-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MAbdRJIi1fGwaYuv+Bdcni3gtA9jTiRgR3T/eSuz8lJCZxJusFmWeQvs4bJxCC43 nq2YULgXk+tLMrgU8zKl/Q== 0000950147-98-000496.txt : 19980630 0000950147-98-000496.hdr.sgml : 19980630 ACCESSION NUMBER: 0000950147-98-000496 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980629 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHAMPION FINANCIAL CORP /MD/ CENTRAL INDEX KEY: 0000877050 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 521949024 STATE OF INCORPORATION: UT FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-19499 FILM NUMBER: 98655564 BUSINESS ADDRESS: STREET 1: 9495 EAST SAN SALVADOR DR STREET 2: STE 1820 CITY: SCOTTSDALE STATE: AZ ZIP: 85258 BUSINESS PHONE: 6026144260 MAIL ADDRESS: STREET 1: 19 HILLSYDE COURT CITY: COCKEYSVILLE STATE: MD ZIP: 21030 10KSB 1 ANNUAL REPORT Securities and Exchange Commission Washington, D. C. 20549 ----------------------- FORM 10-KSB (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended March 31, 1998. OR |_| 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 0-19499 ------- CHAMPION FINANCIAL CORPORATION ------------------------------ (Name of Small Business as specified in its Charter) UTAH 88-0169547 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 9495 East San Salvador Drive, Scottsdale, Arizona 85258 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number: 602) 451-8575 ------------- Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Name of Each Exchange Title of Each Class in which Registered ------------------- ------------------- Common Stock, $.001 per share OTC Bulletin Board Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Check if there is disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. |_| Issuer's revenues for its most recent fiscal year were $7,853,996. The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average of the high and low closing sales prices of such stock as of June 23, 1998 was $11,322,456. As of such date, 5,955,802 shares of the Registrant's Common Stock were outstanding. Transitional Small Business Disclosure Format: (Check One): Yes |_| No |X| PART I Item 1. Business Overview Champion Financial Corporation ("Champion" or "Company") is a healthcare management company dedicated to controlling the costs, improving the quality and enhancing the delivery of healthcare services. The Company provides related products and services designed to reduce healthcare costs. The Company markets and provides programs and services to insurance companies, self-insured businesses for their medical plans, health and welfare funds and third parties who administer employee medical plans. These programs and services assist the Company's clients in reducing healthcare costs for group health plans and for workers' compensation coverage and automobile accident injury claims. The Company provides a wide array of medical cost containment services such as implementing and coordinating case management procedures, managing and reviewing the utilization of healthcare services, providing independent medical examinations and intervention in the early stages of medical care for the injured party, and comprehensive bill review, claims processing and medical repricing services. Through its subsidiaries: National Health Benefits & Casualty Corporation, a Nevada corporation ("NHBC"), Three Rivers Provider Network, a Nevada corporation ("TRPN") and the recently acquired HealthStar, Inc., an Illinois Corporation, ("HealthStar"), the Company provides access to, and operates, one of the largest independent preferred provider organizations ("PPO") of healthcare professionals and facilities in the United States. In addition, the Company offers a point of service ("POS") vision program, which offers members of the program an opportunity to obtain eye exams at reduced fees and purchase eye wear substantially below retail prices from participating providers. The Company seeks to expand its presence as a national provider of medical management services in the United States. To achieve this goal, the Company's strategy is to (i) expand its network of providers to areas currently not covered by provider contracts, (ii) expand its range of services, (iii) enhance its opportunities for growth through strategic acquisitions, and (iv) focus on creating a stronger market presence in the workers' compensation and automobile accident injury claim markets. Development of Business The Company is a Utah corporation organized in February 1981 as "Bersham Energy & Minerals, Inc." In 1984, the Company changed its name to "Champion Energy Corporation" and in 1989, changed its name to "Champion Financial Corporation". Prior to 1997, the Company was primarily an inactive corporation which most recently had been engaged in the business of distributing synthetic polymers and other polymers in the United States. In January 1997, the Company acquired all of the issued and outstanding stock of NHBC in a business combination accounted for as a reverse acquisition. NHBC was incorporated in Nevada in July 1996 to serve as the parent corporation of National Property Casualty Corporation ("NPCC"). NPCC has been in business since 1994 providing management of group healthcare services, workers' compensation claims and automobile accident medical claims for property and casualty insurers, third-party administrators, and self-insured employers, as well as a POS vision program. 2 In December 1997, the Company acquired HealthStar, Inc., based in Chicago, Illinois. HealthStar is a diversified healthcare and financial services company with over 14 years experience in the formulation and management of PPO networks. HealthStar employs over 220 people and operates managed care networks in the Midwest, Southeast and Southwest regions covering 23 states and 1.5 million lives. The HealthStar PPO network includes approximately 1,600 hospitals and 88,000 physicians. HealthStar was purchased for approximately $13,700,000. The purchase price consisted of $6,000,000 in cash plus 382,500 shares of Company stock, a $200,000 note to the seller and transaction and related costs of $1,244,902. Under the terms of the Purchase Agreement, there were certain contractual adjustments which were to be measured 90 days after the acquisition date whereby the purchase price will be adjusted accordingly. The Company is currently negotiating the final adjustment which is not expected to have a material adjustment on the purchase price. The cash portion of the purchase price was obtained through the following: o $4,000,000 of the Company's Series A 8% Senior Subordinated Convertible Redeemable Debentures due December 3, 1999. o $2,500,000 Term Loan bearing interest at the Prime Rate (8.5% at March 31, 1998) secured by substantially all of the assets of the Company due December 14, 2000; $2,000,000 of which was utilized for the purchase. In April 1998, the Company merged its subsidiary TRPN into HealthStar. Industry Overview In response to escalating healthcare costs over the past 20 years, federal and state governmental authorities have increasingly emphasized stringent cost-containment measures, and employers, consumers, and other purchasers of healthcare services have sought cost-effective alternatives to traditional indemnity insurance, under which providers generally receive payment on a fee-for-service basis. As a result, companies providing managed healthcare delivery systems developed. Managed healthcare encompasses various arrangements among healthcare providers, payors, and enrollees that apply direction of patients, case management, utilization review, utilization of authorization systems, and allocation of risks and rewards to increase the efficiency of delivery of healthcare services. Managed care delivery systems may include coalitions of independent medical practices, alliances between hospitals and individual medical practices or physician networks, PPOs, point of service plans and health maintenance organizations ("HMOs"). Managed care health plans create economic incentives designed to encourage patients to seek care from a panel of providers and for providers to monitor enrollees, eliminate inefficiencies, and reduce unnecessary utilization of services while maintaining and improving the quality of patient care. The managed care industry has expanded beyond traditional organizations providing cost containment services to group health insurance companies and self-funded employers to include workers' compensation coverages and automobile accident medical claims. Group health insurance benefits may be provided through various channels. One source is 3 the traditional insurance company that charges premiums and bears the underwriting risk. Another source is union health and welfare trust funds in which a certain amount of union dues are placed in a trust fund and administered by trustees in accordance with the Taft-Hartley Act. Group health benefits may also be provided by an employer that is self-insured. In these instances, the employer usually contracts with a Third Party Administrator (TPA) to administer the health plan. Most states have significant legislation related to group health insurance and HMOs. This legislation governs the financial incentives that an insurance company may give insureds. Some state insurance departments also regulate the services that can or must be covered by the insurance company. In addition, the payment of health claims is regulated. In most states, HMOs are highly regulated. PPOs, on the other hand, are usually not subject to the same degree of regulation. In some states, there is little or no regulation of PPOs, while in other states, PPOs are registered with the state but not subject to licensure. Self-insured plans are subject to the federal Employers Retirement Income Security Act (ERISA). The union health and welfare funds are subject to the provisions of the Taft-Hartley Act. Medical provider reimbursement methods for workers' compensation medical services vary on a state-by-state basis. A majority of the states have adopted fee schedules pursuant to which all healthcare providers are uniformly reimbursed. The fee schedules mandated by each state typically establish the maximum amounts that are required to be reimbursed for each procedure. In states without fee schedules, healthcare providers are reimbursed based on usual, customary and reasonable ("UCR") fees charged in the particular geographic area within the state in which the services are provided. Workers' compensation is a statutorily defined employee benefit which varies on a state-by-state basis. Workers' compensation laws generally require employers to fully pay for employees' costs of medical treatment and a significant portion of lost wages, legal fees and other costs associated with work-related injuries and disabilities. Companies provide such coverage to their employees through either the purchase of commercial insurance from private insurance companies, participation in state-run funds or through self-insurance. For workers' compensation claims, many states do not permit employers to restrict a claimant's choice of healthcare provider, making it more difficult for employers and private insurance companies to utilize traditional managed care approaches. However, employers in 20 states currently have the right to direct employees to a specific primary healthcare provider during the onset of a workers' compensation case, subject to the right of the employee to change physicians after a specific period. Recently, a number of states have adopted legislation encouraging the use of workers' compensation managed care organizations in an effort to allow employers to control their workers' compensation costs. The automobile casualty industry is slowly beginning to incorporate managed care services into controlling the medical care cost for the clients that are injured in an automobile accident. Like the workers' compensation industry, the automobile insurance industry is regulated on a state-by-state basis. While regulatory approval is not required for the Company to offer most of its services to the automobile insurance market, state regulatory approval is required in order to offer automobile insurers products that permit them to direct claimants into a network of medical providers. Currently, several states have legislated the optional use of PPOs by private automobile, property and casualty insurance companies and in return, the insured receives a reduced annual premium. Additionally, six states have adopted fee schedules for healthcare providers to be reimbursed for automobile related injuries. Because of escalating medical costs, the Company expects that additional states will pass legislation adopting managed care components for insureds 4 injured in an automobile accident. The management of the Company believes that the growing implementation of managed case services in the automobile casualty industry creates additional market opportunities. The Company's Programs and Services The Company assists its customers in managing the increasing medical costs of group health plans, workers' compensation claims and automobile related injury claims through managed care techniques by providing access to a PPO network, and the POS vision program, as well as a variety of cost containment services such as utilization review, case management, bill review, claims processing and medical repricing. In addition, the Company provides bill negotiation for clients on medical claims from health care providers who do not participate in the Company's PPO networks. The Company has contracts with over 400 insurance companies, third party administrators, health and welfare funds and self-insured employers of all sizes in approximately 38 states. Five clients accounted for, in the aggregate, approximately 25% of the Company's revenue for the fiscal year ended March 31, 1998. No single client accounted for more than 9% of the Company's revenue in fiscal 1998. PPO Networks PPOs are typically groups of hospitals, physicians and other healthcare providers that offer services at pre-negotiated rates to groups. PPO networks offer the Company's clients a means of managing healthcare costs by reducing the per-unit price of medical services provided to clients, reviewing utilization and managing high cost cases. The Company's network is one of the largest independent networks of directly contracted hospitals available in the United States and includes acute care hospitals, out-patient facilities, physical rehabilitation services, ancillary services and a panel of primary care physicians and specialists. In addition to directly contracted providers, the Company provides its customers with access to a limited number of PPO networks organized by others which meet the Company's criteria for provider selection. The Company uses the following guidelines in determining a provider's eligibility for membership in the PPO: (a) geographic locations to meet the needs of payors; (b) demonstrated cost effectiveness; (c) range of service offered; (d) verification of provider's adequate professional liability insurance and all licenses and certifications as required by law and (e) risk profile including malpractice litigation history and licensure actions. The Company provides limited or full access to its PPO network depending upon the client's business practices and the level of savings for medical costs that the client is seeking. Some customers will access all the Company's PPO networks, while other customers will only contract with the Company for a very specific geographic region. Most customers access the Company's network of both hospitals and other healthcare providers including physicians. However, there are some customers who only access the Company's PPO hospitals. As of the end of the fiscal year, the Company had direct contracts with over 1,600 hospitals and 88,000 physicians. In addition, there were 5,000 other healthcare providers under contract, including ancillary providers, home health care agencies, pharmacies and outpatient facilities. Clients provide their subscribers with identification cards with the Company's logo and information. In addition, most clients provide their subscribers with a directory of network providers and financial incentives to seek care from the network providers. The Company contracts with most hospitals using a per diem methodology for inpatient 5 services. Hospital outpatient services are currently contracted on a percentage discount from billed charges. This outpatient services billing methodology is being converted to a percentage of a hospital's inpatient per diem. Physicians and other providers are normally contracted on a percentage discount from billed charges based upon a fee schedule taking into account the provider's specialty and geographic location. The Company's standard contract with a provider has an initial term of two years with automatic one-year renewal unless the contracting provider or the Company provides written notice of termination, typically 90 days prior to the renewal date. The Company also offers a network of facilities known as the Exclusive Provider Organization ("EPO"). The health care providers in the EPO network have agreed to further discounts in exchange for proper patient identification, direction on the facilities that may be used, and greater financial incentives than found in the PPO network of providers. Over the years, the Company has become more involved in managing its client's healthcare costs when the client chooses to utilize the Company's EPO network. The EPO network normally requires enhanced utilization review and case management services. Although some state legislation prohibits automobile insurance companies from directing a patient to a facility when the insured has suffered an injury, no state legislation prohibits the insured from electing to direct their own treatment in time for medical need. Consequently, a cost containment program called Elective Extension of Benefits was instituted by the Company on behalf of its automobile insurance clients. The creation of Elective Extension of Benefits was designed to permit the automobile policyholder to extend the number of medical care visits by utilizing one of the Company's contracted medical providers. When the provider has agreed to accept a medical reimbursement below their usual and customary fees, the policyholder is able to receive more treatments without exceeding the medical limits of their policy. Clients of the Company enhance benefits to their policyholders by permitting the policyholder access to providers willing to reduce their fee for service. A recently developed product is the Company's Non-Par Claims program. In this program the Company negotiates a discount from medical providers who do not participate in the PPO networks being accessed by the customer, but who submitted a medical claim to a customer of the Company. Many of these non-participating providers are willing to give a one time discount on the submitted claim in exchange for timely payment of that claim. In exchange for the discount, the client must pay the claim in a timely manner, usually within two weeks. The Company receives a percentage of the savings as compensation for securing the discount. The Company has contracts with over 400 insurance companies, third party administrators, health and welfare funds and self-insured employers of all sizes in approximately 38 states. These clients then provide their subscribers with identification cards, directories of the PPO network and in most cases, financial incentives to utilize the PPO network. In addition to the printed directory, each policyholder is given the opportunity to contact the Company on its toll free line when requesting a qualified provider in his or her own community. The Company also has a web site that allows subscribers to locate medical providers. With more than 1,600 hospitals and 88,000 physicians directly contracted in the network, the Company is striving to ensure that its providers are located in areas desired by its customers. The Company's compensation for network access is based on either a percentage of savings, or a fixed access fee based on the number of insureds ("Capitation Fee"). The majority of the clients 6 accessing the PPO networks pay the Company on the Capitation Fee basis. This fee varies based upon the scope of services contracted. Clients who have contracted with the Company for the Workers' Compensation network, the automobile casualty network and the Non-par Claims product all reimburse the Company on a percentage of savings basis. The fee is a percentage of the savings generated off of billed charges. Although the Company maintains its own PPO, it also contracts with other national and regional PPOs based on the needs and demographics of its clients. The PPO access fee paid by the Company to these contracted PPOs ranges from 8% to 21% of the savings. The Company plans to continue to directly contract with providers whenever possible. Therefore, the relationships with other national and regional PPOs will continue to be terminated over the next year in accordance with their contract terms. Bill Review, Claims Processing and Medical Repricing Services The Company offers retrospective bill review, claims processing and medical repricing services for physician and hospital bills ("Bill Review"). Bill Review consists of an on-line computer-based information system which stores and accesses state-mandated fee schedules and licensed usual and customary charge information for the review of medical charges. The management of the Company believes that their program is one of the most comprehensive bill review and medical repricing programs in today's market. The Company's software systems monitor the bills by matching procedure codes with the prevailing medical diagnosis thus making the necessary adjustments. Prior to the application of a PPO fee schedule, the Bill Review system screens each bill for more than 90 different unwarranted charges. After a review of the entire bill, the Bill Review system automatically makes the necessary corrections and adjustments. In addition, the Bill Review system reveals duplicate procedures, validates medical procedures and analyzes the relationship of diagnosis to procedures performed. As part of the contractual arrangements with the PPO network, clients are able to access certain PPO contracted rates that can result in costs below the state-mandated fee schedule, which may generate additional savings. Vision Program The Company's First American Vision Services ("FAVS") program is a POS vision program offering its members the opportunity to purchase eye wear substantially below retail prices, when purchased from an independently owned FAVS provider. In addition, members are entitled to an eye examination at a pre-established reduced fee. The program benefits are extended to the members and their immediate families, and there are no restrictions on the number of purchases. The Company maintains toll free telephone lines to assist members in accessing the nearest FAVS provider. FAVS providers consist primarily of Doctors of Optometry and to a lesser extent licensed opticians. As of March 31, 1998, there were approximately 3,650 vision care providers and 1.2 million members participating in the FAVS program. In addition to receiving reductions in the cost of an eye exam and eye wear purchases, a member is entitled to purchase replacement contact lenses at the wholesale price through the FAVS mail order program. The member simply provides the Company with a current copy of their prescription in order to purchase replacement contact lenses which are sent to them in the original 7 manufacturer's containers. This program is available in most states, while a few states prohibit the dispensing of contact lenses directly to the patient. Sales and Marketing The Company actively markets its services to group health insurance companies, automobile insurance companies, workers' compensation insurance companies, third-party administrators and self-insured employers through the Company's direct sales force of seven full-time professionals. The Company creates interest and demand for its programs and services primarily through direct contact with potential customers and follow-up with marketing literature and information designed to specifically address the client's needs. The Company also participates in managed healthcare conventions and trade shows and advertises its services on a limited basis in trade journals and other print media, primarily to enhance name recognition and its reputation in the managed care cost containment industry. Competition The managed healthcare cost containment industry is highly fragmented, with a large number of competitors. The Company does not believe that any single company commands significant market share. Competition for customers is intense, and management of the Company believes the level of competition will continue to increase in the future. Most of the Company's competitors are national managed care providers, insurance companies, HMOs, and third-party administrators that have implemented their own managed care programs. Several large insurance companies for workers' compensation, health and automobile have also implemented their own cost-containment programs through the carrier's own personnel. Many of the Company's current and potential competitors are significantly larger and have greater financial, technical, marketing, and management resources than the Company. The Company competes on the basis of its specialized knowledge and expertise in the managed healthcare services industry and on its ability to deliver effective services to the customer with a high level of customer satisfaction at a very affordable price. The managed healthcare industry has experienced significant changes in recent years, primarily as a result of rising healthcare costs. The Company will be required to respond to various competitive factors affecting the healthcare industry, including new medical technologies that may be introduced; general trends relating to demand for healthcare services; regulatory, economic, and political factors; changes in patient demographics; and competitive pricing strategies by HMOs and other healthcare plans. There can be no assurance that the Company will be able to compete successfully. Over the past few years, there has been much discussion regarding "Silent PPOs". These are payors that do not refer or direct patients to network providers but still take discounts on health care claims. The Silent PPOs have undercut the integrity of managed care and damaged the reputation of legitimate PPO networks. The Company has spent considerable time over the past few years educating its staff, providers and customers about Silent PPOs. The Company is not in fact, or appearance, a Silent PPO because all of the Company's standard contracts require identification cards, directories and financial incentives. 8 Intellectual Property, Proprietary Rights, and Licenses The Company regards certain features of its programs and services as proprietary and relies on a combination of contract, copyright, trade secret laws and other measures to protect its proprietary information. As part of its confidentiality procedures, the Company generally obtains nondisclosure agreements from its employees and hospital-clients and limits access to and distribution of its software, documentation, and other proprietary information. The Company believes that trade secret and copyright protection are less significant than factors such as the knowledge, ability, and experience of the Company's employees and the timeliness and quality of the services they provide. In addition, HealthStar holds several federally registered trademarks, including the name HealthStar. The Company has aggressively pursued any suspected trademark infringement of the HealthStar name. Government Regulation Managed healthcare programs for group healthcare, workers' compensation and automobile accident injuries are conducted within a regulated environment. The Company's activities are regulated principally at the state level, which means the Company may be required to comply with certain regulatory standards which differ from state to state. Although the laws affecting the Company's operations vary widely from state to state, these laws fall into four principal categories: (i) laws that require licensing, certification or other approval of businesses that provide managed healthcare services; (ii) laws regulating the operation of managed care provider networks; (iii) laws that restrict the methods and procedures that the Company may employ in its health, workers' compensation and automobile managed care programs; and (iv) proposed laws which, if adopted, would have as their objective the reform of the healthcare system as a whole. Generally, parties that actually provide or arrange for the provision of healthcare services assume financial risk related to the provision of those services, or undertake direct responsibility for making payment or payment decisions for those services, are subject to a number of complex regulations that govern many aspects of their conduct and operations. In contrast, the services provided by the Company to its customers typically have not been the subject of regulation by the federal government and most states. Since the managed healthcare field is a rapidly expanding and changing industry and the cost of providing healthcare continues to increase, it is possible that the applicable state and federal regulatory frameworks will expand to more fully regulate the conduct and operation of the Company's business. The Company's ability to provide comprehensive managed care services depends in part on its ability to contract with or create networks of healthcare facilities and providers which share the Company's objectives. The Company offers access to networks of healthcare providers selected by the Company for quality of care and pricing. New laws regulating the operation of managed care provider networks have been adopted by a number of states. These laws may apply to managed care provider networks having contracts with the Company or to provider networks which the Company may organize or acquire. To the extent the Company is governed by these regulations, it may be subject to additional licensing requirements, financial oversight and procedural standards for beneficiaries and providers. These regulations may result in increased costs of operations for the Company, which may have an adverse impact upon the Company's ability to compete with other available alternatives for healthcare cost control. 9 The Employee Retirement Income Security Act of 1974 ("ERISA"), governs employee benefit plans offered by employers who self-insure. Employers opt to self insure as a way to underwrite their own health claims and better control their healthcare costs. Regulation of such self-insured benefit plans falls under the jurisdiction of the United States Department of Labor, which has strict guidelines relative to such plans and to the TPAs which administer such plans. In addition to the ERISA guidelines, a TPA may be subject to additional state requirements regarding registration. The Company does not engage in any professional practice or control the cost of professional services. Likewise, the Company does not believe that membership in the Company's programs constitutes insurance subjecting the Company to laws and regulations governing healthcare insurers and their operations. Certain regulations, present in most state and local jurisdictions, relating to the standards governing licensed healthcare professionals, prohibit such professionals from compensating any third person for soliciting patients or patronage on their behalf. Although the Company has not sought or received confirmation from government officials or an opinion of counsel, the Company believes that payments to the Company by participating vision and chiropractic providers do not violate such regulations since the Company's programs involve only the purchase of products and services on a cost containment basis. The automobile insurance industry, like the workers' compensation industry, is regulated on a state-by-state basis. While regulatory approval is not required for the Company to offer most of its services to the automobile insurance market, state regulatory approval is required in order to offer automobile insurers products that permit them to direct claimants into a network of medical providers. To date, only a few states have legislation that permits such direction of care. Regulations in the healthcare, workers' compensation and automobile insurance fields are constantly evolving. The Company is unable to predict what additional regulations, if any, affecting its business may be promulgated in the future. The Company's business may be adversely affected by failure to comply with existing laws and regulations, failure to obtain necessary licenses and government approvals or failure to adapt to new or modified regulatory requirements. Proposals for healthcare legislative reforms are regularly considered at the federal and state levels. In addition, changes in workers' compensation laws and regulations may impact demand for the Company's services, require the Company to develop new or modified services to meet the demands of the marketplace or modify the fees that the Company may charge for its services. Recently, the managed care industry has received significant amounts of negative publicity. This publicity, in turn, has contributed to increased legislative activity, regulation and review of industry practices. These factors may adversely affect the Company's ability to market its products or services, could necessitate changes in the Company's products and services, and may increase regulatory burdens under which the Company operates, further increasing the costs of doing business and adversely affecting profitability. Employees As of March 31, 1998, the Company had 198 full-time employees and 59 part time employees, including its corporate officers. The vast majority of the employees, 173 full-time and 56 part-time, were employed by HealthStar. The remaining 28 employees were employed by the Company and NHBC. The Company has no collective bargaining agreements with any unions and 10 believes that its overall relations with its employees are good. The operations and success of the Company are dependent in large part upon the efforts and abilities of Stephen J. Carder, the Company's President and Chief Executive Officer. The loss of services of Mr. Carder would have a material and adverse effect upon the Company. The Company has not procured "keyman" insurance policies on the life of Mr. Carder. The Company intends to hire additional executive personnel in connection with the proposed expansion of its business and its acquisition of additional PPO networks. There can be no assurance the Company will be successful in attracting or retaining qualified personnel in such areas, and management's plan of operation could be adversely affected if qualified personnel are not immediately available as needed. "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 Certain statements contained in the Business section and elsewhere in this Form 10-KSB, including certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations herein, that are not historical facts may be deemed to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (`PSLRA"). When used in this Form 10-KSB and in future filings by the Company with the Securities and Exchange Commission, in Company's press releases, and in oral statements made by or with the approval of an authorized executive officer of the Company, the words or phrases "believes," "anticipates," "intends," "will likely result," "estimates," "projects" or similar expressions are intended to identify such forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause the Company's actual results to differ materially from the results described in the forward-looking statements. Factors that May Effect Future Operating Results The discussion below relates to certain factors regarding the Company's business that investors and others should consider. The discussion is intended to qualify under the "safe harbor" provisions of the PSLRA. In discussing these factors, the Company is not undertaking to address or update each factor in future filings or communications regarding the Company's business or results, and is not undertaking to address how any of these factors may have caused results to differ from discussions or information contained in previous filings or communications. In addition, any of the matters discussed herein may have affected the Company's past, as well as current, forward-looking statements about future results, so that the Company's actual results in the future may differ materially from those expressed in prior communication. Volatility of Stock Market The market prices of the securities of certain publicly-held companies in the industry in which the Company operates have shown volatility and sensitivity in response to many factors, including general market trends, public communications regarding managed care, legislative or regulatory actions, healthcare costs trends, pricing trends, competition, earnings and acquisition activity. There can be no assurance regarding the level or stability of the Company's share price at any time or the impact of these or any other factors on share price. 11 Control By Management Stephen J. Carder, President and Chief Executive Officer of the Company, has voting control of approximately 18.78% of the outstanding shares of the Company's Common Stock. In addition, the Board of Directors has voting control over 1,500,000 shares of Common Stock held by InfoPlan Partners, LLC pursuant to an Irrevocable Proxy by InfoPlan Partners dated April 16, 1998. The Irrevocable Proxy expires at the conclusion of the Annual Meeting of the Shareholders of the Company to be conducted in calendar year 1998. In total, senior management and the Board of Directors have voting control of approximately 44.42% of the outstanding shares of the Company's Common Stock. Consequently, senior management and the Board of Directors of the Company will have a significant influence over the policies and affairs of the Company and will be in a position to influence the outcome of corporate actions requiring stockholder approval, including the election of directors, the adoption of amendments to the Company's corporate documents and approval of mergers and sales of the Company's assets. See "Security Ownership of Certain Beneficial Owners and Management". Possible Litigation and Legal Liability The Company contracts and markets medical care utilization management services and case management services that make recommendations concerning the appropriateness of providers medical treatment plans of patients throughout the country, and it could share in potential liabilities for adverse medical consequences. The Company does not grant or deny claims for payment of benefits and the Company does not believe that it engages in the practice of medicine or the delivery of medical services. There can be no assurance however, that the Company will not be subject to claims or litigation related to the grant or denial of claims for payment of benefits or allegations that the Company engages in the practice of medicine or the delivery of medical service. In addition, there can be no assurance that the Company will not be subject to other litigation that may adversely affect the Company's business or results of operations. The Company is subject to potential product liability in its mail order contact lens distribution business arising from dispensing incorrect prescriptions, potential product tampering or damage including that occurring while in the mail distribution system or lack of personal customer and physician contact. In addition, it is possible that the Company could be named as a party in any malpractice action which might be brought against a physician or hospital in the Company's PPO network. The Company does not have product liability insurance or insurance intended to protect against claims which might be asserted in any malpractice action. If the Company were found liable for any such claim, the cost of defending such claim as well as any judgment against the Company, could materially adversely affect the Company's financial condition, results of operations and future prospects. Risks Related To Growth Strategy The Company's strategy is to continue its internal growth and, as strategic opportunities arise, to consider acquisitions of, or relationships with, other companies in related lines of business. As a result, the Company is subject to certain growth-related risks, including the risk that it will be unable to attract and retain personnel or acquire other resources necessary to service such growth adequately. Expenses arising from the Company's efforts to increase its market penetration may have a negative impact on operating results. In addition, there can be no assurance that any suitable opportunities for strategic acquisitions or relationships will arise or, if they do arise, that the 12 transactions contemplated thereby could be completed. If such a transaction does occur, there can be no assurance that the Company will be able to integrate effectively any acquired businesses into the Company. In addition, any such transactions would be subject to various risks associated with the acquisition of businesses, including the financial impact of expenses associated with the integration of businesses. There can be no assurance that any future acquisitions or strategic relationships will not have an adverse impact on the Company's business, financial condition or results of operations. As suitable opportunities arise, the Company anticipates that it would finance such transactions, as well as internal growth, through working capital or through debt or equity financing. There can be no assurance however, that such debt and equity financing would be available to the Company on acceptable terms when and if suitable strategic opportunities arise. Year 2000 Matters The Company is in the process of reviewing, modifying, and testing its computer applications to ensure their functionality with respect to the Year 2000 changes. At present, the Company does not anticipate that material incremental costs will be incurred in any single future year. The Company is also dependent on its contracting medical providers and payor clients to successfully address their respective Year 2000 technology issues in connection with their claims processing functions. The Company has not determined whether such providers or clients face Year 2000 problems that if not resolved, may have a material adverse affect on the Company's business or results of operations. Item 2. Properties The Company leases approximately 24,000 square feet of office space in Chicago Illinois; 3,300 square feet of office space in Atlanta, Georgia; 7,600 square feet of office space in Independence, Ohio; 6,300 square feet of office space in Dallas, Texas and approximately 6,700 square feet of office space in Scottsdale, Arizona. The Atlanta, Georgia lease expires in October, 1998. The Scottsdale, Arizona lease expires April 30, 1999. The Independence, Ohio and Dallas, Texas leases expire in the year 2000. The Chicago, Illinois lease expires in the year 2006. This office space is adequate for the Company's current operations. As a result of the acquisition of HealthStar, the Company is also paying rent on several former HealthStar offices that have since been closed, including; 1,300 square feet in Birmingham, Alabama; 2,900 square feet in Jacksonville, Florida; 3,000 square feet in Indianapolis, Indiana; 2,300 square feet in Louisville, Kentucky and 2,200 square feet in Charlotte, North Carolina. The Birmingham, Alabama, and Louisville, Kentucky leases expire in 1998. The Company has come to an agreement on the termination of the lease in Indianapolis, Indiana which was scheduled to end in October 1999. The Charlotte, North Carolina lease is scheduled to end in the year 2000. The Jacksonville, Florida lease is through April, 2001. The Company continues to look for subtenants for these spaces. The Company does not have a formal policy with respect to investments in real estate and real estate related investments. Item 3. Legal Proceedings In March 1998, the Company, as assignee of a shareholder, filed a lawsuit in U.S. District Court in Arizona, alleging that a Canadian brokerage firm, among others, perpetrated a "scheme and conspiracy to defraud" by "manipulating the market in Champion common stock." The suit names 13 Thomas Kernaghan & Co. Ltd.; Ronald G. Williams; Sheldon D. Taiger; London Select Enterprises Ltd.; Select Capital Advisors, Inc.; Mark Valentine; and Bronia GmbH as defendants. The complaint alleges that the defendants manipulated the market in and for Company's common stock and, more particularly artificially depressed the price at which the Company's common stock traded, resulting in damages, including to the business and reputation of the Company. Certain of the defendants have filed motions to stay and/or dismiss the lawsuit. Additionally, Thomson Kernaghan & Co. LTD and Bronia GmbH have filed an arbitration proceeding against the Company with the American Arbitration Association in New York City, claiming that the Company "wrongfully refused to honor their request to convert" certain debentures into common stock of the Company. The relief sought against the Company is to convert certain debentures into common stock of the Company and for "liquidated and punitive damages." From time to time, the Company is named as a defendant in routine litigation incidental to its business. Based on the information currently available, the Company believes that none of such current proceedings, individually or in the aggregate, will have a material adverse effect on the Company. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Common Equity and Related Stockholder Matters The Company's Common Stock is quoted on the Over-The-Counter Bulletin Board market under the symbol "CPFC." The following table sets forth the approximate high and low closing sales prices per share as reported by the Over-The-Counter Bulletin Board market for the Company's Common Stock for the calendar periods indicated. The quotations do not reflect retail markups, markdowns or commissions and may not reflect actual transactions. Fiscal Quarter High Low -------------- ---- --- Quarter Ended March 31, 1998 $10.75 $2.75 Quarter Ended December 31, 1997 $12.13 $9.00 Quarter Ended September 30, 1997 $9.25 $5.00 Quarter Ended June 30, 1997 $7.00 $4.75 Quarter Ended March 31, 1997 $6.25 $4.25 Quarter Ended December 31, 1996 $8.25 $5.00 Quarter Ended September 30, 1996 $7.75 $5.50 Quarter Ended June 30, 1996 $7.50 $4.50 There were approximately 850 shareholders of record and approximately 900 beneficial owners of the Company's Common Stock as of March 31, 1998. The Company has neither declared nor paid any cash dividends to date and is restricted by the Harris Bank loan agreement from paying out future cash dividends. 14 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview In January 1997, Champion acquired NHBC in a business combination accounted for as a reverse acquisition with a publicly-traded shell company. In completing the acquisition, Champion issued 2,200,000 shares of common stock for all of the outstanding shares of the common stock of NHBC. To effect the combination, the fair value of the net tangible assets of Champion were added to the equity of NHBC. The historical financial statements of NHBC are presented as the historical financial statements of the combined enterprise and the results of operations of Champion are included in the financial statements of the combined enterprise beginning on the acquisition date. On January 9, 1997, the Company acquired the outstanding stock of TRPN through the issuance of 100,000 shares of Champion common stock. The business combination was treated as a purchase transaction which created $76,039 of goodwill through excess purchase cost. On January 14, 1997, Champion completed a private placement of common stock. The Company received net proceeds of $753,556 for the issuance of 225,000 shares of common stock. In April 1997, the Company acquired 12.4% of the outstanding stock of Hayes Technology for $309,626. On December 15, 1997, the Company acquired all of the outstanding stock of HealthStar, for approximately $13,700,000. The acquisition was accounted for using the purchase method and accordingly, the purchase price was allocated to the assets purchased and the liabilities assumed, based upon fair values at the date of acquisition. The excess purchase cost over the estimated fair value of the net tangible assets acquired was approximately $9,000,000 and was recorded as goodwill. Results of Operations When comparing the Company's financial results for the year ended March 31, 1998 to the year ended March 31, 1997, it is important to note that the majority of the increase in the level of revenues and expenses is due primarily to the acquisition of HealthStar which was completed on December 15, 1997. The financial results for HealthStar for approximately 15 weeks are included in the financial results of the Company in fiscal 1998. Revenue The Company derives the majority of its revenue from fees charged to clients for access to the Company's network of contracted providers. The Company's client base consists of a variety of payors of medical claims such as insurance companies, third-party administrators and self-insured employers. Access fees can be either a fixed, monthly fee per enrolled subscriber which is called a capitated fee or can be based on a percentage of the amount of the discount from billed charges which is granted by a contracted provider. The Company's participation in the amount saved varies from 20% to 35% with the exact amount determined by contractual provisions with the Company's clients. 15 Total revenue increased $5,567,788 to $7,853,996 for the fiscal year ended March 31, 1998 compared to $2,286,208 for 1997, an increase of 244%. Approximately $5,100,000 of this increase was due to the Company's acquisition of HealthStar. The remainder of the increase was due to the increased level of medical claims repricing fees earned by NHBC. Operating Expenses Cost of services includes the cost of outsourcing the case management and utilization review function, commissions paid to outside brokers, fees paid to other regional PPO networks for access to providers not contracted directly with the Company and other products and services provided by outside vendors. Cost of services increased $469,785 from $996,602 in 1997 to $1,466,387 in 1998. The entire increase is attributable to HealthStar and is primarily related to the cost of outsourcing case management and utilization review. As a percentage of revenue, cost of services decreased from 44% in 1997 to 19% in 1998. This margin improvement is a result of the fact that HealthStar contracts directly with healthcare providers and thus avoids paying fees to access other PPO networks. Salaries and wages includes all employee compensation including payroll taxes, health insurance and other employee benefits. Also included are commissions paid to in-house sales and marketing personnel. Salaries and wages increased $2,576,562 from $660,972 in 1997 to $3,237,534 in 1998. A majority of this increase is due to the addition of HealthStar, which accounted for an additional two-hundred (200) employees. Other factors include the hiring of additional management and administrative personnel to accommodate the increase in business and future growth. General and administrative expenses include all other operating expenses such as telephone charges, office supplies, postage, travel and entertainment, professional fees, rent and utilities. General and administrative expenses increased $1,565,102 from $476,263 in 1997 to $2,041,365 in 1998. The addition of HealthStar accounts for a majority of the increase in this category. Depreciation and amortization increased significantly due to the goodwill created as a result of the HealthStar acquisition. Goodwill of approximately $9,000,000 is being amortized over 20 years. Interest expense of $228,320 relates to the indebtedness incurred as a result of the HealthStar acquisition. The interest rate on the Company's term loan and line of credit was 8.5% at March 31, 1998. The interest rate on the convertible debentures is 8.0%, and the interest rate on the seller note is 8.0%. Approximately $75,000 is due to the amortization of prepaid financing costs related to the convertible debentures and the Harris Bank term loan and line of credit. Overall, total operating expenses increased 240% in 1998, to $7,365,586 from $2,167,841 in 1997. Despite the overall dollar increase in operating expenses, the Company's pretax operating margin improved from 5.2% in 1997 to 6.2% in 1998. Income taxes were provided for at an effective rate of 38% in 1998 compared to 13% in 1997. The increase in the tax provision is due to higher overall income and limitations on the amount of net operating losses which could be used to offset income in 1998. Net earnings increased $200,738 or 194% from $103,367 or $0.03 per share in 1997 to $304,105 or $0.05 per share in 1998. The Company's net margin decreased from 4.5% in 1997 to 3.9% in 1998 due to the impact of income taxes. 16 Liquidity and Capital Resources The Company has historically funded its working capital requirements and capital expenditures primarily from cash flow generated from operations supplemented by short-term borrowings under various short-term credit facilities. The Company had approximately $200,000 in cash and cash equivalents at March 31, 1998. In connection with the acquisition of HealthStar, the Company secured a $1,500,000 line of credit with Harris Trust and Savings Bank. The line of credit bears interest at the Prime rate (8.5% at March 31, 1998) and is secured by substantially all of the assets of Champion and its subsidiaries. At March 31, 1998, the Company had borrowed $300,000 on the line of credit, and had approximately $720,000 of additional borrowing capacity available. In connection with the Harris Bank term loan and line of credit, the Company is required to comply with certain financial covenants. Covenants include a minimum current ratio, maximum leverage ratio and a minimum fixed charge coverage ratio. Although there can be no assurances, management of the Company anticipates growth and expansion to continue to accelerate in the upcoming year through the acquisition of complementary businesses or business lines, management personnel and infrastructure additions. The Company believes additional sources of capital may be required in conjunction with any such acquisition activity. There can be no assurance that the Company will be able to obtain such funds on terms acceptable to the Company. Management believes that cash on hand, amounts available under the revolving line of credit and cash generated from future operations will be sufficient to fund the Company's operations and anticipated expansion plans. New Accounting Standards Statement of Financial Accounting Standards No. 128, "Earnings Per Share" specifies the computation, presentation and disclosure requirements for earnings per share for entities with publicly-held common stock. This statement requires the presentation of basic earnings per share and diluted earnings per share. Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure" is intended to consolidate existing disclosure requirements into one publication to make them easier to apply. This new standard continues the requirement to disclose certain information about an entity's capital structure, as contained in other authoritative literature. The adoption of this statement contains no change in disclosure requirements for the Company. Accounting Standards Not Yet Adopted Statement of Financial Accounting Standards No. 130, "Reporting of Comprehensive Income" establishes standards for reporting and display of comprehensive income (all changes in equity during a period except those resulting from investments by and distributions to owners) and its components in financial statements. This new standard, which will be effective for the Company for the quarter ending June 30, 1998, is not currently anticipated to have a significant impact on the Company's consolidated financial statements based on the current financial structure and operations of the Company. 17 Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" establishes standards for reporting information about operating segments in annual financial statements, selected information about operating segments in interim financial reports and disclosures about products and services, geographic area and major customers. This pronouncement will be required to be implemented in the year ended March 31, 1999 and may result in presenting more detailed information in the notes to the Company's consolidated financial statements. Item 7. Financial Statements The financial statements attached to this Report on Form 10-KSB as pages F-1 to F-13 are incorporated herein by reference. Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act The following table sets forth certain information as of June 15, 1998, of the Directors and Executive Officers of the Company:
Name Age Position ---- --- -------- Gerald E. Finnell 58 Director, Chairman of the Board Stephen J. Carder 43 President, Chief Executive Officer and Director Gary L. Nielsen 55 Director Jon M. Donnell 38 Director Steven L. Lange 37 Vice President Sales and Marketing Kevin J. Ryan 41 Vice President/General Counsel and Secretary
Gerald E. Finnell has been a Director of the Company since June 1997. In April 1998 Mr. Finnell was elected Chairman of the Board. Mr. Finnell was a partner with the public accounting firm of KPMG Peat Marwick LLP from 1970 to 1995, and served on its Board of Directors from 1987 to 1994. Mr. Finnell also serves as a Director of Westminister Capital, Inc. of Beverly Hills, California. Stephen J. Carder, has been President, Chief Executive Officer and Director, since April 1998. Prior to April 1998, Mr. Carder served as Executive Vice President, Chief Financial Officer/Treasurer and Secretary of the Company. Prior to that, Mr. Carder was principally employed since 1994 as Executive Vice President and Chief Operating Officer of National Property and Casualty Corporation. From 1989 to 1994, Mr. Carder served as Vice President of Finance and Administration for the Del Webb Development Corporation, a subsidiary of Del Webb Corporation, a NYSE company that develops and markets active adult communities. Mr. Carder served as Vice President of Finance for National Health Benefits Corporation from 1987 to 1988. Prior to 1987, Mr. Carder served as Vice 18 President of Finance and Administration for First American Health Concepts, a publicly traded corporation listed on NASDAQ, which markets and administers a national vision program. Gary L. Nielsen has been a Director of the Company since June 1997. Mr. Nielsen is the Vice President Finance and Chief Financial Officer of Best Western International, Inc. and has held that position since May 1996. From October 1986 to May 1996, Mr. Nielsen was Vice President and Treasurer of Giant Industries, Inc. Jon M. Donnell has been a director of the Company since June 1998. Mr. Donnell is the Chief Operating Officer and Chief Financial Officer of Dominion Homes, Inc. and has held that position since 1995. Prior to working for Dominion Homes, Mr. Donnell was with the Del Webb Corporation for 12 years. Mr. Donnell also serves on the Board of Directors of Dominion Homes. Steven L. Lange has been Vice President Sales and Marketing for the Company since May 1998. Prior to that Mr. Lange was Vice President of Sales and Marketing for HealthStar which he joined in 1995. Prior to joining HealthStar, Mr. Lange worked for National Accident Insurance Underwriters, Inc. and Stewart Smith MidAmerica, Inc. Kevin J. Ryan has been Vice President/General Counsel, Secretary since December 1997. Mr. Ryan was previously Vice President and Legal Counsel for HealthStar. Mr. Ryan joined HealthStar in 1992. Prior to joining HealthStar, Mr. Ryan was associated with the law firm of Chuhak & Tecson, P.C. from 1987 until 1992 representing corporate health care clients. From 1980 until 1987, Mr. Ryan was employed by Ingalls Memorial Hospital in various administrative capacities, most recently as Director of Planning. Item 10. Executive Compensation The following table sets forth information regarding compensation paid for all services rendered to the Company in all capacities during the last three completed fiscal years by the Company's Chief Executive Officer and certain executive officers of the Company. No other executive officers of the Company received compensation in excess of $100,000 during the fiscal year ended March 31, 1998.
