EXHIBIT 10.12

EMPLOYMENT AGREEMENT

This Employment Agreement (this “Agreement”) is effective as of September 1,
2011, between University General Health System, Inc., a Nevada corporation and
any of its Affiliates to which this Agreement is hereafter assigned (the
“Company”), and Donald W. Sapaugh sole, a resident of Galveston County, Texas
(“Employee”). In consideration of the premises and the mutual covenants
contained herein, the parties hereby agree as follows:

1. Employment. The Company hereby agrees to employ Employee and Employee hereby
agrees to work as President for the Company and/or those of the Company’s or
subsidiaries, (each a “Subsidiary”) as directed by the Company. Employee’s
principal office shall be in Houston, Texas. So long as Employee is employed by
the Company, Employee shall devote Employee’s skill, energy and substantially
all of his business-related efforts to the faithful discharge of Employee’s
duties as an employee (and if applicable, as an officer and director) of the
Company in accordance with applicable rules governing such duties in the State
of Texas. In providing services hereunder, Employee shall comply with and follow
all directives, policies, standards and regulations from time to time
established by the Company on behalf of the Company or its Affiliates.

2. Term of Employment. Employee’s employment by the Company pursuant to this
Agreement shall continue in effect for a term of three years from the date of
this Agreement (the “Initial Period”), which shall be automatically extended for
additional, successive one year periods (the “Additional Periods”) commencing on
the third anniversary date of this Agreement and on each anniversary date
thereafter, unless either party gives notice of nonrenewal as provided in
Section 10(e) or otherwise terminates this Agreement in accordance with the
other provisions of Section 10.

3. Representations and Warranties. Subject to applicable rules governing
attorney conduct in the State of Texas, Employee represents and warrants that
Employee is under no contractual or other restrictions or obligations that will
significantly limit Employee’s activities on behalf of the Company or will
prohibit or limit the disclosure or use of by Employee of any information which
directly or indirectly relates to the nature of the Company or the services to
be rendered by Employee under this Agreement. .

4. Compensation. Subject to the provisions of Section 10, Employee will be
entitled to the compensation and benefits set forth in this Section 4.

(a) During the Initial Period, the Company shall pay Employee an Annual Base
Salary, payable semi-monthly, in equal semi-monthly installments at a rate equal
to $456,000 per year for the first calendar year or portion thereof. In each
subsequent calendar year during the term of this Agreement, the Company shall
pay to Employee an Annual Base Salary determined by the General Partner
following its annual salary and performance review. Employee’s Annual Base
Salary will be reviewed at least annually in the fourth quarter of each fiscal
year of Employee’s employment hereunder, commencing in the second quarter of
2012, or as the board determines is appropriate.

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(b) All payments of salary and other compensation to Employee shall be made
after deduction of any taxes required to be withheld with respect thereto under
applicable federal and state laws.

5. Fringe Benefits; Expenses.

(a) During the term of employment of Employee hereunder, Employee shall
participate in all employee benefit plans sponsored by the Company for its
executive employees, including but not limited to sick leave and disability
leave, Employee and Employee’s dependents under the Company’s health insurance
plan and dental insurance and pension and/or profit sharing plans; provided,
however, that except as provided below, the nature, amount and limitations of
such plans shall be determined from time to time by the General Partner of the
Company.

(b) The Company will reimburse Employee for all reasonable business expenses
incurred by Employee in the scope of Employee’s employment; provided, however,
that Employee must file expense reports with respect to such expenses in
accordance with the Company’s policies as are in effect from time to time.

(c) During the term of employment of Employee hereunder, Employee shall be
initially entitled to 160 hours of paid-time-off (“PTO”) as of the beginning of
the Term. Thereafter, the Company will accrue additional PTO for the benefit of
Employee in accordance with the Company’s PTO program for its executive
employees.

(d) During the term of employment of Employee hereunder, the Company will pay
all license fees, occupation taxes, continuing legal education, and such other
reasonable educational costs and expenses necessary to maintain Employee’s good
standing under any professional licenses.

