledgor and Bank or between Bank and any other obligor on the Obligation, including but not limited to any other note or instrument, loan agreement, security agreement, deed of trust, mortgage, promissory note, assignment or other agreement or instrument concerning the Obligation; or (b) an Event of Default shall occur under the Loan Agreement or any other Loan Document. A. RIGHTS AND REMEDIES. If any Event of Default shall occur, then, in each and every such case, Bank may, without (a) presentment, demand, or protest, (b) notice of default, dishonor, demand, non-payment, or protest, (c) notice of intent to accelerate all or any part of the Obligation, (d) notice of acceleration of all or any part of the Obligation, or (e) notice of any other kind, all of which Pledgor hereby expressly waives (except for any notice required under this Agreement, any other Loan Document or which may not be waived under applicable law), at any time thereafter exercise and/or enforce any of the following rights and remedies, at Bank's option: B. i. ACCELERATION. The Obligation shall, at Bank's option, become immediately due and payable, and the obligation, if any, of Bank to permit further borrowings under the Obligation shall at Bank's option immediately cease and terminate. ii. iii. LIQUIDATION OF COLLATERAL. Sell, or instruct any agent or broker to sell, all or any part of the Collateral in a public or private sale, direct any agent or broker to liquidate all or any part of any account and deliver all proceeds thereof to Bank, and apply all proceeds to the payment of any or all of the Obligation in such order and manner as Bank shall, in its discretion, choose. Bank is authorized, at any sale of the Collateral, if it deems it advisable, to restrict the prospective bidders of Purchasers to those persons who will represent and agree that they are purchasing for their own account, for investment, and not with a view to distribution or sale of any of the Collateral. Pledgor agrees that, because of the Securities Act of 1933, as amended, or any other laws or regulations, and for other reasons, there may be legal and/or practical restrictions or limitations affecting Bank in any attempts to dispose of certain portions of the Collateral and for the enforcement of their rights. For these reasons, Bank is hereby authorized by Pledgor, but not obligated, upon the occurrence and during the continuation of an Event of Default, to sell all or any part of the Collateral at private sale, subject to investment letter or in 8 any other manner which will not require the Collateral, or any part thereof, to be registered in accordance with the Securities Act of 1933, as amended, or the rules and regulations promulgated thereunder, or any other laws or regulations, at a reasonable price at such private sale or other distribution in the manner mentioned above. Pledgor understands that Bank may in its discretion approach a limited number of potential purchasers and that a sale under such circumstances may yield a lower price for the Collateral, or any part or party thereof, than would otherwise be obtainable if such collateral were either afforded to a larger number or potential purchasers, or registered or sold in the open market. Pledgor agrees that such private sale shall be deemed to have been made in a commercially reasonable manner, and that Bank has no obligation to delay sale of any Collateral to permit the issuer thereof to register it for public sale under any applicable federal or state securities laws. Bank is authorized, in connection with any such sale (i) to restrict the prospective bidders on or purchasers of any of the Collateral to a limited number of sophisticated investors who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or sale of any of such Collateral and (ii) to impose such other limitations or conditions in connection with any such sale as Bank reasonably deems necessary in order to comply with applicable law. Pledgor covenants and agrees that he will execute and deliver such documents and take such other action as Bank reasonably deems necessary in order that any such sale may be made in compliance with applicable law. Upon any such sale, Bank shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold. Each purchaser at any such sale shall hold the Collateral so sold absolutely, free from any claim or right of Pledgor of whatsoever kind, including any equity or right of redemption of Pledgor. Pledgor, to the extent permitted by applicable law, hereby specifically waives all rights of redemption, stay or appraisal which he has or may have under any law now existing or hereafter enacted. iv. v. In addition, and without limiting the foregoing, Pledgor agrees that Bank may, in its discretion, advertise, prepare for, and conduct a foreclosure sale of the Collateral pursuant to newspaper advertisements or other public advertisements, in accordance with (and subject to conditions set forth in) no action letters, pronouncements and requirements of the Securities and Exchange Commission, in order to comply with the Securities Act of 1933, as amended, or any other laws or regulations. vi. vii. UNIFORM COMMERCIAL CODE. All of the rights, powers and remedies of a secured creditor under the Uniform Commercial Code ("UCC") as adopted in the jurisdiction to which Bank is subject under this Agreement. viii. ix. RIGHT OF SET OFF. Without notice or demand to Pledgor, set off and apply against any and all of the Obligation any and all deposits (general or special, time or demand, provisional or final) and any other indebtedness, at any time held or owing by Bank or by any of Bank's affiliates or correspondents to or for the credit of the account of Pledgor or any guarantor or indorser of Pledgor's Obligation. x. xi. Pledgor specifically understands and agrees that any sale by Bank of all or part of the Collateral pursuant to the terms of this Agreement may be effected by Bank at times and in manners which could result in the proceeds of such sale as being significantly and materially less than might have been received if such sale had occurred at different times or in different manners, and Pledgor hereby releases Bank and its officers and representatives from and against any and all obligations and liabilities arising out of or related to the timing or manner of any such sale. xii. xiii. If, in the opinion of Bank, there is any question that a public sale or distribution of any Collateral will violate any state or federal securities law, Bank may offer and sell such Collateral in a transaction exempt from registration under federal securities law, and any such sale made in good faith by Bank shall be deemed "commercially reasonable." 9 1. GENERAL. 2. A. PARTIES BOUND. Bank's rights hereunder shall inure to the benefit of its successors and assigns, and in the event of any assignment or transfer of any of the Obligation or the Collateral, Bank thereafter shall be fully discharged from any responsibility with respect to the Collateral so assigned or transferred, but Bank shall retain all rights and powers hereby given with respect to any of the Obligation or the Collateral not so assigned or transferred. All representations, warranties and agreements of Pledgor if more than one are joint and several and all shall be binding upon the personal representatives, heirs, successors and assigns of Pledgor. A. WAIVER. No delay of Bank 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 Bank of any right hereunder or of any default by Pledgor shall be binding upon Bank unless in writing, and no failure by Bank to exercise any power or right hereunder or waiver of any default by Pledgor shall operate as a waiver of any other or further exercise of such right or power or of any further default. Each right, power and remedy of Bank as provided for herein or in any of the loan documents related to the Obligation, or which shall now or hereafter exist at law or in equity or by statute or otherwise, shall be cumulative and concurrent and shall be in addition to every other such right, power or remedy. The exercise or beginning of the exercise by Bank of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise by Bank of any or all other such rights, powers or remedies. B. C. 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 Bank and Pledgor 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. Time is of the essence of this Agreement. D. E. DEFINITIONS. Unless the context indicates otherwise, definitions in the UCC apply to words and phrases in this Agreement; if UCC definitions conflict, Article 8 and/or 9 definitions apply. F. G. NOTICE. Notice shall be deemed reasonable if it is made (i) in writing and personally delivered or mailed by prepaid certified or registered mail, or (ii) made by facsimile transmission delivered or transmitted, to the party to whom such notice of communication is directed, to the address of such party shown opposite its name on the signature pages hereof. Any such communication shall be deemed to have been given (whether actually received or not) on the day it is personally delivered or, if transmitted by facsimile transmission, on the day that such communication is transmitted. H. I. 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 Pledgor and Bank. The provisions of this Agreement shall not be modified or limited by course of conduct or usage of trade. J. K. PARTIAL INVALIDITY. The unenforceability or invalidity of any provision of this Agreement shall not affect the enforceability or validity of any other provision herein, and the invalidity or unenforceability of any provision of any Loan Document to any person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances. L. M. APPLICABLE LAW AND VENUE. This Agreement has been delivered in the State of Texas and shall be construed in accordance with the laws of that State. It is performable by Pledgor in the county or city 10 of Bank's address set out above and Pledgor expressly waives any objection as to venue in any such location. Wherever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Agreement. N. O. Financing Statement. To the extent permitted by applicable law, a carbon, photographic or other reproduction of this Agreement or any financing statement covering the Collateral shall be sufficient as a financing statement. P. Q. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. R. i. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY OF ANY BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT, AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. ii. iii. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT, AGREEMENT OR DOCUMENT; OR (II) BE A WAIVER BY BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH 11 PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT, PROVIDED THAT IF BANK SHALL PETITION A COURT FOR SUCH RELIEF OR REMEDIES, THEN PLEDGOR SHALL BE ENTITLED TO ASSERT IN SUCH COURT ANY CLAIMS OR DEFENSES RELATED TO THE SUBJECT MATTER OF BANK'S PETITION. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. iv. S. Controlling Document. To the extent that this Agreement conflicts with or is in any way incompatible with any other loan document concerning the Obligation, any promissory note shall control over any other document, and if such promissory note does not address an issue, then each other loan document shall control to the extent that it deals most specifically with an issue. T. U. Notice of Final Agreement. THIS WRITTEN AGREEMENT AND ANY OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH 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. V. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized representatives as of February 10, 1998. Bank/Secured Party: Pledgor(s)/Debtor(s): NATIONSBANK OF TEXAS, N.A. AMERICAN PHYSICIANS SERVICE GROUP, INC., By: /s/ Teena Belcik ----------------- Teena Belcik, Name: /s/ William H Hayes Vice President Title: Sr VP Finance SCHEDULE I TO PLEDGE AGREEMENT Type of Collateral: Shares of common stock, described in Section 2.A. of the Agreement, and which (1) are validly issued, fully paid and non-assessable; (2) are owned of record and beneficially by Pledgor, and represented by stock certificates issued in the name of Pledgor properly endorsed to Bank; (3) may be sold by Bank, pursuant to the terms of the Pledge Agreement; and (4) have been delivered and pledged to Bank pursuant to the Pledge Agreement. i SCHEDULE II PLEDGE CERTIFICATE Reference is hereby made to that certain Pledge Agreement dated as of February , 1998 ("Pledge Agreement"), between American Physicians Service Group, Inc., a Texas corporation ("Pledgor") and NationsBank of Texas, N.A., a national banking association ("Bank"). This Pledge Certificate is delivered pursuant to Section 2 of the Pledge Agreement. All capitalized terms used and not otherwise defined herein shall have their respective meanings as set forth in the Pledge Agreement. Pledgor hereby certifies that concurrently with the delivery of this Pledge Certificate, [X] Pledgor is delivering to Bank the following items of Collateral as additional Collateral for the Obligation (collectively, the "Additional Collateral"): ______ shares of Common Stock, $.01 par value of Prime Medical Services, Inc., a Delaware corporation. Pledgor hereby acknowledges that Pledgor has granted to Bank a security interest in the Additional Collateral pursuant to the Pledge Agreement to secure the Obligation and that the Collateral covered by the Pledge Agreement includes, without limitation, Additional Collateral. Pledgor hereby represents and warrants that all of the representations and warranties contained in the Pledge Agreement are true and correct in all material respects, including with respect to the Additional Collateral, on the date hereof as though made as of the date hereof. EXECUTED this 10th day of February, 1998. Pledgor(s)/Debtor(s): AMERICAN PHYSICIANS SERVICE GROUP, INC., By: /s/ William H Hayes Name: William H Hayes Title: Sr VP Finance i RULE 144 RIDER This Rule 144 Rider is made this 10th day of February, 1998, and is incorporated into and shall be deemed to supplement the Pledge Agreement ("Agreement") of the same date given by Pledgor to secure the Obligation to Bank. Terms used and not otherwise defined in this Rider which are defined in the Agreement have the meanings given them in the Agreement. 1. The securities listed on Exhibit A hereto, which Exhibit is made a part of this Rider and the Agreement for all purposes, are or may be deemed (check one or more boxes): [X] Restricted securities [X] Control securities for purposes of Rule 144 of the General Regulations under the Securities Act of 1933 ("Rule 144") promulgated by the Securities and Exchange Commission. These securities ("Rule 144 Securities") comprise all or part of the Collateral held by Bank presently subject to the terms and conditions of the Agreement and this Rider. 2. Pledgor represents and warrants that Pledgor has held the Rule 144 Securities free and clear of all liens (except for liens, encumbrances and debt held by Bank) encumbrances and debt, and borne the full economic risk thereof since October 12, 1989. 3. Pledgor covenants and agrees that: a. After an Event of Default, Pledgor will cooperate fully with Bank with respect to any sale by Bank of any of the Rule 144 Securities, including full and complete compliance with all requirements of Rule 144, and will give to Bank all information and will do all things necessary, including the execution of all documents, forms, instruments and other items, to comply with Rule 144 for the complete and unrestricted sale and/or transfer of the Rule 144 Securities and will exercise its best efforts to have the issuer of such securities, upon the request of Bank, take all such action as may be required to satisfy the public information requirements of Rule 144(c). b. Pledgor will not approve or consent to any amendment of the articles of incorporation or charter of any issuer of the Rule 144 Securities that may materially adversely affect the value of the Rule 144 Securities, or that permit any issuer of the Rule 144 Securities to merge or consolidate with or into any corporation or other person, without the prior written consent of Bank. c. Pledgor will use all reasonable efforts, upon Bank's written request, to have issuer publish all information necessary to satisfy Rule 144 in the event any issuer of the Rule 144 Securities is not current in its filings under the Securities Exchange Act of 1934 at the time of a foreclosure sale by Bank. By signing below, Pledgor accepts and agrees to the terms and covenants contained in this Rider. Pledgor(s)/Debtor(s): AMERICAN PHYSICIANS SERVICE GROUP, INC., /s/ William H Hayes Name: William H Hayes Title: Sr VP Finance EX-10 20 CONTINUING AND UNCONDITIONAL GUARANTY Exhibit 10.56 NationsBank of Texas, N.A. CONTINUING AND UNCONDITIONAL GUARANTY 1. Guaranty. For Value Received, and to induce NationsBank of Texas, N.A. Austin Commercial Banking ------------------------- Banking Center 515 Congress Avenue, 11th Flor, Austin, Texas 78701 - - ----------------------------------------------- ------------------------------- Bank Street Address City State Zip Code (Attn: Teena Belcik ) (herein called "Bank"), to make loans or advances or to extend credit or other financial accommodations or benefits, with or without security, to or for the account of American Physicians Service Group, Inc., a Texas corporation - - ------------------------------------------------------------ Borrower's Name 1301 Capital of Texas, Suite 300, Austin, Texas, 78746 - - -------------------------------------------------- ---------------------------- Street Address City State Zip Code (herein called "Borrower"), the undersigned (herein called "Guarantor"), if more than one, then each of them jointly and severally, hereby becomes surety for and irrevocably and unconditionally guarantees to Bank the full and prompt payment when due, whether by acceleration or otherwise, of any and all Liabilities (as hereinafter defined) of Borrower to Bank, together with reasonable attorney's fees, costs and expenses incurred by Bank in enforcing any and all of such indebtedness. This Guaranty is continuing and unlimited as to the amount. Guarantor further unconditionally guarantees the faithful, prompt and complete compliance by Borrower with all terms, conditions, covenants, agreements and undertakings of Borrower (herein collectively referred to as the "Obligations") under all notes and other documents evidencing the Liabilities, as hereinafter defined, and under all security agreements and other agreements, documents and instruments executed in connection with the Liabilities or related thereto including, without limitation, all obligations of Borrower pursuant to that certain Revolving Credit Loan Agreement dated as of February , 1998, executed by Bank and Borrower (the "Loan Agreement") (all such security agreements and other documents securing payment of the Liabilities and all notes and other agreements, documents, and instruments evidencing or relating to the Liabilities and Obligations being herein collectively called the "Loan Documents"). The undertakings of Guarantor hereunder are independent of the Liabilities and Obligations of the Borrower and a separate action or actions for payment, damages or performance may be brought or prosecuted against Guarantor, whether or not an action is brought against the Borrower or to realize upon the security for the Liabilities and/or Obligations and whether or not Borrower is joined in any such action or actions, and whether or not notice is given or demand is made upon the Borrower. Bank shall not be required to proceed first against Borrower, or any other person, firm or corporation, whether primarily or secondarily liable, or against any Collateral held by it, before resorting to Guarantor for payment, and Guarantor shall not be entitled to assert as a defense to the enforceability of the Guaranty any defense of Borrower with respect to any Liabilities or Obligations. 1. PARAGRAPH HEADINGS AND GOVERNING LAW. Guarantor agrees that the paragraph headings in this Guaranty are for convenience only and that they will not limit any of the provisions of this Guaranty. Guarantor further agrees that this Guaranty shall be governed by and construed in accordance with the laws of the State of Texas and applicable United States federal law. Guarantor further agrees that this Guaranty shall be deemed to have been made in the State of Texas at Bank's address indicated herein, and shall be governed by, and construed in accordance with, the laws of the State of Texas, or the United States courts located within the State of Texas, and is performable in Austin, Travis County, Texas. 1. DEFINITIONS. 