All Other Name and Position Year Salary Bonus Compensation(1) ----------------- ---- ------ ----- --------------- Stephen J. Carder (2), 1998 $135,000 $20,000 $12,000 Executive Vice President, 1997 $83,750 $33,500 $7,800 Chief Financial Officer, 1996 $55,000 $43,350 $7,600 and Director Steven L. Lange, 1998 $110,000 $10,000 $2,425 Vice President, 1997 $95,000 $2,500 $6,983 Sales and Marketing 1996 $95,000 $7,300 $3,000 Kevin J. Ryan, 1998 $132,500 $10,000 $2,425 Vice President, 1997 $132,500 $2,500 $3,000 General Counsel 1996 $125,000 $8,250 $7,184 Paul F. Caliendo (3) 1998 $135,000 $0 $12,000 1997 $83,750 $33,500 $9,420 1996 $55,000 $43,350 $7,600
19 (1) The Company pays each of its executive officers an automobile allowance each month and pays or reimburses its executive officers for business-related expenses. The Company also provides certain health insurance benefits for all full time employees, including its officers. Champion's officers do not receive additional compensation for serving as directors of the Company. (2) Mr. Carder was elected the Company's President and Chief Executive Officer on April 16, 1998. (3) Mr. Caliendo served as the Company's Chairman, President and Chief Executive Officer until April 16, 1998. The Company did not grant any stock options or other stock-based compensation in fiscal year 1998 and no executive officers or directors hold stock options or other stock-based incentives. Item 11. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of March 31, 1998, for (i) each executive officer of the Company; (ii) each director of the Company; (iii) all executive officers and directors of the Company as a group; and (iv) each person known by the Company to be the beneficial owner of more than five percent of the Common Stock.
Beneficial Owner(1) - ------------------- % of Outstanding Officers and Directors: Shares Beneficially Owned(2) Stock - ---------------------- ------------------------- ----- Gerald E. Finnell................................. 0 * Stephen J. Carder................................. 1,100,000 18.78% Gary L. Nielsen................................... 0 * Jon M. Donnell.................................... 1,000 * Steven L. Lange................................... 0 * Kevin J. Ryan..................................... 0 * All six officers and directors as a group(1) 2,601,000 44.42% 5% Holders: InfoPlan Partners(3) ............................. 1,500,000 20.49% Paul F. Caliendo ................................. 915,000 15.63% Thomas H. Stateman................................ 382,500 6.53%
* Indicates less than 1.0% (1) Unless otherwise indicated, the address of the beneficial owner is c/o Champion Financial Corporation, 9495 East San Salvador Drive, Scottsdale, Arizona 85258. The Board of Directors was granted voting control over 1,500,000 shares of Common Stock owned by InfoPlan Partners, LLC and its related parties pursuant to an Irrevocable Proxy by InfoPlan Partners and related parties dated April 16, 1998. The proxy gave to the Company's Board of Directors, the right to vote all such shares at the Annual Meeting of the Shareholders of the Company to be conducted in calendar year 1998. (2) Beneficial ownership is determined with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to stock options and warrants currently exercisable or exercisable within 60 days are deemed to be outstanding for computing the percentage ownership of the person holding such options and the percentage ownership of any group of which the holder is a member, but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of capital stock shown beneficially owned by them. (3) See note 1 above. The Board of Directors has voting control over 1,500,000 shares of Common Stock held by InfoPlan Partners, LLC pursuant to an Irrevocable Proxy by InfoPlan Partners and related parties dated April 16, 1998. 20 Item 12. Certain Relationships and Related Transactions None. Item 13. Exhibits, and Reports on Form 8-K (A) EXHIBITS The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Report. (B) REPORTS ON FORM 8-K. A report on Form 8-K was filed with the Securities and Exchange Commission on December 12, 1997, relating to the sale of the Series A 8% Senior Subordinated Convertible Redeemable Debentures pursuant to Regulation S. A report on Form 8-K, was filed with the Securities and Exchange Commission on December 30, 1997, relating to the acquisition of HealthStar, Inc. A report on Form 8-K/A, was filed with the Securities and Exchange Commission on February 27, 1998, relating to the acquisition of HealthStar, Inc. 21 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stephen J. Carder, as his true and lawful attorneys-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-KSB and any documents related to this report and filed pursuant to the Securities and Exchange Act of 1934, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agent, or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. SIGNATURES ---------- Pursuant to the requirements of Section 13 and 15(2) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHAMPION FINANCIAL CORPORATION By: /s/ Stephen J. Carder -------------------------------------- Stephen J. Carder President, Chief Executive Officer and Director 22 Date: June 26, 1998 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. Signature Date --------- ---- /s/ Stephen J. Carder June 26, 1998 - -------------------------------------------- Stephen J. Carder President, Chief Executive Officer and Director (Principal Executive and Financial Officer) /s/ Kevin J. Ryan June 26, 1998 - -------------------------------------------- Kevin J. Ryan Vice President, General Counsel, Secretary and Director /s/ Gerald E. Finnell June 26, 1998 - -------------------------------------------- Gerald E. Finnell Director /s/ Gary L. Nielsen June 26, 1998 - -------------------------------------------- Gary L. Nielsen Director /s/ Jon M. Donnell June 26, 1998 - -------------------------------------------- Jon M. Donnell Director Independent Auditors' Report The Board of Directors and Shareholders Champion Financial Corporation: We have audited the accompanying consolidated balance sheet of Champion Financial Corporation and subsidiaries as of March 31, 1998 and the related consolidated statements of earnings and retained earnings, and cash flows for the years ended March 31, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Champion Financial Corporation and subsidiaries at March 31, 1998, and the results of their operations and their cash flows for the years ended March 31, 1998 and 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Phoenix, Arizona June 12, 1998 F-1 CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheet March 31, 1998
Assets Current assets: Cash and cash equivalents $ 199,466 Trade accounts receivable, less allowance for doubtful accounts of $250,000 2,512,446 Other current assets 69,126 ----------- Total current assets 2,781,038 ----------- Property and equipment, net 2,851,957 Investment in healthcare technology company 309,626 Intangibles, net of accumulated amortization of $146,030 9,006,465 Other assets, at cost 499,577 ----------- $15,448,663 =========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 1,163,741 Accrued expenses 2,269,678 Current portion of long-term debt 400,000 Note payable 200,000 ----------- Total current liabilities 4,033,419 ----------- Line of credit 300,000 Long-term debt 6,100,000 ----------- Total liabilities 10,433,419 Shareholders' equity: Common stock, $.001 par value 100,000,000 shares authorized, 5,855,802 shares issued and outstanding 5,856 Additional paid-in capital 4,617,015 Retained earnings 392,373 ----------- Total shareholders' equity 5,015,244 Commitments and contingencies Total liabilities and shareholders' equity $15,448,663 ===========
See accompanying notes to consolidated financial statements. F-2 CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings and Retained Earnings Years ended March 31, 1998 and 1997 1998 1997 ---------- ---------- Revenues: Capitated fees $3,536,008 -- Repricing fees 3,957,456 2,002,952 Other fees 360,532 283,256 ---------- ---------- 7,853,996 2,286,208 ---------- ---------- Operating expenses: Cost of services 1,466,387 996,602 Salaries and wages 3,237,534 660,972 General and administrative 2,041,365 476,263 Depreciation and amortization 391,980 34,004 Interest expense 228,320 -- ---------- ---------- 7,365,586 2,167,841 ---------- ---------- Earnings before income taxes 488,410 118,367 Income tax 184,305 15,000 ---------- ---------- Net earnings 304,105 103,367 Distribution to shareholders -- (100,000) Retained earnings at beginning of year 88,268 84,901 ---------- ---------- Retained earnings at end of year $ 392,373 88,268 ========== ========== Earnings per share - Basic $ .05 .03 ========== ========== Weighted average shares outstanding - Basic 5,587,500 3,018,000 ========== ========== See accompanying notes to consolidated financial statements. F-3 CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended March 31, 1998 and 1997
1998 1997 ----------- ----------- Operating activities: Net earnings $ 304,105 103,367 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 391,980 34,004 Bad debt expense 80,062 15,000 Loss on sale of fixed assets 5,658 -- Increase (decrease) in cash resulting from changes in operating assets and liabilities: Trade accounts receivable (619,338) (83,321) Other current assets 38,218 (14,415) Accounts payable (886,649) 147,717 Accrued expenses 161,539 72,993 Deferred revenue (58,909) 58,909 ----------- ----------- Net cash provided by (used in) operating activities (583,334) 334,254 ----------- ----------- Investing activities: Purchases of equipment (141,751) (101,499) Proceeds from sale of fixed assets 12,336 -- Investment in healthcare technology company (309,626) -- Acquisition of HealthStar (6,000,000) -- ----------- ----------- Net cash used in investing activities (6,439,041) (101,499) ----------- ----------- Financing activities: Increase in other assets (449,915) (4,737) Principal payments on line of credit -- (10,000) Net proceeds from line of credit 300,000 -- Net proceeds (payments) on long-term debt 2,475,660 (10,055) Issuance of convertible debt 4,000,000 -- Proceeds from issuance of common stock -- 753,556 Distribution to shareholders -- (100,000) ----------- ----------- Net cash provided by financing activities 6,325,745 628,764 ----------- ----------- Net increase (decrease) in cash and cash equivalents (696,630) 861,519 Cash and cash equivalents at beginning of year 896,096 34,577 ----------- ----------- Cash and cash equivalents at end of year $ 199,466 896,096 =========== =========== Supplemental financial disclosure: Interest paid $ 106,730 3,394 =========== =========== Income taxes paid $ 1,205 -- =========== =========== Supplemental disclosure of noncash aspects of acquisitions through issuance of common stock: Assets acquired $ 4,667,250 151,209 Liabilities assumed 2,840,165 34,395
See accompanying notes to consolidated financial statements. F-4 CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1998 (1) Description of Business National Property Casualty Corporation (NPCC) began operations in September 1994. On January 1, 1997, NPCC was merged into National Health Benefits & Casualty Corporation (NHBC), which was owned by the same shareholders. NHBC provides management of health care services and workers' compensation claims for property and casualty companies. The Company also operates a point of sale vision care program, First American Vision Services (FAVS), which permits members to purchase eyewear at a reduced price from its vision network providers, and a chiropractic network designed to assist property and casualty insurance companies in the reduction of costs associated with soft tissue claims. On January 1, 1997, NHBC was acquired by Champion Financial Corporation in a business combination accounted for as a reverse acquisition with a publicly-traded shell company. In completing the acquisition, Champion Financial Corporation (Champion) issued 2,200,000 shares of common stock for all of the outstanding shares of NHBC common stock. To effect the combination, the fair value of the net tangible assets of Champion were added to the equity of NHBC. The historical financial statements of NHBC are presented as the historical financial statements of the combined enterprise and the results of operations of Champion are included in the financial statements of the combined enterprise beginning on the acquisition date. Due to this accounting treatment, pro forma results are equivalent to actual results. On January 9, 1997, Champion acquired the outstanding stock of Three Rivers Provider Network (TRPN) through the issuance of 100,000 shares of Champion common stock valued at $.71 a share by an independent appraiser. The business combination was treated as a purchase transaction which created $76,039 of goodwill through excess purchase cost. The goodwill is being amortized over 10 years. Pro forma results are not materially different from actual results. On January 14, 1997, Champion completed a private placement of common stock. The Company received net proceeds of $753,556 for the issuance of 225,000 shares of common stock. On April 29, 1997, the Company entered into an agreement (Acquisition Agreement) with Hayes, Incorporated (Hayes). In expectation of closing under the Acquisition Agreement, the Company advanced to Hayes an aggregate of $309,626. The Company accepted 338,476 shares of the common stock of Hayes for an aggregate purchase price equal to the amount of the advance. The issuance of Hayes common stock resulted in the Company acquiring a 12.4% interest in Hayes. Between the date of the agreement and December 1998, Hayes has the right to redeem its common stock by paying an amount ranging from $324,000-$340,000 to the Company. On December 15, 1997, Champion purchased the outstanding stock of HealthStar, Inc. (HealthStar) as of the close of business on Friday, December 12, 1997. This transaction was accounted for under the purchase method of accounting. The purchase price consisted of approximately $6.0 million in cash, 382,500 shares of Champion common stock valued at $9 a share based on prices quoted by a stock exchange, a seller note in the amount of $200,000 and transaction and related costs of $1,244,902. Under the terms of the Purchase Agreement, there were certain contractual adjustments which were to be measured 90 days after the acquisition date, and the purchase price will be adjusted accordingly. The Company is currently negotiating the final adjustment which is not expected to have a material effect on the purchase price. The assets and liabilities of HealthStar at the time of acquisition were adjusted to their fair values. The excess purchase price over the estimated fair value of the tangible net assets acquired is being amortized using the straight-line method over a period of 20 years. In connection with the HealthStar acquisition the Company also agreed to issue 100,000 shares of common stock valued at $3 a share using the Black Scholes valuation method. These shares are reflected in additional paid in capital at March 31, 1998. F-5 CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (2) Summary of Significant Accounting Policies Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Principles of Consolidation The consolidated financial statements include the financial statements of the Company and its three wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Cash Equivalents The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. Earnings Per Share The Company adopted Statement of Accounting Standards No. 128 "Earnings per Share" (SFAS 128) during 1997. The Company's Earnings per Common Share (EPS) figures for the prior period were not effected by adoption of SFAS 128. In accordance with SFAS 128, basic EPS is computed by dividing net income, after deducting preferred stock dividends requirements (if any), by the weighted average number of shares of common stock outstanding. Diluted EPS reflects the maximum dilution that would result after giving effect to dilutive stock options and warrants and to the assumed conversion of all dilutive convertible securities and stock. The number of shares used in the calculation of diluted earnings per share was increased 257,467 shares for the conversion of the convertible debentures. Net income has been increased $105,778 to add back the interest on the convertible debentures for purposes of the diluted earnings per share calculation. The resulting $.07 per share is antidilutive. Fair Value of Financial Instruments The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. Management believes that the recorded amounts of current assets and current liabilities approximate fair value because of the short maturity of these instruments. The recorded balance of long-term debt approximates fair value, as the terms of the debt are similar to rates currently offered to the Company for similar debt instruments. Revenue Recognition Repricing fees are derived from a negotiated percentage of the medical savings generated from customer claims managed by the Company or on a per member per month basis. The percentage of savings fees are recognized as revenue as the Company renders services and notifies the health care provider of their required billings reduction for a specified period of time. The Company receives monthly capitation fees based upon the number of each customer's members regardless of services actually provided. F-6 CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Cost of Services The major components of cost of services consist of utilization review, case management and external marketing commissions. Property and Equipment Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which approximates three years for equipment to seven years for furniture and fixtures. Computer software is amortized over three to five years. Intangibles Intangibles, which represent the excess of purchase price over fair value of net tangible assets acquired, are amortized on a straight-line basis over the expected periods to be benefited, generally 20 years. The Company assesses the recoverability of intangible assets by determining whether the amortization of the intangibles over their remaining lives can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of intangible impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of intangibles will be impacted if estimated future operating cash flows are not achieved. Income Taxes The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance must be established to reduce deferred income tax benefits if it is more likely than not that a portion of the deferred income tax benefits will not be realized. It is management's opinion that the entire deferred tax benefit may not be recognized in future years. Therefore, a valuation allowance equal to the deferred tax benefit has been established. Impairment of Long-Lived Assets Management reviews the possible impairment of long-lived assets and certain identifiable intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. F-7 CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Year 2000 Management has developed a plan to address the Year 2000 problem and all computer systems are in the process of conversion to be Year 2000 compliant. The Year 2000 problem is the result of computer programs being written using two digits rather than four digits to define the applicable year. The total cost of the project is not material and the Company is expensing all associated costs as they are incurred. (3) Property and Equipment A summary of property and equipment by major classification at March 31, 1998 follows: Furniture and fixtures $ 790,025 Computer software 608,000 Equipment 1,742,482 ----------- 3,140,507 Accumulated depreciation (288,550) ----------- $ 2,851,957 =========== (4) Debt The Company maintains a $1,500,000 line of credit with Harris Trust and Savings Bank. The line of credit bears interest at prime (8.5% at March 31, 1998). The line is collateralized by substantially all the assets of the Company. There were $300,000 in borrowings against this line of credit at March 31, 1998. Debt consists of the following at March 31, 1998: 8% Series A Senior Subordinated Convertible Debentures due December 3, 1999 in an aggregate principal amount, interest payable quarterly $ 4,000,000 Note payable to Harris Trust and Savings Bank due on December 14, 2000, with quarterly principal payments ranging from $100,000 - $150,000 plus interest on the unpaid balance at prime (8.5% at March 31, 1998), secured by substantially all the assets of the Company 2,500,000 Unsecured note payable to an individual, interest payable monthly at 8%, due December 15, 1998 200,000 ---------- 6,700,000 Less current maturities 600,000 ---------- $ 6,100,000 ========== F-8 CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Scheduled cash payments on principal maturities of debt are as follows for the years ending March 31st: 1999 $ 600,000 2000 500,000 2001 1,600,000 2002 0 2003 0 ---------- $ 2,500,000 ========== Champion's 8% convertible debentures due December 3, 1999 are convertible into common stock of Champion Financial Corporation at the election of the investor. In the event that the investor has not converted the entire amount of the debenture prior to the maturity date of December 3, 1999, the debenture will automatically convert into common stock on the maturity date. The debentures convert at the lower of 75% of the average closing bid price of Champion stock for the five days preceding the subscription, or 75% of the closing bid price of Champion stock on the day prior to the holders' election to convert. At March 31, 1998, $2.8 million of debentures have been presented to the company for conversion, but the conversion has been refused based on issues raised in the litigation described in Note 8. (5) Accrued Expenses A summary of accrued expenses at March 31, 1998 follows: Salaries and benefits $ 767,594 Professional fees 313,769 Income taxes 192,952 Transaction and restructuring costs 302,101 Interest 70,336 Other 622,926 ---------- $ 2,269,678 ========== F-9 CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (6) Business and Credit Concentration The Company operates in a very competitive market. The Company's success is dependent upon the ability of its marketing group to continue to identify and contract with insurance companies and self-funded companies; to effectively administer repricing claims, and to expand into new markets and opportunities through acquisition. Changes in the insurance and health care industries, including the regulation thereof by federal and state agencies, may significantly affect management's estimates of the Company's performance. The allowance for doubtful accounts is based on the creditworthiness of the Company's customers as well as consideration for general economic conditions. Consequently, an adverse change in those factors could affect the Company's estimate of its bad debts. The Company's customers are located throughout the United States. In 1998, there were no customers whose revenue or accounts receivable exceeded 10% of total revenue or total accounts receivable. During 1997 revenue with four customers totaled approximately 32%, 20%, 15% and 13% of total revenue in 1997. At March 31, 1997, three customers accounted for 31%, 18%, and 8% of total accounts receivable. (7) Acquisition of HealthStar The following unaudited pro forma information presents a summary of consolidated results of operations of the Company as if the acquisition of HealthStar had occurred at April 1, 1996, with pro forma adjustments together with related income tax effects. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would actually have resulted had the combination been in effect on the date indicated. 1998 1997 ------------ ------------ (Unaudited) Total revenues $ 20,328,321 $ 17,074,837 Net income 562,802 130,027 Basic earnings per common share $ .10 $ .04 F-10 CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (8) Commitments and Contingencies The Company is obligated under noncancelable operating leases for office space and equipment which expire at various dates during the next nine years. Rent expense under noncancelable operating leases was $399,521 and $148,488 in 1998 and 1997, respectively. Future minimum lease payments under these leases are as follows: Operating leases ----------- Fiscal years ending March 31: 1999 $ 1,118,000 2000 1,010,000 2001 650,000 2002 574,000 2003 571,000 Thereafter 2,081,000 ----------- Total minimum lease payments $ 6,004,000 =========== The Company has a 401(k) Plan covering substantially all of its employees. Under this plan, the Company does not contribute any funds on behalf of the participants. The Company is currently involved in litigation involving the holders of the 8% Series A Senior Subordinated Convertible Debentures. The Company filed a lawsuit against various parties on March 18, 1998 alleging stock manipulation and artificial depression of the Company's stock price. On March 26, 1998, the defendants filed a demand for arbitration alleging, among other things, that the Company wrongfully refused to honor the holders' rights to convert their debt into Champion common stock. On May 4, 1998, the Company filed a motion to stay the arbitration. A hearing has been set for June 29, 1998. It is management's opinion that the final outcome of this matter will not materially effect the Company's financial condition. The Company is also involved in a litigation matter which was originally filed against HealthStar prior to the purchase. In this litigation an individual claims breach of contract among other charges. It is management's opinion that the final outcome of this matter will not materially effect the Company's financial condition. The Company is also the subject of various other claims and litigation arising out of the ordinary course of business. In the opinion of management, the Company has adequate legal defenses and the outcome of these matters will not materially effect the Company's financial position. The repricing agreements with customer companies and physicians are cancelable at the option of those parties with written notice which varies from 30 to 90 days. Management generally attempts to renegotiate any such canceled agreements. Management believes that there is very little likelihood that there would be cancellations sufficient to have a material adverse effect on the Company's results of operations or financial condition. F-11 CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (9) Income Taxes The utilization of the Company's net operating carryforwards is dependent on the Company's ability to generate sufficient taxable income during the carryforward period. However, in March 1995, there was an ownership change in the Company as defined in Section 382 of the Internal Revenue Code. As a result, the Company's ability to utilize net operating losses and capital losses available before the ownership change is restricted to a total of approximately $46,000 per year. At March 31, 1998, the Company has available net operating loss carryforwards and capital loss carryforwards for Federal income tax purposes, subject to the limitations discussed above, which may provide future tax benefits expiring as follows: Expiration Date Operating Capital --------- --------- 1999 $ -- 908,393 2000 -- 48,000 2001 -- 78,791 2002 -- -- 2003 -- -- 2004 -- -- 2005 459 -- 2006 201,008 -- 2007 -- -- 2008 -- -- 2009 -- -- 2010 11,465 -- 2011 1,114 -- 2012 264,844 -- --------- ----------- $ 478,890 1,035,184 ========= =========== Income tax expense for the year ended March 31, 1998 consists of: Current Deferred Total -------- -------- -------- U.S. Federal $ 148,504 -- 148,504 State and local 35,801 -- 35,801 -------- -------- -------- $ 184,305 -- 184,305 ======== ======== ======== F-12 CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The provision for income taxes differs from the amount computed by applying the statutory Federal income tax rate to income before taxes. The sources and tax effects of the differences are as follows: Computed "expected" federal income tax expense $ 172,859 Expected state income taxes, net of federal benefit 23,629 Change in valuation allowance (29,632) Non deductible item 8,718 Other 8,731 -------- $ 184,305 ======== The tax effects of temporary differences that give rise to significant portions of deferred tax assets are as follows, there are no material deferred tax liabilities: Deferred tax assets: Net operating loss carry forward $ 162,823 Capital loss carryforward 351,963 Reserve for bad debt 85,000 Accrued expenses 44,880 --------- Deferred tax asset 644,666 Less valuation allowance (527,408) -------- Net deferred tax asset $ 117,258 Deferred tax liabilities: Amortization (22,173) Fixed Assets (73,561) Prepaid expenses (21,524) --------- Deferred tax liability (117,258) Net deferred tax asset $ -- ========== The net change in the total valuation allowance for the year ended March 31, 1998 was approximately $30,000. In assessing the realizability of the deferred tax asset, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate realization of a deferred tax asset is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will not realize the entire benefit of the deferred tax assets. F-13 EXHIBIT INDEX Exhibit Number Description - -------------- ----------- 1.1 Form of Letter Agreement between Champion Financial Corporation and London Select Enterprises, Ltd. dated December 1, 1997 (incorporated by reference to Exhibit 1.1 to the Company's Report on Form 8-K filed with the Commission on December 12, 1997). 3.1 Articles of Incorporation dated February 15, 1981 and all amendments thereto (incorporated by reference to Exhibit 3.1 to the Company's Report on Form 10-K filed with the Commission on July 17, 1996). 3.2 By-Laws (incorporated by reference to Exhibit 3.2 to the Company's Report on Form 10-K filed with the Commission on July 17, 1996). 4.1 Form of Offshore Securities Subscription Agreement (incorporated by reference to Exhibit 4.1 to the Company's Report on Form 8-K filed with the Commission on December 12, 1997). 4.2 Form of Debenture (incorporated by reference to Exhibit 4.2 to the Company's Report on Form 8-K filed with the Commission on December 12, 1997). 4.3 Form of Warrant Certificate (incorporated by reference to Exhibit 4.3 to the Company's Report on Form 8-K filed with the Commission on December 12, 1997). 10.1 Stock Purchase Agreement by and among Champion Financial Corporation, HealthStar Inc., and Thomas H. Stateman, dated December 8, 1997 (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K/A filed with the Commission February 27, 1998). 10.2 Non-Negotiable Subordinated Promissory Note between the company and Thomas H. Stateman Dated December 15, 1997 (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K/A filed with the Commission February 27, 1998). 10.3.1 Credit Agreement by and between Champion Financial Corporation and Harris Trust and Savings Bank, dated December 15, 1997. 10.3.2 Pledge and Security Agreement by and between Champion Financial Corporation and Harris Trust and Savings Bank, dated December 15, 1997. 10.3.3 Security Agreement by and between Champion Financial Corporation and Harris Trust and Savings Bank, dated December 15, 1997. 10.3.4 Security Agreement by and between HealthStar Inc. and Harris Trust and Savings Bank, dated December 15, 1997. 10.3.5 Security Agreement by and between National Health Benefits & Casualty Corporation and Harris Trust and Savings Bank, dated December 15, 1997. 10.4 Form of Agreement dated April 1998 by and among the Company and the other parties thereto (related to InfoPlan proxy and severance with Paul F. Caliendo, former CEO). 21. Subsidiaries of the Registrant. 27. Financial Data Schedule EX-10.3.1 2 CREDIT AGREEMENT W/ HARRIS TRUST AND SAVINGS BANK Exhibit 10.31 ================================================================================ $4,000,000 CREDIT AGREEMENT BY AND BETWEEN CHAMPION FINANCIAL CORPORATION AND HARRIS TRUST AND SAVINGS BANK DATED AS OF DECEMBER 15, 1997 ================================================================================ TABLE OF CONTENTS Page ---- SECTION 1. THE CREDITS...................................... 1 Section 1.1. Revolving Credit............................. 1 Section 1.2. Loans........................................ 1 Section 1.3. Term Credit.................................. 2 Section 1.4. Manner and Disbursement of Borrowings........ 2 SECTION 2. INTEREST AND CHANGE IN CIRCUMSTANCES............. 2 Section 2.1. Interest Rate Options........................ 2 Section 2.2. Minimum Amounts.............................. 4 Section 2.3. Computation of Interest...................... 4 Section 2.4. Manner of Rate Selection..................... 4 Section 2.5. Change of Law................................ 4 Section 2.6. Unavailability of Deposits or Inability to Ascertain Adjusted LIBOR..................... 4 Section 2.7. Taxes and Increased Costs.................... 5 Section 2.8. Funding Indemnity............................ 6 Section 2.9. Lending Branch............................... 6 Section 2.10. Discretion of Bank as to Manner of Funding... 6 SECTION 3. FEES, PREPAYMENTS, TERMINATIONS, APPLICATIONS AND CAPITAL ADEQUACY................................. 6 Section 3.1. Fees......................................... 6 Section 3.2. Voluntary Prepayments........................ 7 Section 3.3. Mandatory Prepayments........................ 7 Section 3.4. Terminations................................. 8 Section 3.5. Place and Application of Payments............ 8 Section 3.6. Notations.................................... 8 Section 3.7. Change in Capital Adequacy Requirements...... 9 SECTION 4. THE COLLATERAL AND THE GUARANTIES................ 9 Section 4.1. Security..................................... 9 Section 4.2. Guaranties................................... 9 Section 4.3. Further Assurances........................... 9 -i- SECTION 5. DEFINITIONS...................................... 10 Section 5.1. Definitions.................................. 10 Section 5.2. Interpretation............................... 18 SECTION 6. REPRESENTATIONS AND WARRANTIES................... 18 Section 6.1. Organization and Qualification............... 18 Section 6.2. Subsidiaries................................. 19 Section 6.3. Margin Stock................................. 19 Section 6.4. Financial Reports............................ 19 Section 6.5. Good Title................................... 20 Section 6.6. Litigation and Other Controversies........... 20 Section 6.7. Taxes........................................ 20 Section 6.8. Approvals.................................... 20 Section 6.9. Affiliate Transactions....................... 20 Section 6.10. Investment Company; Public Utility Holding Company...................................... 21 Section 6.11. ERISA........................................ 21 Section 6.12. Compliance with Laws; Environmental Laws..... 21 Section 6.13. Other Agreements............................. 21 SECTION 7. CONDITIONS PRECEDENT............................. 22 Section 7.1. Each Advance................................. 22 Section 7.2. Initial Advance.............................. 22 SECTION 8. COVENANTS........................................ 24 Section 8.1. Corporate Existence, Etc..................... 24 Section 8.2. Maintenance of Properties.................... 24 Section 8.3. Taxes and Assessments........................ 24 Section 8.4. Insurance.................................... 24 Section 8.5. Financial Reports............................ 24 Section 8.6. Current Ratio................................ 26 Section 8.7. Leverage Ratio............................... 26 Section 8.8. Fixed Charge Coverage Ratio.................. 26 Section 8.9. Indebtedness for Borrowed Money.............. 26 Section 8.10. Liens........................................ 27 Section 8.11. Investments, Acquisitions, Loans, Advances and Guaranties............................... 28 Section 8.12. Debentures and Subordinated Note............. 29 Section 8.13. Sales and Leasebacks......................... 29 ii Section 8.14. Dividends and Certain Other Restricted Payments..................................... 29 Section 8.15. Mergers, Consolidations and Sales............ 29 Section 8.16. ERISA........................................ 29 Section 8.17. Compliance with Laws......................... 30 Section 8.18. Burdensome Contracts With Affiliates......... 30 Section 8.19. No Changes in Fiscal Year.................... 30 Section 8.20. Formation of Subsidiaries.................... 30 Section 8.21. Inspection and Field Audit................... 30 Section 8.22. Use of Credit................................ 31 SECTION 9. EVENTS OF DEFAULT AND REMEDIES................... 31 Section 9.1. Events of Default............................ 31 Section 9.2. Non-Bankruptcy Defaults...................... 33 Section 9.3. Bankruptcy Defaults.......................... 33 SECTION 10. MISCELLANEOUS.................................... 33 Section 10.1. Holidays..................................... 33 Section 10.2. No Waiver, Cumulative Remedies............... 33 Section 10.3. Amendments, Etc.............................. 34 Section 10.4. Costs and Expenses........................... 34 Section 10.5. Documentary Taxes............................ 34 Section 10.6. Survival of Representations.................. 34 Section 10.7. Survival of Indemnities...................... 34 Section 10.8. Notices...................................... 34 Section 10.9. Headings..................................... 35 Section 10.10. Severability of Provisions................... 35 Section 10.11. Counterparts................................. 35 Section 10.12. Binding Nature, Governing Law, Etc........... 35 Section 10.13. Terms of Collateral Documents not Superseded. 36 Signature................................................................... 37 Exhibit A - Revolving Credit Note Exhibit B - Term Note Exhibit C - Borrowing Base Exhibit D - Opinion of Counsel Exhibit E - Compliance Certificate Schedule 6.2 - Subsidiaries iii CHAMPION FINANCIAL CORPORATION CREDIT AGREEMENT Harris Trust and Savings Bank Chicago, Illinois Ladies and Gentlemen: The undersigned, Champion Financial Corporation, a Utah corporation (the "Company"), applies to you (the "Bank") for your commitment, subject to the terms and conditions hereof and on the basis of the representations and warranties hereinafter set forth, to extend credit to the Company, all as more fully hereinafter set forth. SECTION 1. THE CREDITS. Section 1.1. Revolving Credit. Subject to the terms and conditions hereof, the Bank agrees to extend a revolving credit (the "Revolving Credit") to the Company which may be availed of by the Company from time to time during the period from the date hereof to and including the Termination Date, at which time the commitment of the Bank to extend credit under the Revolving Credit shall expire. The Revolving Credit may be utilized by the Company in the form of Revolving Credit Loans, all as more fully hereinafter set forth, provided that the aggregate amount of Revolving Credit Loans outstanding at any one time shall not exceed the lesser of (i) $1,500,000 (such amount, as the same may be reduced pursuant to Section 3.4 hereof, being hereinafter referred to as the "Revolving Credit Commitment"); provided, however, that Loans which bear interest with reference to Adjusted LIBOR shall be in such greater amount as is required by Section 2 hereof and (ii) the Available Borrowing Base. For all purposes of this Agreement, where a determination of the unused or available amount of the Revolving Credit Commitment is necessary, the Revolving Credit Loans shall be deemed to utilize the Revolving Credit Commitment. Section 1.2. Loans. Subject to all of the terms and conditions hereof, the Revolving Credit may be utilized in the form of Revolving Credit Loans. Each Revolving Credit Loan shall be in a minimum amount of $100,000 or such greater amount which is an integral multiple of $50,000. Each Loan shall initially constitute part of the Domestic Rate Portion except to the extent the Company has otherwise timely elected that such Loan, or any part thereof, constitute part of a LIBOR Portion as provided in Section 2 hereof. Each Revolving Credit Loan shall be made against and evidenced by a single promissory note of the Company in the form (with appropriate insertions) attached hereto as Exhibit A (the "Revolving Credit Note") payable to the order of the Bank in the face principal amount of $1,500,000. The Revolving Credit Note shall be dated the date of issuance thereof, be expressed to bear interest as set forth in Section 2.1 hereof, and be expressed to mature on the Termination Date. Without regard to the principal amount of the Revolving Credit Note stated on its face, the actual principal amount at any time outstanding and owing by the Company on account of the Revolving Credit Note shall be the sum of all Revolving Credit Loans made under this Section (including for such purposes, as aforesaid, the Existing Revolving Credit Loans) less all payments of principal actually received by the Bank. Section 1.3. Term Credit. Subject to the terms and conditions hereof, the Bank also agrees to make a term loan (the "Term Loan") to the Company in an amount not exceeding $2,500,000 (the "Term Credit Commitment") on or before December 15, 1997, at which time the Term Credit Commitment shall expire. There shall be a maximum of one advance under the Term Credit Commitment. The Term Loan shall be made against and evidenced by a single promissory note of the Company in the form (with appropriate insertions) attached hereto as Exhibit B (the "Term Note", and together with the Revolving Credit Note, the "Notes") payable to the order of the Bank in the original principal amount of the Term Loan. The Term Note shall be dated the date of issuance thereof, be expressed to bear interest as set forth in Section 2.1 hereof, and be expressed to mature in twelve (12) consecutive quarterly installments, commencing on March 31, 1998 and continuing on the last day of each and every June, September, December and March, with the final payment due on December 14, 2000, the date on which the final installment is due, with each installment through and including December 31, 1998 in the amount of $100,000, with each installment from and including March 31, 1999 through and including December 31, 1999 in the amount of $125,000 and with each installment from and including March 31, 2000 through and including December 14, 2000 in the amount of $150,000 (except for the last such installment on December 14, 2000, which shall be in the full amount of the then unpaid balance of the Term Note). No amount paid or prepaid on the Term Note may be reborrowed. Section 1.4. Manner and Disbursement of Borrowings. The Company shall give written or telephonic notice to the Bank (which notice shall be irrevocable once given and, if given by telephone, shall be promptly confirmed in writing) by no later than 11:00 a.m. (Chicago time) on the date the Company requests the Bank to make a Loan hereunder. Each such notice shall specify the date of the Loan requested (which must be a Business Day), whether such Loan is the Term Loan or a Revolving Credit Loan and the amount of such Loan. The Company agrees that the Bank may rely upon any written or telephonic notice given by any person the Bank in good faith believes is an Authorized Representative without the necessity of independent investigation and, in the event any telephonic notice conflicts with the written confirmation, such notice shall govern if the Bank has acted in reliance thereon. Subject to the provisions of Section 7 hereof, the proceeds of each Loan shall be made available to the Company at the principal office of the Bank in Chicago, Illinois, in immediately available funds. -2- SECTION 2. INTEREST AND CHANGE IN CIRCUMSTANCES. Section 2.1. Interest Rate Options. (a) Subject to all of the terms and conditions of this Section 2, portions of the principal indebtedness evidenced by the Notes (all of the indebtedness evidenced by the Notes bearing interest at the same rate for the same period of time being hereinafter referred to as a "Portion") may, at the option of the Company, bear interest with reference to the Domestic Rate (the "Domestic Rate Portion") or with reference to an Adjusted LIBOR ("LIBOR Portions"), and Portions may be converted from time to time from one basis to the other. All of the indebtedness evidenced by the Notes which is not part of a LIBOR Portion shall constitute a single Domestic Rate Portion. All of the indebtedness evidenced by the Notes which bears interest with reference to a particular Adjusted LIBOR for a particular Interest Period shall constitute a single LIBOR Portion. There shall not be more than three LIBOR Portions applicable to the Notes outstanding at any one time. Anything contained herein to the contrary notwithstanding, the obligation of the Bank to create, continue or effect by conversion any LIBOR Portion shall be conditioned upon the fact that at the time no Default or Event of Default shall have occurred and be continuing. The Company hereby promises to pay interest on each Portion at the rates and times specified in this Section 2. (b) Domestic Rate Portion. Each Domestic Rate Portion shall bear interest at the Domestic Rate as in effect from time to time, provided that if the Domestic Rate Portion or any part thereof is not paid when due (whether by lapse of time, acceleration or otherwise) such Portion shall bear interest, whether before or after judgment, until payment in full thereof at the rate per annum determined by adding 2% to the interest rate which would otherwise be applicable thereto from time to time. Interest on the Domestic Rate Portion shall be payable quarterly in arrears on the last day of each March, June, September and December in each year (commencing March 31, 1998) and at maturity of the Notes and interest after maturity (whether by lapse of time, acceleration or otherwise) shall be due and payable upon demand. Any change in the interest rate on the Domestic Rate Portion resulting from a change in the Domestic Rate shall be effective on the date of the relevant change in the Domestic Rate. (c) LIBOR Portions. Each LIBOR Portion shall bear interest for each Interest Period selected therefor at a rate per annum determined by adding 3% to the Adjusted LIBOR for such Interest Period, provided that if any LIBOR Portion is not paid when due (whether by lapse of time, acceleration or otherwise) such Portion shall bear interest, whether before or after judgment, until payment in full thereof through the end of the Interest Period then applicable thereto at the rate per annum determined by adding 2% to the interest rate which would otherwise be applicable thereto, and effective at the end of such Interest Period such LIBOR Portion shall automatically be converted into and added to the Domestic Rate Portion and shall thereafter bear -3- interest at the interest rate applicable to the Domestic Rate Portion after default. Interest on each LIBOR Portion shall be due and payable on the last day of each Interest Period applicable thereto and, with respect to any Interest Period applicable to a LIBOR Portion in excess of 3 months, on the date occurring every 3 months after the date such Interest Period began and at the end of such Interest Period, and interest after maturity (whether by lapse of time, acceleration or otherwise) shall be due and payable upon demand. The Company shall notify the Bank on or before 11:00 a.m. (Chicago time) on the third Business Day preceding the end of an Interest Period applicable to a LIBOR Portion whether such LIBOR Portion is to continue as a LIBOR Portion, in which event the Company shall notify the Bank of the new Interest Period selected therefor, and in the event the Company shall fail to so notify the Bank, such LIBOR Portion shall automatically be converted into and added to the Domestic Rate Portion as of and on the last day of such Interest Period. Section 2.2. Minimum Amounts. Each LIBOR Portion shall be in an amount equal to $500,000 or such greater amount which is an integral multiple of $250,000. Section 2.3. Computation of Interest. All interest on the Notes shall be computed on the basis of a year of 360 days for the actual number of days elapsed. Section 2.4. Manner of Rate Selection. The Company shall notify the Bank by 11:00 a.m. (Chicago time) at least 3 Business Days prior to the date upon which the Company requests that any LIBOR Portion be created or that any part of the Domestic Rate Portion be converted into a LIBOR Portion. If any request is made to convert a LIBOR Portion into a Domestic Rate Portion, such conversion shall only be made so as to become effective as of the last day of the Interest Period applicable thereto. All requests for the creation, continuance and conversion of Portions under this Agreement shall be irrevocable. Such requests may be written or oral and the Bank is hereby authorized to honor telephonic requests for creations, continuances and conversions received by it from any person the Bank in good faith believes to be an Authorized Representative without the need of independent investigation, the Company hereby indemnifying the Bank from any liability or loss ensuing from so acting. Section 2.5. Change of Law. Notwithstanding any other provisions of this Agreement or any Note, if at any time the Bank shall determine that any change in applicable laws, treaties or regulations or in the interpretation thereof makes it unlawful for the Bank to create or continue to maintain any LIBOR Portion, it shall promptly so notify the Company and the obligation of the Bank to create, continue or maintain any such LIBOR Portion under this Agreement shall terminate until it is no longer unlawful for the Bank to create, continue or maintain such LIBOR Portion. The Company, on demand, shall, if the continued maintenance of any such LIBOR Portion is unlawful, thereupon prepay the outstanding principal amount of the affected LIBOR Portion, together with all interest accrued thereon and all other amounts payable -4- to the Bank with respect thereto under this Agreement; provided, however, that the Company may elect to convert the principal amount of the affected Portion into another type of Portion available hereunder, subject to the terms and conditions of this Agreement. Section 2.6. Unavailability of Deposits or Inability to Ascertain Adjusted LIBOR. Notwithstanding any other provision of this Agreement or any Note, if prior to the commencement of any Interest Period, the Bank shall determine that deposits in the amount of any LIBOR Portion scheduled to be outstanding during such Interest Period are not readily available to the Bank in the relevant market or, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining Adjusted LIBOR, then the Bank shall promptly give notice thereof to the Company and the obligations of the Bank to create, continue or effect by conversion any such LIBOR Portion in such amount and for such Interest Period shall terminate until deposits in such amount and for the Interest Period selected by the Company shall again be readily available in the relevant market and adequate and reasonable means exist for ascertaining Adjusted LIBOR. Section 2.7. Taxes and Increased Costs. With respect to any LIBOR Portion, if the Bank shall determine that any change in any applicable law, treaty, regulation or guideline (including, without limitation, Regulation D of the Board of Governors of the Federal Reserve System) or any new law, treaty, regulation or guideline, or any interpretation of any of the foregoing by any governmental authority charged with the administration thereof or any central bank or other fiscal, monetary or other authority having jurisdiction over the Bank or its lending branch or the LIBOR Portions contemplated by this Agreement (whether or not having the force of law), shall: (i) impose, increase, or deem applicable any reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, or any other acquisition of funds or disbursements by, the Bank which is not in any instance already accounted for in computing the interest rate applicable to such LIBOR Portion; (ii) subject the Bank, any LIBOR Portion or any Note to the extent it evidences such a Portion to any tax (including, without limitation, any United States interest equalization tax or similar tax however named applicable to the acquisition or holding of debt obligations and any interest or penalties with respect thereto), duty, charge, stamp tax, fee, deduction or withholding in respect of this Agreement, any LIBOR Portion or any Note to the extent it evidences such a Portion, except such taxes as may be measured by the overall net income or gross receipts of the Bank or its lending branches and imposed by the jurisdiction, or any political subdivision or taxing authority thereof, in which the Bank's principal executive office or its lending branch is located; -5- (iii) change the basis of taxation of payments of principal and interest due from the Company to the Bank hereunder or under any Note to the extent it evidences any LIBOR Portion (other than by a change in taxation of the overall net income or gross receipts of the Bank); or (iv) impose on the Bank any penalty with respect to the foregoing or any other condition regarding this Agreement, any LIBOR Portion, or its disbursement, or any Note to the extent it evidences any LIBOR Portion; and the Bank shall determine that the result of any of the foregoing is to increase the cost (whether by incurring a cost or adding to a cost) to the Bank of creating or maintaining any LIBOR Portion hereunder or to reduce the amount of principal or interest received or receivable by the Bank (without benefit of, or credit for, any prorations, exemption, credits or other offsets available under any such laws, treaties, regulations, guidelines or interpretations thereof), then the Company shall pay on demand to the Bank from time to time as specified by the Bank such additional amounts as the Bank shall reasonably determine are sufficient to compensate and indemnify it for such increased cost or reduced amount. If the Bank makes such a claim for compensation, it shall provide to the Company a certificate setting forth the computation of the increased cost or reduced amount as a result of any event mentioned herein in reasonable detail and such certificate shall be conclusive if reasonably determined. Section 2.8. Funding Indemnity. In the event the Bank shall incur any loss, cost or expense (including, without limitation, any loss (including loss of profit), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired or contracted to be acquired by the Bank to fund or maintain any LIBOR Portion or the relending or reinvesting of such deposits or other funds or amounts paid or prepaid to the Bank) as a result of: (i) any payment of a LIBOR Portion on a date other than the last day of the then applicable Interest Period for any reason, whether before or after default, and whether or not such payment is required by any provisions of this Agreement; or (ii) any failure by the Company to create, borrow, continue or effect by conversion a LIBOR Portion on the date specified in a notice given pursuant to this Agreement; then upon the demand of the Bank, the Company shall pay to the Bank such