(e) During the term of employment of Employee hereunder, the Company shall use
reasonable efforts to provide (i) life insurance payable to Employee’s
designated beneficiary in an amount of at least two-times Employee’s Annual Base
Salary and (ii) disability insurance on behalf of Employee which, as a goal,
shall provide for salary continuation in the event of long-term or permanent
disability in an amount equal to $10,000 per month.

6. Indemnification and Insurance. The Company shall indemnify Employee with
respect to matters relating to Employee’s services to the Company or any of its
Affiliates (as defined in Exhibit A attached hereto) to the extent permitted by
applicable law and as set forth in the Company’s Articles of Incorporation and
Bylaws and otherwise in accordance with the terms of any other indemnification
which is generally applicable to executive officers of the Company or any of its
Affiliates that may be provided by the Company or any such Affiliate from time
to time. The foregoing indemnity is contractual and will survive any adverse
amendment to or repeal of the Articles of Incorporation or Bylaws. The Company
will also cover Employee under a professional liability insurance policy as well
as a policy of officers’ and directors’ liability insurance providing coverage
that is comparable to that provided now or hereafter to any other executive
officer, partner, or director of the Company. The provisions of this Section 6
will survive the termination of Employee’s employment for any reason and the
term of this Agreement.

 

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7. Change in Control of the Company.

(a) If a Change of Control (as defined in Exhibit A attached hereto) occurs and
if during the Protected Period (as defined in Exhibit A attached hereto),
Employee’s employment is terminated or not renewed pursuant to Section 10,
whether by the Company or by Employee, then the Company shall promptly pay or
otherwise provide to Employee the benefits set forth below:

(i) An amount equal to Employee’s Annual Base Salary then in effect, payable in
a single lump sum by certified or bank cashier’s check within 30 days of such
termination; and

(ii) An amount equal to the product of (A) the maximum monthly premium payment
that may be charged to continue coverage for Employee and Employee’s dependents
under the Company’s health insurance plan under COBRA and under all life
insurance and disability policies provided by Employer for Employee, multiplied
by (B) 12 months (payable over such period). Any unpaid amount under this clause
(ii) will cease if Employee obtains substantially similar coverage under new
employment.

The Company will use its best efforts to keep the policies of insurance referred
to in clause (ii) above in effect for the benefit of the Employee through the 12
month period, and after the expiration of such 12 month period, if the Employee
is unable to secure reasonable alternative coverage as a result of lack of
insurability, at the written request of the Employee, the Company will use
reasonable commercial efforts to continue such coverage, provided that the
Company will have no obligation to incur any incremental cost or risk (other
than minor administration inconvenience) and Employee shall agree in writing to
bear all such cost and risk and hold the Company harmless against same.
Notwithstanding the foregoing, Employee shall not be entitled to any benefits
under this Section 7 if such termination is (i) due to Employee’s death, (ii) by
the Company on account of Employee’s disability as provided in Section 10(d)
below, (iii) by the Company for Cause (as defined in Exhibit A attached hereto)
or (iv) by Employee for other than Good Reason (as defined in Exhibit A attached
hereto) as provided in Section 10 below.

8. Gross-Up of Parachute Payments.

(a) To provide Employee with adequate protection in connection with Employee’s
ongoing employment with the Company, this Agreement or other incentive plans of
the Company provide Employee with various benefits in the event of termination
of Employee’s employment with the Company during the Protected Period. If
Employee’s employment is terminated or not renewed pursuant to Section 10 during
a Protected Period or otherwise in connection with a “change of control” of the
Company, within the meaning of Section 2806 of the Internal Revenue Code of
1986, as amended (the “Code”), a portion of those benefits could be
characterized as “excess parachute payments” within the meaning of Section 2806
of the Code. The parties hereto acknowledge that the protections set forth in
this Section 8 are

 

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important, and it is agreed that Employee should not have to bear the full
burden of the excise tax that might be levied under Section 4999 of the Code or
any similar provision of state or federal law, in the event that any portion of
the benefits payable to Employee pursuant to this Agreement or the other
incentive plans of the Company are treated as an excess parachute payment. The
parties, therefore, have agreed as set forth in this Section 8.