2. A. "Liability" or "Liabilities" as used herein shall include without limitation, all liabilities, overdrafts, indebtedness, and obligations of Borrower to Bank, whether direct or indirect, 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, now or hereafter existing, or held or to be held by the Bank for its own account or as agent for another or others, whether created directly, indirectly, or acquired by assignment or otherwise, including but not limited to all extensions or renewals thereof, and all sums payable under or by virtue thereof, including without limitation, all amounts of principal and interest, all expenses (including attorney's fees and cost of collection as specified) incurred in the collection thereof or the enforcement of rights thereunder or in enforcing this Guaranty (including without limitation, any liability arising from failure to comply with state or federal laws, rules and regulations concerning the control of hazardous wastes or substances), whether arising in the ordinary course of business or otherwise, and whether held or to be held by Bank for its own account or as agent for another or others. If Borrower is a partnership, corporation or other entity the term "Liability" or "Liabilities" as used herein shall include all Liabilities to Bank of any successor entity or entities. A. "Guarantor" as used herein shall mean Guarantor or any one or more of them. Anyone executing this Guaranty shall be bound by the terms hereof without regard to execution by anyone else. This Guaranty is binding upon Guarantor, his, their or its executors, administrators, successors or assigns, and shall inure to the benefit of Bank, its successors, endorsees or assigns. B. C. "Guarantor" as used in this instrument shall be construed as singular or plural to correspond with the number of persons executing this instrument as Guarantor. The pronouns used in this Agreement are in the masculine gender but shall be construed as female or neuter as an occasion may require. D. E. "Collateral" means the property subject to a security interest, and includes accounts and chattel paper which have been sold, including but not limited to all additions and accessions thereto, all replacements or substitutes therefor, and all immediate and remote proceeds of the sale or other disposition thereof. 1. WAIVERS BY GUARANTOR. Guarantor waives notice of acceptance of this Guaranty, notice of any Liability or Obligations to which it may apply, and waives presentment, demand for payment, protest, notice of dishonor or nonpayment of any Liabilities, waiver of notice of intent to accelerate, waiver of notice of acceleration and notice of any suit or the taking of other action by Bank against Borrower, Guarantor or any other person and any other notice to any party liable thereon (including Guarantor) and any applicable statute of limitations. Until payment in full of the Liabilities and the Obligations, each Guarantor also hereby waives any claim, right or remedy which such Guarantor may now have or hereafter acquire against the Borrower that arises hereunder and/or from the performance by any Guarantor hereunder including, without limitation, any claim, remedy or right of subrogation, reimbursement, exoneration, contribution, indemnification, or participation in any claim, right or remedy of the Bank against the Borrower or any security which the Bank now has or hereafter acquires, whether or not such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise. Guarantor hereby agrees to waive the benefits of any provision of law requiring that the Bank exhaust any right or remedy, or take any action, against the Borrower, any Guarantor, any other person and/or property including but not limited to the provisions of the Texas Civil Practice and Remedies Code ss. 17.001, Texas Rules of Civil Procedure Rule 31 and the Texas Business and Commerce Code ss. 34.03, as amended, or otherwise. Bank may at any time and from time to time (whether before or after revocation or termination of this Guaranty) without notice to Guarantor (except as required by law), without incurring responsibility to Guarantor, without impairing, releasing, or otherwise affecting the obligations of Guarantor, in whole or in part, and without the endorsement or execution by Guarantor of any additional consent, waiver or guaranty: (a) change the manner, place or terms of payment; (b) change or extend the time of or renew or alter, any Liability or Obligation or installment thereof, or any security therefor; (c) loan additional monies or extend additional credit to Borrower, with or without security, thereby creating new Liabilities or Obligations the payment or performance of which shall be guaranteed hereunder, and the Guaranty herein made shall apply to the Liabilities and Obligations as so changed, extended, surrendered, realized upon or otherwise altered; (d) sell, exchange, release, surrender, realize upon or otherwise deal with in any manner and in any order any property at any time pledged or mortgaged to secure the Liabilities or Obligations and any offset there against; (e) exercise or refrain from exercising any rights against Borrower or others (including Guarantor) or act or refrain from acting in any other manner; (f) settle or compromise any Liability or Obligation or any security therefor and subordinate the payment of all or any part thereof to the payment of any Liability or Obligation of any other parties primarily or secondarily liable on any of the Liabilities or Obligations; (g) release or compromise any liability of Guarantor hereunder or any Liability or Obligation of any other parties primarily or secondarily liable on any of the Liabilities or Obligations; or (h) apply any sums from any sources to any Liability without regard to any Liabilities remaining unpaid. 1. SUBORDINATION. Upon demand of Bank, Guarantor agrees that it will not demand, take or receive from the Borrower, by set-off or in any other manner, payment of any liabilities and/or obligations, now and at any time or times hereafter owing by the Borrower to Guarantor unless and until all the Liabilities shall have been fully paid, and any security interest, liens or encumbrances which Guarantor now has and from time to time hereafter may have upon any of the assets of the Borrower shall be made subordinate, junior and inferior and postponed in priority, operation and effect to any security interest of Bank in such assets. 2. 3. WAIVERS BY BANK. No delay on the part of Bank in exercising any of its options, powers or rights, or any partial or single exercise thereof, shall constitute a waiver thereof. No waiver of any of its rights hereunder, and no modification or amendment of this Guaranty, shall be deemed to be made by Bank unless the same shall be in writing, duly signed on behalf of Bank; and each such waiver, if any, shall apply only with respect to the specific instance involved, and shall in no way impair the rights of Bank or the obligations of Guarantor to Bank in any other respect at any other time. 4. 5. TERMINATION. This Guaranty shall continue until written notice of revocation signed by each respective Guarantor or until written notice of the death of such Guarantor shall actually have been received by Bank, notwithstanding change in name, location, composition or structure of, or the dissolution, termination or increase, decrease or change in personnel, owners or partners of Borrower, or any one or more of Guarantors, provided, however, that no notice of revocation or termination hereof shall affect in any manner rights arising under this Guaranty with respect to Liabilities or Obligations that shall have been created, contracted, assumed or incurred prior to receipt of such written notice pursuant to any agreement entered into by Bank prior to receipt of such notice, and the sole effect of such notice of revocation or termination hereof shall be to exclude from this Guaranty, Liabilities or Obligations thereafter arising that are unconnected with Liabilities or Obligations theretofore arising or transactions entered into theretofore. 6. 7. PARTIAL INVALIDITY AND/OR ENFORCEABILITY OF GUARANTY. The unenforceability or invalidity of any provision of this Guaranty shall not affect the enforceability or validity of any other provision herein and the invalidity or unenforceability of any provision of any Loan Document as it may apply to any person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances. 8. 9. In the event Bank is required to relinquish or return the payments, the Collateral or the proceeds thereof, in whole or in part, which had been previously applied to or retained for application against any Liability, by reason of a proceeding arising under the Bankruptcy Code, or for any other reason, this Guaranty shall automatically continue to be effective notwithstanding any previous cancellation or release effected by the Bank. 10. 11. OBLIGATIONS OF GUARANTOR. Upon the occurrence of an event of default, Guarantor shall upon demand by Bank, promptly and with due diligence pay all Liabilities and perform and satisfy for the benefit of Bank all Obligations. 12. 13. Guarantor will not become a party to a merger or consolidation with any other company, except as provided in the Loan Agreement. Guarantor further agrees that this Guaranty Agreement shall be binding, legal and enforceable against Guarantor in the event Borrower changes its name, status or type of entity. 14. 15. FINANCIAL AND OTHER INFORMATION. In entering into this Guaranty, the Guarantor has not relied upon any representation of the Bank as to the financial condition, operation or creditworthiness of the Borrower. The Guarantor further agrees that the Bank shall have no duty or responsibility now or hereafter to make any investigation or appraisal of the Borrower on behalf of the Guarantor or to provide the Guarantor with any credit or other information which may come to its attention now or hereafter. 16. 17. NOTICES. All notices required or permitted to be given to Bank herein shall be sent by registered or certified mail, return receipt requested to the Bank at the address shown in the preamble to this agreement. Guarantor agrees that all notices required or permitted to be given to Guarantor shall be sent by first class mail, postage 2 prepaid United States mail. The parties agree that the notice shall be considered received by Guarantor five (5) days after being placed in the United States mail. 18. 19. EVENTS OF DEFAULT. The following are events of default hereunder: (a) an Event of Default as defined in the Loan Agreement shall occur and be continuing; or (b) termination of Guaranty by Guarantor. 20. 21. REMEDIES. Upon the occurrence of any event of default hereunder, Bank shall have all of the remedies of a creditor and, to the extent applicable, of a secured party, under all applicable law, and without limiting the generality of the foregoing, Bank may, at its option and without notice of demand: (a) declare any Liability accelerated and due and payable at once; and (b) take possession of any Collateral wherever located, and sell, resell, assign, transfer and deliver all or any part of said Collateral of Borrower or Guarantor at any public or private sale or otherwise dispose of any or all of the Collateral in its then condition, for cash or on credit or for future delivery, and in connection therewith Bank may impose reasonable conditions upon any such sale. Bank, unless prohibited by law the provisions of which cannot be waived, may purchase all or any part of said Collateral to be sold, free from and discharged of all trusts, claims, rights or redemption and equities of the Borrower or Guarantor whatsoever; Guarantor acknowledges and agrees that the sale of any Collateral through any nationally recognized broker-dealer, investment banker or any other method common in the securities industry shall be deemed a commercially reasonable sale under the Uniform Commercial Code or any other equivalent statute or federal law, and expressly waives notice thereof except as provided herein; and (c) set-off against any or all liabilities of Guarantor all money owed by Bank in any capacity to Guarantor whether or not due, and also set-off against all other Liabilities of Borrower or Guarantor to Bank all money owed by Bank in any capacity to any Borrower or Guarantor, and if exercised by Bank, Bank shall be deemed to have exercised such right of set-off and to have made a charge against any such money immediately upon the occurrence of such default although made or entered on the books subsequent thereto. 22. 23. ATTORNEY FEES, Cost and Expenses. Guarantor shall pay all costs of collection and reasonable attorney's fees, including reasonable attorney's fees in connection with any suit, mediation or arbitration proceeding, out of court payment agreement, trial, appeal, bankruptcy proceedings or otherwise, incurred or paid by Bank in enforcing the payment of any Liability or enforcing or preserving any right or interest of Bank hereunder, including the collection, preservation, sale or delivery of any Collateral from time to time pledged to Bank, and after deducting such fees, costs and expenses from the proceeds of sale or collection, Bank may apply any residue to pay any of the Liabilities and Guarantor shall continue to be liable for any deficiency with interest at the rate specified in any instrument evidencing the Liability or, at the Bank's option, equal to the highest lawful rate, which shall remain a liability. 24. 25. PRESERVATION OF PROPERTY. Bank shall not be bound to take any steps necessary to preserve any rights in any of the property of Guarantor pledged to Bank to secure Guarantor's obligations against prior parties who may be liable in connection therewith, and Guarantor hereby agrees to take any such steps. Bank, nevertheless, at any time, may (a) take any action it deems appropriate for the care or preservation of such property or of any rights of Guarantor or Bank therein, (b) demand, sue for, collect or receive any money or property at any time due, payable or receivable on account of or in exchange for any property of Guarantor, (c) compromise and settle with any person liable on such property, or (d) extend the time of payment or otherwise change the terms of the Loan Documents as to any party liable on the Loan Documents, all without notice to, without incurring responsibility to, and without affecting any of the obligations or liabilities of Guarantor. 26. 27. Collateral. Bank shall have a properly perfected security interest in all of Guarantor's funds on deposit with Bank to secure the balance of any liabilities and/or obligations that Guarantor may now or in the future owe the Bank. Bank is granted a contractual right of set-off and will not be liable for dishonoring checks or withdrawals where the exercise of Bank's contractual right of set-off or security interest results in insufficient funds in Guarantor's account. As authorized by law, Guarantor grants to Bank this contractual right of set-off and security interest in all property of Guarantor now or at anytime hereafter in the possession of Bank, including but not limited to any joint account, special account, account by the entireties, tenancy in common, and all dividends and distributions now or hereafter in the possession or control of Bank. 28. 29. LIMITATION. It is the intention of Guarantor and the Bank that the amount of the Liabilities and Obligations guaranteed by Guarantor by this Guaranty shall be in, but not in excess of, the maximum amount permitted by fraudulent conveyance, fraudulent transfer or similar laws applicable as to Guarantor. Accordingly, notwithstanding anything to the contrary contained in this Guaranty or any other agreement or instrument executed in connection with the payment of any of the Limitations and the Obligations, the amount of the Liabilities and the Obligations guaranteed by Guarantor by this Guaranty shall be limited to that amount which after giving effect thereto would not (i) render Guarantor insolvent, (ii) result in the fair saleable value of the assets of Guarantor being less than the amount required to pay its debts and other liabilities (including contingent liabilities) as they mature, or (iii) leave Guarantor with unreasonably small capital to carry out its business as now conducted and as proposed to be conducted, including its capital needs, as such concepts described in (i), (ii) and (iii) herein are determined under applicable law, if the obligations of Guarantor hereunder would otherwise be set aside, terminated, annulled or avoided for such reason by a court of competent jurisdiction in a proceeding actually pending before such court. For purposes of this Guaranty, the term "applicable law" means as to Guarantor each statute, law, ordinance, regulation, order, judgment, injunction or decree of the United States or any state or commonwealth, any municipality, any foreign country, or any territory, possession or tribunal applicable to Guarantor. 30. 31. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY RELATED AGREEMENTS OR INSTRUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF JUDICIAL ARBITRATION AND MEDIATION SERVICES, INC. (J.A.M.S.), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. 32. A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF THE BORROWER'S DOMICILE AT THE TIME OF THIS AGREEMENT'S EXECUTION AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN 3 ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. B. C. RESERVATION OF RIGHTS. NOTHING IN THIS AGREEMENT SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS AGREEMENT; OR (II) BE A WAIVER BY THE BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SET-OFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS AGREEMENT. AT BANK'S OPTION, FORECLOSURE UNDER A DEED OF TRUST OR MORTGAGE MAY BE ACCOMPLISHED BY ANY OF THE FOLLOWING: THE EXERCISE OF A POWER OF SALE UNDER THE DEED OF TRUST OR MORTGAGE, OR BY JUDICIAL SALE UNDER THE DEED OF TRUST OR MORTGAGE, OR BY JUDICIAL FORECLOSURE. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. D. 33. NOTICE OF FINAL AGREEMENT. THIS WRITTEN CONTINUING AND UNCONDITIONAL GUARANTY REPRESENTS 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. 34. 35. 36. Dated: February 10, 1998 37. 38. NATIONSBANK OF TEXAS, N.A. By: /s/ Teena Belcik ---------------------------- Teena Belcik, Vice President 4 Guarantors: SYNTERA TECHNOLOGIES, INC., a Delaware corporation By: /s/ Jackie Fife Name: J.L Fife Title: President APS REALTY, INC., a Texas corporation By: /s/ William H Hayes Name: W.H. Hayes Title: VP EX-10 21 RESTRUCTURING AGREEMENT Exhibit 10.57 RESTRUCTURING AGREEMENT This Restructuring Agreement (this "Agreement") is made and entered into as of the 25th day of March, 1999 (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 (the "Subsidiaries") listed on Schedule I attached hereto (except for 7-7, Inc., an Arkansas corporation), 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 secured by various security agreements, assignments and guarantees executed and granted by Consolidated and the Subsidiaries (collectively, the "Original Security Documents"), including, without limitation, those listed on Schedule II attached hereto; and WHEREAS, APS, Consolidated and the Subsidiaries of Consolidated executed and delivered that certain Master Refinancing Agreement dated November 6, 1997 (the "Refinancing Agreement"), pursuant to which (i) Consolidated executed and delivered to APS a renewal and replacement promissory note in the amount of $3,788,580 (the "Existing Note") in lieu of the Original Note, (ii) Consolidated and the Subsidiaries affirmed the existence and enforceability of the Original Security Documents as security for, among other things, payment of the Existing Note and (iii) Consolidated and certain of the Subsidiaries executed and delivered new security agreements and guarantees securing, among other things, payment of the Existing Note, including, without limitation, those listed on Schedule II attached hereto (all such new security agreements and guarantees, together with the Refinancing Agreement, the Original Security Documents, and all other contracts, or agreements entered into by Consolidated and/or its current or former subsidiaries and/or affiliates, with or for the benefit of APS and/or APS subsidiaries and/or affiliates, are hereinafter collectively referred to as the "Existing Security Documents"); WHEREAS, Consolidated is in default under the Existing Note and some or all of the Subsidiaries are in default under the terms of one or more of the Existing Security Documents, and, in connection therewith, Consolidated and certain of the Subsidiaries have agreed to execute and deliver additional security documents (the "Additional Security Documents") securing, among other things, full satisfaction of all amounts owing APS under the Existing Note and Existing Security Documents; and WHEREAS, Consolidated has agreed to execute and deliver, and APS has conditionally agreed to accept, but only upon the terms and the prior satisfaction of certain conditions set forth herein, a new note in the original principal amount of $2,500,000, substantially in the form attached hereto as Exhibit A (the "New Note"), in renewal, replacement and extension of the Existing Note, which New Note is also to be secured pursuant to the Existing Security Documents and the Additional Security Documents; and 2 WHEREAS, in addition to the covenants and agreements contained in the New Note, the Existing Security Documents and the Additional Security Documents (together, the "Security Documents"), Consolidated, the Subsidiaries and APS desire to memorialize certain other understandings and binding 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: Section 1. Acknowledgement of Existing Debt. Consolidated and each of the Subsidiaries hereby acknowledge the existence and enforceability of the Existing Note, that all the original principal amount remains due thereunder and has been accelerated and is now fully due and owing, and that accrued and unpaid interest owed thereunder to APS through February 1, 1999, is approximately $731,800. The principal and interest due APS under the Existing Note, together with any and all expenses, fees (including attorneys' fees), costs of collection, and other amounts owed under the Existing Note and any Transaction Document, as defined in Section 7 hereof is collectively referred to herein as the "Existing Debt." Consolidated and each of the Subsidiaries acknowledges and agrees that Consolidated is currently in default under the Existing Note and one or more of the Transaction Documents, that such default is material, and that APS has not previously waived, and does not hereby waive, any breach or default, or any of its rights, under any of the Transaction Documents. 