-----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, IAo4qqR/ZM4/Gr/lmClA4yaemX9Bee1uhedGoj10xh7KvdFoQXQQlV+GR2iCmEPH MqMSIzEWsLnpPHcbzEkIHQ== 0000899243-99-002405.txt : 19991130 0000899243-99-002405.hdr.sgml : 19991130 ACCESSION NUMBER: 0000899243-99-002405 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990831 FILED AS OF DATE: 19991129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNACQ INTERNATIONAL INC CENTRAL INDEX KEY: 0000890908 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 760375477 STATE OF INCORPORATION: NV FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-21574 FILM NUMBER: 99765729 BUSINESS ADDRESS: STREET 1: 10304 INTERSTATE 10 EAST STREET 2: SUITE 369 CITY: HOUSTON STATE: TX ZIP: 77029 BUSINESS PHONE: 7136736639 MAIL ADDRESS: STREET 1: 10304 I-10 EAST STREET 2: SUITE 369 CITY: HOUSTON STATE: TX ZIP: 77029 10KSB 1 FORM 10-KSB FOR FISCAL YEAR ENDED AUGUST 31, 1999 FORM 10-KSB U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal year ended August 31, 1999 ------------------------------------------------ [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to _______________________ Commission file number 0-20554 ------------------------------------------------ DYNACQ INTERNATIONAL, INC. - -------------------------------------------------------------------------------- (Name of Small Business Issuer in its charter) NEVADA 76-0375477 - --------------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 10304 INTERSTATE 10 EAST, SUITE 369 HOUSTON, TEXAS 77029 - --------------------------------------- ------------------------------------ (Address of principal executive (Zip Code) offices) Issuer's telephone number, including area code (713) 673-6432 ------------------------------------ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which Title of each class registered None None - --------------------------------------- ------------------------------------ Securities registered pursuant to Section 12(g) of the Act: Common Stock - $.001 Par Value ------------------------------ (Title of Class) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period than 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 ____. Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no such disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. _______ The issuer's gross revenues for the most recent fiscal year: $20,296,421 As of November 22, 1999, there were 3,235,611 shares of the registrant's common stock, $.001 par value, issued and outstanding, 953,264 of which having an aggregate market value of approximately $9,413,482 (based on the last trade price of $9.875 as of November 22, 1999) were held by non-affiliates of the registrant. In determining the number of shares held by non-affiliates, shares held by officers, directors and the Company's majority shareholder were excluded. DOCUMENTS INCORPORATED BY REFERENCE None ------------- Transitional Small Business Disclosure Format. Yes ____. No [X] FORM 10-KSB DYNACQ INTERNATIONAL, INC. TABLE OF CONTENTS PART I..................................................................... 1 ITEM 1. Description of Business...................................... 1 ITEM 2. Description of Property...................................... 6 ITEM 3. Legal Proceedings............................................ 7 ITEM 4. Submission of Matters to a Vote of Security Holders.......... 7 PART II.................................................................... 7 ITEM 5. Market for Common Equity and Related Stockholder Matters..... 8 ITEM 6. Management's Discussion and Analysis or Plan of Operation.... 12 ITEM 7. Financial Statements......................................... 12 ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 12 PART III................................................................... 12 ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act............ 12 ITEM 10. Executive Compensation....................................... 13 ITEM 11. Security Ownership of Certain Beneficial Owners and Management............................................... 15 ITEM 12. Certain Relationships and Related Transactions............... 15 ITEM 13. Exhibits and Reports on Form 8-k............................. 15
PART I ITEM 1. Description of Business General Dynacq International, Inc., a Nevada corporation incorporated on June 16, 1989 (the "Company"), is engaged in the business of providing home infusion healthcare services and supplies to patients in their homes, the operation of an outpatient surgical facility, the operation of a medical office complex, and the management of physician practices, all located in the Houston metropolitan area. In addition, in May 1998, the Company organized Vista Community Medical Center, L.L.C., a Texas limited liability company which is 70% owned by a subsidiary of the Company ("Vista Medical"), for the purpose of operating a General Acute Care Hospital located adjacent to the "Vista Facility" (defined below), which was completed and opened in May 1999 (the "Hospital"). Unless otherwise indicated, all references to the Company herein include its subsidiaries. See Note 1.B. of Notes to Consolidated Financial Statements. Effective August 1, 1992, the Company commenced operations as a provider of healthcare services and supplies to patients in their homes specializing in home infusion therapy. Home infusion therapy is the administration to a patient of nutrients, antibiotics or other medications whether intravenously or through a feeding tube, usually as a continuation of treatment initiated in a hospital. While historically the Company's core business has been home infusion therapy, the Company has taken several steps during the past five (5) years to diversify its operations and use of assets, including (i) the acquisition of Vista Healthcare, Inc., a Texas corporation ("Vista") described below in August 1994 which owned and operated a 15,000 square foot outpatient surgical facility located in Pasadena, Texas (the "Vista Facility"), (ii) the formation of Doctors Practice Management, Inc., a Texas corporation ("DPMI") in March 1994, to manage physician practices, (iii) the construction and operation of a professional building completed in May 1995, and (iv) the construction and operation of the Hospital completed in May 1999. In September 1993, the Company's Common Stock commenced trading on the NASDAQ Small Cap System under the symbol DYII. In February 1998, the Company amended its Articles of Incorporation to effectuate a four (4) to one (1) reverse stock split in order to increase the price of its Common Stock to, among other things, maintain the listing of the Common Stock on the NASDAQ Small Cap System and to attempt to enhance the acceptability and marketability of the Common Stock. In 1994, the Company completed the acquisition of approximately 65% of the outstanding common stock of Vista in exchange for approximately 5% of the Company's then outstanding common stock ($.001 par value per share, the "Common Stock") issued to 30 shareholders of Vista in exchange for their shares of Vista common stock pursuant to an Exchange Agreement. Vista operates the Vista Facility, a 15,000 square foot medical clinic and outpatient surgical center in Pasadena, Texas. Vista provides a variety of surgeries, medical treatments and laboratory services on an outpatient basis. Under the Company's control, Vista continues to utilize its facilities and equipment in the same manner, however, the Company expanded the services offered and purchased new equipment. Revenues from the Vista Facility substantially increased in fiscal 1998 and 1999 and it has become the Company's largest revenue producer, exceeding the combined revenues from the Company's home infusion therapy business and revenues from the Company's management of physician practices described below. The Company completed construction of a 35,900 square foot medical office building adjacent to the Vista Facility in 1995 at a total cost of approximately $1,937,000 (the "Office Building.") Several of the offices in the Office Building are currently utilized by physicians with whom the Company has management contracts through its wholly-owned subsidiary DPMI. Offices are also leased to other physician practices that are not subject to management agreements with DPMI. In March 1994, the Company formed DPMI for the purpose of providing (i) fee-based management services to physicians' groups, and (ii) assistance in consolidating medical providers into integrated delivery systems. DPMI began managing Vista in January 1996. It currently has agreements to manage three (3) physician practices and it has a Management Agreement to manage the Vista Facility. 1 The Home Infusion Healthcare Market The Company's home infusion healthcare business principally involves the administration of physician-prescribed nutrients, antibiotics or other medications to patients in their homes, usually as a continuation of a treatment program initiated in a hospital and is generally comprised of Parenteral Nutrition Therapy and Antibiotic Therapy services described below. Throughout the course of treatment, a company licensed pharmacist compounds or supervises the preparation of all prescribed drugs, solutions and related supplies and answers questions concerning the prescribed therapy and the Company's services. In certain cases where the patient is incapable of self-administering the therapy, a nurse is also present at each administration of the therapy. Company nurses visit patients periodically to review training, catheter placement and compliance with the patient care plan. The Company's personnel are available to respond to patient needs 24 hours a day, seven days a week. Due to increasing competition and decreasing reimbursable charges paid by third parties, the Company is not emphasizing home infusion therapy services in its business growth strategy. See "Management's Discussion and Analysis" hereinafter referred to as "MD&A." Parenteral Nutrition Therapy. Parenteral nutrition therapy is prescribed for individuals unable to eat or digest food due to a failure of their gastrointestinal tracts. Parenteral nutrition is typically administered through central vein catheters that are surgically implanted during hospitalization. The Company formulates, compounds and dispenses solutions pursuant to a physician's order. Solutions used in this therapy typically contain amino acids (protein), dextrose (carbohydrate), lipids (fat), electrolytes, vitamins and trace minerals. Some patients requiring this type of therapy periodically require routine re-hospitalization throughout their treatment. Some patients may require therapy for the remainder of their life. Antibiotic Therapy. Antibiotic and anti-infection therapies are used to treat a variety of infections, including osteomyelitis (bone infections), bacterial endocarditis (heart valve infections), septicemia (blood infections), wound infections, bone and joint infections and infections associated with cystic fibrosis and diabetes. By intravenously administering antibiotics into the bloodstream (as opposed to ingesting them orally), the effectiveness of the medication is generally increased. Antibiotic therapy is also a significant therapy for treating individuals suffering from Acquired Immune Deficiency Syndrome ("AIDS"). Because of the gradual destruction of the immune system by the AIDS virus, orally administered drugs typically become less effective against opportunistic infections, and consequently antibiotics must be introduced intravenously. Physicians' Practice Management During fiscal 1999, DPMI had agreements to manage the medical practices of three physician-group practices and the Vista Facility. Each physician practice management agreement is called a "Full Service Facility and Management Agreement" (the "Management Agreement"). The Management Agreements generally require DPMI, at its expense, to: (i) act as the sole and exclusive agent of the physician or physician group for the management and administration of business functions and services related to the physicians' medical practice; (ii) undertake marketing, billing, record keeping, collection, clerical staffing and support services; (iii) provide physical office space, facilities and equipment necessary for the physician's practice, including the repair and maintenance thereof and all utilities and supplies related thereto including licenses and permits; (iv) undertake the hiring, firing, selection, training and supervision of all non-medical personnel; (v) prepare and maintain accounting and financial records and patient files; and (vi) undertake other management and administrative functions related to the foregoing. In consideration of its services, DPMI receives a management fee ranging from 35% to 65% of revenues generated by the physicians. DPMI attempts to negotiate long-term (5 years or longer) noncancellable Management Agreements due to its large initial costs in setting up and equipping fully staffed and functional facilities for physicians. The Management Agreements may be terminated by the non-defaulting party in the event of a breach by the defaulting party. DPMI and the physicians each agree to indemnify the other for claims which may arise in connection with the performance of their respective obligations. Pursuant to the Management Agreements, DPMI is entitled to a fixed percentage of collections from the physicians' practice and is obligated to pay certain fixed categories of expenses which obligation is not limited in amount. To the extent DPMI's share of collections is not sufficient to cover its expense obligations under the Management Agreements, DPMI is obligated to pay the excess expenses and is subject to losses under the Management Agreements. The Company is not pursuing additional physician Management Agreements at this time and is concentrating its resources on the operations of the Vista Facility and the Hospital. 2 Outpatient Surgical Facility, Office Building and Hospital The Company's Vista Facility, consisting of approximately 15,000 square feet, provides outpatient surgical facilities, x-ray diagnostic services and full service laboratory testing to physicians and their patients. The Vista Facility, Office Building and Hospital are located adjacent to each other. Effective October 1, 1998, DPMI entered into a one (1) year Management Agreement renewable for two (2) additional years for the Vista Facility which entitles DPMI to 60% of the revenues generated by the facility in exchange for comprehensive management services provided by DPMI. The Management Agreement for the Vista Facility is similar in scope to the ones entered into by DPMI to manage physician practices and was renewed for one (1) year in October 1999. The Office Building, consisting of approximately 35,900 square feet, is utilized by DPMI for the location of physician practices under Management Agreements and for leasing space to physician practices which are not under management with DPMI. The Hospital was completed in May 1999 and has two (2) surgical suites and 42 beds. See "Item 2. Description of Property." Business Growth Strategy Beginning in late fiscal 1994 and during fiscal 1995, the Company commenced implementation of a new business strategy of diversifying from an almost exclusively home infusion service provider into an integrated medical/healthcare services Company. The foundation of this strategy was the acquisition of a majority interest in Vista in August 1994 and the completion of the Office Building adjacent to the Vista Facility in April 1995. The Company also formed DPMI to provide management services to medical practices. DPMI provides office space and fee-based management services to client physicians located in the Office Building and in other locations. Vista provides outpatient surgical facilities, x-ray diagnostic services and full service laboratory testing to physicians and their patients in the Vista Facility. In fiscal 1998, the Company decided to build a 42-bed hospital adjacent to its Vista Facility (the outpatient surgical center) and its Office Building which was completed in May 1999. With the addition of the Hospital, the Company will broaden the range of medical services it can provide including major surgical cases which require hospitalization. The Company intends to grow as a provider of healthcare services by (i) expanding the business of its existing operations locally, (ii) acquiring established healthcare facilities, and (iii) opening new branch facilities in selected local markets. The Company will periodically evaluate possible acquisitions and suitable locations for new facilities. The Company's growth strategy is dependent in a large part on the ability of the Company to attract and retain key management, marketing and operating personnel at the local facility level. Such persons are in high demand and are often subject to competing offers from other healthcare service companies and related businesses. The Company primarily will target growth opportunities in the ambulatory surgical center business where it has established operating success. The Company's target markets are areas with major industrial companies and middle class blue-collar workers, generally with strong union ties and with superior insurance coverage. This population group has proven to be very open to the type of healthcare center concept offered by the Company. The Company's operations are in Pasadena, Texas, a petrochemical industry hub which provides a stable patient base of insured patients. The Company anticipates growth within a targeted area by purchasing or constructing an outpatient surgical center and, if it is successful, adding a professional building or a hospital at the same location or nearby. It is anticipated that each hub area will consist of a central core of outpatient surgical, diagnostic and laboratory centers, infusion therapy facilities and specialized practices serving outlying clusters of general practitioners. Subsequent alliances of physicians, specialists and clinics are feasible in other areas around Houston, such as Clear Lake, La Porte, Baytown, Deer Park, and other industrial/petrochemical centers wherever located. Competition The Company is one of many in the greater Houston metropolitan area that provide medical practice management, outpatient surgical facilities, professional buildings, hospitals or home infusion therapy. Several major hospital organizations with greater financial resources are planning to or have entered the Pasadena area (the Company's principal market) which will directly compete with the Company's operations. Such competition could be particularly acute with respect to the Company's outpatient surgical facility and the Hospital and have an adverse effect on the ability of the Company to attract and retain physician practices in the Office Building. The home infusion healthcare therapy market is highly competitive and management anticipates that competition, particularly for patient referrals, will intensify in all metropolitan areas. The industry has been subject to market consolidation in recent years and the Company believes that this trend will continue. The Company currently competes with other home infusion therapy companies, hospitals, physician groups and other healthcare organizations, many of which operate on a 3 regional or national basis and are larger and have significantly greater resources than the Company. In the past three years, the Company has experienced substantial pressure from insurance companies with respect to the need for and the cost of home infusion therapy treatments. This pressure has resulted in a declining patient base and reimbursable charges per patient resulting in substantially lower revenues to the Company from home infusion operations. Presently, the Company operates only in the greater Houston metropolitan area. However, the Company would expand its operations into other markets through acquisitions if suitable acquisition properties or businesses are identified and the acquisition terms are acceptable to the Company. With respect to the Company's healthcare operations, the primary competitive factors are (i) quality of care, including responsiveness of service and quality of professional personnel, (ii) the ability to establish and maintain relationships with referring physicians, hospitals, health maintenance organizations, clinics and nursing agencies, (iii) price, (iv) breadth of services offered, and (v) general reputation with physicians, other referral sources and potential patients. Management believes that the Company competes successfully in all of these areas. Marketing and Sales With respect to the Company's home infusion business and its outpatient surgical facility, the Company relies primarily on patient referrals from physicians, including those officing in the Office Building. With respect to home infusion therapy, these referral sources tend to be concentrated among a limited number of physician specialists, allowing the Company to conduct a directed selling effort. Primarily due to escalating pressures to contain healthcare costs, insurance companies and other third-party payers are participating to a greater extent in decisions regarding healthcare alternatives. Consequently, management believes that such third-party payers will be increasingly important in marketing the Company's services in the future. In connection with the opening of the Hospital, the Company utilized traditional billboard and newspaper advertising. Healthcare Regulation The federal government and the state of Texas regulate various aspects of the Company's business. The Company's Vista Facility is licensed as a pharmacy and is subject to federal and state laws and regulations governing pharmacies. Federal laws require, among other things, that the Company's facilities comply with rules relating to controlled substances. These rules include an obligation to register with the Drug Enforcement Administration of the United States Department of Justice and to meet certain requirements concerning security, record keeping, inventory controls, prescription forms, order forms and labeling. The Company's pharmacists and nurses also are subject to state licensing requirements and laws regarding standards of professional conduct. Each nurse and pharmacist used by the Company must have a valid license. Management believes that the Company's operations comply in all material respects with applicable pharmacy licensing requirements. The healthcare industry is highly regulated at the federal and state levels. The Company believes its business is in material compliance with applicable law. The relationships between the Company and its affiliated physician groups, however, are unique, and many aspects of these relationships have not been the subject of judicial or regulatory interpretation. There can be no assurance that a review of the Company's business by courts or by healthcare, tax, labor or other regulatory authorities would not result in determinations that could adversely affect the Company's operations or that the healthcare regulatory environment will not change so as to restrict the Company's existing operations or potential for expansion. A federal statute (the "federal anti-kickback statute") prohibits the offer or payment of remuneration, or the solicitation or receipt of remuneration, to induce either (i) the purchase of any item or service reimbursable in whole or in part by Medicare or certain state healthcare programs (including Medicaid); or (ii) the referral of an individual for the furnishing of any item or service reimbursable in whole or in part by Medicare or certain state healthcare programs. Both criminal and civil penalties can be imposed for violations of the federal-kickback statute, including exclusion from participation in the Medicare and Medicaid programs. The Department of Health and Human Services and law enforcement authorities are increasingly scrutinizing arrangements between healthcare providers and referring physicians to ensure that those arrangements do not constitute mechanisms for paying for referrals. In addition, a number of states have adopted similar legislation that applies to patients not covered by Medicare or Medicaid programs. The Company does not believe that its business operations violate federal or state anti-kickback statutes. Medicare and state healthcare programs do not reimburse medical practices for management fees paid to the Company, and the Company does not refer patients to the medical practices. Nevertheless, because of the breadth of federal and state anti- kickback statutes and the absence of court decisions interpreting their application to arrangements such as those entered into by the Company, there can be no assurance that the Company's activities will not be challenged by regulatory authorities or that the Company's position will prevail if challenged. 4 Numerous legislative proposals have been introduced or proposed in the U.S. Congress and in some state legislatures that would effect major changes in the U.S. healthcare system nationally or at the state level. It is not clear at this time what proposals, if any, will be adopted or, if adopted, what effect, if any, such proposals would have on the Company's business. Certain proposals, such as reducing Medicare and Medicaid, could adversely affect the Company. There can be no assurance that currently proposed or future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs will not have a material adverse effect on the Company. General business corporations (as opposed to professional corporations which are wholly-owned by physicians) are generally not allowed to render medical care. While the Company structures its operations to comply with applicable laws concerning the corporate practice of medicine, there can be no assurance that, given varying and uncertain interpretations of such laws, the Company would be found to be in compliance with such laws. A determination that the Company is in violation of applicable restrictions on the practice of medicine could have a material adverse effect on the Company if the Company were unable to restructure its operations to comply with applicable state requirements. Risks Inherent in Provision of Medical Services The Company's operations involve the delivery of healthcare services to the public and the Company is exposed to the risk of professional liability claims. Claims of this nature, if successful, could result in damage awards to the claimants in excess of the limits of any applicable insurance coverage maintained by the Company or healthcare providers utilized by the Company or those who utilize the Company's facilities, equipment and services. Insurance against losses related to claims of this type can be expensive and varies widely from state to state. The Company or its affiliated physician groups and professional service providers maintain liability insurance in amounts and coverages believed to be usual and customary. Nevertheless, successful malpractice or other liability claims asserted against the medical care providers or the Company could have a material adverse effect on the Company. Reductions in Third-Party Reimbursements Healthcare providers typically bill various third-party payers, such as governmental programs (e.g., Medicare and Medicaid), private insurance plans and managed care plans, for the healthcare services provided to their patients. These third-party payers are increasingly negotiating the prices charged for medical services, pharmaceuticals and other supplies, with the goal of lowering reimbursement and utilization rates. Third-party payers can also deny reimbursement for medical services, pharmaceuticals and other supplies if they determine that a treatment was not performed in accordance with treatment protocols established by such payers or for other reasons. Loss of revenues to the Company caused by cost containment efforts could have a material adverse effect on the Company. Although the Company does not have any contracts to provide healthcare services on a capitated or other risk sharing basis, the Company anticipates that it will eventually offer its services to payers in the future on a capitated or other risk sharing basis. To the extent that patients or enrollees covered by a contract require more frequent or extensive care than is anticipated by the Company, the revenue to the Company derived from such contracts may be insufficient to cover the costs of the services provided. Insufficient revenue under capitated or other risk sharing contracts could have a material adverse effect on the Company. Insurance In recent years, physicians, hospitals and other participants in the healthcare market have become subject to an increasing number of lawsuits alleging malpractice, product liability or related legal theories, many of which involve large claims and significant defense costs. With respect to its home infusion healthcare business, the Company does not carry liability insurance for any employee or contract representative. The Company requires that all healthcare professionals, including registered nurses with whom the Company contracts, carry personal professional liability insurance. However, the Company does not require continuing proof of insurance, mandate policy limits or deductibles or require that the Company be named as an additional insured. Should one of the Company's agents or contracting healthcare professionals commit a negligent or other liability producing act or omission in the Company's home infusion operations, the patient could have a direct claim against the Company which would be uninsured. Mr. Chiu Chan has in force personal professional liability insurance with coverage limits of $1 million per incident. He has not experienced difficulty in obtaining insurance in the past and believes the current insurance coverage is adequate to provide for any claims that may arise and related settlements, if any, involving him personally. As the pharmacist in charge of home infusion therapy, any claims would probably involve Mr. Chiu Chan 5 and the Company and Mr. Chan's insurance may apply to the extent the loss is related to his pharmacy services. The Company may, however, be exposed to the extent Mr. Chiu Chan's insurance does not apply or is insufficient to cover any losses for which the Company is jointly liable. Management believes the Company has reasonable and customary insurance coverage with respect to the remainder of its business operations although the Company cannot provide any assurance that its insurance would cover all losses to which the Company may be subject to. Employees The Company and its subsidiaries employed approximately 100 full-time and 25 part-time employees as of August 31, 1999. Employee Benefit Plans In August 1995, the Board of Directors approved a 1995 Non-Qualified Stock Option Plan for consultants and non-employee directors. Under the terms of the Plan, the Company may grant stock options in the Company's Common Stock to consultants and non-employee directors of the Company and its subsidiaries. The options granted under the Plan are not intended to qualify as "incentive stock options" as that term is defined under Section 422A of the Internal Revenue Code and, as such, the nonstatutory options granted under the Plan are not entitled to special treatment under Section 422 of the Code. In addition, in August 1995, the Company's shareholders approved a 1995 Incentive Stock Option Plan. The 1995 Incentive Stock Option Plan was recommended by the Board of Directors because of its belief that the Plan will advance the interests of the Company by providing key employees, who have substantial responsibility for the direction and management of the Company, with additional incentive for them to promote the success of the Company by increasing their proprietary interest in the success of the Company. It is intended that options issued under the Plan will qualify as Incentive Stock Options under Section 422A of the Internal Revenue Code. The Company believes its compensation paid to employees and its compensatory plans are sufficient to attract and retain qualified employees. Hospital Operations The Company has no experience with respect to the ownership and operation of a hospital. The Company's Hospital which opened in May 1999 is owned by the Company and managed by Vista Medical. The Company leased the Hospital to Vista Medical pursuant to a five (5) year long-term lease for $57,500 per month. Vista Medical is owned 70% by DPMI and 30% by Halcyon, L.L.C. The Company funded the costs to equip and construct the Hospital of approximately $5,000,000 from its cash flow and cash on hand. The Company cannot provide any assurances that the operations of the Hospital will be successful in the long-term or short-term. The Company believes the Hospital reached the break-even point in its sixth month of operations. In the long-term, the Company's ability to manage the Hospital and competition will be key factors in the success of the Hospital. ITEM 2. Description of Property The Company's office space for its headquarters at 10304 Interstate 10 East, Suite 369 consisting of approximately 1,000 square feet is leased on a month-to-month basis for $1,286.00 per month. The lessor of the office space is Capital Bank. One of the Company's directors is a director of Capital Bank. Management believes that the lease rate being paid is consistent with other commercial rates available in the East Houston area. In August 1994, the Company consummated the acquisition of 65% of the outstanding common stock of Vista, which owned the Vista Facility, an outpatient surgical center in Pasadena, Texas consisting of a one story building containing approximately 15,000 square feet. The Vista Facility serves as collateral for a note payable to G.E. Capital. Vista is the Maker of the Note which bears a fixed interest rate of 9.65%, requires monthly installment payments of $19,533, and has a maturity date of September 1, 2002. The note is guaranteed by the Company. As of August 31, 1999, the balance was $622,971. Management believes the facility is adequately covered by insurance. The depreciation on the Vista Facility is computed using the straight line method over thirty-nine years, furniture and fixtures are depreciated over seven years, and equipment is depreciated over five years. The property tax rate is about 3% of appraised value and the annual real and personal property taxes are about $80,000. The Vista Facility is 100% utilized as an outpatient surgical center and to provide laboratory and diagnostic testing services. On September 1, 1998, Vista sold the Vista Facility building and the land on which the Vista Facility, the Office Building and Hospital are located to the Company for a total purchase price of $1,670,000 payable pursuant 6 to two (2) promissory notes bearing interest at 8.5% per annum and payable in eighty-four monthly installments of $26,446.93 in the aggregate. In September 1994, the Company commenced construction of the Office Building (adjacent to the existing Vista Facility described above) which was completed in 1995. The total cost of the Office Building was approximately $1,937,000, and was financed from working capital. The Office Building was constructed as a professional office building for physician practices. There is competition from several professional buildings in the surrounding area. Management believes the Office Building is adequately covered by insurance. The Office Building is comprised of two stories and contains approximately 35,900 square feet of space all of which is leased. In addition, the Company has invested approximately $700,000 for new equipment and furnishings for the Office Building. All depreciation is calculated on the straight line method, with the building being depreciated over thirty-nine years, furniture and fixtures over seven years, and equipment over five years. The property tax rate is approximately 3% of appraised value and the annual real and personal property taxes are about $80,000. As of August 31, 1999, there were three physician practices under management with DPMI which are located in the Office Building. Pursuant to the Management Agreements which provide DPMI with a percentage of revenues from each physician's practice, DPMI agrees to provide fully-equipped office space and other services. Approximately 10% of the space in the Office Building is utilized by DPMI for physician practices under its management. Four (4) physician groups collectively lease approximately 70% of the Office Building space. Due to increased demand for office space in the past year, the Company does not believe the loss or cancellation of any lease would be material. On July 1, 1996, DPMI leased approximately 3,000 square feet of office space from the City of Pasadena pursuant to a five (5) year lease (containing an option for an additional five (5) years) which requires lease payments of $7,200 annually. The property is located at 1001 East Shaw, Pasadena, Texas. DPMI leased the property for the location of a medical practice under a Management Agreement which relocated to the Office Building. The property is not being utilized by the Company at this time. The Hospital is located next to the Vista Facility and the Office Building in Pasadena, Texas. It has 42 beds, two surgical suites, an emergency room, an intensive care area, nurse station, kitchen and other facilities necessary to operate as a complete hospital. The Hospital was completed in May 1999 at a total cost of approximately $5,000,000 which includes furniture, fixtures and equipment of approximately $1,579,000. The Company funded the foregoing cost from internally generated funds and cash-on-hand. The Hospital and its associated equipment are depreciated on the same basis as the Company's Vista Facility and Office Building. The Company believes the Hospital is adequately insured. The Company further believes that it has achieved positive cash flow from Hospital operations as of the date hereof. The Company's Office Building is owned by the Company free of any liens or encumbrances owed to third parties. The remainder of the Company's real estate holdings, including the Vista Facility and the Hospital, are subject to a first lien deed of trust to secure the remaining indebtedness owed to G.E. Capital of approximately $622,971. Additionally, all of the Company's real estate is subject to a deed of trust and lien to secure the Company's purchase money notes in the aggregate principal amount of $1,670,000 payable to Vista Healthcare, Inc. which is 70% owned by the Company. 7 ITEM 3. Legal Proceedings The Company is not a party to any material litigation. ITEM 4. Submission of Matters to a Vote of Security Holders Not applicable. PART II. ITEM 5. Market for Common Equity and Related Stockholder Matters In September 1993, the Company's Common Stock began trading on NASDAQ's Small Capitalization Market under the symbol DYII. Prior to obtaining the NASDAQ listing, the Company's Common Stock had traded in the over-the-counter market on the pink sheets and on the NASD Electronic Bulletin Board. The following table sets forth the high and low closing bid prices for the Company's Common Stock during each of the last eight fiscal quarters as reported by the National Quotation Bureau, Inc.
