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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
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[_] 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
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DYNACQ INTERNATIONAL, INC.
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(Name of Small Business Issuer in its charter)
NEVADA 76-0375477
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
10304 INTERSTATE 10 EAST, SUITE 369
HOUSTON, TEXAS 77029
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(Address of principal executive (Zip Code)
offices)
Issuer's telephone number, including
area code (713) 673-6432
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class registered
None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $.001 Par Value
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(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
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Transitional Small Business Disclosure Format. Yes ____. No [X]
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FORM 10-KSB
DYNACQ INTERNATIONAL, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
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
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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.
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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.
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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
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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.
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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
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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
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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
<PAGE>
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.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
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)
</TABLE>
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
<PAGE>
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
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
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 ($) ($) ($) ($) (#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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-
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
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
---- ------- ------------------------ -------------- ---------------
<S> <C> <C> <C> <C>
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.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTIONS/SAR VALUES
<TABLE>
<CAPTION>
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
---- --------- -------- ------------- -------------
<S> <C> <C> <C> <C>
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.
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES AND
TITLE OF CLASS OF BENEFICIAL OWNER NATURE OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ---------------------- ------------------------- -------------------------------- -------------------
<S> <C> <C> <C>
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)
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/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
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS.
Not Applicable.
17
<PAGE>
DYNACQ INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended August 31, 1999
and August 31, 1998
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
INDEX
<TABLE>
<CAPTION>
A. Financial Statements Page
-------------------- ----
<S> <C>
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
</TABLE>
F-1
<PAGE>
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
<PAGE>
DYNACQ INTERNATIONAL, INC.
Consolidated Balance Sheet
August 31, 1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
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
===================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
DYNACQ INTERNATIONAL, INC.
Consolidated Statements of Income
For the Years Ended August 31, 1999 and 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998
---- ----
<S> <C> <C>
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
=================== ====================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
DYNACQ INTERNATIONAL, INC.
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended August 31, 1999 and 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Treasury Stock,
Common Stock at Cost Additional
------------ ------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings Total
------ ------ ------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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
=========== ========== ======== ========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
DYNACQ INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
For the Years Ended August 31, 1999 and 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1999 1998
---- ----
<S> <C> <C>
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 $ -
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
NOTE 3. PROPERTY AND EQUIPMENT
At August 31, 1999, property and equipment consisted of the following:
<TABLE>
<S> <C>
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
===========
</TABLE>
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
<PAGE>
NOTE 6. LONG-TERM DEBT
At August 31, 1999, long-term debt consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
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
=========
</TABLE>
The aggregate principal payments on long-term debt subsequent to August 31,
1999, are as follows:
<TABLE>
<CAPTION>
Year ending August 31,
<S> <C>
2000 $268,657
2001 297,522
2002 329,512
2003 58,453
--------
Total $954,144
========
</TABLE>
NOTE 7. INCOME TAXES
The provision for income tax expense consisted of the following at August 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
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
========== ========
</TABLE>
F-13
<PAGE>
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:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
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
=========== =========
</TABLE>
Significant components of the Company's deferred tax liabilities and assets, at
August 31, 1999, were as follows:
<TABLE>
<CAPTION>
Current Noncurrent
------- ----------
<S> <C> <C>
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)
=========== =========
</TABLE>
F-14
<PAGE>
NOTE 7. INCOME TAXES (continued)
The following table reconciles the Federal statutory income tax rate and the
Company's effective income tax rate:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
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%
==== ====
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
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
</TABLE>
F-17
<PAGE>
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:
<TABLE>
<CAPTION>
Weighted Average
Price
Date of Grant or
----------------
Number of Shares Exercise
---------------- --------
<S> <C> <C>
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
</TABLE>
The following table summarizes information about the Company's stock options at
August 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ----------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Prices Number Contractual Life Exercise Price Number Exercise Price
- --------------- ------ ---------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$ 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
======= =======
</TABLE>
F-18
<PAGE>
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
<PAGE>
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:
<TABLE>
<S> <C>
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
===========
</TABLE>
F-20
<PAGE>
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
<PAGE>
NOTE 13. SEGMENT AND RELATED INFORMATION (Continued)
Summarized financial information concerning the Company's reportable segments is
shown in the following table.
<TABLE>
<CAPTION>
Physician Emergency and Clinic and
Infusion Practice Inpatient Outpatient
Therapy Management Surgical Center Surgical Center Totals
------- ----------- ---------------- --------------- ------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
The following table provides a reconciliation of the reportable segments'
revenues, profit/(loss), assets, and other significant items to the consolidated
totals.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
</TABLE>
The Company's revenues and long-lived assets are derived and domiciled from a
customer base located solely in the United States.
F-22
<PAGE>
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
<PAGE>
(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
<PAGE>
(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
<PAGE>
(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
<PAGE>
(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
<PAGE>
EXHIBIT 10.37
<PAGE>
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.
<PAGE>
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
---------------------------------
<PAGE>
EXHIBIT 10.38
<PAGE>
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
<PAGE>
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
-----------------------------------------
<PAGE>
EXHIBIT 10.39
<PAGE>
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:
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(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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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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.
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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
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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
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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.
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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
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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:
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(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,
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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
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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
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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
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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.
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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.
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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,
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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.
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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
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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.
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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.
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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
<PAGE>
EXHIBIT 10.40
<PAGE>
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
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<PAGE>
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
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<PAGE>
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
<PAGE>
EXHIBIT 10.41
<PAGE>
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.
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<PAGE>
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
<PAGE>
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
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<PAGE>
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
<PAGE>
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
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<PAGE>
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.
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<PAGE>
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
<PAGE>
EXHIBIT 10.42
<PAGE>
__________________________________________________________________
VISTA COMMUNITY MEDICAL CENTER, L.L.C.
A Texas Limited Liability Corporation
__________________________________________________________________
REGULATIONS AND OPERATING AGREEMENT
__________________________________________________________________
<PAGE>
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:
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<PAGE>
(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.
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(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.
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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,
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(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.
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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
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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.
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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.
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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.
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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.
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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.
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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
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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
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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.
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(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").
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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.
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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
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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.
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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
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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
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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.
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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
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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,
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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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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