3 Section 2. Acceptance of New Note and Deficiency Obligation. APS agrees to, upon the expiration of at least eighteen (18) months immediately following the Effective Date, accept in full satisfaction of the Existing Debt (i) the New Note and (ii) the obligation of Consolidated and the Subsidiaries to pay, upon the terms and conditions hereinafter provided, the deficiency, (the "Deficiency Obligation") between the amount of the New Note and the amount of the Existing Debt (as increased by any additional indebtedness arising hereafter under any of the Transaction Documents). Once APS accepts the New Note under the terms of this Agreement, APS agrees that its sole remedy and recourse with respect to the Deficiency Obligation will be payment by Consolidated and the Subsidiaries of the Contingent Payments (as defined in Section 4 hereof) upon the terms and conditions provided in Section 4 hereof. APS's obligation under this Section to accept the New Note and the Deficiency Obligation in replacement of the Existing Debt is further qualified by each of the following conditions (subject to waiver by APS in its sole discretion): (a) Compliance with Existing Agreements. At the time of APS's acceptance of the New Note and the Deficiency Obligation (the "Exchange Date"), neither Consolidated nor any of the Subsidiaries shall be in default, and no event of default shall have previously occurred since the Effective Date, under any of the Transaction Documents, except only for: (i) default in making the scheduled payments described in the Existing Note, (ii) default under the provisions of the Refinancing Agreement (but not this Agreement) requiring submission of financial information and (iii) the provisions of Section 1 of the Refinancing Agreement requiring registration of securities of Consolidated; and 4 (b) Bankruptcy/Insolvency. At no time prior to and including the Exchange Date has Consolidated or any Subsidiary: (i) taken any action that could impair any collateral securing the obligations of Consolidated and/or the Subsidiaries under any of the Transaction Documents (the "Collateral"); (ii) had 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; (iii) filed 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 had an involuntary petition for relief filed against it under any Applicable Bankruptcy Law, or had an order for relief naming it entered under any Applicable Bankruptcy Law, or had any composition, rearrangement, extension, reorganization or other relief of debtors now or hereafter existing requested or consented to by it; or (iv) failed to have discharged within a period of ten (10) days any attachment, sequestration or similar writ levied upon, or any claim against or affecting, any property of such party; and (c) Minimum Receipts. APS must have been paid a minimum of (i) all Additional Reimbursable Costs (as defined in Section 11), plus (ii) $375,000 from Consolidated and the Subsidiaries, which $375,000 shall be applied first to any penalties and interest accrued and unpaid under the Existing Debt, with any balance to be applied to principal; provided, that amounts retained by APS pursuant to Section 3(g) shall count toward the minimum receipts requirement set forth in this subsection; and 5 (d) Acquisition of Eco-Systems. APS and/or its affiliates must have acquired, through the Foreclosure or otherwise, all of the issued and outstanding capital stock or other equity ownership interests of Eco-Systems (as hereinafter defined), and there shall not be outstanding any right on the part of any person or entity to acquire any interest in the capital stock of, or other equity ownership interest in, Eco-Systems. Section 3. Acquisition of Eco-Systems. (a) Foreclosure. Consolidated and each Subsidiary hereby agrees that APS is entitled to foreclose (the "Foreclosure") on the issued and outstanding capital stock of Eco Acquisition, Inc. d/b/a Eco-Systems ("Eco-Systems"), an Arkansas corporation, pursuant to that certain Assignment and Security Agreement dated November 6, 1997, by and between APS and Consolidated (the "Eco-Systems Security Agreement"). Consolidated and each Subsidiary (including, without limitation, Eco-Systems) acknowledges and agrees that there exists under the Eco-Systems Security Agreement an Event of Default (as defined therein), and as of the date of this Agreement, such Event of Default has not been cured. Consolidated and each Subsidiary, including, without limitation, Eco-Systems, further agrees to cooperate fully with APS in the Foreclosure, and to not take any action which could adversely impact the value of Eco-Systems up to, and/or after, the Foreclosure. Accordingly, Consolidated and each Subsidiary acknowledges and agrees that any sale conducted by APS or one of its affiliates under the Eco-Systems Security Agreement and this Agreement is hereby accepted by Consolidated and each Subsidiary as a commercially reasonable sale. APS or one of its affiliates may bid on the collateral under the Eco-Systems Security Agreement at the sale, whether public 6 or private, and in the event it is the successful bidder, all parties hereby agree that such purchase shall not be a discharge or satisfaction of Consolidated's or any Subsidiary's obligations under Section 9.505 of the Texas UCC (Texas Business and Commerce Code). Furthermore, Consolidated and each Subsidiary hereby renounces any right to notification of the Foreclosure. Any amount of value or credit arising from the Foreclosure will be applied to the Existing Debt pursuant to the terms of the applicable Existing Security Documents and will, in no event, reduce the original amount of, or any amounts due under, the New Note. (b) Limitation on Foreclosure. Notwithstanding the foregoing provisions of subsection (a), APS agrees that it will not consummate the Foreclosure prior to April 1, 1999 as long as the following conditions are met: (i)Compliance with Existing Agreements. Consolidated and each of the Subsidiaries complies in all respects with its respective obligations under each of the Transaction Documents to which it is a party (except for obligations to make the scheduled payments called for in the Existing Note); and (ii) Distributions. Without the prior written approval of APS in each instance, Eco-Systems does not distribute any cash or other assets to Consolidated, another Subsidiary or (except to pay the obligations and expenses of Eco-Systems incurred in the ordinary course of business) any third party. 7 (iii) Access. APS and its representatives is allowed free and complete access to books, records, employees, officers, directors and assets of Eco-Systems for purposes of evaluating the business, prospects, financial condition, continued viability and value of Eco-Systems. (c) Indemnification. Consolidated and each Subsidiary, jointly and severally, hereby agrees to indemnify and hold harmless (i) APS, and all of APS's affiliates, subsidiaries, employees, officers, directors, shareholders and representatives (collectively, the "APS Indemnified Parties"), from and against any and all damages, losses, claims, liabilities, demands, charges, suits, penalties, costs and expenses (including, without limitation, any and all taxes, court costs and attorneys' fees and expenses incurred in investigating and preparing for any litigation or proceeding) (collectively, "Indemnified Costs") which any APS Indemnified Party may sustain or become subject to in connection with the commencement or assertion of any action, proceeding, demand or claim arising out of the Foreclosure or the ownership of any interest in Eco-Systems upon and after the Foreclosure and that is related to or arises, directly or indirectly, in whole or in part, out of matters occurring or circumstances existing on or prior to the date of the Foreclosure and (ii) APS, each APS Indemnified Party and Eco-Systems from and against any and all Indemnified Costs that are (A) incurred by, or asserted against, Eco-Systems, (B) related to any act or omission by or on behalf of Eco-Systems, Consolidated or any Subsidiary occurring on or prior to the date of Foreclosure, and (C) that are not reflected by amount, or included within an amount, shown as a liability on the balance sheet of Eco-Systems dated January 31, 1999 and provided to APS by Consolidated, a copy of which is attached hereto as Exhibit B. Furthermore, any Indemnified Cost incurred by APS or Eco-Systems that is not 8 promptly paid or reimbursed by Consolidated pursuant to this Section shall bear interest at an annual rate of ten percent (10%). (d) Issuance of Employee Stock Options. All parties hereto acknowledge and agree that, after the Foreclosure, Eco-Systems may, from time-to-time, issue employee stock options to its directors, officers and/or employees on such terms and conditions as may be approved by the Board of Directors of Eco-Systems. APS agrees that it will, during the six (6) consecutive month period beginning on the Effective Date, and only to the extent allowed under applicable law, take all actions necessary to prevent the grant of any and all employee stock options by Eco-Systems without the prior approval of Jim Connors in each instance. (e) Allocation of Expenses and Corporate Overhead. Consolidated and each of the Subsidiaries acknowledges and agrees that, for any period during which APS owns a controlling interest in Eco-Systems, APS is entitled to allocate to and charge Eco-Systems for, and receive the corresponding payment for (i) direct and indirect costs for services and products provided to Eco-Systems by APS or one of its affiliates, (ii) corporate overhead associated with accounting costs, employee benefit administration costs and executive or manager salaries, incurred by APS and attributable to Eco-Systems, together with such other corporate overhead allocation as is consistent with the past practices of APS and its subsidiaries and (iii) the amount of any and all other costs, expenses, fees, liabilities or other obligations that are incurred by APS or one of its affiliates, to the extent that such amounts benefit Eco-Systems, directly or indirectly. The parties agree that no allocation to or payment by Eco-Systems pursuant to this Section will constitute payment of any of their obligations under any of the Transaction 9 Documents (including, without limitation, obligations under the Existing Debt or the New Note, as the case may be). (f) Restricted Payments. Consolidated, Eco-Systems and APS each agree that any payments made by Eco-Systems to Sam Sexton after the Foreclosure, regardless of whether such payments are compensatory in nature, shall be restricted for all purposes to no greater than $10,000 per month and shall count toward the payment obligations of APS set forth in the second paragraph of Section 3(g). Consolidated, Eco-Systems and APS each further agree that after October 15, 1999, Eco-Systems will not be obligated in any manner to pay any amounts to Sam Sexton, as compensation or otherwise, except for such salary and benefits as have been approved in writing by the then current officers of Eco-Systems. (g) Application of Post-Foreclosure Proceeds. APS agrees that, after the Foreclosure, APS will apply any cash dividends distributed from Eco-Systems to APS, or such subsidiaries of APS who then own equity interests in Eco-Systems, first to satisfaction of all Additional Reimbursable Costs and then to satisfaction of interest and principal under the Existing Debt, or, once the New Note has been accepted by APS pursuant hereto, to interest and principal owed under the New Note. But in the event that, prior to APS's acceptance of the New Note, APS receives cash dividends paid pursuant to this Section by Eco-Systems (excluding any portion of such amounts paid over to Consolidated pursuant to this Section) in excess of the sum of (i) all Additional Reimbursable Costs, plus (ii) $375,000, then any such excess amount will not be applied to the Existing Debt, but will rather be applied by APS as a contingent prepayment of the New Note (contingent only upon APS's acceptance of the New 10 Note); provided, however, that such excess amount will be applied to the Existing Debt in the event that APS does not accept the New Note. APS further agrees that it will pay to Consolidated (or its designee) one-half of all cash dividends received on or before October 14, 1999 in respect of APS's or APS's subsidiaries' ownership of Eco-Systems. Notwithstanding the foregoing or any other provision of this Agreement, Consolidated acknowledges and agrees that amounts paid to Consolidated (or its designee) pursuant to the immediately preceding sentence will not be applied against the Existing Debt or the New Note, as the case may be. In the event APS acquires, directly or indirectly, all ownership interests in Eco-Systems through the Foreclosure, APS agrees that it will use reasonable efforts to cause Eco-Systems to distribute as dividends all excess cash that is reasonably available for distribution (using commercially prudent business judgment) after payment of Eco-Systems' obligations and expenses and establishment of reasonable reserves. (h) Repurchase Option. Consolidated is hereby granted a right to purchase from APS or its affiliates all (but only all) of the capital stock of Eco-Systems that may have been acquired by APS or its affiliates through the Foreclosure (the "Repurchase Option"). But the Repurchase Option is subject to the following terms and conditions: (i) APS must have accepted the New Note upon satisfaction of the terms and conditions set forth in this Agreement, (ii) all amounts outstanding under the New Note, including all interest thereon shall have been paid, (iii) Consolidated and each of the Subsidiaries must have fully complied with all of the terms of this Agreement and the Additional Security Documents, including, without limitation, the payment of all amounts due to any APS Indemnified Parties and Eco-Systems pursuant to the indemnity obligations 11 under Section 3(c) (including any interest provided for therein), (iv) the Repurchase Option, if available, must be exercised prior to the expiration of six (6) months immediately following the full satisfaction of all amounts owed under the New Note, (v) the purchase price of $1,000 in immediately available funds must be tendered at the closing of the conveyance allowed under the Repurchase Option, and (vi) Consolidated and each Subsidiary must execute and deliver at the closing a general release of liability in favor of all APS Indemnified Parties, and such other documents and instruments as APS may request. Section 4. Contingent Payments. Consolidated and the Subsidiaries each agree that the payments set forth in this Section (each a "Contingent Payment") will be made upon the occurrence of the events triggering such payments, all as more fully described in subsections (a) through (c) below. Any Contingent Payment received by APS or one of its affiliates is to be applied as set forth in the applicable subsection which describes the Contingent Payment obligation. (a) Payment Upon Disposition of Interests in Subsidiaries. Consolidated agrees that it must have APS's prior written approval for any sale or disposition of either the stock or the assets (or any portion thereof) of Exsorbet Technical Services, Inc., an Arkansas corporation doing business as SpilTech Services, Inc. ("SpilTech"), KR Industrial Service of Alabama, Inc., an Alabama corporation ("KR") or any other Subsidiary. Assuming any such sale is negotiated on arms-length terms, APS will agree to give such approval provided Consolidated first notifies APS in writing of the possibility of such disposition and provides APS (prior to execution) with copies of the documents governing such disposition. Consolidated 12 acknowledges and agrees that, notwithstanding the foregoing or any other provision of this Agreement, any such disposition is, and remains after the Effective Date, prohibited under the Transaction Documents, absent the express prior written consent of APS in each instance. Consolidated further agrees that, with respect to any sale of the stock or assets of either SpilTech or KR, such documents must provide that seventy-five percent (75%) of the net proceeds from such disposition (after payment of only perfected secured indebtedness which is senior to the liens of APS) will be paid directly to APS at the closing of the disposition, limited in amount, however, to the aggregate of all amounts then owing to APS by Consolidated and the Subsidiaries. APS agrees that it will apply any Contingent Payment received pursuant to this subsection first to satisfaction of all Additional Reimbursable Costs and then to satisfaction of interest and principal under the Existing Debt, or, once the New Note has been accepted by APS pursuant hereto, to interest and principal owed under the New Note. But in the event that, prior to APS's acceptance of the New Note, APS receives combined Contingent Payments pursuant to this subsection and dividends from Eco-Systems that it may retain pursuant to Section 3(g), in excess of the sum of (i) all Additional Reimbursable Costs, plus (ii) $375,000, then any such excess amount will not be applied to the Existing Debt, but will rather be applied by APS as a contingent prepayment of the New Note (contingent only upon APS's acceptance of the New Note); provided, however, that such excess amount will be applied to the Existing Debt in the event that APS does not accept the New Note. (b) Payment Upon Disposition of Interests in Consolidated. Consolidated agrees that prior to any sale, change of control transaction, or other disposition (by merger, 13 consolidation or otherwise) of either its stock or its assets (or any portion thereof), Consolidated will notify APS in writing of the possibility of such disposition and provide APS (prior to execution) with copies of the documents governing such disposition. Consolidated acknowledges and agrees that, notwithstanding the foregoing or any other provision of this Agreement, any such disposition is, and remains after the Effective Date, prohibited under the Transaction Documents, absent the express prior written consent of APS in each instance. Consolidated agrees that the documents governing such disposition must provide that seventy-five percent (75%) of the net proceeds from such disposition (prior to any payment or other consideration being received by any direct or indirect shareholders or controlling persons of Consolidated) will be paid to APS at the closing of the disposition, limited in amount, however, to $600,000. APS agrees that it will apply any Contingent Payment received pursuant to this subsection to satisfaction of interest and principal under the Existing Debt, or, once the New Note has been accepted by APS pursuant hereto, to the Deficiency Obligation. In no event will amounts paid under this subsection be applied to the New Note. Notwithstanding the foregoing or any other provision of this Agreement to the contrary, this subsection (b) shall not apply to any sale of stock of either KR or SpilTech as long as the Contingent Payment obligations in Section 4(a) have been fully satisfied with respect to such sale of stock. (c) Payment Upon Settlement of Everen Securities Lawsuit. Consolidated and the Subsidiaries agree to pay to APS seventy-five percent (75%) of the total cash proceeds 14 payable to them (after deduction of only legal fees and up to $75,000 payable to American Dynasty Insurance Company), by way of settlement, judgment or otherwise, out of or in relation to any litigation and claims (whether or not asserted as of the Effective Date, but including, without limitation, the litigation pending on the Effective Date) between Everen Securities and/or any of its affiliates or insurers on the one hand and Consolidated and/or any of its affiliates on the other hand, limited in amount, however, to $600,000. Consolidated and the Subsidiaries agree that they will promptly pay such amounts to APS upon receipt and will not dispose of, settle or agree to the entry of any judgment without the prior written consent of APS; provided, however, that such consent may not be withheld if such disposition, settlement or judgment explicitly provides for immediate payment of $600,000 to APS pursuant to this Section. APS agrees that it will apply any Contingent Payment received pursuant to this subsection to satisfaction of interest and principal under the Existing Debt, or, once the New Note has been accepted by APS pursuant hereto, to the Deficiency Obligation. In no event will amounts paid under this subsection be applied to the New Note. Consolidated agrees that it must provide APS with at least ten (10) days opportunity, prior to the closing of any disposition described in the foregoing subsections (a) or (b), or prior to finalizing any settlement or judgment described in subsection (c), and after receipt by APS of all documents, instruments and agreements related to such disposition, settlement or judgment, to review the terms and conditions of such and to ensure compliance with the conditions imposed under this Agreement and under any of the other Transaction Documents. Furthermore, Consolidated agrees to cooperate with APS and to provide APS access to, and participation in, the closing of any such disposition, settlement or judgment all as requested by APS in order to ensure compliance 15 with the terms and conditions of the Transaction Documents. Upon any breach by Consolidated of the terms