High Low ---- --- 1999 Fiscal Year - Quarter Ended: November 30, 1998 2.62 2.37 February 28, 1999 4.75 2.37 May 31, 1999 4.75 3.81 August 31, 1999 8.50 4.71 1998 Fiscal Year - Quarter Ended: November 30, 1997 $3.00 $1.50 February 28, 1998 2.50 2.00 May 31, 1998 2.75 2.00 August 31, 1998 2.50 2.37
These quotations reflect inter-dealer prices, without retail markup, mark- down or commission and may not represent actual transactions and are adjusted to reflect the Company's four (4) to one (1) reverse stock split effective February 1998. As of November 16, 1999, the Company had approximately 273 shareholders of record. This number does not include shareholders who hold the Company's securities in nominee accounts with broker-dealer firms or depository institutions. Including the beneficial owners of shares held in nominee accounts or depository institutions, the Company believes it has in excess of 400 beneficial owners of its Common Stock. The Company has not paid any cash dividends on its Common Stock and intends to retain all earnings for the operation and expansion of its business. The Company does not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of cash dividends will depend upon the Company's results of operations, financial condition and capital requirements, as well as such other factors as the Company's Board of Directors may consider. There are no contractual or other restrictions which limit the Company's right to declare and pay dividends should the Board of Directors elect to do so. 8 In the second quarter of fiscal 1999 Vista Medical sold 30% of its limited liability company interests for $360,000 to an outside investor in a private placement under Section 4(2) of the Securities Act of 1933, as amended, and pursuant to applicable state law exemptions. ITEM 6. Management's Discussion and Analysis of Financial Condition and Results of Operations Analysis of Operations The following discussion provides an analysis of the Company's results of operations and reasons for material changes therein for the three years ended August 31, 1999. August 31, 1999 vs. August 31, 1998 The Company recorded consolidated net income of $2,663,832 for the year ended August 31, 1999, as compared to consolidated net income of $945,843 in fiscal 1998 and a net loss of $1,059,195 in 1997. There were no significant, unusual or non-recurring items of income or expense during the three years ended August 31, 1999, except for writeoffs in fiscal 1997 of uncollectible notes in the amount of $776,922 and the writeoff of $371,736 in uncollectible advances to a subsidiary. As discussed below, the Company's loss for fiscal 1997 includes the writeoff of loans previously made by the Company to various physician groups. The Company does not expect to record further significant writeoffs due to uncollectible loans in future years. As a result of a significant increase in the Company's revenues and expenses during fiscal 1999 relating to the Company's Vista Facility and the Hospital operations, it is difficult to meaningfully compare revenues and expenses on a year-to-year basis. For the fiscal year ended August 31, 1999 total consolidated revenues increased by $9,316,052 to $20,296,421, a 85% increase. Of this amount, revenues of $2,146,838 were recorded by DPMI in fiscal 1999 compared to $2,197,789 in fiscal 1998 as a result of the Company's decision to limit its expansion in the management of physician practices during fiscal 1999. The Company expects physician management revenues (and corresponding expenses) to further decrease in fiscal 2000 as it reduces its business in the area of physician management practice. The Company records revenues from the management of physician practices on a combined or consolidated basis and reflects as revenues all patient billings of the respective practices and expenses payments to physicians and other physician practice costs. Revenues attributable to operations of the Vista Facility were $16,030,473 in fiscal 1999, compared to $6,951,253 in fiscal 1998, an increase of 131%. Revenues from home infusion therapy were $758,872 in fiscal 1999 compared to $1,831,327 in fiscal 1998, a decrease of 59%, primarily as a result of lower recoverable charges per day per patient and a smaller patient load. Revenues from the Hospital for the first four months of operation were approximately $1,360,238 in fiscal 1999. Expenses for compensation and benefits to employees increased by 72% to $3,165,407 as a result of more employees needed by the Company to service the increased activities of Vista and the new business associated with the management of the Hospital by DPMI. The number of employees employed by the Company and its subsidiaries increased from approximately 53 in fiscal 1998 to approximately 100 as of August 31, 1999. The Company's provision for uncollectible trade accounts increased from $2,240,258 in fiscal 1998 to $4,120,862 in fiscal 1999 primarily as a result of increased trade revenues resulting in corresponding increases for uncollectible trade accounts. As a percentage of revenues, the Company's provision for uncollectible trade accounts for both fiscal 1998 and fiscal 1999 remained unchanged at approximately 27%. The Company expects its uncollectible trade accounts as a percentage of revenues to remain relatively constant in the future at approximately 27%. The Company recorded writeoffs for uncollectible loans in fiscal 1999 of $0 as compared to $149,698 in fiscal 1998. The Company does not expect to incur similar recurring writeoffs of notes receivable in fiscal 2000 and does not intend to fund advances or loans to physician groups in the future in connection with its management of physician practices. Expenses for medical supplies increased 159% to $2,724,407 associated with the increased revenues and business from the Hospital and Vista operations. General and administrative expenses increased 141% to $4,027,931 primarily as a result of increased operational activities at the Vista Facility and the addition of the Hospital operations for about four months. Rent and other income 9 increased from $195,359 in fiscal 1998 to $336,744 in fiscal 1999 primarily as a result of additional rental income received from outside physicians not under DPMI management. The Company's physician management practice (exclusive of the Vista Facility Management Agreement) and its home infusion division did not significantly contribute to the Company's operating profit. DPMI's net income of $2,182,592 was primarily derived from the operations of the Vista outpatient surgery clinic, through the Vista Facility Management Agreement. The future success of the Company is largely dependent on successful operations at the Vista Facility and the Hospital. The Company faces certain general business risks with respect to all of its operations. In addition to regulatory concerns and increasing competition with respect to all of its operations, the Company's home infusion therapy operations are subject to substantial risks because the Company serves a relatively small number of patients. The Company's home infusion healthcare revenues decreased from $ 2,730,753 in fiscal 1995 to $758,872 in fiscal 1999 as a result of a significant decrease in the number of full-time patients from approximately ten (10) in fiscal 1995 to an average of two (2) full-time patients in fiscal 1999. The Company does not intend to aggressively market its home infusion therapy services at this time primarily because of reduced recoverable patient day rates being paid by third-party payers. The Company will not continue to accept home infusion patients if rates continue to decline. In the past three (3) years, the Company has faced increasing pressure from insurance companies to justify the need for continued home infusion therapy in some cases and the Company's charges therefor. The Company expects these pressures to continue and to increase. With respect to its physician's practice management services, the Company has yet to establish a consistently successful operating history, particularly in view of the writeoffs for uncollectible notes recorded in fiscal 1997. The Company does not intend to pursue additional management agreements for physician practices at this time. Revenues from the Vista Facility increased significantly during fiscal 1999 due to increased patient referrals. The Company expects, and will aggressively pursue, increased patient referrals for the Vista Facility during fiscal 2000 and expects to maintain revenue and operating profit. The Company has no operating history for the Hospital although the Company expects the operations of the Hospital to have a material effect on the Company's consolidated operating results. While the Company believes the operating results of the Hospital will be successful in the long- term, it can provide no assurance at this time to its shareholders. In the short-term, expected operating results from the Hospital could be negatively impacted by low patient utilization (particularly in the first year), which could have a material adverse effect on the Company's liquidity and capital resources. The Company believes it obtained breakeven cash flow with respect to Hospital operations in the sixth month. In the long-term, the skill and experience of the Hospital's management team and competition will play critical roles. August 31, 1998 vs. August 31, 1997 The Company recorded consolidated net income of $945,843 for the year ended August 31, 1998, as compared to consolidated net loss of $1,059,195 in fiscal 1997 and net income of $559,473 in 1996. There were no significant, unusual or non-recurring items of income or expense during the three years ended August 31, 1998, except for writeoffs in fiscal 1997 of uncollectible notes in the amount of $776,922 and the writeoff of $371,736 in uncollectible advances to a subsidiary. As discussed below, the Company's loss for fiscal 1997 includes the writeoff of loans previously made by the Company to various physician groups. The Company does not expect to record further significant writeoffs due to uncollectible loans in future years. As a result of a significant increase in the Company's revenues and expenses during fiscal 1997 relating to the Company's management of physician practices and the recordation of physician practice revenues and expenses on a combined or consolidated basis (see footnote 8 of Notes to Consolidated Financial Statements), it is difficult to meaningfully compare on a year-to-year basis the large differences in many of the expense categories. For the fiscal year ended August 31, 1998, total consolidated revenues increased by $1,208,420 to $10,980,369, a 12% increase. Of this amount, revenues of $2,197,789 were recorded by DPMI in fiscal 1998 compared to $5,188,381 in fiscal 1997 as a result of the Company's decision to limit its management of physician practices and the termination or cancellation of five (5) Management Agreements with physicians during fiscal 1997. The Company expects physician management revenues (and corresponding expenses) to further decrease in fiscal 1999 as it reduces its business in the area of physician management practice. The Company records revenues from the management of physician practices on a combined or consolidated basis and reflects as revenues all patient billings of the respective practices and expenses payments to physicians and other physician practice costs. 10 Revenues attributable to Vista operations were $6,951,253 in fiscal 1998, compared to $3,058,704 in fiscal 1997, an increase of 127%. Revenues from home infusion therapy were $1,831,327 in fiscal 1998 compared to $1,524,864 in fiscal 1997, an increase of 20%, primarily as a result of higher recoverable charges per day per patient. Expenses for compensation and benefits to employees decreased by 22% to $1,840,573 as a result of fewer employees needed by the Company to service the decreased business associated with the management of physician practices by DPMI. The number of employees employed by the Company and its subsidiaries decreased from approximately 75 in fiscal 1997 to approximately 53 as of August 31, 1998. Expenses for contract payments to physicians decreased 58% to $1,250,252 primarily as a result of fewer physician practices under management during fiscal 1998. The Company's provision for uncollectible trade accounts increased from $1,269,066 in fiscal 1997 to $2,240,258 in fiscal 1998 primarily as a result of increased trade revenues resulting in corresponding increases for uncollectible trade accounts. As a percentage of revenues, the Company's provision for uncollectible trade accounts increased to in excess of 20% in fiscal 1998. The Company expects its uncollectible trade accounts as a percentage of revenues to remain relatively constant in the future at over 20%. The Company recorded writeoffs for uncollectible loans in fiscal 1998 of $149,698 as compared to $776,922 in prior years. The Company does not expect to incur similar recurring writeoffs of notes receivable in fiscal 1999 and does not intend to fund advances or loans to physician groups in the future in connection with its management of physician practices. Expenses for medical supplies decreased 18% to $1,051,194 associated with the decreased revenues and business from the Company's physician management practice. General and administrative expenses increased 22% to $1,669,832 primarily as a result of increased operational activities at the Vista Facility. Rent and other income increased from $23,847 in fiscal 1997 to $195,359 in fiscal 1998 primarily as a result of additional rental income received from outside physicians not under DPMI management. The Company's physician management practice (exclusive of the Vista Facility Management Agreement) and its home infusion division did not significantly contribute to the Company's operating profit. Substantially all of the Company's operating net income in fiscal 1998 was derived from the operations of the Vista outpatient surgery clinic, primarily from the Vista Facility Management Agreement. Liquidity and Capital Resources The Company maintained sufficient liquidity in fiscal 1999 and 1998 to meet its business needs. The Company had working capital of $998,701 as of August 31, 1999 and $2,510,981 as of August 31, 1998. The Company had net cash provided by operating activities of $3,784,009 for fiscal 1999 as opposed to $2,299,032 for fiscal 1998. As of August 31, 1999, the Company maintained a liquid position evidenced by a current ratio of 1.21 to 1 and a total debt to equity ratio of 0.68 to 1. The Company expects to have positive cash flow from operations for fiscal 2000. The Company is actively targeting opportunities to expand in the outpatient surgical clinic markets by acquisition of existing facilities or the construction of new facilities. The Company has funded approximately $5,000,000 to equip and construct the Hospital. The Company expects to fund the balance from cash-on-hand and internally generated funds. The Company believes it has the ability to borrow funds if necessary to meet its capital needs. However, there can be no assurance that the Company will have sufficient funds available to meet all of its capital needs. Management believes that available cash funds and funds generated from operations will be sufficient for the Company to finance working capital requirements for the foreseeable future and to meet its future payment obligations on its long-term third-party indebtedness of $685,487 as of August 31, 1999 and long-term indebtedness owed to its affiliate Vista Healthcare of approximately $1,600,000. The Company expects the operations of the Hospital to have a material effect on the Company's consolidated operating results. While the Company believes the operating results of the Hospital will be successful in the long- term, it can provide no such assurance at this time to its Shareholders. In the short-term, expected operating results from the Hospital could be negatively impacted by problems including staffing and equipment, low patient utilization (particularly in the first year), licensing or regulatory delays or other problems, which could have a material adverse effect on the Company's liquidity and capital resources. In the long-term, the skill and experience of the Hospital's management team and competition will play critical roles. The Company believes it achieved positive cash flow from operations at the Hospital in its sixth month of operations. Year 2000 Compliance Issues. The Company is currently evaluating its entire operation as a result of potential problems associated with Year 2000. The Company's personnel are evaluating all areas for compliance issues and are 11 developing correction plans if necessary. Some internal areas and processes being evaluated include initial charge entry through billing and collections; accounts payable invoice receipt through processing and payment; bank processing of receipts and disbursements; computer hardware and software functionality; and time and/or date-sensitive office and medical equipment functionality. At present, the Company does not anticipate any material disruption in its operations or significant costs to be incurred to attain compliance. There can be no assurance, however, that the Company will identify or adequately assess all aspects of its business that may be affected. Due to this uncertainly, a contingency plan will be developed as each area is evaluated to minimize any negative impact to the Company. The Company is in the process of soliciting information concerning the Year 2000 compliance status of its payors (including the Medicare and Medicaid governmental programs), suppliers, and customers. In the event that any of the Company's significant payors, suppliers, or customers do not successfully and timely achieve Year 2000 compliance, the Company's business and/or operations could be adversely affected. Inflation. Inflation has not significantly impacted the Company's financial position or operations. Forward-Looking Information. Information in this Annual Report on Form 10-K contains forward-looking statements and information relating to the Company that are based on the beliefs of the Company's management, as well as assumptions made by, and information currently available to the Company's management. When used in this Annual Report on Form 10-K, words such as "anticipate," "believe," "estimate," "expect," "intend," and similar expressions, as they relate to the Company or the Company's management, identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events, and are subject to certain risks, uncertainties, and assumptions relating to the operations and results of operations of the Company, competitive factors and pricing pressures, costs of products and services, general economic conditions, and the acts of third parties, as well as other factors described in this Annual Report on Form 10-K, and, from time to time, in the Company's periodic earnings releases and other reports filed with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as anticipated, believed, estimated, expected, or intended, or the like. ITEM 7. Financial Statements The information required by this item is included in a separate section of this Annual Report on Form 10-K beginning on Page F-1 and is incorporated herein by reference. ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. 12 PART III. ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act The following table (and accompanying text) sets forth the names and ages of all the directors and executive officers of the Company, all positions and offices with the Company held by each person, each such person's term of office as a director and business experience for the past five years.
NAME AGE POSITION Chiu Moon Chan 47 Chairman of the Board of Directors, Chief Executive Officer, President and Secretary (July 1992-Present) Philip Chan 48 Vice President - Finance and Treasurer/Director (July 1992-Present) Stephen L. Huber 49 Director (July 1992-Present) Earl R. Votaw 73 Director (July 1992-Present) Glenn Rodriguez 53 CEO, Vista Healthcare, Inc. (November 1995-Present)
Chiu Moon Chan has served as a director and as the Company's President, Secretary and Chief Executive Officer since July 1992. Mr. Chan is a registered pharmacist and since May 1978, was employed by various healthcare service organizations in Houston, Texas prior to his affiliation with the Company. Mr. Chan earned a Bachelor of Science degree in Pharmacy from the University of Houston. Philip Chan has served as a director and as the Company's Vice President -- Finance, CFO and Treasurer since July 1992. Mr. Chan earned advanced accounting degrees from the University of Houston and is a CPA in the State of Texas. Mr. Chan has previous corporate and outside accounting experience. He is not related to Chiu Moon Chan. Stephen L. Huber is a registered pharmacist and earned a Bachelor of Science degree in Pharmacy from the University of Houston. Since December 1991, Mr. Huber served as the Deputy Division Head for patient care services at the University of Texas M.D. Anderson Cancer Center. Mr. Huber joined M.D. Anderson in 1984 as Assistant Director of Operations. In 1999, Mr. Huber joined Cortex Communications, Inc., a medical education company, as President and Chief Operating Officer. Mr. Huber remains a research consultant at M.D. Anderson. Mr. Huber has served as director of the Company since 1992 and currently serves on the Company's Audit and Compensation committees. Earl R. Votaw retired in December 1993. He earned a Bachelor of Arts degree from the University of the Americas in Mexico City and a certificate of graduation from the Graduate School of Mortgage Banking from Northwestern University of Chicago. Prior to his retirement, Mr. Votaw served as a director and as the President and Chief Executive Officer of Capital Bank, a Texas chartered bank located in Houston, Texas. Mr. Votaw has served as a director of the Company since 1992 and currently serves on the Company's Audit and Compensation committees. Glenn Rodriguez, age 52, earned a B.B.A. in Accounting from Florida International University in Miami, Florida, graduating in 1976. Mr. Rodriguez has served as the CEO of Vista Healthcare, Inc., a majority-owned subsidiary of the Company since March 1997, and prior to that served as CEO of Surgical Care Center of Texas, an outpatient surgical facility in Pasadena, Texas. Mr. Rodriguez is not a director of the Company. Each director holds office until the earlier of the election of his successor at the next annual meeting of stockholders or his resignation or removal. Compliance with Section 16(a) of the Exchange Act Based solely upon the Company's review of Forms 3, 4, and 5 filed by the Company's officers and directors and persons who beneficially own 10% or more of the Company's Common Stock and the written representations of such persons, 13 the Company is not aware that any of such persons failed to timely file the foregoing forms during the last fiscal year, except for the failure by Messrs. Chan and Rodriguez to file a Form 4 or Form 5 in fiscal 1999 as a result of options issued to them in January 1999. ITEM 10. Executive Compensation The Summary Compensation Table sets forth in summary form the compensation received during each of the Company's last three completed fiscal years by the name executive officers. In addition, the remaining tables show the options granted to the Company's named executive officers in fiscal 1999 and the value of exercised and unexercised options, respectively. SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------ Annual Compensation Long-Term Compensation --------------------------------- ------------------------------------- Awards Payouts --------------------------- ------- Other Securities Annual Restricted Underlying All other Compen- Stock Options/ LTIP Compen- Name and Salary Bonus sation Award(s) SARs Payouts sation Principal Position Year ($) ($) ($) ($) (#) ($) ($) - ------------------------------------------------------------------------------------------------------------------------------ Chiu Chan, CEO 1999 80,000 100,000 -0- -0- -0- -0- -0- --------------------------------------------------------------------------------------------------------- 1998 80,000 -0- -0- -0- -0- -0- -0- --------------------------------------------------------------------------------------------------------- 1997 100,000 -0- -0- -0- -0- -0- -0- - ------------------------------------------------------------------------------------------------------------------------------ Glenn Rodriguez, 1999 79,000 200,000 -0- -0- 30,000 -0- -0- --------------------------------------------------------------------------------------------------------- President - Vista 1998 60,000 -0- -0- -0- 22,500 -0- -0- Healthcare, Inc. --------------------------------------------------------------------------------------------------------- 1997 45,000 -0- -0- -0- -0- -0- -0- - ------------------------------------------------------------------------------------------------------------------------------
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Number of Securities Percent of Total Underlying Options/ Options/SAR's SAR's Granted to Name Granted Employees in Fiscal Year Exercise Price Expiration Date ---- ------- ------------------------ -------------- --------------- Chiu Chan, CEO 0 N/A N/A N/A Glenn D. Rodriguez, 30,000 34% $ 2.375 1/3/2004 President - Vista Healthcare, Inc. - -------------------------------------------------------------------------------------------------------------
14 AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTIONS/SAR VALUES
Number of Unexcercised Value of Securities Unexercised Shares Underlying In-The-Money Acquired Options/SARs Options/SARs on Value at FY-End (#) at FY-End ($) Exercise Realized Exercisable/ Exercisable/ Name (#) ($) Unexercisable Unexercisable ---- --------- -------- ------------- ------------- Chiu Chan, CEO 0 N/A N/A N/A Glenn D. Rodriguez 22,500 160,312 30,000 183,750 President - Visa Healthcare, Inc.
No other officer, director or employee of the Company or its subsidiaries received total compensation in excess of $100,000 during the last three fiscal years. The Company has no employment agreements with its executives. Mr. Chiu Chan, Philip Chan, and Glenn Rodriguez devote 100% of their time to the Company. Pursuant to the Company's Incentive Stock Option Plan, options to purchase 68,882 shares were granted on May 14, 1996, which number includes 39,402 options granted to Mr. Philip Chan. The remaining options were granted to approximately ten (10) nonexecutive employees of the Company and its subsidiaries. These options are exercisable at $3.75 per share and expire May 14, 2001. A total of 43,750 options were granted to two (2) consultants during fiscal 1996. In addition, in December 1997, the Company granted ten (10) employees options to purchase 106,250 shares in the aggregate at an exercise price of $1.38 per share which expire December 18, 2002, including options for 20,000 shares issued to Philip Chan and 22,500 to Glenn Rodriguez. In January 1999, the Company granted seven (7) employees options to purchase 88,000 shares in the aggregate at an exercise price of $2.375 per share which expire January 3, 2004, including options for 24,000 shares issued to Philip Chan and 30,000 to Glenn Rodriguez. In February 1998, the Company granted one (1) consultant options to purchase 12,500 shares at an exercise price of $2.00 per share which expires January 31, 2003. In September 1999, the Company granted two (2) consultants options to purchase 25,000 shares each for a total of 50,000 shares at an exercise price of $8.00 per share which expire January 3, 2004. Directors of the Company do not receive any mandatory compensation for their services as directors, although directors will be reimbursed for expenses incurred in attending board meetings. 15 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following sets forth certain information with respect to the beneficial ownership of shares held by directors, executive officers and persons known to management to own more than 5% of the outstanding Common Stock of the Company as of November 29, 1999.
NAME AND ADDRESS NUMBER OF SHARES AND TITLE OF CLASS OF BENEFICIAL OWNER NATURE OF BENEFICIAL OWNERSHIP PERCENT OF CLASS - ---------------------- ------------------------- -------------------------------- ------------------- Common Stock Chiu Moon Chan 2,267,722/1/ 70.00% 323 Wood Loop Houston, Texas 77015 Common Stock Ella Chan 2,267,722/1/ 70.00% 323 Wood Loop Houston, Texas 77015 Common Stock Philip Chan 95,277/2/ 2.94% 7930 Millbrook Drive Houston, Texas 77095 Common Stock Glenn Rodriguez 55,250/3/ 1.71% 10304 I10 East, Suite 369 Houston, Texas 77029 Common Stock Officers and Directors 2,418,249 74.74% as a group (6)
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits. The exhibits required by Item 601 of Regulation S-B are included in this report commencing on page E-1 hereof which contains a list of such exhibits. The list of exhibits and the exhibits contained herein are incorporated into this part by reference. B. Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the fourth quarter of fiscal 1999. - ------------- /1/ Includes 1,692,048 shares held individually by Chiu Moon Chan, (ii) 474,282 shares held in the name of Mr. Chan's spouse, and (iii) 101,392 shares held by two of Mr. Chan's minor children. Mr. Chan disclaims any beneficial ownership of the shares held by his spouse and minor children. Mrs. Chan disclaims any beneficial ownership of shares held by her spouse and minor children. /2/ Includes 39,402 shares which may be acquired by Mr. Philip Chan pursuant to options granted to him in May 1996 exercisable at $3.75 and expiring May 14, 2001 and 20,000 shares which may be acquired by Mr. Chan pursuant to options granted to him on December 18, 1997, which are exercisable at $1.375 and expire on December 18, 2002, and 24,000 shares which may be acquired by Mr. Chan pursuant to options granted to him in January 4, 1999, which are exerciseable at $2.375 and expire on January 3, 2004. /3/ Includes options to purchase 22,500 shares which are exercisable at $1.375 and expire on December 18, 2002, which were granted on December 18, 1997 and 30,000 shares which may be acquired by Mr. Rodriguez pursuant to option granted to him in January 4, 1999, which are exercisable at $2.375 and expire on January 3, 2004. 16 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DYNACQ INTERNATIONAL, INC. By: /s/ Chiu Moon Chan Date: November 29, 1999 --------------------------------------- Chiu Moon Chan, Chairman of the Board Chief Executive Officer, President and Secretary In accordance with the Exchange Act, this report has been signed below by the following persons, on behalf of the Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ Chiu Moon Chan Chairman of the Board, November 29, 1999 ------------------------------------------ Chief Executive Officer, Chiu Moon Chan President and Secretary /s/ Philip S. Chan Vice President, November 29, 1999 ------------------------------------------ Chief Financial Officer, Philip S. Chan Controller, and Director /s/ Stephen L. Huber Director November 29, 1999 ------------------------------------------ Stephen L. Huber /s/ Earl R. Votaw Director November 29, 1999 ------------------------------------------ Earl R. Votaw
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS. Not Applicable. 17 DYNACQ INTERNATIONAL, INC. CONSOLIDATED FINANCIAL STATEMENTS Years Ended August 31, 1999 and August 31, 1998 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES INDEX
A. Financial Statements Page -------------------- ---- Report of Independent Public Accountants F-2 Consolidated Balance Sheet as of August 31, 1999 F-3 Consolidated Statements of Income for the Years Ended F-4 August 31, 1999 and 1998 Consolidated Statements of Changes in Stockholders' Equity for the F-5 Years Ended August 31, 1999 and 1998 Consolidated Statements of Cash Flows for the Years Ended F-6 August 31, 1999 and 1998 Notes to Consolidated Financial Statements F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors Dynacq International, Inc. Houston, Texas We have audited the accompanying consolidated balance sheet of Dynacq International, Inc. and its subsidiaries (the "Company") as of August 31, 1999, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the years ended August 31, 1999 and 1998. 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 the Company as of August 31, 1999, and the results of its operations and its cash flows for the years ended August 31, 1999 and 1998 in conformity with generally accepted accounting principles. /s/ Wood, Harper & Associates, P.C. ------------------------------------- Sugar Land, Texas Wood, Harper & Associates, P.C. November 19, 1999 F-2 DYNACQ INTERNATIONAL, INC. Consolidated Balance Sheet August 31, 1999
- --------------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 1,163,535 Accounts receivable, net of allowance for doubtful accounts of $8,381,676 4,405,494 Inventories 31,869 Notes receivable 75,000 Due from related party 32,625 ------------------- Total current assets 5,708,523 Property and equipment, net 9,579,207 Other assets, net 224,782 ------------------- Total assets $ 15,512,512 =================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 250,000 Current maturities of long-term debt 268,657 Accounts payable 1,432,114 Accrued liabilities 1,146,745 Income taxes payable 1,037,306 Deferred income taxes payable 585,000 ------------------- Total current liabilities 4,719,822 Noncurrent liabilities: Long-term debt, net of current maturities 685,487 Deferred income taxes 244,000 ------------------- Total noncurrent liabilities 929,487 Commitments and contingencies - Minority interests 1,498,801 Stockholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued or outstanding - Common stock, $.001 par value, 300,000,000 shares authorized; 3,606,628 shares issued 3,607 Additional paid-in capital 3,552,761 Retained earnings 5,537,881 Less treasury stock; 371,017 shares at cost (729,847) ------------------- Total stockholders' equity 8,364,402 ------------------- Total liabilities and stockholders' equity $ 15,512,512 ===================
The accompanying notes are an integral part of the consolidated financial statements. F-3 DYNACQ INTERNATIONAL, INC. Consolidated Statements of Income For the Years Ended August 31, 1999 and 1998
- --------------------------------------------------------------------------------------------------------------------------- 1999 1998 ---- ---- Revenues, net: Infusion therapy $ 758,872 $ 1,831,327 Physician practice management 2,146,838 2,197,789 Emergency and inpatient surgical 1,360,238 - Clinic and outpatient surgical 16,030,473 6,951,253 ------------------- -------------------- Total revenues, net 20,296,421 10,980,369 Costs and expenses: Direct costs of infusion therapy revenues 316,889 408,074 Compensation and benefits 3,165,407 1,840,573 Contract payments to physicians 1,361,021 1,250,252 Provision for uncollectible trade accounts 4,120,862 2,240,258 Provision for uncollectible notes - 149,698 Medical supplies 2,724,407 1,051,194 Depreciation and amortization 566,254 527,876 Rent and occupancy 87,405 81,858 Other general and administrative expenses 4,027,931 1,669,832 ------------------- -------------------- Total costs and expenses 16,370,176 9,219,615 ------------------- -------------------- Income from operations 3,926,245 1,760,754 ------------------- -------------------- Other income: Rent and other income 336,744 195,359 Interest income 75,516 58,707 Interest expense (118,165) (132,562) ------------------- -------------------- Total other income 294,095 121,504 ------------------- -------------------- Income before income taxes and minority interest 4,220,340 1,882,258 Provision for income taxes 1,410,000 716,000 ------------------- -------------------- Net income before minority interest 2,810,340 1,166,258 Minority interest in earnings (146,508) (220,415) ------------------- -------------------- Net income $ 2,663,832 $ 945,843 =================== ==================== Basic earnings per common share $ 0.82 $ 0.28 =================== ==================== Diluted earnings per common share $ 0.80 $ 0.27 =================== ==================== Weighted average common shares-basic 3,243,361 3,432,005 =================== ==================== Weighted average common shares-diluted 3,342,376 3,467,542 =================== ====================
The accompanying notes are an integral part of the consolidated financial statements. F-4 DYNACQ INTERNATIONAL, INC. Consolidated Statements of Changes in Stockholders' Equity For the Years Ended August 31, 1999 and 1998 - -------------------------------------------------------------------------------
Treasury Stock, Common Stock at Cost Additional ------------ ------- Paid-In Retained Shares Amount Shares Amount Capital Earnings Total ------ ------ ------ ------ ------- -------- ----- Balance, August 31, 1997 14,235,136 $ 14,235 71,335 $ (57,322) $3,452,130 $1,928,206 $5,337,249 Restricted stock issued 191,280 191 - - 89,812 - 90,003 Four-for-one reverse stock split at par value (10,819,788) (10,819) (53,501) - 10,819 - - Treasury stock acquired - - 308,205 (568,577) - - (568,577) Net income - - - - - 945,843 945,843 ----------- ---------- -------- --------- ---------- ---------- ---------- Balance, August 31, 1998 3,606,628 3,607 326,039 (625,899) 3,552,761 2,874,049 5,804,518 ----------- ---------- -------- --------- ---------- ---------- ---------- Treasury stock acquired, net - - 44,978 (103,948) - - (103,948) Net income - - - - - 2,663,832 2,663,832 ----------- ---------- -------- --------- ---------- ---------- ---------- Balance, August 31, 1999 3,606,628 $ 3,607 371,017 $(729,847) $3,552,761 $5,537,881 $8,364,402 =========== ========== ======== ========= ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-5 DYNACQ INTERNATIONAL, INC. Consolidated Statements of Cash Flows For the Years Ended August 31, 1999 and 1998
- ---------------------------------------------------------------------------------------------------------------------- 1999 1998 ---- ---- Cash flows from operating activities: Net income $ 2,663,832 $ 945,843 Adjustments to reconcile net income to net cash provided by operating activities: Deprecation and amortization 566,254 527,876 Bad debt expense 4,120,862 2,240,258 Provision for uncollectible notes - 149,698 Loss on retirement of property and equipment 32,914 - Deferred income taxes, net 510,000 61,000 Minority interests 146,508 220,415 Changes in operating assets and liabilities: Accounts receivable (6,861,007) (1,781,297) Income tax receivable - 181,294 Inventories (2,261) 2,071 Due from related party (16,769) 944 Accounts payable 643,678 (243,549) Accrued liabilities 835,391 (470,827) Income taxes payable 572,000 465,306 ----------------- ----------------- Net cash provided by operating activities 3,211,402 2,299,032 ----------------- ----------------- Cash flows from investing activities: Purchases of property and equipment (4,345,026) (535,512) Issuance of notes receivable (75,000) - Redemption of short-term investments 30,000 159,638 Decrease in other assets 474 26,780 ----------------- ----------------- Net cash used in investing activities (4,389,552) (349,094) ----------------- ----------------- Cash flows from financing activities: Principal payments on long-term debt (242,612) (227,070) Acquisition of treasury stock, net (103,948) (113,577) Contributions from minority interests 360,000 - Purchase of minority interests (85,012) (38,377) ----------------- ----------------- Net cash used in financing activities (71,572) (379,024) ----------------- ----------------- Net increase (decrease) in cash and cash equivalents (1,249,722) 1,570,914 Cash and cash equivalents at beginning of year 2,413,257 842,343 ----------------- ----------------- Cash and cash equivalents at end of year $ 1,163,535 $ 2,413,257 ================= ================= Supplemental cash flow disclosures: Cash paid during year for: Interest $ 111,436 $ 126,220 Income taxes $ 328,000 $ 8,400 Noncash investing activity: Property and equipment included in accounts payable $ 600,619 $ -