(b) Anything in this Agreement to the contrary notwithstanding, if it shall be
determined that any payment or distribution (including income recognized by
Employee upon the early vesting of restricted property or upon the exercise of
options whose exercise date has been accelerated) by the Company or any other
person to or for the benefit of Employee (whether paid or payable or distributed
or distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this
Section 8) (a “Payment”) would be subject to the excise tax imposed by
Section 4999 of the Code or any similar provision of state or federal law or any
interest or penalties are incurred by Employee with respect to such excise tax
(such excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the “Excise Tax”), then the Company shall pay an
additional payment, not to exceed $250,000 in the aggregate (a “Gross-Up
Payment”), in an amount such that after payment by Employee of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed on the Gross-Up Payment,
Employee retains an amount of the Gross-Up Payment equal to fifty percent
(50%) the Excise Tax imposed on the Payments. The Employee will bear the cost of
the remaining 50% until the aggregate Gross Payments from the Company have
reached $250,000, and will thereafter bear all additional taxes, interest or
penalties.

(c) In the event of any dispute as to the applicability or amount of any
Gross-Up Payment, all determinations required to be made under this Section 8,
including whether and when a Gross-Up Payment is required and the amount of such
Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by the independent accounting firm regularly
employed by the Company (the “Accounting Firm”) which shall provide detailed
supporting calculations both to the Company and to Employee within 15 business
days after the receipt of notice from Employee that there has been a Payment, or
such earlier time as is requested by the Company. All fees and expenses of the
Accounting Firm will be borne by the Company. If the Accounting Firm determines
that no Excise Tax is payable by Employee, it shall furnish Employee with a
written statement that failure to report the Excise Tax on Employee’s applicable
federal income tax return would not result in the imposition of a negligence or
similar penalty. Any determination by the Accounting Firm shall be binding on
the Company and Employee unless and until a final determination is received from
the Internal, Revenue Service indicating a contrary result. As a result or
uncertainty in the application of Section 4999 of the Code at the time of the
initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments may not have been made by the Company that should have been
made (“Underpayment”), consistent with the calculations required to be made
hereunder. If the Employee thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of Employee, consistent with the maximum
limitation stated in paragraph 8(b) above. In the event it is determined by the
Accounting Firm that the Gross Payments previously made by the Company exceeded
the limitations stated in paragraph 8(b) above, upon written notice from the
Company, accompanied by a copy of the Accounting Firm’s calculation of same, the
amount of such overpayment shall be promptly paid by the Employee to the
Company.

 

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9. Options and Other Stock-Related Plans. The terms and conditions of any
option, stock or equity bonus, restricted stock or equity, equity award or other
equity-related plan or program with respect to capital stock or partnership
interests of the Company which may be granted to Employee or in which Employee
may participate shall be governed by the applicable Company plan, if any, and/or
separate agreement(s) between the Company and Employee with respect thereto.

10. Termination or Non-Renewal of Employment.

(a) Termination by Either Party: General Provisions. Either the Company or
Employee may terminate Employee’s employment hereunder at any time during the
term of this Agreement by delivery of ninety (90) days prior written notice by
the terminating party to the other party. Promptly after such termination of
employment, in addition to any other payments or benefits provided in this
Section 10, the Company shall pay to Employee an amount equal to the sum of
(i) the Employee’s earned but unpaid Annual Base Salary through the date of
termination of employment at the rate in effect at the time of such termination,
(ii) vacation pay earned but not taken to the date of such termination, and
(iii) all other amounts previously deferred by Employee or earned but not paid
as of such date under all Company incentive or deferred compensation plans or
programs.

(b) Termination for Cause: Resignation without Good Reason. If the Company
terminates Employee’s employment for Cause, or if the Employee terminates
employment without Good Reason, the payments due to Employee shall be limited to
the amounts described in Section 10(a).