and provisions of this Section, the entire Deficiency Obligation shall automatically become immediately due and payable without any limitation on the source of repayment as otherwise provided herein. Section 5. Additional Covenants. (a) Future Subsidiaries. Consolidated and each Subsidiary agrees that it will take any and all actions that may be necessary to cause any future corporations or other entities that become owned or controlled, wholly or partially, directly or indirectly, by Consolidated or that Subsidiary after the Effective Date to execute and deliver to APS (i) a counterpart to this Agreement, and (ii) a payment and performance guaranty agreement and a first lien security agreement on all of its assets, each for the benefit of APS covering all payment and performance obligations of Consolidated, in substantially the same form of the guaranty agreements and security agreements executed by the Subsidiaries that are included in the Security Documents. Consolidated and each Subsidiary further agrees that, with respect to each such newly owned or controlled corporation or entity, it will (i) execute and deliver to APS a first lien, perfected security interest in and to all of the capital stock or other equity interests held by Consolidated or the Subsidiary in that entity and (ii) take any and all other actions as may be necessary to ensure that such entity is considered a Subsidiary hereunder for all purposes. (b) Dismissal of Lawsuit. APS agrees to dismiss, within 10 business days of the Effective Date, the existing lawsuit by APS against Consolidated. Such dismissal, however, 16 will be without prejudice and without any limitation on the refiling of the same or other lawsuits by APS or its affiliates against Consolidated, any Subsidiary or any of their respective affiliates. (c) Existing Covenants Under Transaction Documents. Consolidated and each of the Subsidiaries covenants and agrees that it will continue to comply with all of the covenants set forth in the Transaction Documents to which it is a party. (d) Other Agreements. Consolidated agrees to execute and deliver, concurrently with its execution and delivery of this Agreement, the Assignment and Security Agreement attached hereto as Exhibit C and the Security Agreement attached hereto as Exhibit D, both of which, for all purposes hereof, shall be deemed to be included within the Additional Security Documents. Furthermore, each of Eco-Systems, SpilTech and KR agrees to execute and deliver, concurrently with its execution and delivery of this Agreement, a Security Agreement in a form attached hereto as Exhibit E, which shall, for all purposes of this Agreement, be considered included in the Additional Security Documents. (e) Financial Reporting Requirements. In addition to such financial and other reporting requirements as may be provided pursuant to the Transaction Documents, Consolidated covenants and agrees that it will, after the date of this Agreement, provide to APS true and correct copies of all financial statements, reports or summaries concerning the business, financial condition or operations of Consolidated or any of the Subsidiaries (or Consolidated and the Subsidiaries on a consolidated basis), within ten (10) days after such statements, reports or summaries become available to Consolidated. Furthermore, any such statements, reports or 17 summaries shall contain a written statement signed by the Chief Financial Officer of Consolidated to the effect that the financial information contained therein has been prepared in accordance with generally accepted accounting principles, consistently applied, and is fairly and accurately presented. (f) Consolidated and Eco-Systems each agree that they will (i) vigorously contest any lawsuit, claim or action filed against either Consolidated or Eco-Systems by former accountants of Consolidated and (ii) allow APS full participation in the defense of any such lawsuit, claim or action. Section 6. No Additional Financings. The parties acknowledge and agree that certain of the Transaction 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 Transaction 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 18 course of business; provided, however that the following will not be deemed to constitute a violation of the foregoing prohibition: (i) factoring transactions that occurred prior to October 15, 1997, so long as there has not since October 15, 1997 been, and there is not after the date of this Agreement, any increase in the amounts due or involved in such factoring relationships and (ii) refinancing of existing obligations (but only those existing obligations which are themselves not in violation of any of the Transaction Documents), so long as there is not any increase in amounts due under such existing obligations. Section 7. Representations and Warranties. Consolidated and each of the Subsidiaries hereby, jointly and severally, represents and warrants to APS (as of the Effective Date), 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 this Agreement, the Existing Note, the Refinancing Agreement, each Security Document, and each other document, agreement, contract, instrument or certificate contemplated by or executed and delivered in connection with any of the foregoing, including, without limitation, the New Note (if issued and accepted) and those certain agreements referred to in Section 5(d) above and in Section 7(g) below (collectively, including this Agreement, the "Transaction Documents"), to which it is a party. 19 (b) 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. Furthermore, each of the Transaction Documents is, or will be when executed and delivered, the valid and binding obligation of the parties thereto (other than APS), enforceable against the parties thereto (other than APS) in accordance with its respective terms. (c) There is only one class of capital stock of Consolidated, Eco-Systems, SpilTech and KR outstanding. (d) Consolidated's and each of the Subsidiaries' representations and warranties under each of the Transaction 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. (e) The entering into, and delivery and performance of their obligations under, the Transaction Documents does not, and will not, (i) 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 or (ii) require any notice to, declaration, filing or registration with, or permit or consent from, any domestic or foreign governmental or regulatory body or authority, or any other person or entity, including, without limitation, any party to any contract or agreement by which Consolidated or any Subsidiary is bound or any approval by the shareholders of Consolidated or any Subsidiary. 20 (f) Following the Foreclosure described in Section 3(a) hereof, APS will, directly or indirectly, enjoy sole and exclusive ownership, free and clear of any liens or encumbrances, of any and all of the capital stock, of all classes, of Eco-Systems. Furthermore, APS will enjoy all of the rights and benefits of stock ownership with respect to any shares of capital stock of Eco-Systems acquired through the Foreclosure, including, without limitation, the sole and exclusive right to elect new directors and to amend or replace existing (or adopt new) stock option plans. (g) Consolidated and Eco-Systems, jointly and severally, represent and warrant that Jim Connors has been fully and unconditionally released from his employment with Consolidated and that he is free of any contract, agreement, understanding or other restraint that could be construed as prohibiting his full time employment with Eco-Systems after the date of this Agreement. Consolidated and Eco-Systems, jointly and severally, represent and warrant that, except as set forth and described in detail on (or attached to) Schedule III, there are no contracts or agreements relating to the employment (as an employee, independent contractor, consultant or otherwise) of any individual by Eco-Systems, and each of them covenants and agrees not to allow any such contract or agreement to be entered into hereafter without APS's prior written consent. (h) Consolidated and each Subsidiary acknowledges and agrees that execution and delivery of each of the Transaction Documents required to be executed by it under this Agreement (or any other Transaction Document) is a condition to each and every obligation of APS under this Agreement. 21 (i) Consolidated and each Subsidiary has supplied APS with all information necessary for APS to conduct appropriate lien searches with respect to any and all property owned by Consolidated and each Subsidiary, and Schedule IV attached hereto contains the location of both the principal place of business (by city) and all property (by county and state) of Consolidated and each Subsidiary. Section 8. Release. The parties being released by Consolidated and each of the Subsidiaries by virtue of this Section, all of whom are collectively referred to herein as the "Released Parties", are APS, Eco-Systems, Jim Connors, their principals, shareholders, partners, members, directors, officers, agents, employees, spouses, children, servants, insurers, employee welfare benefit plans, pension and/or deferred compensation plans, administrators and other fiduciaries, parent companies, affiliated entities, subsidiaries, successors and assigns, and each of them, individually and collectively (in each case excluding, however, Consolidated and the Subsidiaries other than Eco-Systems). (a) Release by Consolidated and the Subsidiaries. Each of Consolidated and the Subsidiaries hereby releases and discharges the Released Parties (the "Release"), individually and collectively, of and from any and all claims, causes of action, suits, debts, contracts, agreements (including, with respect to Jim Connors, and without limitation, any existing employment agreement between Jim Connors and Consolidated), promises, liability, demands, damages, and other expenses of any nature whatsoever, at law or in equity, known or unknown, fixed or contingent, contemplated or uncontemplated, whether asserted or assertable, arising out 22 of any matter whatsoever which has occurred from the beginning of time up through and including the date hereof. Without limiting the generality of the foregoing, each of Consolidated and the Subsidiaries hereby acknowledges and agrees that the Release is intended to waive and discharge any and all actions, claims, demands and causes of action arising out of or in any way related to its prior relationship with the Released Parties. But the foregoing provisions do not, and should not be construed so as to, alter, amend or negate the enforceability of this Agreement or any other Transaction Document. (b) Construction. The Release is intended to be and should be construed as a general, complete and final waiver and release of all claims. The Release is being made and executed by each of Consolidated and the Subsidiaries individually and on behalf of its successors, assigns, agents, all persons subrogated to its rights or to whom its rights are secondary or derivative, and all other persons on behalf of whom it is authorized to act. (c) No Admissions. It is expressly understood and agreed that neither this Agreement, the Release, nor the furnishing of consideration for this Agreement or the Release, shall be deemed or construed at any time for any purpose as an admission by anyone of wrongdoing or liability of any kind, all such wrongdoing and liability being expressly denied. (d) Knowledge of Claims. Each of Consolidated and the Subsidiaries expressly warrants and stipulates that it intends for the Release to release any and all claims that it may now have against the Released Parties, regardless of whether such claims have been 23 asserted and regardless of whether such claims arise out of or are related in any way to any facts in existence on or before the date of this Agreement. Section 9. Further Assurances. Consolidated and each Subsidiary agrees to cooperate fully with APS, and to take such steps and execute and deliver such documents, instruments or certificates as may be necessary to carry out, or further evidence, its obligations under this Agreement. Section 10. 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 Transaction Documents, and all of the Transaction Documents are intended to be, and remain, binding and enforceable in accordance with their terms. The Transaction 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 Transaction 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 Transaction Documents. Without limiting the foregoing, and except as expressly provided in any release arising out of that certain action filed in the United States District Court for the Western District of Texas, Austin Division, Case No. A98CA375-SS, Consolidated and each of the Subsidiaries 24 expressly acknowledges and agrees 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 the negotiation and entering into the various agreements and transactions which gave rise to any of the Transaction Documents, or any misrepresentation made in connection therewith, or any breach or default thereunder. Consolidated and the Subsidiaries agree to an extension or tolling of all defenses based on the passage of time, including but not limited to statutes of limitation and principles of laches, applicable or relating to any possible claims, demand, and/or cause of action which APS may have that arises out of or in connection with any of the Transaction Documents any of the transactions giving rise to the Original Note or any other transaction, act or omission involving APS or any of the APS Indemnified Parties, or the promises, warranties, inducements, or representations in connection therewith. Such tolling and extension of the time in which APS may bring any such claim, demand, and/or cause of action shall extend until the Existing Debt, or all amounts due under the New Note and Deficiency Obligation (if the New Note is issued) have been paid in full. Section 11. Reimbursement of Expenses. Without in any way reducing or otherwise limiting any of Consolidated's or the Subsidiaries' other obligations to reimburse expenses pursuant to any of the Transaction Documents or otherwise, Consolidated agrees to reimburse APS for (i) $45,000 previously advanced by APS or its affiliates on behalf of Consolidated, 25 (ii) all legal, accounting and other costs, fees and expenses incurred by APS in negotiating, preparing and entering into this Agreement and the other Transaction Documents, and perfecting the various security interests granted pursuant thereto and (iii) all legal, accounting and other costs, fees and expenses incurred by APS or one of its affiliates at any time after March 1, 1999 and arising out of or related to the transactions contemplated in this Agreement. All amounts for which reimbursement is due under this Section are collectively referred to herein as the "Additional Reimbursable Costs." Section 12. 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 under any of the Transaction Documents. Section 13. 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. 26 Section 14. 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. Section 15. 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. Section 16. Limitation on Interest: Maximum Rate. The parties agree that, with respect to any and all lending provisions contained in any of the Transaction Documents, they intend to contract in strict compliance with applicable usury law from time to time in effect. To effectuate this intention, the parties acknowledge and agree that none of the terms and provisions of any of the Transaction Documents, whether now existing or arising hereafter, shall ever be construed as a contract to pay interest for the use, forbearance or detention of money in excess of the Maximum Rate (as hereinafter defined). If, from any possible construction of any Transaction Document, interest would otherwise be payable to the lender thereunder in excess of the Maximum Rate, any such construction shall be subject to the provisions of this Section and such document shall be automatically reformed and the interest payable to the lender thereunder shall be automatically reduced to the Maximum Rate permitted under applicable law, without the necessity of the execution of any amendment or new document. Neither the borrower, endorsers or other persons that now or hereafter become liable for payment of any obligation referred to 27 herein shall ever be liable for any unearned interest on the principal amount or shall ever be required to pay interest thereon in excess of the Maximum Rate. Any party that is a lender under any Transaction Document and any subsequent holder of the related loan expressly disavows any intention to charge or collect unearned or excessive interest or finance charges in the event the maturity of such loan, is accelerated. If the maturity of such loan is accelerated for any reason, whether as a result of a default under the loan, or by voluntary prepayment, or otherwise, any amounts constituting interest, or adjudicated as constituting interest, which are then unearned and have previously been collected by such lender or any subsequent holder of the loan shall be applied to reduce the principal balance thereof then outstanding, or if such amounts exceed the unpaid balance of principal, the excess shall be refunded to the borrower thereunder. In the event such lender or any subsequent holder of the loan ever receives, collects or applies as interest any amounts constituting interest or adjudicated as constituting interest which would otherwise increase the interest to an amount in excess of the amount permitted under applicable law, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of the loan, and, if the principal balances of the loan is paid in full, any remaining excess shall be paid to the borrower thereunder. In determining whether or not the interest paid or payable under the specific contingencies exceeds the Maximum Rate allowed by applicable law, the borrower and the lender thereunder shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment as an expense, fee or premium, rather than as interest; (ii) exclude voluntary prepayments and the effect thereof; (iii) amortize, prorate, allocate and spread, in equal parts, the total amount of interest throughout the entire contemplated term of the applicable loan (as it may be renewed and extended) so that the interest rate is uniform throughout the entire term of the loan. The terms and provisions of this 28 section shall control and supersede every other provision of all existing and future agreements between each such lender and each such borrower. As used in this Agreement, "Maximum Rate" means the maximum non-usurious interest rate that at any time or from time to time may be contracted for, taken, reserved, charged or received on the unpaid principal or accrued past due interest under applicable law and may be greater than the applicable rate, the parties hereby stipulating and agreeing that the lender may contract for, take, reserve, charge or receive interest up to the Maximum Rate without penalty under any applicable law; and "applicable law" means the laws of the State of Texas or the laws of the United States of America, whichever laws allow the greater interest, as such laws now exist or may be changed or amended or come into effect in the future. In the event applicable law provides for an interest ceiling under Chapter One of Title 79, Texas Revised Civil Statutes Annotated, as amended, that ceiling shall be the indicated rate ceiling, subject to any right the lender may have in the future to change the method of determining the Maximum Rate. Section 17. Treatment of 7-7. The parties hereby acknowledge and agree that 7-7, Inc., an Arkansas corporation ("7-7"), is a subsidiary of Consolidated and is a party to various of the Security Documents. Although not a signatory to this Agreement, references in this Agreement to "Subsidiary" shall include 7-7, and nothing in this Section 17 may be construed as a waiver or other relinquishment of rights by APS under any Security Document to which 7-7 is a party. Section 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 29 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 Consolidated Eco-Systems, Inc. or 3201 W. 65th Street the Subsidiaries: Little Rock, Arkansas 72209 Attn: President Any party may change its address for purposes of this Agreement by proper notice to the other party. [Signature pages to follow] 30 SIGNATURE PAGES TO RESTRUCTURING AGREEMENT IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the 25 th day of March, 1999. CONSOLIDATED: Consolidated Eco-Systems, Inc. By /s/ Larry Woodcock Name Larry Woodcock Title President APS: American Physicians Service Group, Inc. By /s/ Duane K. Boyd, Jr. Name Duane K. Boyd, Jr. Title VP LARCO: Larco Environmental Services, Inc. By /s/ Larry Woodcock Name Larry Woodcock Title President 1 SIGNATURE PAGES TO RESTRUCTURING AGREEMENT (continued) CES: Consolidated Environmental Services, Inc. By /s/ Larry Woodcock Name Larry Woodcock Title President CIERRA: Cierra, Inc. By /s/ Larry Woodcock Name Larry Woodcock Title President KR INDUSTRIAL: KR Industrial Service of Alabama, Inc. By /s/ Larry Woodcock Name Larry Woodcock Title President 2 SIGNATURE PAGES TO RESTRUCTURING AGREEMENT (continued) EXSORBET TECHNICAL: Exsorbet Technical Services, Inc. By /s/ Larry Woodcock Name Larry Woodcock Title President ECO-SYSTEMS: Eco Acquisition, Inc. By /s/ Larry Woodcock Name Larry Woodcock Title President 3 SCHEDULE I SUBSIDIARIES 1. Consolidated Environmental Services, Inc., an Arkansas corporation 2. Cierra, Inc., an Arkansas corporation 3. Larco Environmental Services, Inc., a Louisiana corporation 4. KR Industrial Service of Alabama, Inc., an Alabama corporation 5. Exsorbet Technical Services, Inc., an Arkansas corporation doing business as SpilTech Services, Inc. 6. Eco Acquisition, Inc., an Arkansas corporation also known as Eco-Systems, Inc. 7. 