The accompanying notes are an integral part of the consolidated financial statements. F-6 NOTE 1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Business and Organization Dynacq International, Inc. (the "Company") is engaged in the business of providing home infusion health care services and supplies to patients in their homes, the operation of an outpatient surgical center, the operation of a medical office complex, the management of physician practices, and the operation of a general acute hospital, all located in the Houston metropolitan area. The Company was incorporated under the laws of the State of Utah on September 16, 1983, as Rujo, Inc. On January 14, 1987, the shareholders of the Company approved the change of name of the Company to Jackson Brothers Industries, Inc. The Company merged into a Nevada corporation of the same name on June 16, 1989, pursuant to a share-for-share exchange of stock. On January 12, 1992, the shareholders of the Company again approved a change of corporate name to Dynacq International, Inc., elected directors of the Company and approved a plan of recapitalization whereby authorized capital was increased to an aggregate of 55,000,000 shares of stock, comprised of 50,000,000 Common Shares and 5,000,000 Preferred Shares. On July 28, 1992, the Company completed the sale of 2,812,500 shares of its "restricted" common stock to several investors for a total purchase price of $2 million. As part of this recapitalization of the Company, the authorized number of common shares was increased from 50 to 300 million and three holders of "restricted" stock returned a total of 309,375 shares to the Company's treasury. In February 1993, the Company became the beneficial owners of all of the outstanding common stock of Lucky China International Limited, a Hong Kong- chartered corporation, whose corporation name has since been changed to Dynacq (Asia), Limited ("Asia"). There are two shares outstanding. One share is held in the name of the Company and the other share is held in the name of Mr. Kwong Chung Wai, as a nominee for the Company. On April 13, 1995, Mr. Wai accepted an appointment as Director of Asia. During 1995, Asia disposed of substantially all of its assets and ceased its operations. Effective March 8, 1993, the Company's shareholders approved a reverse split of the outstanding shares of the Company's common stock on the basis of one share for every eight shares outstanding, with the par value of each share remaining at $.001. The reverse split was recommended by the Board of Directors because of its belief that the pre-split per share price level adversely affected the marketability of the Company's common stock and that an increase in the per share price was important to qualify for a listing on the National Association of Securities Dealer, Inc. Automated Quotation System (NASDAQ). In September 1993, the Company's common stock received its listing and began trading on the NASDAQ Small Cap system under the symbol DYII. In August 1994, the Company consummated the acquisition of approximately 65% of the outstanding stock of Vista Healthcare, Inc. ("Vista"), which operates a medical clinic and F-7 NOTE 1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) outpatient surgical center in Pasadena, Texas. The Company issued 179,093 shares of its common stock in a transaction valued at $1,289,461. This acquisition, which was accounted for as a purchase, resulted in the recording of excess costs over net assets acquired totaling $230,717. In 1994, the Company commenced construction of a new medical office building (adjacent to the Vista facility) which was completed in 1995 at a total cost of approximately $1,925,000. Several of the existing physician-minority shareholders of Vista relocated their offices to the new facility. In September 1994, the Company formed Doctors Practice Management, Inc. ("DPMI") to provide fee based practice management services to physicians and to assist in consolidating medical providers into integrated delivery systems. In November 1997, Aso Medical, Inc. ("ASO") was formed as a wholly owned subsidiary of DPMI to provide billing and related services to physicians. ASO had no operations during 1999 and 1998. Effective January 15, 1998, the Company's shareholders approved a reverse split of the outstanding shares of the Company's Common Stock on the basis of one share for every four shares outstanding, with the par value of each share remaining at $.001. The reverse split was recommended by the Board of Directors because of its belief that the post-split per share price will enhance the acceptability and marketability of the Company's common stock by the financial community and investing public. Additionally, management believed that the reverse split would result in the Company's common stock having a minimum bid price in excess of $1.00 per share and would, therefore, enable the Company to maintain the listing of its common stock on the Nasdaq Small Cap Market. In May 1998, DPMI organized Vista Community Medical Center, L.L.C. ("Vista Medical"), a Texas limited liability company, for the purpose of operating a General Acute Hospital (the "Hospital"). The Hospital is located adjacent to the Vista medical clinic and outpatient surgical center in Pasadena, Texas. In 1998, the Company commenced construction of the new Hospital which was completed and opened in 1999 at a total cost, including furnishings, of approximately $4,960,000. DPMI has a 70% membership interest in Vista Medical. B. Consolidated Statements The accompanying financial statements present the consolidated accounts of Dynacq International, Inc., a Nevada corporation, and its wholly owned and majority owned subsidiaries. Accordingly, the consolidated financial statements include all of the assets, liabilities, income, expenses, and cash flows for these companies. All significant intercompany transactions and balances have been eliminated. F-8 NOTE 1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) C. Revenue Recognition The Company recognizes revenue from the performance of medical services in the period in which such services are provided. Substantially all of the Company's revenues are derived from claims filed under major medical policies, workers' compensation policies, Medicare or Medicaid, or personal injury claims. Allowances for discounts on services or adjustments for non-covered costs and expenses are recognized in the period in which the related revenues are provided. Allowances for doubtful accounts are determined by management based upon historical experience and an assessment of the circumstances applicable to individual accounts. D. Stock-Based Compensation The Company accounts for employee stock options under the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and has adopted the "disclosure only" alternative described in Statement of Financial Accounting Standards No. 123, "Accounting for the Stock-Based Compensation" ("SFAS 123"), which requires proforma disclosure of compensation expense using fair value based method of accounting for stock- based compensation plans. E. Cash and Cash Equivalents The Company considers all highly liquid investments with maturity of three months or less as cash equivalents. At August 31, 1999, cash equivalents were composed primarily of investments in money market funds. F. Inventories Inventories are valued at the lower of cost or market with substantially all stated at the first-in, first-out (FIFO) method. G. Property and Equipment Land, buildings and improvements, furniture, fixtures and equipment are stated at cost. Ordinary maintenance and repairs are charged to income as incurred. Expenditures which extend the physical or economic life of the assets are capitalized and depreciated. Gains or losses on the disposition of assets sold are recognized in income and the related asset and accumulated depreciation accounts are adjusted accordingly. Depreciation is computed using the straight-line method over the estimated useful lives of the assets ranging from 3 to 39 years. The Company provides tax depreciation using various accelerated methods in conformity with the provisions of applicable tax law. F-9 NOTE 1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) H. Other Non-Current Assets Excess costs over net assets acquired from the Vista acquisition are amortized on the straight-line basis over a period of 14 years. Loan origination fees are amortized on the straight-line basis over the terms of the related debt. I. Impairment of Long-Lived Assets The Company reviews its property and equipment and unamortized intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company estimates the future cash flows expected to result from operations and if the sum of the expected undiscounted future cash flows is less than the carrying amount of the long-lived asset, the Company recognizes an impairment loss by reducing the unamortized cost of the long-lived asset to its estimated fair value. To date the Company has not recognized any significant impairment on long- lived assets. J. Advertising Costs The Company expenses advertising costs as incurred. Amounts expended for the years ended August 31, 1999 and 1998, were approximately $82,000 and $293,500, respectively. K. Income Taxes The Company utilizes Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires that deferred tax liabilities or assets be recognized for differences between the income tax basis and the financial reporting basis of assets and liabilities and are measured using the enacted marginal tax rates currently in effect when the differences reverse. The Company's principal differences giving rise to deferred income taxes are accounts receivable, reserve for bad debts, accounts payable, accrued liabilities, and accumulated depreciation. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future taxable income. L. Earnings Per Common Share Earning per common share for the years ended August 31, 1999 and 1998, are presented in accordance with the provisions of Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the presentation of primary and fully diluted earnings per share (EPS), with a presentation of basic EPS and diluted EPS. Under SFAS 128, basic EPS excludes dilution for common stock equivalents and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the years F-10 NOTE 1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) ended August 31, 1999 and 1998, diluted common and common equivalent shares outstanding includes 131,882 and 143,750, respectively, of common share equivalents, consisting of stock options, determined under the treasury stock method. M. Segments For the year ended August 31, 1999, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131) which establishes standards for the way public business enterprises report information about operating segments in annual financial statements. Also established were standards for related disclosures about products, services, geographical areas, and major customers. The adoption of SFAS 131 did not have an effect on the Company's primary financial statements. N. Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that effect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the balance sheet. Actual results could differ from those estimates. Accounts receivable and revenues in the health care industry are subject to possible third party payor adjustments. Management periodically reviews such estimates and it is reasonably possible that management's assessment of recoverability of accounts receivable may change based on actual results and other factors. NOTE 2. VISTA HEALTHCARE, INC. On August 25, 1994, the Company completed the acquisition of approximately 65% of the common stock of Vista in a transaction accounted for as a purchase. Accordingly, the accompanying financial statements reflect the results of operations of Vista for the period subsequent to August 25, 1994. During 1995, the Company sold a portion of its investment in Vista to certain affiliates for $80,000 cash. During 1996, Vista repurchased a portion of its common stock from certain affiliates for $134,958 and resold $20,000 of this stock to an affiliated Physician. During 1997, the remaining treasury stock was sold to the Company at Vista's cost of $114,958. During 1998, the Company purchased 1.45% of the common stock of Vista for $11,600 cash. During 1999, the Company purchased an additional 2.56% of Vista for $37,000 cash. Net assets purchased in excess of costs incurred have been included in consolidated operations. As of August 31, 1999, the Company owned approximately 70% of the outstanding common stock of Vista. F-11 NOTE 3. PROPERTY AND EQUIPMENT At August 31, 1999, property and equipment consisted of the following: Land $ 497,109 Buildings and improvements 7,177,253 Furniture and fixtures 459,944 Equipment 3,869,730 Automobile 24,125 ----------- 12,028,161 Less, accumulated depreciation (2,448,954) ----------- Net property and equipment $ 9,579,207 ===========
Vista's existing physical facility is pledged as collateral on a long-term mortgage to a financing company in the amount of $622,970 as of August 31, 1999. In connection with its 1994 acquisition of approximately 65% interest in Vista, the Company has guaranteed 65% of the outstanding balance of this long-term mortgage. For the years ended August 31, 1999 and 1998, depreciation expense was $546,365 and $449,728, respectively. NOTE 4. OTHER NON-CURRENT ASSETS In connection with the acquisition of Vista, excess costs over net assets acquired totaling $230,717 were incurred. This amount is being amortized over a period of fourteen years on the straight-line basis beginning August 25, 1994. For the years ended August 31, 1999 and 1998, amortization expense was $16,480 for each period. NOTE 5. NOTES PAYABLE Notes payable consists of two 6.50% short-term notes due to a physician group for which the Company provides management services. F-12 NOTE 6. LONG-TERM DEBT At August 31, 1999, long-term debt consisted of the following:
Note payable to a former shareholder, payable in monthly installments of $10,007, including interest at 11.50%, through December 2002, uncollateralized. $ 331,174 Note payable to a financing company payable in monthly installments of $19,533, including interest at 9.65%, through September 2002, collateralized by land and guaranteed by certain minority stockholders of Vista. 622,970 --------- 954,144 Less, current maturities (268,657) --------- $ 685,487 =========
The aggregate principal payments on long-term debt subsequent to August 31, 1999, are as follows:
Year ending August 31, 2000 $268,657 2001 297,522 2002 329,512 2003 58,453 -------- Total $954,144 ========
NOTE 7. INCOME TAXES The provision for income tax expense consisted of the following at August 31:
1999 1998 ---- ---- Current tax expense: Federal $1,087,000 $604,000 State 93,000 51,000 ---------- -------- Total current 1,180,000 655,000 Deferred tax expense: Federal 212,000 56,000 State 18,000 5,000 ---------- -------- Total deferred 230,000 61,000 ---------- -------- Total $1,410,000 $716,000 ========== ========
F-13 NOTE 7. INCOME TAXES (continued) Deferred taxes arise primarily due to the Company and its subsidiaries filing their individual income tax returns on a cash basis, the use of the specific charge-off method for tax reporting, and accelerated methods of computing depreciation for tax purposes. The components of the provision for deferred income taxes, at August 31, were as follows:
1999 1998 ---- ---- Applicable to: ------------- Cash basis of accounting for federal income tax purposes. $ 1,286,000 $ 819,000 Use of reserve for bad debts for financial reporting and specific charge-off method for tax reporting. (1,090,000) (785,000) Difference in methods of computing depreciation for tax and financial reporting purposes and other. 34,000 27,000 ----------- --------- $ 230,000 $ 61,000 =========== =========
Significant components of the Company's deferred tax liabilities and assets, at August 31, 1999, were as follows:
Current Noncurrent ------- ---------- Deferred tax liabilities: Basis in property and equipment $ - $(244,000) Receivables (4,514,000) - Deferred tax assets: Payables and other 894,000 - Reserve for bad debts 3,035,000 - ----------- --------- Net liability $ (585,000) $(244,000) =========== =========
F-14 NOTE 7. INCOME TAXES (continued) The following table reconciles the Federal statutory income tax rate and the Company's effective income tax rate:
1999 1998 ---- ---- Provision for income taxes at federal statutory rate 34.0% 34.0% State tax provision, net of federal benefits 3.0 3.0 Minority interest in loss of partnership on which tax benefit was not recorded (3.3) - Other differences (0.3) 1.0 ---- ---- Effective tax rate 33.4% 38.0% ==== ====
NOTE 8. RELATED PARTY TRANSACTIONS The Company leases to its President his personal residence at a monthly rate of $1,400. Total rent income for the years ended August 31, 1999 and 1998, was $16,800 for each year. The amount due for rent for the year ended August 31, 1999 is included in current assets as due from related party. Due to the legislative requirements concerning the practice of medicine in the state of Texas, the Company has entered into agreements with various Professional Associations and individual doctors (the "Physicians") for the services of physicians. The Physicians provide services to third parties and after covering the costs associated with the Physicians, remit proceeds to the Company for management services. The structure of the agreements between the Company for its clinic and the Physicians require that all income be paid to the Company for management services or to the physicians for compensation. The accompanying financial statements reflect transactions with the Physicians on a basis as if the Company and Physicians were "combined" or "consolidated" as revenues reflect all clinic revenues billed to patients and expenses reflect compensation incurred to the Physicians. NOTE 9. CAPITAL STOCK Pursuant to an Asset Purchase Agreement dated October 22, 1997, the Company issued 45,000 shares of restricted common stock valued at $90,000. This issuance was valued at fair market value based upon management's estimation of the open market closing price. In exchange for the restricted common stock, the Company assumed liabilities of $63,300 and received tangible and intangible property with a fair value of $153,300. In addition to the restricted common shares, the Company granted a two-year option to purchase an additional 37,500 restricted shares of common stock at $2.00 per share. In October 1998, the Company filed a civil lawsuit claiming breach of contract of the Asset Purchase Agreement. On October 29, 1998, a Compromise, Settlement and Mutual Release Agreement was entered into whereby the Company agreed to pay $118,000 in exchange for the return of the 45,000 shares of restricted common stock, the cancellation of the option to acquire 37,500 restricted shares of common stock and the transfer of approximately $57,849 of the original $63,300 of liabilities assumed. F-15 NOTE 9. CAPITAL STOCK (continued) On February 26, 1998, the Company agreed to buy back 287,500 shares of common stock for $517,500 or $1.80 per share. A cash payment of $62,500 was made, and the balance of $455,000 is being repaid pursuant to an unsecured promissory note in sixty (60) monthly installments of $10,007 each including accrued interest at an annual interest rate of 11.50%. Stock Options The Company has various stockholder-approved stock option plans which provide for the grant of options to directors, officers, key employees and consultants to purchase Common Stock at a price determined by the Board of Directors which may not be less than 100% of the fair market value as of the date of grant. The Board of Directors administers the stock option plans. Options may be granted as incentive stock options or as non-qualified stock options. Incentive stock options vest 100% annually, upon completion of one year of employment subsequent to the date of grant. The non-qualified stock options are subject to vesting schedules determined by the Board of Directors at the date of grant subject to a minimum six month vesting provision. The options expire at dates ranging from five to ten years from the date of grant. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 is effective for fiscal years beginning after December 15, 1995 and allows for the option of continuing to account for stock-based compensation under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations, or selecting the fair value method of expense recognition as described in SFAS 123. The Company has elected to follow APB 25 in accounting for its stock option plans. The total compensation expense associated with stock options granted in 1998 and 1999 was $200,760 and $202,248, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Hence, the 1999 pro- forma disclosures reflect the vesting of the options granted in 1998 and their related compensation expense. The options granted in 1999 and their related compensation expense will be reflected at the time such options vest. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998 and 1999, respectively: risk-free interest rates of 5.50% and 4.72%; dividend yield of zero as the Company has not paid and does not anticipate paying any dividends in the future; volatility factors of the expected market price of the Company's common stock of 1.51 and 1.87; and a weighted-average expected life of the options of five years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock F-16 NOTE 9. CAPITAL STOCK (continued) price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. The Company's pro forma information follows:
1999 1998 ---- ---- Net income available for common stock as reported $2,663,832 $945,843 SFAS No. 123 effect (200,760) - ---------- -------- Pro forma net income available for common stock $2,463,072 $945,843 ========== ======== Pro forma basic earnings per share $ 0.76 $ 0.28 Pro forma diluted earnings per share $ 0.74 $ 0.27
F-17 NOTE 9. CAPITAL STOCK (continued) The following is a summary of the Company's stock option activity and related information for the years ended August 31, 1999 and 1998:
Weighted Average Price Date of Grant or ---------------- Number of Shares Exercise ---------------- -------- Outstanding at August 31, 1997 112,632 $ 4.40 Options Granted 156,250 1.58 Options Exercised - - Options Canceled - - -------- ------ Outstanding at August 31, 1998 268,882 2.76 Options Granted 88,000 2.38 Options Exercised - - Options Canceled (37,500) (2.00) -------- ------ Outstanding at August 31, 1999 319,382 $ 2.74 ======== ====== Options exercisable at year-end 231,382 $ 2.88 Weighted-average fair value of options granted during the year $ 2.38
The following table summarizes information about the Company's stock options at August 31, 1999:
Options Outstanding Options Exercisable --------------------------------------------------- ---------------------------- Weighted- Average Weighted- Weighted- Range of Remaining Average Average Exercise Prices Number Contractual Life Exercise Price Number Exercise Price - --------------- ------ ---------------- -------------- ------ -------------- $ 1 - 4 275,632 3.39 $2.31 187,632 $2.28 $ 5 - 7 43,750 6.03 $5.43 43,750 $5.43 ------- ------- $ 1 - 7 319,382 3.75 $2.74 231,382 $2.88 ======= =======
F-18 NOTE 10. COMMITMENTS AND CONTINGENCIES Leases The Company leases certain of its facilities and equipment under operating leases with net aggregate future lease payments of $13,800 at August 31, 1999, payable as follows: Year ending August 31, 2000 7,800 2001 6,000 ------- Total $13,800 ======= Rent expense related to its facilities and equipment leases, for the years ended August 31, 1999 and 1998, was $35,444 and $8,438, respectively. The Company also leases corporate office space under an operating lease on a month-to-month basis. Rent expense for its corporate lease was $16,372 and $15,432 for each of the years ended August 31, 1999 and 1998. In addition, the Company pays certain operating leases on behalf of the physicians being managed by Doctors Practice Management, Inc. For the years ended August 31, 1999 and 1998, total physicians' operating lease expenses were $35,589 and $57,988, respectively. Total rent expenses, including those physicians' operating leases paid by the Company, for the years ended August 31, 1999 and 1998, was approximately $87,405 and $81,858, respectively. Litigation In March 1997, the Company filed a civil lawsuit against one of the Physicians for which the Company provided management services, seeking repayment of advances of $110,000 owed to the Company pursuant to a Revolving Credit Agreement and Security Agreement executed between the parties in July of 1996. In April 1997, the Physician filed a counterclaim against the Company and the Company's president seeking alleged damages in excess of $500,000. In May 1997, the Company and the Company's president filed a response denying allegations made in the counterclaim. In November 1998, the matter was tried and resulted in a $200,000 judgement favorable to the Company. All claims against the Company were resolved and dismissed. In the opinion of management, the Company's allowance for doubtful accounts, which was provided to cover any potential loss in 1997, is still appropriate as collection of the judgement, if any, is uncertain at this time. The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position of the Company. F-19 ITEM 10. COMMITMENTS AND CONTINGENCIES (Continued) Other Risks The Company maintains insurance for worker's compensation, automobile, general liability, property loss, and medical malpractice claims. Management does not believe the Company's exposure to medical malpractice is significant, and is not aware of any pending or potential claims against the Company. NOTE 11. SUPPLEMENTARY INFORMATION At August 31, 1999, the detail of certain balance sheet accounts was as follows: Accounts receivable: Trade $12,721,675 Other 65,495 ----------- 12,787,170 Less, allowance for doubtful accounts (8,381,676) ----------- $ 4,405,494 =========== Other assets: Excess costs over net assets acquired, net of accumulated amortization of $82,670 $ 148,047 Other 76,735 ----------- $ 224,782 =========== Accrued liabilities: Compensation to Physicians $ 294,829 Interest expense 35,585 Wages and payroll taxes 637,589 Ad valorem taxes 178,742 ----------- $ 1,146,745 ===========
F-20 NOTE 12. CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has financial instruments which are exposed to concentrations of credit risk; they consist primarily of cash investments and trade accounts receivable. The Company routinely maintains cash and temporary cash investments at certain financial institutions in amounts substantially in excess of FDIC insurance limits; however, management believes that these financial institutions are of high quality and the risk of loss is minimal. As is customary in the health care business, the Company has trade accounts receivable from various private insurers, and the balance due from a particular insurer at any point in time may be in excess of the allowance for doubtful accounts. The Company does not request collateral from its customers and continually monitors its exposure for credit losses and maintains allowances for anticipated losses. The trade receivables from private insurers is normally in excess of 90% of the total trade receivables at any point in time. The carrying amounts of cash and cash equivalents, short-term investments, receivables, notes payable and accounts payable approximate fair value due to the short-term maturities of these instruments. The carrying amounts of the Company's long-term borrowings, at August 31, 1999, approximate their fair value. NOTE 13. SEGMENT AND RELATED INFORMATION The Company adopted Statement of Financial Accounting Standards No. 131 during the fiscal year ended August 31, 1999. The Company has four reportable segments: infusion therapy, physician practice management, emergency and inpatient surgical center, and clinic and outpatient surgical center. The infusion therapy segment's business principally involves the administration of physician-prescribed nutrients, antibiotics or other medicines to cancer patients in their homes. The physician practice management segment provides office space and fee-based management services to physicians. The emergency and patient surgical center segment is comprised of a forty-two bed hospital which provides a wide range of medical services including major surgical cases which require hospitalization. The clinic and outpatient surgical center segment provides outpatient surgical facilities, X-ray diagnostic services and full service laboratory testing. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses. The Company accounts for intersegment sales and expenses as if the sales or transfers were to third parties, that is, at current market prices. The Company's reportable segments are business units that offer different services. They are managed separately because each business requires different technology and marketing strategies. F-21 NOTE 13. SEGMENT AND RELATED INFORMATION (Continued) Summarized financial information concerning the Company's reportable segments is shown in the following table.
Physician Emergency and Clinic and Infusion Practice Inpatient Outpatient Therapy Management Surgical Center Surgical Center Totals ------- ----------- ---------------- --------------- ------ Revenues from external customers $ 758,873 $12,565,203 $1,360,238 $16,030,473 $30,714,787 Intersegment revenues - 10,418,366 - - 10,418,366 Interest revenue 21,478 33,133 8,979 136,230 199,820 Interest expense 173,573 - - 68,895 242,468 Depreciation and amortization 326,854 53,870 - 185,530 566,254 Income tax expense (benefit) (90,000) 1,060,000 (414,000) 854,000 1,410,000 Segment assets 6,525,563 3,974,496 2,333,942 7,003,964 19,837,965 Expenditures for segment assets 4,047,964 124,664 - 172,398 4,345,026 Segment profit/(loss) (179,870) 2,112,592 (824,607) 1,702,225 2,810,340
The following table provides a reconciliation of the reportable segments' revenues, profit/(loss), assets, and other significant items to the consolidated totals.
REVENUES: -------- Total revenues for reportable segments $ 30,714,787 Elimination of intersegment revenues (10,418,366) ------------ Consolidated total revenues $ 20,296,421 ============ PROFIT/(LOSS): ------------- Total profit/(loss) for reportable segments $ 2,838,340 Elimination of minority interests (146,508) ------------ Consolidated net income $ 2,663,832 ============ ASSETS: ------ Total assets for reportable segments $ 19,837,965 Elimination of intercompany accounts and other (4,325,453) ------------ Consolidated total assets $ 15,512,512 ============ OTHER SIGNIFICANT ITEMS: ----------------------- Segment Consolidated Totals Adjustments Totals ------ ----------- ------ Interest revenue $199,820 $(124,303) $ 75,517 Interest expense 242,468 (124,303) 118,165
The Company's revenues and long-lived assets are derived and domiciled from a customer base located solely in the United States. F-22 INDEX TO EXHIBITS All Exhibits listed below are incorporated by reference from prior filings except for those denoted by an asterisk which are filed herewith. (2.1.) Stock Sale Agreement, dated July 21, 1992, pertaining to a change in control of Dynacq International, Inc. (the "Company") which was previously filed in and is incorporated herein by this reference to, the Company's Registration Statement on Form 10, No. 0-20554. (2.2.) Exchange Agreement by and among the Company, Vista Healthcare, Inc. ("Vista") and certain Vista shareholders which was previously filed in, and is incorporated by this reference to, the Company's Current Report on Form 8-K, dated August 4, 1994. (3.0) Articles of Incorporation, filed June 16, 1989, which were previously filed in, and are hereby incorporated by reference to the Company's Registration Statement on Form 10, No. 0-20554. (3.1.) Amendment to Articles of Incorporation, filed February 12, 1992, which was previously filed in, and is hereby incorporated by reference to, the Company's Registration Statement on Form 10, No. 0-20554. (3.2.) Amendment to Articles of Incorporation, filed July 20, 1992, which was previously filed in, and is hereby incorporated by reference to, the Company's Registration Statement on Form 10, No. 0-20554. (3.3.) Amendment to Articles of Incorporation filed February 10, 1998. (3.4.) Bylaws (amended August 1, 1995) which were previously filed in and are hereby incorporated by reference to the Company's Amended Form 10-K for fiscal 1995 dated May 1, 1996, File No. 0-20554. (10.1.) Pledge-Security Agreement between the Company and Capital Bank dated July 20, 1994, which was previously filed in and incorporated by this reference to, the Company's current Report on Form 8-K, dated August 4, 1994, No. 0-20554. (10.2.) Guaranty Agreement between the Company and Metlife Capital Corporation dated July, 1994, which was previously filed in and is hereby incorporated by reference to, the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1993. commission File No. 0-20564. (10.3.) Security Agreement dated July 18, 1996, between Vista and Capital Bank, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.4.) 1995 Incentive Stock Option Plan for Employees and Employee Directors, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. E1 (10.5.) 1995 Non-Qualified Stock Option Plan for Consultants and Non-Employee Directors, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.6.) 1995 Stock Option Agreement between the Company and Philip S. Chan, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.7.) Full Service Facility and Management Agreement between DPMI and JCW Medical Associates, P.A. dated May 1, 1996, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.8.) Full Service Management Agreement between DPMI and Ping S. Chu, M.D., dated March 1, 1996, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0- 20554. (10.9.) Promissory Note dated November 15, 1996, from JCW Medical Associates, P.A. payable to the Company in the principal amount of $666,922.22, bearing interest at 8% per annum and payable in 180 monthly installments, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.10.) Security Agreement dated May 1, 1996, by JCW Medical Associates, P.A. to DPMI, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.11.) Credit Agreement dated May 1, 1996, between JCW Medical Associates, P.A. and DPMI, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.12.) Revolving Credit Note from JCW Medical Associates, P.A. to DPMI dated April 1, 1996 for $675,000, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.13.) Credit Agreement dated April 1, 1996, between R.S. Arora, M.D., as Borrower, to DPMI as Lender, for advances up to $100,000, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.14.) Security Agreement dated April 1, 1996, by R.S. Arora M.D. as Grantor to DPMI as Lender, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0- 20554. (10.15.) Revolving Credit Note dated April 1, 1996, in the principal amount of $100,000 from R.S. Arora, M.D. to DPMI, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.16.) $100,000 Revolving Credit Note dated July 1, 1996, from Houston Physical Medicine Associates, M.D., P.A. to DPMI, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. E2 (10.17.) Credit Agreement dated July 1, 1996, between Houston Physical Medicine Associates, M.D., P.A. and DPMI, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.18.) Full Service Facility and Management Agreement dated October 1, 1996 by and between Milton Kirkwood, D.O. and DPMI, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, Commission File No. 0-20554. (10.19.) Asset Purchase Agreement and Bill of Sale dated October 22, 1997 by and between Medtek Management, Inc. and DPMI, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, Commission File No. 0-20554. (10.20.) Asset Purchase Agreement dated November 13, 1997 by and among DPMI, Kirkwood Medical Associates, P.A., Milton E. Kirkwood, D.O., Ron Kirkwood, D.O., and John Kirkwood, D.O., filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, Commission File No. 0-20554. (10.21.) Lease Agreement effective July 1, 1996 by and between DPMI as Tenant and the City of Pasadena as Landlord relating to 3,000 square feet of office space in Pasadena, Texas, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, Commission File No. 0-20554. (10.22.) Lease Agreement dated November 1, 1997 by and between DPMI as Landlord and Kirkwood Medical Associates as Tenant relating to approximately 9,200 square feet of office space located at 4301A Vista Road, Pasadena, Texas, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, Commission File No. 0- 20554. (10.23.) Amendment No. 1 effective September 1, 1996 to the Full Service Management Agreement between DPMI and Ping S. Chu, M.D. dated March 1, 1996, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, Commission File No. 0-20554. (10.24.) Amendment No. 1 effective September 1, 1996 to Full Service Facility and Management Agreement between DPMI and JCW Medical Associates, P.A. dated May 1, 1996, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, Commission File No. 0- 20554. (10.25.) $60,000.00 Promissory Note dated November 30, 1996, of the Company, payable to JCW Medical Associates, P.A., filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, Commission File No. 0-20554. (10.26.) $190,000.00 Promissory Note dated January 31, 1997, of DPMI, payable to JCW Medical Associates, P.A., filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, Commission File No. 0-20554. (10.27.) Stock Option Agreement for Philip Chan dated effective December 18, 1997, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. E3 (10.28.) Stock Option Agreement for Glenn Rodriguez dated effective December 18, 1997, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. (10.29.) Letter Agreement regarding pharmaceutical services between Vista and the Company dated effective September 1, 1998, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. (10.30.) Office/Surgical Care Center Lease Agreement dated September 1, 1998, between the Company as Landlord and Vista as Tenant, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. (10.31.) Management Support and Marketing Agreement dated October 1, 1998, by and between DPMI and Ultramed, L.C., filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. (10.32.) Full Service Management Agreement dated October 1, 1998, by and between DPMI and Vista, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0- 20554. (10.33.) Real Estate Lien Note dated September 1, 1998, in the principal amount of $1,400,000.00 from the Company to Vista, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. (10.34.) Warranty Deed with Vendor's Lien from Vista to the Company dated September 1, 1998, relating to 4.5799 acres of land in Pasadena, Texas, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. (10.35.) Deed of Trust dated September 1, 1998 from the Company regarding 4.5799 acres of land in Pasadena, Texas, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. (10.36.) AIA Construction Contract dated April 13, 1998, by and between the Company and Beck-Ford Construction, Inc. for construction of the Hospital for approximately $2,500,000, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. (10.37)* Stock Option Agreement for Philip Chan dated January 4, 1999, relating to options to purchase $24,000 shares at $2.375. (10.38)* Stock Option Agreement for Glenn Rodriguez dated January 4, 1999, relating to options to purchase 30,000 shares at $2.375. (10.39)* Hospital Lease Agreement from Dynacq to Vista Community Medical Center, L.L.C. for 23,000 square with annual retails of $57,500 per month for through January 31, 2004. (10.40)* The Company's Real Estate Lien Note dated September 1, 1998 in the principal amount of $270,000 payable to Vista Healthcare, Inc. E4 (10.41)* Deed of Trust dated September 1, 1998, from the Company with respect to its real estate properties in Pasadena, Texas. (10.42)* Regulations of Vista Community Medical Center, L.L.C. (21.0) Listing of subsidiaries of the Company, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. (27.)* Financial Data Schedule. __________________________________ * Filed herewith. E5 EX-10.37 2 STOCK OPTION AGREEMENT FOR PHILIP CHAN EXHIBIT 10.37 1998 STOCK OPTION AGREEMENT FOR ------------------------------- 1995 INCENTIVE STOCK OPTION PLAN FOR ------------------------------------ EMPLOYEES AND EMPLOYEE DIRECTORS -------------------------------- OF -- DYNACQ INTERNATIONAL, INC. -------------------------- The parties to this Agreement are DYNACQ INTERNATIONAL, INC., a Nevada Corporation (the "Company") and Philip Chan (the "Participant"). GRANT OF OPTION --------------- The Company hereby grants to Participant the right, privilege, and option to purchase up to 24,000 (twenty-four thousand) shares of common stock of the Company of a purchase (grant) price of $2 3/8 per share, in accordance with the terms and conditions of the 1995 Incentive Stock Option Plan for Employees and Employee Directors approved by the Company's Board of Directors on August 31, 1995 (the "Plan"). The Plan, a copy of which is attached hereto, is incorporated herein by this reference. 1. Notice of Exercise. Subject to the provisions set forth in Paragraph ------------------ 8 of the Plan, any option granted under this Agreement may be exercised at any time and from time to time in whole or in part by written notice delivered to the Company. Such notice shall state the number of shares being exercised and shall specify a date, not more than (10) days from the date of such notice, as the date on which full payment for the option price for the number of shares specified shall be made thereof at the principal office of the Company. Upon receipt of payment, the Company shall instruct its transfer agent to issue such shares provided that if any law or regulation requires the Company to take action with respect to the shares specified in the notice, before the issuance thereof, then the date of delivery of such shares shall be extended for the period necessary to take such action which may include registration of the stock under applicable law. 2. No Shareholder Rights. The Participant acknowledges that he has no --------------------- rights as a shareholder with respect to shares for which the option has not been exercised, and the Participant shall have no rights with respect to such shares unless otherwise conferred hereby. 3. Option Rights and Holding Period. The options granted hereunder shall -------------------------------- be fully vested and exercisable by the Participant one year from the Effective Date hereof. The option rights herein are exercisable for the full amount or for any part hereof from time to time during the period of five (5) years from the Effective Date hereof and only by each participant. 4. Nontransferability. No option hereby shall be transferable other than ------------------ by Will or by the laws of descent and distribution. No option or interest therein may be transferred, assigned, pledged, or hypothecated by the Participant during the lesser of (1) five years from the Effective Date hereof; or (2) his lifetime, by operation of law or otherwise, or be made subject to execution, attachment, or similar process. 5. Effective Date. The Effective Date of this Agreement shall be January --------------- 4, 1999. 6. Acknowledgment. The undersigned Participant has read and understands -------------- this Agreement and the law and the terms and conditions of the Plan and hereby agrees to be bound by all of the terms and conditions thereof. COMPANY: DYNACQ INTERNATIONAL, INC. By: /s/ Chiu Chan ------------------------------ Title: President and Chairman PARTICIPANT: /s/ Philip Chan --------------------------------- EX-10.38 3 STOCK OPTION AGREEMENT FOR GLENN RODRIGUEZ EXHIBIT 10.38 1998 STOCK OPTION AGREEMENT FOR ------------------------------- 1995 INCENTIVE STOCK OPTION PLAN FOR ------------------------------------ EMPLOYEES AND EMPLOYEE DIRECTORS -------------------------------- OF -- DYNACQ INTERNATIONAL, INC. -------------------------- The parties to this Agreement are DYNACQ INTERNATIONAL, INC., a Nevada Corporation (the "Company") and Glenn Rodriguez (the "Participant"). GRANT OF OPTION --------------- The Company hereby grants to Participant the right, privilege, and option to purchase up to 30,000 (twenty-four thousand) shares of common stock of the Company of a purchase (grant) price of $2 3/8 per share, in accordance with the terms and conditions of the 1995 Incentive Stock Option Plan for Employees and Employee Directors approved by the Company's Board of Directors on August 31, 1995 (the "Plan"). The Plan, a copy of which is attached hereto, is incorporated herein by this reference. 