(c) Termination Without Cause: Termination for Good Reason. If the Company
terminates Employee’s employment without Cause (except as provided in
Section 10(d) below), or if the Employee terminates Employee’s employment for
Good Reason, then the Company shall promptly pay or otherwise provide to
Employee the following amounts in addition to those set forth in Section 10(a):

(i) An amount equal to Employee’s Annual Base Salary then in effect, payable in
a single lump sum by certified or bank cashier’s check within 30 days of such
termination; and

(ii) An amount equal to the product of (A) the maximum monthly premium payment
that may be charged to continue coverage for Employee and Employee’s dependents
under the Company’s health insurance plan under COBRA, and under all life
insurance and disability policies provided by Employer for Employee multiplied
by (B) 12 months (payable over such period). Any unpaid amount under this clause
(ii) will cease if Employee obtains substantially similar coverage under new
employment.

 

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(d) Termination on Disability. If at any time during the term of Employee’s
employment hereunder, Employee is unable due to physical or mental disability,
to perform effectively Employee’s duties hereunder, the Company shall continue
payment of salary as provided in Section 4 during the first 3 month period of
such disability to the extent not covered by the Company’s disability insurance
policies (the Company may offset against its obligations in this sentence the
amounts actually received by the Employee under such policies). Upon the
expiration of such 3 month period, the Company, at its sole option, may continue
payment of Employee’s salary for such additional periods as the Company elects,
or may terminate Employee’s employment hereunder without any further
compensation obligations to Employee hereunder. If Employee should die during
the term of Employee’s employment hereunder, Employee’s employment and the
Company’s obligations hereunder for compensation payments shall terminate as of
the end of the month in which Employee’s death occurs.

(e) Non-Renewal of Employment; General Provisions. Either the Company or
Employee may elect not to renew Employee’s employment hereunder at the end of
the Initial Period, or at the end of any Additional Period thereafter, by
delivery of ninety (90) days prior written notice by the electing party to the
other party. At the expiration of the employment term (in addition to any other
amounts provided in Section 10(f) below in the case of a non-renewal by the
Company), the Company shall pay to Employee an amount equal to the sum of
(i) Employee’s earned but unpaid Annual Base Salary through the date of
termination of employment at the rate then in effect, (ii) vacation pay earned
but not taken to the date of such termination, and (iii) all other amounts
previously deferred by Employee or earned but not paid as of such date under all
Company incentive or deferred compensation plans or programs. In the event of a
non-renewal by the Employee, the amounts due the Employee shall be limited to
the amounts specified in clause (i), (ii) and (iii) of the preceding sentence.

(f) Non-Renewal by the Company at End of Initial Period or Additional Period. If
the Company elects not to renew the Employee’s employment as of the end of the
Initial Period or an Additional Period, and provided the Employee continues to
perform Employee’s duties and responsibilities through the end of such Initial
Period or Additional Period, as the case may be, then the Company shall promptly
pay or otherwise provide to Employee the following amounts in addition to those
set forth in Section 10(a):

(i) An amount equal to Employee’s Annual Base Salary then in effect, payable in
a single lump sum by certified or bank cashier’s check within 30 days of such
termination; and

(ii) An amount equal to the product of (A) the maximum monthly premium payment
that may be charged to continue coverage for Employee and Employee’s dependents
under the Company’s health insurance plan under COBRA, and under all life
insurance and disability policies provided by Employer for Employee multiplied
by (B) 12 months (payable over such period). Any unpaid amount under this clause
(ii) will cease if Employee obtains substantially similar coverage under new
employment.

(g) Continuance of Insurance. The Company will use its best efforts to keep the
policies of insurance referred to in clause (ii) of Sections 10(c) and
Section 10(f) above in effect for the benefit of the Employee through the 12
month period (as the case may be), and after the expiration of such 12 month
period (as the case may be) if the Employee is unable to secure reasonable
alternative coverage as a result of lack of insurability, at the written request
of the

 

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Employee, the Company will use reasonable commercial efforts to continue such
coverage, provided that the Company will have no obligation to incur any
incremental cost or risk (other than minor administration inconvenience) and
Employee shall agree in writing to bear all such cost and risk and hold the
Company harmless against same.