7-7, Inc., an Arkansas corporation 1 SCHEDULE II EXISTING SECURITY DOCUMENTS 1. Guaranty Agreement dated September 30, 1996 in favor of American Physicians Service Group, Inc. from Consolidated Environmental Services, Inc. 2. Guaranty Agreement dated September 30, 1996 in favor of American Physicians Service Group, Inc. from Cierra, Inc. 3. Guaranty Agreement dated September 30, 1996 in favor of American Physicians Service Group, Inc. from Larco Environmental Services, Inc. 4. Guaranty Agreement dated September 30, 1996 in favor of American Physicians Service Group, Inc. from KR Industrial Service of Alabama, Inc. 5. Guaranty Agreement dated September 30, 1996 in favor of American Physicians Service Group, Inc. from Exsorbet Technical Services, Inc. 6. Guaranty Agreement dated September 30, 1996 in favor of American Physicians Service Group, Inc. from Eco Acquisition, Inc. 7. Guaranty Agreement dated September 30, 1996 in favor of American Physicians Service Group, Inc. from 7-7 Merger, Inc. 8. Security Agreement dated September 30, 1996 by and between 7-7 Merger, Inc. and American Physicians Service Group, Inc. 9. Assignment and Security Agreement dated September 30, 1996 by and between American Physicians Service Group, Inc. and Exsorbet Industries, Inc. 10. Security Agreement dated December 12, 1996 by and between 7-7 Merger, Inc. and American Physicians Service Group, Inc. 11. Master Refinancing Agreement dated November 6, 1997 by and among Consolidated Eco-Systems, Inc. ("Consolidated") and all of the wholly or partially owned subsidiaries of Consolidated and American Physicians Service Group, Inc. 12. Promissory Note dated November 6, 1997 executed by Consolidated Eco-Systems, Inc. and payable to American Physicians Service Group, Inc. in the original principal amount of $3,788,580. 13. Security Agreement dated November 6, 1997 by and between Larco Environmental Services, Inc. and American Physicians Service Group, Inc. 2 14. Assignment and Security Agreement dated November 6, 1997 by and between Consolidated Eco-Systems, Inc. and American Physicians Service Group, Inc. 3 SCHEDULE III EMPLOYMENT AGREEMENTS [TO BE PREPARED BY CHIP SEXTON] 1 SCHEDULE IV BUSINESS AND ASSET LOCATIONS 1 EXHIBIT A 2 EXHIBIT B 3 EXHIBIT C 4 EXHIBIT D 5 EXHIBIT E 6 EX-10 22 ASSIGNMENT AND SECURITY AGREEMENT Exhibit 10.58 ASSIGNMENT AND SECURITY AGREEMENT THIS ASSIGNMENT AND SECURITY AGREEMENT (this "Agreement") is entered into effective the 25 th day of March, 1999, 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 6, 1997 (as amended, supplemented, or modified, and including any replacement thereof or substitution therefore, the "Note") in the original principal amount of Three Million Seven Hundred Eighty-Eight Thousand Five Hundred Eighty Dollars ($3,788,580) payable to the order of Secured Party. B. The Note was issued pursuant to a Master Refinancing Agreement (the "Loan Agreement"), between Debtor, its subsidiaries and Secured Party. The obligations of Debtor under the Note and the Loan Agreement are guaranteed by certain guaranty agreements executed by the subsidiaries of Debtor, and are secured pursuant to the terms of certain security agreements, pledges and other agreements and instruments entered into by Debtor and certain subsidiaries of Debtor. The Loan Agreement and all such guarantees, security agreements, pledges and other agreements and instruments are collectively referred to herein as the "Original Security Documents." C. Debtor will, concurrently with its execution of this Agreement, execute and deliver that certain Restructuring Agreement (the "Second Loan Agreement"), of even date herewith, by and between Debtor, all of Debtor's wholly or partially owned subsidiaries, and Secured Party, along with other guarantees, security agreements, pledges, documents, agreements, contracts, instruments and certificates contemplated therein or executed and delivered in connection therewith (collectively, including the Second Loan Agreement and this Agreement, the "New Security Documents"). D. Debtor has received, and will continue to receive, valuable consideration as a result of the transactions evidenced by, or related to, the Note, the Original Security Documents, the New Security Documents and this Agreement. E. Debtor has agreed to pledge the Collateral (as defined below) to secure certain obligations and liabilities, including without limitation (i) Debtor's obligations under the Note, (ii) Debtor's and Debtor's subsidiaries' performance of the covenants and agreements set forth in the Original Security Documents, (iii) Debtor's and Debtor's subsidiaries' performance of the covenants and agreements set forth in the New Security Documents, and (iv) Debtor's performance of the covenants more fully set forth herein. F. Reference is hereby made to Schedule I, attached hereto and incorporated herein by reference, for certain defined terms used in this Agreement. 2 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 continuing first priority security interest in and lien (the "Security Interest") upon, the following described collateral, whether now owned or hereafter acquired, and wherever located (collectively, the "Collateral"): (a) Shares of SpilTech. All issued and outstanding shares of capital stock (of all classes) of Exsorbet Technical Services, Inc. ("SpilTech"), an Arkansas corporation doing business as SpilTech Services, Inc. and a subsidiary of Debtor, 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 SpilTech subsequently delivered or issued to Debtor (the above described stock is sometimes collectively referred to as the "SpilTech Shares"); and any options, rescission rights, registration rights, conversion rights, subscription rights, contractual or quasi-contractual 3 rights, warrants, redemption rights, redemption proceeds, calls, preemptive rights and all other rights and benefits pertaining to the SpilTech Shares; (b) Shares of Industrial. All issued and outstanding shares of capital stock (of all classes) of KR Industrial Service of Alabama, Inc. ("Industrial"), an Alabama corporation and a subsidiary of Debtor, 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 Industrial subsequently delivered or issued to Debtor (the above described stock is sometimes collectively referred to as the "Industrial Shares"); and any options, rescission rights, registration rights, conversion rights, subscription rights, contractual or quasi-contractual rights, warrants, redemption rights, redemption proceeds, calls, preemptive rights and all other rights and benefits pertaining to the Industrial 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 is now or may hereafter become entitled to receive with respect to any Collateral described in (a) or (b) above; (d) Additional Property. "Collateral" shall also include the following property (collectively, the "Additional Property") which Debtor becomes entitled to receive 4 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 spin-off; (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; and (e) Proceeds. All proceeds (cash and non-cash) 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. 1.2 Obligations. This Agreement and the Security Interest shall secure full and punctual payment and performance of the following indebtedness, duties and obligations (collectively, the "Obligations"): (a) All covenants, obligations, and liabilities of Debtor and Debtor's subsidiaries to Secured Party under the Original Security Documents and the New Security Documents; 5 (b) All principal, interest, fees and other amounts payable to the Secured Party pursuant to the Note, including all future advances, extensions, renewals, modifications, increases, or substitutions thereof whether or not provided for in the New Security Documents; (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 Debtor's 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 Note, the Original Security Documents, the New Security Documents, this Agreement, or any other document, agreement, or instrument executed in connection therewith, (ii) all accrued but unpaid interest on any of the indebtedness described in (i) above, (iii) all obligations of Debtor and/or Debtor's 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 attorneys' fees, and (v) all renewals, extensions, modifications and rearrangements of the indebtedness and obligations described in (i), (ii), (iii) and (iv) above. 6 (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 (as defined in Section 7.1 hereof) 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 DEBTOR'S 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 7 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. Neither the SpilTech Shares nor the Industrial Shares are subject to any right of redemption by SpilTech, Industrial or Debtor, or any call or put options, voting trust, proxy, shareholders agreement, right of first refusal or any provision of the respective articles of incorporation or bylaws of either SpilTech or Industrial, 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. Debtor's principal place of business and chief executive office are located at 3201 West 65th Street, Little Rock, Arkansas, 72209. The office where the records concerning the Collateral are kept is located at Debtor's principal place of business. 2.5 Solvency of Debtor and the Subsidiaries. As of the date hereof, and after giving effect to the Note, the Original Security Documents, the New Security Documents and this Agreement, and the completion of all other transactions contemplated by Debtor and the 8 subsidiaries at the time of the execution of the New Security Documents and this Agreement, (i) Debtor and each subsidiary 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), and (iii) Debtor has and will have sufficient capital to carry on Debtor's 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 non-assessable, 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 both SpilTech and Industrial, and there are no outstanding stock rights, rights to subscribe, options, warrants or convertible securities outstanding or any other rights outstanding entitling any person or entity, including Debtor, to obtain (through conversion or otherwise) any capital stock, of any class, of either SpilTech or Industrial. All issued and outstanding shares of common stock of both SpilTech and Industrial are evidenced by the certificates described in Schedule II attached hereto. 2.7 Ownership of the SpilTech Shares and the Industrial Shares. Debtor is, as of the date hereof, the legal and beneficial owner of both the SpilTech Shares and the Industrial Shares, and Debtor has paid the full purchase price or other consideration for the SpilTech Shares and the Industrial Shares on the date hereof. 9 2.8 SpilTech Share and Industrial Shares Issued and Paid. All of the SpilTech Shares and the Industrial Shares are validly issued and outstanding shares of capital stock of SpilTech and Industrial, respectively, and are fully paid and nonassessable. ARTICLE III DEBTOR'S OTHER REPRESENTATIONS AND WARRANTIES 3.1 Good Standing - 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 Good Standing - Subsidiaries. Each subsidiary of Debtor 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. 3.3 Authority and Compliance. Debtor has full power and authority to enter into this Agreement. Debtor and Debtor's subsidiaries, where applicable, have full power and authority to enter into and perform their obligations under the Note, the Original Security Documents, the New Security Documents, this 10 Agreement, and any other documents, agreements, or instruments executed in connection therewith, 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 the Note, the Original Security Documents, the New Security Documents, this Agreement, or any other documents, agreements, or instruments executed in connection therewith. Debtor and each subsidiary is in compliance with all Laws to which it is subject. 3.4 Binding Agreement. The Note, the Original Security Documents, the New Security Documents, this Agreement, and any other documents, agreements, or instruments executed in connection therewith, 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 Debtor's or any subsidiary's ability to perform its obligations under the Note, the Original Security Documents, the New Security Documents, this Agreement, or any other documents, agreements, or instruments executed in connection therewith. 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 Note, the Original Security Documents, the New Security Documents, this Agreement, and any other documents, agreements, or instruments 11 executed in connection therewith. 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 such documents, agreements, or instruments 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. 12 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 Debtor's 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. 13 4.2 Further Assurances. 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 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 Party's 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 Party's request, to cooperate in registering such securities in Secured Party's name or with Secured Party's account maintained with a Federal Reserve Bank. 4.3 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 14 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 and delivered to Secured Party pursuant to this Section 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. 4.4 Sale, Transfer, Encumbrance. 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, including without limitation by purchase, lease, barter, trade, payment deferral, or the creation, assumption or guarantee of indebtedness or other lending of credit. 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. 4.5 Liens. Neither Debtor nor any person acting on Debtor's 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. 15 4.6 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. 4.7 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 or entity. 4.8 Change of Name. Debtor shall not change its name, or allow any subsidiary to change its name (or any assumed name or other name under which Debtor or any subsidiary 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, and cause each applicable subsidiary to 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. 4.9 Dilution of Ownership. As to any securities pledged as Collateral, Debtor will not consent to or approve of, and will prohibit, 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 16 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. 4.10 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. As to any securities pledged as collateral, Debtor will not consent to or approve of any stock split, reverse stock split, stock dividend, reclassification, or other similar act or transaction regarding such capital stock unless all other shares of such capital stock which constitute Collateral hereunder are included in such act or transaction and effected thereby in all respects the same as any other shares, or class of shares, of such capital stock. ARTICLE V DEBTOR'S 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 subsidiary's books of account and other records at such reasonable times and as often as Secured Party may desire during office hours 17 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. 18 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 Debtor's or any subsidiary's financial condition or on Debtor's ability to perform the Obligations or any subsidiary's 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 19 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 Additional Subsidiaries. Debtor and Secured Party contemplate that, from time to time, additional subsidiaries, either directly or indirectly owned, in whole or in part, 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 Original Security Documents, and shall execute and be bound by the Loan Agreement and the Second Loan Agreement. Each such new subsidiary shall be deemed a "subsidiary" as used in this Agreement and shall be subject to the terms, conditions, and covenants of this Agreement. Notwithstanding the foregoing, Debtor covenants and agrees not to create any new subsidiary by transfer of, or otherwise convey or transfer to any subsidiary, any assets, rights or properties belonging to any of its other subsidiaries. For purposes of this Agreement, the term "subsidiary" means any corporation, limited liability company, partnership or other entity that, directly or indirectly, is owned or controlled by Debtor; it being agreed that, without limitation, Debtor shall conclusively be deemed to have control for purposes of this definition if it, directly or indirectly, owns or has the right to vote twenty percent (20%) or more of the voting ownership interests, however designated, of any corporation, limited liability company, partnership or other entity. 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 20 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 Party's 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 Transfer 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 One Thousand Dollars ($1,000) except in the normal course of its business. 21 6.2 Change in Ownership or Structure. Dissolve or liquidate; become a party to any merger or consolidation; reorganize; 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 subsidiary's 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 unsecured 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. 22 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 or any subsidiary to pay any Obligation within fifteen (15) calendar days after such payment is due, including, without limitation, principal and/or interest payments on the Note; (b) Any breach by Debtor or any subsidiary of any covenant, term or condition in this Agreement or the Second Loan Agreement, or any other failure to perform any of their obligations under this Agreement, the Second Loan Agreement or any of the Original Security Documents or the New Security Documents; 23 (c) Any representation or warranty made in this Agreement, the Second Loan Agreement or any of the Original Security Documents or New Security Documents shall be false or misleading, as determined in the reasonable discretion of Secured Party; (d) The occurrence of an Event of Default under any of the Original Security Documents or any of the New Security Documents; (e) If Debtor or any other party obligated to pay any portion of the Obligations: (i) becomes insolvent, 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 lead 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 any substantial portion 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 thirty (e0) 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 thirty (30) days after the filing thereof, or an order for 24 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 ten (10) days any attachment, sequestration or similar writ levied upon, any claim against or affecting, 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 Party's 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 25 rights, remedies and privileges of Debtor arising from the Collateral, or any part thereof, including without limitation compromising, 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 Debtor's attorney-in-fact 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 26 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 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. (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 or any of the Original Security Documents or New Security Documents; (d) then, to or among the amounts of fees, interest and 27 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 Note, the Original Security Documents, the New Security Documents, this Agreement, and any other documents, agreements, or instruments executed in connection therewith, for the deficiency, together with interest thereon at the maximum non-usurious rate 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 Note or other governing document, agreement, or instrument. 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 Debtor's attorney-in-fact (such power of attorney being coupled with an interest) and proxy to exercise any voting rights with respect to Debtor's securities pledged as Collateral upon the occurrence of an Event of Default. 28 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 Attorney-in-Fact. Debtor hereby appoints Secured Party as attorney-in-fact 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. 29 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; (c) collect any amounts payable in respect of the Collateral; (d) sell all or any portion of the Collateral to avoid market loss; (e) sell all or any portion of the Collateral; 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 30 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 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. 31 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 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 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 Set-Off. 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, set-off any indebtedness owing by Secured Party to Debtor against any of the Obligations without first 32 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 33 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. 