1. Notice of Exercise. Subject to the provisions set forth in Paragraph ------------------ 8 of the Plan, any option granted under this Agreement may be exercised at any time and from time to time in whole or in part by written notice delivered to the Company. Such notice shall state the number of shares being exercised and shall specify a date, not more than (10) days from the date of such notice, as the date on which full payment for the option price for the number of shares specified shall be made thereof at the principal office of the Company. Upon receipt of payment, the Company shall instruct its transfer agent to issue such shares provided that if any law or regulation requires the Company to take action with respect to the shares specified in the notice, before the issuance thereof, then the date of delivery of such shares shall be extended for the period necessary to take such action which may include registration of the stock under applicable law. 2. No Shareholder Rights. The Participant acknowledges that he has no --------------------- rights as a shareholder with respect to shares for which the option has not been exercised, and the Participant shall have no rights with respect to such shares unless otherwise conferred hereby. 3. Option Rights and Holding Period. The options granted hereunder shall -------------------------------- be fully vested and exercisable by the Participant one year from the Effective Date hereof. The option rights herein are exercisable for the full amount or for any part hereof from time to time during the period of five (5) years from the Effective Date hereof and only by each participant. 4. Nontransferability. No option hereby shall be transferable other than ------------------ by Will or by the laws of descent and distribution. No option or interest therein may be transferred, assigned, pledged, or hypothecated by the Participant during the lesser of (1) five years from the Effective Date hereof; or (2) his lifetime, by operation of law or otherwise, or be made subject to execution, attachment, or similar process. 5. Effective Date. The Effective Date of this Agreement shall be January -------------- 4, 1999. 6. Acknowledgment. The undersigned Participant has read and understands -------------- this Agreement and the law and the terms and conditions of the Plan and hereby agrees to be bound by all of the terms and conditions thereof. COMPANY: DYNACQ INTERNATIONAL, INC. By: /s/ Chiu Chan --------------------------------------- Title: President and Chairman PARTICIPANT: /s/ Glenn Rodriguez ----------------------------------------- EX-10.39 4 HOSPITAL LEASE AGREEMENT EXHIBIT 10.39 HOSPITAL LEASE AGREEMENT THE STATE OF TEXAS COUNTY OF HARRIS This Lease, dated ___________ ______, 1998, and entered into by and between the Landlord and Tenant identified hereinbelow. 1. DEFINITIONS AND BASIC PROVISIONS. 1.1 Parties and Addresses. The parties hereto and their respective addresses are as follows: (1) Landlord: Dynacq International, Inc. (2) Landlord's Address: 4301A Vista, Pasadena, Texas 77504 (3) Tenant: Vista Community Medical Center, L.L.C. (4) Tenant's Address: 4301B Vista, Pasadena, Texas 77504 (5) Tenant's Taxpayer Identification Number:______________ 1.2 Defined Terms. The following terms shall be deemed to be defined terms of this Lease for all purposes. Each of the following definitions and basic provisions shall be construed in conjunction with and limited by the reference thereto in other provisions of this Lease: (1) Fixed Minimum Rent: $3.00 per net rentable square foot annually, for the Terms hereof, payable $ 57,500.00 per month for the full term of this lease. (2) Leased Premises: Those certain premises known as 4301B Vista, Pasadena Texas, containing approximately 23,000 square feet of net rentable area, as herein defined and all fixtures and equipment as reflected on the attached "Exhibit D". The Leased Premises are substantially reflected on the attached Floor Plan and being located in the Building. (4) Commencement Date: February 1, 1998 (5) Term: The period beginning on the commencement date and continuing for 60 months with a series of options, in the Lessee, to renew the lease for three additional 60 month terms. (6) Rent: All Fixed Minimum Rent and Additional Rent. (7) Additional Rent: All rent and other sums payable hereunder from Tenant to Landlord, other than Fixed Minimum Rent. (8) Base Year: The Calendar Year 1999. (9) Operating Expenses: All expenses, costs and disbursements (but not replacement of capital items nor specific costs billed to and paid by specific tenants, except as otherwise hereinafter provided) of every kind and nature which Landlord shall pay or become obligated to pay because of, or in connection with the ownership, management, maintenance and operation of the Building, the Common Areas and related facilities, including but not limited to the following: 1 (i) compensation, fees, wages and salaries of all contractors (including property management companies) or employees engaged in the operation management and/or maintenance, or access control, and any personnel who may provide traffic relating to egress and egress to and from the parking areas to the adjacent public streets; all taxes, insurance and benefits relating to contractors or employees providing these services shall be included; (ii) all supplies, tools, equipment and materials used in operations and maintenance; (iii) costs of all utilities, including but not limited to, the cost of water and power, heating, lighting, air conditioning and ventilating, telephone, cable TV, garbage removal, and said other utilities as are required for the operation of the Building. (iv) costs of all maintenance and service agreements and the equipment therein, including, but not limited to, access control service, window cleaning and elevator maintenance; (v) cost of all insurance, including, but not limited to, the cost of casualty and liability insurance; (vi) costs of repairs and general maintenance; (vii) amortization of the costs of installation of capital improvements that reduce operating costs or which may be required by governmental authority; such costs to be amortized over such reasonable period as Landlord shall determine with a return on capital at the then current interest rate on the unamortized balance or at such higher interest rate as may have been paid by Landlord on funds borrowed for the purpose of constructing such capital improvements; (viii) Landlord's central accounting and audit costs; and (ix) all other costs and expenses which would generally be regarded as operating and maintenance costs and expenses. (10) Escalations: The dollar amount by which the Operating Expenses exceed the actual Building Operating Expenses for the calendar year 1998. (11) Pro Rata Share: 100. percent ( 100%), provided that if the Building is expanded or contracted, Tenant's Pro Rata Share shall increase or decrease, as the case may be, such that it will equal a fraction, the numerator of which is the net rentable area of the Leased Premises, and the denominator of which is the net rentable area of the Building, which is approximately 23,000. (12) Permitted Use: General Medical Hospital, provided such use is granted only to Tenant, and complies with all laws, ordinances and statutes. (13) Floor Plan: The outline of the Leased Premises as depicted in Exhibit "B" attached hereto and made a part hereof for all purposes. (14) Interior of the Leased Premises: Standard office front and entrance (including without limitation, all plate glass and exterior doors), all of the interior wall framing, floors and floor covering, ceiling and interior staining and finishes, all interior doors and hardware, all interior electrical conduits and appurtenances, mechanical machinery and equipment, all interior electrical fixtures, interior plumbing and plumbing fixtures, Tenants' trade fixtures, and all other parts in the interior of Lease Premises. 2 (15) Building: The building in which the Leased Premises are situated, being generally known as Vista Medical Center Professional Bldg. (16) Common Area: Those parts of the Building and the Land and related facilities designated by landlord from time to time for the common use of all tenants. Including among other facilities, parking areas, sidewalks, landscaping, curbs, loading areas, private streets and alleys, automobile entrances, exits and driveways, entranceways, open (enclosed or otherwise), lighting facilities, drinking fountains, public toilets, signs, service areas, common utility lines, pipes, and/or conduits, and the like. (17) Land: The lot, tract or parcel of land upon which the Building is situated, in Harris County, Texas as more particularly described by metes and bounds on Exhibit "A" attached hereto and made a part hereof for all purposes, plus any contiguous parcels or strips of land which currently are owned by Landlord or leased to Landlord by lease agreement or easement, and are used in connection with or service the Building or any part thereof. (18) Security Deposit: The sum $57,500 to be deposited by Tenant with Landlord, and held by Landlord pursuant to the terms hereof. (19) Late Charge: $0.05 per each dollar overdue, per month. (20) Lease: This Hospital Lease Agreement. (21) Expiration Date: The last day of the Term hereof, which date is contemplated as being January 31, 2004 (22) Broker (s): None. 2. GRANTING CLAUSE. In consideration of the Rent reserved and the covenants and agreements herein contained on the part of the Tenant to be observed and performed, Landlord hereby demises, lets and leases unto Tenant, and Tenant hereby rents from Landlord, the Leased Premises. 3. RENT. 3.1 Fixed Minimum Rent. Tenant promises and agrees to pay to Landlord for the original Term of this Lease, at the Landlord's Address or at such other place designated by Landlord, without any prior demand therefor and without any deduction or setoff, the Fixed Minimum Rent. The Fixed Minimum Rent shall be paid by Tenant, paying to Landlord the Monthly Minimum Rent Payment on or before the first day of each month during the Term hereof. A monthly Minimum Rent Payment for any fractional month at the beginning or the end of the Term shall be prorated based upon the actual number of days in such month. It is agreed that, notwithstanding anything to the contrary, the Leased Premises are leased for the Fixed Minimum Rental for the original Term hereof, payable at the time of the making of this Lease and that the provisions herein contained for the payment of same in Monthly Minimum Rent Payments are for the convenience of Tenant only, and that, upon default in the payment of any such Monthly Minimum Rent Payment, as herein allowed, the whole of the Fixed Minimum Rental reserved for the whole of the Term herein provided for and then remaining unpaid shall, at the option of Landlord, become due and payable upon notice and demand. Landlord expressly reserves the 3 right to apply the payment of Fixed Minimum Rent to any items of non-rent that are not paid by Tenant. 3.2 Escalations. (1) In addition to the Fixed Minimum Rent as specified herein, Tenant agrees to pay to Landlord as Additional Rent its Pro Rata Share of the Escalations. (2) Tenant's Pro Rata Share of Operating Expenses for the remainder of the calendar year after the Commencement Date and for each subsequent calendar year shall be estimated by Landlord, and written notice thereof shall be given to Tenant. Upon receipt of said written notice from Landlord, the estimated Escalations shall be due and payable as herein provided. For any such remainder of the calendar year after the Commencement Date, Tenant agrees to pay Landlord each month, at the same time the Monthly Minimum Rent Payment is due, an amount equal to the amount of such estimated monthly Pro Rata Share of Escalations for the remainder of such calendar year; and during each calendar year thereafter Tenant agrees to pay Landlord each month, at the same time the Monthly Minimum Rent Payments are due, an amount equal to one-twelfth (1/12th) of the estimated annual Pro Rata Share of Escalations due. Landlord agrees to limit Tenants pro rata share of Common Area Maintenance and Insurance Charges, excluding Taxes, to ten (10) percent per year. If any portion of Operating Expenses increase during a calendar year, Landlord may revise the estimated Escalations during such year by giving Tenant written notice to that effect, and thereafter Tenant agrees to pay Landlord, in each of the remaining months of such year, an additional amount equal to the amount of such annual increase in the estimated Pro Rata Share of Escalations divided by the number of months remaining in such year. (4) After the end of each calendar year, Landlord shall prepare and deliver to Tenant a statement showing Tenant's Pro Rata Share of the total amount of Escalations. Within ten (10) days after receipt of the aforementioned statement, Tenant agrees to pay Landlord the remaining amount owed by Tenant. However, if Tenant has paid more than its Pro Rata Share of the actual Escalations, Landlord shall either pay to Tenant within a reasonable time the amount of such excess, or at Landlord's option, apply such excess to any sums due or to become due from Tenant to Landlord. (5) Notwithstanding anything herein to the contrary, in no event will the Fixed Minimum Rental provided for in this Lease ever be reduced. 3.3 Payment For Other Services. Tenant agrees to pay Landlord as Additional Rent all charges for any services, goods, or materials furnished at Tenant's request which are not required to be furnished by Landlord under this Lease, immediately upon demand, plus an administrative fee not to exceed fifteen percent (15%) of the cost of the requested services, good or materials. 3.4 Late Charge. If any Rent payment is not received by Landlord on or before the 10th day of the month, the Late Charge shall be due and payable (in addition thereto). Said Late Charge is for the purpose of reimbursing Landlord for the extra costs and expenses incurred in connection with the handling and processing of such late payment. 4. SECURITY DEPOSIT. Landlord hereby acknowledges receipt from Tenant of the Security Deposit, which sum is to be held by Landlord as security for the full and faithful performance by Tenant of all the terms, covenants and conditions of this Lease to be kept and performed by Tenant during the Term hereof. If Tenant defaults with respect to any provision of this Lease, including but not limited to the provisions relating to the payment of Rent, Landlord may (but shall not be 4 required to) use, apply or retain all or any part of the Security Deposit for the payment of any Rent or any other sum in default, or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said deposit is so used or applied Tenant shall, on demand, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount, and Tenant's failure to do so shall be a default under the Lease. Landlord shall no be required to keep the Security Deposit separate from its general funds and may commingle said deposit with any other funds. Tenant shall not be entitled to interest on said deposit. It is expressly understood that the Security Deposit shall not be considered an advance payment of Rent or a measure of Landlord's damages in the event of default by Tenant. If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, the Security Deposit or any balance thereof shall be returned to Tenant (or, at Landlord's option, to the last approved assignee of Tenant's interest under this Lease) within thirty (30) days following the expiration of the Lease Term. In the event Landlord transfers its interest in the Leased Premises during the Lease Term, Landlord may assign the Security Deposit to the transferee and thereafter shall have no further liability for the return of such deposit. 5. COMMON AREAS 5.1 Parking Facilities and Other Common Areas. During the Term of this Lease, Tenant shall be entitled to the nonexclusive use (in common with others entitled thereto) of the Common Areas. Subject to the terms of this Lease and any parking rules of Landlord, the Parking Spaces shall be provided to Tenant located in parking areas provided by Landlord for the common parking of all tenants of the Building. All Common Areas which Landlord elects or is obligated to provide and maintain shall at all times be subject to the exclusive control and management of Landlord, and Landlord shall have the right form time to time to establish, modify and enforce rules and regulation with respect to all such facilities and areas so provided by Landlord. Landlord shall have the right, in its sole discretion, to change the number, to re-stripe and redesign, to relocate or modify the entrances and exits to and from the parking areas and parking spaces, and to provide additional entrances and exits if Landlord so elects. Further, Landlord reserves the right to change from time to time the dimensions and location of the Common Areas as well as the location, dimensions, identity and type of any facilities and improvements located thereon and to construct additional building or additional stories on the Building or other improvements on the Land, and to eliminate facilities and improvements (other than the Building) from the Land Tenant shall not conduct, solicit business or display merchandise on or within the Common Areas, or distribute handbills therein, or take any action which would interfere with the rights of other persons to use the Common Areas. Landlord may temporarily close any part of the Common Areas for such periods of time as Landlord deems necessary to prevent the public from obtaining prescriptive rights or to make repairs or alterations. 5.2 Parking Regulations. Landlord shall have the right to maintain and operate lighting facilities on all of the parking areas and to police all of the parking and other Common Areas, including, without limitation, the right to discourage non-tenant parking to designate and regulate parking areas, and to do and perform such other acts with respect to said Common Areas as in the judgement of Landlord or Landlord's counsel may be legally necessary to prevent a dedication thereof to the public. 5.3 Revocable License. All Common Areas and facilities not within the Leased Premises, which Tenant may be permitted to use and occupy, are to be used and occupied under a revocable license, and if the amount of such areas be diminished, Landlord shall not be subject any liability nor shall Tenant be entitled to any compensation or diminution or abatement or Rent, 5 nor shall such diminution of such areas quality and shall be in accordance with the then existing federal, state and local regulations regarding health and safety, and shall be approved in writing by Landlord prior to installation. All such repairs and replacements of the Interior of the Leased Premises made by Tenant in and to the Leased Premises pursuant to this Section shall constitute a part of the fee estate remainder subject to this Lease, and Tenant's rights, title and interest therein shall be limited to its right of possession and use pursuant to the provisions of this Lease and subject to all of the terms and provisions hereof. If Tenant shall neglect and/or fail to observe, keep or perform any of its obligations to maintain and repair and Leased Premises in the time and manner provided in this Article and if such neglect and/or failure shall continue for ten (10) days after notice thereof, Landlord shall have the right to perform said maintenance and repairs. In the event Landlord does so perform Tenant's responsibilities for said maintenance and repairs, Landlord shall furnish Tenant a statement of the actual cost thereof, plus an administration fee not to exceed fifteen percent (15%) of the actual costs, which statement shall be immediately payable by Tenant. 6. MAINTENANCE AND REPAIRS. 6.1 Landlord's Obligations. Landlord shall maintain and repair at its own cost and expense throughout the Term of this Lease, the Structural parts of the Building, provided, however, in the event of damage to said Structural Parts which results from an actual or attempted entrance to, or exit from the Lease Premises for any unlawful purpose by tenant, tenant shall bear the entire cost of such maintenance and repair. Landlord shall further provide or cause to be provided maintenance of the Common Areas, plumbing, air conditioning systems, elevators (if any), and fire protection sprinkler systems (if any). 6.2 Tenants' Obligations. Tenant shall maintain and repair at its own cost and expense the Interior of the Leased Premises. All maintenance and repairs shall be done with materials and equipment of good quality and shall be in accordance with the existing federal, state, and local regulations regarding health and safety, and shall be approved in writing by landlord prior to installation. All such repairs and replacements of the Interior of the Leased Premises made by tenant in and to the Leased Premises pursuant to this Section shall constitute a part of the fee estate remainder subject to this lease, and tenants' rights, title and interest therein shall be limited to its right of possession and use pursuant to the provisions of this Lease and subject to all of the terms and provisions hereof. If Tenant shall neglect and/or fail to observe, keep or perform any of its obligations to maintain and repair and Leased Premises in the time and manner provided in this Article and if such neglect and/or failure shall continue for ten (10) days after notice thereof, landlord shall have the right to perform said maintenance and repairs, landlord shall furnish Tenant a statement of the actual cost thereof, plus an administration fee not to exceed fifteen percent (15%) of the actual costs, which statement shall be immediately payable by Tenant. 7. TAXES ON TENANT'S PROPERTY. Tenant shall be responsible for and shall pay, before same becomes delinquent, all federal, state, county, and local taxes levied or assessed whether they be attributable to the Land, Building, Common Areas or related facilities, or the operation thereof and upon any and all personal property of any kind owned by or placed in, on or about the Leased Premises by tenant during the term of this Lease, and all taxes and assessments on trade fixtures, furniture, and all sales, excise and other taxes on Tenant's business shall be paid entirely by Tenant. If any such taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property, or if the assessed value of Landlord's property is increased by inclusion of personal property, furniture or fixtures placed by Tenant in the Leased Premises, Tenant shall pay to Landlord upon demand that part of such taxes for which Tenant is 6 primarily liable hereunder. 8. INSURANCE. 8.1 Hold Harmless. Tenant covenants and agrees to indemnify and save Landlord harmless from and against any and all costs, liability or expense arising out of any claims of any person or persons on account of any occurrence in, upon or at the Leased Premises, or resulting from the occupancy or use thereof by Tenant, or by any person or persons holding or using the Leased Premises thereunder, occasioned in whole or in part by reason of the improper and/or lack of control and supervision throughout the Common Areas of property owned or controlled by Tenant, or by reason of the use or misuse of the parking area or any other Common Areas by Tenant or by any person or persons holding or using the Leased Premises, or any part thereof, under Tenant, including without limitation, Tenant's clients, invites, agents, contractors, employees, servants, subtenants, assignees or licensees, and without limiting the generality of the foregoing, Tenant further covenants and agrees to indemnify and save Landlord harmless from and against any penalty, damage or charge incurred or imposed by reason of any violation of law or ordinance by Tenant or any person or persons holding under Tenant or using the Leased Premises or the Building or Common Areas, and from any cost, damage or expense arising out of the death of or injury to any person or persons holding under Tenant or using the Lease Premises or the Building or Common Areas and from any cost, damage or expense arising out of the death of or injury to any person or persons holding under tenant or using the Leased Premises, or any part thereof, or any part of the Building or Common Areas. In case any action or claim to which Landlord is entitled to indemnification shall be brought or asserted in any way against Landlord or Tenant, Tenant shall immediately notify Landlord of the same and shall furnish Landlord with all relative information. Landlord shall be entitled, at Tenant's expense, to participate in, and to the extent that it wishes, to assume the defense thereof. 8.2 Tenant's Liability Insurance. Tenant agrees to maintain in force during the Term of this Lease a policy or policies of comprehensive public liability insurance, including property damage, written by one or more responsible insurance companies approved by Landlord and licensed to do business in Texas, which insurance companies shall be rated not less than A+8 by Best Guide Rating, insuring Tenant and naming as additional named insureds, Landlord, Landlord's property management company as agent, and such other persons, firms, or corporations as are designated by Landlord, against loss of life, bodily injury and property damages in which the limit of public liability shall be not less than ONE MILLION AND NO/100 DOLLARS ($ 1,000,000.00) single limit bodily injury and in which the limit of property damage liability shall be not less than FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000.00). Each such policy shall be non-cancellable for any cause without first giving Landlord ten (10) days prior written notice. Subject to all of the foregoing, the insurance coverage required to be furnished by Tenant pursuant to this Section may be in the form of a blanket policy covering all of Tenant's operations. 8.3 Tenant's Fire Insurance. Tenant agrees to maintain in force during the Term of this Lease a policy or policies of fire and extended coverage insurance in the case of fire sprinkler leakage, malicious mischief, vandalism and other extended coverage perils, for the full insurable replacement value of all additions and of all office furniture, office equipment, merchandise, and other items of Tenants' property within or on the Leased Premises. 7 8.4 Tenant's Workers Compensation. Tenant agrees to maintain in force during the Term of this Lease workers compensation and employers liability insurance with a waiver or subrogation endorsement, in a form and amount satisfactory to Landlord. 8.5 Evidence of Insurance. A copy of each such policy or a certificate of such insurance required to be maintained by Tenant shall be delivered to Landlord upon the Commencement Date of this Lease and annually thereafter upon the first day of each Lease Year throughout the Term of this Lease. If Tenant fails to procure said insurance or deliver to Landlord, such evidence thereof, Landlord may procure same and Tenant shall reimburse Landlord for the cost thereof immediately upon demand. 8.6 Landlord's Liability Insurance. Landlord agrees to maintain in force during the Term of this Lease a policy or policies of comprehensive public liability insurance, including property damage, written by one or more responsible insurance companies licensed to do business in Texas and insuring Landlord against loss of life, bodily injury and/or property damage with respect to the Common Areas and the operation of the Building, the policy limits of which to be in amount satisfactory to Landlord. In addition, Landlord may maintain in force such umbrella policy or policies of public liability insurance as Landlord, in its sole discretion, may deem appropriate. Landlord's failure to procure any such insurance shall not invalidate this Lease or lessen Tenant's liability hereunder. 8.7 Landlord's Fire Insurance. Landlord agrees to procure and keep in effect during the original and any extended Term of this Lease a policy or policies of fire and extended coverage insurance covering the Building, including rent abatement, vandalism and malicious mischief coverage, written by an insurance company authorized to do business within the State of Texas, and in an amount deemed satisfactory to Landlord. Such insurance shall provide protection against losses so insured against for the sole and exclusive benefit of Landlord. The full amount of any proceeds payable thereunder shall be payable to Landlord, and Tenant shall not be entitled to, and shall have no interest in, such proceeds or any part thereof. Tenant is advised to procure such insurance as Tenant deems appropriate to protect its interest. 8.8 Waiver of Subrogation. To the extent permitted by the laws and insurance regulations of the State of Texas, the respective parties hereto hereby waive and release any and all claims, demands and causes of action which each might have against the other party, either for damage to or loss of any part of the Leased Premises or of any adjoining premises belonging to Landlord, arising from perils ordinarily insured against under a standard fire and extended coverage insurance policy issued in the State of Texas, regardless of whether such damage or loss is occasioned by the negligence of the respective parties, or either of them, their agents, servants or employees. 9. UTILITIES AND SERVICES. Provided Tenant is not in default of any term, condition or covenant of this Lease, Landlord agrees to furnish or cause to be furnished to the Leased Premises gas, water (for drinking, cleaning and lavatory purposes only), and electricity during the term of this Lease. Landlord shall furnish tempered and refrigerated water at those points of supply designated by Landlord in the Common Areas, heated and refrigerated air conditioning in season (at temperatures, in amounts and at times considered by Landlord to be standard or in compliance with any governmental regulations; such service after hours, on Saturday afternoons, Sundays and holidays will be furnished only upon the prior written request of Tenant who shall bear the entire cost thereof). Landlord shall furnish janitorial service, in the manner and to the extent deemed standard by Landlord during the periods and hours as such services are normally furnished to all 8 tenants. The work of the Building janitor shall not be hindered by Tenant. Landlord shall furnish routine maintenance, painting and lighting service for all Common Areas in the manner and to the extent deemed by Landlord to be standard. Tenant will pay all telephone charges. Landlord shall not be liable in damages or otherwise for failure, stoppage or interruption of any such service nor shall the same be construed as an eviction of Tenant, work an abatement of Rent, or relieve Tenant from the operation of any covenant or agreement set forth herein; but in the event of any failure, stoppage or interruption thereof not caused by Tenant or Tenant's agents, employees, contractors, clients or invites, Landlord shall use reasonable diligence to resume service promptly. Notwithstanding anything hereinabove to the contrary, Landlord reserves the right from time to time to make reasonable modifications to the above standards for services and utilities. 10. EXPANSION. Landlord and Tenant covenant and agree as follows: (1) Landlord reserves the right to make changes in and to alter the Building, automobile parking areas, and other Common Areas, and this right shall include the right to elevate or multipledeck or to provide underground parking facilities. This may mean all or a portion of Tenants view may be blocked, and if such occurs, Tenant consents to same without any right to compensation. In no event shall Landlord be required to maintain any specific parking-to-building ratio for any automobile parking areas. (2) With respect to any premises adjoining or adjacent to the Building which Landlord may now own or henceforth acquire, by deed, easement contract, license or otherwise Landlord expressly reserves unto itself, its successors and assigns, the right (but Landlord, its successors and assigns shall have no obligation) to develop, dedicate, finance, improve, lease, manage, operate and/or convey the adjoining or adjacent premises, or any part thereof, for whatever use or purpose Landlord or Landlord's successors or assigns shall deem appropriate, including, without limitation, the use thereof for expansion of the Building; and this Lease shall not be construed to limit Landlord's rights, or to restrict the use of said adjoining or adjacent premises or any part thereof. The foregoing provisions of this paragraph shall not be construed to give Tenant any rights in common areas within any of the adjoining or adjacent premises, including without limitation, any rights in the parking areas that might be provided in adjoining or adjacent premises. (3) No such permitted change, alteration, addition to or consolidation of the Building, including without limitation, the performance of all construction and/or excavation required thereof, shall invalidate this Lease or affect Tenants' obligation under any provision hereof and tenant agrees to ratify and approve the modified Building Plan, if any, in writing. Tenant expressly waives all claims for inconvenience, interruption and/or loss of Tenants' business or other damage due to such permitted change, alteration, addition or consolidation, unless caused by gross negligence by the Landlord. 11. PROPERTY OBLIGATIONS 11.1 Tenant's Property. Landlord shall not be liable for any damage to or loss of personal property placed in or about the Leased Premises by Tenant or Tenant's agents, employees, clients, guests, invites or others, resulting from fire, theft, explosion, flood, windstorm or other casualty caused by Acts of God or by the acts or omissions of other occupants of other space in the Building or caused by operations during construction of any public or quasi public work. All property kept or stored within the Leased Premises shall be kept or stored at the risk of Tenant only, and Tenant shall hold Landlord harmless from any claims arising out of damage to the same, including subrogation claims by Tenant's insurer, if any, unless such damage shall be caused by the gross negligence of Landlord. 9 11.2 Tenant Fixtures, Alterations and Personal Property. Tenant shall not make or allow to be made any alterations or physical additions in or to the Lease Premises without the prior written consent of Landlord. Upon Tenant's receipt of Landlord's written approval and upon Tenant's payment to Landlord of the fee prescribed by Landlord (which fee shall be in consideration for the work of Landlord and its employees and representatives and the reviewing of the plans and specifications), Tenant may proceed to the construction of the approved alterations, but only so long as they are in strict compliance with the plans and specifications and with the provisions of this Section. All alterations shall be made at Tenant's expense, either by Tenant's contractors which have been approved in writing by Landlord, or at Landlord's option, by Landlord's contractors on terms reasonably satisfactory to Tenant, including a fee of ten percent (10%) of Landlord's actual cost of the work to cover Landlord's overhead. None of Tenant's construction, alterations or improvements shall (i) alter the exterior appearance of the Building in any manner, (ii) adversely affect the structure or safety of the Building or any portion thereof, (iii) fail to comply with all building, safety, fire and other codes and governmental and insurance requirements, or (iv) fail to be completely promptly and in a good and workmanlike manner. All trade fixtures be installed by Tenant shall be new or completely reconditioned. At Landlord's option any such approved additions, alterations, improvements and/or fixtures furnished or installed by Tenant which are sufficiently affixed or annexed to the Leased Premises so as to become a part thereof, other than unaffixed movable trade fixtures, shall upon the expiration or earlier termination of this Lease, become the property of Landlord; or in the alternative, Landlord may require Tenant to remove said additions, alterations, improvements and/or fixtures, as well as all unaffixed movable trade fixtures and operating equipment of Tenant, upon the expiration or earlier termination of this Lease, and thereafter Tenant will restore the Leased Premises to the condition they were in upon delivery of possession thereto under this Lease, reasonable wear and tear only expected. Any damage to the Leased Premises caused by such installation and/or removal of Tenant's fixtures and equipment shall be repaired at Tenant's sole cost and expense. The provisions of this Section shall expressly survive the expiration or earlier termination of this Lease. 11.3 Liens. Tenant shall neither permit nor suffer an involuntary lien to be filed or affixed against the Building, the Leased Premises, the fee simple title of the Land or any leasehold estate therein or any part thereof, and shall not voluntarily grant any lien or security interest therein. In the event any such involuntary or voluntary lien, including without limitation, mechanic's lien and tax lien, is filed and/or affixed against the Building, the Leased Premises the fee simple title of the Land or any leasehold estate therein, or any part thereof, or against any fixtures, equipment, furnishings therein or all types of work and improvements comprising the Interior of the Leased Premises (which when completed shall constitute a part of the fee estate remainder subject to the terms and provisions of this Lease) and Tenant has not caused the same to be released and discharged of record within ten (10) days after notice thereof, same shall constitute a default hereunder. Upon such default, in addition to any other remedies available to Landlord herein, Landlord may release and discharge of such lien, Tenant shall repay to Landlord immediately upon demand as Additional Rent hereunder all such sums disbursed or deposited by Landlord. Nothing contained herein, however, shall imply any consent or agreement on the part of Landlord or anyone holding under Landlord to subject Landlord's interest to liability under any mechanic's or other lien law, regardless of whether the performance or the furnishing of such work, labor, services or materials to Tenant or anyone holding under Tenant shall have been consented to by Landlord. 10 12. SUBORDINATION/ATTORNMENT. 12.1 Subordination. Tenant covenants and agrees promptly upon request of Landlord to execute and deliver, in a recordable form provided by Landlord, an acknowledgment of the subordination of this Lease to any mortgage, deed of trust, security agreement or other lien or encumbrance resulting from any method of financing or refinancing, presently or henceforth placed upon the Land and/or the Building and any future expansion thereof or additions thereto, and to all advances of money or other value heretofore or hereafter made upon the security thereof. 12.2 Collateral Assignment by Landlord. Subject to the foregoing provisions of this Article, Landlord reserves the right, without notice to or consent of Tenant, to assign this Lease and/or any and all Rent hereunder as security for the payment of any mortgage loan, deed of trust loan, or other method of financing or refinancing. 12.3 Attornment. In the event any such mortgage is foreclosed, or in the event of the exercise of the power of sale under any such deed of trust, Tenant shall consider the purchaser and the foreclosure trustee's sale shall to be the Landlord hereunder, and Tenant will attorn to the purchaser and will recognize the purchaser as the owner and Landlord under this Lease. 13. USE AND OPERATION 13.1 Use of Leased Premises. The Leased Premises shall be used and occupied by Tenant solely for the Permitted Use and Tenant expressly agrees that no use shall be made or permitted or acts done by Tenant and/or any agents, employees, subtenants, or assignees of Tenant, which shall increase the existing rate of insurance coverage or cause cancellation of such insurance coverage. Tenant shall not (i) permit any objectionable or unpleasant odors to emanate from the Leased Premises; nor place or permit any radio, television, loudspeaker or amplifier on the roof or outside of the Leased Premises or where the same can be seen or heard from outside the Leased Premises; (ii) place any antenna, awning or other projection on the exterior of the Leased Premises; (iii) take any other action which would constitute a nuisance or would disturb or endanger other tenants of the Building or unreasonably interfere with their use of their respective premises; or (iv) do anything which would tend to injure the reputation of the Building. 13.2 Name of Business. Tenant promises and agrees to conduct the business above described in and upon the Leased Premises under Tenant's professional name, and Tenant shall not change such name without the prior written consent of Landlord, which consent shall not be unreasonably withheld. 