(h) Waiver of Claims. In the event this Agreement expires as a result of
non-renewal by the Company, or is terminated by the Company without Cause or as
a result of a disability of Employee in accordance with Section 10(d), or is
terminated by Employee with Good Reason, Employee agrees to accept, in full
settlement of any and all claims, losses, damages and other demands that
Employee may have arising out of such termination or non-renewal, as liquidated
damages and not as a penalty, the payments, benefits and vesting of rights set
forth in this Agreement. Employee hereby waives any and all rights Employee may
have to bring any cause of action or proceeding contesting any such termination
or non-renewal; provided, however, that such waiver shall not be deemed to
affect Employee’s rights to enforce any other obligations of the Company
unrelated to employment. Under no circumstances shall Employee be entitled to
any compensation or confirmation of any benefits under this Agreement for any
period of time following Employee’s date of termination if Employee’s
termination is for Cause.

(i) Lock-ups, etc. During the one year period after Employee receives the lump
sum payments as provided in Section 10(c) or (f) above, Employee shall sign any
lock-up letters, standstill agreements, or other similar documentation
specifically required by an underwriter from such Employee in connection with a
public offering of securities by the Company or take other actions reasonably
related thereto as requested by the Board of Directors of the Company; provided,
however, that equivalent agreements are being required of Company management and
the period of any such lock-up or standstill agreements shall not exceed the
shorter of (i) 180 days or (ii) the balance of the one (1) year period. In the
event Employee fails to sign any such letters, agreements or similar
documentation or take any such action, the Company may seek and obtain specific
performance of such covenant, including any injunction requiring execution
thereof or the taking of any such actions, and Employee hereby appoints the then
president of the Company in office from time to time to sign any such documents
on Employee’s behalf so long as such documents are prepared on the same basis as
other shareholders generally or as all Company management shareholders.

(j) Liquidated Damages upon Termination. If the Company terminates Employee’s
employment without Cause (except as provided in Section 10(d) below), or if the
Employee terminates Employee’s employment for Good Reason, , Employee shall be
awarded as liquidated damages caused by any such separation with the Company,
the Employee shall be awarded 2% of the units of TrinityCare Senior Living, LLC,
or such units as necessary for the Employee and Mr. Albert W. Denson to have 51%
of the outstanding units of TrinityCare Senior Living, LLC.

11. No Mitigation Obligation. The Company acknowledges that it will be difficult
and may be impossible (i) for Employee to find reasonably comparable employment
following termination of Employee’s employment and (ii) to measure the amount of
damages which Employee may suffer as a result of the termination of Employee’s
employment. Accordingly, all amounts paid to Employee under this Agreement
following Employee’s termination of employment are acknowledged by the Company
to be reasonable and to be liquidated damages, and Employee will not be required
to mitigate the amount of such payments by seeking other employment or
otherwise, nor will any profits, income, earnings or other benefits from any
source whatsoever (including from other employment) create any mitigation,
offset, reduction or any other obligation on the part of Employee under this
Agreement.

 

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12. Covenant Not to Compete.

(a) During Employee’s employment with the Company or any of its Affiliates and
thereafter during the Restricted Period (as defined in Exhibit A attached
hereto), regardless of the reason for the termination of Employee’s employment,
Employee will not engage in or carry on, directly or indirectly, either for
himself or as a member of a partnership or as a shareholder, investor, owner,
officer or director of a company or other entity, or as an employee, agent,
associate or consultant of any person, partnership, corporation or other entity,
any business that directly competes with any services or products produced,
sold, conducted, developed, or in the process of development by the Company or
its Affiliates on the date of termination of Employee’s employment within a 35
mile radius of such business or entity

(b) Notwithstanding the foregoing, Employee shall not be deemed to be in
violation of Section 12(a) based solely on the ownership of less than one
percent of any class of securities of a publicly-held company whose gross assets
exceed $100,000,000.

(c) Employee acknowledges that the limitations set forth herein on Employee’s
rights to compete with the Company and its Affiliates are reasonable and
necessary for the protection of the Company and its Affiliates. In this regard,
Employee specifically agrees that the limitations as to period of time and
geographic area, as well as all other restrictions on Employee’s activities
specified herein, are reasonable and necessary for the protection of the Company
and its Affiliates. In particular, Employee acknowledges that the parties
anticipate that Employee will be actively seeking markets for the products and
services of the Company and its Affiliates throughout the United States during
Employee’s employment with the Company.