34 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: 3201 West 65th Street Little Rock, Arkansas 72209 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. 35 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, 36 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. THE NOTE, THE ORIGINAL SECURITY DOCUMENTS, THE NEW SECURITY DOCUMENTS, THIS AGREEMENT, AND ANY OTHER DOCUMENTS, AGREEMENTS OR INSTRUMENTS EXECUTED IN CONNECTION THEREWITH, 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. 37 EXECUTED this 25 th day of March, 1999. DEBTOR: Consolidated Eco-Systems, Inc. By: /s/ Larry Woodcock Name: Larry Woodcock Title: President SECURED PARTY: American Physicians Service Group, Inc. By: /s/ Duane K. Boyd, Jr. Name: Duane K. Boyd, Jr. Title: VP 38 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. 1 "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. 2 Schedule II 1. Certificate No. 2, dated March 22, 1999, for 1,000 shares of Exsorbet Technical Services, Inc. common stock, issued to Consolidated Eco-Systems, Inc. 2. Certificate, dated March 17, 1999, for 1,000 shares of KR Industrial Services of Alabama, Inc. common stock, issued to Consolidated Eco-Systems, Inc. 1 EX-10 23 SECURITY AGREEMENT - CONSOL ECO-SYSTEMS Exhibit 10.59 SECURITY AGREEMENT This Security Agreement (this "Agreement") is entered into effective the 25th day of March, 1999, by and between Consolidated Eco-Systems, Inc., an Idaho corporation (the "Debtor") formerly known as Exsorbet Industries, Inc., and American Physicians Service Group, Inc., a Texas corporation (the "Secured Party"). R E C I T A L S: A. Debtor executed and delivered that certain Promissory Note dated November 6, 1997 (as amended, supplemented, or modified, and including any replacement thereof or substitution therefore, the "Note") in the original principal amount of Three Million Seven Hundred Eighty-Eight Thousand Five Hundred Eighty Dollars ($3,788,580) payable to the order of Secured Party. B. The Note was issued pursuant to a Master Refinancing Agreement of even date with the Note (the "Loan Agreement") between Debtor, its subsidiaries and Secured Party. The obligations of Debtor under the Note and the Loan Agreement are guaranteed by certain guaranty agreements executed by the subsidiaries of Debtor, and are secured pursuant to the terms of certain security agreements, pledges and other agreements and instruments entered into by Debtor and certain subsidiaries of Debtor. The Loan Agreement and all such guarantees, security agreements, pledges and other agreements and instruments are collectively referred to herein as the "Original Security Documents." C. Debtor will, concurrently with its execution of this Agreement, execute and deliver that certain Master Restructuring Agreement (the "Second Loan Agreement"), of even date herewith, by and between Debtor, all of Debtor's wholly or partially owned subsidiaries, and Secured Party, along with other guarantees, security agreements, pledges, documents, agreements, contracts, instruments and certificates contemplated therein or executed and delivered in connection therewith (collectively, including the Second Loan Agreement and this Agreement, the "New Security Documents"). D. Debtor has received, and will continue to receive, valuable consideration as a result of the transactions evidenced by, or related to, the Note, the Original Security Documents, the New Security Documents and this Agreement. E. Debtor has agreed to pledge the Collateral (as defined below) to secure certain obligations and liabilities, including without limitation (i) Debtor's obligations under the Note, (ii) Debtor's and Debtor's subsidiaries' performance of the covenants and agreements set forth in the Original Security Documents, (iii) Debtor's and Debtor's subsidiaries' performance of the covenants and agreements set forth in the New Security Documents, and (iv) Debtor's performance of the covenants more fully set forth herein. 2 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. Debtor assigns and transfers to Secured Party, and grants to Secured Party a continuing security interest in and lien upon (the "Security Interest"), the Collateral (as defined in Article II below) to secure the payment and the performance of the Indebtedness (as hereinafter defined). 1.2 Indebtedness. The following indebtedness and obligations (collectively, the "Indebtedness") are secured by this Agreement and the Security Interest: (a) All debt, obligations, liabilities, and agreements of Debtor and/or any of Debtor's subsidiaries, to Secured Party, now or hereafter existing, arising directly between Debtor and Secured Party and/or any of Debtor's subsidiaries 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, 3 contractual or tortious, liquidated or unliquidated, arising by operation of law or otherwise, including, without limitation, all obligations and amounts due under the Note and the Original Security Documents, the New Security Documents, and all renewals, extensions, modifications, or rearrangements of any of the foregoing. (b) Secured Party's 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 attorney's fees and legal expenses, 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 The Security Interest is granted in the following, whether now owned or hereafter acquired, and wherever located (the "Collateral"): 4 (a) All accounts (whether or not earned by performance), letters of credit, contract rights, chattel paper, instruments, securities, documents, securities accounts, security entitlements, commodity contracts, commodity accounts, investment property and all other forms of obligations at any time owing to such borrower, all guaranties and other security therefor, all merchandise returned or repossessed by Debtor, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party (collectively referred to herein as "Accounts"). (b) All goods, merchandise or other personal property, to be furnished under any contract of service or held for sale or lease (including without limitation all raw materials, work in process, finished goods and goods in transit, and including without limitation all farm products), and all materials and supplies of every kind and description used in Debtor's operations or owned by Debtor and any interests in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions or improvements to any of the foregoing, wherever located (collectively referred to herein as "Inventory"). (c) All machinery, molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and other goods (other than Inventory) of every kind and description used in Debtor's operations or owned by Debtor and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, or 5 improvements, to any of the foregoing, wherever located (collectively referred to herein as "Equipment"). (d) Investment Property, as defined in Chapter 9 of the Texas UCC (as hereinafter defined). (e) All choses in action, contract rights, documents or certificates of title, causes of action, corporate or other business records, Deposit Accounts, Investment Property, inventions, designs, drawings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of such Debtor against the Secured Party, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including without limitation life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guarantees security interests or other security held by or granted to such Debtor, all rights to indemnification and all other intangible property of every kind and nature (other than Accounts) (collectively referred to herein as "General Intangibles"), including without limitation, all of such Debtor deposit accounts, as defined in Chapter 9 of the Texas UCC, and 6 all money and all property now or at any time in the future in the Secured Party's possession (including claims and credit balances) (f) All security for the payment of any of the foregoing, and all goods which gave or will give rise to any of the foregoing or are evidenced, identified, or represented therein or thereby. (g) All real estate or other real property now or hereafter acquired by Debtor. (h) All assets or other property similar to any of the foregoing hereafter acquired by Debtor. (i) All other assets or property of Debtor not otherwise described above, whether now owned or hereafter acquired. (j) All proceeds of any of the foregoing (including proceeds of any insurance policies, proceeds of proceeds, and claims against third parties), all products of any of the foregoing, and all books and records related to any of the foregoing. 7 ARTICLE III DEBTOR'S 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 the financing statements relating to the Permitted 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 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 Permitted 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. All real property owned by Debtor is described, by legal description and street address, on Schedule I hereto, all of which shall be deemed included in the Collateral. 8 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 Debtor's 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; provided those certain liens described on Schedule II hereof in existence on the date hereof (the "Permitted Liens") may remain in existence subject to the terms and conditions of this Agreement. 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 enter into and perform this Agreement. 9 3.8 Principal Place of Business. Debtor's chief executive office is at Debtor's address stated above in Little Rock, Pulaski County, Arkansas, and such address is also where Debtor keeps its books and records. 3.9 Location of Collateral. All of Debtor's Inventory and Equipment is located at Debtor's principal place of business located at 3201 West 65th Street, Little Rock, Arkansas 72209. 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 Alabama Secretary of State, the Office of the Arkansas Secretary of State, the Office of the Louisiana Secretary of State, the Office of the Mississippi Secretary of State and the Office of the Texas 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 the Permitted 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. 10 ARTICLE IV DEBTOR'S COVENANTS Debtor covenants and agrees that: 4.1 Indebtedness and This Agreement. Debtor shall pay, or cause the payment of, the Indebtedness, and any indebtedness secured by the Permitted Liens, in accordance with its terms and shall promptly perform all of its agreements herein and in any other agreements between it and Secured Party or between it and the holder of any Permitted Liens. 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 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 Permitted Liens. Debtor shall not allow any of the Permitted Liens to secure any indebtedness or obligations other than the specific indebtedness or obligations outstanding, and only to the extent outstanding, on the date this Agreement is entered into that are expressly secured by the applicable Permitted Liens as of such date. Debtor will not incur or permit any increase in any indebtedness or obligation secured by any of the Permitted Liens and will not enter into, consent to, grant, agree to or permit any amendment modification or waiver of any right of Debtor or of any security agreement contract, understanding or other agreement of any kind which creates, grants or otherwise gives risk to any of the Permitted Liens. 11 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 Debtor's to the extent of any deficiency in any effective insurance coverage. Secured Party is appointed Debtor's 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 Party's Costs. Debtor shall pay all costs necessary to obtain, preserve, perfect, defend, and enforce the Security Interest, collect the Indebtedness, and preserve, defend, enforce, and collect the Collateral, including but not limited to taxes, assessments, insurance premiums, repairs, reasonable attorney's fees and legal expenses, feed, rent, storage costs, and expenses of sales. Whether Collateral is or is not in Secured Party's possession, and without any obligation to do so and without waiving Debtor's 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 12 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 Debtor's 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 Further Assurances. Debtor shall execute and deliver any documents or instruments (including without limitation any financing statements or deeds of trust) furnished by Secured Party, and take such further action, at Debtor's sole cost and expense, 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 Party's interest in Collateral or to obtain proceeds of Collateral. 13 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 Debtor's 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 14 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 15 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 Secured Party 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. Secured Party's written consent to any sale, mortgage, transfer, or encumbrance shall not be construed to be a waiver of this provision with 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. 16 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 (as defined in Section 6.1 hereof). 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. 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 17 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 18 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 and deliver such certificates to Secured Party. 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. 19 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 20 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. 21 ARTICLE VI DEFAULT 6.1 Events of Default. The following are events of default under this Agreement ("Events of Default"): (a) default, by Debtor or any subsidiary of Debtor, in the timely payment of any part of the Note or other Indebtedness or any breach or default in performance or observance of the terms and conditions herein, in any of the Original Security Documents, in any of the New Security Documents, or in any other agreement between Debtor or any of Debtor's subsidiaries on the one hand and Secured Party on the other hand; (b) any warranty, representation, or statement made or furnished to Secured Party by Debtor or any of Debtor's subsidiaries proves to have been false in any material respect when made or furnished; (c) acceleration of the maturity of debt of Debtor or any of Debtor'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; 22 (e) sale, loss, theft, destruction, incurrence of an encumbrance upon, 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) 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 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 or any of Debtor's subsidiaries; (i) a judgment against Debtor in excess of $1,000 becomes final and remains unsatisfied and unappealed for thirty (30) calendar days; (j) any liability or agreement of third parties to or with Debtor on or relating to the Collateral shall not be paid or performed in accordance with the terms thereof; or 23 (k) any breach or default by Debtor under any agreement giving rise to any of the Permitted Liens or under any indebtedness or obligation secured thereby, or any action by any holder of any of the Permitted Liens is taken or instituted to enforce the rights of such holder with respect to any such Permitted Liens. 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 24 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; No Liability of Secured Party. Secured Party's rights under this Agreement and the Security Interest shall inure to the benefits of its successors and assigns. 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. 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 25 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. 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. 26 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; Terms Commercially Reasonable. 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. The terms of this Agreement shall be deemed commercially reasonable within the meaning of the Texas UCC. 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. 27 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. 28 EXECUTED this 25th day of March, 1999. DEBTOR: CONSOLIDATED ECO-SYSTEMS, INC. By: /s/ Larry Woodcock Name: Larry Woodcock Title: President SECURED PARTY: AMERICAN PHYSICIANS SERVICE GROUP, INC. By: /s/ Duane K. Boyd, Jr. Name: Duane K. Boyd, Jr. Title: VP 29 1 SCHEDULE I DESCRIPTION OF REAL PROPERTY 1 SCHEDULE II DESCRIPTION OF PERMITTED LIENS - - ---------------------------- ------------------------------------------- ------- Description, Outstanding Balance Name and Address of and Maturity Date of Secured Secured Party Description of Collateral Obligation - - -------------------------------------------------------------------------------- EX-10 24 SECURITY AGREEMENT - ECO-ACQUISITION Exhibit 10.60 SECURITY AGREEMENT This Security Agreement (this "Agreement") is entered into effective the 25th day of March, 1999, by and between Eco Acquisition, Inc., an Arkansas corporation (the "Debtor"), and American Physicians Service Group, Inc., a Texas corporation (the "Secured Party"). R E C I T A L S: A. Consolidated Eco-Systems, Inc., an Idaho corporation formerly known as Exsorbet Industries, Inc. ("Consolidated"), the parent company of Debtor, executed and delivered that certain Promissory Note dated November 6, 1997 (as amended, supplemented, or modified, and including any replacement thereof or substitution therefore, the "Note") in the original principal amount of Three Million Seven Hundred Eighty-Eight Thousand Five Hundred Eighty Dollars ($3,788,580) payable to the order of Secured Party. B. The Note was issued pursuant to a Master Refinancing Agreement of even date with the Note (the "Loan Agreement") between Consolidated, its subsidiaries and Secured Party. The obligations of Consolidated under the Note and the Loan Agreement are guaranteed by certain guaranty agreements executed by Debtor and the other subsidiaries of Consolidated, and are secured pursuant to the terms of certain security agreements, pledges and other agreements and instruments entered into by Consolidated and certain subsidiaries of Consolidated. The Loan Agreement and all such guarantees, security agreements, pledges and other agreements and instruments are collectively referred to herein as the "Original Security Documents." C. Debtor will, concurrently with its execution of this Agreement, execute and deliver that certain Master Restructuring Agreement (the "Second Loan Agreement"), of even date herewith, by and between Consolidated, Debtor, all of Consolidated's other wholly or partially owned subsidiaries, and Secured Party, along with other guarantees, security agreements, pledges, documents, agreements, contracts, instruments and certificates contemplated therein or executed and delivered in connection therewith (collectively, including the Second Loan Agreement and this Agreement, the "New Security Documents"). D. Debtor has received, and will continue to receive, valuable consideration as a result of the transactions evidenced by, or related to, the Note, the Original Security Documents, the New Security Documents and this Agreement. E. Debtor has agreed to pledge the Collateral (as defined below) to secure certain obligations and liabilities, including without limitation (i) Consolidated's obligations under the Note, (ii) Debtor's, Consolidated's and Consolidated's other subsidiaries' performance of the covenants and agreements set forth in the Original Security Documents, (iii) Debtor's, Consolidated's and Consolidated's other subsidiaries' performance of the covenants and agreements set forth in the New Security Documents, and (iv) Debtor's performance of the covenants more fully set forth herein. 2 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. Debtor assigns and transfers to Secured Party, and grants to Secured Party a continuing security interest in and lien upon (the "Security Interest"), the Collateral (as defined in Article II below) to secure the payment and the performance of the Indebtedness (as hereinafter defined). 