13.3 Suitability of Premises. Tenant warrants to Landlord that it has, prior to the execution hereof, full inspected the Leased Premises, the building (including common areas), the property and all items related thereto, and that it has made, performed, obtained and received all studies, inspections, reports, diagnoses and tests that Tenant desires relative to the Leased Premises the building (including common areas), the property and all items related thereto and Tenant's proposed business use of the Leased Premises. Tenant understands and agrees that it is accepting the Leased Premises the building (including common areas), the property and all items related thereto in its present "AS- IS", "WHERE-IS" condition, "WITH ALL FAULTS" and without any warranty or guarantee whatsoever. Tenant warrants that it used all due diligence in conducting all studies inspections, diagnoses and tests on the Leased Premises the building (including common areas), the property and all items related thereto that Tenant deemed necessary or appropriate. Tenant acknowledges that Landlord has not made and does not make, and Landlord hereby disclaims, any and all warranties, express or implied, which in any way relate to the 11 Leased Premises the building (including common areas), the property and all items related thereto or the condition thereof, including without limitation any implied warranty of suitability or habitability. Tenant further understands that Landlord has relied upon Tenant's having made all inspections Tenant desired prior to leasing the Leased Premises from Landlord, and that but for such inspections by Tenant, Landlord would not have leased the Leased Premises to Tenant. Additionally, the parties agree that the obligation of Tenant to pay all rental and other sums hereunder provided to be paid by Tenant, and the obligation of Landlord to perform Landlord's other covenants and duties hereunder constitutes independent, separate and unconditional obligations to be performed at all times provided for hereunder, save and except only when an abatement thereof or reduction therein is expressly provided for herein and not otherwise. It is agreed that in the event Landlord commences any proceedings against Tenant for nonpayment of rental or any other sum due and payable by Tenant hereunder, Tenant shall not interpose any counterclaim or other claim against Landlord of whatever nature or description in any such proceedings; and in the event Tenant interposes any such counterclaim or other claim against Landlord in any such proceeding, Landlord and Tenant stipulate and agree that, in addition to any other lawful remedy of Landlord, upon motion of Landlord, such counterclaim or other claim asserted by Tenant shall be severed out of the proceedings instituted by Landlord and Landlord may proceed to final judgment separately and apart from and without consolidation with or reference to the status of such counterclaim or any other claim asserted by Tenant. 13.4 Operation of Business. Tenant shall operate all of the Leased Premises during the entire Lease Term using sound business practices, due diligence and efficiency. Tenant shall provide, install and at all times maintain in the Leased Premises all suitable furniture, fixtures, equipment and other personal property and such personnel as may be necessary for the conduct of Tenant's business therein in a businesslike manner. 14. SIGNS/ADVERTISING. 14.1 Signs. No signs of any kind or nature, symbol or identifying marks shall be put on the Building, the Land, the Common Areas, or within the Premises so as to be visible from the Common Areas or exterior of the Building, without prior written approval of Landlord. All signs or lettering shall conform in all respects to the sign and/or lettering criteria established by Landlord. Landlord agrees to provide Tenants name on the directory board. 14.2 Advertising of Tenant. No advertising medium originating from within the Leased Premises shall be utilized by Tenant which can be heard or experienced outside the Leased Premises, including, without limiting the generality of the foregoing, flashing lights, searchlights, loudspeakers, phonographs, radios and television. Tenant shall not display, paint, place or cause to be placed, any handbills, bumper stickers or other advertising devices on any vehicle parked in the parking area of the Building, whether belonging to Tenant, Tenant's agent, or to any other person. Tenant shall not distribute, or cause to be distributed, any handbills or other advertising devices within the Building or Common Areas. 15. ASSIGNING, MORTGAGING, SUBLETTING. 15.1 Prohibitions. Tenant shall not transfer, assign, sublet, enter into any license or concession agreements, change ownership or hypothecate this Lease or the Tenants' interest into the Leased Premises nor permit the occupancy or use of any part thereof, without first procuring the written consent of the Landlord. Any assignment, mortgage, pledge, hypothecation, encumbrance, subletting or license of this Lease, the leasehold estate hereby created, or the Leased Premises or any portion thereof, either voluntary or involuntary, whether by operation of the law 12 or otherwise, without the prior written consent of the Landlord first had and obtained therefor, shall be null and void, at the option of the Landlord, and Landlord may declare a default and exercise all remedies available to Landlord under this Lease or at law. 15.2 Refusal of Consent. Without in any way limiting Landlord's right to refuse to give such consent for any other reason or reasons, Landlord reserves the right to refuse to give such consent unless Tenant remains fully liable during the unexpired Term of this Lease and Landlord further reserves the right to refuse to give such consent if, in Landlord's sole discretion and opinion, the quality of Landlord's operation is or may be in any way adversely affected during the term of the proposed new tenant is less than that of the Tenant as of the date hereof. 15.3 Conditions to Consent. Landlord may condition its consent to any assignment or subletting (i) upon Tenant's agreement to termination of this Lease and simultaneous creation of a new lease between Landlord and the proposed successor, and upon Tenant's giving its unconditional guaranty of such new lease in form and substance satisfactory to counsel for Landlord, or (ii) upon Tenant's agreement simultaneously with the execution of any sublease or assignment approved by Landlord, to name Landlord its agent for purposes of collection of rental from the sublessee approved by Landlord under any such sublease or assignment (in order to enable Landlord to maintain its collection and other relationships). 15.4 Reimbursement of Fees. Tenant agrees to reimburse Landlord for Landlord's reasonable attorney's fees incurred in conjunction with the processing and documentation of any such requested transfer, assignment, subletting, licensing or concession agreement, change of ownership or hypothecation of this Lease or Tenant's interest of ownership or hypothecation of this Lease or Tenant's interest in and to the Leased Premises, as well as in conjunction with any modification of this Lease. 15.5 Transactions Consented To. Each transfer, assignment, subletting, lease concession agreement and hypothecation to which there has been consent shall be by an instrument in writing in form satisfactory to Landlord and shall be executed by the transferor assignor, sublessor, licensor, concessionaire, hypothecator or mortgagor and the transferee, assignee, sublessee, licensee concessionaire or mortgagee in each instance, as the case may be: and each transferee, assignee, sublessee, licensee, concessionaire or mortgagee shall agree in writing for the benefit of the Landlord herein to assume, to be bound by, and to perform the terms, covenants and conditions of this Lease to be done, kept and performed by the Tenant. One (or more, if required by Landlord) executed copy of such written instrument shall be delivered to Landlord. Failure to first obtain in writing Landlord's consent or failure to comply with the provisions of this Article shall operate to prevent any such transfer, assignment, subletting, license, concession agreement or hypothecation from becoming effective. 15.6 Excess Rental. If the rental due and payable by any assignee or subtenant under any such permitted assignment or sublease (or a combination of the rental payable under such assignment or sublease plus any bonus or other consideration therefor or any payment incident thereto) for the Leased Premises (or any portion thereof) exceeds the rent payable under this Lease for the Leased Premises (or any portion thereof), Tenant shall be bound and obligated to pay to Landlord all such excess rental and other excess consideration within ten (10) days following receipt thereof by Tenant from such assignee or subtenant, as the case may be. 13 16. WASTE, NUISANCE, APPLICABLE LAWS. 16.1 Waste and Nuisance. Tenant shall not commit or suffer to be committed any waste in or upon the Leased Premises and shall not commit or suffer to be committed therein any nuisance or other act or thing which may disturb the quiet enjoyment of any other tenant in the Building, or which may disturb the quiet enjoyment of any person within the immediate vicinity of the Building. 16.2 Tenant's Compliance with Laws. Tenant shall, at Tenant's sole cost and expense, comply with all the requirements of all federal, state, county, municipal and other applicable authorities, now in force or which may hereafter be in force. 16.3 Landlord's Compliance with Laws. Landlord shall, at Landlord's sole cost and expense, comply with all the requirements of all federal, state, county, municipal and other applicable authorities, now in force or which may hereafter be in force. 17. DESTRUCTION. 17.1 Notice of Loss. Tenant shall give immediate notice to Landlord in the event of fire or other accidents or casualties within the Leased Premises or in or around the Building, and such other notice as prescribed by the fire and extended coverage insurance policy required herein to be carried thereon, and further, Tenant shall give immediate notice to Landlord of any defect in any of the fixtures or equipment located within the Leased Premises or in or around the building. 17.2 Premises Useable. In the event the Leased Premises shall be damaged by fire or other casualty, but shall not be rendered wholly or partially unusable, regardless of the time remaining in the Term of this Lease, Landlord may elect either (i) to cause such damage to be repaired, and the Fixed Minimum Rent shall not be reduced or abated unless the repairs are delayed beyond ninety (90) days after commencement of such repairs, and thereafter, only if Landlord is not diligently pursuing such repairs, and then only to the extent as may be equitable based upon the amount of damage, or (ii) to give Tenant written notice within sixty (60) days following the date of such occurance of its intention to terminate this Lease. Should Landlord decide to make repairs, the Landlord agrees to commence repairs promptly after the damage occurs. 17.3 Premises Unusable. If the Leased Premises shall be rendered partially or wholly unusable, Landlord may elect either (a) to cause such damage to be repaired and the Fixed Minimum Rent shall be reduced in proportion to Tenant's loss of effective use of the Leased Premises during such repair, or (b) to give Tenant written notice within sixty (60) days following the date of such occurrence of its intention to terminate this Lease. 17.4 Building Damaged. In the event all or part of the Building, other than the Leased Premises, shall be damaged or destroyed by fire or other casualty, and regardless of the time remaining in the original and any extended Term of this Lease, Landlord at its sole discretion may elect either (a) to cause such damage to be repaired or (b) to terminate this Lease by giving Tenant written notice within sixty (60) days following the date of such occurrence of its intention to terminate this Lease. Neither Fixed Minimum Rent nor any other sums due hereunder shall be abated or reduced. 17.5 Scope of Repair. In the event Landlord elects or shall be obligated to repair or restore any damage or destruction as aforesaid, the scope of the work shall be limited to the shell of the Building and Lease Premises. Landlord shall not be required to make repairs or replacements of any panels, decoration, trade fixtures, railings, floor covering, partitions or other 14 parts of the Interior of the Leased Premises or any other property installed or placed in the Leased Premises. Commencement of Repairs. Anything to the contrary herein notwithstanding, Landlord shall not be required to commence repairs and/or restoration prior to the expiration of sixty (60) days following the occurrence or the receipt by Landlord of the insurance proceeds covering said damage, whichever event shall first occur, provided, however, that if said repairs and/or restoration are not commenced at the end of such sixty (60) day period, unless commencement is prevented by an act beyond Landlord's control, Tenant may give Landlord thirty (30) days prior written notice of intent to terminate. If Landlord shall within said thirty (30) day period commence such repairs and/or restoration, the notice of intent to terminate shall cease to be operative and shall become without force and effect. 18. CONDEMNATION. 18.1 Total Taking. If all of the Leased Premises should be taken for any public or quasi public use under any governmental law, ordinance or regulation or by right of eminent domain or by private purchase in lieu thereof, then this Lease shall terminate and the Rent shall be abated during the unexpired portion of the Term, effective on the date physical possession is taken by the condemning authority. 18.2 Partial Taking. If any part (but not all) of the Building, Common Areas or the Leased Premises should be so taken, Landlord may terminate this Lease if Landlord, in its sole discretion, so elects. Any election to terminate this Lease in accordance with this provision shall be evidenced by written notice of termination to Tenant within thirty (30) days after the date physical possession is taken by the condemning authority. If this Lease is not so terminated, the Fixed Minimum Rent payable hereunder during the unexpired portion of the term shall be reduced in proportion to the area of the Leased Premises taken, effective on the date physical possession is taken by the condemning authority. 18.3 Award. All compensation awarded for any taking (or the proceeds of private sale in lieu thereof) of the Building, the Leased Premises or the Common Areas shall be the property of Landlord and Tenant hereby assigns its interests in any such award to Landlord 19. QUIET ENJOYMENT. So long as Tenant shall pay all Rent and other payments due hereunder and shall observe and perform all of the covenants on Tenant's part to be observed and performed hereunder, and Tenant is not in default hereunder, Tenant shall peaceably and quietly hold and enjoy the Leased Premises (including easement rights) for the entire Term hereof without interruption by Landlord or person or persons lawfully or equitably claiming by, through or under Landlord, subject, nevertheless, to all of the terms and provisions of this Lease and to the reservations, encumbrances and limitations affecting the title to the premises upon which the Building is situated. 20. DEFAULT AND REMEDIES. 20.1 Default. The following events shall be deemed to be the events of default by Tenant under this Lease: 15 (1) Tenant shall fail to pay any installment of the Fixed Minimum Rent or any Additional Rent hereunder within five (5) working days of due date. (2) Tenant shall fail to comply with any term, provision or covenant of this lease, other than the payment of any sums due Landlord, including but not limited to, the Fixed Minimum Rent or any Additional Rent, shall not cure such failure within thirty (30) days after written notice thereof of Tenant (or such shorter notice period as may be provided elsewhere in this Lease for specific events of default). (3) Tenant or any guarantor of Tenants' obligations hereunder shall become insolvent in any chapter of the United States Bankruptcy Code, or shall make a transfer in fraud of creditors, or shall make an assignment for the benefit of creditors. (4) Tenant or any guarantor shall file a petition under any section or chapter of the United States Bankruptcy Code, or under any similar law or statute of the United States or any state thereof; or Tenant shall be adjudged bankrupt or insolvent as defined in any chapter of the United States Bankruptcy Code in proceedings filed against Tenant or any guarantor of Tenant's obligations under this Lease. (5) A receiver or trustee shall be appointed for the Leased Premises or for all or substantially all of the assets of Tenant or any guarantor and such receiver or trustee shall not be discharged within thirty (30) days following such appointment. (6) Tenant shall desert or vacate or shall commence to desert or vacate the Leased Premises or any substantial portion of the Leased Premises, or shall discontinue operations therein, or shall remove or attempt to remove, without the prior written consent of the Landlord, all or a substantial portion of Tenant's equipment, fixtures, furniture or other personal property. (7) If Tenant or any guarantor, or any general partner of Tenant or any guarantor, is an entity of any type, the sale, transfer, change or hypothecation of fifty percent (50%) or greater of the ownership interest of Tenant or any guarantor or any general partner. (8) The discovery by Landlord that any financial statement given by Tenant or any of its assignees, subtenants or successors-in-interest, or any guarantor of Tenant's obligations hereunder to Landlord, was materially false. 20.2 Remedies. (1) Upon the occurrence of any event of default hereunder, and notwithstanding the fact that the termination or cancellation of this Lease by Landlord may substantially interfere with the ability of Tenant to conduct a non-liquidation proceeding under any chapter of the United States Bankruptcy Code, Landlord shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever. (i) Terminate this Lease, in which event Tenant shall immediately surrender the Leased Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which he may have for possession or arrearages in Rent, enter upon and take possession of the Leased Premises and expel or remove Tenant and any other person who may be occupying said Leased Premises or any part thereof, without being liable for prosecution or any claim for damages therefor; and/or (ii) Enter upon and take possession of the Leased Premises and expel or remove Tenant and any other person who may be occupying said Premises or any part thereof, without being liable for prosecution or any claim for damages therefor, and if Landlord so elects, 16 relet the Leased Premises on such terms as Landlord may deem advisable and receive rental therefor. (2) Pursuit of any of the foregoing remedies shall not preclude pursuit of any other remedies herein provided or provided by law, nor shall pursuit of any other such remedy constitute a forfeiture or waiver of any Rent or other sums due to Landlord hereunder or of any damages accruing to the Landlord by reason of the violation of any of the terms, provisions and covenants herein contained. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an event of default shall not be deemed or construed to constitute a waiver of such default. In determining the amount of loss or damage which Landlord may suffer by reason of termination of this Lease or the deficiency arising by reason of any reletting by Landlord as above provided, allowance shall be made for the expense of repossession and any repairs or remodeling undertaken by Landlord following repossession. (3) Exercise by Landlord of any one or more remedies hereunder granted or otherwise available shall not be deemed to be an acceptance of surrender of the Premises by Tenant, whether by agreement or by operation of law it being understood that such surrender can be effected only by the written agreement of Landlord and Tenant. No removal or other exercise of dominion by Landlord over the property of Tenant or others at the Leased Premises shall be deemed unauthorized or constitute a conversion. Tenant hereby consenting, after any event of default, to the aforesaid exercise of dominion over Tenant's property within the Building. All claims for damages by reason of such reentry and/or repossession and/or alteration of locks or other security devices are hereby waived, as are all claims for damages by reason of any distress warrant, forcible detainer proceedings, sequestration proceedings or other legal process. Tenant agrees that any reentry by Landlord may be pursuant to judgment obtained in forcible detainer proceedings or other legal proceedings, as Landlord may elect and Landlord shall not be liable in trespass or otherwise,(after deducting expenses incurred by Landlord as provided herein). In no event shall Tenant be entitled to any excess of any rental obtained by reletting over and above the Rent herein reserved. Actions to collect amounts due by Tenant as provided in this Paragraph may be brought from time to time, on one or more occasions, without the necessity of Landlord's waiting until expiration of the Lease Term. (4) In the event Landlord elects to terminate this Lease by reason of event or default, then notwithstanding such termination, Tenant shall be liable for and shall pay to Landlord, at Pasadena, Texas, the sum of all Rent, Additional Rent and other indebtedness accrued to the date of such termination, plus, as damages, an amount equal to the present value of the Rent and any and all other sums reserved hereunder for the remaining unexpired portion of the Lease Term (had the Lease not been so terminated by Landlord)I, less the then present value of the then fair rental value of the Leased Premises. (5) In the event Landlord elects to repossess the Leased Premises without terminating the Lease, then Tenant shall be liable for and shall pay to Landlord at Pasadena, Texas, all Rent and other indebtedness accrued to date of such repossession, plus all Rent and any ant all other sums required to be paid by Tenant to Landlord during the remainder of the Lease Term until the date of expiration of the Term, diminished by any net sums thereafter received by Landlord through reletting the Premises during Period (after deducting expenses incurred by Landlord as provided herein). In no event shall Tenant be entitled to any excess of any rental obtained by reletting over and above the Rent herein reserved. Actions to collect amounts due by 17 Tenant as provided in the Paragraph may be brought from time to time, on one or more occasions, without necessity of Landlord's waiting until expiration of the Lease Term. (6) In the event of termination or repossession of the Leased Premises for an event of default, Landlord shall have an obligation to attempt to relet the Leased Premises, or any portion thereof. However, in the event of reletting Landlord may relet the whole or any portion of the Leased Premises for any period, to any tenant, and for any use and purpose. Should Landlord choose to relet the Leased Premises, or any portion thereof, for the remainder of the Term provided for herein, and if the rental received through reletting does not at least equal the Rent provided for herein, Tenant shall pay and satisfy the deficiency between the amount of the Rent so provided for and that received through reletting, including, but not limited to, the cost of renovating, altering, and decorating for a new occupant. Further, Tenant shall not in any event ever be entitled to any excess rental and other sums provided for herein, and the same shall belong solely to Landlord. Nothing herein shall be construed as in any way denying Landlord the right, in the event of abandonment of said Premises or other breach of this Lease by Tenant, to treat the same as an entire breach and at Landlord's option to terminate this Lease and/or immediately seek recovery for the entire breach of this Lease and any and all damages which Landlord suffers thereby. (7) If Tenant should fail to make any payment or cure any default hereunder within the time herein permitted, Landlord, without being under any obligation to do so and without thereby waiving such default, may make such payment and/or remedy such other default for the account of Tenant (and enter the Leased Premises for such purpose), and thereupon Tenant shall be obligated and hereby agrees, to pay Landlord, upon demand, all costs, expenses and disbursements (including reasonable attorneys' fees) incurred by Landlord in taking such remedial action. (8) In the event of the breach or the attempted or threatened breach of any covenant or provision contained in this Lease by Tenant, Landlord shall have, in addition to all other remedies provided it hereunder or by law or equity, the right to obtain an injunction prohibiting such breach or attempted breach without the necessity for proof of inadequacy of legal remedy, irreparable harm or probable right of recovery. (9) In the event of any default by Landlord. Tenant's exclusive remedy shall be an action for damages (Tenant hereby waiving the benefit of any laws granting it a lien upon the property of Landlord and/or upon rental due Landlord), but prior to any such action Tenant will give Landlord written notice specifying such default with particularity, and Landlord shall thereupon have thirty (30) days in which to cure any such default. Unless and until Landlord fails to so cure any default after such notice, Tenant shall not have any remedy or cause of action by reason thereof. All obligations of Landlord hereunder will be construed as covenants, not conditions; and all such obligations will be binding upon Landlord only during the period of its possession of the Building and not thereafter. 20.3 Waiver of Notices. Notwithstanding anything to the contrary contained herein, if Tenant has received two (2) notices of default hereunder during the Term hereof, then all future notices of default which would otherwise be required hereunder are expressly waived by Tenant, and it is agreed that Landlord may immediately exercise any of its remedies hereunder without any notice whatsoever to Tenant. 20.4 Quarterly Payments. Notwithstanding anything to the contrary contained herein, if Tenant has committed two or more events of default hereunder in any one Lease Year, and 18 Landlord has elected to allow Tenant to subsequently cure its default and remain in possession hereunder, Landlord shall nonetheless have the option to require Tenant to pay all Fixed Minimum Rent in quarter-annual installment, in advance of each such quarterly period, such quarterly periods to be designated by Landlord. Such option shall be in addition to and cumulative of any and all other rights and remedies of Landlord hereunder. 20.5 Expenses/Attorneys' Fees. In the case of an event of default hereunder, Tenant shall also be liable for and shall pay to Landlord, at Pasadena, Texas, in addition to any sum provided to be paid above: broker's fees incurred by Landlord in connection with reletting the whole or any part of the Premises; the costs of removing and storing Tenant's or other occupant's property; the costs of repairing, altering, remodeling or otherwise putting the Premises into condition acceptable to a new tenant or tenants, and all reasonable expenses incurred by Landlord in enforcing Landlord's rights or remedies, including reasonable attorneys' fees and court costs until the expiration of the original or any extended Term of this Lease Tenant shall permit the Landlord to exhibit the Leased Premises to prospective tenants and to place notices upon the Leased Premises advertising "For Lease". Landlord may at any time, exhibit the Leased Premises to prospective purchasers. and place notices, upon the Building or the Leased Premises advertising "For Sale." 20.6 Limitation on Landlord's Personal Liability. Tenant specifically agrees to look solely to Landlord's interest in the Building for the recovery for any judgement from Landlord, it being agreed that Landlord, its agents, employees, shareholders, officers, directors, and limited partners, shall never be personally liable hereunder for anything whatsoever. 21. ACCESS. Landlord or its agents shall have the right to enter the Leased Premises at all reasonable times, and whenever necessary because of emergencies, to inspect the same, and to make such repairs, replacements, alterations, improvements or additions as Landlord may deem necessary or desirable, including alterations, repairs, improvements or additions to the space adjacent to Leased Premises and/or to the Building, without the same constituting an eviction of Tenant in whole or in part, and the Rent reserved shall in no way abate while said repairs, replacements, alterations, improvements or additions are being made, by reason of loss or interruption of Tenant's business or otherwise. During the ninety (90) days prior to the expiration of the original or any extended Term of this Lease Tenant shall permit the Landlord to exhibit the Leased Premises to prospective tenants and to place notices upon the Leased Premises advertising "For Lease". Landlord may, at any time, exhibit the Leased Premises to prospective purchasers, and place notices, upon the Building or the Leased Premises advertising "For Sale." 22. SURRENDER AND REMOVAL OF PROPERTY. 22.1 Surrender of Premises. Promptly upon the expiration or earlier termination of the Term of this Lease, Tenant shall surrender the Leased Premises in the same condition as they were in upon delivery of possession thereto under this Lease, reasonable wear and tear and damage by unavoidable casualty or Act of God only excepted. Further, Tenant shall surrender all keys to the Leased Premises at the place then fixed for the payments of Fixed Minimum Rent due hereunder. All items of work and improvements comprising the Interior of the Leased Premises, shall constitute a part of the fee estate remainder subject to this Lease, notwithstanding that Tenant may construct or cause to be constructed all or any part of said improvements or may contribute to the cost thereof, and notwithstanding that Tenant may or might be required to maintain, repair and/or replace same or some part thereof pursuant to some other provisions in this Lease. Subject to the provisions of this Section, Tenant shall remove all of Tenant's trade fixtures, operation equipment 19 and other personal property before surrendering the Leased Premises as aforesaid and shall repair at Tenant's expense any damage to the Leased Premises caused thereby. Failure to Remove Property. If Tenant shall neglect to remove Tenant's personally as herein provided, Landlord shall have the right (i) to remove said property and cause it to be stored in a public warehouse or elsewhere, at the cost of and for the account of Tenant, or (ii) in the alternative, if said property shall not be removed within thirty (30) days after said termination, to dispose of said property in a manner deemed suitable to Landlord, all without service of notice or resort to legal process and without becoming liable for any loss damage which may be occasioned thereby, and any proceeds of such disposition shall be retained by Landlord without liability to Tenant, Tenant hereby waiving any interest in such proceeds. 22.3 Survival of Covenants. Tenant's obligations to observe or perform the covenants contained in this Article shall expressly survive the expiration or earlier termination of the original or any extended Term of this Lease. 23. HOLDING OVER. Any holding over without the consent of Landlord after the expiration or earlier termination of the Term of this Lease shall be construed to be and shall constitute a tenancy at the will of Landlord, and Tenant agrees to pay as rents and liquidated damages for such holding over a sum equivalent to the Rent herein specified and reserved plus One Hundred Percent (100%) of the Fixed Minimum Rent (prorated on a monthly basis) and shall otherwise be on the same terms and conditions herein, as far as applicable. 24. CERTIFICATES/MEMORANDUM. 24.1 Certifications. Tenant agrees at any time and from time to time during the Term of this Lease, upon demand, to execute and acknowledge and deliver unto Landlord a statement or statements, in writing, certifying (if such be true) that this Lease is unmodified and in good standing (or if modified, then in good standing as modified, stating the modification), and the date or dates, if any, to which Fixed Minimum Rent, Additional Rent or other charges hereunder, if any, have been paid in advance, it being the intention of the parties hereto that any such statement delivered by Tenant pursuant to the provisions of this Section may be relied upon by any prospective purchaser, mortgagee or assignee of any mortgagee of the Leased Premises, the Building or any part thereof. 24.2 Memorandum of Lease. Promptly after the Commencement Date, Landlord and Tenant, if requested by Landlord, shall execute and acknowledge and deliver a memorandum or short form of this Lease, in recordable form, acknowledging Tenant's acceptance of the Leased Premises for all purposes herein provided and specifying the Commencement Date and the termination date of this Lease in accordance with the provisions hereof, and said memorandum may be recorded by Landlord only, in the Office of the County Clerk of Harris County, Texas, but this Lease Agreement itself shall not be recorded. In the event Tenant records a memorandum of this Lease, or this Lease, Landlord may terminate this Lease upon five (5) days written notice provisions of Section 1.1 hereof. 25. NOTICES. All notices required or permitted to be given hereunder by either party hereto to the other party shall be deemed sufficiently given or made three (3) business days after the date when mailed by United States Registered or Certified Mail, adequate postage paid, to their respective addresses as specified in Section 1.1 hereof. Each party hereto may notify the other party of any change in its mailing address by notice in the manner herein above provided, which new address shall thereafter be deemed the proper address for notice hereunder. 20 26. TENANT'S PAYMENTS 26.1 Payments. Tender of Rent and/or any other payment due hereunder shall be considered to have been made on the date such payments received by Landlord and not on the date mailed by Tenant. For purposes hereof, the office of Landlord is the office presently or henceforth designated pursuant to the provisions of Section 1.1 hereof. Checks or drafts tendered will constitute payment only when duly paid by the drawers bank promptly upon presentment, properly endorsed, for payment. 26.2 Interest. All sums due and owing by Tenant to Landlord under this Lease shall bear interest at the maximum rate permitted by the laws of the State of Texas from the date due until paid. 27. LANDLORD'S LIEN. To secure the payment of all Fixed Minimum Rent, and Additional Rent reserved herein, and all other payments due Landlord hereunder, or to become due hereunder and the faithful performance of all covenants, agreements and stipulations herein contained to be performed by Tenant, Tenant hereby grants to Landlord an express first and prior contract lien and security interest on all property (including fixtures, equipment, inventory, goods, wares, furniture, office equipment, supplies and merchandise) which may be placed in the Leased Premises, and also upon all proceeds of any insurance which may accrue to Tenant by reason of destruction of or damage to any such property. All exemption laws are hereby waived by Tenant in favor of said lien and security interest. This lien and security interest is given in addition to the Landlord's statutory lien and shall be cumulative thereof. Tenant shall not remove any property from the Leased Premises until all of Tenant's obligations under this Lease are satisfied. This lien may be foreclosed with or without court proceedings by public or private sale, provided Landlord gives Tenant at least ten (10) days notice of the time, place and terms of said sale, and Landlord shall have the right to become the purchaser of such property, upon being the highest bidder therefor at said sale. The notice referred to in the preceding sentence may (but needs not) be given by Landlord to Tenant contemporaneously with any other notice from Landlord to Tenant which may be given in accordance herewith. At the time of the execution of this Lease, and if requested thereafter by Landlord, Tenant shall execute and deliver to Landlord financing statement instruments in form deemed sufficient by Landlord to reflect the security interest herein granted and any proper amendment of, assignment of, modification in or extension of the aforesaid contract lien and security interest hereby granted. Tenant hereby grants to Landlord a power of attorney to sign, in place and stead of Tenant, any and all such instruments. Said power of attorney is irrevocable and coupled with an interest. Landlord shall, in addition to all of its rights hereunder, have all of the rights and remedies of a secured party under the Texas Business and Commerce Code. 28. RULES AND REGULATIONS. Such reasonable rules and regulations applying to all tenants in the Building as may be adopted by Landlord for the safety, care, cleanliness, preservation of good order or operation of the Leased Premises, the Building, the Property and the Common Areas, are hereby made a part hereof and Tenant agrees to comply with all such rules and regulations, immediately upon receipt of a copy of same. Landlord shall have the right at all times to change any of the rules and regulations or to amend them in any manner deemed reasonable by Landlord. All changes and amendments will be sent by Landlord to Tenant in writing and shall be thereafter carried out and observed by Tenant. 21 29. RELOCATION. In the event Landlord determines to utilize the Leased Premises for other purposes during the term of this Lease, Tenant agrees to relocate to other space in the Building designated by Landlord, provided such other space is of equal or larger size than the Leased Premises. Landlord shall pay all out-of- pocket expenses of any such relocation, including the expenses of moving and reconstruction of Tenant improvements, whether furnished by Landlord or Tenant. In the event of such relocation this Lease shall continue in full force and effect without any change in the terms or other conditions, but with the new location substituted for the old location set forth in this Lease. Further it is contemplated by Landlord that Landlord intends (at its sole option) to build a parking garage on the Property. In such event, Tenant agrees all or a part of its parking spaces hereunder may be relocated possibly even to a location within several blocks of the property. Further Tenant acknowledges constructing such garage may cause delays in egress/ingress, excessive noise or other inconveniences, for which Tenant will not receive any compensation, and to which Tenant consents. 30. BROKERS. None. 31. MISCELLANEOUS 31.1 Successors and Assigns. All rights and liabilities herein granted to or imposed upon the respective parties hereto shall extend to and jointly and severally bind the several respective heirs, legal representatives, successors and assigns of the respective parties hereto, an if there shall be more than one Landlord or Tenant, all shall be bound jointly and severally the terms, conditions and agreements herein contained. No rights, however, shall inure to the benefit of any assignee of Tenant unless the assignment to such assignee has been approved by Landlord in writing as provided herein. 31.2 Waivers. One or more waivers of any breach or violation of any agreement, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent violation or breach of the same or any other agreement, covenant, or condition herein contained, and the consent or approval by either party of any act by the other, which act requires the approval or consent of the other party, shall not be deemed to waive or render unnecessary the future requirements of consent or approval of the same or similar act; and the subsequent acceptance of Rent or other payment due hereunder shall not be deemed to be a waiver of any preceding breach by Tenant, other than failure of Tenant to pay the particular Rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of the acceptance of said Rent. No express covenant, term or condition of this Lease shall be deemed to have been waived by either party, unless such waiver be in writing. 31.3 Accord and Satisfaction. No payment made by Tenant or received by Landlord in an amount less than the amount herein stipulated shall be deemed to be other than on account of the earliest received payment, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept any such check or payment without prejudice to Landlord's right to recover the balance of such amount or to pursue any other remedy in this Lease or by law provided Landlord. 31.4 Entire Agreement. This Lease, together with the exhibit or exhibits aforesaid and the rider or riders, if any, attached hereto and forming a part hereof, contains and sets forth the entire agreement and understandings between the parties hereto concerning the Leased Premises, and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between said parties other than as herein expressly set forth. Except as herein otherwise provided, 22 no subsequent alteration, amendment, change or addition to this Lease shall be binding upon either party hereto, unless reduced to writing and signed by both parties. 31.5 Partnership. Landlord does not become a partner of Tenant in the conduct of its business or otherwise, or a joint venturer or a member of a joint enterprise with Tenant by virtue of this Lease. 31.6 Force Majeure In the event Landlord shall be delayed, hindered or prevented from the performance of any act required hereunder by reason of strikes, fire, explosions, lock-outs, failure of electrical power, governmental restrictions or regulations, unavailability of suitable financing, materials and/or labor, riots, insurrection, war or on account of any other condition or occurrence not the fault of Landlord, then the performance of any such act shall be extended for a period equivalent to the period of such delay. 31.7 Captions and Numbers. The captions, section numbers and article numbers appearing in this Lease are inserted only as a matter of convenience and in no wise define, limit, construe or describe the scope or intent of such sections or articles, nor in any wise affect this Lease. 