amount as will reimburse the Bank for such loss, cost or expense. If the Bank requests such a reimbursement, it shall provide to the Company a certificate setting forth the computation of the loss, cost or expense giving rise to the request for reimbursement in reasonable detail and such certificate shall be conclusive if reasonably determined. -6- Section 2.9. Lending Branch. The Bank may, at its option, elect to make, fund or maintain Portions of the Loans hereunder at such of its branches or offices as the Bank may from time to time elect. Section 2.10. Discretion of Bank as to Manner of Funding. Notwithstanding any provision of this Agreement to the contrary, the Bank shall be entitled to fund and maintain its funding of all or any part of any Loan in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder (including, without limitation, determinations under Sections 2.6, 2.7 and 2.8 hereof) shall be made as if the Bank had actually funded and maintained each LIBOR Portion during each Interest Period applicable thereto through the purchase of deposits in the relevant market in the amount of such LIBOR Portion, having a maturity corresponding to such Interest Period, and, in the case of any LIBOR Portion, bearing an interest rate equal to the LIBOR for such Interest Period. SECTION 3. FEES, PREPAYMENTS, TERMINATIONS, APPLICATIONS AND CAPITAL ADEQUACY Section 3.1. Fees. (a) Commitment Fee. The Company shall pay to the Bank a commitment fee at the rate of 1/2 of 1% per annum (computed on the basis of a year of 360 days and the actual number of days elapsed) on the daily average unused portion of the Revolving Credit Commitment available hereunder. Such commitment fee shall be payable quarter-annually in arrears on the last day of each March, June, September and December in each year (commencing January 31, 1998) and on the Termination Date, unless the Revolving Credit Commitment is terminated in whole on an earlier date, in which event the commitment fee for the period to the date of such termination in whole shall be paid on the date of such termination. (b) Closing Fee. On the date hereof, the Company shall pay to the Bank a non-refundable closing fee equal to 1% per annum of the Commitments. (c) Audit Fees. The Company shall pay for each audit of the Collateral performed by the Bank or any of its agents or representatives. Section 3.2. Voluntary Prepayments. (a) Domestic Rate Portion. The Company shall have the privilege of prepaying without premium or penalty and in whole or in part (but if in part, then in an amount not less than $100,000) the Domestic Rate Portion of the Note at any time upon notice to the Bank prior to 11:00 a.m. (Chicago time) on the date fixed for prepayment, each such prepayment to be made -7- by the payment of the principal amount to be prepaid and accrued interest thereon to the date of prepayment. (b) LIBOR Portions. The Company may prepay any LIBOR Portion of the Notes only on the last date of the then applicable Interest Period, in whole or in part (but if in part, then in an amount not less than $500,000 or such greater amount which is an integral multiple of $250,000), upon 3 Business Days' prior notice to the Bank (which notice shall be irrevocable once given, must be received by the Bank no later than 11:00 a.m. (Chicago time) on the third Business Day preceding the date of such prepayment, and shall specify the principal amount to be repaid); provided, however, that the outstanding principal amount of any LIBOR Portion of the Notes prepaid in part shall not be less than $500,000 or such greater amount which is an integral multiple of $250,000 after giving effect to such prepayment. Any such prepayment shall be effected by payment of the principal amount to be prepaid and accrued interest thereon to the end of the applicable Interest Period. Section 3.3. Mandatory Prepayments. (a) Available Borrowing Base Deficiency. The Company agrees that if at any time the sum of the then unpaid principal balance of the Revolving Credit Loans shall be in excess of the Available Borrowing Base as then determined and computed, the Company shall immediately and without notice or demand pay over the amount of the excess to the Bank as and for a mandatory prepayment on such obligations, with such prepayments to be first applied to the Revolving Credit Note until payment in full thereof with any remaining balance to be held by the Bank as collateral security for the obligations owing under the Term Note. (b) Borrowing Base Deficiency. The Company agrees that if at any time the outstanding principal amount of the Term Note shall at any time and for any reason exceed the Borrowing Base as then determined and computed, the Company shall immediately and without notice or demand pay over the amount of the excess to the Bank as and for a mandatory prepayment on the Term Note. Section 3.4. Terminations. The Company shall have the right at any time and from time to time, upon three (3) Business Days' prior notice to the Bank, to terminate without premium or penalty and in whole or in part (but if in part, then in an amount not less than $500,000) the Revolving Credit Commitment, provided that the Revolving Credit Commitment may not be reduced to an amount less than the aggregate principal amount of the Revolving Credit Loans then outstanding. Any termination of the Revolving Credit Commitment pursuant to this Section may not be reinstated. Section 3.5. Place and Application of Payments. All payments of principal, interest, fees and all other amounts payable hereunder shall be made to the Bank at its principal office in -8- Chicago, Illinois no later than 11:00 a.m. (Chicago time) on the date any such payment is due and payable. All such payments shall be made in lawful money of the United States of America, in immediately available funds at the place of payment, without setoff or counterclaim and without reduction for, and free from, any and all present or future taxes, levies, imposts, duties, fees, charges, deductions, withholdings, restrictions or conditions of any nature imposed by any government or any political subdivision or taxing authority thereof (but excluding any taxes imposed on or measured by the net income of the Bank). Any amount paid or prepaid on the Revolving Credit Note may, subject to the terms and conditions of this Agreement, be reborrowed. No amount paid or prepaid on the Term Note may be reborrowed. All prepayments on the Term Note shall be applied to the several installments thereof in the inverse order of their maturity. Unless the Company otherwise directs, principal payments shall be first applied to the Domestic Rate Portion until payment in full thereof, with any balance applied to the LIBOR Portions in the order in which their Interest Periods expire. Section 3.6. Notations. All Loans made against the Notes, the status of all amounts evidenced by the Note as constituting part of the Domestic Rate Portion or a LIBOR Portion, and, in the case of any LIBOR Portion, the rates of interest and Interest Periods applicable to such Portions shall be recorded by the Bank on its books and records or, at its option in any instance, endorsed on a schedule to the appropriate Note and the unpaid principal balance and status, rates and Interest Periods so recorded or endorsed by the Bank shall be prima facie evidence in any court or other proceeding brought to enforce such Note of the principal amount remaining unpaid thereon, the status of the Loans evidenced thereby and the interest rates and Interest Periods applicable thereto; provided that the failure of the Bank to record any of the foregoing shall not limit or otherwise affect the obligation of the Company to repay the principal amount of each Note together with accrued interest thereon. Prior to any negotiation of any Note, the Bank shall record on a schedule thereto the status of all amounts evidenced thereby as constituting part of the Domestic Rate Portion or a LIBOR Portion and, in the case of any LIBOR Portion, the rates of interest and the Interest Periods applicable thereto. Section 3.7. Change in Capital Adequacy Requirements. If the Bank shall determine that the adoption after the date hereof of any applicable law, rule or regulation regarding capital adequacy, or any change in any existing law, rule or regulation, or any change in the interpretation or administration thereof, by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank (or any of its branches) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Bank's capital as a consequence of its obligations hereunder or for the credit which is the subject matter hereof to a level below that which the Bank could have achieved but for such adoption, change or compliance (taking into consideration the Bank's policies with respect to liquidity and capital -9- adequacy) by an amount deemed by the Bank to be material, then from time to time, within fifteen (15) days after demand by the Bank, the Company shall pay to the Bank such additional amount or amounts reasonably determined by the Bank as will compensate the Bank for such reduction. SECTION 4. THE COLLATERAL AND THE GUARANTIES. Section 4.1. Security. The Notes and the other Obligations shall be secured by all of the Company's accounts receivable, and certain other assets and property related thereto, of the Company pursuant to that certain Security Agreement dated of even date herewith from the Company to the Bank, as the same may be amended, modified or supplemented from time to time (the "Security Agreement"), and a pledge of the stock of the Guarantors pursuant to that certain Pledge and Security Agreement dated of even date herewith from the Company to the Bank (the "Pledge Agreement"). Section 4.2. Guaranties. The Notes and the other Obligations shall be guaranteed by each Guarantor pursuant to separate guaranty agreements which are in form and substance satisfactory to the Bank (individually a "Guaranty" and collectively the "Guaranties"). Each Guaranty shall be secured by valid and perfected first Liens on all of the accounts receivable, equipment and certain other assets and property related thereto, of the Guarantor executing such Guaranty. In the event the Company forms or acquires a direct Subsidiary after the date hereof in accordance with Section 8.20 hereof, the Company shall cause each such Subsidiary to (i) execute and deliver to the Bank a guaranty agreement in form and substance satisfactory to the Bank, (ii) secure such guaranty agreement by valid and perfected first Liens on all of the accounts receivable, equipment and certain other assets and property related thereto, of such Subsidiary, and (iii) execute such of the instruments, documents, certificates and opinions required by the Bank in connection therewith. Section 4.3. Further Assurances. The Company covenants and agrees that it shall comply with, and will cause each Subsidiary to comply with, all terms and conditions of each of the Collateral Documents and that it will, and will cause each Subsidiary to, at any time and from time to time as requested by the Bank, execute and deliver such further instruments and do such acts and things as the Bank may deem necessary or desirable to provide for or protect or perfect the Liens of the Bank on the Collateral. SECTION 5. DEFINITIONS; INTERPRETATION. Section 5.1. Definitions. The following terms when used herein shall have the following meanings: -10- "Adjusted LIBOR" means a rate per annum determined by the Bank in accordance with the following formula: Adjusted LIBOR = LIBOR ----------------------- 100%-Reserve Percentage "Reserve Percentage" means, for the purpose of computing Adjusted LIBOR, the maximum rate of all reserve requirements (including, without limitation, any marginal, emergency, supplemental or other special reserves) imposed by the Board of Governors of the Federal Reserve System (or any successor) under Regulation D on Eurocurrency liabilities (as such term is defined in Regulation D) for the applicable Interest Period as of the first day of such Interest Period, but subject to any amendments to such reserve requirement by such Board or its successor, and taking into account any transitional adjustments thereto becoming effective during such Interest Period. For purposes of this definition, LIBOR Portions shall be deemed to be Eurocurrency liabilities as defined in Regulation D without benefit of or credit for prorations, exemptions or offsets under Regulation D. "LIBOR" means, for each Interest Period, (a) the LIBOR Index Rate for such Interest Period, if such rate is available, and (b) if the LIBOR Index Rate cannot be determined, the arithmetic average of the rates of interest per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) at which deposits in U.S. Dollars in immediately available funds are offered to the Bank at 11:00 a.m. (London, England time) two (2) Business Days before the beginning of such Interest Period by three (3) or more major banks in the interbank eurodollar market selected by the Bank for a period equal to such Interest Period and in an amount equal or comparable to the applicable LIBOR Portion scheduled to be outstanding from the Bank during such Interest Period. "LIBOR Index Rate" means, for any Interest Period, the rate per annum (rounded upwards, if necessary, to the next higher one hundred-thousandth of a percentage point) for deposits in U.S. Dollars for a period equal to such Interest Period, which appears on the Telerate Page 3750 as of 11:00 a.m. (London, England time) on the day two (2) Business Days before the commencement of such Interest Period. "Telerate Page 3750" means the display designated as "Page 3750" on the Telerate Service (or such other page as may replace Page 3750 on that service or such other service as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying British Bankers' Association Interest Settlement Rates for U.S. Dollar deposits). Each determination of LIBOR made by the Bank shall be conclusive and binding absent manifest error. "Affiliate" means any Person, directly or indirectly controlling or controlled by, or under direct or indirect common control with, another Person. A Person shall be deemed to control another Person for the purposes of this definition if such Person possesses, directly or indirectly, the power to direct, or cause the direction of, the management and policies of the other Person, -11- whether through the ownership of voting securities, common directors, trustees or officers, by contract or otherwise. "Authorized Representative" means those persons shown on the list of officers provided by the Company pursuant to Section 6.2(a) hereof or on any update of any such list provided by the Company to the Bank, or any further or different officer(s) of the Company so named by any Authorized Representative of the Company in a written notice to the Bank. "Available Borrowing Base" means the amount (if any) by which (x) the Borrowing Base as then determined and computed exceeds (y) the principal amount then outstanding under the Term Loan. "Bank" is defined in the introductory paragraph hereof. "Borrowing Base" means, as of any time it is to be determined, the sum of: (a) 80% of the then outstanding unpaid amount of Eligible Accounts of the Company and the Guarantors; plus (b) 50% of the Eligible Equipment of the Company and the Guarantors. The Borrowing Base shall be computed only as against and on so much of the Collateral as is included on the certificates to be furnished from time to time by the Company pursuant to Section 8.5(a) hereof and, if required by the Bank pursuant to any of the terms hereof or of any Collateral Document, as verified by such other evidence reasonably required to be furnished to the Bank pursuant hereto or pursuant to any such Collateral Document. "Business Day" means any day other than a Saturday or Sunday on which the Bank is not authorized or required to close in Chicago, Illinois and, when used with respect to LIBOR Portions, a day on which the Bank is also dealing in United States Dollar deposits in London, England and Nassau, Bahamas. "Capital Expenditures" means for any Person, for any period, the capital expenditures of such Person and its Subsidiaries during such period as defined and classified in accordance with GAAP. "Capital Lease" means any lease of Property which in accordance with GAAP is required to be capitalized on the balance sheet of the lessee. -12- "Capitalized Lease Obligation" means the amount of the liability shown on the balance sheet of any Person in respect of a Capital Lease determined in accordance with GAAP. "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute thereto. "Collateral" means all properties, rights, interests and privileges from time to time subject to the Liens granted to the Bank by the Collateral Documents. "Collateral Documents" means (i) all guaranties as shall from time to time guarantee the Notes or any other Obligations, (ii) the Pledge Agreement, and (iii) the Security Agreement and all other mortgages, deeds of trust, security agreements, assignments, financing statements and other documents as shall from time to time secure the Obligations or any such guaranties, all as the same may from time to time be modified, supplemented or amended. "Commitments" mean and include the Revolving Credit Commitment and the Term Credit Commitment. "Company" is defined in the introductory paragraph hereof. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Company or any Subsidiary, are treated as a single employer under Section 414 of the Code. "Current Ratio" means, at any time the same is to be determined, the ratio of current assets of the Company and its Subsidiaries to current liabilities of the Company and its Subsidiaries, all as determined on a consolidated basis in accordance with GAAP consistently applied. "Debentures" means the 8% Series A Senior Subordinated Convertible Redeemable Debentures of the Company Due December 31, 1999, in an aggregate principal amount equal to $4,000,000. "Default" means any event or condition the occurrence of which would, with the passage of time or the giving of notice, or both, constitute an Event of Default. "Domestic Rate" means, for any day, the rate of interest announced by the Bank from time to time as its prime commercial rate, as in effect on such day. "Domestic Rate Portion" is defined in Section 2.1(a) hereof. -13- "EBIT" means for any Person, with reference to any period, Net Income for such period plus all amounts deducted in arriving at such Net Income amount in respect of (i) Interest Expense for such period and (ii) federal, state and local income taxes for such period. "EBITDA" means for any Person, with reference to any period, EBIT for such period plus all amounts properly charged for depreciation of fixed assets and amortization of intangible assets during such period on the books of the Company and its Subsidiaries. "Eligible Account" means, as to any Person, each account receivable of such Person, provided that an account receivable shall only be an Eligible Account to the extent it: (a) is included, in the ordinary course of such Person's business, on the separate accounts receivable records of such Person in accordance with GAAP; (b) arises out of the sale (including the rendition of services in connection with such sale) of finished goods, work-in-process or other inventory by such Person to an account debtor located within the United States of America or, if such right has arisen out of the sale of such goods to an account debtor located in any other country, such right is secured by a valid and irrevocable letter of credit pursuant to which any of such Person or its transferee may draw on a lender reasonably acceptable to the Bank for the full amount thereof; (c) is the valid, binding and legally enforceable obligation of the account debtor obligated thereon and such account debtor is not (i) a Subsidiary or Affiliate of the Company or such Person, (ii) a shareholder, director, officer or employee of the Company, such Person or any Affiliate of the Company or such Person, (iii) the United States of America or any department, agency or instrumentality thereof unless such Person has complied with the Assignment of Claims Act to the satisfaction of the Bank, (iv) a debtor under any proceeding under the United States Bankruptcy Code or any other comparable bankruptcy or insolvency law applicable under the law of any other country or political subdivision thereof, or (v) an assignor for the benefit of creditors; (d) is assignable and not evidenced by an instrument or chattel paper unless the same has been endorsed and delivered to the Bank; (e) is subject to a perfected, first priority Lien in favor of the Bank, and is free and clear of any other Lien; (f) is net of any credit or allowance given by such Person to such account debtor; -14- (g) is not subject to any offset, counterclaim or other defense with respect thereto; (h) is not unpaid more than ninety (90) days after the invoice date; (i) is not owed by an account debtor who is obligated on accounts owed to such Person more than 30% of the aggregate unpaid balance of which have been past due for longer than the relevant period specified in clause (h) above unless the Bank has approved the continued eligibility thereof; (j) it would not cause the total Eligible Accounts owing from any one account debtor or its Affiliates to exceed 25% of all Eligible Accounts; and (k) does not arise from a sale to an account debtor on a bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval, consignment or any other repurchase or return basis, provided that this subsection (k) shall not exclude sales by such Person where such Person delays delivery of the goods in the ordinary course of its business as presently conducted for a period no longer than fifteen (15) days after billing for such sale because the account debtor on such sale is not ready to accept delivery of such goods. "Eligible Equipment" means all equipment of any Person acceptable to the Bank in its sole discretion provided that no such equipment shall be deemed "eligible" if it is not: (a) an asset of such Person to which it has good and marketable title, freely assignable, subject to a perfected, first priority Lien in favor of the Bank, and is free and clear of any other Lien other than Liens permitted by Section 8.10(a) and (b) hereof; and (b) located at such Person's facilities in such locations as are approved in writing by the Bank and, in the case of facilities not owned by such Person, which are at all times subject to landlord waiver agreements in form and substance satisfactory to the Bank; provided, however, that with respect to the equipment of HealthStar, Inc., such landlord waiver agreements may be delivered within 60 days of the date hereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute thereto. "Event of Default" means any event or condition identified as such in Section 8.1 hereof. "Fixed Charges" means, with reference to any period, the sum of (i) the aggregate amount of payments required to be made by the Company and its Subsidiaries during the next -15- succeeding twelve-month period in respect of principal on all Indebtedness for Borrowed Money (whether at maturity, as a result of mandatory sinking fund redemption, mandatory prepayment, acceleration or otherwise), plus (ii) Interest Expense for the four fiscal quarters then ended, plus (iii) the aggregate amount of payments required to be made by the Company and its Subsidiaries during the next succeeding twelve-month period in respect of leases or similar arrangements (including without limitation all payments required under operating and Capital Leases under which the Company or any Subsidiary is liable as lessee). "GAAP" means generally accepted accounting principles as an effect from time to time, applied by the Company and its Subsidiaries on a basis consistent with the preparation of the Company's most recent financial statements furnished to the Bank pursuant to Section 5.4 hereof. "Guaranties" is defined in Section 6.4 hereof. "Guarantors" means and includes NHBC, TRPN and HealthStar. "HealthStar" means HealthStar, Inc., an Illinois corporation. "Indebtedness for Borrowed Money" means for any Person (without duplication) (i) all indebtedness created, assumed or incurred in any manner by such Person representing money borrowed (including by the issuance of debt securities), (ii) all indebtedness for the deferred purchase price of property or services (other than trade accounts payable arising in the ordinary course of business which are not more than ninety (90) days past due), (iii) all indebtedness secured by any Lien upon Property of such Person, whether or not such Person has assumed or become liable for the payment of such indebtedness, (iv) all Capitalized Lease Obligations of such Person and (v) all obligations of such Person on or with respect to letters of credit, bankers' acceptances and other extensions of credit whether or not representing obligations for borrowed money. "Interest Expense" means for any Person, with reference to any period, the sum of all interest charges (including imputed interest charges with respect to Capitalized Lease Obligations and all amortization of debt discount and expense) of such Person and its Subsidiaries for such period determined in accordance with GAAP. "Interest Period" means, with respect to any LIBOR Portion, the period commencing on, as the case may be, the creation, continuation or conversion date with respect to such LIBOR Portion and ending 1, 3 or 6 months thereafter as selected by the Company in its notice as provided herein; provided that all of the foregoing provisions relating to Interest Periods are subject to the following: -16- (i) if any Interest Period would otherwise end on a day which is not a Business Day, that Interest Period shall be extended to the next succeeding Business Day, unless in the case of an Interest Period for a LIBOR Portion the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (ii) no Interest Period may extend beyond the final maturity date of the Notes; (iii) the interest rate to be applicable to each Portion for each Interest Period shall apply from and including the first day of such Interest Period to but excluding the last day thereof; and (iv) no Interest Period may be selected if after giving effect thereto the Company will be unable to make a principal payment scheduled to be made during such Interest Period without paying part of a LIBOR Portion on a date other than the last day of the Interest Period applicable thereto. For purposes of determining an Interest Period, a month means a period starting on one day in a calendar month and ending on a numerically corresponding day in the next calendar month, provided, however, if an Interest Period begins on the last day of a month or if there is no numerically corresponding day in the month in which an Interest Period is to end, then such Interest Period shall end on the last Business Day of such month. "LIBOR Portions" is defined in Section 2.1(a) hereof. "Lien" means any mortgage, lien, security interest, pledge, charge or encumbrance of any kind in respect of any Property, including the interests of a vendor or lessor under any conditional sale, Capital Lease or other title retention arrangement. "Loan" means a Revolving Credit Loan or the Term Loan, unless the context in which such term is used shall otherwise require. "Loan Documents" means this Agreement, the Notes and the Collateral Documents. "Material Plan" is defined in Section 9.1(h) hereof. "Net Income" means for any Person, with reference to any period, the net income (or net deficit) of such Person and its Subsidiaries for such period as computed on a consolidated basis in accordance with GAAP, and without limiting the foregoing, after deduction from gross -17- income of all expenses and reserves, including reserves for all taxes on or measured by income, but excluding any extraordinary profits and also excluding any taxes on such profits. "NHBC" means National Health Benefit & Casualty Corporation, a Nevada corporation. "Notes" is defined in Section 1.3 hereof. "Obligations" means all obligations of the Company to pay principal and interest on the Loans, all fees and charges payable hereunder, and all other payment obligations of the Company arising under or in relation to any Loan Document, in each case whether now existing or hereafter arising, due or to become due, direct or indirect, absolute or contingent, and howsoever evidenced, held or acquired. "PBGC" means the Pension Benefit Guaranty Corporation or any Person succeeding to any or all of its functions under ERISA. "Person" means an individual, partnership, corporation, association, trust, unincorporated organization or any other entity or organization, including a government or agency or political subdivision thereof. "Plan" means any employee pension benefit plan covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code that either (i) is maintained by a member of the Controlled Group for employees of a member of the Controlled Group, (ii) is maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, or (iii) under which a member of the Controlled Group has any liability, including any liability by reason of having been a substantial employer within the meaning of Section 4063 of ERISA at any time during the preceding five years or by reason of being deemed a contributing sponsor under Section 4064 of ERISA. "Pledge Agreement" is defined in Section 4.1 hereof. "Portion" is defined in Section 2.1(a) hereof. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Restricted Payments" means for any Person (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock of such Person, now or hereafter -18- outstanding, except a dividend payable solely in shares of that class of stock to the holders of that class or (ii) any redemption, retirement, purchase or other acquisition for value, direct or indirect, of any shares of any class of stock of such Person. "Revolving Credit" is defined in Section 1.1 hereof. "Revolving Credit Commitment" is defined in Section 1.1 hereof. "Revolving Credit Loan" means a loan under the Revolving Credit. "Revolving Credit Note" is defined in Section 1.2 hereof. "Security Agreement" is defined in Section 4.1 hereof. "Subordinated Note" means the Non-Negotiable Subordinated Promissory Note, dated December 15, 1997, in an amount not to exceed $200,000, issued by the Company to Thomas H. Stateman. "Subsidiary" means any corporation or other Person more than 50% of the outstanding ordinary voting shares or other equity interests of which is at the time directly or indirectly owned by the Company, by one or more of its Subsidiaries, or by the Company and one or more of its Subsidiaries. "Term Credit Commitment" is defined in Section 1.3 hereof. "Termination Date" means December 14, 2000, or such earlier date on which one or both of the Commitments is terminated in whole pursuant to Sections 3.4, 9.2 or 9.3 hereof. "Term Loan" is defined in Section 1.3 hereof. "Term Note" is defined in Section 1.3 hereof. "Total Liabilities" means for any Person, as of any time the same is to be determined, the aggregate of all indebtedness, obligations, liabilities, reserves and any other items which would be listed as a liability on a balance sheet of such Person and its Subsidiaries determined on a consolidated basis in accordance with GAAP. "TRPN" means Three Rivers Provider Network, a Nevada corporation. "Unfunded Vested Liabilities" means, for any Plan at any time, the amount (if any) by which the present value of all vested nonforfeitable accrued benefits under such Plan exceeds the fair market value of all Plan assets allocable to such benefits, all determined as of the then most -19- recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the Controlled Group to the PBGC or the Plan under Title IV of ERISA. "Voting Stock" of any Person means the capital stock of any class or classes or other equity interest (however designated) having ordinary voting power for the election of directors or similar governing body of such Person, other than stock or other equity interests having such power only by reason of the happening of a contingency. "Welfare Plan" means a "welfare plan" as defined in Section 3(1) of ERISA. "Wholly Owned Subsidiary" means a Subsidiary of which all of the issued and outstanding shares of capital stock (other than directors' qualifying shares as required by law) or other equity interests are owned by the Company and/or one or more Wholly Owned Subsidiaries within the meaning of this definition. Section 5.2. Interpretation. The foregoing definitions are equally applicable to both the singular and plural forms of the terms defined. The words "hereof", "herein" and "hereunder" and words of like import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All references to time of day herein are references to Chicago, Illinois time unless otherwise specifically provided. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, it shall be done in accordance with GAAP except where such principles are inconsistent with the specific provisions of this Agreement. SECTION 6. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to the Bank as follows: Section 6.1. Organization and Qualification. The Company is duly organized, validly existing and in good standing as a corporation under the laws of the State of Utah, has full and adequate corporate power to own its Property and conduct its business as now conducted, and is duly licensed or qualified and in good standing in each jurisdiction in which the nature of the business conducted by it or the nature of the Property owned or leased by it requires such licensing or qualifying and in which the failure to be so licensed or qualified could reasonably be expected to have or does in fact have a material adverse effect on the business, operations or assets of the Company and its Subsidiaries considered as a whole. The Company has full right and authority to enter into this Agreement, to make the borrowings herein provided for, to issue its Notes in evidence thereof, and to perform each and all of the matters and things herein and therein provided for; and this Agreement and the other Loan Documents do not, nor does the performance or observance by the Company of any of the matters and things herein or -20- therein provided for, contravene or constitute a default under any provision of law or any judgment, injunction, order or decree binding upon the Company or any charter or by-law provision of the Company or any covenant, indenture or agreement of or affecting the Company or any of its Properties, or result in the creation or imposition of any Lien on any Property of the Company. Section 6.2. Subsidiaries. Each Subsidiary is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated or organized, as the case may be, has full and adequate power to own its Property and conduct its business as now conducted, and is duly licensed or qualified and in good standing in each jurisdiction in which the nature of the business conducted by it or the nature of the Property owned or leased by it requires such licensing or qualifying and in which the failure to be so licensed or qualified could reasonably be expected to have or does in fact have a material adverse effect on the business, operations or assets of the Company and its Subsidiaries considered as a whole. Schedule 6.2 hereto (as updated from time to time in accordance with Section 8.20 hereof) identifies each Subsidiary, the jurisdiction of its incorporation or organization, as the case may be, the percentage of issued and outstanding shares of each class of its capital stock or other equity interests owned by the Company and the Subsidiaries and, if such percentage is not 100% (excluding directors' qualifying shares as required by law), a description of each class of its authorized capital stock and other equity interests and the number of shares of each class issued and outstanding. All of the outstanding shares of capital stock and other equity interests of each Subsidiary are validly issued and outstanding and fully paid and nonassessable and all such shares and other equity interests indicated on Schedule 6.2 as owned by the Company or a Subsidiary are owned, beneficially and of record, by the Company or such Subsidiary free and clear of all Liens. There are no outstanding commitments or other obligations of any Subsidiary to issue, and no options, warrants or other rights of any Person to acquire, any shares of any class of capital stock or other equity interests of any Subsidiary. Section 6.3. Margin Stock. Neither the Company nor any of its Subsidiaries is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Loan will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock. Section 6.4. Financial Reports. The consolidated balance sheet of the Company and its Subsidiaries as of March 31, 1997 and the related consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for the fiscal year then ended, and accompanying notes thereto, which financial statements are accompanied by the audit report of KPMG Peat Marwick, independent public accountants, and the unaudited interim consolidated -21- balance sheet of the Company and its Subsidiaries as at September 30, 1997 and the related consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for the six (6) months then ended, and the balance sheet of HealthStar, dated December 12, 1997, heretofore furnished to the Bank, fairly present the consolidated financial condition of the Company and its Subsidiaries as at said dates and the consolidated results of their operations cash flows for the periods then ended in conformity with GAAP applied on a consistent basis. Neither the Company nor any Subsidiary has contingent liabilities which are material to it other than as indicated on such financial statements or, with respect to future periods, on the financial statements furnished pursuant to Section 8.5 hereof. Since March 31, 1997, there has been no material adverse change in the condition (financial or otherwise) or business prospects of the Company and its Subsidiaries nor any change to the Company and its Subsidiaries except those occurring in the ordinary course of business. Section 6.5. Good Title. The Company and each of its Subsidiaries have good and defensible title to its assets as reflected on the most recent consolidated balance sheet of the Company and its Subsidiaries furnished to the Bank (except for sales of assets by the Company and its Subsidiaries in the ordinary course of its business), subject to no Liens other than such thereof as are permitted by Section 8.10 hereof. Section 6.6. Litigation and Other Controversies. There is no litigation or governmental proceeding or labor controversy pending, nor to the knowledge of the Company threatened, against the Company or any Subsidiary which if adversely determined would result in any material adverse change in the financial condition, Properties, business or operations of the Company and its Subsidiaries taken as a whole. Section 6.7. Taxes. All federal, state, local and other tax returns of the Company and each Subsidiary required to be filed have been filed and the Company and each Subsidiary have paid, or have made adequate provisions for the payment of all federal, state, local and other taxes, assessments and other governmental charges upon the Company and its Subsidiaries or their Property, except such taxes, assessments and charges which are being contested in good faith and by appropriate proceedings and as to which adequate reserves have been established therefor. There are no objections to or controversies or assessments due in respect of the tax returns of the Company and its Subsidiaries pending, nor to the knowledge of the Company is any such objection, controversy or assessment threatened. Section 6.8. Approvals. No authorization, consent, license, exemption, filing or registration with any court or governmental department, agency or instrumentality (other than those which have already been obtained), nor any approval or consent of the stockholders of the Company or any other Person, is or, to the knowledge and belief of the Company, will be -22- necessary to the valid execution, delivery or performance by the Company of this Agreement or the Notes. Section 6.9. Affiliate Transactions. Neither the Company nor any Subsidiary is a party to any contracts or agreements with any of its Affiliates (other than with Wholly Owned Subsidiaries) on terms and conditions which are less favorable to the Company or such Subsidiary than would be usual and customary in similar contracts or agreements between Persons not affiliated with each other. Section 6.10. Neither the Company nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "public utility holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 6.11. ERISA. To the knowledge and belief of the Company and its Subsidiaries, the Company and its Subsidiaries are in compliance in all material respects with ERISA to the extent applicable to them and have received no notice to the contrary from the PBGC or any other governmental entity or agency. As of November 30, 1997, the net liability of the Company and its Subsidiaries to the PBGC in respect of Unfunded Vested Liabilities would not have been in excess of $0 if all employee pension benefit plans maintained by the Company and its Subsidiaries had been terminated as of such date. To the knowledge and belief of the Company and its Subsidiaries, no condition exists nor has any event or transaction occurred with respect to any Plan which could reasonably be expected to result in the incurrence by the Company or any Subsidiary of any material liability, fine or penalty under ERISA or in connection with any Plan. Neither the Company nor any Subsidiary has any contingent liability for any post-retirement benefits under a Welfare Plan, other than liability for continuation of coverage described in Part 6 of Title I of ERISA. Section 6.12. To the knowledge and belief of the Company and its Subsidiaries, the Company and each of its Subsidiaries are in compliance with the requirements of all federal, state and local laws, rules and regulations applicable to or pertaining to the Properties or business operations of the Company and its Subsidiaries (including, without limitation, the Occupational Safety and Health Act of 1970, the Americans with Disabilities Act of 1990, and laws and regulations establishing quality criteria and standards for air, water, land and toxic or -23- hazardous wastes and substances), non-compliance with which could have a material adverse effect on the financial condition, Properties, business or operations of the Company and its Subsidiaries taken as a whole. Neither the Company nor any Subsidiary has received notice to the effect that its operations are not in compliance with any of the requirements of applicable federal, state or local environmental, health and safety statutes and regulations or are the subject of any governmental investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could have a material adverse effect on the financial condition, Properties, business or operations of the Company and its Subsidiaries taken as a whole. Section 6.13. Other Agreements. Neither the Company nor any Subsidiary is in default under the terms of any covenant, indenture or agreement of or affecting the Company, any Subsidiary or any of their Properties, which default if uncured would have a material adverse effect on the financial condition, Properties, business or operations of the Company and its Subsidiaries taken as a whole. SECTION 7. CONDITIONS PRECEDENT. The obligation of the Bank to make any Loan under this Agreement is subject to the following conditions precedent: Section 7.1. Each Advance. As of the time of the making of each extension of credit (including the initial extension of credit) hereunder: (a) each of the representations and warranties set forth in Section 6 hereof and in the other Loan Documents shall be true and correct as of such time, except to the extent the same expressly relate to an earlier date; (b) the Company shall be in full compliance with all of the terms and conditions of this Agreement and of the other Loan Documents, and no Default or Event of Default shall have occurred and be continuing or would occur as a result of making such extension of credit; (c) after giving effect to such extension of credit, the aggregate principal amount of all Revolving Credit Loans outstanding under this Agreement shall not exceed the lesser of (i) the Revolving Credit Commitment and (ii) the Available Borrowing Base; and (d) no Default or Event of Default shall have occurred and be continuing hereunder. The Company's request for any Loan shall constitute its warranty as to the foregoing effects. Section 7.2. Initial Advance. At or prior to the making of the initial extension of credit hereunder, the following conditions precedent shall also have been satisfied: -24- (a) the Bank shall have received the following (each to be properly executed and completed) and the same shall have been approved as to form and substance by the Bank: (i) the Notes; (ii) the Collateral Documents, together with any financing statements requested by the Bank in connection therewith; (iii) the Guaranties; (iv) certified copies of resolutions of the Board of Directors of the Company and each Guarantor authorizing the execution and delivery of this Agreement, the Notes, the Guaranties and the other Loan Documents, as appropriate, indicating the authorized signers of such documents and all other documents relating thereto and the specimen signatures of such signers; (v) copies of the Articles of Incorporation and Bylaws of the Company and each Guarantor certified by the Secretary or other appropriate officer of the Company or such Guarantor, as the case may be; (vi) an incumbency certificate containing the name, title and genuine signatures of each of the Company's Authorized Representatives; and (vii) evidence of insurance required by Section 8.4 hereof. (b) legal matters incident to the execution and delivery of this Agreement and other Loan Documents and to the transactions contemplated hereby shall be satisfactory to the Bank and its counsel; (c) the Bank shall have received the favorable written opinion of counsel for the Company and the Guarantors in the form attached hereto as Exhibit D and otherwise satisfactory to the Bank and its counsel; (d) the Bank shall have received a Borrowing Base certificate in the form attached hereto as Exhibit C showing the computation of the Available Borrowing Base in reasonable detail as of December 15, 1997; (e) the Bank shall have received good standing certificates for the Company and each Guarantor (dated as of the date no earlier than ten (10) days prior to the date -25- hereof) from the office of the secretary of state of the state of its incorporation and each state in which it is qualified to do business as a foreign corporation; (f) the Liens granted to the Bank under the Collateral Documents shall have been perfected in a manner satisfactory to the Bank and its counsel; (g) the Bank shall have received the initial fees called for by Section 3.2(b) hereof; (h) the acquisition referred to in Section 8.22 hereof shall have occurred (except for the Bank's funding of a portion of the purchase price therefor) on terms and conditions substantially similar to those heretofore provided to the Bank in writing; and (i) the bank shall have received a subordination agreement in form and substance satisfactory to the Bank from the payee of the Subordinated Note. SECTION 8. COVENANTS. The Company agrees that, so long as any credit is available to or in use by the Company hereunder, except to the extent compliance in any case or cases is waived in writing by the Bank: Section 8.1. Corporate Existence, Etc. The Company shall, and shall cause each Subsidiary to, preserve and maintain its corporate existence. The Company will preserve and keep in force and effect, and cause each Subsidiary to preserve and keep in force and effect, all licenses, permits and franchises necessary to the proper conduct of its business. Section 8.2. Maintenance of Properties. The Company will maintain, preserve and keep its Properties in good repair, working order and condition (ordinary wear and tear excepted) and will from time to time make all needful and proper repairs, renewals, replacements, additions and betterments thereto so that at all times the efficiency thereof shall be fully preserved and maintained, and will cause each Subsidiary to do so in respect of Property owned or used by it. Section 8.3. Taxes and Assessments. The Company will duly pay and discharge, and will cause each Subsidiary to duly pay and discharge, all taxes, rates, assessments, fees and governmental charges upon or against it or its Properties, in each case before the same become delinquent and before penalties accrue thereon, unless and to the extent that the same are being contested in good faith and by appropriate proceedings which prevent enforcement of the matter under contest and adequate reserves are provided therefor. -26- Section 8.4. Insurance. The Company will insure and keep insured, and will cause each Subsidiary to insure and keep insured, with good and responsible insurance companies, all insurable Property owned by it which is of a character usually insured by Persons similarly situated and operating like Properties against loss or damage from such hazards and risks, and in such amounts, as are insured by Persons similarly situated and operating like Properties; and the Company will insure, and cause each Subsidiary to insure, such other hazards and risks (including employers' and public liability risks) with good and responsible insurance companies as and to the extent usually insured by Persons similarly situated and conducting similar businesses. The Company will upon request (which requests, prior to the occurrence of an Event of Default hereunder, shall be no more frequent than once per calendar year), of the Bank furnish a certificate setting forth in summary form the nature and extent of the insurance maintained pursuant to this Section. Section 8.5. Financial Reports. The Company will, and will cause each Subsidiary to, maintain a standard system of accounting in accordance with GAAP and will furnish to the Bank and its duly authorized representatives such information respecting the business and financial condition of the Company and its Subsidiaries as the Bank may reasonably request; and without any request, will furnish to the Bank: (a) as soon as available, and in any event within thirty (30) days after the close of each calendar month, a Borrowing Base certificate in the form attached hereto as Exhibit C showing the computation of the Available Borrowing Base in reasonable detail as of the close of business on the last day of such month, prepared by the Company and certified to by the chief financial officer of the Company; (b) as soon as available, and in any event within (i) thirty (30) days after the close of each calendar month, and (ii) within forty-five (45) days after the close of each calendar quarter, prepared on a consolidated and consolidating basis, copies of the consolidated and consolidating balance sheets for the Company and its Subsidiaries as of the close of each such period and the consolidated and consolidating statements of income, retained earnings and cash flows of the Company and its Subsidiaries for such period, all in reasonable detail and, commencing January 31, 1998, showing in comparative form the figures for the corresponding date and period in the previous fiscal year, prepared by the Company in accordance with GAAP and certified to by the chief financial officer of the Company; (c) as soon as available, and in any event within ninety (90) days after the close of each annual accounting period of the Company, copies of the consolidated and consolidating balance sheets of the Company and its Subsidiaries as of the close of such period and the consolidated and consolidating statements of income, retained earnings -27- and cash flows of the Company and its Subsidiaries for such period, and accompanying notes thereto, all in reasonable detail showing in comparative form the figures for the previous fiscal year, accompanied by an unqualified opinion thereon of KPMG Peat Marwick or another firm of independent public accountants of recognized national standing, selected by the Company and satisfactory to the Bank, to the effect that the financial statements have been prepared in accordance with GAAP and present fairly in accordance with GAAP the consolidated financial condition of the Company and its Subsidiaries as of the close of such fiscal year and the results of their operations and cash flows for the fiscal year then ended and that an examination of such accounts in connection with such financial statements has been made in accordance with generally accepted auditing standards and, accordingly, such examination included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances; (d) as soon as available and in any event by March 31, 1998, financial statements of the Company and HealthStar as of the date hereof prepared by the Company and audited by KPMG Peat Marwick LLP, for the period from April 1, 1997 through the date hereof, including a computation of Working Capital as of the date hereof; and (e) promptly after knowledge thereof shall have come to the attention of any responsible officer of the Company, written notice of any threatened or pending litigation or governmental proceeding or labor controversy against the Company or any Subsidiary which, if adversely determined, would adversely effect the financial condition, Properties, business or operations of the Company and its Subsidiaries taken as a whole or of the occurrence of any Default or Event of Default hereunder. Each of the financial statements furnished to the Bank pursuant to clauses (b) and (c) of this Section shall be accompanied by a written certificate in the form attached hereto as Exhibit E signed by the chief financial officer of the Company to the effect that to the best of the chief financial officer's knowledge and belief no Default or Event of Default has occurred during the period covered by such statements or, if any such Default or Event of Default has occurred during such period, setting forth a description of such Default or Event of Default and specifying the action, if any, taken by the Company to remedy the same. Such certificate shall also set forth the calculations supporting such statements in respect of Sections 8.6, 8.7 and 8.8 of this Agreement. Section 8.6. Current Ratio. The Company shall not, at any time during the periods specified below, permit the Current Ratio to be less than: -28- FROM AND INCLUDING TO AND INCLUDING CURRENT RATIO SHALL NOT BE LESS THAN The date hereof 03/31/98 0.65 to 1.0 04/01/98 03/31/99 1.0 to 1.0 04/01/99 all times thereafter 1.1 to 1.0 Section 8.7. Leverage Ratio. The Company shall not, as of the last day of each fiscal quarter of the Company permit the ratio of Total Indebtedness for Borrowed Money to EBITDA for the four quarters of the Company then ended to be more than (i) 3.0 to 1.0 for the fiscal quarter ending March 31, 1998, (ii) 2.75 to 1.0 for the fiscal quarter ending June 30, 1998, (iii) 2.50 to 1.0 for the fiscal quarter ending September 30, 1998, and (iv) 2.25 to 1.0 for each fiscal quarter thereafter; provided, however, that for purposes of this covenant, EBITDA shall be computed during the 1998 calendar year, cumulatively for all fiscal quarters completed