1.2 Indebtedness. The following indebtedness and obligations (collectively, the "Indebtedness") are secured by this Agreement and the Security Interest: (a) All debt, obligations, liabilities, and agreements of Debtor, Consolidated and/or any of Consolidated's subsidiaries, to Secured Party, now or hereafter existing, arising directly between Debtor and Secured Party, Consolidated and Secured Party and/or any of Consolidated's subsidiaries and Secured Party, or acquired outright, conditionally, or as collateral security from another by Secured Party, 3 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 Note and the Original Security Documents, the New Security Documents, and all renewals, extensions, modifications, or rearrangements of any of the foregoing. (b) Secured Party's 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 attorney's fees and legal expenses, 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 The Security Interest is granted in the following, whether now owned or hereafter acquired, and wherever located (the "Collateral"): 4 (a) All accounts (whether or not earned by performance), letters of credit, contract rights, chattel paper, instruments, securities, documents, securities accounts, security entitlements, commodity contracts, commodity accounts, investment property and all other forms of obligations at any time owing to such borrower, all guaranties and other security therefor, all merchandise returned or repossessed by Debtor, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party (collectively referred to herein as "Accounts"). (b) All goods, merchandise or other personal property, to be furnished under any contract of service or held for sale or lease (including without limitation all raw materials, work in process, finished goods and goods in transit, and including without limitation all farm products), and all materials and supplies of every kind and description used in Debtor's operations or owned by Debtor and any interests in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions or improvements to any of the foregoing, wherever located (collectively referred to herein as "Inventory"). (c) All machinery, molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and other goods (other than Inventory) of every kind and description used in Debtor's operations or owned by Debtor and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, or 5 improvements, to any of the foregoing, wherever located (collectively referred to herein as "Equipment"). (d) Investment Property, as defined in Chapter 9 of the Texas UCC (as hereinafter defined). (e) All choses in action, contract rights, documents or certificates of title, causes of action, corporate or other business records, Deposit Accounts, Investment Property, inventions, designs, drawings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of such Debtor against the Secured Party, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including without limitation life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guarantees security interests or other security held by or granted to such Debtor, all rights to indemnification and all other intangible property of every kind and nature (other than Accounts) (collectively referred to herein as "General Intangibles"), including without limitation, all of such Debtor deposit accounts, as defined in Chapter 9 of the Texas UCC, and 6 all money and all property now or at any time in the future in the Secured Party's possession (including claims and credit balances) (f) All security for the payment of any of the foregoing, and all goods which gave or will give rise to any of the foregoing or are evidenced, identified, or represented therein or thereby. (g) All real estate or other real property now or hereafter acquired by Debtor. (h) All assets or other property similar to any of the foregoing hereafter acquired by Debtor. (i) All other assets or property of Debtor not otherwise described above, whether now owned or hereafter acquired. (j) All proceeds of any of the foregoing (including proceeds of any insurance policies, proceeds of proceeds, and claims against third parties), all products of any of the foregoing, and all books and records related to any of the foregoing. 7 ARTICLE III DEBTOR'S 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 the financing statements relating to the Permitted 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 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 Permitted 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. All real property owned by Debtor is described, by legal description and street address, on Schedule I hereto, all of which shall be deemed included in the Collateral. 8 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 Debtor's 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; provided those certain liens described on Schedule II hereof in existence on the date hereof (the "Permitted Liens") may remain in existence subject to the terms and conditions of this Agreement. 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 enter into and perform this Agreement. 9 3.8 Principal Place of Business. Debtor's chief executive office is at Debtor's address stated above in Little Rock, Pulaski County, Arkansas, and such address is also where Debtor keeps its books and records. 3.9 Location of Collateral. All of Debtor's Inventory and Equipment is located at Debtor's principal place of business located at 1225 Breckenridge Drive, Suite 200, Little Rock, Arkansas 72205. 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 Arkansas Secretary of State, the Office of the Alabama Secretary of State, the Office of the Mississippi Secretary of State and the Office of the Texas 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 the Permitted 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. 10 ARTICLE IV DEBTOR'S COVENANTS Debtor covenants and agrees that: 4.1 Indebtedness and This Agreement. Debtor shall pay, or cause the payment of, the Indebtedness, and any indebtedness secured by the Permitted Liens, in accordance with its terms and shall promptly perform all of its agreements herein and in any other agreements between it and Secured Party or between it and the holder of any Permitted Liens. 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 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 Permitted Liens. Debtor shall not allow any of the Permitted Liens to secure any indebtedness or obligations other than the specific indebtedness or obligations outstanding, and only to the extent outstanding, on the date this Agreement is entered into that are expressly secured by the applicable Permitted Liens as of such date. Debtor will not incur or permit any increase in any indebtedness or obligation secured by any of the Permitted Liens and will not enter into, consent to, grant, agree to or permit any amendment modification or waiver of any right of Debtor or of any security agreement contract, understanding or other agreement of any kind which creates, grants or otherwise gives risk to any of the Permitted Liens. 11 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 Debtor's to the extent of any deficiency in any effective insurance coverage. Secured Party is appointed Debtor's 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 Party's Costs. Debtor shall pay all costs necessary to obtain, preserve, perfect, defend, and enforce the Security Interest, collect the Indebtedness, and preserve, defend, enforce, and collect the Collateral, including but not limited to taxes, assessments, insurance premiums, repairs, reasonable attorney's fees and legal expenses, feed, rent, storage costs, and expenses of sales. Whether Collateral is or is not in Secured Party's possession, and without any obligation to do so and without waiving Debtor's 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 12 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 Debtor's 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 Further Assurances. Debtor shall execute and deliver any documents or instruments (including without limitation any financing statements or deeds of trust) furnished by Secured Party, and take such further action, at Debtor's sole cost and expense, 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 Party's interest in Collateral or to obtain proceeds of Collateral. 13 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 Debtor's 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 14 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 15 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 Secured Party 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. Secured Party's written consent to any sale, mortgage, transfer, or encumbrance shall not be construed to be a waiver of this provision with 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. 16 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 (as defined in Section 6.1 hereof). 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. 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 17 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 18 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 and deliver such certificates to Secured Party. 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. 19 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 20 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. 21 ARTICLE VI DEFAULT 6.1 Events of Default. The following are events of default under this Agreement ("Events of Default"): (a) default, by Consolidated, Debtor or any other subsidiary of Consolidated, in the timely payment of any part of the Note or other Indebtedness or any breach or default in performance or observance of the terms and conditions herein, in any of the Original Security Documents, in any of the New Security Documents, or in any other agreement between Consolidated, Debtor or any of Consolidated's other subsidiaries on the one hand and Secured Party on the other hand; (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; 22 (e) sale, loss, theft, destruction, incurrence of an encumbrance upon, 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) 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 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; (j) any liability or agreement of third parties to or with Debtor on or relating to the Collateral shall not be paid or performed in accordance with the terms thereof; or 23 (k) any breach or default by Debtor under any agreement giving rise to any of the Permitted Liens or under any indebtedness or obligation secured thereby, or any action by any holder of any of the Permitted Liens is taken or instituted to enforce the rights of such holder with respect to any such Permitted Liens. 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 24 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; No Liability of Secured Party. Secured Party's rights under this Agreement and the Security Interest shall inure to the benefits of its successors and assigns. 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. 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 25 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. 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. 26 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; Terms Commercially Reasonable. 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. The terms of this Agreement shall be deemed commercially reasonable within the meaning of the Texas UCC. 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. 27 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. 28 EXECUTED this 25th day of March, 1999. DEBTOR: ECO ACQUISITION, INC. By: /s/ Larry Woodcock Name: Larry Woodcock Title: President SECURED PARTY: AMERICAN PHYSICIANS SERVICE GROUP, INC. By: /s/ Duane K. Boyd, Jr. Name: Duane K. Boyd, Jr. Title: VP 29 SCHEDULE I DESCRIPTION OF REAL PROPERTY SCHEDULE II DESCRIPTION OF PERMITTED LIENS - - ---------------------------- ------------------------------------------- ------- Description, Outstanding Balance and Maturity Name and Address of Date of Secured Obligation of Secured Party Description of Collateral EX-10 25 SECURITY AGREEMENT - EXSO TECH SERVICES Exhibit 10.61 SECURITY AGREEMENT This Security Agreement (this "Agreement") is entered into effective the 25th day of March, 1999, by and between Exsorbet Technical Services Inc., an Arkansas corporation (the "Debtor"), and American Physicians Service Group, Inc., a Texas corporation (the "Secured Party"). R E C I T A L S: A. Consolidated Eco-Systems, Inc., an Idaho corporation formerly known as Exsorbet Industries, Inc. ("Consolidated"), the parent company of Debtor, executed and delivered that certain Promissory Note dated November 6, 1997 (as amended, supplemented, or modified, and including any replacement thereof or substitution therefore, the "Note") in the original principal amount of Three Million Seven Hundred Eighty-Eight Thousand Five Hundred Eighty Dollars ($3,788,580) payable to the order of Secured Party. B. The Note was issued pursuant to a Master Refinancing Agreement of even date with the Note (the "Loan Agreement") between Consolidated, its subsidiaries and Secured Party. The obligations of Consolidated under the Note and the Loan Agreement are guaranteed by certain guaranty agreements executed by Debtor and the other subsidiaries of Consolidated, and are secured pursuant to the terms of certain security agreements, pledges and other agreements and instruments entered into by Consolidated and certain subsidiaries of Consolidated. The Loan Agreement and all such guarantees, security agreements, pledges and other agreements and instruments are collectively referred to herein as the "Original Security Documents." C. Debtor will, concurrently with its execution of this Agreement, execute and deliver that certain Master Restructuring Agreement (the "Second Loan Agreement"), of even date herewith, by and between Consolidated, Debtor, all of Consolidated's other wholly or partially owned subsidiaries, and Secured Party, along with other guarantees, security agreements, pledges, documents, agreements, contracts, instruments and certificates contemplated therein or executed and delivered in connection therewith (collectively, including the Second Loan Agreement and this Agreement, the "New Security Documents"). D. Debtor has received, and will continue to receive, valuable consideration as a result of the transactions evidenced by, or related to, the Note, the Original Security Documents, the New Security Documents and this Agreement. E. Debtor has agreed to pledge the Collateral (as defined below) to secure certain obligations and liabilities, including without limitation (i) Consolidated's obligations under the Note, (ii) Debtor's, Consolidated's and Consolidated's other subsidiaries' performance of the covenants and agreements set forth in the Original Security Documents, (iii) Debtor's, Consolidated's and Consolidated's other subsidiaries' performance of the covenants and agreements set forth in the New Security Documents, and (iv) Debtor's performance of the covenants more fully set forth herein. 2 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. Debtor assigns and transfers to Secured Party, and grants to Secured Party a continuing security interest in and lien upon (the "Security Interest"), the Collateral (as defined in Article II below) to secure the payment and the performance of the Indebtedness (as hereinafter defined). 1.2 Indebtedness. The following indebtedness and obligations (collectively, the "Indebtedness") are secured by this Agreement and the Security Interest: (a) All debt, obligations, liabilities, and agreements of Debtor, Consolidated and/or any of Consolidated's subsidiaries, to Secured Party, now or hereafter existing, arising directly between Debtor and Secured Party, Consolidated and Secured Party and/or any of Consolidated's subsidiaries and Secured Party, or acquired outright, conditionally, or as collateral security from another by Secured Party, 3 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 Note and the Original Security Documents, the New Security Documents, and all renewals, extensions, modifications, or rearrangements of any of the foregoing. (b) Secured Party's 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 attorney's fees and legal expenses, 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 The Security Interest is granted in the following, whether now owned or hereafter acquired, and wherever located (the "Collateral"): 4 (a) All accounts (whether or not earned by performance), letters of credit, contract rights, chattel paper, instruments, securities, documents, securities accounts, security entitlements, commodity contracts, commodity accounts, investment property and all other forms of obligations at any time owing to such borrower, all guaranties and other security therefor, all merchandise returned or repossessed by Debtor, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party (collectively referred to herein as "Accounts"). (b) All goods, merchandise or other personal property, to be furnished under any contract of service or held for sale or lease (including without limitation all raw materials, work in process, finished goods and goods in transit, and including without limitation all farm products), and all materials and supplies of every kind and description used in Debtor's operations or owned by Debtor and any interests in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions or improvements to any of the foregoing, wherever located (collectively referred to herein as "Inventory"). (c) All machinery, molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and other goods (other than Inventory) of every kind and description used in Debtor's operations or owned by Debtor and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, or 5 improvements, to any of the foregoing, wherever located (collectively referred to herein as "Equipment"). (d) Investment Property, as defined in Chapter 9 of the Texas UCC (as hereinafter defined). (e) All choses in action, contract rights, documents or certificates of title, causes of action, corporate or other business records, Deposit Accounts, Investment Property, inventions, designs, drawings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of such Debtor against the Secured Party, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including without limitation life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guarantees security interests or other security held by or granted to such Debtor, all rights to indemnification and all other intangible property of every kind and nature (other than Accounts) (collectively referred to herein as "General Intangibles"), including without limitation, all of such Debtor deposit accounts, as defined in Chapter 9 of the Texas UCC, and 6 all money and all property now or at any time in the future in the Secured Party's possession (including claims and credit balances) (f) All security for the payment of any of the foregoing, and all goods which gave or will give rise to any of the foregoing or are evidenced, identified, or represented therein or thereby. (g) All real estate or other real property now or hereafter acquired by Debtor. (h) All assets or other property similar to any of the foregoing hereafter acquired by Debtor. (i) All other assets or property of Debtor not otherwise described above, whether now owned or hereafter acquired. (j) All proceeds of any of the foregoing (including proceeds of any insurance policies, proceeds of proceeds, and claims against third parties), all products of any of the foregoing, and all books and records related to any of the foregoing. 7 ARTICLE III DEBTOR'S 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 the financing statements relating to the Permitted 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 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 Permitted 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. All real property owned by Debtor is described, by legal description and street address, on Schedule I hereto, all of which shall be deemed included in the Collateral. 8 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 Debtor's 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; provided those certain liens described on Schedule II hereof in existence on the date hereof (the "Permitted Liens") may remain in existence subject to the terms and conditions of this Agreement. 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 enter into and perform this Agreement. 9 3.8 Principal Place of Business. Debtor's chief executive office is at Debtor's address stated above in Little Rock, Pulaski County, Arkansas, and such address is also where Debtor keeps its books and records. 3.9 Location of Collateral. All of Debtor's Inventory and Equipment is located at Debtor's principal place of business located at 3201 West 65th Street, Little Rock, Arkansas 72209. 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 Arkansas Secretary of State and the Office of the Texas 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 the Permitted 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. 10 ARTICLE IV DEBTOR'S COVENANTS Debtor covenants and agrees that: 4.1 Indebtedness and This Agreement. Debtor shall pay, or cause the payment of, the Indebtedness, and any indebtedness secured by the Permitted Liens, in accordance with its terms and shall promptly perform all of its agreements herein and in any other agreements between it and Secured Party or between it and the holder of any Permitted Liens. 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 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 Permitted Liens. Debtor shall not allow any of the Permitted Liens to secure any indebtedness or obligations other than the specific indebtedness or obligations outstanding, and only to the extent outstanding, on the date this Agreement is entered into that are expressly secured by the applicable Permitted Liens as of such date. Debtor will not incur or permit any increase in any indebtedness or obligation secured by any of the Permitted Liens and will not enter into, consent to, grant, agree to or permit any amendment modification or waiver of any right of Debtor or of any security agreement contract, understanding or other agreement of any kind which creates, grants or otherwise gives risk to any of the Permitted Liens. 