(d) In the event that there shall be any violation of the covenant not to
compete set forth in this Section 12, then the time limitation thereof shall be
extended for a period of time equal to the period of time during which such
violation continues; and in the event the Company is required to seek relief
from such violation in any court, board of arbitration or other tribunal, then
the covenant shall be extended for a period of time equal to the pendency of
such proceedings, including all appeals.

(e) Employee agrees that the remedy at law for any breach by Employee of this
Section 12 will be inadequate and that the Company shall also be entitled to
injunctive relief.

13. Confidential Information. During the term of Employee’s employment
hereunder, and for two years after Employee’s termination of employment,
Employee shall not use or disclose, without the prior written consent of the
Company, Confidential Information (as defined in Exhibit A attached hereto)
relating to the Company or any of its Affiliates, and upon termination of
Employee’s employment will return to the Company all written materials in
Employee’s possession embodying such Confidential Information. Employee will
promptly disclose to the Company all Confidential Information, as well as any
business opportunity related to the Company which comes to Employee’s attention
during the term of Employee’s employment with the Company. Employee agrees that
the remedy at law for any breach by Employee of this Section 12 will be
inadequate and that the Company shall also be entitled to injunctive relief.

 

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14. Intellectual Property.

(a) To the extent they relate to, or result from, directly or indirectly, the
actual or anticipated operations of the Company or any of its Affiliates,
Employee hereby agrees that all patents, trademarks, copyrights, trade secrets,
and other intellectual property rights, all inventions, whether or not
patentable, and any product, drawing, design, recording, writing, literary work
or other author’s work, in any other tangible form developed in whole or in part
by Employee during the term of this Agreement, or otherwise developed, purchased
or acquired by the Company or any of its Affiliates, shall be the exclusive
property of the Company or such Affiliate, as the case may be (“Intellectual
Property”). Employee however shall have the right to utilize any intellectual or
work product developed by himself or herself in the normal course of business
after any termination of employment.

(b) Employee will hold all Intellectual Property in trust for the Company and
will deliver all Intellectual Property in Employee’s possession or control to
the Company upon request and, in any event, at the end of Employee’s employment
with the Company.

(c) Employee shall assign and does hereby assign to the Company all property
rights that Employee may now or hereafter have in the Intellectual Property.
Employee shall take such action, including, but not limited to, the execution,
acknowledgment, delivery and assistance in preparation of documents, and the
giving of testimony, as may be requested by the Company to evidence, transfer,
vest or confirm the Company’s right, title and interest in the Intellectual
Property.

(d) Employee will not contest the validity of any invention, any copyright, any
trademark or any mask work registration owned by or vesting in the Company or
any of its Affiliates under this Agreement.

15. Definitions. As used in this Agreement , the terms defined in Exhibit A have
the means assigned to such terms in such exhibit.

16. Notices. All notices, requests, demands and other communications required by
or permitted under this Agreement shall be in writing and shall be sufficiently
delivered if delivered by hand, by courier service, or sent by registered or
certified mail, postage prepaid, to the parties at their respective addresses
listed below:

(a)    If to Employee:

Donald W. Sapaugh

204 Century Drive

Friendswood, Texas 77546

 

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(b)    If to the Company:

University General Health System, Inc.

Attn. Chairman or Chief Executive Officer

7501 Fannin St

Houston, TX 77054

Any party may change such party’s address by such notice to the other parties.

17. Set-off Rights. The Company’s obligations to make the payments and provide
the benefits required by this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set off, counterclaim, recoupment,
defense or other claim, right or action that the Company may have against
Employee or others, unless such amount is a determinable liability of the
Employee to the Company.

18. Assignment. This Agreement is personal to Employee, and Employee shall not
assign any of Employee’s rights or delegate any of Employee’s duties hereunder
without the prior written consent of the Company. Neither Employee nor
Employee’s spouse will have the right to commute, encumber, or otherwise dispose
of any payments under this Agreement. The Company shall have the right to assign
this Agreement to a successor in interest in connection with a merger, sale of
substantially all assets, or the like; provided however, that an assignment of
this Agreement to an entity with operations, products or services outside of the
industries in which the Company is then active shall not be deemed to expand the
scope of Employee’s covenant not to compete with such operations, products or
services without Employee’s written consent. The Company shall require any
Person who is the successor (whether direct or indirect, by purchase, merger,
consolidation, reorganization, or otherwise) to all or substantially all of the
business and/or assets of the Company to expressly assume and agree to perform,
by a written agreement in form and substance reasonably satisfactory to
Employee, all of the obligations of the Company under this Agreement. As used in
this Agreement, the term “Company” means the Company as hereinbefore defined and
any successor to its business and/or assets as aforesaid which assumes and
agrees to perform this Agreement by operation of law, written agreement, or
otherwise.