as of the date of determination and on an annualized basis. Section 8.8. Fixed Charge Coverage Ratio. The Company shall not, as of the last day of each fiscal quarter of the Company permit the ratio of EBITDA less capital expenditures for the four fiscal quarters of the Company then ended plus Fixed Charges to Fixed Charges (the "Fixed Charge Coverage Ratio") to be less than (i) 1.50 to 1.0 for the fiscal quarters of the Company ending March 31, 1998, June 30, 1998 and September 30, 1998, (ii) 1.75 to 1.0 for the fiscal quarters of the Company ending December 31, 1998 and March 31, 1999 and (iii) 2.00 to 1.0 for each fiscal quarter of the Company thereafter; provided, however, that for purposes of this covenant, EBITDA and Interest Expense shall be computed during the 1998 calendar year, cumulatively for all fiscal quarters completed as of the date of determination and on an annualized basis. Section 8.9. Indebtedness for Borrowed Money. The Company will not, nor will it permit any Subsidiary to, issue, incur, assume, create or have outstanding any Indebtedness for Borrowed Money; provided, however, that the foregoing provisions shall not restrict nor operate to prevent: (a) the indebtedness of the Company on the Notes and other indebtedness of the Company owing to the Bank; (b) Capitalized Lease Obligations in an aggregate amount not to exceed $50,000 at any one time outstanding; -29- (c) indebtedness secured by Liens on real property and equipment (excluding Collateral) permitted by Section 8.10(d) hereof in an aggregate amount not to exceed $50,000 at any one time outstanding; and (d) intercompany indebtedness of Subsidiaries permitted by Section 8.11 hereof; (e) the Subordinated Note; and (f) the Debentures. Section 8.10. Liens. The Company will not, nor will it permit any Subsidiary to, create, incur or permit to exist any Lien of any kind on any Property owned by the Company or any Subsidiary; provided, however, that this Section shall not apply to nor operate to prevent: (a) Liens arising by statute in connection with worker's compensation, unemployment insurance, old age benefits, social security obligations, taxes, assessments, statutory obligations or other similar charges, good faith cash deposits or liens in connection with tenders, contracts or leases to which the Company or any Subsidiary is a party or other cash deposits or liens to secure performances of statutory obligations, tenders, contracts or leases all of which are required to be made in the ordinary course of business, provided in each case that the obligation is not for borrowed money and that the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate proceedings which prevent enforcement of the matter under contest and adequate reserves have been established therefor; (b) mechanics', workmen's, materialmen's, landlords', carriers', or other similar Liens arising in the ordinary course of business with respect to obligations which are not due or which are being contested in good faith by appropriate proceedings which prevent enforcement of the matter under contest; (c) the pledge of assets for the purpose of securing an appeal, stay or discharge in the course of any legal proceeding, provided that the aggregate amount of liabilities of the Company and its Subsidiaries secured by a pledge of assets permitted under this clause, including interest and penalties thereon, if any, shall not be in excess of $50,000 at any one time outstanding; (d) Liens on Property other than Collateral securing indebtedness permitted by Section 8.9(c) hereof; and -30- (e) Liens granted in favor of the Bank by the Collateral Documents. Section 8.11. Investments, Acquisitions, Loans, Advances and Guaranties. The Company will not, nor will it permit any Subsidiary to, directly or indirectly, make, retain or have outstanding any investments (whether through purchase of stock or obligations or otherwise) in, or loans or advances (other than for travel advances and other cash advances made to employees in the ordinary course of business) to, any other Person, or acquire all or any substantial part of the assets or business of any other Person, or be or become liable as endorser, guarantor, surety or otherwise for any debt, obligation or undertaking of any other Person, or otherwise agree to provide funds for payment of the obligations of another, or supply funds thereto or invest therein or otherwise assure a creditor of another against loss or apply for or become liable to the issuer of a letter of credit which supports an obligation of another, or subordinate any claim or demand it may have to the claim or demand of any other Person; provided, however, that the foregoing provisions shall not apply to nor operate to prevent: (a) investments in direct obligations of the United States of America or of any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America, provided that any such obligations shall mature within one year of the date of issuance thereof; (b) investments in commercial paper rated at least P-1 by Moody's Investors Services, Inc. and at least A-1 by Standard & Poor's Corporation maturing within 270 days of the date of issuance thereof; (c) investments in certificates of deposit issued by any United States commercial bank having capital and surplus of not less than $100,000,000 which have a maturity of one year or less; (d) endorsement of items for deposit or collection of commercial paper received in the ordinary course of business; (e) loans and advances by the Company to its Subsidiaries or loans and advances by the Company's Subsidiaries to the Company or to another Subsidiary of the Company; and (f) loans and advances by the Company to employees in the ordinary course of business aggregating not more than $20,000 at any one time outstanding. In determining the amount of investments, acquisitions, loans, advances and guarantees permitted under this Section, investments and acquisitions shall always be taken at the original -31- cost thereof (regardless of any subsequent appreciation or depreciation therein), loans and advances shall be taken at the principal amount thereof then remaining unpaid and guarantees shall be taken at the amount of obligations guaranteed thereby. Section 8.12. Debentures and Subordinated Note. The Company will not, without the prior written consent of the Bank, (i) prepay any principal of or interest on the Debentures or the Subordinated Note prior to the date when due thereunder, or (ii) amend, modify, supplement or alter the Debentures or the Subordinated Note. The Company shall pay all amounts due under the Debentures by issuing common stock of the Company in accordance with the terms of the Debentures, unless the Bank shall otherwise consent in writing. Section 8.13. Sales and Leasebacks. The Company will not, nor will it permit any Subsidiary to, enter into any arrangement with any bank, insurance company or any other lender or investor providing for the leasing by the Company or any Subsidiary of any Property theretofore owned by it and which has been or is to be sold or transferred by such owner to such lender or investor. Section 8.14. Dividends and Certain Other Restricted Payments. The Company will not, nor will it permit a Subsidiary to, make any Restricted Payments. Section 8.15. Mergers, Consolidations and Sales. The Company will not, nor will it permit any Subsidiary to, be a party to any merger or consolidation, or sell, transfer, lease or otherwise dispose of all or any substantial part of its Property (except for sales of inventory in the ordinary course of business), or in any event sell or discount (with or without recourse) any of its notes or accounts receivable; provided, however, that this Section shall not apply to nor prohibit: (a) any merger or consolidation so long as the Company is the surviving corporation and, at the time of such merger or consolidation or immediately after giving effect thereto, no Default or Event of Default shall occur or be continuing; (b) any merger or consolidation of a Subsidiary of the Company with or into the Company (so long as the Company is the surviving entity) or any other Subsidiary of the Company (so long as a Wholly Owned Subsidiary is the surviving entity) so long as, at the time of such merger or consolidation or immediately after giving effect thereto, no Default or Event of Default shall occur or be continuing; (c) the sale, lease, transfer or other disposition by any Subsidiary of all or any portion of its assets to the Company or any other Subsidiary. -32- The term "substantial" as used herein shall mean to sell, transfer, lease or other disposition of 10% of the total consolidated assets of the Company. Section 8.16. ERISA. The Company will, and will cause each Subsidiary to, promptly pay and discharge all obligations and liabilities arising under ERISA of a character which if unpaid or unperformed might result in the imposition of a Lien against any of its Properties. The Company will, and will cause each Subsidiary to, promptly notify the Bank of (i) the occurrence of any reportable event (as defined in ERISA) with respect to a Plan, (ii) receipt of any notice from the PBGC of its intention to seek termination of any Plan or appointment of a trustee therefor, (iii) its intention to terminate or withdraw from any Plan, and (iv) the occurrence of any event with respect to any Plan which would result in the incurrence by the Company or any Subsidiary of any material liability, fine or penalty, or any material increase in the contingent liability of the Company or any Subsidiary with respect to any post-retirement Welfare Plan benefit. Section 8.17. Compliance with Laws. The Company will, and will cause each Subsidiary to, comply in all respects with the requirements of all federal, state and local laws, rules, regulations, ordinances and orders applicable to or pertaining to the Properties or business operations of the Company or any Subsidiary, non-compliance with which could have a material adverse effect on the financial condition, Properties, business or operations of the Company and its Subsidiaries or could result in a Lien upon any of their Property in violation of this Agreement. Section 8.18. Burdensome Contracts With Affiliates. The Company will not, nor will it permit any Subsidiary to, enter into any contract, agreement or business arrangement with any of its Affiliates (other than with Wholly Owned Subsidiaries) on terms and conditions which are less favorable to the Company or such Subsidiary than would be usual and customary in similar contracts, agreements or business arrangements between Persons not affiliated with each other. Section 8.19. No Changes in Fiscal Year. Neither the Company nor any Subsidiary will change its fiscal year from its present basis without the prior written consent of the Bank. Section 8.20. Formation of Subsidiaries. Except for existing Subsidiaries designated on Schedule 6.2 hereto, the Company will not, nor will it permit any Subsidiary to, form or acquire any Subsidiary without the prior written consent of the Bank. In the event any direct Subsidiary is formed or acquired by the Company after the date hereof, the Company shall cause any such newly-formed or acquired direct Subsidiary with assets in excess of $250,000 to (i) execute and deliver a guaranty agreement in form and substance satisfactory to the Bank, (ii) secure such guaranty agreement by valid and perfected first Liens on all of the accounts receivable, equipment and certain other assets and property related thereto, and (iii) execute and -33- deliver such instruments, documents, certificates and opinions required by the Bank in connection therewith. Thereafter, such direct Subsidiary shall be deemed a Subsidiary hereunder and Schedule 6.2 of this Agreement shall be deemed amended to include reference to such Subsidiary. Section 8.21. Inspection and Field Audit. The Company will, and will cause each Subsidiary to, permit the Bank and its duly authorized representatives and agents to visit and inspect any of the Properties, corporate books and financial records of the Company and each Subsidiary, to examine and make copies of the books of accounts and other financial records of the Company and each Subsidiary, and to discuss the affairs, finances and accounts of the Company and each Subsidiary with, and to be advised as to the same by, its officers and independent public accountants (and by this provision the Company authorizes such accountants to discuss with the Bank the finances and affairs of the Company and of each Subsidiary) at such reasonable times and reasonable intervals as the Bank may designate. After the occurrence of an Event of Default, the Company shall pay for all costs and expenses incurred by the Bank in connection with any such visitation or inspection. Section 8.22. Use of Credit. The Company will use all credit under this Agreement solely to (i) finance general corporate purposes and (ii) finance the acquisition of certain assets and liabilities of HealthStar. SECTION 9. EVENTS OF DEFAULT AND REMEDIES. Section 9.1. Events of Default. Any one or more of the following shall constitute an Event of Default hereunder: (a) default in the payment when due of all or any part of the principal of or interest on any Note (whether at the stated maturity thereof or at any other time provided for in this Agreement) or of any fee or other Obligation payable by the Company hereunder or under any other Loan Document; or (b) default in the observance or performance of any covenant set forth in Sections 8.4, 8.6, 8.7, 8.8, 8.9, 8.10, 8.11, 8.12, 8.13, 8.14, 8.15, 8.16, 8.17, 8.18, 8.19, 8.20, 8.21 or 8.22 hereof or of any provision of any Loan Document requiring the maintenance of insurance on the Collateral subject thereto or dealing with the use or remittance of proceeds of Collateral; or (c) default in the observance or performance of any other provision hereof or of any other Loan Document which is not remedied within thirty (30) days after written notice thereof to the Company by the Bank; or -34- (d) any representation or warranty made by the Company herein or in any other Loan Document, or in any statement or certificate furnished by it pursuant hereto or thereto, or in connection with any extension of credit made hereunder, proves untrue in any material respect as of the date of the issuance or making thereof; or (e) any Guarantor shall purport to disavow, revoke, repudiate or terminate its Guaranty; or (f) (i) default shall occur under any evidence of Indebtedness for Borrowed Money issued, assumed or guaranteed by the Company or any Subsidiary aggregating in excess of $100,000 or under any indenture, agreement or other instrument under which the same may be issued, and such default shall continue for a period of time sufficient to permit the acceleration of the maturity of any such Indebtedness for Borrowed Money (whether or not such maturity is in fact accelerated) or any such Indebtedness for Borrowed Money shall not be paid when due (whether by lapse of time, acceleration or otherwise), or (ii) an event of default, or an event which, with the giving of notice or passage of time, or both, shall constitute an event of default under any Debenture shall have occurred; or (g) any judgment or judgments, writ or writs, or warrant or warrants of attachment, or any similar process or processes in an aggregate amount in excess of $100,000 shall be entered or filed against the Company or any of its Subsidiaries or against any of their Property and which remains unvacated, unbonded, unstayed or unsatisfied for a period of thirty (30) days; or (h) the Company or any member of its Controlled Group shall fail to pay when due an amount or amounts aggregating in excess $100,000 which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans having aggregate Unfunded Vested Liabilities in excess of $100,000 (collectively, a "Material Plan") shall be filed under Title IV of ERISA by the Company or any other member of its Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Material Plan or a proceeding shall be instituted by a fiduciary of any Material Plan against the Company or any member of its Controlled Group to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within thirty (30) days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or -35- (i) any Person or two or more Persons acting in concert shall acquire beneficial ownership (within the meaning or Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 20% or more of the issued and outstanding Voting Stock of the Company (a "20% Holder"), except any Person who is on the date hereof a 20% Holder; or (j) the Company shall at any time and for any reason cease to own, both legally and beneficially, 100% of the Voting Stock of any Guarantor; or (k) the Company or any Subsidiary shall (i) have entered involuntarily against it an order for relief under the United States Bankruptcy Code, as amended, (ii) not pay, or admit in writing its inability to pay, its debts generally as they become due, (iii) make an assignment for the benefit of creditors, (iv) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any substantial part of its Property, (v) institute any proceeding seeking to have entered against it an order for relief under the United States Bankruptcy Code, as amended, to adjudicate it insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, or (vi) fail to contest in good faith any appointment or proceeding described in Section 8.1(m) hereof; or (l) a custodian, receiver, trustee, examiner, liquidator or similar official shall be appointed for the Company or any of its Subsidiaries or any substantial part of any of their Property, or a proceeding described in Section 8.1(l)(v) shall be instituted against the Company or any of its Subsidiaries, and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of sixty (60) days. Section 9.2. Non-Bankruptcy Defaults. When any Event of Default described in clauses (a) through (k), both inclusive, of Section 8.1 has occurred and is continuing, the Bank or any holder of the Notes may, by notice to the Company, take either or both of the following actions: (a) terminate the obligation of the Bank to extend any further credit hereunder on the date (which may be the date thereof) stated in such notice; (b) declare the principal of and the accrued interest on the Notes to be forthwith due and payable and thereupon the Notes, including both principal and interest and all fees, charges and other Obligations payable hereunder and under the other Loan -36- Document shall be and become immediately due and payable without further demand, presentment, protest or notice of any kind; and (c) enforce any and all rights and remedies available to it under the Loan Documents or applicable law. Section 9.3. Bankruptcy Defaults. When any Event of Default described in clauses (k) or (l) of Section 9.1 has occurred and is continuing, then the Notes, including both principal and interest, and all fees, charges and other Obligations payable hereunder and under the other Loan Documents, shall immediately become due and payable without presentment, demand, protest or notice of any kind, and the obligation of the Bank to extend further credit pursuant to any of the terms hereof shall immediately terminate. In addition, the Bank may exercise any and all remedies available to it under the Loan Documents or applicable law. SECTION 10. MISCELLANEOUS. Section 10.1. Holidays. If any payment of principal or interest on any Note or any fee or other Obligation shall fall due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day on which the same is payable and, in the case of any payment of principal, interest shall continue to accrue thereon at the rate per annum determined in accordance with this Agreement during such extension. Section 10.2. No Waiver, Cumulative Remedies. No delay or failure on the part of the Bank or on the part of the holder of any of the Obligations in the exercise of any power or right shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise of any power or right preclude any other or further exercise thereof, or the exercise of any other power or right. The rights and remedies hereunder of the Bank and of the holders of any of the Obligations are cumulative to, and not exclusive of, any rights or remedies which any of them would otherwise have. Section 10.3. Amendments, Etc. No amendment, modification, termination or waiver of any provision of this Agreement or of the other Loan Documents, nor consent to any departure by the Company therefrom, shall in any event be effective unless the same shall be in writing and signed by the Bank. No notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. Section 10.4. Costs and Expenses. The Company agrees to pay on demand the reasonable costs and expenses of the Bank in connection with the negotiation, preparation, execution and delivery of this Agreement, the other Loan Documents and the other instruments and documents to be delivered hereunder or thereunder, and in connection with the recording or -37- filing of any of the foregoing, and in connection with the transactions contemplated hereby or thereby, and in connection with any consents hereunder or waivers or amendments hereto or thereto, including the reasonable fees and expenses of Messrs. Chapman and Cutler, counsel for the Bank, with respect to all of the foregoing (whether or not the transactions contemplated hereby are consummated), and all reasonable costs and expenses (including attorneys' fees), if any, incurred by the Bank or any other holder of any of the Obligations in connection with a default under, or the enforcement of, this Agreement, any other Loan Document or any other instrument or document to be delivered hereunder or thereunder or in connection with any action, suit or proceeding brought against the Bank by any Person which in any way arises out of the transactions contemplated or financed hereby or out of any action or inaction by the Bank hereunder or thereunder except for such thereof arising solely from the Bank's gross negligence or willful misconduct. In addition, at the time of requesting any amendment hereof or consent or waiver hereunder, the Company must negotiate with the Bank a fee to the Bank for engaging in and documenting any such action. Section 10.5. Documentary Taxes. The Company agrees to pay on demand any documentary, stamp or similar taxes payable in respect of this Agreement or any other Loan Document, including interest and penalties, in the event any such taxes are assessed, irrespective of when such assessment is made and whether or not any credit is then in use or available hereunder. Section 10.6. Survival of Representations. All representations and warranties made herein or in any of the other Loan Documents or in certificates given pursuant hereto or thereto shall survive the execution and delivery of this Agreement and the other Loan Documents, and shall continue in full force and effect with respect to the date as of which they were made as long as any credit is in use or available hereunder. Section 10.7. Survival of Indemnities. All indemnities and other provisions relative to reimbursement to the Bank of amounts sufficient to protect the yield of the Bank with respect to the Loans, including, but not limited to, Sections 2.7 and 2.8 hereof, shall survive the termination of this Agreement and the payment of the Note. Section 10.8. Notices. Except as otherwise specified herein, all notices hereunder shall be in writing (including cable, telecopy or telex) and shall be given to the relevant party at its address or telecopier number set forth below, or such other address or telecopier number as such party may hereafter specify by notice to the other given by United States certified or registered mail or by other telecommunication device capable of creating a written record of such notice and its receipt. Notices hereunder shall be addressed: -38- to the Company at: Champion Financial Corporation 9495 East San Salvador Drive Scottsdale, Arizona 85258 Attention: Chief Financial Officer/Mr. Stephen Carder Telephone: (602) 614-4285 Telecopy: (602) 451-9087 to the Bank at: Harris Trust and Savings Bank P.O. Box 755 111 West Monroe Street Chicago, Illinois 60690 Attention: Tax-Exempt Institutions Division Mr. Christopher Randall Telephone: (312) 461-5068 Telecopy: (312) 461-7365 Each such notice, request or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopier number specified in this Section and a confirmation of such telecopy has been received by the sender, (ii) if given by mail, five (5) days after such communication is deposited in the mail, certified or registered with return receipt requested, addressed as aforesaid or (iii) if given by any other means, when delivered at the addresses specified in this Section; provided that any notice given pursuant to Section 1 or Section 2 hereof shall be effective only upon receipt. Section 10.9. Headings. Section headings used in this Agreement are for convenience of reference only and are not a part of this Agreement for any other purpose. Section 10.10. Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 10.11. Counterparts. This Agreement may be executed in any number of counterparts, and by different parties hereto on separate counterpart signature pages, and all such counterparts taken together shall be deemed to constitute one and the same instrument. Section 10.12. Binding Nature, Governing Law, Etc. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of the Bank and the benefit of its successors and assigns, including any subsequent holder of the Obligations. -39- This Agreement and the rights and duties of the parties hereto shall be governed by, and construed in accordance with, the internal laws of the State of Illinois without regard to principles of conflicts of laws. This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof and any prior agreements, whether written or oral, with respect thereto are superseded hereby. The Company may not assign its rights hereunder without the written consent of the Bank. Section 10.13. Terms of Collateral Documents not Superseded. Nothing contained herein shall be deemed or construed to permit any act or omission which is prohibited by the terms of any Collateral Document, the covenants and agreements contained herein being in addition to and not in substitution for the covenants and agreements contained in the Collateral Documents. -40- Upon your acceptance hereof in the manner hereinafter set forth, this Agreement shall constitute a contract between us for the uses and purposes hereinabove set forth. Dated as of this 15th day of December, 1997. CHAMPION FINANCIAL CORPORATION By /s/ Stephen J Carder ----------------------- Its Executive Vice President Accepted and agreed to at Chicago, Illinois as of the day and year last above written. HARRIS TRUST AND SAVINGS BANK By /s/ Mark Lewis ----------------- Its Senior Vice President -41- EX-10.3.2 3 PLEDGE AND SECURITY AGREEMENT EXHIBIT 10.32 PLEDGE AND SECURITY AGREEMENT This Pledge and Security Agreement (the "Agreement") is dated as of December 15, 1997, between CHAMPION FINANCIAL CORPORATION, a Utah corporation (the "Debtor"), with its chief executive office and mailing address at 9495 East San Salvador Drive, Scottsdale, Arizona 85258, and HARRIS TRUST AND SAVINGS BANK, an Illinois banking corporation (the "Secured Party"), with its mailing address at 111 West Monroe Street, Chicago, Illinois 60690. PRELIMINARY STATEMENT A. The Debtor has requested that the Secured Party extend credit or otherwise make financial accommodations available to or for the account of the Debtor. B. As a condition to extending credit or otherwise making financial accommodations available to or for the account of the Debtor, the Secured Party requires, among other things, that the Debtor grant the Secured Party a security interest in the Debtor's personal property described herein subject to the terms and conditions hereof. NOW, THEREFORE, in consideration of the benefits accruing to the Debtor, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Grant of Security Interest. The Debtor hereby grants to the Secured Party a lien on and security interest in, and acknowledges and agrees that the Secured Party has and shall continue to have a continuing lien on and security interest in, any and all right, title and interest of the Debtor, whether now owned or existing or hereafter created, acquired or arising, in and to the following: (a) all shares of the capital stock of each subsidiary of the Debtor, whether now existing or hereafter formed or acquired (those shares delivered to and deposited with the Secured Party on the date hereof being listed and described on Schedule A attached hereto), and all substitutions and additions to such shares (herein, the "Pledged Securities"), (b) all dividends, distributions and sums distributable or payable from, upon or in respect of the Pledged Securities, (c) all other rights and privileges incident to the Pledged Securities, and (d) all proceeds and products of the foregoing (all of the foregoing being hereinafter referred to collectively as the "Collateral"). 2. Obligations Hereby Secured. The lien and security interest granted and provided for herein is made and given to secure, and shall secure, the payment and performance of (a) any and all indebtedness, obligations and liabilities of whatsoever kind and nature of the Debtor to the Secured Party (whether arising before or after the filing of a petition in bankruptcy), whether direct or indirect, absolute or contingent, due or to become due, and whether now existing or hereafter arising and howsoever held, evidenced or acquired, and whether several, joint or joint and several and (b) any and all expenses and charges, legal or otherwise, suffered or incurred by the Secured Party in collecting or enforcing any of such indebtedness, obligations and liabilities or in realizing on or protecting or preserving any security therefor, including, without limitation, the lien and security interest granted hereby (all of the foregoing being hereinafter referred to as the "Obligations"). 3. Covenants, Agreements, Representations and Warranties. The Debtor hereby covenants and agrees with, and represents and warrants to, the Secured Party that: (a) The Debtor is a corporation duly organized and validly existing in good standing under the laws of the State of Utah, is the sole and lawful legal, record and beneficial owner of the Collateral, and has full right, power and authority to enter into this Agreement and to perform each and all of the matters and things herein provided for. The execution and delivery of this Agreement, and the observance and performance of the matters and things herein set forth, will not (i) contravene or constitute a default under any provision of law, or any judgment, injunction, order or decree binding upon the Debtor, or any provision of the Debtor's articles of incorporation or by-laws, or any covenant, indenture or agreement of or affecting the Debtor or any of its property, or (ii) result in the creation or imposition of any lien or encumbrance on any property of the Debtor except for the lien and security interest in the Collateral granted to the Secured Party pursuant to this Agreement. The Debtor's chief executive office is located at 9495 East San Salvador Drive, Scottsdale, Arizona 85258, and the Debtor shall not move its chief executive office without first providing the Secured Party 30 days prior written notice of the Debtor's intent to do so, provided that the Debtor shall at all times maintain its chief executive office in the United States of America and, with respect to any such new location, the Debtor shall have taken all action requested by the Secured Party to maintain the lien and security interest of the Secured Party in the Collateral at all times fully perfected and in full force and effect. The Debtor's Federal tax identification number is 88-0169547. (b) The certificates for all shares of the Pledged Securities shall be delivered by the Debtor to the Secured Party duly endorsed in blank for transfer or accompanied by an appropriate assignment or assignments or an appropriate undated stock power or powers, in every case sufficient to transfer title thereto. The Secured Party may at any time after the occurrence of an Event of Default cause to be transferred into its name or into the name of its nominee or nominees any and all of the shares of the Pledged Securities. The Secured Party shall at all times have the right to exchange the certificates representing the Pledged Securities for certificates of smaller or larger denominations. -2- (c) The Pledged Securities have been validly issued and are fully paid and non-assessable. There are no outstanding commitments or other obligations of the issuer of any of the Pledged Securities to issue, and no options, warrants or other rights of any person or entity to acquire, any share of any class or series of capital stock of such issuer. The Pledged Securities listed and described on Schedule A attached hereto constitute all of the issued and outstanding capital stock of every class and series of the issuers thereof (other than directors' qualifying shares as required by law). The Debtor further agrees that in the event that any such issuer of the Pledged Securities shall issue any additional capital stock of any class or series, the Debtor shall forthwith pledge and deposit hereunder, or cause to be pledged and deposited hereunder, all such additional shares of such capital stock (other than directors' qualifying shares as required by law). (d) The Collateral and every part thereof is and will be free and clear of all security interests, liens (including, without limitation, mechanics', laborers' and statutory liens), attachments, levies and encumbrances of every kind, nature and description and whether voluntary or involuntary, except for the security interest of the Secured Party therein and as otherwise provided on Schedule B attached hereto. The Debtor shall warrant and defend the Collateral against any claims and demands of all persons or entities at any time claiming the same or any interest in the Collateral adverse to the Secured Party. The Debtor has the right to vote the Collateral and there are no restrictions upon the voting rights associated with, or the transfer of, any of the Collateral, except as provided by federal and state laws applicable to the sale of securities generally or as otherwise disclosed to the Secured Party in writing. (e) None of the Collateral constitutes margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System). (f) The Debtor shall not, without the Secured Party's prior written consent, sell, assign, or otherwise dispose of the Collateral or any interest therein. (g) The Debtor shall promptly pay when due all taxes, assessments and governmental charges and levies upon or against the Debtor or the Collateral, in each case before the same become delinquent and before penalties accrue thereon, unless and to the extent that the same are being contested in good faith by appropriate proceedings which prevent foreclosure on or other realization upon any of the Collateral and the Debtor shall have established adequate reserves therefor. (h) The Debtor agrees to execute and deliver to the Secured Party such further agreements, assignments, instruments and documents and to do all such other things as the Secured Party may deem necessary or appropriate to assure the Secured Party its lien and security interest hereunder, including such assignments, stock powers, financing statements, -3- instruments and documents as the Secured Party may from time to time require in order to comply with the Uniform Commercial Code as enacted in the State of Illinois and any successor statute(s) thereto (the "Code"). The Debtor hereby agrees that a carbon, photographic or other reproduction of this Agreement or any such financing statement is sufficient for filing as a financing statement by the Secured Party without notice thereof to the Debtor wherever the Secured Party in its sole discretion desires to file the same. In the event for any reason the law of any jurisdiction other than Illinois becomes or is applicable to the Collateral or any part thereof, or to any of the Obligations, the Debtor agrees to execute and deliver all such agreements, assignments, instruments and documents and to do all such other things as the Secured Party in its sole discretion deems necessary or appropriate to preserve, protect and enforce the lien and security interest of the Secured Party under the law of such other jurisdiction. The Debtor agrees to mark its books and records to reflect the lien and security interest of the Secured Party in the Collateral. (i) If, as and when the Debtor delivers any securities for pledge hereunder in addition to those listed on Schedule A hereto, the Debtor shall furnish to the Secured Party a duly completed and executed amendment to such Schedule in substantially the form (with appropriate insertions) of Schedule C hereto reflecting the securities pledged hereunder after giving effect to such addition. (j) On failure of the Debtor to perform any of the covenants and agreements herein contained, the Secured Party may, at its option, perform the same and in so doing may expend such sums as the Secured Party may deem advisable in the performance thereof, including, without limitation, the payment of any taxes, liens and encumbrances, expenditures made in defending against any adverse claims, and all other expenditures which the Secured Party may be compelled to make by operation of law or which the Secured Party may make by agreement or otherwise for the protection of the security hereof. All such sums and amounts so expended shall be repayable by the Debtor immediately without notice or demand, shall constitute additional Obligations secured hereunder and shall bear interest from the date said amounts are expended at the rate per annum (computed on the basis of a 360-day year for the actual number of days elapsed) determined by adding 2% to the rate per annum from time to time announced by the Secured Party as its prime commercial rate, with any change in such rate per annum as so determined by reason of a change in such prime commercial rate to be effective on the date of such change in said prime commercial rate (such rate per annum as so determined being hereinafter referred to as the "Default Rate"). No such performance of any covenant or agreement by the Secured Party on behalf of the Debtor, and no such advancement or expenditure therefor, shall relieve the Debtor of any default under the terms of this Agreement or in any way obligate the Secured Party to take any further or future action with respect thereto. The Secured Party, in making any payment hereby authorized, may do so according to any bill, statement or estimate procured from the appropriate public office or holder of the claim to be -4- discharged without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax assessment, sale, forfeiture, tax lien or title or claim. The Secured Party, in performing any act hereunder, shall be the sole judge of whether the Debtor is required to perform same under the terms of this Agreement. The Secured Party is hereby authorized to charge any depository or other account of the Debtor maintained with the Secured Party for the amount of such sums and amounts so expended. 4. Special Provisions re: Voting Rights and Dividends. Unless and until an Event of Default has occurred and thereafter until notified by the Secured Party pursuant to Section 6(b) hereof: (a) The Debtor shall be entitled to exercise all voting and/or consensual powers pertaining to the Collateral or any part thereof for all purposes not inconsistent with the terms of this Agreement or any other document evidencing or otherwise relating to any of the Obligations. (b) The Debtor shall be entitled to receive and retain all dividends which are paid in cash out of earned surplus of the issuer of the relevant Pledged Securities; but all dividends paid upon or in respect of the Collateral and all stock or other property distributed in respect thereof representing stock or liquidating dividends or a distribution or return of capital upon or in respect of the Collateral or any part thereof or resulting from a split-up or reclassification of the Collateral or any part thereof or received in addition to, in substitution of or in exchange for the Collateral or any part thereof as a result of a merger, consolidation or otherwise, shall be paid, delivered or transferred, as appropriate, directly to the Secured Party immediately upon the receipt thereof by the Debtor and may, in the case of cash, be applied by the Secured Party to the satisfaction of Obligations (in whatever order the Secured Party elects) whether or not the same may then be due or otherwise adequately secured and shall, in the case of all other property, together with any cash received by the Secured Party and not applied as aforesaid, be held by the Secured Party pursuant hereto as additional Collateral pledged under and subject to the terms of this Agreement. (c) In order to permit the Debtor to exercise such voting and/or consensual powers which it is entitled to exercise under subsection (a) above and to receive such distributions which the Debtor is entitled to receive and retain under subsection (b) above, the Secured Party will, if necessary, upon the written request of the Debtor, from time to time execute and deliver to the Debtor appropriate proxies and dividend orders. (d) In order to permit the Secured Party to receive all cash and other property to which it may be entitled under subsection (b) above, the Debtor shall, if necessary, -5- upon the written request of the Secured Party, from time to time execute and deliver to the Secured Party appropriate dividend orders. 5. Power of Attorney. The Debtor hereby appoints the Secured Party, and each of its nominees, officers, agents, attorneys, and any other person whom the Secured Party may designate, as the Debtor's attorney-in-fact, with full power and authority to ask, demand, collect, receive, receipt for, sue for, compound and give acquittance for any and all sums or properties which may be or become due, payable or distributable in respect of the Collateral or any part thereof, with full power to settle, adjust or compromise any claim thereunder or therefor as fully as the Debtor could itself do, to endorse or sign the Debtor's name on any assignments, stock powers, or other instruments of transfer and on any checks, notes, acceptances, money orders, drafts and any other forms of payment or security that may come into the Secured Party's possession and on all documents of satisfaction, discharge or receipt required or requested in connection therewith, and, in its discretion, to file any claim or take any other action or proceeding, either in its own name or in the name of the Debtor, or otherwise, which the Secured Party may deem necessary or appropriate to collect or otherwise realize upon all or any part of the Collateral, or effect a transfer thereof, or which may be necessary or appropriate to protect and preserve the right, title and interest of the Secured Party in and to such Collateral and the security intended to be afforded hereby. The Debtor hereby ratifies and approves all acts of any such attorney and agrees that neither the Secured Party nor any such attorney will be liable for any acts or omissions nor for any error of judgment or mistake of fact or law other than such person's gross negligence or willful misconduct. The Secured Party may file one or more financing statements disclosing its security interest in all or any part of the Collateral without the Debtor's signature appearing thereon, and the Debtor also hereby grants the Secured Party a power of attorney to execute any such financing statements, and any amendments or supplements thereto, on behalf of the Debtor without notice thereof to the Debtor. The foregoing powers of attorney, being coupled with an interest, are irrevocable until the Obligations have been fully paid and satisfied and all agreements of the Secured Party to extend credit to or for the account of the Debtor have expired or otherwise have been terminated. 6. Defaults and Remedies. (a) The occurrence of any one or more of the following events shall constitute an "Event of Default" hereunder: (i) default in the payment when due (whether by demand, lapse of time, acceleration or otherwise) of the Obligations or any part thereof; or -6- (ii) default in the observance or performance of any covenant set forth in Section 4 hereof or of any provision hereof dealing with the use or remittance of proceeds of Collateral; or (iii) default in the observance or performance of any other provision hereof which is not remedied within 10 days after the earlier of (a) the date on which such default shall first become known to any officer of the Debtor or (b) written notice thereof is given to the Debtor by the Secured Party; or (iv) any representation or warranty made by the Debtor herein, or in any statement or certificate furnished by it pursuant hereto, or in connection with any loan or extension of credit made to or on behalf of or at the request of the Debtor by the Secured Party, shall be false in any material respect as of the date of the issuance or making thereof; or (v) default in the observance or performance of any terms or provisions of any mortgage, security agreement or any other instrument or document securing any Obligations or setting forth terms and conditions applicable thereto or otherwise relating thereto, or this Agreement or any such other mortgage, security agreement, instrument or document shall for any reason not be or shall cease to be in full force and effect or any of the foregoing is declared to be null and void; or (vi) default shall occur under any evidence of indebtedness issued, assumed or guaranteed by the Debtor or under any indenture, agreement or other instrument under which the same may be issued, and such default shall continue for a period of time sufficient to permit the acceleration of the maturity of any such indebtedness (whether or not such maturity is in fact accelerated), or any such indebtedness shall not be paid when due (whether by lapse of time, acceleration or otherwise); or (vii) the Debtor makes any payment on account of the principal of or interest on any indebtedness which is prohibited under the terms of any instrument subordinating such indebtedness to indebtedness owed to the Secured Party; or (viii) any judgment or judgments, writ or writs, or warrant or warrants of attachment, or any similar process or processes in an aggregate amount in excess of $100,000 shall be entered or filed against the Debtor or against any of its property or assets and which remains unvacated, unbonded, unstayed or unsatisfied for a period of 30 days; or -7- (ix) the Debtor shall (a) have entered involuntarily against it an order for relief under the United States Bankruptcy Code, as amended, (b) not pay, or admit in writing its inability to pay, its debts generally as they become due, (c) make an assignment for the benefit of creditors, (d) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any substantial part of its property, (e) institute any proceeding seeking to have entered against it an order for relief under the United States Bankruptcy Code, as amended, to adjudicate it insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (f) take any action in furtherance of any matter described in parts (a) through (e) above, or (g) fail to contest in good faith any appointment or proceeding described in Section 6(a)(x) hereof; or (x) a custodian, receiver, trustee, examiner, liquidator or similar official shall be appointed for the Debtor or any substantial part of any of its property, or a proceeding described in Section 6(a)(ix)(e) shall be instituted against the Debtor, and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of 60 days; or (xi) any guarantor of any Obligations shall die or shall terminate, breach, repudiate or disavow its guarantee or any part thereof, or any event specified in Sections 6(a)(viii), 6(a)(ix) or 6(a)(x) hereof shall occur with regard to said guarantor. (b) Upon the occurrence of any Event of Default, all rights of the Debtor to receive and retain the distributions which it is entitled to receive and retain pursuant to Section 4(b) hereof shall, at the option of the Secured Party, cease and thereupon become vested in the Secured Party which, in addition to all other rights provided herein or by law, shall then be entitled solely and exclusively to receive and retain the distributions which the Debtor would otherwise have been authorized to retain pursuant to Section 4(b) hereof and all rights of the Debtor to exercise the voting and/or consensual powers which it is entitled to exercise pursuant to Section 4(a) hereof shall, at the option of the Secured Party, cease and thereupon become vested in the Secured Party which, in addition to all other rights provided herein or by law, shall then be entitled solely and exclusively to exercise all voting and other consensual powers pertaining to the Collateral and to exercise any and all rights of conversion, exchange or subscription and any other rights, privileges or options pertaining thereto as if the Secured Party were the absolute owner thereof including, without limitation, the right to exchange, at its discretion, the Collateral or any part thereof upon the merger, consolidation, reorganization, recapitalization or other readjustment of the respective issuer thereof or upon the exercise by or -8- on behalf of any such issuer or the Secured Party of any right, privilege or option pertaining to the Collateral or any part thereof and, in connection therewith, to deposit and deliver the Collateral or any part thereof with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Secured Party may determine. (c) Upon the occurrence of any Event of Default, the Secured Party shall have, in addition to all other rights provided herein or by law, the rights and remedies of a secured party under the Code (regardless of whether the Code is the law of the jurisdiction where the rights or remedies are asserted and regardless of whether the Code applies to the affected Collateral), and further the Secured Party may, without demand and without advertisement, notice, hearing or process of law, all of which the Debtor hereby waives, at any time or times, sell and deliver any or all Collateral held by or for it at public or private sale, at any securities exchange or broker's board or elsewhere, for cash, upon credit or otherwise, at such prices and upon such terms as the Secured Party deems advisable, in its sole discretion. In the exercise of any such remedies, the Secured Party may sell all the Collateral as a unit even though the sales price thereof may be in excess of the amount remaining unpaid on the Obligations. The Secured Party is authorized at any sale or other disposition of the Collateral, if it deems it advisable so to do, to restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing for their own account for investment, and not with a view to the distribution or resale of any of the Collateral. In addition to all other sums due the Secured Party hereunder, the Debtor shall pay the Secured Party all costs and expenses incurred by the Secured Party, including attorneys' fees and court costs, in obtaining, liquidating or enforcing payment of Collateral or the Obligations or in the prosecution or defense of any action or proceeding by or against the Secured Party or the Debtor concerning any matter arising out of or connected with this Agreement or the Collateral or the Obligations, including, without limitation, any of the foregoing arising in, arising under or related to a case under the United States Bankruptcy Code (or any successor statute). Any requirement of reasonable notice shall be met if such notice is personally served on or mailed, postage prepaid, to the Debtor in accordance with Section 9(b) hereof at least 10 days before the time of sale or other event giving rise to the requirement of such notice; provided however, no notification need be given to the Debtor if the Debtor has signed, after an Event of Default has occurred, a statement renouncing any right to notification of sale or other intended disposition. The Secured Party shall not be obligated to make any sale or other disposition of the Collateral regardless of notice having been given. The Secured Party may be the purchaser at any such sale or other disposition of the Collateral or any part thereof. The Debtor hereby waives all of its rights of redemption from any sale or other disposition of the Collateral or any part thereof. Subject to the provisions of applicable law, the Secured Party may postpone or cause the postponement of the sale of all or any portion of the Collateral by announcement at the time and place of such sale, and such sale may, without further notice, be made at the time and place to which the sale was postponed or the Secured Party may further postpone such sale by announcement made at such time and place. -9- (d) The powers conferred upon the Secured Party hereunder are solely to protects its interest in the Collateral and shall not impose on it any duty to exercise such powers. The Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equivalent to that which the Secured Party accords its own property, consisting of similar type securities, it being understood, however, that the Secured Party shall have no responsibility for (a) ascertaining or taking any action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Collateral, whether or not the Secured Party has or is deemed to have knowledge of such matters, (b) taking any necessary steps to preserve rights against any parties with respect to any Collateral, or (c) initiating any action to protect the Collateral against the possibility of a decline in market value. This Agreement constitutes an assignment of rights only and not an assignment of any duties or obligations of the Debtor in any way related to the Collateral, and the Secured Party shall have no duty or obligation to discharge any such duty or obligation. (e) Failure by the Secured Party to exercise any right, remedy or option under this Agreement or any other agreement between the Debtor and the Secured Party or provided by law, or delay by the Secured Party in exercising the same, shall not operate as a waiver; and no waiver by the Secured Party shall be effective unless it is in writing and then only to the extent specifically stated. Neither the Secured Party nor any party acting as attorney for the Secured Party shall be liable for any acts or omissions or for any error of judgment or mistake of fact or law other than their gross negligence or willful misconduct. The rights and remedies of the Secured Party under this Agreement shall be cumulative and not exclusive of any other right or remedy which the Secured Party may have. For purposes of this Agreement, an Event of Default shall be construed as continuing after its occurrence until the same is waived in writing by the Secured Party. 