11 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 Debtor's to the extent of any deficiency in any effective insurance coverage. Secured Party is appointed Debtor's 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 Party's Costs. Debtor shall pay all costs necessary to obtain, preserve, perfect, defend, and enforce the Security Interest, collect the Indebtedness, and preserve, defend, enforce, and collect the Collateral, including but not limited to taxes, assessments, insurance premiums, repairs, reasonable attorney's fees and legal expenses, feed, rent, storage costs, and expenses of sales. Whether Collateral is or is not in Secured Party's possession, and without any obligation to do so and without waiving Debtor's 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 12 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 Debtor's 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 Further Assurances. Debtor shall execute and deliver any documents or instruments (including without limitation any financing statements or deeds of trust) furnished by Secured Party, and take such further action, at Debtor's sole cost and expense, 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 Party's interest in Collateral or to obtain proceeds of Collateral. 13 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 Debtor's 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 14 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 15 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 Secured Party 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. Secured Party's written consent to any sale, mortgage, transfer, or encumbrance shall not be construed to be a waiver of this provision with 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. 16 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 (as defined in Section 6.1 hereof). 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. 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 17 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 18 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 and deliver such certificates to Secured Party. 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. 19 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 20 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. 21 ARTICLE VI DEFAULT 6.1 Events of Default. The following are events of default under this Agreement ("Events of Default"): (a) default, by Consolidated, Debtor or any other subsidiary of Consolidated, in the timely payment of any part of the Note or other Indebtedness or any breach or default in performance or observance of the terms and conditions herein, in any of the Original Security Documents, in any of the New Security Documents, or in any other agreement between Consolidated, Debtor or any of Consolidated's other subsidiaries on the one hand and Secured Party on the other hand; (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; 22 (e) sale, loss, theft, destruction, incurrence of an encumbrance upon, 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) 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 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; (j) any liability or agreement of third parties to or with Debtor on or relating to the Collateral shall not be paid or performed in accordance with the terms thereof; or 23 (k) any breach or default by Debtor under any agreement giving rise to any of the Permitted Liens or under any indebtedness or obligation secured thereby, or any action by any holder of any of the Permitted Liens is taken or instituted to enforce the rights of such holder with respect to any such Permitted Liens. 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 24 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; No Liability of Secured Party. Secured Party's rights under this Agreement and the Security Interest shall inure to the benefits of its successors and assigns. 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. 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 25 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. 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. 26 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; Terms Commercially Reasonable. 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. The terms of this Agreement shall be deemed commercially reasonable within the meaning of the Texas UCC. 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. 27 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. 28 EXECUTED this 25th day of March, 1999. DEBTOR: EXSORBET TECHNICAL SERVICES, INC. By: /s/ Larry Woodcock Name: Larry Woodcock Title: President SECURED PARTY: AMERICAN PHYSICIANS SERVICE GROUP, INC. By: /s/ Duane K. Boyd, Jr. Name: Duane K. Boyd, Jr. Title: VP 29 SCHEDULE I DESCRIPTION OF REAL PROPERTY SCHEDULE II DESCRIPTION OF PERMITTED LIENS - - ---------------------------- ------------------------------------------- ------- Description, Outstanding Balance and Maturity Name and Address of Date of Secured Obligation of Secured Party Description of Collateral EX-10 26 SECURITY AGREEMENT - KR INDUSTRIAL Exhibit 10.62 SECURITY AGREEMENT This Security Agreement (this "Agreement") is entered into effective the 25th day of March, 1999, by and between KR Industrial of Alabama, Inc., an Alabama corporation (the "Debtor"), and American Physicians Service Group, Inc., a Texas corporation (the "Secured Party"). R E C I T A L S: A. Consolidated Eco-Systems, Inc., an Idaho corporation formerly known as Exsorbet Industries, Inc. ("Consolidated"), the parent company of Debtor, executed and delivered that certain Promissory Note dated November 6, 1997 (as amended, supplemented, or modified, and including any replacement thereof or substitution therefore, the "Note") in the original principal amount of Three Million Seven Hundred Eighty-Eight Thousand Five Hundred Eighty Dollars ($3,788,580) payable to the order of Secured Party. B. The Note was issued pursuant to a Master Refinancing Agreement of even date with the Note (the "Loan Agreement") between Consolidated, its subsidiaries and Secured Party. The obligations of Consolidated under the Note and the Loan Agreement are guaranteed by certain guaranty agreements executed by Debtor and the other subsidiaries of Consolidated, and are secured pursuant to the terms of certain security agreements, pledges and other agreements and instruments entered into by Consolidated and certain subsidiaries of Consolidated. The Loan Agreement and all such guarantees, security agreements, pledges and other agreements and instruments are collectively referred to herein as the "Original Security Documents." C. Debtor will, concurrently with its execution of this Agreement, execute and deliver that certain Master Restructuring Agreement (the "Second Loan Agreement"), of even date herewith, by and between Consolidated, Debtor, all of Consolidated's other wholly or partially owned subsidiaries, and Secured Party, along with other guarantees, security agreements, pledges, documents, agreements, contracts, instruments and certificates contemplated therein or executed and delivered in connection therewith (collectively, including the Second Loan Agreement and this Agreement, the "New Security Documents"). D. Debtor has received, and will continue to receive, valuable consideration as a result of the transactions evidenced by, or related to, the Note, the Original Security Documents, the New Security Documents and this Agreement. E. Debtor has agreed to pledge the Collateral (as defined below) to secure certain obligations and liabilities, including without limitation (i) Consolidated's obligations under the Note, (ii) Debtor's, Consolidated's and Consolidated's other subsidiaries' performance of the covenants and agreements set forth in the Original Security Documents, (iii) Debtor's, Consolidated's and Consolidated's other subsidiaries' performance of the covenants and agreements set forth in the New Security Documents, and (iv) Debtor's performance of the covenants more fully set forth herein. 2 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. Debtor assigns and transfers to Secured Party, and grants to Secured Party a continuing security interest in and lien upon (the "Security Interest"), the Collateral (as defined in Article II below) to secure the payment and the performance of the Indebtedness (as hereinafter defined). 1.2 Indebtedness. The following indebtedness and obligations (collectively, the "Indebtedness") are secured by this Agreement and the Security Interest: (a) All debt, obligations, liabilities, and agreements of Debtor, Consolidated and/or any of Consolidated's subsidiaries, to Secured Party, now or hereafter existing, arising directly between Debtor and Secured Party, Consolidated and Secured Party and/or any of Consolidated's subsidiaries and Secured Party, or acquired outright, conditionally, or as collateral security from another by Secured Party, 3 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 Note and the Original Security Documents, the New Security Documents, and all renewals, extensions, modifications, or rearrangements of any of the foregoing. (b) Secured Party's 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 attorney's fees and legal expenses, 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 The Security Interest is granted in the following, whether now owned or hereafter acquired, and wherever located (the "Collateral"): 4 (a) All accounts (whether or not earned by performance), letters of credit, contract rights, chattel paper, instruments, securities, documents, securities accounts, security entitlements, commodity contracts, commodity accounts, investment property and all other forms of obligations at any time owing to such borrower, all guaranties and other security therefor, all merchandise returned or repossessed by Debtor, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party (collectively referred to herein as "Accounts"). (b) All goods, merchandise or other personal property, to be furnished under any contract of service or held for sale or lease (including without limitation all raw materials, work in process, finished goods and goods in transit, and including without limitation all farm products), and all materials and supplies of every kind and description used in Debtor's operations or owned by Debtor and any interests in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions or improvements to any of the foregoing, wherever located (collectively referred to herein as "Inventory"). (c) All machinery, molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and other goods (other than Inventory) of every kind and description used in Debtor's operations or owned by Debtor and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, or 5 improvements, to any of the foregoing, wherever located (collectively referred to herein as "Equipment"). (d) Investment Property, as defined in Chapter 9 of the Texas UCC (as hereinafter defined). (e) All choses in action, contract rights, documents or certificates of title, causes of action, corporate or other business records, Deposit Accounts, Investment Property, inventions, designs, drawings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of such Debtor against the Secured Party, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including without limitation life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guarantees security interests or other security held by or granted to such Debtor, all rights to indemnification and all other intangible property of every kind and nature (other than Accounts) (collectively referred to herein as "General Intangibles"), including without limitation, all of such Debtor deposit accounts, as defined in Chapter 9 of the Texas UCC, and 6 all money and all property now or at any time in the future in the Secured Party's possession (including claims and credit balances) (f) All security for the payment of any of the foregoing, and all goods which gave or will give rise to any of the foregoing or are evidenced, identified, or represented therein or thereby. (g) All real estate or other real property now or hereafter acquired by Debtor. (h) All assets or other property similar to any of the foregoing hereafter acquired by Debtor. (i) All other assets or property of Debtor not otherwise described above, whether now owned or hereafter acquired. (j) All proceeds of any of the foregoing (including proceeds of any insurance policies, proceeds of proceeds, and claims against third parties), all products of any of the foregoing, and all books and records related to any of the foregoing. 7 ARTICLE III DEBTOR'S 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 the financing statements relating to the Permitted 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 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 Permitted 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. All real property owned by Debtor is described, by legal description and street address, on Schedule I hereto, all of which shall be deemed included in the Collateral. 8 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 Debtor's 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; provided those certain liens described on Schedule II hereof in existence on the date hereof (the "Permitted Liens") may remain in existence subject to the terms and conditions of this Agreement. 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 enter into and perform this Agreement. 9 3.8 Principal Place of Business. Debtor's chief executive office is at Debtor's address stated above in Childersburg, Talladega County, Alabama, and such address is also where Debtor keeps its books and records. 3.9 Location of Collateral. All of Debtor's Inventory and Equipment is located at Debtor's principal place of business located at 15 Industrial Park Drive, Childersburg, Alabama 35044. 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 Alabama 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 the Permitted 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. 10 ARTICLE IV DEBTOR'S COVENANTS Debtor covenants and agrees that: 4.1 Indebtedness and This Agreement. Debtor shall pay, or cause the payment of, the Indebtedness, and any indebtedness secured by the Permitted Liens, in accordance with its terms and shall promptly perform all of its agreements herein and in any other agreements between it and Secured Party or between it and the holder of any Permitted Liens. 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 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 Permitted Liens. Debtor shall not allow any of the Permitted Liens to secure any indebtedness or obligations other than the specific indebtedness or obligations outstanding, and only to the extent outstanding, on the date this Agreement is entered into that are expressly secured by the applicable Permitted Liens as of such date. Debtor will not incur or permit any increase in any indebtedness or obligation secured by any of the Permitted Liens and will not enter into, consent to, grant, agree to or permit any amendment modification or waiver of any right of Debtor or of any security agreement contract, understanding or other agreement of any kind which creates, grants or otherwise gives risk to any of the Permitted Liens. 11 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 Debtor's to the extent of any deficiency in any effective insurance coverage. Secured Party is appointed Debtor's 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 Party's Costs. Debtor shall pay all costs necessary to obtain, preserve, perfect, defend, and enforce the Security Interest, collect the Indebtedness, and preserve, defend, enforce, and collect the Collateral, including but not limited to taxes, assessments, insurance premiums, repairs, reasonable attorney's fees and legal expenses, feed, rent, storage costs, and expenses of sales. Whether Collateral is or is not in Secured Party's possession, and without any obligation to do so and without waiving Debtor's 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 12 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 Debtor's 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 Further Assurances. Debtor shall execute and deliver any documents or instruments (including without limitation any financing statements or deeds of trust) furnished by Secured Party, and take such further action, at Debtor's sole cost and expense, 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 Party's interest in Collateral or to obtain proceeds of Collateral. 13 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 Debtor's 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 14 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 15 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 Secured Party 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. Secured Party's written consent to any sale, mortgage, transfer, or encumbrance shall not be construed to be a waiver of this provision with 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. 16 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 (as defined in Section 6.1 hereof). 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. 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 17 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 18 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 and deliver such certificates to Secured Party. 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. 19 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 20 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. 21 ARTICLE VI DEFAULT 6.1 Events of Default. The following are events of default under this Agreement ("Events of Default"): (a) default, by Consolidated, Debtor or any other subsidiary of Consolidated, in the timely payment of any part of the Note or other Indebtedness or any breach or default in performance or observance of the terms and conditions herein, in any of the Original Security Documents, in any of the New Security Documents, or in any other agreement between Consolidated, Debtor or any of Consolidated's other subsidiaries on the one hand and Secured Party on the other hand; (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; 22 (e) sale, loss, theft, destruction, incurrence of an encumbrance upon, 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) 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 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; (j) any liability or agreement of third parties to or with Debtor on or relating to the Collateral shall not be paid or performed in accordance with the terms thereof; or 23 (k) any breach or default by Debtor under any agreement giving rise to any of the Permitted Liens or under any indebtedness or obligation secured thereby, or any action by any holder of any of the Permitted Liens is taken or instituted to enforce the rights of such holder with respect to any such Permitted Liens. 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 24 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; No Liability of Secured Party. Secured Party's rights under this Agreement and the Security Interest shall inure to the benefits of its successors and assigns. 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. 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 25 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. 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. 26 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; Terms Commercially Reasonable. 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. The terms of this Agreement shall be deemed commercially reasonable within the meaning of the Texas UCC. 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. 27 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. 28 EXECUTED this 25th day of March, 1999. DEBTOR: KR INDUSTRIAL SERVICE OF ALABAMA, INC. By: /s/ Larry Woodcock Name: Larry Woodcock Title: President SECURED PARTY: AMERICAN PHYSICIANS SERVICE GROUP, INC. By: /s/ Duane K. Boyd, Jr. Name: Duane K. Boyd, Jr. Title: VP 29 SCHEDULE I DESCRIPTION OF REAL PROPERTY SCHEDULE II DESCRIPTION OF PERMITTED LIENS - - ---------------------------- ------------------------------------------- ------- Description, Outstanding Balance and Maturity Name and Address of Date of Secured Obligation of Secured Party Description of Collateral EX-21 27 SUBSIDIARIES OF APS GROUP, INC. EXHIBIT 21.1 SUBSIDIARIES OF AMERICAN PHYSICIANS SERVICE GROUP, INC. AS OF MARCH 25, 1999 Name of Subsidiary State of Incorporation - - --------------------------- ------------------------ APS Investment Services, Inc. Delaware APS Financial Corporation Colorado APS Asset Management, Inc. Delaware APS Insurance Services, Inc. Delaware APS Facilities Management, Inc. Texas American Physicians Insurance Agency, Inc. Texas APSFM, Inc. Delaware APS Realty, Inc. Texas EX-23 28 INDEPENDENT AUDITORS CONSENT Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT - - -------------------------------------------------------------------------------- We consent to incorporation by reference in the registration statements (No. 33-66308, No. 333-07427, and No. 333-62233) on Form S-8 and (No.33-62213) on Form S-3 of American Physicians Service Group, Inc. of our report dated March 9, 1999, relating to the consolidated balance sheets of American Physicians Service Group Inc. and subsidiaries as of December 31, 1998 and 1997, 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, 1998 which report appears in the annual report on Form 10-K of American Physicians Service Group, Inc. for the year ended December 31, 1998. /s/ KPMG LLP ----------------------- Austin, Texas March 30, 1999 EX-27 29 FINANCIAL DATA SCHEDULE - DEC 31, 1998
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1998 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 3,214 0 234 38 1 7,567 4,969 3,316 32,914 5,785 0 0 0 416 24,186 32,914 0 16,403 0 14,709 454 383 59 2,255 863 1,214 331 0 0 1,545 0.37 0.31 THE VALUE FOR EPS-PRIMARY NOW REPRESENTS EPS-BASIC AND THE VALUE FOR EPS-DILUTED REPRESENTS THE VALUE PREVIOUSLY REPORTED AS EPS-FULLY DILUTED.
-----END PRIVACY-ENHANCED MESSAGE-----