19. Survival. The provisions of this Agreement shall survive the termination of
Employee’s employment hereunder in accordance with their terms.

20. Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of Texas, county of Harris without regard
to the choice-of-law principles thereof.

21. Binding Upon Successors. This Agreement shall be binding upon, and shall
inure to the benefit of, the parties hereto and their respective heirs, legal
representatives, successors and permitted assigns.

22. Entire Agreement. This Agreement constitutes the entire agreement between
the Company and Employee with respect to the terms of employment of Employee by
the Company and supersedes all prior agreements and understandings, whether
written or oral, between them concerning such terms of employment.

 

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23. Amendments and Waivers. This Agreement may be amended, modified or
supplemented, and any obligation hereunder may be waived, only by a written
instrument executed by the parties hereto. The waiver by either party of a
breach of any provision of this Agreement shall not operate as a waiver of any
subsequent breach. No failure on the part of any party to exercise, and no delay
in exercising, any right or remedy. hereunder shall operate as a waiver hereof,
nor shall any single or partial exercise of any such right or remedy by such
party preclude any other or further exercise thereof or the exercise of any
other right or remedy.

24. Cumulative Rights And Remedies. All rights and remedies hereunder are
cumulative and are in addition to all other rights and remedies provided by law,
agreement or otherwise. Employee’s obligations to the Company and the Company’s
rights and remedies hereunder are in addition to all other obligations of
Employee and rights and remedies of the Company created pursuant to any other
agreement.

25. Construction. Each party to this Agreement has had the opportunity to review
this Agreement with legal counsel. This Agreement shall not be construed or
interpreted against any party on the basis that such party drafted or authored a
particular provision, parts of or the entirety of this Agreement.

26. Severability. In the event that any provision or provisions of this
Agreement is held to be invalid, illegal or unenforceable by any court of law or
otherwise, the remaining provisions of this Agreement shall nevertheless
continue to be valid, legal and enforceable as though the invalid or
unenforceable parts had not been included therein. In addition, in such event
the parties hereto shall negotiate in good faith to modify this Agreement so as
to effect the original intent of the parties as closely as possible with respect
to those provisions which were held to be invalid, illegal or unenforceable.

27. Attorneys’ Fees and Costs. If any action at law or in equity is brought to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys’ fees, costs and necessary disbursements in
addition to any other relief to which it may be entitled.

 

IN WITNESS WHEREOF, the Company and Employee have executed this Agreement on the
date first above written.

 

“COMPANY”

     

UNIVERSITY GENERAL HOSPITAL SYSTEM INC.,

a Nevada Corporation

      /s/ Hassan Chahadeh       By: Hassan Chahadeh       Title: Chairman, Chief
Executive Officer

“EXECUTIVE”

      /s/ Donald W. Sapaugh       Donald W. Sapaugh, an individual

 

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EXHIBIT A

DEFINITIONS

“Annual Base Salary” means the salary of Employee in effect at the relevant time
determined in accordance with Section 4(a) hereof.

“Affiliate” means, with respect to any Person, each other Person who controls,
is controlled by, or is under common control with the Person specified. Without
limiting the generality of the foregoing, Affiliates of the Company.