7. Application of Proceeds. The proceeds and avails of the Collateral at any time received by the Secured Party after the occurrence of any Event of Default hereunder shall, when received by the Secured Party in cash or its equivalent, be applied by the Secured Party as follows: (i) First, to the payment and satisfaction of all sums paid and costs and expenses incurred by the Secured Party hereunder or otherwise in connection herewith, including such monies paid or incurred in connection with protecting, preserving or realizing upon the Collateral or enforcing any of the terms hereof, including attorneys' fees and court costs, together with any interest thereon (but without preference or priority of principal over interest or of interest over principal), to the extent the Secured Party is not reimbursed therefor by the Debtor; and -10- (ii) Second, to the payment and satisfaction of the remaining Obligations, whether or not then due (in whatever order the Secured Party elects), both for interest and principal. The Debtor shall remain liable to the Secured Party for any deficiency. Any surplus remaining after the full payment and satisfaction of the foregoing shall be returned to the Debtor or to whomsoever the Secured Party reasonably determines is lawfully entitled thereto. 8. Continuing Agreement. This Agreement shall be a continuing agreement in every respect and shall remain in full force and effect until all of the Obligations, both for principal and interest, have been fully paid and satisfied and all agreements of the Secured Party to extend credit to or for the account of the Debtor have expired or otherwise have been terminated. Upon such termination of this Agreement, the Secured Party shall, upon the request and at the expense of the Debtor, forthwith release its security interest hereunder. 9. Miscellaneous. (a) This Agreement cannot be changed or terminated orally. All of the rights, privileges, remedies and options given to the Secured Party hereunder shall inure to the benefit of its successors and assigns, and all the terms, conditions, covenants, agreements, representations and warranties of and in this Agreement shall bind the Debtor and its legal representatives, successors and assigns, provided that the Debtor may not assign its rights or delegate its duties hereunder without the Secured Party's prior written consent. The Debtor hereby releases the Secured Party from any liability for any act or omission relating to the Collateral or this Agreement, except for the Secured Party's gross negligence or willful misconduct. (b) Except as otherwise specified herein, all notices hereunder shall be in writing (including, without limitation, notice by telecopy) and shall be given to the relevant party at its address or telecopier number set forth below, or such other address or telecopier number as such party may hereafter specify by notice to the other given by United States certified or registered mail, by telecopy or by other telecommunication device capable of creating a written record of such notice and its receipt. Notices hereunder shall be addressed: -11- to the Debtor at: to the Secured Party at: Champion Financial Corporation Harris Trust and Savings Bank 9495 East San Salvador Drive P.O. Box 755 Scottsdale, Arizona 85258 111 West Monroe Street Attention: Mr. Stephen Carder, Chicago, Illinois 60690 Chief Financial Officer Attention: Mr. Christopher Randall, Telephone: (602) 614-4285 Tax-Exempt Institutions Division Telecopy: (602) 451-9087 Telephone: (312) 461-5068 Telecopy: (312) 461-7365 Each such notice, request or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopier number specified in this Section and a confirmation of such telecopy has been received by the sender, (ii) if given by mail, five (5) days after such communication is deposited in the mail, certified or registered with return receipt requested, addressed as aforesaid, or (iii) if given by any other means, when delivered at the addresses specified in this Section. (c) In the event that any provision hereof shall be deemed to be invalid or unenforceable by reason of the operation of any law or by reason of the interpretation placed thereon by any court, this Agreement shall be construed as not containing such provision, but only as to such locations where such law or interpretation is operative, and the invalidity or unenforceability of such provision shall not affect the validity of any remaining provisions hereof, and any and all other provisions hereof which are otherwise lawful and valid shall remain in full force and effect. (d) This Agreement shall be deemed to have been made in the State of Illinois and shall be governed by, and construed in accordance with, the laws of the State of Illinois. All terms which are used in this Agreement which are defined in the Code shall have the same meanings herein as said terms do in the Code unless this Agreement shall otherwise specifically provide. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning of any provision hereof. (e) This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterpart signature pages, each constituting an original, but all together one and the same instrument. The Debtor acknowledges that this Agreement is and shall be effective upon its execution and delivery by the Debtor to the Secured Party, and it shall not be necessary for the Secured Party to execute this Agreement or any other acceptance hereof or otherwise to signify or express its acceptance hereof. -12- (f) The Debtor hereby submits to the non-exclusive jurisdiction of the United States District Court for the Northern District of Illinois and of any Illinois state court sitting in the City of Chicago for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Debtor irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient form. THE DEBTOR AND THE SECURED PARTY EACH HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. IN WITNESS WHEREOF, the Debtor has caused this Agreement to be duly executed and delivered the day and year first above written. CHAMPION FINANCIAL CORPORATION By /s/ Stephen J Carder ----------------------- Stephen J Carder,Executive Vice President and Secretary EX-10.3.3 4 SECURITY AGREEMENT EXHIBIT 10.33 SECURITY AGREEMENT This Security Agreement (the "Agreement") is dated as of December 15, 1997, between CHAMPION FINANCIAL CORPORATION, a Utah corporation (the "Debtor"), with its mailing address as set forth in Section 12(b) hereof, and HARRIS TRUST AND SAVINGS BANK, an Illinois banking corporation (the "Secured Party"), with its mailing address as set forth in Section 12(b) hereof. PRELIMINARY STATEMENT A. The Debtor has requested that the Secured Party extend credit or otherwise make financial accommodations available to or for the account of the Debtor. B. As a condition to extending credit or otherwise making financial accommodations available to or for the account of the Debtor, the Secured Party requires, among other things, that the Debtor grant the Secured Party a security interest in the Debtor's personal property described herein subject to the terms and conditions hereof. NOW, THEREFORE, in consideration of the benefits accruing to the Debtor, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Grant of Security Interest. The Debtor hereby grants to the Secured Party a lien on and security interest in, and acknowledges and agrees that the Secured Party has and shall continue to have a continuing lien on and security interest in, any and all right, title and interest of the Debtor, whether now owned or existing or hereafter created, acquired or arising, in and to the following: (a) Receivables. All Receivables, whether now owned or existing or hereafter created, acquired or arising, and however evidenced or acquired, or in which the Debtor now has or hereafter acquires any rights (the term "Receivables" means and includes all accounts, accounts receivable, contract rights, instruments, notes, drafts, acceptances, documents, chattel paper, and all other forms of obligations owing to the Debtor, any right of the Debtor to payment for goods sold or leased or for services rendered, whether or not earned by performance, and all of the Debtor's rights to any merchandise and other goods (including, without limitation, any returned or repossessed goods and the right of stoppage in transit) which is represented by, arises from or is related to any of the foregoing); (b) General Intangibles. All General Intangibles, whether now owned or existing or hereafter created, acquired or arising, or in which the Debtor now has or hereafter acquires any rights (the term "General Intangibles" means and includes all general intangibles, patents, patent applications, patent licenses, trademarks, trademark registrations, trademark licenses, trade styles, trade names, copyrights, copyright registrations, copyright licenses and other licenses and similar intangibles, all customer, client and supplier lists (in whatever form maintained), all rights in leases and other agreements relating to real or personal property, all causes of action and tax refunds of every kind and nature, all privileges, franchises, immunities, licenses, permits and similar intangibles, all rights to receive payments in connection with the termination of any pension plan or employee stock ownership plan or trust established for the benefit of employees of the Debtor, and all other personal property (including things in action) not otherwise covered by this Agreement); (c) Inventory. All Inventory, whether now owned or existing or hereafter created, acquired or arising, or in which the Debtor now has or hereafter acquires any rights, and all documents of title at any time evidencing or representing any part thereof (the term "Inventory" means and includes all inventory and any other goods which are held for sale or lease or are to be furnished under contracts of service or consumed in the Debtor's business, all goods which are raw materials, work-in-process or finished goods, all goods which are returned or repossessed goods, and all materials and supplies of every kind and nature used or usable in connection with the acquisition, manufacture, processing, supply, servicing, storing, packing, shipping, advertising, selling, leasing or furnishing of the foregoing, and any constituents or ingredients thereof; (d) Equipment. All Equipment, whether now owned or existing or hereafter created, acquired or arising, or in which the Debtor now has or hereafter acquires any rights (the term "Equipment" means and includes all equipment and any other machinery, tools, fixtures, trade fixtures, furniture, furnishings, office equipment, vehicles (including vehicles subject to a certificate of title law), and all other goods now or hereafter used or usable in connection with the Debtor's business, together with all parts, accessories and attachments relating to any of the foregoing); (e) Investment Property. All Investment Property, whether now owned or existing or hereafter created, acquired or arising, or in which the Debtor now has or hereafter acquires any rights (the term "Investment Property" means and includes all investment property and any other securities (whether certificated or uncertificated), -2- security entitlements, securities accounts, commodity contracts and commodity accounts, including all substitutions and additions thereto, all dividends, distributions and sums distributable or payable from, upon, or in respect of such property, and all rights and privileges incident to such property); (f) Deposits and Property in Possession. All deposit accounts (whether general, special or otherwise) of the Debtor maintained with the Secured Party and all sums now or hereafter on deposit therein or payable thereon, and all other personal property and interests in personal property of the Debtor of any kind or description now held by the Secured Party or at any time hereafter transferred or delivered to, or coming into the possession, custody or control of, the Secured Party, or any agent or affiliate of the Secured Party, whether expressly as collateral security or for any other purpose (whether for safekeeping, custody, collection or otherwise), and all dividends and distributions on or other rights in connection with any such property, in each case whether now owned or existing or hereafter created, acquired or arising; (g) Records. All supporting evidence and documents relating to any of the above-described property, whether now owned or existing or hereafter created, acquired or arising, including, without limitation, computer programs, disks, tapes and related electronic data processing media, and all rights of the Debtor to retrieve the same from third parties, written applications, credit information, account cards, payment records, correspondence, delivery and installation certificates, invoice copies, delivery receipts, notes and other evidences of indebtedness, insurance certificates and the like, together with all books of account, ledgers and cabinets in which the same are reflected or maintained; (h) Accessions and Additions. All accessions and additions to, and substitutions and replacements of, any and all of the foregoing, whether now owned or existing or hereafter created, acquired or arising; and (i) Proceeds and Products. All proceeds and products of the foregoing and all insurance of the foregoing and proceeds thereof, whether now owned or existing or hereafter created, acquired or arising; all of the foregoing being herein sometimes referred to as the "Collateral". All terms which are used in this Agreement which are defined in the Uniform Commercial Code of the State of Illinois ("UCC") shall have the same meanings herein as such terms are defined in the UCC, unless this Agreement shall otherwise specifically provide. -3- 2. Obligations Hereby Secured. The lien and security interest herein granted and provided for is made and given to secure, and shall secure, the payment and performance of (a) any and all indebtedness, obligations and liabilities of whatsoever kind and nature of the Debtor to the Secured Party (whether arising before or after the filing of a petition in bankruptcy), whether direct or indirect, absolute or contingent, due or to become due, and whether now existing or hereafter arising and howsoever held, evidenced or acquired, and whether several, joint or joint and several and (b) any and all expenses and charges, legal or otherwise, suffered or incurred by the Secured Party in collecting or enforcing any of such indebtedness, obligations or liabilities or in realizing on or protecting or preserving any security therefor, including, without limitation, the lien and security interest granted hereby (all of the foregoing being hereinafter referred to as the "Obligations"). 3. Covenants, Agreements, Representations and Warranties. The Debtor hereby covenants and agrees with, and represents and warrants to, the Secured Party that: (a) The Debtor is a corporation duly organized and validly existing in good standing under the laws of the State of Utah, is the sole and lawful owner of the Collateral, and has full right, power and authority to enter into this Agreement and to perform each and all of the matters and things herein provided for. The execution and delivery of this Agreement, and the observance and performance of each of the matters and things herein set forth, will not (i) contravene or constitute a default under any provision of law or any judgment, injunction, order or decree binding upon the Debtor or any provision of the Debtor's articles of incorporation or by-laws or any covenant, indenture or agreement of or affecting the Debtor or any of its property or (ii) result in the creation or imposition of any lien or encumbrance on any property of the Debtor except for the lien and security interest granted to the Secured Party hereunder. The Debtor's Federal tax identification number is 88-0169547. (b) The Debtor's chief executive office and principal place of business is at, and the Debtor keeps and shall keep all of its books and records relating to Receivables only at, 9495 East San Salvador Drive, Scottsdale, Arizona 85258; and the Debtor has no other executive offices or places of business other than those listed under Item 1 on Schedule A. The Collateral is and shall remain in the Debtor's possession or control at the locations listed under Item 2 on Schedule A attached hereto (collectively, the "Permitted Collateral Locations"). If for any reason any Collateral is at any time kept or located at a location other than a Permitted Collateral Location, the Secured Party shall nevertheless have and retain a lien on and security interest therein. The Debtor owns and shall at all times own all Permitted Collateral Locations, except to the extent otherwise disclosed under Item 2 on Schedule A. The Debtor shall not move its chief executive office or maintain a place of business at a location other than those specified under Item 1 on Schedule A or permit the Collateral to be located at a location other than those specified under Item 2 on Schedule A, in each case without first providing the Secured Party -4- 30 days' prior written notice of the Debtor's intent to do so; provided that the Debtor shall at all times maintain its chief executive office and, unless otherwise specifically agreed to in writing by the Secured Party, Permitted Collateral Locations in the United States of America and, with respect to any new chief executive office or place of business or location of Collateral, the Debtor shall have taken all action requested by the Secured Party to maintain the lien and security interest of the Secured Party in the Collateral at all times fully perfected and in full force and effect. (c) The Debtor has not invoiced Receivables or otherwise transacted business at any time during the immediately preceding five-year period, and does not currently invoice Receivables or otherwise transact business, under any trade names other than the Debtor's name set forth in the introductory paragraph of this Agreement. The Debtor shall not change its name or transact business under any other trade name without first giving 30 days' prior written notice of its intent to do so to the Secured Party. (d) The Collateral and every part thereof is and shall be free and clear of all security interests, liens (including, without limitation, mechanics', laborers' and statutory liens), attachments, levies and encumbrances of every kind, nature and description, whether voluntary or involuntary, except for the lien and security interest of the Secured Party therein and as otherwise permitted by Section 8.10 of that certain Credit Agreement dated as of even date herewith between the Debtor and the Secured Party, as the same may be amended or modified from time to time, including amendments and restatements of the same in its entirety (hereinafter, the "Credit Agreement"). The Debtor shall warrant and defend the Collateral against any claims and demands of all persons at any time claiming the same or any interest in the Collateral adverse to the Secured Party. (e) The Debtor shall promptly pay when due all taxes, assessments and governmental charges and levies upon or against the Debtor or any of the Collateral, in each case before the same become delinquent and before penalties accrue thereon, unless and to the extent that the same are being contested in good faith by appropriate proceedings which prevent foreclosure or other realization upon any of the Collateral and preclude interference with the operation of the Debtor's business in the ordinary course, and the Debtor shall have established adequate reserves therefor. (f) The Debtor shall not use, manufacture, sell or distribute any Collateral in violation of any statute, ordinance or other governmental requirement. The Debtor shall not waste or destroy the Collateral or any part thereof or be negligent in the care or use of any Collateral. The Debtor shall perform in all material respects its obligations under any contract or other agreement constituting part of the Collateral, it being understood and agreed that the Secured Party has no responsibility to perform such obligations. -5- (g) Subject to Sections 4(b), 6(b), 6(c), and 7(c) hereof, the Debtor shall not, without the Secured Party's prior written consent, sell, assign, mortgage, lease or otherwise dispose of the Collateral or any interest therein. (h) The Debtor shall at all times insure the Collateral consisting of tangible personal property against such risks and hazards as other persons similarly situated insure against, and including in any event loss or damage by fire, theft, burglary, pilferage, loss in transit and such other hazards as the Secured Party may specify. All insurance required hereby shall be maintained in amounts and under policies and with insurers reasonably acceptable to the Secured Party, and all such policies shall contain loss payable clauses naming the Secured Party as loss payee as its interest may appear (and, if the Secured Party requests, naming the Secured Party as an additional insured therein) in a form acceptable to the Secured Party. All premiums on such insurance shall be paid by the Debtor. Certificates of insurance evidencing compliance with the foregoing and, at the Secured Party's request, the policies of such insurance shall be delivered by the Debtor to the Secured Party. All insurance required hereby shall provide that any loss shall be payable to the Secured Party notwithstanding any act or negligence of the Debtor, shall provide that no cancellation thereof shall be effective until at least 30 days after receipt by the Debtor and the Secured Party of written notice thereof, and shall be satisfactory to the Secured Party in all other respects. In case of any material loss, damage to or destruction of the Collateral or any part thereof, the Debtor shall promptly give written notice thereof to the Secured Party generally describing the nature and extent of such damage or destruction. In case of any loss, damage to or destruction of the Collateral or any part thereof, the Debtor, whether or not the insurance proceeds, if any, received on account of such damage or destruction shall be sufficient for that purpose, at the Debtor's cost and expense, shall promptly repair or replace the Collateral so lost, damaged or destroyed, except to the extent such Collateral, prior to its loss, damage or destruction, had become uneconomical, obsolete or worn out and is not necessary for or of importance to the proper conduct of the Debtor's business in the ordinary course. In the event the Debtor shall receive any proceeds of such insurance, the Debtor shall immediately pay over such proceeds to the Secured Party. The Debtor hereby authorizes the Secured Party, at the Secured Party's option, to adjust, compromise and settle any losses under any insurance afforded at any time during the existence of any Event of Default or any other event or condition which with the lapse of time or the giving of notice, or both, would constitute an Event of Default, and the Debtor does hereby irrevocably constitute the Secured Party, and each of its nominees, officers, agents, attorneys, and any other person whom the Secured Party may designate, as the Debtor's attorneys-in-fact, with full power and authority to effect such adjustment, compromise and/or settlement and to endorse any drafts drawn by an insurer of the Collateral or any part thereof and to do everything necessary to carry out such purposes and to receive and receipt for any unearned premiums due under policies of such insurance. Unless the Secured Party elects to adjust, compromise or settle losses as aforesaid, any adjustment, compromise and/or settlement of any losses under any insurance shall be made by the Debtor subject to final approval of the -6- Secured Party (regardless of whether or not an Event of Default shall have occurred) in the case of losses exceeding $100,000. Net insurance proceeds received by the Secured Party under the provisions hereof or under any policy of insurance covering the Collateral or any part thereof shall be applied to the reduction of the Obligations (whether or not then due); provided, however, that the Secured Party may in its sole discretion release any or all such insurance proceeds to the Debtor. All insurance proceeds shall be subject to the lien and security interest of the Secured Party hereunder. UNLESS THE DEBTOR PROVIDES THE SECURED PARTY WITH EVIDENCE OF THE INSURANCE COVERAGE REQUIRED BY THIS AGREEMENT, THE SECURED PARTY MAY PURCHASE INSURANCE AT THE DEBTOR'S EXPENSE TO PROTECT THE SECURED PARTY'S INTERESTS IN THE COLLATERAL. THIS INSURANCE MAY, BUT NEED NOT, PROTECT THE DEBTOR'S INTERESTS IN THE COLLATERAL. THE COVERAGE PURCHASED BY THE SECURED PARTY MAY NOT PAY ANY CLAIMS THAT THE DEBTOR MAKES OR ANY CLAIM THAT IS MADE AGAINST THE DEBTOR IN CONNECTION WITH THE COLLATERAL. THE DEBTOR MAY LATER CANCEL ANY SUCH INSURANCE PURCHASED BY THE SECURED PARTY, BUT ONLY AFTER PROVIDING THE SECURED PARTY WITH EVIDENCE THAT THE DEBTOR HAS OBTAINED INSURANCE AS REQUIRED BY THIS AGREEMENT. IF THE SECURED PARTY PURCHASES INSURANCE FOR THE COLLATERAL, THE DEBTOR WILL BE RESPONSIBLE FOR THE COSTS OF THAT INSURANCE, INCLUDING INTEREST AND ANY OTHER CHARGES THAT THE SECURED PARTY MAY IMPOSE IN CONNECTION WITH THE PLACEMENT OF THE INSURANCE, UNTIL THE EFFECTIVE DATE OF THE CANCELLATION OR EXPIRATION OF THE INSURANCE. THE COSTS OF THE INSURANCE MAY BE ADDED TO THE OBLIGATIONS SECURED HEREBY. THE COSTS OF THE INSURANCE MAY BE MORE THAN THE COST OF INSURANCE THE DEBTOR MAY BE ABLE TO OBTAIN ON ITS OWN. (i) The Debtor shall at all times allow the Secured Party and its representatives free access to and right of inspection of the Collateral. (j) If any Collateral is in the possession or control of any of the Debtor's agents or processors and the Secured Party so requests, the Debtor agrees to notify such agents or processors in writing of the Secured Party's security interest therein and instruct them to hold all such Collateral for the Secured Party's account and subject to the Secured Party's instructions. The Debtor shall, upon the request of the Secured Party, authorize and instruct all bailees and other parties, if any, at any time processing, labeling, packaging, holding, storing, shipping or transferring all or any part of the Collateral to permit the Secured Party and its representatives to examine and inspect any of the Collateral then in such party's possession and to verify from such party's own books and records any information concerning the Collateral or any part thereof which the Secured Party or its representatives may seek to verify. As to any premises not owned by the Debtor wherein any of the Collateral is located, the Debtor shall, unless the Secured Party requests otherwise, cause each party having any right, title or interest in, or lien on, any of such -7- premises to enter into an agreement (any such agreement to contain a legal description of such premises) whereby such party disclaims any right, title and interest in, and lien on, the Collateral and allows the removal of such Collateral by the Secured Party and is otherwise in form and substance acceptable to the Secured Party; provided, however, that no such agreement need be obtained with respect to any one location wherein the value of the Collateral as to which such agreement has not been obtained aggregates less than $100,000 at any one time. (k) The Debtor agrees from time to time to deliver to the Secured Party such evidence of the existence, identity and location of the Collateral and of its availability as collateral security pursuant hereto (including, without limitation, schedules describing all Receivables created or acquired by the Debtor, copies of customer invoices or the equivalent and original shipping or delivery receipts for all merchandise and other goods sold or leased or services rendered, together with the Debtor's warranty of the genuineness thereof, and reports stating the book value of Inventory and Equipment by major category and location), in each case as the Secured Party may reasonably request. The Secured Party shall have the right to verify all or any part of the Collateral in any manner, and through any medium, which the Secured Party considers appropriate (including, without limitation, the verification of Collateral by use of a fictitious name), and the Debtor agrees to furnish all assistance and information, and perform any acts, which the Secured Party may require in connection therewith. The Debtor shall promptly notify the Secured Party of any Collateral which the Debtor has determined to have been rendered obsolete, stating the prior book value of such Collateral, its type and location. (l) The Debtor shall comply in all material respects with the terms and conditions of all leases, easements, right-of-way agreements and other similar agreements binding upon the Debtor or affecting the Collateral or any part thereof, and all orders, ordinances, laws and statutes of any city, state or other governmental entity, department or agency having jurisdiction with respect to the premises wherein such Collateral is located or the conduct of business thereon. (m) The Debtor agrees to execute and deliver to the Secured Party such further agreements, assignments, instruments and documents and to do all such other things as the Secured Party may deem necessary or appropriate to assure the Secured Party its lien and security interest hereunder, including such financing statements, and amendments thereof or supplements thereto, and such other instruments and documents as the Secured Party may from time to time require in order to comply with the UCC. The Debtor hereby agrees that a carbon, photographic or other reproduction of this Agreement or any such financing statement is sufficient for filing as a financing statement by the Secured Party without notice thereof to the Debtor wherever the Secured Party in its sole discretion desires to file the same. In the event for any reason the law of any jurisdiction other than Illinois becomes or is applicable to the Collateral or any part thereof, or to any of the Obligations, the Debtor agrees to execute and deliver all such instruments and documents and to do all such other things as the Secured Party in -8- its sole discretion deems necessary or appropriate to preserve, protect and enforce the lien and security interest of the Secured Party under the law of such other jurisdiction. The Debtor agrees to mark its books and records to reflect the lien and security interest of the Secured Party in the Collateral. (n) On failure of the Debtor to perform any of the covenants and agreements herein contained, the Secured Party may, at its option, perform the same and in so doing may expend such sums as the Secured Party may deem advisable in the performance thereof, including, without limitation, the payment of any insurance premiums, the payment of any taxes, liens and encumbrances, expenditures made in defending against any adverse claims, and all other expenditures which the Secured Party may be compelled to make by operation of law or which the Secured Party may make by agreement or otherwise for the protection of the security hereof. All such sums and amounts so expended shall be repayable by the Debtor immediately without notice or demand, shall constitute additional Obligations secured hereunder and shall bear interest from the date said amounts are expended at the rate per annum (computed on the basis of a 360-day year for the actual number of days elapsed) determined by adding 2% to the rate per annum from time to time announced by Harris Trust and Savings Bank as its prime commercial rate with any change in such rate per annum as so determined by reason of a change in such prime commercial rate to be effective on the date of such change in said prime commercial rate (such rate per annum as so determined being hereinafter referred to as the "Default Rate"). No such performance of any covenant or agreement by the Secured Party on behalf of the Debtor, and no such advancement or expenditure therefor, shall relieve the Debtor of any default under the terms of this Agreement or in any way obligate the Secured Party to take any further or future action with respect thereto. The Secured Party, in making any payment hereby authorized, may do so according to any bill, statement or estimate procured from the appropriate public office or holder of the claim to be discharged without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax assessment, sale, forfeiture, tax lien or title or claim. The Secured Party, in performing any act hereunder, shall be the sole judge of whether the Debtor is required to perform same under the terms of this Agreement. The Secured Party is hereby authorized to charge any depository or other account of the Debtor maintained with the Secured Party for the amount of such sums and amounts so expended. 4. Special Provisions Re: Receivables. (a) As of the time any Receivable becomes subject to the security interest provided for hereby, and at all times thereafter, the Debtor shall be deemed to have warranted as to each and all of such Receivables that all warranties of the Debtor set forth in this Agreement are true and correct with respect to each such Receivable; that each Receivable and all papers and documents relating thereto are genuine and in all respects what they purport to be; that each Receivable is valid and subsisting and, if such Receivable is an account, arises out of a bona fide -9- sale of goods sold and delivered by the Debtor to, or in the process of being delivered to, or out of and for services theretofore actually rendered by the Debtor to, the account debtor named therein; that no such Receivable is evidenced by any instrument or chattel paper unless such instrument or chattel paper has theretofore been endorsed by the Debtor and delivered to the Secured Party (except to the extent the Secured Party specifically requests the Debtor not to do so with respect to any such instrument or chattel paper); that no surety bond was required or given in connection with such Receivable or the contracts or purchase orders out of which the same arose; that the amount of the Receivable represented as owing is the correct amount actually and unconditionally owing, except for normal cash discounts on normal trade terms in the ordinary course of business if such Receivable is an account; and that the amount of such Receivable represented as owing is not disputed and is not subject to any set-offs, credits, deductions or countercharges other than those arising in the ordinary course of the Debtor's business which are disclosed to the Secured Party in writing promptly upon the Debtor becoming aware thereof. Without limiting the foregoing, if any Receivable arises out of a contract with the United States of America, or any state or political subdivision thereof, or any department, agency or instrumentality of any of the foregoing, the Debtor agrees to notify the Secured Party and execute whatever instruments and documents are required by the Secured Party in order that such Receivable shall be assigned to the Secured Party and that proper notice of such assignment shall be given under the federal Assignment of Claims Act (or any successor statute) or any similar state or local statute, as the case may be. (b) Unless and until an Event of Default occurs, any merchandise or other goods which are returned by a customer or account debtor or otherwise recovered may be resold by the Debtor in the ordinary course of its business as presently conducted in accordance with Section 6(b) hereof; and, during the existence of any Event of Default, such merchandise and other goods shall be set aside at the request of the Secured Party and held by the Debtor as trustee for the Secured Party and shall remain part of the Secured Party's Collateral. Unless and until an Event of Default occurs, the Debtor may settle and adjust disputes and claims with its customers and account debtors, handle returns and recoveries and grant discounts, credits and allowances in the ordinary course of its business as presently conducted for amounts and on terms which the Debtor in good faith considers advisable; and, during the existence of any Event of Default, unless the Secured Party requests otherwise, the Debtor shall notify the Secured Party promptly of all returns and recoveries and, on the Secured Party's request, deliver any such merchandise or other goods to the Secured Party. During the existence of any Event of Default, unless the Secured Party requests otherwise, the Debtor shall also notify the Secured Party promptly of all disputes and claims and settle or adjust them at no expense to the Secured Party, but no discount, credit or allowance other than on normal trade terms in the ordinary course of business as presently conducted shall be granted to any customer or account debtor and no returns of merchandise or other goods shall be accepted by the Debtor without the Secured Party's consent. The Secured Party may, at all times during the existence of any Event of -10- Default, settle or adjust disputes and claims directly with customers or account debtors for amounts and upon terms which the Secured Party considers advisable. 5. Collection of Receivables. (a) Except as otherwise provided in this Agreement, the Debtor shall make collection of all Receivables and may use the same to carry on its business in accordance with sound business practice and otherwise subject to the terms hereof. (b) Upon the occurrence of any Event of Default or of any event or condition which with the lapse of time or the giving of notice, or both, would constitute an Event of Default, whether or not the Secured Party has exercised any or all of its rights under other provisions of this Section 5, in the event the Secured Party requests the Debtor to do so: (i) all instruments and chattel paper at any time constituting part of the Receivables or any other Collateral (including any postdated checks) shall, upon receipt by the Debtor, be immediately endorsed to and deposited with the Secured Party; and/or (ii) the Debtor shall instruct all customers and account debtors to remit all payments in respect of Receivables or any other Collateral to a lockbox or lockboxes under the sole custody and control of the Secured Party and which are maintained at post office(s) in Chicago, Illinois selected by the Secured Party. (c) Upon the occurrence of any Event of Default or of any event or condition which with the lapse of time or the giving of notice, or both, would constitute an Event of Default, whether or not the Secured Party has exercised any or all of its rights under other provisions of this Section 5, the Secured Party or its designee may notify the Debtor's customers and account debtors at any time that Receivables or any other Collateral have been assigned to the Secured Party or of the Secured Party's security interest therein, and either in its own name, or the Debtor's name, or both, demand, collect (including, without limitation, through a lockbox analogous to that described in Section 5(b)(ii) hereof), receive, receipt for, sue for, compound and give acquittance for any or all amounts due or to become due on Receivables or any other Collateral, and in the Secured Party's discretion file any claim or take any other action or proceeding which the Secured Party may deem necessary or appropriate to protect or realize upon the security interest of the Secured Party in the Receivables or any other Collateral. (d) Any proceeds of Receivables or other Collateral transmitted to or otherwise received by the Secured Party pursuant to any of the provisions of Sections 5(b) or 5(c) hereof may be handled and administered by the Secured Party in and through a remittance account at the Secured Party, and the Debtor acknowledges that the maintenance of such remittance account by -11- the Secured Party is solely for the Secured Party's convenience and that the Debtor does not have any right, title or interest in such remittance account or any amounts at any time standing to the credit thereof. The Secured Party may, after the occurrence and during the continuation of any Event of Default or of any event or condition which with the lapse of time or the giving of notice, or both, would constitute an Event of Default, apply all or any part of any proceeds of Receivables or other Collateral received by it from any source to the payment of the Obligations (whether or not then due and payable), such applications to be made in such amounts, in such manner and order and at such intervals as the Secured Party may from time to time in its discretion determine, but not less often than once each week. The Secured Party need not apply or give credit for any item included in proceeds of Receivables or other Collateral until the Secured Party has received final payment therefor at its office in cash or final solvent credits current in Chicago, Illinois, acceptable to the Secured Party as such. However, if the Secured Party does give credit for any item prior to receiving final payment therefor and the Secured Party fails to receive such final payment or an item is charged back to the Secured Party for any reason, the Secured Party may at its election in either instance charge the amount of such item back against the remittance account or any depository account of the Debtor maintained with the Secured Party, together with interest thereon at the Default Rate. Concurrently with each transmission of any proceeds of Receivables or other Collateral to the remittance account, the Debtor shall furnish the Secured Party with a report in such form as the Secured Party shall reasonably require identifying the particular Receivable or other Collateral from which the same arises or relates. The Debtor hereby indemnifies the Secured Party from and against all liabilities, damages, losses, actions, claims, judgments, costs, expenses, charges and reasonable attorneys' fees suffered or incurred by the Secured Party because of the maintenance of the foregoing arrangements; provided, however, that the Debtor shall not be required to indemnify the Secured Party for any of the foregoing to the extent they arise solely from the gross negligence or willful misconduct of the Secured Party. The Secured Party shall have no liability or responsibility to the Debtor for accepting any check, draft or other order for payment of money bearing the legend "payment in full" or words of similar import or any other restrictive legend or endorsement whatsoever or be responsible for determining the correctness of any remittance. 6. Special Provisions Re: Inventory and Equipment. (a) The Debtor shall at its own cost and expense maintain, keep and preserve the Inventory in good and merchantable condition and keep and preserve the Equipment in good repair, working order and condition, ordinary wear and tear excepted, and, without limiting the foregoing, make all necessary and proper repairs, replacements and additions to the Equipment so that the efficiency thereof shall be fully preserved and maintained. -12- (b) The Debtor may, until an Event of Default has occurred and is continuing and thereafter until otherwise notified by the Secured Party, use, consume and sell the Inventory in the ordinary course of its business, but a sale in the ordinary course of business shall not under any circumstance include any transfer or sale in satisfaction, partial or complete, of a debt owing by the Debtor. (c) The Debtor may, until an Event of Default has occurred and is continuing and thereafter until otherwise notified by the Secured Party, sell obsolete, worn out or unusable Equipment which is concurrently replaced with similar Equipment at least equal in quality and condition to that sold and owned by the Debtor free of any lien, charge or encumbrance other than the security interest granted hereby. (d) As of the time any Inventory or Equipment becomes subject to the security interest provided for hereby and at all times thereafter, the Debtor shall be deemed to have warranted as to any and all of such Inventory and Equipment that all warranties of the Debtor set forth in this Agreement are true and correct with respect to such Inventory and Equipment; that all of such Inventory and Equipment is located at a location set forth pursuant to Section 3(b) hereof; and that, in the case of Inventory, such Inventory is new and unused and in good and merchantable condition. The Debtor warrants and agrees that no Inventory is or will be consigned to any other person without the Secured Party's prior written consent. (e) Upon the Secured Party's request, the Debtor shall at its own cost and expense cause the lien of the Secured Party in and to any portion of the Collateral subject to a certificate of title law to be duly noted on such certificate of title or to be otherwise filed in such manner as is prescribed by law in order to perfect such lien and shall cause all such certificates of title and evidences of lien to be deposited with the Secured Party. (f) Except for Equipment from time to time located on the real estate described on Schedule B attached hereto and as otherwise disclosed to the Secured Party in writing, none of the Equipment is or will be attached to real estate in such a manner that the same may become a fixture. (g) If any of the Inventory is at any time evidenced by a document of title, such document shall be promptly delivered by the Debtor to the Secured Party except to the extent the Secured Party specifically requests the Debtor not to do so with respect to any such document. -13- Section 7. Special Provisions Re: Investment Property. (a) Unless and until an Event of Default has occurred and is continuing and thereafter until notified to the contrary by the Secured Party pursuant to Section 9(d) hereof: (i) The Debtor shall be entitled to exercise all voting and/or consensual powers pertaining to the Investment Property or any part thereof, for all purposes not inconsistent with the terms of this Agreement or any other document evidencing or otherwise relating to any Obligations; and (ii) The Debtor shall be entitled to receive and retain all cash dividends paid upon or in respect of the Investment Property. (b) At the Secured Party's request, certificates for all securities now or at any time constituting Investment Property shall be promptly delivered by the Debtor to the Secured Party duly endorsed in blank for transfer or accompanied by an appropriate assignment or assignments or an appropriate undated stock power or powers, in every case sufficient to transfer title thereto including, without limitation, all stock received in respect of a stock dividend or resulting from a split-up, revision or reclassification of the Investment Property or any part thereof or received in addition to, in substitution of or in exchange for the Investment Property or any part thereof as a result of a merger, consolidation or otherwise. With respect to any Investment Property held by a securities intermediary, commodity intermediary, or other financial intermediary of any kind, at the Secured Party's request, the Debtor shall execute and deliver, and shall cause any such intermediary to execute and deliver, an agreement among the Debtor, the Secured Party, and such intermediary in form and substance reasonably satisfactory to the Secured Party which provides, among other things, for the intermediary's agreement that it shall comply with entitlement orders, and apply any value distributed on account of any Investment Property maintained in an account with such intermediary, as directed by the Secured Party without further consent by the Debtor at any time after the occurrence and during the continuation of any Event of Default. The Secured Party may at any time, after the occurrence of an Event of Default or an event or condition which with the lapse of time or the giving of notice, or both, would constitute an Event of Default, cause to be transferred into its name or the name of its nominee or nominees all or any part of the Investment Property hereunder. (c) Unless and until an Event of Default has occurred and is continuing, the Debtor may sell or otherwise dispose of any Investment Property, provided that the Debtor shall not sell or otherwise dispose of any capital stock of any direct or indirect subsidiary without the prior written consent of the Secured Party. After the occurrence and during the continuation of any Event of Default, the Debtor shall not sell all or any part of the Investment Property without the prior written consent of the Secured Party. -14- (d) The Debtor represents that on the date of this Agreement, none of the Investment Property consists of margin stock (as such term is defined in Regulation U of the Board of Governors of the Federal Reserve System) except to the extent the Debtor has delivered to the Secured Party a duly executed and completed Form U-1 with respect to such stock. If at any time the Investment Property or any part thereof consists of margin stock, the Debtor shall promptly so notify the Secured Party and deliver to the Secured Party a duly executed and completed Form U-1 and such other instruments and documents reasonably requested by the Secured Party in form and substance satisfactory to the Secured Party. (e) Notwithstanding anything to the contrary contained herein, in the event any Investment Property is subject to the terms of a separate security agreement in favor of the Secured Party, the terms of such separate security agreement shall govern and control unless otherwise agreed to in writing by the Secured Party. Section 8. Power of Attorney. In addition to any other powers of attorney contained herein, the Debtor hereby appoints the Secured Party, its nominee, and any other person whom the Secured Party may designate, as the Debtor's attorney-in-fact, with full power to sign the Debtor's name on verifications of accounts and other Collateral; to send requests for verification of Collateral to the Debtor's customers, account debtors and other obligors; to endorse the Debtor's name on any checks, notes, acceptances, money orders, drafts and any other forms of payment or security that may come into the Secured Party's possession or on any assignments, stock powers, or other instruments of transfer relating to the Collateral or any part thereof; to sign the Debtor's name on any invoice or bill of lading relating to any Collateral, on claims to enforce collection of any Collateral, on notices to and drafts against customers and account debtors and other obligors, on schedules and assignments of Collateral, on notices of assignment and on public records; to notify the post office authorities to change the address for delivery of the Debtor's mail to an address designated by the Secured Party; to receive, open and dispose of all mail addressed to the Debtor; and to do all things necessary to carry out this Agreement. The Debtor hereby ratifies and approves all acts of any such attorney and agrees that neither the Secured Party nor any such attorney will be liable for any acts or omissions nor for any error of judgment or mistake of fact or law other than such person's gross negligence or willful misconduct. The Secured Party may file one or more financing statements disclosing its security interest in any or all of the Collateral without the Debtor's signature appearing thereon. The Debtor also hereby grants the Secured Party a power of attorney to execute any such financing statements, or amendments and supplements to financing statements, on behalf of the Debtor without notice thereof to the Debtor. The foregoing powers of attorney, being coupled with an interest, are irrevocable until the Obligations have been fully paid and satisfied and all agreements of the Secured Party to extend credit to or for the account of the Debtor have expired or otherwise have been terminated; provided, however, that the Secured Party agrees, as a personal covenant to the Debtor, not to exercise the powers of attorney set forth in this Section unless an Event of Default exists. -15- 9. Defaults and Remedies. (a) The occurrence of any one or more of the following events shall constitute an "Event of Default" hereunder: (i) default in the payment when due (whether by demand, lapse of time, acceleration or otherwise) of the Obligations or any part thereof; or (ii) default in the observance or performance of any covenant set forth in Sections 5(b), 5(c) or 7(b) hereof or of any provision hereof requiring the maintenance of insurance on the Collateral or dealing with the use or remittance of proceeds of Collateral; or (iii) the occurrence of any event or the existence of any condition which is specified as an "Event of Default" under the Credit Agreement. (b) Upon the occurrence and during the continuation of any Event of Default, the Secured Party shall have, in addition to all other rights provided herein or by law, the rights and remedies of a secured party under the UCC (regardless of whether the UCC is the law of the jurisdiction where the rights or remedies are asserted and regardless of whether the UCC applies to the affected Collateral), and further the Secured Party may, without demand and without advertisement, notice, hearing or process of law, all of which the Debtor hereby waives, at any time or times, sell and deliver all or any part of the Collateral (and any other property of the Debtor attached thereto or found therein) held by or for it at public or private sale, for cash, upon credit or otherwise, at such prices and upon such terms as the Secured Party deems advisable, in its sole discretion. In addition to all other sums due the Secured Party hereunder, the Debtor shall pay the Secured Party all costs and expenses incurred by the Secured Party, including reasonable attorneys' fees and court costs, in obtaining, liquidating or enforcing payment of Collateral or the Obligations or in the prosecution or defense of any action or proceeding by or against the Secured Party or the Debtor concerning any matter arising out of or connected with this Agreement or the Collateral or the Obligations, including, without limitation, any of the foregoing arising in, arising under or related to a case under the United States Bankruptcy Code (or any successor statute). Any requirement of reasonable notice shall be met if such notice is personally served on or mailed, postage prepaid, to the Debtor in accordance with Section 12(b) hereof at least 10 days before the time of sale or other event giving rise to the requirement of such notice; provided however, no notification need be given to the Debtor if the Debtor has signed, after an Event of Default has occurred, a statement renouncing any right to notification of sale or other intended disposition. The Secured Party shall not be obligated to make any sale or other disposition of the Collateral regardless of notice having been given. The Secured Party may be the purchaser at any such sale. The Debtor hereby waives all of its rights of redemption -16- from any such sale. The Secured Party may postpone or cause the postponement of the sale of all or any portion of the Collateral by announcement at the time and place of such sale, and such sale may, without further notice, be made at the time and place to which the sale was postponed or the Secured Party may further postpone such sale by announcement made at such time and place. (c) Without in any way limiting the foregoing, upon the occurrence and during the continuation of any Event of Default, the Secured Party shall have the right, in addition to all other rights provided herein or by law, to take physical possession of any and all of the Collateral and anything found therein, the right for that purpose to enter without legal process any premises where the Collateral may be found (provided such entry be done lawfully), and the right to maintain such possession on the Debtor's premises (the Debtor hereby agreeing to lease such premises without cost or expense to the Secured Party or its designee if the Secured Party so requests) or to remove the Collateral or any part thereof to such other places as the Secured Party may desire. Upon the occurrence and during the continuation of any Event of Default, the Secured Party shall have the right to exercise any and all rights with respect to deposit accounts of the Debtor maintained with the Secured Party, including, without limitation, the right to collect, withdraw and receive all amounts due or to become due or payable under each such deposit account. Upon the occurrence and during the continuation of any Event of Default, the Debtor shall, upon the Secured Party's demand, assemble the Collateral and make it available to the Secured Party at a place designated by the Secured Party. If the Secured Party exercises its right to take possession of the Collateral, the Debtor shall also at its expense perform any and all other steps requested by the Secured Party to preserve and protect the security interest hereby granted in the Collateral, such as placing and maintaining signs indicating the security interest of the Secured Party, appointing overseers for the Collateral and maintaining Collateral records. (d) Without in any way limiting the foregoing, upon the occurrence and during the continuation of any Event of Default, all rights of the Debtor to exercise the voting and/or consensual powers which it is entitled to exercise pursuant to Section 7(a)(i) hereof and/or to receive and retain the distributions which it is entitled to receive and retain pursuant to Section 7(a)(ii) hereof, shall, at the option of the Secured Party, cease and thereupon become vested in the Secured Party, which, in addition to all other rights provided herein or by law, shall then be entitled solely and exclusively to exercise all voting and other consensual powers pertaining to the Investment Property and/or to receive and retain the distributions which the Debtor would otherwise have been authorized to retain pursuant to Section 7(a)(ii) hereof and shall then be entitled solely and exclusively to exercise any and all rights of conversion, exchange or subscription or any other rights, privileges or options pertaining to any Investment Property as if the Secured Party were the absolute owner thereof. Without limiting the foregoing, the Secured Party shall have the right to exchange, at its discretion, any and all of the Investment Property upon the merger, consolidation, reorganization, recapitalization or other readjustment of -17- the respective issuer thereof or upon the exercise by or on behalf of any such issuer or the Secured Party of any right, privilege or option pertaining to any Investment Property and, in connection therewith, to deposit and deliver any and all of the Investment Property with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Secured Party may determine. In the event the Secured Party in good faith believes any of the Collateral constitutes restricted securities within the meaning of any applicable securities laws, any disposition thereof in compliance with such laws shall not render the disposition commercially unreasonable. (e) Without in any way limiting the foregoing, the Debtor hereby grants to the Secured Party a royalty-free irrevocable license and right to use all of the Debtor's patents, patent applications, patent licenses, trademarks, trademark registrations, trademark licenses, trade names, trade styles, copyrights, copyright applications, copyright licenses, and similar intangibles in connection with any foreclosure or other realization by the Secured Party on all or any part of the Collateral. The license and right granted the Secured Party hereby shall be without any royalty or fee or charge whatsoever. (f) The powers conferred upon the Secured Party hereunder are solely to protect its interest in the Collateral and shall not impose on it any duty to exercise such powers. The Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of Investment Property in its possession if such Collateral is accorded treatment substantially equivalent to that which the Secured Party accords its own property, consisting of similar type assets, it being understood, however, that the Secured Party shall have no responsibility for ascertaining or taking any action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any such Collateral, whether or not the Secured Party has or is deemed to have knowledge of such matters. This Agreement constitutes an assignment of rights only and not an assignment of any duties or obligations of the Debtor in any way related to the Collateral, and the Secured Party shall have no duty or obligation to discharge any such duty or obligation. The Secured Party shall have no responsibility for taking any necessary steps to preserve rights against any parties with respect to any Collateral or initiating any action to protect the Collateral against the possibility of a decline in market value. Neither the Secured Party nor any party acting as attorney for the Secured Party shall be liable for any acts or omissions or for any error of judgment or mistake of fact or law other than their gross negligence or willful misconduct. (g) Failure by the Secured Party to exercise any right, remedy or option under this Agreement or any other agreement between the Debtor and the Secured Party or provided by law, or delay by the Secured Party in exercising the same, shall not operate as a waiver; and no waiver by the Secured Party shall be effective unless it is in writing and then only to the extent specifically stated. The rights and remedies of the Secured Party under this Agreement shall be -18- cumulative and not exclusive of any other right or remedy which the Secured Party may have. For purposes of this Agreement, an Event of Default shall be construed as continuing after its occurrence until the same is waived in writing by the Secured Party. 