31.8 Tenant, Defined Use of Pronouns. The word "Tenant" shall be deemed and taken to mean each and every person or party mentioned as a Tenant herein, be the same one or more and if there shall be more than one Tenant. Any notice required or permitted by the terms of this of Lease may be given by or to any one thereof and shall have the same force and effect as if given by or to all thereof. The use of the neuter singular pronoun to refer to Landlord or Tenant shall be deemed a proper reference even though Landlord or Tenant may be an individual, a partnership, a corporation, a group of two or more individuals or corporations. The necessary grammatical changes required to make the provisions of this Lease apply in the plural sense where there is more than one Landlord or one Tenant, and to either corporations, associations, partnerships or individuals, males or females, shall in all instances be assumed as though in each case fully expressed. 31.9 Severability. If any provisions covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, there reminder of this Lease, or the application of such provision, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each provision, covenant or condition of this Lease shall be valid and shall be enforced to the fullest extent permitted by Law. 31.10 Survival. Landlord and Tenant expressly agree that all provisions of this Lease which contemplate performance after the expiration or earlier termination hereof shall survive such expiration or earlier termination of this Lease. 31.11 Authority. Tenant is fully authorized and empowered to enter into this Lease. Further, if Tenant is not an individual, then the person signing this Lease on Behalf of Tenant warrants and covenant that (s)he has the full authority and power to execute this Lease on behalf of Tenant and to bind Tenant hereto, and that all requisite actions and formalities have been taken to authorize Tenant to enter into this Lease and to authorize the person signing on Tenant's behalf to do so. 31.12 Governing law. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas. Venue for any legal actions hereunder shall be in the District Courts of Harris County, Texas. 23 31.13 Other documents. The parties agree to execute all other documents or instruments necessary to effect the transfers of property set forth herein and otherwise to implement the provisions of this Agreement. SPECIAL PROVISIONS: Landlord agrees that tenant shall have the following months rent abated: February, and March of 1999. EXECUTED as of the date first set forth above in multiple counterparts each of which shall be deemed to be an original. Landlord: Tenant: Dynacq International, Inc. Vista Community Medical Center By:_______________________ By:___________________________ Name: Phillip Chan Name: Phillip Chan Title: Vice President, Title: President Dynacq International, Inc. Doctors Practice Management STATE OF TEXAS (S) (S) COUNTY OF HARRIS (S) On this _____ day of ____________, 1998, before me personally appeared PHILLIP CHAN, VICE PRESIDENT, DYNACQ INTERNATIONAL, INC., known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged that he executed the same for the purpose and consideration therein expressed and in the capacity therein stated. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. ____________________________ NOTARY PUBLIC in and for the STATE OF TEXAS STATE OF TEXAS (S) (S) COUNTY OF HARRIS (S) On this _____ day of ____________, 1998, before me personally appeared PHILLIP CHAN, PRESIDENT, DOCTORS PRACTICE MANAGEMENT.., known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged that she executed the same for the purpose and consideration therein expressed and in the capacity therein stated. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. ____________________________ NOTARY PUBLIC in and for the STATE OF TEXAS 24 EXHIBIT "C" RULES AND REGULATIONS 1. All tenants will refer all contractor's representatives and installation technicians who are to perform any work within the Building, grounds, and Parking Area to Lessor for Lessor's supervision, approval and control before the performance of any such work. This provision shall apply to all work performed in the Building, grounds and Parking Area including, but not limited to, installations of telephones, telegraph equipment, electrical devices and attachments, and any and all installations of every nature effecting floors, walls, woodwork, trim, window, ceilings, equipment and any other physical portion of the Building, grounds, and Parking Area. Lessee shall not mark, paint, drill into, or in any way deface any part of the Building or the Leased Premises without Lessor's written consent. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of the Lessor, and as the Lessor may direct. 2. The work of the janitorial or cleaning personnel shall not be hindered by Lessee after 5:30 pan. and such work may be done at any time when the Leased Premises are vacant. The windows. doors and fixtures in the Leased Premises and Building may be cleaned at any time. Lessee shall provide adequate waste and rubbish receptacles, cabinets, books cases, map cases, etc., necessary to prevent unreasonable hardship to Lessor in discharging its cleaning obligations. 3. Movement in or out of the Building or through the Building entrances or lobbies of furniture or office equipment, or dispatch or receipt by Lessee of any heavy equipment, bulky material. merchandise or other item which requires use of elevators or stairways, shall be restricted to such hours as Lessor shall designate. The method of such movement, routing of such movement, safety precautions associated with such movement and the prohibition of Lessee bringing any dangerous items into the Building shall be subject to the Lessor's discretion and control. Any hand trucks, carryalls, or similar appliances used for the delivery or receipt of merchandise or equipment shall be equipped with rubber tires, side guards and such other safeguards as the Lessor shall require. Although Lessor or its personnel may participate in or assist in the supervision of such movement, Lessee assumes final responsibility for all risks as to damage to property and injury to persons that may result from such participation or assistance and Lessee shall indemnify and hold harmless Lessor and Lessor's employees and agents, and reimburse Lessor and Lessor's employees and agents with respect to any and all claims, demands, causes of action and liability arising as a result of any assistance or supervision or exercise of control over Lessee's movement of items in and out of the Building. 4. No sign, advertisement or notice shall be displayed, painted or affixed by Lessee or Lessee's employees, agents or contractors in or on any part of the outside or inside of the Building or Leased Premises without prior written consent of Lessor, and then only of such color, size, character, style and material and in such places as shall be approved and designated by Lessor. Signs on doors and entrances to the Leased Premises and outside of the Leased Premises within the Building, grounds or Parking Area shall be placed thereon by a contractor approved by Lessor. 5. Lessee shall not place, install or operate on the Leased Premises or in any part of the Building any engine, refrigerating, heating or air conditioning apparatus, stove or machinery, or conduct mechanical operations or place or use in or about the Leased Premises or the Building any explosives, gasoline, kerosene, oil, acids, caustics or any other inflammable, explosive, hazardous or odorous material without the prior written consent of Lessor. No portion of the Leased Premises shall at any time be used for cooking, sleeping or lodging quarters. 25 6. Lessee shall not make or permit any nuisance or improper noises in the Building or otherwise interfere in any way with other tenants or persons doing business in the Building or with Lessor's operation of the Building. 7. Lessor will not be responsible for any fixtures, personal property, equipment, jewelry or money lost in or stolen from the Leased Premises or public areas of the Building, grounds or Parking Area. Lessor shall not be responsible for damages to or theft of motor vehicles or other items from any Parking Areas used in connection with the Building. 8. No maintenance or repair work shall be done on any vehicles in the Parking Area. No disabled vehicles shall be parked or stored in the Parking Area. All vehicles in the Parking Area shall be parked within the designated spaces and not in more than one (1) space or across spaces. At Lessor's option, all disabled vehicles, recreational vehicles, boats and vehicles improperly parked in spaces designated for handicapped persons and all other improperly parked vehicles may be towed or otherwise removed from the Parking Area at the owner's expense. In the event any vehicle or boat is towed, Lessor will not be liable or responsible for the loss, damage or theft of any property located in the vehicle or boat or for any damage to the vehicle or boat. 9. Neither Lessee or Lessee's employees, agents, invitees or licensees shall at any time leave or discard any rubbish, paper, articles or objects of any kind whatsoever outside the doors of the Leased Premises or in any other area within the Building or on the grounds or in the Parking Area. No birds, animals, bicycles or vehicles shall be brought into or kept in or about the Building. 10. None of the entries passages, doors, hallways, or stairways in the Building shall be blocked or obstructed by Lessee Such areas shall not be used by Lessee at any time except for ingress or egress to the Leased Premises by Lessee's, Lessee's employees, agents and invitees. 11. Lessor shall have the right to determine and prescribe the weight and proper position of any usually heavy equipment, including but not limited to copying equipment, computer equipment, safes and large files that are to be placed in the Building. Only those items which in the exclusive judgment of the Lessor will not do damage to the floors, structure and elevators may be moved into the Building. Any damage resulting from moving or installing such articles in the Building or the existence of same in the Building shall be paid for by Lessee. 12. All Christmas and other decorations in the Building must be flame retardant. 13. After hours air conditioning and heating on Monday through Saturday and all day Sunday and holidays determined by Lessor must be requested in writing by noon of a regular work day prior to the day for which additional air conditioning is requested. Lessee shall be charged at the prevailing hourly rate for the use of such air conditioning and heating. 14. Any request by Lessee to place or remove names from the directory board in the lobby of the Building shall be furnished to Lessor in writing on Lessee's letterhead. 15. Any services which Lessee requests Lessor to perform which Lessor is not required to perform under this Lease shall, if performed by Lessor, be billed to Lessee at Lessor's cost plus a 15% fee to cover Lessor's overhead costs. Lessor shall have the right to refuse to perform any such services. 16. If Lessor's maintenance engineer or any of Lessor's other personnel do any work after normal business hours at the request of Lessee, Lessee shall pay for the cost of such work. 26 17. All doors leading from public corridors to the Leased Premises are to be kept closed when not in use. 18. Canvassing, soliciting or peddling in the Building is prohibited and Lessee shall cooperate with Lessor to prevent such activities. 19. Lessee shall give Lessor immediate notice in the event that any defects or dangerous conditions arise or exist in the Leased Premises or in the Building or if any accidents or emergencies occur in the Leased Premises or Building. 20. Lessee shall not use the Leased Premises or permit the Leased Premises to be used for photographic, multilith or multigraph reproductions for sale to the general public. All photographic, multilith or multigraph reproductions in the Leased Premises shall be produced for Lessee in the ordinary course of Lessee's business. 21. All requests for services made by Lessee shall be made directly to Lessor or Lessor's designated agents. Employees of Lessor or Lessor's designated agents shall not perform any work or do anything outside of their regular duties unless directed to do so by Lessor or Lessor's designated agents. No requests will be made by Lessee directly to Lessor's employees. 27 EX-10.40 5 REAL ESTATE LIEN NOTE DATED SEPTEMBER 1, 1998 EXHIBIT 10.40 REAL ESTATE LIEN NOTE $270,000.00 Houston, Texas September 1, 1998 For value received, the undersigned, as principal, (the "Maker") promises to pay to the order of VISTA HEALTHCARE, INC., a Texas corporation (the "Payee"), at the Payee's offices at 1401 Vista, Pasadena, Texas 77504, in legal and lawful money of the United States of America the principal sum of TWO HUNDRED SEVENTY THOUSAND AND NO/100 DOLLARS ($270,000.00), with interest thereon from date hereof until maturity upon the balance of the principal sum at the rate of EIGHT AND ONE HALF PERCENT (8.5%) per annum until paid. Upon demand, but if demand not sooner made, in eighty-four (84) monthly installments (both principal and interest), with the first installment in the amount of FOUR THOUSAND TWO HUNDRED SEVENTY FIVE AND 85/100 DOLLARS ($4,275.85) being due and payable on October 1, 1998 and a like installment to be paid on or before the same calendar day of each succeeding month for eighty-four (83) months until this Note is paid in full. All payments made under this Note shall be applied first to accrued interest and the balance, if any, to principal. The Maker reserves the right to prepay this Note in whole or in part at any time without the payment of a premium or penalty. It is the intention of the parties hereto to conform strictly to the applicable laws of the State of Texas, the United States of America, and judicial and/or administrative interpretations or determinations thereof ("Law"), regarding the contracting for, charging, and receiving of interest for the use and detention of money. The owner and holder hereof shall have no right to claim, charge, or receive any interest in excess of the maximum rate allowable under the law on that portion of the face amount representing principal which is outstanding and unpaid from time to time. Determination of the rate of interest for the purpose of determining whether this Note is usurious under the Law shall be made by amortizing, prorating, allocating and spreading in equal parts during the period of the actual time of this Note, all charged, or received in excess of the maximum lawful rate shall be deemed a result of a mathematical error and a mistake; if this Note is paid in part by the Maker prior to the end of the full stated term of this Note and the interest received for the actual period of existence of this Note exceeds the maximum lawful rate, the owner and holder shall credit the amount of the excess against any amount owing under maturity, the owner shall refund to the Maker the amount of such excess, and shall not be subject to any of the penalties provided by Law for contracting for, charging or receiving Interest in excess of the maximum lawful rate. Any such excess which is unpaid shall be canceled. In the event of a failure to pay any installment of principal and/or interest herein provided when due, or a breach of the provisions of any of the instruments executed in connection with or securing this Note, or failure to pay any obligation of whatever nature owed to the owner and holder hereof whether such obligation is in existence now or in the future, or should the owner and holder hereof deem itself insecure, then the owner and holder thereof, at its option, may 1 declare the entire principal balance and accrued interest owing hereon at once due and payable without notice. Failure to exercise this option shall not constitute a waiver of the right to exercise the same in the event of any subsequent default. The makers, signers, sureties, guarantors, and endorsers of this Note severally waive demand, presentment, notice of dishonor, diligence in collecting, grace, notice and protest, notice of the failure to pay any installments of principal or interest or both prior to acceleration of maturity, notice of default, notice of intent to accelerate, notice of acceleration of maturity, and agree to one or more extensions for any period of periods of time and partial payments, before or after maturity, without prejudice to the holder; and if this Note shall be collected by legal proceedings through a probate or bankruptcy court or shall be placed in the hands of an attorney for collection, the undersigned agree to pay not less than fifteen percent (15%) of all unpaid principal and interest as reasonable attorney's or collection fees, or such other amount for attorney's fees and expenses as may be found by a court of competent jurisdiction as being reasonable and customary. This Note, and the terms, conditions and obligations hereunder shall be binding upon the parties hereto, their respective successors, assigns, executors, and/or administrators as the case may be. Should this Note be signed by more than one person (reference herein to any gender shall reference to all genders) and/or firm and/or corporation, all of the obligations herein contained shall be considered joint and several obligations of each signer hereof. This Note is secured by a deed of trust of even date herewith executed by Maker to ERIC G. CARTER, Trustee, securing the following real property: 4.5799 acres of land being the residue of Lot 14 of South Houston Gardens, Section 5, as recorded in Volume 4, Page 15 of the Map Records of Harris County, Texas, and lying in the Day Land and Cattle Company Survey, Abstract No. 1025, Harris County, Texas, said 4.5799 acres of land being more particularly described by metes and bounds in Exhibit A attached hereto and made a part hereof for all purposes. The liens securing this note are secondary and inferior to the liens securing the payment of the unpaid balance of that certain $1,500,000.00 indebtedness described in and secured by a deed of trust of record under Clerk's file number N822396 in the County Clerk's Office of Harris County, Texas, the payment of which indebtedness the Maker hereof has not assumed but which the Payee herein as well as any other and holder of this note is obligated to pay as and when due and should default be made in the payment thereof the undersigned Maker has the right to cure such default and receive credit on this note, all as provided in the hereinabove mentioned Deed and Deed of Trust, which are referred to, incorporated herein, and made a part hereof. THIS LOAN IS PAYABLE IN FULL SEVEN YEARS FROM THE DATE HEREOF. AT MATURITY, THE MAKER MUST REPAY THE ENTIRE PRINCIPAL BALANCE OF THE NOTE AND THE UNPAID INTEREST THEN DUE. HOLDER IS UNDER NO OBLIGATION TO REFINANCE THIS NOTE AT ANY TIME. YOU WILL THEREFORE, BE REQUIRED 2 TO PAY OUT OF OTHER ASSETS WHICH YOU OWN OR SEEK FINANCING FROM A LENDER, WHICH MAY BE THE HOLDER OF THIS NOTE, WILLING TO LEND YOU THE MONEY. IF YOU REFINANCE THIS LOAN AT MATURITY, YOU MAY HAVE TO PAY SOME OR ALL OF THE CLOSING COSTS NORMALLY ASSOCIATED WITH A NEW LOAN EVEN IF YOU OBTAIN REFINANCING FROM THE SAME HOLDER. THE WRITTEN LOAN AGREEMENTS REPRESENT THE FINAL AGREEMENT BETWEEEN THE ---------------------------------------------------------------------- PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR - ---------------------------------------------------------------------------- SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS - ----------------------------------------------------------------------- BETWEEN THE PARTIES. - ------------------- DYNACQ INTERNATIONAL, INC. By: ______________________________________ Philip Chan, Vice-President Address: 4301A Vista Pasadena, Texas 77504 3 EX-10.41 6 DEED OF TRUST DATED SEPTEMBER 1, 1998 EXHIBIT 10.41 DEED OF TRUST THE STATE OF TEXAS (S) (S) KNOW ALL MEN BY THESE PRESENTS: COUNTY OF HARRIS (S) That the undersigned, DYNACQ INTERNATIONAL, INC., 4301A Vista, Pasadena, Texas 77504, of Harris County, Texas, hereinafter called Grantors (whether one or more) for the purpose of securing the indebtedness hereinafter described and in consideration of the sum of TEN DOLLARS ($10.00) to us in hand paid by the Trustee hereinafter named, the receipt of which is hereby acknowledged, and for the further consideration of the uses, purposes and trusts hereinafter set forth, have GRANTED, SOLD, AND CONVEYED, and by these presents do GRANT, SELL AND CONVEY unto EDWIN LAMM, III, TRUSTEE, of the County of Harris, State of Texas, all of the following described property situated in Harris County, Texas, to-wit: 4.5799 acres of land being the residue of Lot 14 of South Houston Gardens, Section 5, as recorded in Volume 4, Page 15 of the Map Records of Harris County, Texas, and lying in the Day Land and Cattle Company Survey, Abstract No. 1025, Harris County, Texas, said 4.5799 acres of land being more particularly described by metes and bounds in Exhibit A attached hereto and made a part hereof for all purposes. TO HAVE AND TO HOLD the above described property, together with the rights, privileges and appurtenances thereto belonging, unto the said Trustee and to his substitutes or successors forever. And Grantors named herein do hereby bind themselves, their heirs, executors, administrators and assigns to warrant and forever defend the said premises unto the said Trustee, his substitutes or successors and assigns forever, against the claim, or claims, of all persons claiming or to claim the same or any part thereof. This conveyance, however, is made in TRUST to secure payment of one certain promissory note in the original principal sum of $270,000.00 dated September 1, 1998, executed by Grantor and payable to order of VISTA HEALTHCARE, INC. in 84 monthly installments at eight and one-half per cent (8.5%) interest, providing for acceleration of maturity and attorney fees and should Grantors do and perform all of the obligations and covenants so assumed and make prompt payment of the indebtedness evidenced by said note so assumed as the same shall become due and payable, then this conveyance shall become null and void and of no further force and effect, and shall be released at the expense of Grantors, by the holder hereof, hereinafter called Beneficiary (whether one or more.) Grantors covenant and agree as follows: That they are lawfully seized of said property and have the right to convey same, that said property is free from all liens and encumbrances except as herein provided. To protect the title and possession of said property and to pay when due all taxes and assessments now existing or hereafter levied or assessed upon said property, or the interest herein created by this Deed of Trust, and to preserve and maintain the lien hereby created as a first and prior lien on said property including any improvements hereafter made a part of the realty. 1 To keep the improvements on said property in good repair and condition, and not to permit or commit any waste thereof; to keep said buildings occupied so as not to impair the insurance carried thereon. To insure and keep insured all improvements now or hereafter created upon said property against loss or damage by fire and windstorm, and any other hazard or hazards as may be reasonably required from time to time by Beneficiary during the term of the indebtedness hereby secured, to the extent of the original amount of the indebtedness hereby secured, or to the extent of the full insurable value of said improvements, whichever is the lesser, in such form and with such Insurance Company or Companies as may be approved by Beneficiary, and to deliver to Beneficiary the policies of such insurance having attached to said policies such mortgage indemnity clause as Beneficiary shall direct; to deliver renewals of such policies to Beneficiary at last ten (10) days before any such insurance policies shall expire; any proceeds which Beneficiary may receive under any such policy, or policies, may be applied by Beneficiary, at his option, to reduce the indebtedness hereby secured, whether then matured or to mature in the future, and in such manner as Beneficiary may elect, or Beneficiary may permit Grantors to use said proceeds to repair or replace all improvements damaged or destroyed and covered by said policy. Grantors shall create a reserve fund for the payment of annual insurance premiums that will become due and payable, taxes, assessments, and maintenance charges levied and to be levied against the premises by paying to Beneficiary contemporaneously with the installments due on the Note a sum equal to the premiums that will next become due and payable on hazard insurance policies covering the premises, plus taxes, assessments and maintenance charges next due and payable on the premises, as estimated by Beneficiary, divided by the number of months to lapse before one (1) month prior to the date any such premiums, taxes, assessments and maintenance charges will become due and payable. Such sums shall be held by Beneficiary for the purpose of paying such premiums, taxes, assessments, and maintenance charges. Any excess reserve shall be credited by Beneficiary on either subsequent payments of the same nature or to the installments of principal and interest owing on said Note in any order of maturity and manner the Beneficiary may elect. Any excess reserve shall be credited by Beneficiary on either subsequent payments of the same nature or to the installments of principal and interest owing on said Note in any order of maturity and manner the Beneficiary may elect. Any deficiency in said reserve fund shall be paid by Grantors to Beneficiary on or before the date any such premiums, taxes and maintenance charges shall be due and payable. Such reserve funds may be commingled by Beneficiary with other funds, and Grantors shall not be entitled to receive any interest thereon. The reserve funds are pledged to Beneficiary as additional security for the sums secured by this Deed of Trust, and the liens of this Deed of Trust shall at all times extend to said sums, which said funds shall not be assignable or refundable (except as herein provided) until all indebtedness secured by this Deed of Trust has been paid in full. In the event of default under this Deed of Trust, any part or all of said reserve fund may be applied by Beneficiary to said indebtedness, at Beneficiary's sole discretion. That in the event Grantors shall fail to keep the improvements on the property hereby conveyed in good repair and condition, or to pay promptly when due all taxes and assessments, as aforesaid, or to preserve the prior lien of this Deed of Trust on said property, or to keep the buildings and improvements insured, as aforesaid, or to deliver the policy, or policies, of insurance or the renewal thereof to Beneficiary, as aforesaid, then Beneficiary may, at his option, but without being required to do so, make such repairs, pay such taxes and assessments, purchase 2 any tax title thereon, remove any prior liens, and prosecute or defend any suits in relation to the preservation of this Deed of Trust on said property, or insure and deep insured the improvements thereon in an amount not to exceed that above stipulated; that any sums which may be so paid out by Beneficiary and all sums paid for insurance premiums, as aforesaid, including the costs, expenses and attorney's fees paid in any suit affecting said property when necessary to protect the lien hereof shall bear interest from the dates of such payments at ten per cent (10%) per annum or at the rate stated in the promissory note hereby secured, whichever is greater, and shall be paid by Grantors to Beneficiary upon demand, at the same place at which the above-described note is payable, and shall be deemed a part of the debt hereby secured and recoverable as such in all respects. That in the event of default in the payment of any installment, principal or interest, of the note hereby secured, in accordance with the terms thereof, or of a breach of any of the covenants herein contained to be performed by Grantors, then and in any of such events Beneficiary may elect, Grantors hereby expressly waiving presentment and demand for payment, to declare the entire principal indebtedness hereby secured with all interest accrued thereon and all other sums hereby secured immediately due and payable, and in the event of default in the payment of said indebtedness when due or declared due, it shall thereupon, or at any time thereafter, be the duty of the Trustee, or his successor or substitute as hereinafter provided, at the request of Beneficiary (which request is hereby conclusively presumed), to enforce this trust; and after advertising the time, place and terms of the sale of the above described and conveyed property, then subject to the lien hereof, for at least twenty-one (21) days preceding the date of sale by posting written or printed notice thereof at the Courthouse door of the county where said real property is situated, which notice may be posted by the Trustee acting, or by any person acting for him, and the Beneficiary (the holder of the indebtedness secured hereby) has, at least twenty-one (21) days preceding the date of sale, served written or printed notice of the proposed sale by certified mail on each debtor obligated to pay the indebtedness secured by this Deed or Trust according to the records of Beneficiary, by the deposit of such notice, enclosed in a postpaid wrapper, property addressed to such debtor at debtor's most recent address as shown by the records of Beneficiary, in a post office or official depository under the care and custody of the United States postal Service, the Trustee shall sell the above described property, then subject to the lien hereof, at public auction in accordance with such notice at the Courthouse door of said county where such real property is situated (provided where said real property is situated in more than one county, the notice to be posted as herein provided shall be posted at the Courthouse door of each of such counties where said real property is situated, and said above described and conveyed property may be sold at the Courthouse door of any one of such counties, and the notices so posted shall designate the county where the property will be sold), on the first Tuesday in any month between the hours of ten o'clock A.M. and four o'clock P.M., to the highest bidder for cash, selling all of the property as an entirety or in such parcels as the Trustee acting may elect, and make due conveyance to the Purchaser or Purchasers, with general warranty binding Grantors, their heirs and assigns; and out of the money arising from such sale, the Trustee acting shall pay first, all the expenses of advertising the sale and making the conveyance, including a commission of five per cent (5%) to himself, which commission shall be due and owing in addition to the attorney's fees provided for in said note, and then to Beneficiary the full amount of principal, interest, attorney's fees and other charges due and unpaid on said note and all other indebtedness secured hereby, rendering the balance of the sale price, in any, to Grantors, their heirs or assigns; and the recitals in the conveyance to the Purchaser or Purchasers shall be full and conclusive evidence of the truth 3 of the matters therein stated, and all prerequisites to said sale shall be presumed to have been performed, and such sale and conveyance shall be conclusive against Grantors, their heirs and assigns. It is agreed that in the event a foreclosure hereunder shall be commenced by the Trustee, or his substitute or successor, Beneficiary may at any time before the sale of said property direct the said Trustee to abandon the sale, and may then institute suit for the collection of said note, and for the foreclosure of this Deed of Trust lien; it is further agreed that if Beneficiary should institute a suit for the collection thereof, and for a foreclosure of this Deed of Trust lien, that he may at any time before the entry of a final judgment in said suit dismiss the same, and require the Trustee, his substitute or successor to sell the property in accordance with the provisions of the Deed of Trust. Beneficiary shall have the right to purchase at any sale of the property, being the highest bidder and to have the amount for which such property is sold credited on the debt then owing. Beneficiary in any event is hereby authorized to appoint a substitute trustee, or a successor trustee, to act instead of the Trustee named herein without other formality than the designation in writing of a substitute or successor trustee; and the authority hereby conferred shall extend to the appointment of other successor and substitute trustees successively until the indebtedness hereby secured has been paid in full, or until such property is sold hereunder, and each substitute and successor trustee shall succeed to all of the rights and powers of the original trustee named herein. In the event any sale is made of the above described property, or any portion thereof, under the terms of this deed of trust, Grantors, their heirs and assigns, shall forthwith upon the making of such sale surrender and deliver possession of the property so sold to the Purchaser at such sale, and in the event of their failure to do so they shall thereupon from and after the making of such sale be and continue as tenants at will of such Purchaser, and in the event of their failure to surrender possession of said property upon demand, the Purchaser, his heirs or assigns, shall be entitled to institute and maintain an action for forcible detainer of said property in the Justice of the Peace Court in the Justice Precinct in which such property, or any part thereof, is situated. It is agreed that the lien hereby created shall take precedence over and be a prior lien to any other lien of any character whether vendor's Materialmen's or mechanic's lien hereafter created on the above described property, and in the event the proceeds of the indebtedness secured hereby as set forth herein are used to pay off and satisfy any liens heretofore existing on said property, then Beneficiary is, and shall be, subrogated to all of the rights, liens and remedies of the holders of the indebtedness so paid. It is further agreed that if Grantors, their heirs or assigns, while the owner of the hereinabove described property, should commit an act of bankruptcy, or authorize the filing of a voluntary petition in bankruptcy, or should an act of bankruptcy be committed and involuntary proceedings instituted or threatened, or should the property hereinabove described be taken over by a Receiver for Grantors, their heirs or assigns, the note hereinabove described shall, at the option of Beneficiary, immediately become due and payable, and the acting Trustee may then proceed to sell the same under the provisions of this Deed of Trust . 4 Grantor hereby assigns to Beneficiary all rental payable under each lease now or at any time hereafter existing, such assignment being upon the following terms: (a) until receipt from Beneficiary of notice of the occurrence of a default, each lessee may pay rental directly to Grantor, but after default Grantor covenants to hold all rental so paid in trust for the use and benefit of Beneficiary; (b) upon receipt from Beneficiary of notice that a default exists, each lessee is hereby authorized and directed to pay directly to Beneficiary all rental thereafter accruing, and the receipt of the rental by Beneficiary shall be a release of such lessee to the extent of all amounts so paid; (c) rental so received by Beneficiary shall be applied by Beneficiary, first to the expenses, if any, of collection and then in accordance with other provisions hereof; (d) without impairing its rights hereunder, Beneficiary may, at its option, at any time and from time to time, release to Grantor rental so received by Beneficiary, or any part thereof; (e) Beneficiary shall not be liable for its failure to collect or its failure to exercise diligence in the collection of rental, but shall be accountable only for rental that it shall actually receive; and (f) the assignment contained in this paragraph shall terminate upon the release of this deed of trust, but no lessee shall be required to take notice of termination until a copy of such release shall have been delivered to such lessee. As between Beneficiary and Grantor, any person claiming through or under Grantor, other than any lessee who has not received notice of default pursuant to this paragraph, subsection (b), the assignment contained in this section is intended to be absolute, unconditional and presently effective and the provisions of subsections (a) and (b) above are intended solely for the benefit of each lessee and shall never inure to the benefit of the Grantor or any person claiming through or under Grantor, other than a lessee who has not received such notice. It shall never be necessary for Beneficiary to institute legal proceedings of any kind whatsoever to enforce the provisions of this section. It is agreed that an extension, or extensions, may be made of the time of payment of all, or any part, of the indebtedness secured hereby, and that any part of the above described real property may be released from this lien without altering or affecting the priority of the lien created by this Deed of Trust in favor of any junior encumbrances, mortgagee or purchaser, or any person acquiring an interest in the property herein described and all improvements thereon, and that may be hereafter constructed thereon, first and superior to any liens that may be placed thereon, or that may be fixed, given or imposed by law thereon after the execution of this instrument notwithstanding any such extension of the time of payment, or the release of a portion of said property from this lien. In the event any portion of the indebtedness hereinabove described cannot be lawfully secured by this Deed of Trust lien on said real property, it is agreed that the first payments made on said indebtedness shall be applied to the discharge of that portion of said indebtedness. Beneficiary shall be entitled to receive any and all sums which may become payable to Grantors for the condemnation of the hereinabove described real property, or any part thereof, for public or quasi-public use, or by virtue of private sale in lieu thereof, and any sums which may be awarded or become payable to Grantors for damages caused by public works or construction on or near the said property. All such sums are hereby assigned to Beneficiary, who may, after deducting therefrom all expenses actually incurred, including attorney's fees, release same to Grantors or apply the same to the reduction of the indebtedness hereby secured, whether then matured or to mature in the future, or on any money obligation hereunder, as and in such manner 5 as Beneficiary may elect. Beneficiary shall not be, in any event or circumstances, liable or responsible for failure to collect, or exercise diligence in the collection of, any such sums. Nothing herein or in said note contained shall ever entitle Beneficiary, upon the arising of any contingency whatsoever, to receive or collect interest in excess of the highest rate allowed by the laws of the State of Texas on the principal indebtedness hereby secured or on any money obligation hereunder an in no event shall Grantors be obligated to pay interest thereon in excess of such rate. If this Deed of Trust is executed by only one person or by a corporation the plural reference to Grantors shall be held to include the singular and all of the covenants and agreements herein undertaken to be performed by and the rights conferred upon the respective Grantors named herein, shall be binding upon and inure to the benefit of not only said parties respectively but also their respective heirs, executors, administrators, grantees, successors, and assigns. Conveyance of the property herein described in whole or in part or of beneficial interests in Grantor (if Grantor is not a natural person or persons but is a corporation, partnership, trust or other legal entity), without prior written consent and approval of holder of the indebtedness hereby secured gives the holder of said not the right and option, upon ten (10) days' written notice to the Grantors, to declare the entire amount of the indebtedness hereby secured to be due and payable. Grantors expressly represent that this Deed of Trust and the Note hereby secured are given for the following purpose, to-wit: The indebtedness, the payment of which is hereby secured, is in part payment of the purchase price of the real property herein described, and is also secured by a vendor's lien thereon retained in deed of even date herewith to the undersigned, and this Deed of Trust is given as additional security for the payment of said indebtedness. It is stipulated and agreed that the lien created by this instrument is secondary and inferior to the lien securing the unpaid balance of that certain $1,500,000.00 indebtedness described in and secured by a Deed of Trust of record under Clerk's File No. N822396 in the County Clerk's Office of Harris County, Texas, which indebtedness the Grantors herein have not assumed, but which the Beneficiary herein is obligated to pay as and when due, and as provided in the hereinbefore mentioned Deed, and in the event said Beneficiary fails to pay when due any installment or installments falling due thereon, then, so long as Grantors herein are not in default in the payment of $270,000.00 Note hereby secured, or in default in the performance of the covenants of this Deed of Trust, Grantors herein shall have the right to pay any such delinquent installment or installments and receive credit upon the $270,000.00 Note hereby secured for all sums so paid, and in such manner as Grantors may direct, as of the date of such payment. Beneficiary may remedy any default, without waiving same, or may waive any default without waiving any prior or subsequent default. 