10. Application of Proceeds. The proceeds and avails of the Collateral at any time received by the Secured Party after the occurrence and during the continuation of any Event of Default shall, when received by the Secured Party in cash or its equivalent, be applied by the Secured Party as follows: (i) First, to the payment and satisfaction of all sums paid and costs and expenses incurred by the Secured Party hereunder or otherwise in connection herewith, including such monies paid or incurred in connection with protecting, preserving or realizing upon the Collateral or enforcing any of the terms hereof, including reasonable attorneys' fees and court costs, together with any interest thereon (but without preference or priority of principal over interest or of interest over principal), to the extent the Secured Party is not reimbursed therefor by the Debtor; and (ii) Second, to the payment and satisfaction of the remaining Obligations, whether or not then due (in whatever order the Secured Party elects), both for interest and principal. The Debtor shall remain liable to the Secured Party for any deficiency. Any surplus remaining after the full payment and satisfaction of the foregoing shall be returned to the Debtor or to whomsoever the Secured Party reasonably determines is lawfully entitled thereto. 11. Continuing Agreement. This Agreement shall be a continuing agreement in every respect and shall remain in full force and effect until all of the Obligations, both for principal and interest, have been fully paid and satisfied and all agreements of the Secured Party to extend credit to or for the account of the Debtor have expired or otherwise have been terminated. Upon such termination of this Agreement, the Secured Party shall, upon the request and at the expense of the Debtor, forthwith release its security interest hereunder. 12. Miscellaneous. (a) This Agreement cannot be changed or terminated orally. All of the rights, privileges, remedies and options given to the Secured Party hereunder shall inure to the benefit of its successors and assigns, and all the terms, conditions, covenants, agreements, representations and warranties of and in this Agreement shall bind the Debtor and its legal representatives, successors and assigns, provided that the Debtor may not assign its rights or delegate its duties hereunder without the Secured Party's prior written consent. -19- (b) Except as otherwise specified herein, all notices hereunder shall be in writing (including, without limitation, notice by telecopy) and shall be given to the relevant party at its address or telecopier number set forth below (or, if no such address is set forth below, at the address of the Debtor as shown on the records of the Secured Party), or such other address or telecopier number as such party may hereafter specify by notice to the other given by United States certified or registered mail, by telecopy or by other telecommunication device capable of creating a written record of such notice and its receipt. Notices hereunder shall be addressed: to the Debtor at: to the Secured Party at: Champion Financial Corporation Harris Trust and Savings Bank 9495 East San Salvador Drive 111 West Monroe Street Scottsdale, Arizona 85258 Chicago, Illinois 60690 Attention:Stephen Carder, Attention: Christopher Randall, Chief Financial Officer Tax-Exempt Institutions Division Telephone: (602) 614-4285 Telephone: (312) 461-5068 Telecopy: (602) 451-9087 Telecopy: (312) 461-7365 Each such notice, request or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopier number specified in this Section and a confirmation of such telecopy has been received by the sender, (ii) if given by mail, five (5) days after such communication is deposited in the mail, certified or registered with return receipt requested, addressed as aforesaid or (iii) if given by any other means, when delivered at the addresses specified in this Section. (c) In the event and to the extent that any provision hereof shall be deemed to be invalid or unenforceable by reason of the operation of any law or by reason of the interpretation placed thereon by any court, this Agreement shall to such extent be construed as not containing such provision, but only as to such locations where such law or interpretation is operative, and the invalidity or unenforceability of such provision shall not affect the validity of any remaining provisions hereof, and any and all other provisions hereof which are otherwise lawful and valid shall remain in full force and effect. (d) This Agreement shall be deemed to have been made in the State of Illinois and shall be governed by, and construed in accordance with, the laws of the State of Illinois. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning of any provision hereof. (e) The Debtor acknowledges that this Agreement is and shall be effective upon its execution and delivery by the Debtor to the Secured Party, and it shall not be necessary for the -20- Secured Party to execute this Agreement or any other acceptance hereof or otherwise to signify or express its acceptance hereof. (f) The Debtor hereby submits to the non-exclusive jurisdiction of the United States District Court for the Northern District of Illinois and of any Illinois state court sitting in the City of Chicago for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Debtor irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient form. THE DEBTOR AND THE SECURED PARTY EACH HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. -21- IN WITNESS WHEREOF, the Debtor has caused this Agreement to be duly executed and delivered as of this 15th day of December, 1997. CHAMPION FINANCIAL CORPORATION By /s/ Stephen J Carder ----------------------- Its Executive Vice President EX-10.3.4 5 SECURITY AGREEMENT EXHIBIT 10.34 SECURITY AGREEMENT This Security Agreement (the "Agreement") is dated as of December 15, 1997, between HEALTHSTAR, INC., an Illinois corporation (the "Debtor"), with its mailing address as set forth in Section 12(b) hereof, and HARRIS TRUST AND SAVINGS BANK, an Illinois banking corporation (the "Secured Party"), with its mailing address as set forth in Section 12(b) hereof. PRELIMINARY STATEMENT A. The Champion Financial Corporation, a Utah corporation (the "Borrower"), has requested that the Secured Party extend credit or otherwise make financial accommodations available to or for the account of the Borrower. B. As a condition to extending credit or otherwise making financial accommodations available to or for the account of the Borrower, the Secured Party requires, among other things, that the Debtor guarantee all of the indebtedness, obligations, and liabilities of the Borrower to the Bank and grant the Secured Party a security interest in the Debtor's personal property described herein subject to the terms and conditions hereof. C. The Borrower owns, directly or indirectly, all or substantially all of the equity interests in the Debtor and the Borrower provides the Debtor with financial, management, administrative, and technical support which enables the Debtor to conduct its business in an orderly and efficient manner in the ordinary course. D. The Debtor will benefit, directly or indirectly, from credit and other financial accommodations extended by the Bank to the Borrower. NOW, THEREFORE, in consideration of the benefits accruing to the Debtor, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Grant of Security Interest. The Debtor hereby grants to the Secured Party a lien on and security interest in, and acknowledges and agrees that the Secured Party has and shall continue to have a continuing lien on and security interest in, any and all right, title and interest of the Debtor, whether now owned or existing or hereafter created, acquired or arising, in and to the following: (a) Receivables. All Receivables, whether now owned or existing or hereafter created, acquired or arising, and however evidenced or acquired, or in which the Debtor now has or hereafter acquires any rights (the term "Receivables" means and includes all accounts, accounts receivable, contract rights, instruments, notes, drafts, acceptances, documents, chattel paper, and all other forms of obligations owing to the Debtor, any right of the Debtor to payment for goods sold or leased or for services rendered, whether or not earned by performance, and all of the Debtor's rights to any merchandise and other goods (including, without limitation, any returned or repossessed goods and the right of stoppage in transit) which is represented by, arises from or is related to any of the foregoing); (b) General Intangibles. All General Intangibles, whether now owned or existing or hereafter created, acquired or arising, or in which the Debtor now has or hereafter acquires any rights (the term "General Intangibles" means and includes all general intangibles, patents, patent applications, patent licenses, trademarks, trademark registrations, trademark licenses, trade styles, trade names, copyrights, copyright registrations, copyright licenses and other licenses and similar intangibles, all customer, client and supplier lists (in whatever form maintained), all rights in leases and other agreements relating to real or personal property, all causes of action and tax refunds of every kind and nature, all privileges, franchises, immunities, licenses, permits and similar intangibles, all rights to receive payments in connection with the termination of any pension plan or employee stock ownership plan or trust established for the benefit of employees of the Debtor, and all other personal property (including things in action) not otherwise covered by this Agreement); (c) Inventory. All Inventory, whether now owned or existing or hereafter created, acquired or arising, or in which the Debtor now has or hereafter acquires any rights, and all documents of title at any time evidencing or representing any part thereof (the term "Inventory" means and includes all inventory and any other goods which are held for sale or lease or are to be furnished under contracts of service or consumed in the Debtor's business, all goods which are raw materials, work-in-process or finished goods, all goods which are returned or repossessed goods, and all materials and supplies of every kind and nature used or usable in connection with the acquisition, manufacture, processing, supply, servicing, storing, packing, shipping, advertising, selling, leasing or furnishing of the foregoing, and any constituents or ingredients thereof; -2- (d) Equipment. All Equipment, whether now owned or existing or hereafter created, acquired or arising, or in which the Debtor now has or hereafter acquires any rights (the term "Equipment" means and includes all equipment and any other machinery, tools, fixtures, trade fixtures, furniture, furnishings, office equipment, vehicles (including vehicles subject to a certificate of title law), and all other goods now or hereafter used or usable in connection with the Debtor's business, together with all parts, accessories and attachments relating to any of the foregoing); (e) Investment Property. All Investment Property, whether now owned or existing or hereafter created, acquired or arising, or in which the Debtor now has or hereafter acquires any rights (the term "Investment Property" means and includes all investment property and any other securities (whether certificated or uncertificated), security entitlements, securities accounts, commodity contracts and commodity accounts, including all substitutions and additions thereto, all dividends, distributions and sums distributable or payable from, upon, or in respect of such property, and all rights and privileges incident to such property); (f) Deposits and Property in Possession. All deposit accounts (whether general, special or otherwise) of the Debtor maintained with the Secured Party and all sums now or hereafter on deposit therein or payable thereon, and all other personal property and interests in personal property of the Debtor of any kind or description now held by the Secured Party or at any time hereafter transferred or delivered to, or coming into the possession, custody or control of, the Secured Party, or any agent or affiliate of the Secured Party, whether expressly as collateral security or for any other purpose (whether for safekeeping, custody, collection or otherwise), and all dividends and distributions on or other rights in connection with any such property, in each case whether now owned or existing or hereafter created, acquired or arising; (g) Records. All supporting evidence and documents relating to any of the above-described property, whether now owned or existing or hereafter created, acquired or arising, including, without limitation, computer programs, disks, tapes and related electronic data processing media, and all rights of the Debtor to retrieve the same from third parties, written applications, credit information, account cards, payment records, correspondence, delivery and installation certificates, invoice copies, delivery receipts, notes and other evidences of indebtedness, insurance certificates and the like, together with all books of account, ledgers and cabinets in which the same are reflected or maintained; -3- (h) Accessions and Additions. All accessions and additions to, and substitutions and replacements of, any and all of the foregoing, whether now owned or existing or hereafter created, acquired or arising; and (i) Proceeds and Products. All proceeds and products of the foregoing and all insurance of the foregoing and proceeds thereof, whether now owned or existing or hereafter created, acquired or arising; all of the foregoing being herein sometimes referred to as the "Collateral". All terms which are used in this Agreement which are defined in the Uniform Commercial Code of the State of Illinois ("UCC") shall have the same meanings herein as such terms are defined in the UCC, unless this Agreement shall otherwise specifically provide. 2. Obligations Hereby Secured. The lien and security interest herein granted and provided for is made and given to secure, and shall secure, the payment and performance of (a) any and all indebtedness, obligations and liabilities of whatsoever kind and nature of the Debtor to the Secured Party (whether arising before or after the filing of a petition in bankruptcy), whether direct or indirect, absolute or contingent, due or to become due, and whether now existing or hereafter arising and howsoever held, evidenced or acquired, and whether several, joint or joint and several, (b) any and all indebtedness, obligations and liabilities of whatsoever kind and nature of the Borrower to the Secured Party (whether arising before or after the filing of a petition in bankruptcy), whether direct or indirect, absolute or contingent, due or to become due, and whether now existing or hereafter arising and howsoever held, evidenced or acquired, and whether several, joint or joint and several and (c) any and all expenses and charges, legal or otherwise, suffered or incurred by the Secured Party in collecting or enforcing any of such indebtedness, obligations or liabilities or in realizing on or protecting or preserving any security therefor, including, without limitation, the lien and security interest granted hereby (all of the foregoing being hereinafter referred to as the "Obligations"). Notwithstanding anything herein to the contrary, the right of recovery hereunder against the Debtor with respect to the Obligations shall be limited to $1 less than the amount of the lowest claim hereunder against the Collateral which would render this Agreement void or voidable under applicable law. 3. Covenants, Agreements, Representations and Warranties. The Debtor hereby covenants and agrees with, and represents and warrants to, the Secured Party that: (a) The Debtor is a corporation duly organized and validly existing in good standing under the laws of the State of Illinois, is the sole and lawful owner of the Collateral, and has full right, power and authority to enter into this Agreement and to perform each and all of the matters and things herein provided for. The execution and delivery of this Agreement, and the observance and performance of each of the matters and things herein set forth, will not -4- (i) contravene or constitute a default under any provision of law or any judgment, injunction, order or decree binding upon the Debtor or any provision of the Debtor's articles of incorporation or by-laws or any covenant, indenture or agreement of or affecting the Debtor or any of its property or (ii) result in the creation or imposition of any lien or encumbrance on any property of the Debtor except for the lien and security interest granted to the Secured Party hereunder. The Debtor's Federal tax identification number is 36-3146167. (b) The Debtor's chief executive office and principal place of business is at, and the Debtor keeps and shall keep all of its books and records relating to Receivables only at, 8745 West Higgins Road, Suite 300, Chicago, Illinois 60631; and the Debtor has no other executive offices or places of business other than those listed under Item 1 on Schedule A. The Collateral is and shall remain in the Debtor's possession or control at the locations listed under Item 2 on Schedule A attached hereto (collectively, the "Permitted Collateral Locations"). If for any reason any Collateral is at any time kept or located at a location other than a Permitted Collateral Location, the Secured Party shall nevertheless have and retain a lien on and security interest therein. The Debtor owns and shall at all times own all Permitted Collateral Locations, except to the extent otherwise disclosed under Item 2 on Schedule A. The Debtor shall not move its chief executive office or maintain a place of business at a location other than those specified under Item 1 on Schedule A or permit the Collateral to be located at a location other than those specified under Item 2 on Schedule A, in each case without first providing the Secured Party 30 days' prior written notice of the Debtor's intent to do so; provided that the Debtor shall at all times maintain its chief executive office and, unless otherwise specifically agreed to in writing by the Secured Party, Permitted Collateral Locations in the United States of America and, with respect to any new chief executive office or place of business or location of Collateral, the Debtor shall have taken all action requested by the Secured Party to maintain the lien and security interest of the Secured Party in the Collateral at all times fully perfected and in full force and effect. (c) The Debtor has not invoiced Receivables or otherwise transacted business at any time during the immediately preceding five-year period, and does not currently invoice Receivables or otherwise transact business, under any trade names other than the Debtor's name set forth in the introductory paragraph of this Agreement. The Debtor shall not change its name or transact business under any other trade name without first giving 30 days' prior written notice of its intent to do so to the Secured Party. (d) The Collateral and every part thereof is and shall be free and clear of all security interests, liens (including, without limitation, mechanics', laborers' and statutory liens), attachments, levies and encumbrances of every kind, nature and description, whether voluntary or involuntary, except for the lien and security interest of the Secured Party therein and as otherwise permitted by Section 8.10 of that certain Credit Agreement dated as of even date -5- herewith between the Borrower and the Secured Party, as the same may be amended or modified from time to time, including amendments and restatements of the same in its entirety (hereinafter, the "Credit Agreement"). The Debtor shall warrant and defend the Collateral against any claims and demands of all persons at any time claiming the same or any interest in the Collateral adverse to the Secured Party. (e) The Debtor shall promptly pay when due all taxes, assessments and governmental charges and levies upon or against the Debtor or any of the Collateral, in each case before the same become delinquent and before penalties accrue thereon, unless and to the extent that the same are being contested in good faith by appropriate proceedings which prevent foreclosure or other realization upon any of the Collateral and preclude interference with the operation of the Debtor's business in the ordinary course, and the Debtor shall have established adequate reserves therefor. (f) The Debtor shall not use, manufacture, sell or distribute any Collateral in violation of any statute, ordinance or other governmental requirement. The Debtor shall not waste or destroy the Collateral or any part thereof or be negligent in the care or use of any Collateral. The Debtor shall perform in all material respects its obligations under any contract or other agreement constituting part of the Collateral, it being understood and agreed that the Secured Party has no responsibility to perform such obligations. (g) Subject to Sections 4(b), 6(b), 6(c), and 7(c) hereof, the Debtor shall not, without the Secured Party's prior written consent, sell, assign, mortgage, lease or otherwise dispose of the Collateral or any interest therein. (h) The Debtor shall at all times insure the Collateral consisting of tangible personal property against such risks and hazards as other persons similarly situated insure against, and including in any event loss or damage by fire, theft, burglary, pilferage, loss in transit and such other hazards as the Secured Party may specify. All insurance required hereby shall be maintained in amounts and under policies and with insurers reasonably acceptable to the Secured Party, and all such policies shall contain loss payable clauses naming the Secured Party as loss payee as its interest may appear (and, if the Secured Party requests, naming the Secured Party as an additional insured therein) in a form acceptable to the Secured Party. All premiums on such insurance shall be paid by the Debtor. Certificates of insurance evidencing compliance with the foregoing and, at the Secured Party's request, the policies of such insurance shall be delivered by the Debtor to the Secured Party. All insurance required hereby shall provide that any loss shall be payable to the Secured Party notwithstanding any act or negligence of the Debtor, shall provide that no cancellation thereof shall be effective until at least 30 days after receipt by the Debtor and the Secured Party of written notice thereof, and shall be satisfactory to the Secured Party in all other respects. In case of any material loss, damage to or destruction of the Collateral -6- or any part thereof, the Debtor shall promptly give written notice thereof to the Secured Party generally describing the nature and extent of such damage or destruction. In case of any loss, damage to or destruction of the Collateral or any part thereof, the Debtor, whether or not the insurance proceeds, if any, received on account of such damage or destruction shall be sufficient for that purpose, at the Debtor's cost and expense, shall promptly repair or replace the Collateral so lost, damaged or destroyed, except to the extent such Collateral, prior to its loss, damage or destruction, had become uneconomical, obsolete or worn out and is not necessary for or of importance to the proper conduct of the Debtor's business in the ordinary course. In the event the Debtor shall receive any proceeds of such insurance, the Debtor shall immediately pay over such proceeds to the Secured Party. The Debtor hereby authorizes the Secured Party, at the Secured Party's option, to adjust, compromise and settle any losses under any insurance afforded at any time during the existence of any Event of Default or any other event or condition which with the lapse of time or the giving of notice, or both, would constitute an Event of Default, and the Debtor does hereby irrevocably constitute the Secured Party, and each of its nominees, officers, agents, attorneys, and any other person whom the Secured Party may designate, as the Debtor's attorneys-in-fact, with full power and authority to effect such adjustment, compromise and/or settlement and to endorse any drafts drawn by an insurer of the Collateral or any part thereof and to do everything necessary to carry out such purposes and to receive and receipt for any unearned premiums due under policies of such insurance. Unless the Secured Party elects to adjust, compromise or settle losses as aforesaid, any adjustment, compromise and/or settlement of any losses under any insurance shall be made by the Debtor subject to final approval of the Secured Party (regardless of whether or not an Event of Default shall have occurred) in the case of losses exceeding $100,000. Net insurance proceeds received by the Secured Party under the provisions hereof or under any policy of insurance covering the Collateral or any part thereof shall be applied to the reduction of the Obligations (whether or not then due); provided, however, that the Secured Party may in its sole discretion release any or all such insurance proceeds to the Debtor. All insurance proceeds shall be subject to the lien and security interest of the Secured Party hereunder. UNLESS THE DEBTOR PROVIDES THE SECURED PARTY WITH EVIDENCE OF THE INSURANCE COVERAGE REQUIRED BY THIS AGREEMENT, THE SECURED PARTY MAY PURCHASE INSURANCE AT THE DEBTOR'S EXPENSE TO PROTECT THE SECURED PARTY'S INTERESTS IN THE COLLATERAL. THIS INSURANCE MAY, BUT NEED NOT, PROTECT THE DEBTOR'S INTERESTS IN THE COLLATERAL. THE COVERAGE PURCHASED BY THE SECURED PARTY MAY NOT PAY ANY CLAIMS THAT THE DEBTOR MAKES OR ANY CLAIM THAT IS MADE AGAINST THE DEBTOR IN CONNECTION WITH THE COLLATERAL. THE DEBTOR MAY LATER CANCEL ANY SUCH INSURANCE PURCHASED BY THE SECURED PARTY, BUT ONLY AFTER PROVIDING THE SECURED PARTY WITH EVIDENCE THAT THE DEBTOR HAS OBTAINED INSURANCE AS REQUIRED BY THIS AGREEMENT. IF THE SECURED PARTY PURCHASES INSURANCE FOR THE COLLATERAL, THE DEBTOR WILL BE RESPONSIBLE FOR THE COSTS OF THAT INSURANCE, INCLUDING INTEREST -7- AND ANY OTHER CHARGES THAT THE SECURED PARTY MAY IMPOSE IN CONNECTION WITH THE PLACEMENT OF THE INSURANCE, UNTIL THE EFFECTIVE DATE OF THE CANCELLATION OR EXPIRATION OF THE INSURANCE. THE COSTS OF THE INSURANCE MAY BE ADDED TO THE OBLIGATIONS SECURED HEREBY. THE COSTS OF THE INSURANCE MAY BE MORE THAN THE COST OF INSURANCE THE DEBTOR MAY BE ABLE TO OBTAIN ON ITS OWN. (i) The Debtor shall at all times allow the Secured Party and its representatives free access to and right of inspection of the Collateral. (j) If any Collateral is in the possession or control of any of the Debtor's agents or processors and the Secured Party so requests, the Debtor agrees to notify such agents or processors in writing of the Secured Party's security interest therein and instruct them to hold all such Collateral for the Secured Party's account and subject to the Secured Party's instructions. The Debtor shall, upon the request of the Secured Party, authorize and instruct all bailees and other parties, if any, at any time processing, labeling, packaging, holding, storing, shipping or transferring all or any part of the Collateral to permit the Secured Party and its representatives to examine and inspect any of the Collateral then in such party's possession and to verify from such party's own books and records any information concerning the Collateral or any part thereof which the Secured Party or its representatives may seek to verify. As to any premises not owned by the Debtor wherein any of the Collateral is located, the Debtor shall, unless the Secured Party requests otherwise, cause each party having any right, title or interest in, or lien on, any of such premises to enter into an agreement (any such agreement to contain a legal description of such premises) whereby such party disclaims any right, title and interest in, and lien on, the Collateral and allows the removal of such Collateral by the Secured Party and is otherwise in form and substance acceptable to the Secured Party; provided, however, that no such agreement need be obtained with respect to any one location wherein the value of the Collateral as to which such agreement has not been obtained aggregates less than $100,000 at any one time. (k) The Debtor agrees from time to time to deliver to the Secured Party such evidence of the existence, identity and location of the Collateral and of its availability as collateral security pursuant hereto (including, without limitation, schedules describing all Receivables created or acquired by the Debtor, copies of customer invoices or the equivalent and original shipping or delivery receipts for all merchandise and other goods sold or leased or services rendered, together with the Debtor's warranty of the genuineness thereof, and reports stating the book value of Inventory and Equipment by major category and location), in each case as the Secured Party may reasonably request. The Secured Party shall have the right to verify all or any part of the Collateral in any manner, and through any medium, which the Secured Party considers appropriate (including, without limitation, the verification of Collateral by use of a fictitious name), and the Debtor agrees to furnish all assistance and information, and perform any acts, which the Secured Party may require in connection therewith. The Debtor shall promptly notify -8- the Secured Party of any Collateral which the Debtor has determined to have been rendered obsolete, stating the prior book value of such Collateral, its type and location. (l) The Debtor shall comply in all material respects with the terms and conditions of all leases, easements, right-of-way agreements and other similar agreements binding upon the Debtor or affecting the Collateral or any part thereof, and all orders, ordinances, laws and statutes of any city, state or other governmental entity, department or agency having jurisdiction with respect to the premises wherein such Collateral is located or the conduct of business thereon. (m) The Debtor agrees to execute and deliver to the Secured Party such further agreements, assignments, instruments and documents and to do all such other things as the Secured Party may deem necessary or appropriate to assure the Secured Party its lien and security interest hereunder, including such financing statements, and amendments thereof or supplements thereto, and such other instruments and documents as the Secured Party may from time to time require in order to comply with the UCC. The Debtor hereby agrees that a carbon, photographic or other reproduction of this Agreement or any such financing statement is sufficient for filing as a financing statement by the Secured Party without notice thereof to the Debtor wherever the Secured Party in its sole discretion desires to file the same. In the event for any reason the law of any jurisdiction other than Illinois becomes or is applicable to the Collateral or any part thereof, or to any of the Obligations, the Debtor agrees to execute and deliver all such instruments and documents and to do all such other things as the Secured Party in its sole discretion deems necessary or appropriate to preserve, protect and enforce the lien and security interest of the Secured Party under the law of such other jurisdiction. The Debtor agrees to mark its books and records to reflect the lien and security interest of the Secured Party in the Collateral. (n) On failure of the Debtor to perform any of the covenants and agreements herein contained, the Secured Party may, at its option, perform the same and in so doing may expend such sums as the Secured Party may deem advisable in the performance thereof, including, without limitation, the payment of any insurance premiums, the payment of any taxes, liens and encumbrances, expenditures made in defending against any adverse claims, and all other expenditures which the Secured Party may be compelled to make by operation of law or which the Secured Party may make by agreement or otherwise for the protection of the security hereof. All such sums and amounts so expended shall be repayable by the Debtor immediately without notice or demand, shall constitute additional Obligations secured hereunder and shall bear interest from the date said amounts are expended at the rate per annum (computed on the basis of a 360-day year for the actual number of days elapsed) determined by adding 2% to the rate per annum from time to time announced by Harris Trust and Savings Bank as its prime commercial rate with any change in such rate per annum as so determined by reason of a change in such prime commercial rate to be effective on the date of such change in said prime commercial rate -9- (such rate per annum as so determined being hereinafter referred to as the "Default Rate"). No such performance of any covenant or agreement by the Secured Party on behalf of the Debtor, and no such advancement or expenditure therefor, shall relieve the Debtor of any default under the terms of this Agreement or in any way obligate the Secured Party to take any further or future action with respect thereto. The Secured Party, in making any payment hereby authorized, may do so according to any bill, statement or estimate procured from the appropriate public office or holder of the claim to be discharged without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax assessment, sale, forfeiture, tax lien or title or claim. The Secured Party, in performing any act hereunder, shall be the sole judge of whether the Debtor is required to perform same under the terms of this Agreement. The Secured Party is hereby authorized to charge any depository or other account of the Debtor maintained with the Secured Party for the amount of such sums and amounts so expended. 4. Special Provisions Re: Receivables. (a) As of the time any Receivable becomes subject to the security interest provided for hereby, and at all times thereafter, the Debtor shall be deemed to have warranted as to each and all of such Receivables that all warranties of the Debtor set forth in this Agreement are true and correct with respect to each such Receivable; that each Receivable and all papers and documents relating thereto are genuine and in all respects what they purport to be; that each Receivable is valid and subsisting and, if such Receivable is an account, arises out of a bona fide sale of goods sold and delivered by the Debtor to, or in the process of being delivered to, or out of and for services theretofore actually rendered by the Debtor to, the account debtor named therein; that no such Receivable is evidenced by any instrument or chattel paper unless such instrument or chattel paper has theretofore been endorsed by the Debtor and delivered to the Secured Party (except to the extent the Secured Party specifically requests the Debtor not to do so with respect to any such instrument or chattel paper); that no surety bond was required or given in connection with such Receivable or the contracts or purchase orders out of which the same arose; that the amount of the Receivable represented as owing is the correct amount actually and unconditionally owing, except for normal cash discounts on normal trade terms in the ordinary course of business if such Receivable is an account; and that the amount of such Receivable represented as owing is not disputed and is not subject to any set-offs, credits, deductions or countercharges other than those arising in the ordinary course of the Debtor's business which are disclosed to the Secured Party in writing promptly upon the Debtor becoming aware thereof. Without limiting the foregoing, if any Receivable arises out of a contract with the United States of America, or any state or political subdivision thereof, or any department, agency or instrumentality of any of the foregoing, the Debtor agrees to notify the Secured Party and execute whatever instruments and documents are required by the Secured Party in order that such Receivable shall be assigned to the Secured Party and that proper notice of such assignment shall -10- be given under the federal Assignment of Claims Act (or any successor statute) or any similar state or local statute, as the case may be. (b) Unless and until an Event of Default occurs, any merchandise or other goods which are returned by a customer or account debtor or otherwise recovered may be resold by the Debtor in the ordinary course of its business as presently conducted in accordance with Section 6(b) hereof; and, during the existence of any Event of Default, such merchandise and other goods shall be set aside at the request of the Secured Party and held by the Debtor as trustee for the Secured Party and shall remain part of the Secured Party's Collateral. Unless and until an Event of Default occurs, the Debtor may settle and adjust disputes and claims with its customers and account debtors, handle returns and recoveries and grant discounts, credits and allowances in the ordinary course of its business as presently conducted for amounts and on terms which the Debtor in good faith considers advisable; and, during the existence of any Event of Default, unless the Secured Party requests otherwise, the Debtor shall notify the Secured Party promptly of all returns and recoveries and, on the Secured Party's request, deliver any such merchandise or other goods to the Secured Party. During the existence of any Event of Default, unless the Secured Party requests otherwise, the Debtor shall also notify the Secured Party promptly of all disputes and claims and settle or adjust them at no expense to the Secured Party, but no discount, credit or allowance other than on normal trade terms in the ordinary course of business as presently conducted shall be granted to any customer or account debtor and no returns of merchandise or other goods shall be accepted by the Debtor without the Secured Party's consent. The Secured Party may, at all times during the existence of any Event of Default, settle or adjust disputes and claims directly with customers or account debtors for amounts and upon terms which the Secured Party considers advisable. 5. Collection of Receivables. (a) Except as otherwise provided in this Agreement, the Debtor shall make collection of all Receivables and may use the same to carry on its business in accordance with sound business practice and otherwise subject to the terms hereof. (b) Upon the occurrence of any Event of Default or of any event or condition which with the lapse of time or the giving of notice, or both, would constitute an Event of Default, whether or not the Secured Party has exercised any or all of its rights under other provisions of this Section 5, in the event the Secured Party requests the Debtor to do so: (i) all instruments and chattel paper at any time constituting part of the Receivables or any other Collateral (including any postdated checks) shall, upon receipt by the Debtor, be immediately endorsed to and deposited with the Secured Party; and/or -11- (ii) the Debtor shall instruct all customers and account debtors to remit all payments in respect of Receivables or any other Collateral to a lockbox or lockboxes under the sole custody and control of the Secured Party and which are maintained at post office(s) in Chicago, Illinois selected by the Secured Party. (c) Upon the occurrence of any Event of Default or of any event or condition which with the lapse of time or the giving of notice, or both, would constitute an Event of Default, whether or not the Secured Party has exercised any or all of its rights under other provisions of this Section 5, the Secured Party or its designee may notify the Debtor's customers and account debtors at any time that Receivables or any other Collateral have been assigned to the Secured Party or of the Secured Party's security interest therein, and either in its own name, or the Debtor's name, or both, demand, collect (including, without limitation, through a lockbox analogous to that described in Section 5(b)(ii) hereof), receive, receipt for, sue for, compound and give acquittance for any or all amounts due or to become due on Receivables or any other Collateral, and in the Secured Party's discretion file any claim or take any other action or proceeding which the Secured Party may deem necessary or appropriate to protect or realize upon the security interest of the Secured Party in the Receivables or any other Collateral. (d) Any proceeds of Receivables or other Collateral transmitted to or otherwise received by the Secured Party pursuant to any of the provisions of Sections 5(b) or 5(c) hereof may be handled and administered by the Secured Party in and through a remittance account at the Secured Party, and the Debtor acknowledges that the maintenance of such remittance account by the Secured Party is solely for the Secured Party's convenience and that the Debtor does not have any right, title or interest in such remittance account or any amounts at any time standing to the credit thereof. The Secured Party may, after the occurrence and during the continuation of any Event of Default or of any event or condition which with the lapse of time or the giving of notice, or both, would constitute an Event of Default, apply all or any part of any proceeds of Receivables or other Collateral received by it from any source to the payment of the Obligations (whether or not then due and payable), such applications to be made in such amounts, in such manner and order and at such intervals as the Secured Party may from time to time in its discretion determine, but not less often than once each week. The Secured Party need not apply or give credit for any item included in proceeds of Receivables or other Collateral until the Secured Party has received final payment therefor at its office in cash or final solvent credits current in Chicago, Illinois, acceptable to the Secured Party as such. However, if the Secured Party does give credit for any item prior to receiving final payment therefor and the Secured Party fails to receive such final payment or an item is charged back to the Secured Party for any reason, the Secured Party may at its election in either instance charge the amount of such item back against the remittance account or any depository account of the Debtor maintained with the Secured Party, together with interest thereon at the Default Rate. Concurrently with each transmission of any proceeds of Receivables or other Collateral to the remittance account, the -12- Debtor shall furnish the Secured Party with a report in such form as the Secured Party shall reasonably require identifying the particular Receivable or other Collateral from which the same arises or relates. The Debtor hereby indemnifies the Secured Party from and against all liabilities, damages, losses, actions, claims, judgments, costs, expenses, charges and reasonable attorneys' fees suffered or incurred by the Secured Party because of the maintenance of the foregoing arrangements; provided, however, that the Debtor shall not be required to indemnify the Secured Party for any of the foregoing to the extent they arise solely from the gross negligence or willful misconduct of the Secured Party. The Secured Party shall have no liability or responsibility to the Debtor for accepting any check, draft or other order for payment of money bearing the legend "payment in full" or words of similar import or any other restrictive legend or endorsement whatsoever or be responsible for determining the correctness of any remittance. 6. Special Provisions Re: Inventory and Equipment. (a) The Debtor shall at its own cost and expense maintain, keep and preserve the Inventory in good and merchantable condition and keep and preserve the Equipment in good repair, working order and condition, ordinary wear and tear excepted, and, without limiting the foregoing, make all necessary and proper repairs, replacements and additions to the Equipment so that the efficiency thereof shall be fully preserved and maintained. (b) The Debtor may, until an Event of Default has occurred and is continuing and thereafter until otherwise notified by the Secured Party, use, consume and sell the Inventory in the ordinary course of its business, but a sale in the ordinary course of business shall not under any circumstance include any transfer or sale in satisfaction, partial or complete, of a debt owing by the Debtor. (c) The Debtor may, until an Event of Default has occurred and is continuing and thereafter until otherwise notified by the Secured Party, sell obsolete, worn out or unusable Equipment which is concurrently replaced with similar Equipment at least equal in quality and condition to that sold and owned by the Debtor free of any lien, charge or encumbrance other than the security interest granted hereby. (d) As of the time any Inventory or Equipment becomes subject to the security interest provided for hereby and at all times thereafter, the Debtor shall be deemed to have warranted as to any and all of such Inventory and Equipment that all warranties of the Debtor set forth in this Agreement are true and correct with respect to such Inventory and Equipment; that all of such Inventory and Equipment is located at a location set forth pursuant to Section 3(b) hereof; and that, in the case of Inventory, such Inventory is new and unused and in good and -13- merchantable condition. The Debtor warrants and agrees that no Inventory is or will be consigned to any other person without the Secured Party's prior written consent. (e) Upon the Secured Party's request, the Debtor shall at its own cost and expense cause the lien of the Secured Party in and to any portion of the Collateral subject to a certificate of title law to be duly noted on such certificate of title or to be otherwise filed in such manner as is prescribed by law in order to perfect such lien and shall cause all such certificates of title and evidences of lien to be deposited with the Secured Party. (f) Except for Equipment from time to time located on the real estate described on Schedule B attached hereto and as otherwise disclosed to the Secured Party in writing, none of the Equipment is or will be attached to real estate in such a manner that the same may become a fixture. (g) If any of the Inventory is at any time evidenced by a document of title, such document shall be promptly delivered by the Debtor to the Secured Party except to the extent the Secured Party specifically requests the Debtor not to do so with respect to any such document. Section 7. Special Provisions Re: Investment Property. (a) Unless and until an Event of Default has occurred and is continuing and thereafter until notified to the contrary by the Secured Party pursuant to Section 9(d) hereof: (i) The Debtor shall be entitled to exercise all voting and/or consensual powers pertaining to the Investment Property or any part thereof, for all purposes not inconsistent with the terms of this Agreement or any other document evidencing or otherwise relating to any Obligations; and (ii) The Debtor shall be entitled to receive and retain all cash dividends paid upon or in respect of the Investment Property. (b) At the Secured Party's request, certificates for all securities now or at any time constituting Investment Property shall be promptly delivered by the Debtor to the Secured Party duly endorsed in blank for transfer or accompanied by an appropriate assignment or assignments or an appropriate undated stock power or powers, in every case sufficient to transfer title thereto including, without limitation, all stock received in respect of a stock dividend or resulting from a split-up, revision or reclassification of the Investment Property or any part thereof or received in addition to, in substitution of or in exchange for the Investment Property or any part thereof as a result of a merger, consolidation or otherwise. With respect to any Investment Property held by a securities intermediary, commodity intermediary, or other financial intermediary of any kind, at -14- the Secured Party's request, the Debtor shall execute and deliver, and shall cause any such intermediary to execute and deliver, an agreement among the Debtor, the Secured Party, and such intermediary in form and substance reasonably satisfactory to the Secured Party which provides, among other things, for the intermediary's agreement that it shall comply with entitlement orders, and apply any value distributed on account of any Investment Property maintained in an account with such intermediary, as directed by the Secured Party without further consent by the Debtor at any time after the occurrence and during the continuation of any Event of Default. The Secured Party may at any time, after the occurrence of an Event of Default or an event or condition which with the lapse of time or the giving of notice, or both, would constitute an Event of Default, cause to be transferred into its name or the name of its nominee or nominees all or any part of the Investment Property hereunder. (c) Unless and until an Event of Default has occurred and is continuing, the Debtor may sell or otherwise dispose of any Investment Property, provided that the Debtor shall not sell or otherwise dispose of any capital stock of any direct or indirect subsidiary without the prior written consent of the Secured Party. After the occurrence and during the continuation of any Event of Default, the Debtor shall not sell all or any part of the Investment Property without the prior written consent of the Secured Party. (d) The Debtor represents that on the date of this Agreement, none of the Investment Property consists of margin stock (as such term is defined in Regulation U of the Board of Governors of the Federal Reserve System) except to the extent the Debtor has delivered to the Secured Party a duly executed and completed Form U-1 with respect to such stock. If at any time the Investment Property or any part thereof consists of margin stock, the Debtor shall promptly so notify the Secured Party and deliver to the Secured Party a duly executed and completed Form U-1 and such other instruments and documents reasonably requested by the Secured Party in form and substance satisfactory to the Secured Party. (e) Notwithstanding anything to the contrary contained herein, in the event any Investment Property is subject to the terms of a separate security agreement in favor of the Secured Party, the terms of such separate security agreement shall govern and control unless otherwise agreed to in writing by the Secured Party. Section 8. Power of Attorney. In addition to any other powers of attorney contained herein, the Debtor hereby appoints the Secured Party, its nominee, and any other person whom the Secured Party may designate, as the Debtor's attorney-in-fact, with full power to sign the Debtor's name on verifications of accounts and other Collateral; to send requests for verification of Collateral to the Debtor's customers, account debtors and other obligors; to endorse the Debtor's name on any checks, notes, acceptances, money orders, drafts and any other forms of payment or security that may come into the Secured Party's possession or on any assignments, stock powers, or other instruments of transfer relating to the Collateral or any part -15- thereof; to sign the Debtor's name on any invoice or bill of lading relating to any Collateral, on claims to enforce collection of any Collateral, on notices to and drafts against customers and account debtors and other obligors, on schedules and assignments of Collateral, on notices of assignment and on public records; to notify the post office authorities to change the address for delivery of the Debtor's mail to an address designated by the Secured Party; to receive, open and dispose of all mail addressed to the Debtor; and to do all things necessary to carry out this Agreement. The Debtor hereby ratifies and approves all acts of any such attorney and agrees that neither the Secured Party nor any such attorney will be liable for any acts or omissions nor for any error of judgment or mistake of fact or law other than such person's gross negligence or willful misconduct. The Secured Party may file one or more financing statements disclosing its security interest in any or all of the Collateral without the Debtor's signature appearing thereon. The Debtor also hereby grants the Secured Party a power of attorney to execute any such financing statements, or amendments and supplements to financing statements, on behalf of the Debtor without notice thereof to the Debtor. The foregoing powers of attorney, being coupled with an interest, are irrevocable until the Obligations have been fully paid and satisfied and all agreements of the Secured Party to extend credit to or for the account of the Borrower have expired or otherwise have been terminated; provided, however, that the Secured Party agrees, as a personal covenant to the Debtor, not to exercise the powers of attorney set forth in this Section unless an Event of Default exists. 9. Defaults and Remedies. (a) The occurrence of any one or more of the following events shall constitute an "Event of Default" hereunder: (i) default in the payment when due (whether by demand, lapse of time, acceleration or otherwise) of the Obligations or any part thereof; or (ii) default in the observance or performance of any covenant set forth in Sections 5(b), 5(c) or 7(b) hereof or of any provision hereof requiring the maintenance of insurance on the Collateral or dealing with the use or remittance of proceeds of Collateral; or (iii) the occurrence of any event or the existence of any condition which is specified as an "Event of Default" under the Credit Agreement. (b) Upon the occurrence and during the continuation of any Event of Default, the Secured Party shall have, in addition to all other rights provided herein or by law, the rights and remedies of a secured party under the UCC (regardless of whether the UCC is the law of the jurisdiction where the rights or remedies are asserted and regardless of whether the UCC applies -16- to the affected Collateral), and further the Secured Party may, without demand and without advertisement, notice, hearing or process of law, all of which the Debtor hereby waives, at any time or times, sell and deliver all or any part of the Collateral (and any other property of the Debtor attached thereto or found therein) held by or for it at public or private sale, for cash, upon credit or otherwise, at such prices and upon such terms as the Secured Party deems advisable, in its sole discretion. In addition to all other sums due the Secured Party hereunder, the Debtor shall pay the Secured Party all costs and expenses incurred by the Secured Party, including reasonable attorneys' fees and court costs, in obtaining, liquidating or enforcing payment of Collateral or the Obligations or in the prosecution or defense of any action or proceeding by or against the Secured Party or the Debtor concerning any matter arising out of or connected with this Agreement or the Collateral or the Obligations, including, without limitation, any of the foregoing arising in, arising under or related to a case under the United States Bankruptcy Code (or any successor statute). Any requirement of reasonable notice shall be met if such notice is personally served on or mailed, postage prepaid, to the Debtor in accordance with Section 12(b) hereof at least 10 days before the time of sale or other event giving rise to the requirement of such notice; provided however, no notification need be given to the Debtor if the Debtor has signed, after an Event of Default has occurred, a statement renouncing any right to notification of sale or other intended disposition. The Secured Party shall not be obligated to make any sale or other disposition of the Collateral regardless of notice having been given. The Secured Party may be the purchaser at any such sale. The Debtor hereby waives all of its rights of redemption from any such sale. The Secured Party may postpone or cause the postponement of the sale of all or any portion of the Collateral by announcement at the time and place of such sale, and such sale may, without further notice, be made at the time and place to which the sale was postponed or the Secured Party may further postpone such sale by announcement made at such time and place. (c) Without in any way limiting the foregoing, upon the occurrence and during the continuation of any Event of Default, the Secured Party shall have the right, in addition to all other rights provided herein or by law, to take physical possession of any and all of the Collateral and anything found therein, the right for that purpose to enter without legal process any premises where the Collateral may be found (provided such entry be done lawfully), and the right to maintain such possession on the Debtor's premises (the Debtor hereby agreeing to lease such premises without cost or expense to the Secured Party or its designee if the Secured Party so requests) or to remove the Collateral or any part thereof to such other places as the Secured Party may desire. Upon the occurrence and during the continuation of any Event of Default, the Secured Party shall have the right to exercise any and all rights with respect to deposit accounts of the Debtor maintained with the Secured Party, including, without limitation, the right to collect, withdraw and receive all amounts due or to become due or payable under each such deposit account. Upon the occurrence and during the continuation of any Event of Default, the Debtor shall, upon the Secured Party's demand, assemble the Collateral and make it available to -17- the Secured Party at a place designated by the Secured Party. If the Secured Party exercises its right to take possession of the Collateral, the Debtor shall also at its expense perform any and all other steps requested by the Secured Party to preserve and protect the security interest hereby granted in the Collateral, such as placing and maintaining signs indicating the security interest of the Secured Party, appointing overseers for the Collateral and maintaining Collateral records. (d) Without in any way limiting the foregoing, upon the occurrence and during the continuation of any Event of Default, all rights of the Debtor to exercise the voting and/or consensual powers which it is entitled to exercise pursuant to Section 7(a)(i) hereof and/or to receive and retain the distributions which it is entitled to receive and retain pursuant to Section 7(a)(ii) hereof, shall, at the option of the Secured Party, cease and thereupon become vested in the Secured Party, which, in addition to all other rights provided herein or by law, shall then be entitled solely and exclusively to exercise all voting and other consensual powers pertaining to the Investment Property and/or to receive and retain the distributions which the Debtor would otherwise have been authorized to retain pursuant to Section 7(a)(ii) hereof and shall then be entitled solely and exclusively to exercise any and all rights of conversion, exchange or subscription or any other rights, privileges or options pertaining to any Investment Property as if the Secured Party were the absolute owner thereof. Without limiting the foregoing, the Secured Party shall have the right to exchange, at its discretion, any and all of the Investment Property upon the merger, consolidation, reorganization, recapitalization or other readjustment of the respective issuer thereof or upon the exercise by or on behalf of any such issuer or the Secured Party of any right, privilege or option pertaining to any Investment Property and, in connection therewith, to deposit and deliver any and all of the Investment Property with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Secured Party may determine. In the event the Secured Party in good faith believes any of the Collateral constitutes restricted securities within the meaning of any applicable securities laws, any disposition thereof in compliance with such laws shall not render the disposition commercially unreasonable. (e) Without in any way limiting the foregoing, the Debtor hereby grants to the Secured Party a royalty-free irrevocable license and right to use all of the Debtor's patents, patent applications, patent licenses, trademarks, trademark registrations, trademark licenses, trade names, trade styles, copyrights, copyright applications, copyright licenses, and similar intangibles in connection with any foreclosure or other realization by the Secured Party on all or any part of the Collateral. The license and right granted the Secured Party hereby shall be without any royalty or fee or charge whatsoever. (f) The powers conferred upon the Secured Party hereunder are solely to protect its interest in the Collateral and shall not impose on it any duty to exercise such powers. The Secured Party shall be deemed to have exercised reasonable care in the custody and preservation -18- of Investment Property in its possession if such Collateral is accorded treatment substantially equivalent to that which the Secured Party accords its own property, consisting of similar type assets, it being understood, however, that the Secured Party shall have no responsibility for ascertaining or taking any action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any such Collateral, whether or not the Secured Party has or is deemed to have knowledge of such matters. This Agreement constitutes an assignment of rights only and not an assignment of any duties or obligations of the Debtor in any way related to the Collateral, and the Secured Party shall have no duty or obligation to discharge any such duty or obligation. The Secured Party shall have no responsibility for taking any necessary steps to preserve rights against any parties with respect to any Collateral or initiating any action to protect the Collateral against the possibility of a decline in market value. Neither the Secured Party nor any party acting as attorney for the Secured Party shall be liable for any acts or omissions or for any error of judgment or mistake of fact or law other than their gross negligence or willful misconduct. (g) Failure by the Secured Party to exercise any right, remedy or option under this Agreement or any other agreement between the Debtor and the Secured Party or provided by law, or delay by the Secured Party in exercising the same, shall not operate as a waiver; and no waiver by the Secured Party shall be effective unless it is in writing and then only to the extent specifically stated. The rights and remedies of the Secured Party under this Agreement shall be cumulative and not exclusive of any other right or remedy which the Secured Party may have. For purposes of this Agreement, an Event of Default shall be construed as continuing after its occurrence until the same is waived in writing by the Secured Party. 10. Application of Proceeds. The proceeds and avails of the Collateral at any time received by the Secured Party after the occurrence and during the continuation of any Event of Default shall, when received by the Secured Party in cash or its equivalent, be applied by the Secured Party as follows: (i) First, to the payment and satisfaction of all sums paid and costs and expenses incurred by the Secured Party hereunder or otherwise in connection herewith, including such monies paid or incurred in connection with protecting, preserving or realizing upon the Collateral or enforcing any of the terms hereof, including reasonable attorneys' fees and court costs, together with any interest thereon (but without preference or priority of principal over interest or of interest over principal), to the extent the Secured Party is not reimbursed therefor by the Debtor; and (ii) Second, to the payment and satisfaction of the remaining Obligations, whether or not then due (in whatever order the Secured Party elects), both for interest and principal. -19- The Debtor shall remain liable to the Secured Party for any deficiency. Any surplus remaining after the full payment and satisfaction of the foregoing shall be returned to the Debtor or to whomsoever the Secured Party reasonably determines is lawfully entitled thereto. 11. Continuing Agreement. This Agreement shall be a continuing agreement in every respect and shall remain in full force and effect until all of the Obligations, both for principal and interest, have been fully paid and satisfied and all agreements of the Secured Party to extend credit to or for the account of the Borrower have expired or otherwise have been terminated. Upon such termination of this Agreement, the Secured Party shall, upon the request and at the expense of the Debtor, forthwith release its security interest hereunder. 12. Miscellaneous. (a) This Agreement cannot be changed or terminated orally. All of the rights, privileges, remedies and options given to the Secured Party hereunder shall inure to the benefit of its successors and assigns, and all the terms, conditions, covenants, agreements, representations and warranties of and in this Agreement shall bind the Debtor and its legal representatives, successors and assigns, provided that the Debtor may not assign its rights or delegate its duties hereunder without the Secured Party's prior written consent. (b) Except as otherwise specified herein, all notices hereunder shall be in writing (including, without limitation, notice by telecopy) and shall be given to the relevant party at its address or telecopier number set forth below (or, if no such address is set forth below, at the address of the Debtor as shown on the records of the Secured Party), or such other address or telecopier number as such party may hereafter specify by notice to the other given by United States certified or registered mail, by telecopy or by other telecommunication device capable of creating a written record of such notice and its receipt. Notices hereunder shall be addressed: to the Debtor at: to the Secured Party at: HealthStar, Inc. Harris Trust and Savings Bank 9495 East San Salvador Drive 111 West Monroe Street Scottsdale, Arizona 85258 Chicago, Illinois 60690 Attention: Stephen Carder, Attention: Christopher Randall, Chief Financial Officer Tax-Exempt Institutions Division Telephone: (602) 614-4285 Telephone: (312) 461-5068 Telecopy: (602) 451-9087 Telecopy: (312) 461-7365 with a copy to: HealthStar, Inc. 8745 West Higgins Road -20- Suite 300 Chicago, Illinois 60631 Attention: Controller Each such notice, request or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopier number specified in this Section and a confirmation of such telecopy has been received by the sender, (ii) if given by mail, five (5) days after such communication is deposited in the mail, certified or registered with return receipt requested, addressed as aforesaid or (iii) if given by any other means, when delivered at the addresses specified in this Section. (c) The lien and security herein created and provided for stand as direct and primary security for the Obligations. No application of any sums received by the Bank in respect of the Collateral or any disposition thereof to the reduction of the Obligations or any portion thereof shall in any manner entitle the Debtor to any right, title or interest in or to the Obligations or any collateral security therefor, whether by subrogation or otherwise, unless and until all Obligations have been fully paid and satisfied and any commitment of the Bank to extend credit to the Borrower shall have expired. The Debtor acknowledges and agrees that the lien and security hereby created and provided for are absolute and unconditional and shall not in any manner be affected or impaired by any acts or omissions whatsoever of the Bank or any other holder of any of the Obligations, and without limiting the generality of the foregoing, the lien and security hereof shall not be impaired by any acceptance by the Bank or any holder of any of the Obligations of any other security for or guarantors upon any of the Obligations or by any failure, neglect or omission on the part of the Bank or any other holder of any of the Obligations to realize upon or protect any of the Obligations or any collateral security therefor. The lien and security hereof shall not in any manner be impaired or affected by (and the Bank, without notice to anyone, is hereby authorized to make from time to time) any sale, pledge, surrender, compromise, settlement, release, renewal, extension, indulgence, alteration, substitution, exchange, change in, modification or disposition of any of the Obligations, or of any collateral security therefor, or of any guaranty thereof or of any obligor thereon. The Bank may at its discretion at any time grant credit to the Borrower without notice to the Debtor in such amounts and on such terms as the Bank may elect (all of such to constitute additional Obligations) without in any manner impairing the lien and security hereby created and provided for. In order to foreclose or otherwise realize hereon and to exercise the rights granted the Bank hereunder and under applicable law, there shall be no obligation on the part of the Bank or any other holder of any of the Obligations at any time to first resort for payment to the Borrower or to any guaranty of the Obligations or any portion thereof or to resort to any other collateral security, property, liens or any other rights or remedies whatsoever, and the Bank shall have the right to enforce this instrument irrespective of whether or not other proceedings or steps are pending seeking resort to or realization upon or from any of the foregoing. -21- (d) In the event and to the extent that any provision hereof shall be deemed to be invalid or unenforceable by reason of the operation of any law or by reason of the interpretation placed thereon by any court, this Agreement shall to such extent be construed as not containing such provision, but only as to such locations where such law or interpretation is operative, and the invalidity or unenforceability of such provision shall not affect the validity of any remaining provisions hereof, and any and all other provisions hereof which are otherwise lawful and valid shall remain in full force and effect. (e) This Agreement shall be deemed to have been made in the State of Illinois and shall be governed by, and construed in accordance with, the laws of the State of Illinois. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning of any provision hereof. (f) The Debtor acknowledges that this Agreement is and shall be effective upon its execution and delivery by the Debtor to the Secured Party, and it shall not be necessary for the Secured Party to execute this Agreement or any other acceptance hereof or otherwise to signify or express its acceptance hereof. (g) The Debtor hereby submits to the non-exclusive jurisdiction of the United States District Court for the Northern District of Illinois and of any Illinois state court sitting in the City of Chicago for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Debtor irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient form. THE DEBTOR AND THE SECURED PARTY EACH HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. -22- IN WITNESS WHEREOF, the Debtor has caused this Agreement to be duly executed and delivered as of this 15th day of December, 1997. HEALTHSTAR, INC. By /s/ Stephen J Carder Its Executive Vice President -23- EX-10.3.5 6 SECURITY AGREEMENT EXHIBIT 10.35 SECURITY AGREEMENT This Security Agreement (the "Agreement") is dated as of December 15, 1997, between NATIONAL HEALTH BENEFIT & CASUALTY CORPORATION, a Nevada corporation (the "Debtor"), with its mailing address as set forth in Section 12(b) hereof, and HARRIS TRUST AND SAVINGS BANK, an Illinois banking corporation (the "Secured Party"), with its mailing address as set forth in Section 12(b) hereof. PRELIMINARY STATEMENT A. The Champion Financial Corporation, a Utah corporation (the "Borrower"), has requested that the Secured Party extend credit or otherwise make financial accommodations available to or for the account of the Borrower. B. As a condition to extending credit or otherwise making financial accommodations available to or for the account of the Borrower, the Secured Party requires, among other things, that the Debtor guarantee all of the indebtedness, obligations, and liabilities of the Borrower to the Bank and grant the Secured Party a security interest in the Debtor's personal property described herein subject to the terms and conditions hereof. C. The Borrower owns, directly or indirectly, all or substantially all of the equity interests in the Debtor and the Borrower provides the Debtor with financial, management, administrative, and technical support which enables the Debtor to conduct its business in an orderly and efficient manner in the ordinary course. D. The Debtor will benefit, directly or indirectly, from credit and other financial accommodations extended by the Bank to the Borrower. NOW, THEREFORE, in consideration of the benefits accruing to the Debtor, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Grant of Security Interest. The Debtor hereby grants to the Secured Party a lien on and security interest in, and acknowledges and agrees that the Secured Party has and shall continue to have a continuing lien on and security interest in, any and all right, title and interest of the Debtor, whether now owned or existing or hereafter created, acquired or arising, in and to the following: (a) Receivables. All Receivables, whether now owned or existing or hereafter created, acquired or arising, and however evidenced or acquired, or in which the Debtor now has or hereafter acquires any rights (the term "Receivables" means and includes all accounts, accounts receivable, contract rights, instruments, notes, drafts, acceptances, documents, chattel paper, and all other forms of obligations owing to the Debtor, any right of the Debtor to payment for goods sold or leased or for services rendered, whether or not earned by performance, and all of the Debtor's rights to any merchandise and other goods (including, without limitation, any returned or repossessed goods and the right of stoppage in transit) which is represented by, arises from or is related to any of the foregoing); (b) General Intangibles. All General Intangibles, whether now owned or existing or hereafter created, acquired or arising, or in which the Debtor now has or hereafter acquires any rights (the term "General Intangibles" means and includes all general intangibles, patents, patent applications, patent licenses, trademarks, trademark registrations, trademark licenses, trade styles, trade names, copyrights, copyright registrations, copyright licenses and other licenses and similar intangibles, all customer, client and supplier lists (in whatever form maintained), all rights in leases and other agreements relating to real or personal property, all causes of action and tax refunds of every kind and nature, all privileges, franchises, immunities, licenses, permits and similar intangibles, all rights to receive payments in connection with the termination of any pension plan or employee stock ownership plan or trust established for the benefit of employees of the Debtor, and all other personal property (including things in action) not otherwise covered by this Agreement); (c) Inventory. All Inventory, whether now owned or existing or hereafter created, acquired or arising, or in which the Debtor now has or hereafter acquires any rights, and all documents of title at any time evidencing or representing any part thereof (the term "Inventory" means and includes all inventory and any other goods which are held for sale or lease or are to be furnished under contracts of service or consumed in the Debtor's business, all goods which are raw materials, work-in-process or finished goods, all goods which are returned or repossessed goods, and all materials and supplies of every kind and nature used or usable in connection with the acquisition, manufacture, processing, supply, servicing, storing, packing, shipping, advertising, selling, leasing or furnishing of the foregoing, and any constituents or ingredients thereof; -2- (d) Equipment. All Equipment, whether now owned or existing or hereafter created, acquired or arising, or in which the Debtor now has or hereafter acquires any rights (the term "Equipment" means and includes all equipment and any other machinery, tools, fixtures, trade fixtures, furniture, furnishings, office equipment, vehicles (including vehicles subject to a certificate of title law), and all other goods now or hereafter used or usable in connection with the Debtor's business, together with all parts, accessories and attachments relating to any of the foregoing); (e) Investment Property. All Investment Property, whether now owned or existing or hereafter created, acquired or arising, or in which the Debtor now has or hereafter acquires any rights (the term "Investment Property" means and includes all investment property and any other securities (whether certificated or uncertificated), security entitlements, securities accounts, commodity contracts and commodity accounts, including all substitutions and additions thereto, all dividends, distributions and sums distributable or payable from, upon, or in respect of such property, and all rights and privileges incident to such property); (f) Deposits and Property in Possession. All deposit accounts (whether general, special or otherwise) of the Debtor maintained with the Secured Party and all sums now or hereafter on deposit therein or payable thereon, and all other personal property and interests in personal property of the Debtor of any kind or description now held by the Secured Party or at any time hereafter transferred or delivered to, or coming into the possession, custody or control of, the Secured Party, or any agent or affiliate of the Secured Party, whether expressly as collateral security or for any other purpose (whether for safekeeping, custody, collection or otherwise), and all dividends and distributions on or other rights in connection with any such property, in each case whether now owned or existing or hereafter created, acquired or arising; (g) Records. All supporting evidence and documents relating to any of the above-described property, whether now owned or existing or hereafter created, acquired or arising, including, without limitation, computer programs, disks, tapes and related electronic data processing media, and all rights of the Debtor to retrieve the same from third parties, written applications, credit information, account cards, payment records, correspondence, delivery and installation certificates, invoice copies, delivery receipts, notes and other evidences of indebtedness, insurance certificates and the like, together with all books of account, ledgers and cabinets in which the same are reflected or maintained; -3- (h) Accessions and Additions. All accessions and additions to, and substitutions and replacements of, any and all of the foregoing, whether now owned or existing or hereafter created, acquired or arising; and (i) Proceeds and Products. All proceeds and products of the foregoing and all insurance of the foregoing and proceeds thereof, whether now owned or existing or hereafter created, acquired or arising; all of the foregoing being herein sometimes referred to as the "Collateral". All terms which are used in this Agreement which are defined in the Uniform Commercial Code of the State of Illinois ("UCC") shall have the same meanings herein as such terms are defined in the UCC, unless this Agreement shall otherwise specifically provide. 2. Obligations Hereby Secured. The lien and security interest herein granted and provided for is made and given to secure, and shall secure, the payment and performance of (a) any and all indebtedness, obligations and liabilities of whatsoever kind and nature of the Debtor to the Secured Party (whether arising before or after the filing of a petition in bankruptcy), whether direct or indirect, absolute or contingent, due or to become due, and whether now existing or hereafter arising and howsoever held, evidenced or acquired, and whether several, joint or joint and several, (b) any and all indebtedness, obligations and liabilities of whatsoever kind and nature of the Borrower to the Secured Party (whether arising before or after the filing of a petition in bankruptcy), whether direct or indirect, absolute or contingent, due or to become due, and whether now existing or hereafter arising and howsoever held, evidenced or acquired, and whether several, joint or joint and several and (c) any and all expenses and charges, legal or otherwise, suffered or incurred by the Secured Party in collecting or enforcing any of such indebtedness, obligations or liabilities or in realizing on or protecting or preserving any security therefor, including, without limitation, the lien and security interest granted hereby (all of the foregoing being hereinafter referred to as the "Obligations"). Notwithstanding anything herein to the contrary, the right of recovery hereunder against the Debtor with respect to the Obligations shall be limited to $1 less than the amount of the lowest claim hereunder against the Collateral which would render this Agreement void or voidable under applicable law. 3. Covenants, Agreements, Representations and Warranties. The Debtor hereby covenants and agrees with, and represents and warrants to, the Secured Party that: (a) The Debtor is a corporation duly organized and validly existing in good standing under the laws of the State of Nevada, is the sole and lawful owner of the Collateral, and has full right, power and authority to enter into this Agreement and to perform each and all of the matters and things herein provided for. The execution and delivery of this Agreement, and the observance and performance of each of the matters and things herein set forth, will not -4- (i) contravene or constitute a default under any provision of law or any judgment, injunction, order or decree binding upon the Debtor or any provision of the Debtor's articles of incorporation or by-laws or any covenant, indenture or agreement of or affecting the Debtor or any of its property or (ii) result in the creation or imposition of any lien or encumbrance on any property of the Debtor except for the lien and security interest granted to the Secured Party hereunder. The Debtor's Federal tax identification number is 86-0831112. (b) The Debtor's chief executive office and principal place of business is at, and the Debtor keeps and shall keep all of its books and records relating to Receivables only at, 9495 East San Salvador Drive, Scottsdale, Arizona 85258; and the Debtor has no other executive offices or places of business other than those listed under Item 1 on Schedule A. The Collateral is and shall remain in the Debtor's possession or control at the locations listed under Item 2 on Schedule A attached hereto (collectively, the "Permitted Collateral Locations"). If for any reason any Collateral is at any time kept or located at a location other than a Permitted Collateral Location, the Secured Party shall nevertheless have and retain a lien on and security interest therein. The Debtor owns and shall at all times own all Permitted Collateral Locations, except to the extent otherwise disclosed under Item 2 on Schedule A. The Debtor shall not move its chief executive office or maintain a place of business at a location other than those specified under Item 1 on Schedule A or permit the Collateral to be located at a location other than those specified under Item 2 on Schedule A, in each case without first providing the Secured Party 30 days' prior written notice of the Debtor's intent to do so; provided that the Debtor shall at all times maintain its chief executive office and, unless otherwise specifically agreed to in writing by the Secured Party, Permitted Collateral Locations in the United States of America and, with respect to any new chief executive office or place of business or location of Collateral, the Debtor shall have taken all action requested by the Secured Party to maintain the lien and security interest of the Secured Party in the Collateral at all times fully perfected and in full force and effect. (c) The Debtor has not invoiced Receivables or otherwise transacted business at any time during the immediately preceding five-year period, and does not currently invoice Receivables or otherwise transact business, under any trade names other than the Debtor's name set forth in the introductory paragraph of this Agreement. The Debtor shall not change its name or transact business under any other trade name without first giving 30 days' prior written notice of its intent to do so to the Secured Party. (d) The Collateral and every part thereof is and shall be free and clear of all security interests, liens (including, without limitation, mechanics', laborers' and statutory liens), attachments, levies and encumbrances of every kind, nature and description, whether voluntary or involuntary, except for the lien and security interest of the Secured Party therein and as otherwise permitted by Section 8.10 of that certain Credit Agreement dated as of even date -5- herewith between the Borrower and the Secured Party, as the same may be amended or modified from time to time, including amendments and restatements of the same in its entirety (hereinafter, the "Credit Agreement"). The Debtor shall warrant and defend the Collateral against any claims and demands of all persons at any time claiming the same or any interest in the Collateral adverse to the Secured Party. (e) The Debtor shall promptly pay when due all taxes, assessments and governmental charges and levies upon or against the Debtor or any of the Collateral, in each case before the same become delinquent and before penalties accrue thereon, unless and to the extent that the same are being contested in good faith by appropriate proceedings which prevent foreclosure or other realization upon any of the Collateral and preclude interference with the operation of the Debtor's business in the ordinary course, and the Debtor shall have established adequate reserves therefor. (f) The Debtor shall not use, manufacture, sell or distribute any Collateral in violation of any statute, ordinance or other governmental requirement. The Debtor shall not waste or destroy the Collateral or any part thereof or be negligent in the care or use of any Collateral. The Debtor shall perform in all material respects its obligations under any contract or other agreement constituting part of the Collateral, it being understood and agreed that the Secured Party has no responsibility to perform such obligations. (g) Subject to Sections 4(b), 6(b), 6(c), and 7(c) hereof, the Debtor shall not, without the Secured Party's prior written consent, sell, assign, mortgage, lease or otherwise dispose of the Collateral or any interest therein. (h) The Debtor shall at all times insure the Collateral consisting of tangible personal property against such risks and hazards as other persons similarly situated insure against, and including in any event loss or damage by fire, theft, burglary, pilferage, loss in transit and such other hazards as the Secured Party may specify. All insurance required hereby shall be maintained in amounts and under policies and with insurers reasonably acceptable to the Secured Party, and all such policies shall contain loss payable clauses naming the Secured Party as loss payee as its interest may appear (and, if the Secured Party requests, naming the Secured Party as an additional insured therein) in a form acceptable to the Secured Party. All premiums on such insurance shall be paid by the Debtor. Certificates of insurance evidencing compliance with the foregoing and, at the Secured Party's request, the policies of such insurance shall be delivered by the Debtor to the Secured Party. All insurance required hereby shall provide that any loss shall be payable to the Secured Party notwithstanding any act or negligence of the Debtor, shall provide that no cancellation thereof shall be effective until at least 30 days after receipt by the Debtor and the Secured Party of written notice thereof, and shall be satisfactory to the Secured Party in all other respects. In case of any material loss, damage to or destruction of the Collateral -6- or any part thereof, the Debtor shall promptly give written notice thereof to the Secured Party generally describing the nature and extent of such damage or destruction. In case of any loss, damage to or destruction of the Collateral or any part thereof, the Debtor, whether or not the insurance proceeds, if any, received on account of such damage or destruction shall be sufficient for that purpose, at the Debtor's cost and expense, shall promptly repair or replace the Collateral so lost, damaged or destroyed, except to the extent such Collateral, prior to its loss, damage or destruction, had become uneconomical, obsolete or worn out and is not necessary for or of importance to the proper conduct of the Debtor's business in the ordinary course. In the event the Debtor shall receive any proceeds of such insurance, the Debtor shall immediately pay over such proceeds to the Secured Party. The Debtor hereby authorizes the Secured Party, at the Secured Party's option, to adjust, compromise and settle any losses under any insurance afforded at any time during the existence of any Event of Default or any other event or condition which with the lapse of time or the giving of notice, or both, would constitute an Event of Default, and the Debtor does hereby irrevocably constitute the Secured Party, and each of its nominees, officers, agents, attorneys, and any other person whom the Secured Party may designate, as the Debtor's attorneys-in-fact, with full power and authority to effect such adjustment, compromise and/or settlement and to endorse any drafts drawn by an insurer of the Collateral or any part thereof and to do everything necessary to carry out such purposes and to receive and receipt for any unearned premiums due under policies of such insurance. Unless the Secured Party elects to adjust, compromise or settle losses as aforesaid, any adjustment, compromise and/or settlement of any losses under any insurance shall be made by the Debtor subject to final approval of the Secured Party (regardless of whether or not an Event of Default shall have occurred) in the case of losses exceeding $100,000. Net insurance proceeds received by the Secured Party under the provisions hereof or under any policy of insurance covering the Collateral or any part thereof shall be applied to the reduction of the Obligations (whether or not then due); provided, however, that the Secured Party may in its sole discretion release any or all such insurance proceeds to the Debtor. All insurance proceeds shall be subject to the lien and security interest of the Secured Party hereunder. UNLESS THE DEBTOR PROVIDES THE SECURED PARTY WITH EVIDENCE OF THE INSURANCE COVERAGE REQUIRED BY THIS AGREEMENT, THE SECURED PARTY MAY PURCHASE INSURANCE AT THE DEBTOR'S EXPENSE TO PROTECT THE SECURED PARTY'S INTERESTS IN THE COLLATERAL. THIS INSURANCE MAY, BUT NEED NOT, PROTECT THE DEBTOR'S INTERESTS IN THE COLLATERAL. THE COVERAGE PURCHASED BY THE SECURED PARTY MAY NOT PAY ANY CLAIMS THAT THE DEBTOR MAKES OR ANY CLAIM THAT IS MADE AGAINST THE DEBTOR IN CONNECTION WITH THE COLLATERAL. THE DEBTOR MAY LATER CANCEL ANY SUCH INSURANCE PURCHASED BY THE SECURED PARTY, BUT ONLY AFTER PROVIDING THE SECURED PARTY WITH EVIDENCE THAT THE DEBTOR HAS OBTAINED INSURANCE AS REQUIRED BY THIS AGREEMENT. IF THE SECURED PARTY PURCHASES INSURANCE FOR THE COLLATERAL, THE DEBTOR WILL BE RESPONSIBLE FOR THE COSTS OF THAT INSURANCE, INCLUDING INTEREST -7- AND ANY OTHER CHARGES THAT THE SECURED PARTY MAY IMPOSE IN CONNECTION WITH THE PLACEMENT OF THE INSURANCE, UNTIL THE EFFECTIVE DATE OF THE CANCELLATION OR EXPIRATION OF THE INSURANCE. THE COSTS OF THE INSURANCE MAY BE ADDED TO THE OBLIGATIONS SECURED HEREBY. THE COSTS OF THE INSURANCE MAY BE MORE THAN THE COST OF INSURANCE THE DEBTOR MAY BE ABLE TO OBTAIN ON ITS OWN. (i) The Debtor shall at all times allow the Secured Party and its representatives free access to and right of inspection of the Collateral. (j) If any Collateral is in the possession or control of any of the Debtor's agents or processors and the Secured Party so requests, the Debtor agrees to notify such agents or processors in writing of the Secured Party's security interest therein and instruct them to hold all such Collateral for the Secured Party's account and subject to the Secured Party's instructions. The Debtor shall, upon the request of the Secured Party, authorize and instruct all bailees and other parties, if any, at any time processing, labeling, packaging, holding, storing, shipping or transferring all or any part of the Collateral to permit the Secured Party and its representatives to examine and inspect any of the Collateral then in such party's possession and to verify from such party's own books and records any information concerning the Collateral or any part thereof which the Secured Party or its representatives may seek to verify. As to any premises not owned by the Debtor wherein any of the Collateral is located, the Debtor shall, unless the Secured Party requests otherwise, cause each party having any right, title or interest in, or lien on, any of such premises to enter into an agreement (any such agreement to contain a legal description of such premises) whereby such party disclaims any right, title and interest in, and lien on, the Collateral and allows the removal of such Collateral by the Secured Party and is otherwise in form and substance acceptable to the Secured Party; provided, however, that no such agreement need be obtained with respect to any one location wherein the value of the Collateral as to which such agreement has not been obtained aggregates less than $100,000 at any one time. (k) The Debtor agrees from time to time to deliver to the Secured Party such evidence of the existence, identity and location of the Collateral and of its availability as collateral security pursuant hereto (including, without limitation, schedules describing all Receivables created or acquired by the Debtor, copies of customer invoices or the equivalent and original shipping or delivery receipts for all merchandise and other goods sold or leased or services rendered, together with the Debtor's warranty of the genuineness thereof, and reports stating the book value of Inventory and Equipment by major category and location), in each case as the Secured Party may reasonably request. The Secured Party shall have the right to verify all or any part of the Collateral in any manner, and through any medium, which the Secured Party considers appropriate (including, without limitation, the verification of Collateral by use of a fictitious name), and the Debtor agrees to furnish all assistance and information, and perform any acts, which the Secured Party may require in connection therewith. The Debtor shall promptly notify -8- the Secured Party of any Collateral which the Debtor has determined to have been rendered obsolete, stating the prior book value of such Collateral, its type and location. (l) The Debtor shall comply in all material respects with the terms and conditions of all leases, easements, right-of-way agreements and other similar agreements binding upon the Debtor or affecting the Collateral or any part thereof, and all orders, ordinances, laws and statutes of any city, state or other governmental entity, department or agency having jurisdiction with respect to the premises wherein such Collateral is located or the conduct of business thereon. (m) The Debtor agrees to execute and deliver to the Secured Party such further agreements, assignments, instruments and documents and to do all such other things as the Secured Party may deem necessary or appropriate to assure the Secured Party its lien and security interest hereunder, including such financing statements, and amendments thereof or supplements thereto, and such other instruments and documents as the Secured Party may from time to time require in order to comply with the UCC. The Debtor hereby agrees that a carbon, photographic or other reproduction of this Agreement or any such financing statement is sufficient for filing as a financing statement by the Secured Party without notice thereof to the Debtor wherever the Secured Party in its sole discretion desires to file the same. In the event for any reason the law of any jurisdiction other than Illinois becomes or is applicable to the Collateral or any part thereof, or to any of the Obligations, the Debtor agrees to execute and deliver all such instruments and documents and to do all such other things as the Secured Party in its sole discretion deems necessary or appropriate to preserve, protect and enforce the lien and security interest of the Secured Party under the law of such other jurisdiction. The Debtor agrees to mark its books and records to reflect the lien and security interest of the Secured Party in the Collateral. (n) On failure of the Debtor to perform any of the covenants and agreements herein contained, the Secured Party may, at its option, perform the same and in so doing may expend such sums as the Secured Party may deem advisable in the performance thereof, including, without limitation, the payment of any insurance premiums, the payment of any taxes, liens and encumbrances, expenditures made in defending against any adverse claims, and all other expenditures which the Secured Party may be compelled to make by operation of law or which the Secured Party may make by agreement or otherwise for the protection of the security hereof. All such sums and amounts so expended shall be repayable by the Debtor immediately without notice or demand, shall constitute additional Obligations secured hereunder and shall bear interest from the date said amounts are expended at the rate per annum (computed on the basis of a 360-day year for the actual number of days elapsed) determined by adding 2% to the rate per annum from time to time announced by Harris Trust and Savings Bank as its prime commercial rate with any change in such rate per annum as so determined by reason of a change in such prime commercial rate to be effective on the date of such change in said prime commercial rate -9- (such rate per annum as so determined being hereinafter referred to as the "Default Rate"). No such performance of any covenant or agreement by the Secured Party on behalf of the Debtor, and no such advancement or expenditure therefor, shall relieve the Debtor of any default under the terms of this Agreement or in any way obligate the Secured Party to take any further or future action with respect thereto. The Secured Party, in making any payment hereby authorized, may do so according to any bill, statement or estimate procured from the appropriate public office or holder of the claim to be discharged without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax assessment, sale, forfeiture, tax lien or title or claim. The Secured Party, in performing any act hereunder, shall be the sole judge of whether the Debtor is required to perform same under the terms of this Agreement. The Secured Party is hereby authorized to charge any depository or other account of the Debtor maintained with the Secured Party for the amount of such sums and amounts so expended. 4. Special Provisions Re: Receivables. (a) As of the time any Receivable becomes subject to the security interest provided for hereby, and at all times thereafter, the Debtor shall be deemed to have warranted as to each and all of such Receivables that all warranties of the Debtor set forth in this Agreement are true and correct with respect to each such Receivable; that each Receivable and all papers and documents relating thereto are genuine and in all respects what they purport to be; that each Receivable is valid and subsisting and, if such Receivable is an account, arises out of a bona fide sale of goods sold and delivered by the Debtor to, or in the process of being delivered to, or out of and for services theretofore actually rendered by the Debtor to, the account debtor named therein; that no such Receivable is evidenced by any instrument or chattel paper unless such instrument or chattel paper has theretofore been endorsed by the Debtor and delivered to the Secured Party (except to the extent the Secured Party specifically requests the Debtor not to do so with respect to any such instrument or chattel paper); that no surety bond was required or given in connection with such Receivable or the contracts or purchase orders out of which the same arose; that the amount of the Receivable represented as owing is the correct amount actually and unconditionally owing, except for normal cash discounts on normal trade terms in the ordinary course of business if such Receivable is an account; and that the amount of such Receivable represented as owing is not disputed and is not subject to any set-offs, credits, deductions or countercharges other than those arising in the ordinary course of the Debtor's business which are disclosed to the Secured Party in writing promptly upon the Debtor becoming aware thereof. Without limiting the foregoing, if any Receivable arises out of a contract with the United States of America, or any state or political subdivision thereof, or any department, agency or instrumentality of any of the foregoing, the Debtor agrees to notify the Secured Party and execute whatever instruments and documents are required by the Secured Party in order that such Receivable shall be assigned to the Secured Party and that proper notice of such assignment shall -10- be given under the federal Assignment of Claims Act (or any successor statute) or any similar state or local statute, as the case may be. (b) Unless and until an Event of Default occurs, any merchandise or other goods which are returned by a customer or account debtor or otherwise recovered may be resold by the Debtor in the ordinary course of its business as presently conducted in accordance with Section 6(b) hereof; and, during the existence of any Event of Default, such merchandise and other goods shall be set aside at the request of the Secured Party and held by the Debtor as trustee for the Secured Party and shall remain part of the Secured Party's Collateral. Unless and until an Event of Default occurs, the Debtor may settle and adjust disputes and claims with its customers and account debtors, handle returns and recoveries and grant discounts, credits and allowances in the ordinary course of its business as presently conducted for amounts and on terms which the Debtor in good faith considers advisable; and, during the existence of any Event of Default, unless the Secured Party requests otherwise, the Debtor shall notify the Secured Party promptly of all returns and recoveries and, on the Secured Party's request, deliver any such merchandise or other goods to the Secured Party. During the existence of any Event of Default, unless the Secured Party requests otherwise, the Debtor shall also notify the Secured Party promptly of all disputes and claims and settle or adjust them at no expense to the Secured Party, but no discount, credit or allowance other than on normal trade terms in the ordinary course of business as presently conducted shall be granted to any customer or account debtor and no returns of merchandise or other goods shall be accepted by the Debtor without the Secured Party's consent. The Secured Party may, at all times during the existence of any Event of Default, settle or adjust disputes and claims directly with customers or account debtors for amounts and upon terms which the Secured Party considers advisable. 