6 EXECUTED THIS THE ________ DAY OF SEPTEMBER, 1998. DYNACQ INTERNATIONAL, INC. BY: ____________________________________ _________________________, President THE STATE OF TEXAS ) COUNTY OF HARRIS ) This instrument was acknowledged before me this the ____ day of September, 1998 by ____________________, President of DYNACQ INTERNATIONAL, INC.. ____________________________________ Notary Public, State of Texas Address of Beneficiary: VISTA HEALTHCARE, INC. 1401 Vista Pasadena, Texas 77504 Address of Trustee: EDWIN LAMM, III LAMM & SMITH, P.C. 1415 Louisiana - Suite 1415 Houston, Texas 77002 7 EX-10.42 7 REGULATIONS OF VISTA COMMUNITY MEDICAL CENTER EXHIBIT 10.42 __________________________________________________________________ VISTA COMMUNITY MEDICAL CENTER, L.L.C. A Texas Limited Liability Corporation __________________________________________________________________ REGULATIONS AND OPERATING AGREEMENT __________________________________________________________________ REGULATIONS AND OPERATING AGREEMENT OF VISTA COMMUNITY MEDICAL CENTER, L.L.C. The Regulations and Operating Agreement is entered into on this the 1st day of July, 1998, by and between the Members (as hereinafter defined) of Vista Community Medical Center, L.L.C. whose names and signatures are set forth on the signature page hereof. ARTICLE I. DEFINITIONS The following terms used in this Agreement shall have the following meanings: (a) "Act" shall mean the Texas Limited Liability Company Act set forth in Article 1528n of the Texas Revised Civil Statutes, as may be amended from time to time. (b) "Articles of Organization" shall mean the Articles of Organization of Vista Community Medical Center, L.L.C.. as filed with the Secretary of State of Texas on May 22, 1998, and as may be further amended from time to time. (c) "Capital Account" as of any given date shall mean the Capital Contribution to the Company by a Member as adjusted up to such date pursuant to Article VIII. (d) "Capital Contribution" shall mean any contribution to the capital of the Company in cash or property by a Member whenever made. "Initial Capital Contribution" shall mean the initial contribution to the capital of the Company pursuant to this Operating Agreement. (e) "Code" shall mean the Internal Revenue Code of 1986 or corresponding provisions of subsequent superseding federal revenue laws. (f) "Company" shall refer to Vista Community Medical Center, L.L.C. (g) "Deficit Capital Account" shall mean with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the taxable year, after giving effect to the following adjustments: 1 (i) credit to such Capital Account any amount which such Member is obligated to restore under Section 1.704-l(b)(2)(ii)(c) of the Treasury Regulations, as well as any addition thereto pursuant to the next to last sentence of Sections 1.704-2(g)(1) and (i)(5) of the Treasury Regulations, after taking into account thereunder any changes during such year in partnership minimum gain (as determined in accordance with Section 1.7042(d) of the Treasury Regulations) and in the minimum gain attributable to any partner for non-recourse debt (as determined under Section 1.7042(i)(3) of the Treasury Regulations); and (ii) debit to such Capital Account the items described in Section 1.7041 (b)(2)(ii)(d)(4), (S) and (6) of the Treasury Regulations. This definition of Deficit Capital Account is intended to comply with the provisions of Treasury Regulation Sections 1.704-l(b)(2)(ii)(d) and 1.704-2, and will be interpreted consistently with those provisions. (h) "Distributable Cash" shall mean all cash, revenues and funds received by the Company from Company operations, less the sum of the following to the extent paid or set aside by the Company: (i) all principal and interest payments on indebtedness of the Company and all other sums paid to lenders; (ii) all cash expenditures incurred in the normal operation of the Company's business; (iii) such Reserves as the Managers deem reasonably necessary for the proper operation of the Company's business. (i) "Entity" shall mean any general partnership, limited partnership, limited liability company, corporation, joint venture, trust, business trust, cooperative, association, foreign trust or foreign business organization. (j) "Majority Interest" shall mean one or more Interests of Members which in the aggregate exceed 50% of all Percentage Interests. (k) "Manager" shall mean one or more managers. References to the Manager in the singular or as him, her, it, itself, or other like references shall also, where the context so requires, be deemed to include the plural or the masculine or feminine reference as the case may be. (l) "Member" shall mean each of the individuals or entities who execute a counterpart of this Operating Agreement as a Member and each of the parties who may hereafter become Members. To the extent a Manager has purchased a Membership Interest in the Company, he will have all the rights of a Member with respect to such Membership Interest, and the term "Member" as used herein shall include a Manager to the extent he has purchased such Membership Interest in the Company. In order to qualify as a "Member," the individual, or entity, executing this Operating Agreement may be a physician licensed to practice in the State of Texas and in good standing with all State of Texas licensing boards or a corporation generally engaged in the business of health care services. 2 (m) "Membership Interest" shall mean a Member's entire interest in the Company including such Member's right to share in the Company's Net Profits, Net Losses, distributions of the Company's assets pursuant to this Operation Agreement and the Act, and the right to participate in the management of the business and affairs of the Company, including the right to vote on, consent to, or otherwise participate in any decision or action of or by the Members granted pursuant to this Operating Agreement and the Act. (n) "Net Profits" and "Net Losses" shall mean the income, gain, loss, deductions and credits of the Company in the aggregate or separately stated, as appropriate, determined in accordance with generally accepted accounting principles employed under the cash method of accounting at the close of each fiscal year on the Company's tax return filed for federal income tax purposes. (o) "Operating Agreement" shall mean the Regulations and Operating Agreement as originally executed and as amended from time to time. (p) "Percentage Interest" shall mean, for any Member, the percentage interest in the Company as set forth in Section 5.01, as may be changed from time to time by the unanimous vote of the members. (q) "Persons" shall mean any individual or Entity, and the heirs, executors, administrators, legal representatives, successors, and permitted assigns of such "Person" where the context so permits. (r) "Reserves" shall mean funds set aside or amounts allocated to reserves which shall be maintained in amounts deemed sufficient by the Managers for working capital and to pay taxes, insurance, debt service or other costs or expenses incident to the ownership or operation of the Company's business. (s) "Treasury Regulations" shall include proposed, temporary and final regulations promulgated under the Code. ARTICLE II. COMPANY NAME AND PURPOSE 2. 01 Name. The name of the Company shall be Vista Community Medical Center, L.L.C. and all business conducted by the Company shall be in this name. The Company is a domestic limited liability company as that term is defined and regulated by the Act as of the effective date set forth above. 2.02 Purpose. The company's purpose is to transact and carry on all lawful business for which a limited liability company may be operated in accordance with the Act. 2.03 Principal Place of Business. The principal place of business of the Company shall be located at 4301A Vista Road, Pasadena, Texas 77504. The Company may locate its places of business and registered office at any other place or places as the Managers may deem advisable. 3 2.04 Registered Office/Registered Agent. The Company's initial registered office shall be at, 10304 I-10 East, Suite 369, Houston, Texas 77029 and the name of its registered agent shall be Philip Chan. The registered office and registered agent may be changed by filing the address of the new registered office and/or the name of the new registered agent with the Texas Secretary of State, pursuant to the Act. 2.05 Term. The term of the Company is perpetual from the date of filing of Articles of Organization with the Texas Secretary of State, unless the Company is earlier dissolved in accordance with either the provisions of this Operating Agreement or the Act. ARTICLE III. MANAGERS 3. 01 Management. The business and affairs of the Company shall be managed by its Managers. The Managers shall direct, manage and control the business of the Company. Except for situations in which the approval of the Members is expressly required by this Operating Agreement or by nonwaivable provisions of the Act, the Managers shall have full and complete authority, power and discretion to manage and control the business, affairs and properties of the Company, to make all decisions regarding those matters and to perform any and all other acts or activities customary or incident to the management of the Company's business. Except as otherwise provided in this Operating Agreement, all decisions, approvals, determinations and actions affecting the Company shall be determined, made, approved, or authorized only by an affirmative vote of a majority of all Managers. 3.02 Number Of Managers. There shall be one (1) managers. The Managers are not required to be a resident of the State of Texas nor shall they be required to be a Member of the Company. The number of Managers may be increased or decreased by an affirmative vote of a Majority Interest of Members. 3.03 Manager's Powers. Without limiting the generality of Section 3.01, the Managers shall have power and authority, on behalf of the Company: (a) To acquire property from any Person as the Managers may determine, whether or not such Person is directly or indirectly affiliated or connected with any Manager or Member, (b) To open and maintain banking, checking, savings and trust accounts in the name of the Partnership at any bank, banking institution, trust companies, or other depositories deemed appropriate by the Managers. To borrow money for the Company from banks, other lending institutions, the Managers, Members, or affiliates of the Managers or Members on such terms as the Managers deem appropriate, and in connection therewith, to hypothecate, encumber and grant security interests in the assets of the Company to secure repayment of the borrowed sums. No debt shall be contracted or liability incurred by or on behalf of the Company except by the Managers, or to the extent permitted under the Act, by agents or employees of the Company expressly authorized to contract such debt or incur such liability by the Managers, 4 (c) To purchase liability and other insurance to protect the Company's property and business, (d) To hold and own Company real and personal properties in the name of the Company, (e) To invest Company funds in time deposits, short-term governmental obligations, commercial paper or other investments, (f) Upon the affirmative vote of the Members holding at least a majority of all Percentage Interests, to sell or otherwise dispose of all or substantially all of the assets of the Company as part of a single transaction or plan as long as such disposition is not in violation of or a cause of a default under any other agreement to which the Company may be bound, (g) To execute on behalf of the Company all instruments and documents, including, without limitation, checks; drafts notes and other negotiable instruments; mortgages or deeds of trust; security agreements, financing statements; documents providing for the acquisition, mortgage or disposition of the Company's property; assignments; bills of sale; leases, and any other instruments or documents necessary to the business of the Company, (h) To employ accountants, legal counsel, or other experts to perform as the Managers may approve. (i) To do and perform all other acts as may be necessary or appropriate to the conduct of the Company's business. (j) Enter into, make, and perform contracts, agreements, and other undertakings binding the Company that may be necessary, appropriate, or advisable in furtherance of the purposes of the Company and making all decisions and granting waivers thereunder. (k) Elect Officers of the Company pursuant to Section 8.01. and (l) Declare distributions to Members. Unless authorized to do so by this Operating Agreement or by the Managers of the Company, no attorney-in-fact, employee or other agent of the Company shall have any power or authority to bind the Company in any way, to pledge its credit or to render it liable for any purpose. No Member shall have any power or authority to bind the Company unless the Member has been authorized in writing by the Managers to act as an agent of the Company in accordance with the previous sentence. 5 3.04 Election of Managers. Managers shall be elected by an affirmative vote of the Members holding at least a Majority Interest. Cumulative voting shall not be permitted. Election of Managers shall occur at the annual meeting of the Company, regular meetings of the Members, or at any special meeting of the Members. Managers shall hold office until their successors are elected and qualified. 3.05 Resignations. Any Manager of the Company may resign at any time by giving written notice to the Members of the Company. The resignation of any Manager shall take effect upon receipt of notice thereof or at such later date specified in such notice; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. The resignation of a Manager who is also a member shall not affect the Manager's rights as a Member and shall not constitute a withdrawal of a Member. 3.06 Removal. At a meeting called expressly for that purpose, all or any lesser number of Managers may be removed at any time, with or without cause, by the affirmative vote of Members holding a Majority Interest. The removal of a Manager who is also a Member shall not affect the Manager's rights as a Member and shall not constitute a withdrawal of a Member. 3.07 Vacancies. Any vacancy occurring for any reason in the number of Managers of the Company may be filled by the affirmative vote of Members holding a Majority Interest. Any Manager's positions to be filled by reason of an increase in the number of Managers shall be filled by the election at a meeting of Members called for that purpose or by the Members' unanimous written consent. A Manager elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office and shall hold office until the expiration of such term and until his successor shall be elected and qualified or until his earlier death, resignation or removal. A Manager chosen to fill a position resulting from an increase in the number of Managers shall hold office until his successor shall be elected and qualified, or until his earlier death, resignation or removal. 3.08 Liability For Certain Acts. Each Manager shall perform his duties as Manager in good faith, in a manner he reasonably believes to be in the best interests of the Company, and with such care as an ordinarily prudent person in a like position would use under similar circumstances. A Manager shall not be liable to the Company or to any Member for any loss or damage sustained by the Company or any Member, unless the loss or damage shall have been the result of fraud, deceit, gross negligence, willful misconduct or a wrongful taking by the Manager. 3.09 Managers Have No Express Duty to Company. A Manager shall not be required to manage the Company as his sole and exclusive function and he may have other business interests and engage in activities in addition to those relating to the Company. Neither the Company nor any Member shall have any right, by virtue of this Operating Agreement, to share or participate in such other investments or activities of the Manager or to the income or proceeds derived therefrom. 3.10 Managers' Meetings. Managers' meetings, regular or special, may be held either within or without the State of Texas. Managers may participate in such meetings in person or by use of telephone equipment. An annual meeting of the Managers shall be held at a time and place as determined by the Managers. Additional or special meetings of the Managers shall be held whenever requested to do so by any Manager or the President by providing ten (10) days written 6 notice stating the date, time, place and purpose of the meeting. If all of the Managers execute a waiver of notice of the meeting, no notice shall be required. Attendance of Managers at any meeting shall constitute a waiver of notice of such meeting, except where the Managers attend a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 3.11 Quorum. A majority of the Managers shall constitute a quorum for the transaction of business at all meetings of the Managers unless a greater number is required by law or by the Articles of Organization. The act of a majority of the Managers present at any meeting at which a quorum is present shall be the act of the Managers unless the act of a greater number is required by statute, by the Articles of Organization or by these Regulations. If there is no quorum at a meeting of the Managers, then the meeting shall adjourn and a new notice be sent for a new meeting. If there is no quorum present at the successor meeting, then a majority of those present shall constitute a quorum, unless this action is prohibited by law. 3.12 Minutes Of Meetings. The Managers shall keep regular minutes of its proceedings. The minutes shall be placed in the Company's minute book. 3.13 Committees. The Managers may designate one or more committees to assist in the exercise of the management and business affairs of the Company, subject to the limitations set forth in the Act, and all amendments thereto. Any such committee, to the extent provided in such resolution, the Articles of Organization, or by this Operating Agreement, shall have and may exercise, subject to the control of the Managers, such powers and duties as prescribed and authorized by a majority of the Managers. Each such committee utilized the following minimum requirements and such other requirements as established by the Managers: (i) Each committee shall be comprised of at least one (1) Manager, who shall be the presiding chairman of the committee. The committee members shall be determined by a majority affirmative of the Managers. Committee members (with the exception of the presiding chairman) are not required to be either Managers or Members of the Company. (ii) Any members of any such committee may be removed by the Managers by the affirmative vote of a majority of the Managers, whenever in their judgment the best interests of the Company will be served thereby. (iii) The designation of one or more committees and the delegation of authority to any such committee shall not operate to relieve the Managers of any responsibility imposed upon them by law. (iv) Each such committee shall keep regular minutes of its proceedings and report the same to the Managers when required, but not less than on an annual basis (v) The salaries and/or other compensation of the committee members shall be determined by an affirmative vote of a majority of Managers. 7 3.14 Compensation. The salaries and other compensation of the Managers shall be fixed from time to time by an affirmative vote of the Managers, and no Manager shall be prevented from receiving such salary because he is also a Member of the Company. ARTICLE IV. MEMBERS 4.01 Members. Ownership rights in the Company are reflected as a percentage interest equal to One Hundred Percent (100%). No Member shall own less than one percent (1%) of the Company. The name, address, Percentage Interest, and value of capital contributed each Member shall be recorded in the records of the Company. Each Percentage Interest has equal rights regarding the governance of the Company and shall share equally in the profits, losses and distributions of the Company, in accordance with the provisions of Article VI. In matters subject to a vote of the Members, each Member shall have one vote for each percentage of interest owned. 4.02 Limitation of Liability. Each Member's liability shall be limited as set forth in this Operating Agreement, the Act, the judicial decisions of the State of Texas, and other applicable law. 4.03 Company Debt Liability. A Member will not be personally liable for any debts or losses of the Company beyond his respective Capital Contributions and any obligation of the Member under Section 6.01 and 6.02 to make Capital Contributions, except as provided in Section 4.07 or as otherwise required by law. 4.04 Approval of Sale of All Assets. The Members shall have the right, by the affirmative vote of members holding at least a majority of all Percentage Interests, to approve the sale, exchange or other disposition of all, or substantially all, of the Company's assets which is to occur as part of a single transaction or plan. 4.05 Company Books. The Managers shall maintain and preserve, during the term of the Company, the accounts, books, and other relevant Company documents described in Section 7.09. Upon reasonable written request, each Member shall have the right, at a time during ordinary business hours, as reasonably determined by the Managers, to inspect and copy, at the requesting Member's expense, the Company documents identified in Section 1-40 of the Act, and such other documents which the Manager, in his discretion, deems appropriate. 4.06 Priority and Return of Capital. Except as may be expressly provided in Section VII, no Member shall have priority over any other Member, either as to the return of Capital Contributions or as to Net Losses or distributions; provided that this Section shall not apply to loans which a Member has made to the Company. 4.07 Liability of a Member to the Company. A Member who receives a distribution or the return in whole or in part of its contribution is liable to the Company only to the extent provided by the Act. 8 ARTICLE V. MEETINGS OF MEMBERS 5.01 Meetings. A meeting for the election of Managers and for the transaction of all other business of the Company shall be held annually at a date and time specified by the Managers. Meetings of the Members, for any purpose or purposes, may be called by any Manager or by any Member or Members holding at least 25% of the Percentage Interests. 5.02 Place Of Meetings. The Members may designate any place, either within or outside the State of Texas, as the place of meeting for any meeting of the Members. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the principal place of business of the Company. 5.03 Notice Of Meetings. Excepts as provided in Section 6.04, written notice stating the place, day and hour of the meeting and the purpose or purposes for which the meeting is called shall be delivered not less than five nor more than thirty days before the date of the meeting, either personally or by mail, by or at the direction of the Managers or Member or Members calling the meeting, to each Member entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered two calendar days after being deposited in the United States mail, addressed to the Member at its address as it appears on the books of the Company, with postage thereon prepaid. 5.04 Meetings of All Members. If all of the Members shall meet at any time and place, either within or outside of the State of Texas, and consent to the holding of a meeting at such time and place, such meeting shall be valid without call or notice, and at such meeting lawful action may be taken. 5.05 Record Date. For the purpose of determining Members entitled to notice of or to vote at any meeting of Members or any adjournment thereof, or Members entitled to receive payment of any distribution, or in order to make a determination of Members for any other purpose, the date on which notice of the meeting is mailed or the date on which the resolution declaring such distribution is adopted, as the case may be, shall be the record date for such determination of Members. When a determination of Members entitled to vote at any meeting of Members has been made as provided in this Section, such determination shall apply to any adjournment thereof. 5.06 Quorum. Members holding at least fifty percent (50%) of all Percentage Interests, represented in person or by proxy, shall constitute a quorum at any meeting of Members. In the absence of a quorum at any such meeting, a majority of the Percentage Interests so represented may adjourn the meeting from time to time for a period not to exceed sixty days without further notice. However, if the adjournment is for more than sixty days, or if after the adjournment a new record date is fixed for the adjournment meeting, a notice of the adjourned meeting shall be given to each Member of record entitled to vote at the meeting. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. The Members present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal during such meeting of that number of Percentage Interest whose absence would cause less than a quorum. 9 5.07 Manner of Acting. If a quorum is present, the affirmative vote of Members holding a Majority Interest shall be the act of the Members, unless the vote of a greater or lesser proportion or number is otherwise required by the Act, by the Articles of Organization, or by the Operating Agreement. Unless otherwise expressly provided herein or required under applicable law, only Members who have a Membership Interest may vote or consent upon any matter and their vote or consent, as the case may be, shall be counted in the determination of whether the matter was approved by the Members. 5.08 No Cumulative Voting. There shall be no cumulative voting by the Members. 5.09 Proxies. At all meetings of Members, a Member may vote in person or by proxy executed in writing by the Member or by a duly authorized attorney-in- fact. Such proxy shall be filed with the Managers of the Company before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. 5.10 Action by Members without A Meeting. Action required or permitted to be taken at a meeting of Members may be taken without a meeting if the action is evidenced by one or more written consents describing the action taken, signed by each Member entitled to vote and delivered to the Managers of the Company for inclusion in the minutes or for filing with the Company records. Action taken under this Section is effective when all Members entitled to vote have signed the consent, unless the consent specifies a different effective date. 5.11 Waiver of Notice. When any notice is required to be given to any Member, a waiver thereof in writing signed by the person entitled to such notice, whether before, at, or after the time stated therein, shall be equivalent to the giving of such notice. ARTICLE VI. CONTRIBUTIONS TO THE COMPANY AND CAPITAL ACCOUNTS 6.01 Members' Capital Contributions. Each Member shall contribute an amount of cash or other valuable consideration determined by the Managers, as its share of the Initial Capital Contribution. 6.02 Additional Contributions. A Member shall be required to make such additional Capital Contributions as shall be determined by a majority affirmative vote of the Managers from time to time to be reasonably necessary to meet the expenses and obligations of the Company; however, in no event will such additional Capital Contributions ever exceed One Thousand and No/100 Dollars ($1,000.00) for each one percent (1.00%) Membership Interest owned by a Member. After the making of any such determination, the Managers shall give written notice to each Member of the amount of required additional contribution, and each Member shall deliver to the Company its pro rata share thereof (in proportion to the respective Percentage Interest of the Member on the date such notice is given) no later than thirty days following the date such notice is given. None of the terms, covenants, obligations or rights contained in this Section 6.02 is or shall be deemed to be for the benefit of any person or entity other than the Members and the Company, and no such third person shall under any circumstances have any right to compel any actions or payments by the Managers and or the Members. 10 6.03 Capital Accounts. (a) A separate Capital Account will be maintained for each Member. Each Member's Capital Account will be increased by (1) the amount of money contributed by such Member to the Company; (2) the fair market value of property contributed by such Member to the Company (net of liabilities secured by such contributed property that the Company is considered to assume or take subject to under Code Section 752); and (3) allocations to such Member of Net Profits and Net Losses; and (4) allocations to such Member of income described in Code Section 705(a)(1)(B). Each Member's Capital Account will be decreased by (1) the amount of money distributed to such Member by the Company; (2) the fair market value of property distributed to such Member by the Company (net of liabilities secured by such distributed property that such Member is considered to assume and take subject to under Code Section 752); (3) allocations to such Member of expenditures described in Code Section 705 (a)(2)(B); and (4) allocations to the account of such Member of Company loss and deduction as set forth in such Regulations, taking into account adjustments to reflect book value. (b) In the event of a permitted sale or exchange of a Membership Interest in the Company, the Capital Account of the transferor shall become the Capital Account of the transferee to the extent it relates to the transferred Membership Interest in accordance with Section 1.704- l(b)(2)(iv) of the Treasury Regulations. (c) The manner in which Capital Accounts are to be maintained pursuant to this Section 6.03 is intended to comply with the requirements of Code Section 704 (b) and the Treasury Regulations promulgated thereunder. If the Company determines that the manner in which Capital Accounts are to be maintained pursuant to the preceding provisions of this Section 6.03 should be modified in order to comply with Code Section 704 (b) and the Treasury Regulations, then notwithstanding anything to the contrary contained in the preceding provisions of this Section 603, the method in which Capital Accounts are maintained shall be so modified; provided, however, that any change in the manner of maintaining Capital Accounts shall not materially alter the economic agreement between or among the Members as set forth in the Operating Agreement. (d) Upon liquidation of the Company (or any Member's Membership Interest), liquidating distributions will be made in accordance with the positive Capital Account balances of the Members, as determined after taking into account all Capital Account adjustments for the Company's taxable year during which the liquidation occurs. Liquidation proceeds shall be paid within sixty (60) days of the end of the taxable year (or, if later, within on hundred twenty days after the date of liquidation). The Company may offset damages for breach of this Operating Agreement by a Member whose interest is liquidated (either upon the withdrawal of the Member or the liquidation of the Company) against the amount otherwise distributable to such Member. (e) Except as otherwise required in the Act (and subject to Section 6.01 and 6.02) no Member shall have any liability to restore all or any portion of a deficit balance in such Member's Capital Account. 11 6.04 Withdrawal or Reduction of Members' Contribution to Capital. (a) A Member shall not receive out of the Company's property any part of its Capital Contribution until all liabilities of the Company, except liabilities to Members on account of their Capital Contributions, have been paid or there remains property of the Company sufficient to pay them. (b) A Member, irrespective of the nature of its Capital Contribution, has only the right to demand and receive cash in return for its Capital Contribution. ARTICLE VII. ALLOCATIONS, INCOME TAX, DISTRIBUTIONS, ELECTIONS AND REPORTS 7.01 Allocations of Profits and Losses from Operations. (a) Profits and losses shall be allocated each fiscal year according to the number of percentage of Membership Interest owned, as reflected in the records of the Company. (b) For any Membership Interest not owned by the same person for the entire fiscal year the allocation shall be prorated. (c) The Company shall not recognize any assignment of a Member's right to share in profits and losses. 7.02 Special Allocations to Capital Accounts. Notwithstanding Section 8.01 hereof: (a) No allocations of loss, deduction and/or expenditures described in Code Section 705 (a)(2)(B) shall be charged to the Capital Account of any Member if such allocation would cause such Member to have a Deficit Capital Account. The amount of the loss, deduction and/or Code Section 705 (a)(2)(B) expenditure which would have caused a Member to have a Deficit Capital Account shall instead be charged to the Capital Account of any Members which would not have a Deficit Capital Account as a result of the allocation, in proportion to their respective Capital Contributions, or, if no such Members exist, then to the Members in accordance with their interests in Company profits pursuant to Section 7.01 (b) In the event any Member unexpectedly receives any adjustments, allocations, or distributions described in Sections 1.704- l(b)(2)(ii)(d)(4), (5), and (6) of the Treasury Regulations, which create or increase a Deficit Capital Account of such Member, then items of Company income and gain (consisting of a pro rate portion of each item of Company income, including gross income, and gain for such year and, if necessary, for subsequent years) shall be specially credited to the Capital Account of such Member in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations, the Deficit Capital Account so created as quickly as possible. It is the intent 12 that this Section 7.02 (b) be interpreted to comply with the alternate test for economic effect set forth in Section 1.7041 (b)(2)(ii)(d) of the Treasury Regulations. (c) In the event any Member would have a Deficit Capital Account at the end of any Company taxable year which is in excess of the sum of any amount that such Member is obligated to restore to the Company under Treasury Regulations Section 1.704-1(b)(2)(ii)(c) and such Member's share of minimum gain as defined in Section 1.704-2(g)(1) of the Treasury Regulations (which is also treated as an obligation to restore in accordance with Section 1.704-l(b)(2)(11)(d) of the Treasury Regulations), the Capital Account of such Member shall be specially credited with items of Membership income (including gross income) and gain in the amount of such excess as quickly as possible. (d) Notwithstanding any other provision of this Section 7.02, if there is a net decrease in the Company's minimum gain as defined in Treasury Regulation Section 1.704-2(d) during a taxable year of the Company, then the Capital Account of each Member shall be allocated items of income (including gross income) and gain for such year (and if necessary for subsequent years) equal to that Member's share of the net decrease in Company minimum gain. This Section 7.02 (d) is intended to comply with the minimum gain charge back requirement of Section 1.704-2 of the Treasury Regulations and shall be interpreted consistently therewith. If in any taxable year that the Company has a net decrease in the Company's minimum gain, and the minimum gain charge back requirement would cause a distortion in the economic arrangement among the Members and it is not expected that the Company will have sufficient other income to correct that distortion, the Managers may in their discretion (and shall, if requested to do so by a Member) seek to have the Internal Revenue Service waive the minimum gain charge back requirement in accordance with Treasury Regulation Section 1.704-2 (f)(4). (e) Items of Company loss, deduction and expenditures described in Code Section 705 (a)(2)(B) which are attributable to any nonrecourse debt of the Company and are characterized as partner (Member) nonrecourse deductions under Section 1.704-2(i) of the Treasury Regulations shall be allocated to the Members' Capital Accounts in accordance with Section 1.704-2(i) of the Treasury Regulations. (f) Beginning in the first taxable year in which there are allocations of "nonrecourse deductions" (as described in Section 1,704-2(b) of the Treasury Regulations) such deductions shall be allocated to the Members in accordance with, and as a part of, the allocations of Company profit or loss for such period. (g) In accordance with Code Section 704(c)(1)(A) and Section1.704- l(b)(2)(i)(iv)of the Treasury Regulations, if a Member contributes property with a fair market value that differs from its adjusted basis at the time of contribution, income, gain, loss and deduction with respect to the property shall, solely for federal income tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company and its fair market value at the time of contribution. (h) Pursuant to Code Section 704(c)(1)(B), if any contributed property is distributed by the Company other than to the contributing Member within five years of being 13 contributed, then, except as provided in Code Section 704(c)(2), the contributing Member shall be treated as recognizing gain or loss from the sale of such property in an amount equal to the gain or loss that would have been allocated to such Member under Code Section 704(c)(1)(A) if the property had been sold at its fair market value at the time of the distribution. (i) In the case of any distribution by the Company to a Member, such Member shall be treated as recognizing gain in an amount equal to the lesser of: (1) the excess (if any) of (A) the fair market value of the property (other than money) received in the distribution over (B) the adjusted basis of such Member's Membership Interest in the Company immediately before the distribution reduced (but not below zero) by the amount of money received in the distribution, or (2) the Net Pre-contribution Gain (as defined in Code Section 737 (b)) of the Member. The Net Pre-contribution Gain means the net gain (if any) which would have been recognized by the distributes Member under Code Section 704(c)(1)(B) of all property which (1) had been contributed to the Company within five years of the distribution, and (2) is held by the Company immediately before the distribution, if such property which had been contributed by the distributes Member to the Company, then such property shall not be taken into account under this Section 7.02 (i) and shall not be taken into account in determining the amount of the Net Pre-contribution Gain. If the property distributed consists of an interest in an entity, the preceding sentence shall not apply to the extent that the value of such interest is attributable to the property contributed to such entity after such interest had been contributed to the Company. (j) In connection with a Capital Contribution of money or other property (other than a de minimis amount) by a new or existing Member as consideration for a Membership Interest, or in connection with the liquidation of the Company or a distribution of money or other property (other than a de minimis amount) by the Company to a retiring Member (as consideration for a Membership Interest), the Capital Accounts of the members shall be adjusted to reflect a revaluation of Company property (including intangible assets) in accordance with Treasury Regulation Section 1.704-l(b)(2)(iv)(f). If, under Section 1.7041(b)(2)(iv)(f) of the Treasury Regulations, Company property that has been revalued is properly reflected in the Capital Accounts and on the books of the Company at a book value that differs from the adjusted tax basis of such property, then depreciation, depletion, amortization and gain or loss with respect to such property shall be shared among the Members in a manner that takes account of the variation between the adjusted tax basis of such property and its book value, in the same manner as variations between the adjusted tax basis and fair market value of property contributed to the Company are taken into account in determining the Members' shares of tax items under Code Section 704(c). (k) All recapture of income tax deductions resulting from the sale or disposition of Company property shall be allocated to the Member or Members to whom the deduction that gave rise to such recapture was allocated hereunder to the extent that such member is allocated any gain from the sale or other disposition of such property. 14 (1) Any credit or charge to the Capital Accounts of the Members pursuant to Sections 7.02 (b), (c) and/or (d), hereof shall be taken into account in computing subsequent allocation of profits and losses pursuant to Section 8.01, so that the net amount of any items charged or credited to Capital Accounts pursuant to Sections 8.01 and 8.02 shall to the extent possible, be equal to the net amount that would have been allocated to the Capital Account of each Member pursuant to the provisions of this Section VII if the special allocation required by Sections 7.02 (b), (c) and / or (d), had not occurred. 7.03 Distributions. Except as provided in Section 6.03 (d), a Member has no right to demand and receive any distribution in a form other than cash. All distribution of cash or other property shall be made to the Members pro rata in proportion to the respective Percentage Interests of the members on the record date of such distribution. Except as provided in Section 7.04, all distributions of Distributable Cash and property shall be made at such time and in such amounts as determined by the Managers. All amounts withheld pursuant to the Code or any provisions of state or local tax law with respect to any payment or distribution to the Members from the Company shall be treated as amounts distributed to the relevant Member or Members pursuant to this Section 7.03. 