5. Collection of Receivables. (a) Except as otherwise provided in this Agreement, the Debtor shall make collection of all Receivables and may use the same to carry on its business in accordance with sound business practice and otherwise subject to the terms hereof. (b) Upon the occurrence of any Event of Default or of any event or condition which with the lapse of time or the giving of notice, or both, would constitute an Event of Default, whether or not the Secured Party has exercised any or all of its rights under other provisions of this Section 5, in the event the Secured Party requests the Debtor to do so: (i) all instruments and chattel paper at any time constituting part of the Receivables or any other Collateral (including any postdated checks) shall, upon receipt by the Debtor, be immediately endorsed to and deposited with the Secured Party; and/or -11- (ii) the Debtor shall instruct all customers and account debtors to remit all payments in respect of Receivables or any other Collateral to a lockbox or lockboxes under the sole custody and control of the Secured Party and which are maintained at post office(s) in Chicago, Illinois selected by the Secured Party. (c) Upon the occurrence of any Event of Default or of any event or condition which with the lapse of time or the giving of notice, or both, would constitute an Event of Default, whether or not the Secured Party has exercised any or all of its rights under other provisions of this Section 5, the Secured Party or its designee may notify the Debtor's customers and account debtors at any time that Receivables or any other Collateral have been assigned to the Secured Party or of the Secured Party's security interest therein, and either in its own name, or the Debtor's name, or both, demand, collect (including, without limitation, through a lockbox analogous to that described in Section 5(b)(ii) hereof), receive, receipt for, sue for, compound and give acquittance for any or all amounts due or to become due on Receivables or any other Collateral, and in the Secured Party's discretion file any claim or take any other action or proceeding which the Secured Party may deem necessary or appropriate to protect or realize upon the security interest of the Secured Party in the Receivables or any other Collateral. (d) Any proceeds of Receivables or other Collateral transmitted to or otherwise received by the Secured Party pursuant to any of the provisions of Sections 5(b) or 5(c) hereof may be handled and administered by the Secured Party in and through a remittance account at the Secured Party, and the Debtor acknowledges that the maintenance of such remittance account by the Secured Party is solely for the Secured Party's convenience and that the Debtor does not have any right, title or interest in such remittance account or any amounts at any time standing to the credit thereof. The Secured Party may, after the occurrence and during the continuation of any Event of Default or of any event or condition which with the lapse of time or the giving of notice, or both, would constitute an Event of Default, apply all or any part of any proceeds of Receivables or other Collateral received by it from any source to the payment of the Obligations (whether or not then due and payable), such applications to be made in such amounts, in such manner and order and at such intervals as the Secured Party may from time to time in its discretion determine, but not less often than once each week. The Secured Party need not apply or give credit for any item included in proceeds of Receivables or other Collateral until the Secured Party has received final payment therefor at its office in cash or final solvent credits current in Chicago, Illinois, acceptable to the Secured Party as such. However, if the Secured Party does give credit for any item prior to receiving final payment therefor and the Secured Party fails to receive such final payment or an item is charged back to the Secured Party for any reason, the Secured Party may at its election in either instance charge the amount of such item back against the remittance account or any depository account of the Debtor maintained with the Secured Party, together with interest thereon at the Default Rate. Concurrently with each transmission of any proceeds of Receivables or other Collateral to the remittance account, the -12- Debtor shall furnish the Secured Party with a report in such form as the Secured Party shall reasonably require identifying the particular Receivable or other Collateral from which the same arises or relates. The Debtor hereby indemnifies the Secured Party from and against all liabilities, damages, losses, actions, claims, judgments, costs, expenses, charges and reasonable attorneys' fees suffered or incurred by the Secured Party because of the maintenance of the foregoing arrangements; provided, however, that the Debtor shall not be required to indemnify the Secured Party for any of the foregoing to the extent they arise solely from the gross negligence or willful misconduct of the Secured Party. The Secured Party shall have no liability or responsibility to the Debtor for accepting any check, draft or other order for payment of money bearing the legend "payment in full" or words of similar import or any other restrictive legend or endorsement whatsoever or be responsible for determining the correctness of any remittance. 6. Special Provisions Re: Inventory and Equipment. (a) The Debtor shall at its own cost and expense maintain, keep and preserve the Inventory in good and merchantable condition and keep and preserve the Equipment in good repair, working order and condition, ordinary wear and tear excepted, and, without limiting the foregoing, make all necessary and proper repairs, replacements and additions to the Equipment so that the efficiency thereof shall be fully preserved and maintained. (b) The Debtor may, until an Event of Default has occurred and is continuing and thereafter until otherwise notified by the Secured Party, use, consume and sell the Inventory in the ordinary course of its business, but a sale in the ordinary course of business shall not under any circumstance include any transfer or sale in satisfaction, partial or complete, of a debt owing by the Debtor. (c) The Debtor may, until an Event of Default has occurred and is continuing and thereafter until otherwise notified by the Secured Party, sell obsolete, worn out or unusable Equipment which is concurrently replaced with similar Equipment at least equal in quality and condition to that sold and owned by the Debtor free of any lien, charge or encumbrance other than the security interest granted hereby. (d) As of the time any Inventory or Equipment becomes subject to the security interest provided for hereby and at all times thereafter, the Debtor shall be deemed to have warranted as to any and all of such Inventory and Equipment that all warranties of the Debtor set forth in this Agreement are true and correct with respect to such Inventory and Equipment; that all of such Inventory and Equipment is located at a location set forth pursuant to Section 3(b) hereof; and that, in the case of Inventory, such Inventory is new and unused and in good and -13- merchantable condition. The Debtor warrants and agrees that no Inventory is or will be consigned to any other person without the Secured Party's prior written consent. (e) Upon the Secured Party's request, the Debtor shall at its own cost and expense cause the lien of the Secured Party in and to any portion of the Collateral subject to a certificate of title law to be duly noted on such certificate of title or to be otherwise filed in such manner as is prescribed by law in order to perfect such lien and shall cause all such certificates of title and evidences of lien to be deposited with the Secured Party. (f) Except for Equipment from time to time located on the real estate described on Schedule B attached hereto and as otherwise disclosed to the Secured Party in writing, none of the Equipment is or will be attached to real estate in such a manner that the same may become a fixture. (g) If any of the Inventory is at any time evidenced by a document of title, such document shall be promptly delivered by the Debtor to the Secured Party except to the extent the Secured Party specifically requests the Debtor not to do so with respect to any such document. Section 7. Special Provisions Re: Investment Property. (a) Unless and until an Event of Default has occurred and is continuing and thereafter until notified to the contrary by the Secured Party pursuant to Section 9(d) hereof: (i) The Debtor shall be entitled to exercise all voting and/or consensual powers pertaining to the Investment Property or any part thereof, for all purposes not inconsistent with the terms of this Agreement or any other document evidencing or otherwise relating to any Obligations; and (ii) The Debtor shall be entitled to receive and retain all cash dividends paid upon or in respect of the Investment Property. (b) At the Secured Party's request, certificates for all securities now or at any time constituting Investment Property shall be promptly delivered by the Debtor to the Secured Party duly endorsed in blank for transfer or accompanied by an appropriate assignment or assignments or an appropriate undated stock power or powers, in every case sufficient to transfer title thereto including, without limitation, all stock received in respect of a stock dividend or resulting from a split-up, revision or reclassification of the Investment Property or any part thereof or received in addition to, in substitution of or in exchange for the Investment Property or any part thereof as a result of a merger, consolidation or otherwise. With respect to any Investment Property held by a securities intermediary, commodity intermediary, or other financial intermediary of any kind, at -14- the Secured Party's request, the Debtor shall execute and deliver, and shall cause any such intermediary to execute and deliver, an agreement among the Debtor, the Secured Party, and such intermediary in form and substance reasonably satisfactory to the Secured Party which provides, among other things, for the intermediary's agreement that it shall comply with entitlement orders, and apply any value distributed on account of any Investment Property maintained in an account with such intermediary, as directed by the Secured Party without further consent by the Debtor at any time after the occurrence and during the continuation of any Event of Default. The Secured Party may at any time, after the occurrence of an Event of Default or an event or condition which with the lapse of time or the giving of notice, or both, would constitute an Event of Default, cause to be transferred into its name or the name of its nominee or nominees all or any part of the Investment Property hereunder. (c) Unless and until an Event of Default has occurred and is continuing, the Debtor may sell or otherwise dispose of any Investment Property, provided that the Debtor shall not sell or otherwise dispose of any capital stock of any direct or indirect subsidiary without the prior written consent of the Secured Party. After the occurrence and during the continuation of any Event of Default, the Debtor shall not sell all or any part of the Investment Property without the prior written consent of the Secured Party. (d) The Debtor represents that on the date of this Agreement, none of the Investment Property consists of margin stock (as such term is defined in Regulation U of the Board of Governors of the Federal Reserve System) except to the extent the Debtor has delivered to the Secured Party a duly executed and completed Form U-1 with respect to such stock. If at any time the Investment Property or any part thereof consists of margin stock, the Debtor shall promptly so notify the Secured Party and deliver to the Secured Party a duly executed and completed Form U-1 and such other instruments and documents reasonably requested by the Secured Party in form and substance satisfactory to the Secured Party. (e) Notwithstanding anything to the contrary contained herein, in the event any Investment Property is subject to the terms of a separate security agreement in favor of the Secured Party, the terms of such separate security agreement shall govern and control unless otherwise agreed to in writing by the Secured Party. Section 8. Power of Attorney. In addition to any other powers of attorney contained herein, the Debtor hereby appoints the Secured Party, its nominee, and any other person whom the Secured Party may designate, as the Debtor's attorney-in-fact, with full power to sign the Debtor's name on verifications of accounts and other Collateral; to send requests for verification of Collateral to the Debtor's customers, account debtors and other obligors; to endorse the Debtor's name on any checks, notes, acceptances, money orders, drafts and any other forms of payment or security that may come into the Secured Party's possession or on any assignments, stock powers, or other instruments of transfer relating to the Collateral or any part -15- thereof; to sign the Debtor's name on any invoice or bill of lading relating to any Collateral, on claims to enforce collection of any Collateral, on notices to and drafts against customers and account debtors and other obligors, on schedules and assignments of Collateral, on notices of assignment and on public records; to notify the post office authorities to change the address for delivery of the Debtor's mail to an address designated by the Secured Party; to receive, open and dispose of all mail addressed to the Debtor; and to do all things necessary to carry out this Agreement. The Debtor hereby ratifies and approves all acts of any such attorney and agrees that neither the Secured Party nor any such attorney will be liable for any acts or omissions nor for any error of judgment or mistake of fact or law other than such person's gross negligence or willful misconduct. The Secured Party may file one or more financing statements disclosing its security interest in any or all of the Collateral without the Debtor's signature appearing thereon. The Debtor also hereby grants the Secured Party a power of attorney to execute any such financing statements, or amendments and supplements to financing statements, on behalf of the Debtor without notice thereof to the Debtor. The foregoing powers of attorney, being coupled with an interest, are irrevocable until the Obligations have been fully paid and satisfied and all agreements of the Secured Party to extend credit to or for the account of the Borrower have expired or otherwise have been terminated; provided, however, that the Secured Party agrees, as a personal covenant to the Debtor, not to exercise the powers of attorney set forth in this Section unless an Event of Default exists. 9. Defaults and Remedies. (a) The occurrence of any one or more of the following events shall constitute an "Event of Default" hereunder: (i) default in the payment when due (whether by demand, lapse of time, acceleration or otherwise) of the Obligations or any part thereof; or (ii) default in the observance or performance of any covenant set forth in Sections 5(b), 5(c) or 7(b) hereof or of any provision hereof requiring the maintenance of insurance on the Collateral or dealing with the use or remittance of proceeds of Collateral; or (iii) the occurrence of any event or the existence of any condition which is specified as an "Event of Default" under the Credit Agreement. (b) Upon the occurrence and during the continuation of any Event of Default, the Secured Party shall have, in addition to all other rights provided herein or by law, the rights and remedies of a secured party under the UCC (regardless of whether the UCC is the law of the jurisdiction where the rights or remedies are asserted and regardless of whether the UCC applies -16- to the affected Collateral), and further the Secured Party may, without demand and without advertisement, notice, hearing or process of law, all of which the Debtor hereby waives, at any time or times, sell and deliver all or any part of the Collateral (and any other property of the Debtor attached thereto or found therein) held by or for it at public or private sale, for cash, upon credit or otherwise, at such prices and upon such terms as the Secured Party deems advisable, in its sole discretion. In addition to all other sums due the Secured Party hereunder, the Debtor shall pay the Secured Party all costs and expenses incurred by the Secured Party, including reasonable attorneys' fees and court costs, in obtaining, liquidating or enforcing payment of Collateral or the Obligations or in the prosecution or defense of any action or proceeding by or against the Secured Party or the Debtor concerning any matter arising out of or connected with this Agreement or the Collateral or the Obligations, including, without limitation, any of the foregoing arising in, arising under or related to a case under the United States Bankruptcy Code (or any successor statute). Any requirement of reasonable notice shall be met if such notice is personally served on or mailed, postage prepaid, to the Debtor in accordance with Section 12(b) hereof at least 10 days before the time of sale or other event giving rise to the requirement of such notice; provided however, no notification need be given to the Debtor if the Debtor has signed, after an Event of Default has occurred, a statement renouncing any right to notification of sale or other intended disposition. The Secured Party shall not be obligated to make any sale or other disposition of the Collateral regardless of notice having been given. The Secured Party may be the purchaser at any such sale. The Debtor hereby waives all of its rights of redemption from any such sale. The Secured Party may postpone or cause the postponement of the sale of all or any portion of the Collateral by announcement at the time and place of such sale, and such sale may, without further notice, be made at the time and place to which the sale was postponed or the Secured Party may further postpone such sale by announcement made at such time and place. (c) Without in any way limiting the foregoing, upon the occurrence and during the continuation of any Event of Default, the Secured Party shall have the right, in addition to all other rights provided herein or by law, to take physical possession of any and all of the Collateral and anything found therein, the right for that purpose to enter without legal process any premises where the Collateral may be found (provided such entry be done lawfully), and the right to maintain such possession on the Debtor's premises (the Debtor hereby agreeing to lease such premises without cost or expense to the Secured Party or its designee if the Secured Party so requests) or to remove the Collateral or any part thereof to such other places as the Secured Party may desire. Upon the occurrence and during the continuation of any Event of Default, the Secured Party shall have the right to exercise any and all rights with respect to deposit accounts of the Debtor maintained with the Secured Party, including, without limitation, the right to collect, withdraw and receive all amounts due or to become due or payable under each such deposit account. Upon the occurrence and during the continuation of any Event of Default, the Debtor shall, upon the Secured Party's demand, assemble the Collateral and make it available to -17- the Secured Party at a place designated by the Secured Party. If the Secured Party exercises its right to take possession of the Collateral, the Debtor shall also at its expense perform any and all other steps requested by the Secured Party to preserve and protect the security interest hereby granted in the Collateral, such as placing and maintaining signs indicating the security interest of the Secured Party, appointing overseers for the Collateral and maintaining Collateral records. (d) Without in any way limiting the foregoing, upon the occurrence and during the continuation of any Event of Default, all rights of the Debtor to exercise the voting and/or consensual powers which it is entitled to exercise pursuant to Section 7(a)(i) hereof and/or to receive and retain the distributions which it is entitled to receive and retain pursuant to Section 7(a)(ii) hereof, shall, at the option of the Secured Party, cease and thereupon become vested in the Secured Party, which, in addition to all other rights provided herein or by law, shall then be entitled solely and exclusively to exercise all voting and other consensual powers pertaining to the Investment Property and/or to receive and retain the distributions which the Debtor would otherwise have been authorized to retain pursuant to Section 7(a)(ii) hereof and shall then be entitled solely and exclusively to exercise any and all rights of conversion, exchange or subscription or any other rights, privileges or options pertaining to any Investment Property as if the Secured Party were the absolute owner thereof. Without limiting the foregoing, the Secured Party shall have the right to exchange, at its discretion, any and all of the Investment Property upon the merger, consolidation, reorganization, recapitalization or other readjustment of the respective issuer thereof or upon the exercise by or on behalf of any such issuer or the Secured Party of any right, privilege or option pertaining to any Investment Property and, in connection therewith, to deposit and deliver any and all of the Investment Property with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Secured Party may determine. In the event the Secured Party in good faith believes any of the Collateral constitutes restricted securities within the meaning of any applicable securities laws, any disposition thereof in compliance with such laws shall not render the disposition commercially unreasonable. (e) Without in any way limiting the foregoing, the Debtor hereby grants to the Secured Party a royalty-free irrevocable license and right to use all of the Debtor's patents, patent applications, patent licenses, trademarks, trademark registrations, trademark licenses, trade names, trade styles, copyrights, copyright applications, copyright licenses, and similar intangibles in connection with any foreclosure or other realization by the Secured Party on all or any part of the Collateral. The license and right granted the Secured Party hereby shall be without any royalty or fee or charge whatsoever. (f) The powers conferred upon the Secured Party hereunder are solely to protect its interest in the Collateral and shall not impose on it any duty to exercise such powers. The Secured Party shall be deemed to have exercised reasonable care in the custody and preservation -18- of Investment Property in its possession if such Collateral is accorded treatment substantially equivalent to that which the Secured Party accords its own property, consisting of similar type assets, it being understood, however, that the Secured Party shall have no responsibility for ascertaining or taking any action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any such Collateral, whether or not the Secured Party has or is deemed to have knowledge of such matters. This Agreement constitutes an assignment of rights only and not an assignment of any duties or obligations of the Debtor in any way related to the Collateral, and the Secured Party shall have no duty or obligation to discharge any such duty or obligation. The Secured Party shall have no responsibility for taking any necessary steps to preserve rights against any parties with respect to any Collateral or initiating any action to protect the Collateral against the possibility of a decline in market value. Neither the Secured Party nor any party acting as attorney for the Secured Party shall be liable for any acts or omissions or for any error of judgment or mistake of fact or law other than their gross negligence or willful misconduct. (g) Failure by the Secured Party to exercise any right, remedy or option under this Agreement or any other agreement between the Debtor and the Secured Party or provided by law, or delay by the Secured Party in exercising the same, shall not operate as a waiver; and no waiver by the Secured Party shall be effective unless it is in writing and then only to the extent specifically stated. The rights and remedies of the Secured Party under this Agreement shall be cumulative and not exclusive of any other right or remedy which the Secured Party may have. For purposes of this Agreement, an Event of Default shall be construed as continuing after its occurrence until the same is waived in writing by the Secured Party. 10. Application of Proceeds. The proceeds and avails of the Collateral at any time received by the Secured Party after the occurrence and during the continuation of any Event of Default shall, when received by the Secured Party in cash or its equivalent, be applied by the Secured Party as follows: (i) First, to the payment and satisfaction of all sums paid and costs and expenses incurred by the Secured Party hereunder or otherwise in connection herewith, including such monies paid or incurred in connection with protecting, preserving or realizing upon the Collateral or enforcing any of the terms hereof, including reasonable attorneys' fees and court costs, together with any interest thereon (but without preference or priority of principal over interest or of interest over principal), to the extent the Secured Party is not reimbursed therefor by the Debtor; and (ii) Second, to the payment and satisfaction of the remaining Obligations, whether or not then due (in whatever order the Secured Party elects), both for interest and principal. -19- The Debtor shall remain liable to the Secured Party for any deficiency. Any surplus remaining after the full payment and satisfaction of the foregoing shall be returned to the Debtor or to whomsoever the Secured Party reasonably determines is lawfully entitled thereto. 11. Continuing Agreement. This Agreement shall be a continuing agreement in every respect and shall remain in full force and effect until all of the Obligations, both for principal and interest, have been fully paid and satisfied and all agreements of the Secured Party to extend credit to or for the account of the Borrower have expired or otherwise have been terminated. Upon such termination of this Agreement, the Secured Party shall, upon the request and at the expense of the Debtor, forthwith release its security interest hereunder. 12. Miscellaneous. (a) This Agreement cannot be changed or terminated orally. All of the rights, privileges, remedies and options given to the Secured Party hereunder shall inure to the benefit of its successors and assigns, and all the terms, conditions, covenants, agreements, representations and warranties of and in this Agreement shall bind the Debtor and its legal representatives, successors and assigns, provided that the Debtor may not assign its rights or delegate its duties hereunder without the Secured Party's prior written consent. (b) Except as otherwise specified herein, all notices hereunder shall be in writing (including, without limitation, notice by telecopy) and shall be given to the relevant party at its address or telecopier number set forth below (or, if no such address is set forth below, at the address of the Debtor as shown on the records of the Secured Party), or such other address or telecopier number as such party may hereafter specify by notice to the other given by United States certified or registered mail, by telecopy or by other telecommunication device capable of creating a written record of such notice and its receipt. Notices hereunder shall be addressed: to the Debtor at: to the Secured Party at: National Health Benefit & Harris Trust and Savings Bank Casualty Corporation 111 West Monroe Street 9495 East San Salvador Drive Chicago, Illinois 60690 Scottsdale, Arizona 85258 Attention: Christopher Randall, Attention: Stephen Carder, Tax-Exempt Institutions Division Chief Financial Officer Telephone: (312) 461-5068 Telephone: (602) 614-4285 Telecopy: (312) 461-7365 Telecopy: (602) 451-9087 Each such notice, request or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopier number specified in this Section and a -20- confirmation of such telecopy has been received by the sender, (ii) if given by mail, five (5) days after such communication is deposited in the mail, certified or registered with return receipt requested, addressed as aforesaid or (iii) if given by any other means, when delivered at the addresses specified in this Section. (c) The lien and security herein created and provided for stand as direct and primary security for the Obligations. No application of any sums received by the Bank in respect of the Collateral or any disposition thereof to the reduction of the Obligations or any portion thereof shall in any manner entitle the Debtor to any right, title or interest in or to the Obligations or any collateral security therefor, whether by subrogation or otherwise, unless and until all Obligations have been fully paid and satisfied and any commitment of the Bank to extend credit to the Borrower shall have expired. The Debtor acknowledges and agrees that the lien and security hereby created and provided for are absolute and unconditional and shall not in any manner be affected or impaired by any acts or omissions whatsoever of the Bank or any other holder of any of the Obligations, and without limiting the generality of the foregoing, the lien and security hereof shall not be impaired by any acceptance by the Bank or any holder of any of the Obligations of any other security for or guarantors upon any of the Obligations or by any failure, neglect or omission on the part of the Bank or any other holder of any of the Obligations to realize upon or protect any of the Obligations or any collateral security therefor. The lien and security hereof shall not in any manner be impaired or affected by (and the Bank, without notice to anyone, is hereby authorized to make from time to time) any sale, pledge, surrender, compromise, settlement, release, renewal, extension, indulgence, alteration, substitution, exchange, change in, modification or disposition of any of the Obligations, or of any collateral security therefor, or of any guaranty thereof or of any obligor thereon. The Bank may at its discretion at any time grant credit to the Borrower without notice to the Debtor in such amounts and on such terms as the Bank may elect (all of such to constitute additional Obligations) without in any manner impairing the lien and security hereby created and provided for. In order to foreclose or otherwise realize hereon and to exercise the rights granted the Bank hereunder and under applicable law, there shall be no obligation on the part of the Bank or any other holder of any of the Obligations at any time to first resort for payment to the Borrower or to any guaranty of the Obligations or any portion thereof or to resort to any other collateral security, property, liens or any other rights or remedies whatsoever, and the Bank shall have the right to enforce this instrument irrespective of whether or not other proceedings or steps are pending seeking resort to or realization upon or from any of the foregoing. (d) In the event and to the extent that any provision hereof shall be deemed to be invalid or unenforceable by reason of the operation of any law or by reason of the interpretation placed thereon by any court, this Agreement shall to such extent be construed as not containing such provision, but only as to such locations where such law or interpretation is operative, and the invalidity or unenforceability of such provision shall not affect the validity of any remaining -21- provisions hereof, and any and all other provisions hereof which are otherwise lawful and valid shall remain in full force and effect. (e) This Agreement shall be deemed to have been made in the State of Illinois and shall be governed by, and construed in accordance with, the laws of the State of Illinois. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning of any provision hereof. (f) The Debtor acknowledges that this Agreement is and shall be effective upon its execution and delivery by the Debtor to the Secured Party, and it shall not be necessary for the Secured Party to execute this Agreement or any other acceptance hereof or otherwise to signify or express its acceptance hereof. (g) The Debtor hereby submits to the non-exclusive jurisdiction of the United States District Court for the Northern District of Illinois and of any Illinois state court sitting in the City of Chicago for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Debtor irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient form. THE DEBTOR AND THE SECURED PARTY EACH HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. -22- IN WITNESS WHEREOF, the Debtor has caused this Agreement to be duly executed and delivered as of this 15th day of December, 1997. NATIONAL HEALTH BENEFIT & CASUALTY CORPORATION By /s/ Stephen J Carder Its Executive Vice President -23- SCHEDULE A LOCATIONS Item 1. Places of Business (including Debtor's chief executive office and principal place of business): ADDRESS 9495 East San Salvador Drive Scottsdale, Arizona 85258 Item 2. Permitted Collateral Locations: ADDRESS OWNER OF PREMISES 9495 East San Salvador Drive Scottsdale Property Scottsdale, Arizona 85258 Management, L.L.C. -24- SCHEDULE B REAL ESTATE LEGAL DESCRIPTIONS NONE -25- EX-10.4 7 MERGER AGREEMENT Exhibit 10.4 AGREEMENT --------- By this Agreement, entered into as of this ___ day of April, 1998, the parties identified below state, confirm, represent, warrant and agree as follows: 1. PARTIES 1.1. Champion. Champion Financial Corporation ("Champion") is a corporation organized and existing under and by virtue of the laws of the State of Utah, with its principal place of business in Scottsdale, Arizona. 1.2. Caliendo. Paul F. Caliendo ("Caliendo") is, and was at all times material hereto, a resident of Maricopa County, Arizona. 1.3. Carder. Stephen J. Carder ("Carder") is, and was at all times material hereto, a resident of Maricopa County, Arizona. 1.4. Engelbrecht. Zirk Engelbrecht ("Zirk") and Marcy Engelbrecht ("Marcy") (hereinafter sometimes collectively referred to as "Engelbrecht") are, and at all times material hereto, were residents of the State of Maryland. 1.5. InfoPlan. InfoPlan Partners LLC is, and was at all times material hereto, a limited liability company for which InfoPlan Inc., serves as the managing member. At all times material hereto, Engelbrecht has controlled, and at this time controls, InfoPlan Partners LLC through their control of InfoPlan Inc. 1.6. Pension Trust. The Law Office of Marcy M. Hallock Pension Plan ("Pension Trust") is, and was at all times material hereto, the beneficial owner of 200,000 shares of the common stock of Champion. 1.7. RRG: Risk Resolution Group ("RRG') was, at certain times material hereto, the beneficial owner of up to 1.5 million shares of the common stock of Champion. 1.8. InfoPlan Parties. Engelbrecht, InfoPlan Partners, LLC, InfoPlan, Inc., Pension Trust and RRG shall hereunder sometimes be referred to as the "InfoPlan Parties." 2. RECITALS 2.1. Merger Agreement. On or about January 6, 1997, Champion entered into an Agreement and Plan of Merger with National Health Benefits and Casualty Corporation ("NHBC") pursuant to which NHBC became a wholly owned subsidiary of Champion and Carder and Caliendo, as the sole shareholders of NHBC, each received 1.1 million shares of the common stock of Champion (the "NHBC Merger'). Pursuant to the Agreement and Plan of Merger, Carder and Caliendo were elected to the Board of Directors of Champion, Caliendo was appointed to serve as Champion's President and Chief Executive Officer and Carder was appointed to serve as Champion's Executive Vice President and Chief Financial Officer. Page 1 2.2. RRG Proxy. On or about January 8, 1997, RRG, acting through its authorized agent, Zirk, executed and delivered to Carder and Caliendo an irrevocable proxy granting to Carder and Caliendo the right to vote 1.5 million shares of the common stock of Champion beneficially owned by RRG. A copy of that proxy is attached hereto and incorporated herein as Exhibit "A." 2.3. InfoPlan Proxy. On or about April 1, 1997, InfoPlan LLC, acting through its authorized agent Zirk, executed and delivered to Carder and Caliendo an irrevocable proxy with respect to 1 million shares of the common stock of Champion and beneficially held by InfoPlan Partners LLC, in the form attached hereto and incorporated herein as Exhibit "B." 2.4. Pension Trust Proxy. On or about May 29, 1997, the Pension Trust, acting through its authorized agent Marcy, executed and delivered to Caliendo a proxy with respect to 200,000 shares of the common stock of Champion, in the form attached hereto and incorporated herein as Exhibit "C." 2.5. Subscription Agreement. On or about October 24, 1997, InfoPlan Inc. executed and delivered to Champion a Subscription Agreement which provided for the purchase by InfoPlan LLC of 500,000 shares of the common stock of Champion at $6.00 per share, in the form attached hereto and incorporated herein as Exhibit "D." 2.6. Stock Trading Activity. At various times since the NHBC Merger, Caliendo, Carder, InfoPlan and Engelbrecht have engaged in one or more transactions with respect to the common stock of Champion owned by each of them. 2.7. Proxy Solicitation Activity. At various times since the NHBC Merger, the InfoPlan Parties and their affiliates and agents, have obtained and/or attempted to obtain proxy appointments for purposes of permitting them to vote a majority of the outstanding issued common stock of Champion. 2.8. January 20, 1998 Letter; Board of Directors Inquiry. On or about January 20, 1998, InfoPlan Partners LLC, acting through its authorized agents, Engelbrecht, executed and delivered to Caliendo, the letter which is attached hereto and incorporated herein as Exhibit "E." As a result of that letter, the Board of Directors of Champion has undertaken a formal inquiry into the allegations and statements made in that letter. 2.9. Stateman Transaction. The InfoPlan Parties have entered into certain agreements with Thomas Stateman and/or his affiliates with respect to the registration rights of certain common stock of Champion held by Thomas Stateman (the "Stateman Agreement') and may have entered into agreements with other third parties relating to Champion and its securities. 2.10. Purpose of Agreement. Various disputes have arisen between and among the parties to this Agreement concerning the NHBC Merger, the RRG Proxy, the InfoPlan Proxy, the Pension Trust Proxy, certain stock transactions and certain proxy solicitation activity, as well as with respect to the management of the business affairs of Champion. Without admitting or denying the existence of any past violations of any law or regulation or any liability one to the other, the parties desire to enter into this Agreement for the purpose of resolving their disputes to assure that their future actions with respect to Champion are conducted in strict conformity with all federal and state laws applicable to Champion and its securities. Page 2 2.11. Recitals Part of Agreement. The matters set forth in Articles 1 and 2 of this Agreement are and shall be deemed to be material and operative provisions of this Agreement and not mere recitals. 3. TERMS OF AGREEMENT 3.1. Changes in the Management of Champion. Effective immediately, Champion, acting through its Board of Directors, shall effect certain management and personnel changes. Specifically, Caliendo resigned as Chairman and a Director of Champion immediately after the adjournment of the April 9, 1998 Board of Directors' meeting. Carder shall immediately become the President and Chief Executive Officer of Champion. Champion agrees to pay Caliendo a severance payment of $294,000 payable in twenty-four (24) equal payments of $12,250.00, with the first payment due May 1, 1998 and a like payment on the first day of each of the next succeeding twenty-three (23) months. Caliendo's current medical insurance coverage shall continue and be paid through Champion up to and including April 30, 1999. Caliendo will be on paid vacation through April 30, 1998. Champion and Caliendo agree that Caliendo will not be re-employed or re-appointed to the Champion Board of Directors so long as the Proxy granted in Section 3.6 remains in effect. 3.2. Stock Transfers. Caliendo and Carder shall each immediately request transfer of and promptly cause delivery to InfoPlan LLC 25,000 shares of common stock of Champion. In recognition for all services performed and consideration granted or claimed to be performed or granted by InfoPlan Partners in connection with Champion's recent HealthStar acquisition, Champion shall immediately issue to InfoPlan Partners LLC 100,000 shares of its common stock, which shall, upon issuance, be fully paid and non-assessable. 3.3. Legend. InfoPlan Partners LLC and the other InfoPlan Parties acknowledge that the shares to be transferred pursuant to Section 3.2 will be "restricted shares" and that they will bear the following legend: The securities represented by this Certificate have not been registered under the Securities Act of 1933 or any state securities law. Such securities may not be sold or transferred in the absence of such registration unless an exemption from registration is available. 3.4. Retention of Appropriate Advisors. Champion will use its best efforts to retain within one hundred twenty (120) days such investment banking and investment relations advisory professionals as the Board of Directors, in its discretion, deems necessary and appropriate. 3.5. No Proxy Contest. In consideration for the commitments, undertakings and stock transfers provided for herein, the InfoPlan Parties agree that neither they, nor any of their respective Affiliates, directors, agents, members, shareholders or beneficial owners will, either alone, or in concert with each other or any other person or entity, solicit, induce, encourage or seek to obtain, or cause, solicit, encourage or induce any other person or entity to solicit or seek to obtain, a proxy or other authority to vote with respect to any securities of Champion, including but not limited to the common stock of Champion, until the earlier of (i) a date which is two (2) years from the date of this Agreement; or (ii) the date which is ninety days Page 3 prior to the third annual meeting of shareholders of Champion held following the date of this Agreement. Notwithstanding the foregoing, nothing in this Agreement shall prohibit InfoPlan Parties from engaging in communications which encourage other shareholders of Champion to grant their proxy to vote Champion securities to those persons appointed by the Board of Directors of Champion to solicit proxies in connection with any meeting of Champion shareholders. 3.6. Grant of Proxy. InfoPlan Partners LLC, InfoPlan Inc., RRG, Engelbrecht and the Pension Trust, hereby irrevocably appoint the Board of Directors of Champion, or its designees, with full power of substitution, as their proxy agent(s) ("Proxy Agent") with the authority to vote any and all shares of the common stock of Champion held by them or any Affiliate (as hereinunder defined) on this date, or on any record date established by the Board of Directors with respect to the Annual Meeting of the Shareholders of Champion to be conducted during calendar year 1998 ("1998 Annual Meeting"), or any adjournments thereof with respect to any and all matters to be submitted to the shareholders at such meeting, including but not limited to, the election of directors, the ratification of auditors, the adoption of one or more stock option or other benefit plans, reincorporation of Champion in a state other than Utah pursuant to a change of domicile merger, and any shareholder proposals, or any other matter to be presented at such 1998 Annual Meeting. The InfoPlan Parties further agree to execute and deliver upon request and without the payment of additional consideration, such additional documentation as the Board of Directors of Champion may deem necessary and appropriate to effectuate the foregoing proxy appointment, including but not limited to the execution of separate proxy documentation. Notwithstanding the foregoing commitment to execute such additional documentation, the parties hereto agree that a copy of this Agreement may be presented to the Inspector of Elections appointed in connection with the 1998 Annual Meeting for purposes of evidencing the grant of the proxy contained herein. InfoPlan Partners LLC, InfoPlan Inc., RRG, Engelbrecht, and the Pension Trust hereby agree to waive any right that they or any Affiliate may have to cancel this irrevocable proxy at any time prior to the 1998 Annual Meeting and further acknowledge and agree that the irrevocable proxy granted hereby meets the standards for irrevocability under Utah Code Annotated Section 16-10(a)-722 and that it is coupled with an interest. For purposes of this Agreement, as it relates to the InfoPlan Parties, the term "Affiliate" shall mean (i) any person or entity who controls, who is controlled by, or is under common control with any of the InfoPlan Parties; or (ii) any person who has a contract, agreement, arrangement or understanding with any of the InfoPlan Parties, with respect to the voting, acquisition or disposition of Champion Securities. 3.7. Securities Compliance. The InfoPlan Parties hereby agree to conduct all future activities with respect to the sale, purchase, or transfer of the securities of Champion and/or the solicitation of proxies with respect to voting rights of Champion securities in strict compliance with all federal and state securities laws. Without limiting the generality of the foregoing, the InfoPlan parties agree to immediately amend the Report on Form 13D previously filed by some of such parties with respect to the securities of Champion to accurately reflect the relationships between and among the InfoPlan Parties, and to accurately describe the provisions of Sections 3.5 and 3.6 of this Agreement as they may affect voting rights of the InfoPlan Parties with respect to the common stock of Champion. Additionally, the InfoPlan parties agree that they will file and keep current all reports required by Section 16 of the Securities and Exchange Act of 1934. 3.8. Limitations on Company Communications. The InfoPlan parties agree that, for purposes of assisting them in their compliance with federal and state securities laws, that all future Page 4 communications between the InfoPlan Parties and Champion shall be made through Champion's General Counsel, Kevin J. Ryan, Esq. or any successor appointed by the Board of Directors for such purpose but pursuant to Notice given in accordance with Section 5.1 herein. 3.9. Limitation on Activities. From and after the date of this Agreement, the InfoPlan Parties agree that they will refrain, and will cause their respective directors officers, members and Affiliates to refrain from, engaging in investment banking, shareholder relations, investor relations, market relations or any other similar activities for or on behalf of Champion and that the only communications or activities that they will engage in with respect to Champion or its securities will be those activities appropriate for a non-employee shareholder of a public company. 3.10. Availability of Equitable Relief. The InfoPlan Parties acknowledge and agree that the obligations undertaken by them under this Agreement are special, unique and of an extraordinary character, and that Champion and it shareholders, officers and directors could not be adequately compensated by money damages for a breach of any of the provisions of this Agreement by the InfoPlan Parties. In the event that any provision of this Agreement is breached by the InfoPlan Parties, Champion shall be entitled to obtain (i) an injunction restraining such breach or threatened breach; (ii) specific performance of any provision of this Agreement including but not limited to the provisions of Sections 3.5, 3.6, 3.7, 3.8 and 3.9 or (iii) an order in the nature of a declaratory judgment declaring that the proxy granted by Section 3.6 is valid and irrevocable, in addition to any other right or remedy available to Champion. The InfoPlan Parties agree that a bond or other security shall not be a condition to the issuance of such injunction and/or for the ordering of such specific performance. 3.11. Stateman Agreement. The InfoPlan Parties acknowledge that they shall have sole responsibility to Stateman for the Stateman Agreement and that they will hold Champion and its officers, directors, agents and affiliates harmless from any and all costs, expenses and damages relating thereto, or to any other agreements, arrangements or understandings between any of The InfoPlan parties and any other person or entity. 3.12. Relief. The InfoPlan parties hereby release and discharge Champion, Caliendo and Carder, and their present and future directors, officers, representatives, employees, attorneys, advisors, agents, affiliates, subsidiaries, associates, predecessors, heirs, executors, administrators, successors and assigns from any and all claims, actions, complaints, causes of action, debts, liabilities, demands or suits (each individually a "Claim" and collectively "Claims") at law or in equity, known or unknown, fixed or contingent, contract or tort, which they now have or could assert by reason of actions, events or transactions in any way relating to the Subscription Agreement, the InfoPlan Proxy, the RRG Proxy, or the Pension Trust Proxy. Champion, Carder and Caliendo hereby release and discharge the InfoPlan parties and their respective present, former and future directors, officers, members, representatives, employees, agents, attorneys, advisors, affiliates, associates, predecessors, heirs, executors, administrators, successors and assigns from any and all Claims at law or in equity, known or unknown, fixed or contingent, contract or tort, which they now have or could assert by reason of actions, events or transactions, in any way relating to the Subscription Agreement, the InfoPlan Proxy, the RRG Proxy, or the Pension Trust Proxy. Champion hereby releases and discharges Caliendo from any and all claims, in any way relating to Champion and its subsidiaries, on or prior to the date of this Agreement, including any claims relating to Caliendo's acting as a director or officer of Champion. Champion agrees to indemnify and hold Caliendo harmless from any Claims made against Page 5 him arising from acts as an Officer or Director of Champion provided such acts were done in good faith and did not constitute gross negligence or willful misconduct. Caliendo hereby releases Champion and its subsidiaries and their respective present, former and future directors, officers, members, representatives, employees, agents, attorneys, advisors, affiliates, associates, predecessors, heirs, executors, administrators, successors and assigns from any and all claims, in any way relating to National Health Benefits Corporation, an Arizona corporation, including any claim by Rob Galloway against National Health Benefits Corporation. 3.13. No Disparagement. The InfoPlan Parties, Caliendo, Carder and Champion each agree that none of the parties shall make any disparaging or negative statement (or statements construed to be such), oral or written to anyone concerning or in any way relating to the issues covered in this Agreement. 4. GENERAL 4.1. Notices. Any notice or other communication relating to this Agreement and any and all communications which might become necessary to effectuate the purposes of this Agreement, shall be delivered to the parties by certified mail, facsimile, a recognized overnight national delivery service, at the following addresses: If to any of the InfoPlan Parties: Zirk Engelbrecht, President InfoPlan Inc. 19 Hillsyde Court Cockeysville, Maryland 21030 Fax: (410) 628-1112 If to Champion: Champion Financial Corporation 9495 East San Salvador Drive Scottsdale, Arizona 85258 Fax: (602) 451-9624 Attention: President with copies to: Kevin J. Ryan, Esq. Vice President & General Counsel Champion Financial Corporation 8745 West Higgins Road Suite 300 Chicago, Illinois 60631 Fax: (773) 693-7908 and: Bryan Cave LLP 2800 North Central Avenue Suite 2100 Phoenix, Arizona 85004 Fax: (602) 266-5938 If to Caliendo: Paul F. Caliendo 8075 East Dale Lane Scottsdale, Arizona 85262 Fax: (602) 473-3089 Page 6 If to Carder: Stephen J. Carder Champion Financial Corporation 9495 East San Salvador Drive Scottsdale, Arizona 85258 Fax: (602) 451-9624 4.2. Parties Benefited. This Agreement is made for the benefit and protection of the parties hereto. No other person or organization shall have any right of action or defense based hereon. 4.3. Modifications. No modification or amendment to this Agreement shall be valid, unless in writing and signed by the parties to this Agreement. 4.4. Parties Bound. This Agreement shall be binding on and inure to the benefit of the heirs, personal representatives, predecessors, successors and assigns of the parties hereto. 4.5. Revocation of Prior Proxies. This Agreement shall serve as a revocation of, and a consent to the revocation of, the RRG Proxy, the InfoPlan Proxy and the Pension Trust Proxy by all parties thereto and hereto. 4.6. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and legal representatives. 4.7. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Arizona applicable to agreements made or to be performed entirely within such state, without regard to the conflict of law principles of such state. 4.8. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall together be considered one and the same agreement, and shall become effective when one or more of such counterparts have been signed by each of the parties. 4.9. Severability. In the event that any terminal provision of this Agreement is declared to be invalid or illegal, for any reason, this Agreement shall remain in full force and effect and the same shall be interpreted as though such invalid or illegal provision was not a part hereof. 4.10. Attorneys' Fees. In the event that any party hereto is required to commence or otherwise participate in an action or other proceeding to enforce any right arising under this Agreement, the party prevailing in such action or other proceeding shall be entitled to recover all costs and attorneys' fees, such fees to be set by the court or other tribunal, and not by the jury. 4.11. Additional Instruments and Actions. The parties hereto expressly agree to execute any or further additional instruments as may be required, or to perform any other act necessary to effectuate and carry out the purposes of this Agreement, without the payment of additional consideration. 4.12. Integration. This Agreement and its exhibits, together with any documents executed and delivered pursuant hereto, embody the full and complete understanding and agreement of the parties hereto with respect to the matters addressed herein and supersedes all prior understandings or agreements, whether oral or in writing, and all contemporaneous oral understandings or agreements. Page 7 4.13. Headings; Interpretation. The headings used herein are used for convenience and reference only and are not intended to define, limit or describe the scope or intent of any provision of this Agreement. Page 8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly and delivered as of the date hereof. CHAMPION FINANCIAL CORPORATION By: ---------------------------- Its -------------------------- Acting President and Chief Operating Officer PAUL F. CALIENDO ------------------------------- STEPHEN J. CARDER ------------------------------- ZIRK ENGELBRECHT ------------------------------- MARCY ENGELBRECHT ------------------------------- INFOPLAN PARTNERS LLC, by INFOPLAN PARTNERS INC. By: ---------------------------- Its -------------------------- INFOPLAN INC. By: ---------------------------- Its -------------------------- RISK RESOLUTION GROUP By: ---------------------------- Its -------------------------- LAW OFFICE OF MARCY M. HALLOCK PENSION PLAN By: ---------------------------- Its -------------------------- Page 9 EX-21 8 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Subsidiaries of the Registrant Name State of Incorporation ---- ---------------------- HealthStar, Inc. Illinois National Health Benefits & Casualty Corporation Nevada Three Rivers Provider Network Nevada EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF MARCH 31, 1998, AND STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDING MARCH 31, 1998, OF CHAMPION FINANCIAL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 U.S. Dollars 12-MOS MAR-31-1998 APR-01-1997 MAR-31-1998 1 199,466 0 2,762,446 250,000 0 2,781,038 3,140,507 288,550 15,448,663 4,033,419 0 0 0 5,856 0 0 0 7,853,996 0 0 7,365,586 0 0 488,410 184,305 304,105 0 0 0 304,105 0.05 0
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