7.04 Limitation upon Distributions. (a) No distributions or return of contributions shall be made and paid if, after the distribution or return of distribution is made either (1) the Company would be insolvent; or (2) the net assets of the Company would be less that zero. (b) The Managers may base a determination that a distribution or return of contribution may be made under Section 7.04 (a) in good faith reliance upon a balance sheet and profit and loss statement of the Company represented to be correct by the person having charge of its books of account or certified by an independent public or certified public accountant or firm of accountants to fairly reflect the financial condition of the Company. 7.05 Accounting Principles. The profits and losses of the Company shall be determined in accordance with generally accepted accounting principles applied on a consistent basis using the accrual cash method of accounting. However, for Federal Income Tax purposes the Company may choose to use the cash basis of accounting if deemed appropriate by the Managers. 7.06 Interest On and Return Of Capital Contributions. No member shall be entitled to interest on its Capital Contribution or to return of its Capital Contribution. 7.07 Loans to Company. Nothing in this Operating Agreement shall prevent any Member from making secured or unsecured loans to the Company by agreement with the Company. 7.08 Accounting Period. The Company's accounting period shall be the calendar year ("Fiscal Year"). 15 7.09 Records, Audits and Reports. At the expense of the Company, the Manager shall maintain records and accounts of the operations and expenditures of the Company. At a minimum the Company shall keep at its principal place of business the following records: (a) A current list of the full name and last known address of each Member setting forth the amount of cash each Member has contributed, a description and statement of the agreed value of the other property or services each Member has contributed or has agreed to contribute in the future, and the date on which each became a Member; (b) A copy of the Articles of Organization of the Company and all amendments thereto, together with executed copies of any powers of attorney pursuant to which any amendment has been executed; (c) Copies of the Company's federal, state, and local income tax returns and reports if any, for the three most recent years; (d) Copies of Company's currently effective written Operating Agreement, and copies of any financial statements of the Company for the three most recent years; (e) Minutes of every meeting; (f) Any written consents obtained from Members for actions taken by Members without meeting, and (g) Unless contained in the Articles of Organization or the Operating Agreement, a writing prepared by the Managers setting out the following: (1) The times at which or events on the happening of which any additional contributions agreed to be made by each Member are to be made. (2) Any right of a Member to receive distributions that include a return of all or any part of the Member's contributions. (3) Any power of a Member to grant the right to become an assignee of any part of the Member's Interest, and the terms and conditions of the power. 7.10 Returns and Other Elections. The Managers shall cause the preparation and timely filing of all tax returns required to be filed by the Company pursuant to the Code and all other tax returns deemed necessary and required in each jurisdiction in which the Company does business. Copies of such returns, or pertinent information therefrom, shall be furnished to the Members within a reasonable time after the end of the Company's fiscal year upon the Members' written request. All elections permitted to be made by the Company under federal or state laws shall be made by the Managers in their sole discretion, provided that the Managers shall make any tax election requested by Members owning a Majority Interest. 16 7.11 Tax Matters Manager. Doctors Practice Management, Inc. is designated the "Tax Matters Manager", and is authorized by the Members and Managers, and is required to represent the Company (at the Company's expense) in connection with all examinations of the Company's affairs by tax authorities, including, without limitation, administrative and judicial proceedings, and to expend Company funds for professional services and costs associated therewith. The Members agree to cooperate with each other and to do or refrain from doing any and all things reasonably required to conduct such proceedings. ARTICLE VIII. OFFICERS OF THE COMPANY 8.01 Officers. The officers of the Company shall be a President, a Vice President, a Secretary, and a Treasurer. The Company may also have, at the discretion of the Managers, one or more Vice Presidents, one or more Assistant Secretaries, and one or more Assistant Treasurers. Any two or more offices, including President and Secretary, may be held by one person. No officers need be a Manager, Member or a resident of Texas. All officers shall be elected by and hold office at the pleasure of the Managers, which shall fix the compensation and tenure of all officers. The duties of the officers are as follows: (a) President. Subject to such supervisory powers of the Managers, the President shall also be the Chief Executive Officer the Company and shall, subject to the control of the Managers, have general supervision, direction, and control of the business and officers of the Company. The President shall have the general powers and duties of management usually vested in the office of President of a company; shall have such other powers and duties as may be prescribed by the Managers, or the Operating Agreement; and shall be ex officio member of all managers' committees, ---------- including the executive committee, if any. In addition, the President shall preside at all meetings of the Members and all meetings of the Managers. (b) Vice President. Any Vice President shall have such powers and perform such duties as from time to time may be prescribed by the Operating Agreement, by the Managers or by the President. In the absence or disability of the President, the senior or duly appointed Vice President, if any, shall perform all the duties of the President, pending action by the Managers. When so acting, such Vice President shall have all the powers of, and be subject to all the restrictions on, the President. (c) Secretary. The Secretary shall: (i) see that all notices are duly given in accordance with the provisions of the Operating Agreement and as required by law. In case of the absence or disability of the Secretary, or the Secretary's refusal or neglect to act, notice may be given and served by an Assistant Secretary, the President, any Vice President, or by the Managers; (ii) keep the minutes of Company meetings, and the Corporate Record Book, as set out herein; (iii) maintain, in the Corporate Record Book, a record of all Member Certificates issued or canceled and all Member Certificates of the Company canceled or transferred; (iv) be custodian of the Company's records and of any seal which the Company may from time to time adopt. When the Company exercises its right to use a seal, the Secretary shall see that the seal is embossed on all share certificates prior to 17 their issuance and on all documents authorized to be executed under seal in accordance with the provisions of the Operating Agreement; and (v) in general, perform all duties incident to the office of Secretary, and such other duties as from time to time may be required by the Operating Agreement, the Mangers or by the President. (d) Treasurer. The Treasurer shall: (i) have charge and custody of, and be responsible for, all funds and securities of the Company, and deposit all funds in the name of the Company in those banks, trust companies, or other depositories that shall be selected by the Managers; (ii) receive, and give receipt for, monies due and payable to the Company; (iii) disburse or cause to be disbursed the funds of the Company as may be directed by the Managers, taking proper vouchers for those disbursements; (iv) if required by the Managers or the President, give to the Company a bond to assure the faithful performance of the duties of the Treasurer's office and the restoration to the Company of all corporate books, papers, vouchers, money, and other property of whatever kind in the Treasurer's possession or control, in case of the Treasurer's death, resignation, retirement, or removal from office. Any such bond shall be in a sum satisfactory to the Managers, with one or more sureties or a surety company satisfactory to the Managers; and (v) in general, perform all the duties incident to the office and such other duties as from time to time may be assigned to the Treasurer by the Operating Agreement, by the President, or by the Managers. (e) Assistant Secretary and Assistant Treasurer. The Assistant Secretary or Assistant Treasurer shall have such powers and perform such duties as the Secretary or Treasurer, respectively, or as the Managers or President may prescribe. In case of the absence of the Secretary or Treasurer, the senior Assistant Secretary or Assistant Treasurer, respectively, may perform all of the functions of the Secretary or Treasurer. 8.02 Removal and Resignation of Officers. Any officer may be removed, either with or without cause, by majority vote of the Managers at any meeting of the Managers. Such removal shall be without prejudice to the contract rights, if any, of the person removed. The election or appointment of an officer shall not of itself create any contract rights. Any officer may resign at any time by giving written notice to the Managers, the President, or the Secretary of the Company. Any resignation shall take effect on the date of the receipt of that notice or at any later time specified therein, and, unless otherwise specified therein, the acceptance of that resignation shall not be necessary to make it effective. 8.03 Vacancies. Upon the occasion of any vacancy occurring in any office of the Company, by reason of death, resignation, removal, or otherwise, the Managers may elect an acting successor to hold office for the unexpired term or until a permanent successor is elected. 8.04 Compensation. The compensation of the officers shall be fixed from time to time by the Managers, and no officer shall be prevented from receiving a salary by reason of the fact that the officer is also a Member or Manager of the Company, or both. 18 ARTICLE IX. TRANSFERABILITY AND CERTIFICATES 9.01 Transferability. Except as otherwise specifically provided herein, no Member shall have the right, as to all or any part of its Membership Interest to: (a) sell, assign, pledge, hypothecate, transfer, exchange or otherwise transfer for consideration, (collectively, "sell"); or (b) gift, bequeath or otherwise transfer for no consideration (whether or not by operation of law, except in the case of bankruptcy), 9. 02 Right of First Refusal. (a) Offers to Buy. In the event a Member ("Offering Member") elects to sell all or any portion of his Membership Interest, the Member shall obtain a bona fide written offer ("Proposed Offer") setting forth the price for the Membership Interest, and shall contain all other pertinent terms and conditions of the Proposed Offer. The Offering Member shall provide written notice of the Proposed Offer to the Company. Upon receipt of the written notice with respect to the Proposed Offer, the Company shall have the exclusive first right and option, but not the obligation, exercisable at any time within thirty (30) days from the date of said Proposed Offer, to purchase from the Offering Member all, or any portion of the Member's Interest in the Company at either (i) the same price, and on the same terms and conditions as set forth in the Proposed Offer; or, (ii) a value for the Membership Interest as established in paragraph 9.02(D), whichever is the lesser value. If the Company decides to exercise its option to purchase the Membership Interest identified in the Proposed Offer, the Company shall give written notification of its election to buy said Membership Interests identified in the Proposed Offer to the Offering Member, with the purchase of such Membership Interest to be consummated within thirty (30) days after the date of such written notification. If the Company fails to make a timely election to buy the Membership Interests identified in the Proposed Offer, then such failure shall be deemed as an election to buy the Membership Interests identified in the Proposed Offer pursuant to the terms and conditions contained in the Proposed Offer. If the Company timely elects not to buy the Membership Interests identified in the Proposed Offer, then the Company shall, in good faith, make any and all reasonable efforts to sell all of the Membership Interest identified in the Proposed Offer to a qualified third party. (b) Death of Member. In the event a Member shall die ("Deceased Member"), the Company shall have the exclusive right and option, but not the obligation, to purchase any and all Membership Interests of the Deceased Member for the value established pursuant to paragraph 9.02(D). For the purposes of a sale contemplated by the death of a Member, the notice provisions set forth in paragraph 9.02(A) shall begin, thirty (30) days after the appointment and qualification of a personal representative of the Deceased Member's estate, or, in the event no personal representative shall qualify within one hundred twenty (120) days after the death of the Deceased Member, then thirty (30) days after such one 19 hundred twenty (120) day period shall have expired. If the Company timely elects not to buy the Ownership Interests of the Deceased Member, then the Company, and the Estate of the Deceased Member, shall, in good faith, jointly make any and all reasonable efforts to sell all of the Membership Interest in the Company to a qualified third party for the value established in paragraph 9.02 (D). If the spouse ("Deceased Spouse") of a Member ("Surviving Member") dies and it is determined that all or any portion of the Surviving Member's Membership Interests, or any portion of the Member's Interests held of record by the Deceased Spouse could vest in the Surviving Member ("Vested Interests"), then the Company shall have the exclusive first right, but not the obligation, to purchase such Vested Interests pursuant to the value established in paragraph 9.02(D). Upon the death of a Member's spouse, and the determination that there are Vested Interests, the Company shall have the exclusive first right, for thirty (30) days following the date of such determination, to purchase any or all of such Vested Interests. If within such thirty (30) day period the Company has not given written notice to the Surviving Spouse, or legal representatives of the Deceased Spouse, as to whether or not the Company will purchase any or all of the Allocated or Vested Interests, then the Company will be deemed to have determined to purchase none of such Membership Interests. (c) Termination Marital Relationship. If, upon the final divorce of any Member ("Divorced Member"), all or any portion of the Divorced Member's Membership Interests is allocated or set aside ("Allocated Interests") to his spouse ("Divorced Spouse"), the Company shall have the exclusive first right, but not the obligation, to purchase such Allocated Interests pursuant to the value established in paragraph 9.02(D). However, any Ownership Interests allocated or set aside to a Divorced Spouse who was a registered Member prior to such divorce shall not be deemed to be Allocated Interests. Upon the divorce of a Member and the determination that there are Allocated Interests, the Company shall have, for thirty (30) days following the date of such determination, the exclusive first right to purchase any or all of such Allocated Interests. Failure by the Company to timely exercise this first right to purchase will be deemed as a determination by the Company to not acquire any of the Membership Interest. (d) Price For Purchase Transactions. The purchase price established for all purchase transactions involving Membership Interests in the Company, as defined herein, when purchased by the Company, shall be the Book value as reflected in the Company's most recent quarterly financial report attributable to such Membership interest pursuant to the Regulations and in compliance with Article VI. (i) Notwithstanding the terms of purchase contained in any Proposed Offers, any purchase price payable by the Company for the purchase of any Membership Interest may be either paid in cash; or, alternatively, and at the sole option of the Company, deferred over a period of not more than one (1) year in the manner set forth below. (ii) Any deferred portion of the purchase price shall be evidenced by the execution of a promissory note by the Company, the payment of which shall be secured at any time, and from time to time, only by that Membership Interests which bears the same ratio to the total percentage of Membership Interests 20 purchased by the Company as that portion of the consideration remaining unpaid by the Company bears to the total consideration to be paid by the Company for all purchased membership Interests. Each such promissory note shall bear simple interest at the rate of eight percent (8.00%) per annum. (iii) Each promissory note shall require an initial payment, in cash, of at least thirty-three and one-third percent (33-1/3%) of the principal amount of the note, plus accrued interest thereon, if any. The initial payment shall be due and payable on the closing date. The remaining balance plus accrued interest shall be due and payable one (1) year from the closing date; however, all or any part of the principal amount of such note may be prepaid without penalty. Interest shall cease to accrue on any amount so prepaid, and the interest due under such note shall be adjusted accordingly. (e) Void Transfers. If any Ownership Interests shall be sold, transferred, encumbered, charged, or disposed of, other than in strict accordance with the terms and conditions of this Agreement, the Company shall have the right to treat such transfer as if it were void. The Company, upon approval of the Company's Managers at any time prior to the expiration of six (6) months after the Company receives written notice of any such transfer, may purchase such transferred Membership Interests instead of treating the transfer as void, at a value established in paragraph 9.02(D), and in all respects as if notice of the proposed transfer had been timely given as provided herein. In enforcing such rights, the Company may hold, and refuse to transfer, any Membership Interests or any certificate of ownership therefor presented to it for transfer in addition to, and without prejudice to, any and all other rights or remedies which may be available to it. 9.03 Company's Right of Repurchase. The Company upon the majority vote of the Managers, shall have the right, but not the obligation, to repurchase any Member's Membership Interest (hereinafter "Selling Member") upon the happening of any one (1 ) of the following event(s): (a) a Member obtains an equity interest in any other Hospital that is under common control with the Company; (b) The owners of a majority of the Membership Interests elect to repurchase a Member's Membership Interest; (c) The suspension, revocation, or cancellation of a Member's right to practice or conduct his, her, or its profession in the State of Texas; or, (d) a Member, or an affiliate of a Member enters into a management agreement, or other similar arrangement, pursuant to which all, or any portion, of such Member's, or affiliate of Member's, business is managed by some other entity than that which existed when the member purchased its interest. If the Company decides to exercise its option to repurchase a Membership Interest pursuant 9.03(a) or 9.03(b), the value attributable to the Member's Membership Interest repurchased under this section 9.03 shall be calculated and paid by the Company pursuant to section 9.02(D) hereof. 21 If the Company decides to exercise its option to repurchase a Membership Interest pursuant 9.03(c) or 9.03(d), the value attributable to the Member's Membership Interest repurchased under this section 9.03 shall be calculated at a price equal to Book Value as reflected in the Company's most recent quarterly financial report per one percent (1.00%) Membership Interest owned by the Selling Member. The Company shall give written notification of its election to repurchase said Membership Interests to the Selling Member, with the repurchase of such Membership Interest to be consummated within thirty (30) days after the date of such written notification. 9.04 Certificates. Certificates in the form determined by a majority vote of the Managers shall be delivered representing all Membership Interest to which Members are entitled. The Certificates shall be consecutively numbered, and entered in the Records of the Company as they are issued. Each certificate shall state on the face thereof the holder's name, amount of interest, and such other matters as may be required by the Managers or the laws of the State of Texas. Each certificate shall be signed by the President and Secretary of the Company, and shall be sealed with the official seal of the Company. 9.05 Legend on Certificates. The face of each ownership certificate shall be legended as follows: "SEE RESTRICTIONS ON REVERSE" The reverse of each ownership certificate evidencing Ownership Interests in Company shall be legended as follows: "THE TRANSFER OF MEMBERSHIP INTERESTS EVIDENCED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS, RESTRICTIONS AND CONDITIONS OF REGULATIONS AND JOINT OPERATING AGREEMENT WHICH EXPRESSLY LIMITS THE TRANSFERABILITY OF THE MEMBERSHIP INTERESTS. THE COMPANY WILL FURNISH TO THE RECORD HOLDER OF THIS CERTIFICATE, WITHOUT CHARGE, A COPY OF SUCH REGULATIONS AND JOINT OPERATING AGREEMENT UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS, OR REGISTERED OFFICE." 9.06 Replacement of Certificates. No replacement share certificate shall be issued until the former certificate for the shares represented thereby shall have been surrendered and canceled, except that replacements for lost or destroyed certificates may be issued, upon such terms, conditions, and guarantees as the Managers may see fit to impose, including the filing of sufficient indemnity. 9.07 Community Interest of Spouses. As additional consideration for the transfer of any Membership Interest by the Company, all Members agree (where applicable), to have their respective spouses review this Agreement, and execute the Community Interest Of Spouse Agreement, which is attached hereto and incorporated herein as Exhibit "A". In the event that any Member (where applicable) shall fail to obtain the execution of the Community Interest Of Spouse Agreement, then the Company shall have the right to treat any such transfer as if it were void. Should any Member not provide the Company with a fully executed version of the Community interest Of Spouse Agreement within ten (10) days of receipt of written notification of the 22 Member's failure to provide to the Company, the fully executed Community Interest Of Spouse Agreement, then the Company shall have the option, but not the obligation, to purchase the Member's Interest pursuant to the Paragraph 9.02(A). ARTICLE X. ADDITIONAL MEMBERS From the date of the formation of the Company, only those Persons or Entities acceptable to, and qualified by, the Managers by a majority vote thereof may become a Member in this Company either by the issuance by the Company of Membership Interest for such consideration as the Managers by majority vote shall determine, or as a transferee of a Member's Membership Interest or any portion thereof, subject to the terms and conditions of this Operating Agreement. No Person or Entity may become a Member as set forth in this Operating Agreement unless they are qualified to be a Member. No new Members shall be entitled to any retroactive allocation of losses, income or expense deductions incurred by the Company. The Managers may, at their option, at the time a Member is admitted, close the Company books (as though the Company's tax year has ended) or make pro rata allocations of loss, income and expense deductions to a new Member for that portion of the Company's tax year in which a Member was admitted in accordance with the provisions of Code Section 706 (d) and the Treasury Regulations promulgated thereunder. ARTICLE XI. DISSOLUTION AND TERMINATION 11. 01 Dissolution. (a) The Company shall be dissolved upon the occurrence of any of the following events: (i) by the unanimous written agreement of all Members; or (ii) an entry of a decree of judicial dissolution; (iii) and entry of an administrative dissolution. (b) Notwithstanding anything to the contrary in this Operating Agreement, if a Member or Members owning Percentage Interests, which in the aggregate constitute not less than majority of the Percentage Interest, vote to dissolve the Company at a meeting of the Company pursuant to Section V, then all of the Members shall agree in writing to dissolve the Company on the date agreed upon or in the event of no agreement, as soon as possible, but in any event not more than thirty days thereafter. (c) If a Member who is an individual dies or a court of competent jurisdiction adjudges him to be incompetent to manage his person or his property, the Member's executor, 23 administrator, guardian, conservator, or other legal representative may exercise all of the Member's rights for the purpose of settling his estate or administering his property. 11.02 Winding Up, Liquidation and Distribution of Assets. (a) Upon dissolution, an accounting shall be made by the Company's independent accountants of the accounts of the Company and of the Company's assets, liabilities and operations, from the date of the last previous accounting until the date of dissolution. The Managers shall immediately proceed to wind up the affairs of the Company. (b) If the Company is dissolved and its affairs are to be wound up, the Managers shall: (1) Sell or otherwise liquidate all of the Company's assets as promptly as practicable (except to the extent the Managers may determine to distribute any assets to the Members in kind), (2) Allocate any profit or loss resulting from such sales to the Member's Capital Accounts in accordance with Section VII hereof, (3) Discharge all liabilities of the Company, including liabilities to Members who are creditors, to the extent otherwise permitted by law, other that liabilities to Members for Distributions, and establish such Reserves as may be reasonably necessary to provide for contingent liabilities of the Company (for purposes of determining the Capital Accounts of the Members, the amounts of such Reserves shall be deemed to be an expense of the Company), (4) Distribute the remaining assets in the following order: (i) If any assets of the Company are to be distributed in kind, the net fair market value of such assets as of the date of dissolution shall be determined by independent appraisals, appointed by the Managers, or by 67% of the Members. Such assets shall be deemed to have been sold as of the date of dissolution for their fair market value, and the Capital Accounts of the Members shall be adjusted pursuant to the provisions of Section IV and Section 6.04 of this Operating Agreement to reflect such deemed sale. (ii) The positive balance (if any) of each Member's Capital Account (as determined after taking into account all Capital Account adjustments for the Company's taxable year during which the liquidation occurs) shall be distribution to the Members, either in cash or in kind, as determined by the Managers, with any assets distributed in kind being valued for this purpose at their fair market value as determined pursuant to Section 11.02 (b)(4)(i). Any such distributions to the Members in respect of their Capital Accounts shall be made in accordance with the time requirements set forth in Section 1.704 (b)(2)(ii)(b)(2) of the Treasury Regulations. 24 (c) Notwithstanding anything to the contrary in this Operating Agreement, upon a liquidation within the meaning of Section 1.704- 1(b)(2)(ii)(g) of the Treasury Regulations, if any Member has a Deficit Capital Account (after giving effect to all contributions, distributions, allocations and other Capital Account adjustments for all taxable years, including the year during which such liquidation occurs), such Member shall have no obligation to make any Capital Contribution, and the negative balance of such Member's Capital Account shall not be considered a debt owed by such Member to the Company or to any other Person for any purpose whatsoever. (d) Upon completion of the winding up, liquidation and distribution of the assets, the Company shall be deemed terminated. (e) The Managers shall comply with all requirements of applicable law pertaining to the winding up of the affairs of the Company and the final distribution of its assets. 11.03 Articles Of Dissolution. When all debts, liabilities and obligations of the Company have been paid and discharged or adequate provisions have been made therefor and all of the remaining property and assets of the Company have been distributed, articles of dissolution as required by the Act, shall be executed in duplicate and filed with the Texas Secretary of State. 11.04 Effect Of Filing of Articles of Dissolution. Upon the filing of articles of dissolution with the Texas Secretary of State, the existence of the Company shall cease, except for the purpose of suits, other proceedings and appropriate action as provided in the Act. The Managers shall have authority to distribute any Company property discovered after dissolution, convey real estate and take such other action as may be necessary on behalf of and in the name of Company. 11.05 Return Of Contribution Nonrecourse to Other Members. Except as provided by Law or as expressly provided in this Operating Agreement, upon dissolution, each Member shall look solely to the assets of the Company for the return of its Capital Contribution. If the Company property remaining after the payment or discharge of the debts and liabilities of the Company is insufficient to return the cash contribution of one or more Members, such Member or Members shall have no recourse against any other Member, except as otherwise provided by law. ARTICLE XII. INDEMNIFICATION AND INSURANCE 12.01 Indemnification of Managers and Officers. The Managers shall authorize the Company to pay or reimburse any present or former Manager or Officer of the Company any costs or expenses actually and necessarily incurred (including, but without limitation, judgments, penalties [including excise and similar taxes], fines, settlements, costs and reasonable attorneys' fees) by that Manager or Officer in any action, suit, or proceeding to which the Manager or Officer is made a party by reason of holding that position, provided, however, that no Manager or Officer shall receive such indemnification if finally adjudicated therein to be liable for gross negligence or misconduct in office. This indemnification shall be extend to good-faith expenditures incurred in anticipation of 25 threatened or proposed litigation. The Managers may, in proper cases, extend the indemnification to cover the good faith settlement of any such action, suit, or proceeding, whether formally instituted or not. Additionally, the Managers may, at their discretion pay any of the costs incurred during the pendency of any action, suit, or proceeding; provided that should the Manager or Officer be finally adjudicated as liable for any gross negligence or misconduct in office, any sums previously paid on behalf of said Manager or Officer shall be immediately repaid to the Company. 12.02 Liability Insurance. The Company may purchase and maintain insurance on behalf of any Manager, Officer, employee, or agent of the Company, or on behalf of any person serving at the request of the Company as a Manager, Officer, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against any liability asserted against that person and incurred by that person in any such corporation, whether or not the Company has the power to indemnify that person against liability for any of those acts. ARTICLE XIII. OTHER PROVISIONS 13.01 Waiver of Partition. No Member shall, either directly or indirectly, take any action to require partition or appraisement of the Company, Membership Interest, or of any of the assets or properties or cause the sale of any Company property, and notwithstanding any provisions of applicable law to the contrary, each Member (and his legal representatives, successors and assigns) hereby irrevocably waives any and all right to maintain any action for partition or to compel any sale with respect to his Membership Interest, or with respect to any assets or properties of the Company, except as expressly provided in this Operating Agreement. 13.02 Confidential Information. All information, material, terms, provisions, and data contained within this Operating Agreement or any information, report, material or data that is obtained or prepared as a result of this Agreement shall be deemed by the Members as proprietary and confidential information of the Company. The Managers and Members agree that they shall not, except as otherwise provided in this Operating Agreement, in any way disclose or disseminate said proprietary or confidential information, either orally or in writing, to anyone other than the Members and Managers, their attorneys, accountants, and/or financial advisors without the prior written consent of the Company. Notwithstanding the terms of this paragraph, the members, Managers and the Company may respond to any lawful discovery as may be required by a court of competent jurisdiction with sufficient notice to the Managers to allow for the Company to take appropriate legal action to insure the confidentiality of said proprietary and confidential information. 13.03 Books Of Account and Records. Proper and complete records and books of account shall be kept or shall be caused to be dept by the Managers in which shall be entered fully and accurately all transactions relating to the Company's business in such detail and completeness as is customary and usual for the businesses of the type engaged in by the Company. Such books and records shall be maintained as provided herein and shall at all times be maintained at the principal place of business of the Company. 26 13.04 Notices. Any notice, payment, demand, or communication required or permitted to be given by any provision of this Agreement shall be in writing and shall be deemed to have been delivered, given and received for all purposes (i) if delivered personally to the Party to whom the same is directed, or (ii) is sent by registered or certified mail, postage and charges prepaid, addressed as follows: if to the Company, to the Company at the address set forth in Section 2.03 hereof, or to such other address as the Company may from time to time specify by notice to the Members; if to Managers, to the Managers in care of the Company at the address set forth in Section 2.03 hereof, or to such other address as the Company may from time to time specify by notice to the Members and Managers; if to a Member, to such Member at the address set forth in the initial membership record, or to such other address as such Member may from time to time specify by notice to the Company. In the event any such notice is refused by the addressee for any reason whatsoever, then the date of such refusal shall be deemed the date of receipt of such notice by the addressee. 13.05 Binding Effect. Except as otherwise provided in the Operating Agreement, every covenant, term, and provision of the Operating Agreement shall be binding upon and inure to the benefit of the Members and their respective heirs, legatees, legal representatives, successors, transferees and assigns. 13.06 Construction. Every covenant, term, and provision of this Operating Agreement shall be construed simply according to its fair meaning and not strictly for or against any Member. 13.07 Headings. Section and other headings contained in this Operating Agreement are for reference purposes only and are not intended to describe, interpret, define or limit the scope, extent or intent of this Operating Agreement or any provision hereof. 13.08 Severability. Every provision of this Operating Agreement is intended to be severable. If any term, or provision of this Operating Agreement is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity or legality of the remainder of the Operating Agreement. 13.09 Further Action. Each Member agrees to perform all further acts and execute, acknowledge and deliver any documents which may be reasonably necessary, appropriate or desirable to carry out the provisions and intent of this Operating Agreement. 13.10 Variation of Pronouns. All pronouns and any variations thereof shall be deemed to refer to masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require. 13.11 Amendments. This Operating Agreement may not be amended, altered or repealed except in writing at a properly noticed meeting of the Members at which a quorum is present or represented. The vote required is an affirmative vote of Members holding at least two-thirds of all Percentage Interests. Any amendment changing the Percentage Interests of the Members requires the unanimous vote of the Members. 27 13.12 Waivers; The failure of any party to seek redress for default of or to insist upon the strict performance of any covenant or condition of this Operating Agreement shall not prevent a subsequent act, which would have originally constituted a default, from having the effect of an original default. 13.13 Governing Law. The laws of the State of Texas shall govern the validity of this Operating Agreement, the construction of its terms, and the interpretation of the rights and duties of the parties hereunder. This Operating Agreement is specifically performable in Houston, Harris County, Texas. 13.14 Creditors. None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the Company. 13.15 Representations. Each Member represents: (a) That he is a citizen of the United States of America. (b) That the Member understands that the membership interest purchased herein has not been registered under the Securities Act of 1993, as amended (the "Act") or any state securities law and may not be sold or transferred in the absence of any effective registration statement under the Act, or an exemption from the registration thereunder and compliance with applicable state securities laws. (c) That the purchase of the membership interest herein is within an exemption to the Act. (d) He is purchasing the membership interest for his own account. (e) He understands that this Agreement contains legally binding provisions, he has had the opportunity to consult with a lawyer, and has either (1) consulted with a lawyer, or; (2) decided not to consult with a lawyer. 13.16 Counterpart Execution. This Operating Agreement may be executed in any number of counterparts with same effect as if all of the Members had signed the same document. All counterparts shall be construed together and shall constitute one agreement. 28 IN WITNESS WHEREOF, the parties have entered in this Operating Agreement and have caused their signatures, or the signatures of their duly authorized representatives, to be set forth below on the day and year first above written. "MEMBERS" DOCTORS PRACTICE MANAGEMENT, INC. BY:_______________________________ Philip Chan, Vice President, CFO _______________________________________ _______________________________________ 29 EXHIBIT "A" COMMUNITY INTEREST OF SPOUSE AGREEMENT I, the undersigned, am the spouse of ____________, one of the members of Vista Community Medical Center, L.L.C. I have read, and do, by virtue of the execution of this instrument, ratify, adopt, confirm, state and stipulate, agree and accept the provisions of the Regulations And Operating Agreement Of Vista Community Medical Center, L.L.C., dated the ______ day of __________, 1998. I do hereby acknowledge and agree to be bound by all of the provisions of the Regulations And Operating Agreement, as may be amended from time to time, and particularly recognize Article X regarding the transferability of the membership interests in the event of the of the death of ________________or the termination of our marital relationship. By execution of this instrument, I do hereby ratify, adopt, confirm, state and stipulate, agree and accept, the provisions of the Agreement in lieu of all other interests, community or otherwise, that I may now have or will acquire in the future, in an to the membership interests in the Company. Furthermore, by execution of this instrument, I acknowledge that I have read and hereby state that I fully and completely understand the provisions of the Regulations And Operating Agreement Of Vista Community Medical Center, L.L.C., and specifically Article X. I have been provided with adequate opportunity to review this Agreement and the Regulations And Operating Agreement, and have either fully reviewed this with my attorney, or I have specifically chosen not to do so. Executed as of the date set forth below. Spouse: _________________________ Date:_______________________ Spouse of Member:__________________ 30 STATE OF TEXAS (S) (S) COUNTY OF HARRIS (S) BEFORE ME, the undersigned authority on this day personally appeared __________________________, spouse of _______________________, known to me to be the person whose name is subscribed on the foregoing instrument, after being duly sworn by me, acknowledged the instrument under oath. GIVEN UNDER MY HAND AND OFFICIAL SEAL OF OFFICE on this ____day of ____________________, 199_. _______________________________ Notary Public in and for the State of Texas _______________________________ My Commission Expires: 31 EX-27 8 FINANCIAL DATA SCHEDULE
5 1 12-MOS AUG-31-1999 AUG-31-1999 1,163,535 0 4,513,119 0 31,869 5,708,523 9,579,207 0 15,512,512 4,719,822 929,487 0 0 3,607 8,360,795 15,512,512 0 20,296,421 316,889 11,932,425 0 4,120,862 118,165 4,220,340 1,410,000 2,810,340 0 0 0 2,663,832 0.82 0.80
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