“Cause” when used in connection with the termination of employment with the
Company, means the termination of Employee’s employment by the Company by reason
of (i) the conviction of Employee of a crime involving moral turpitude by a
court of competent jurisdiction; (ii) the proven commission by Employee of an
act of fraud upon the Company; (iii) the willful and proven misappropriation of
any funds or property of the Company by Employee; (iv) the willful, continued
and unreasonable failure by Employee to perform material duties assigned to
Employee after reasonable written notice and opportunity to cure such
performance has been given by the Company; (v) the knowing engagement by
Employee in any direct, material conflict of interest with the Company without
compliance with the Company’s conflict of interest policy, if any then in
effect; (vi) the knowing engagement by Employee, without the approval of the
General Partner of the Company, in any activity which would result in a material
injury to the Company or any of its Affiliates; or (vii) the knowing engagement
in any activity which would constitute a material violation of the provisions of
the Company’s Insider Trading Policy or Business Ethics Policy, if any, then in
effect.

“Certificate of Formation” means the Company’s Certificate of Formation,
including all amendments thereto, filed with the Texas Secretary of State under
and pursuant to the Texas Business Organizations Code, and the issuance of a
certificate of filing for the Company by the Texas Secretary of State.

“Change of Control” means the acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a
“Designated Person”) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”)) of 50% or more of either (1) the then outstanding partnership
interests of the Company (the “Outstanding Company Common Stock”), Management
Control or (2) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of managers
(the “Outstanding. Company Voting Securities”); provided, however, that the
following acquisitions shall not constitute a Change of Control: (a) any
acquisition of Common Stock of the Company or voting securities of the Company
directly from the Company (excluding an acquisition by virtue of the exercise of
a conversion privilege), (b) any acquisition of Common Stock of the Company or
voting securities of the Company by the Company (c) any acquisition of Common
Stock of the Company or voting securities of the Company by any employee benefit
plan(s) (or related

 

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trust(s)) sponsored or maintained by the Company or any corporation controlled
by the Company and approved by the incumbent General Partner, or (d) any
acquisition by any corporation pursuant to a reorganization, merger or
consolidation, if, immediately following such reorganization, merger or
consolidation, the conditions described in clauses (1), (2) and (3) of paragraph
(iii) below of this definition are satisfied.

“Partnership Agreement” means the Company’s Partnership Agreement, as amended,
executed by the partners of the Company in accordance with the Texas Business
Organizations Code.

“Confidential Information” includes information conveyed or assigned to the
Company or any of its Affiliates by Employee or conceived, compiled, created,
developed, discovered or obtained by Employee from and during Employee’s
employment relationship with the Company, whether solely by Employee or jointly
with others, which concerns the affairs of the Company or its Affiliates and
which the Company could reasonably be expected to desire be held in confidence,
or the disclosure of which would likely be embarrassing, detrimental or
disadvantageous to the Company or its Affiliates and without limiting the
generality of the foregoing includes information relating to inventions, and the
trade secrets, technologies, algorithms, products, services, finances, business
plans, marketing plans, legal affairs, supplier lists, client lists, potential
clients, business prospects, business opportunities, personnel assignments,
contracts and assets of the Company or any of its Affiliates and information
made available to the Company or any of its Affiliates by other parties under a
confidential relationship. Confidential Information, however, shall not include
information (a) which is, at the time in question, in the public domain through
no wrongful act of Employee, (b) which is later disclosed to Employee by one not
under obligations of confidentiality to the Company or any of its Affiliates or
Employee, (c) which is required by court or governmental order, law or
regulation to be disclosed, or (d) which the Company has expressly given
Employee the right to disclose pursuant to written agreement.

“Good Reason” means the occurrence of any of the following events:

(a) Employee is assigned duties, taken as a whole, that are materially
inconsistent with, or materially diminished from, Employee’s positions, duties,
responsibilities and status with the Company immediately prior to such action,
or Employee’s status,’ reporting responsibilities, titles or offices are
materially diminished from those in effect immediately prior to such action, or
Employee’s duties and responsibilities are materially increased without a
corresponding reasonable increase in the Employee’s compensation (provided that
in the case of such a change within a Protected Period, such increase must be
satisfactory to the Employee in Employee’s sole reasonable judgment), except in
each case in connection with the termination of Employee’s employment by the
Company for Cause or on account of disability, or as a result of the Employee’s
death, or by the Employee for other than Good Reason; provided, however, that,
Good Reason shall not be triggered under this subsection (a) by an immaterial
action not taken in bad faith or by an action that is remedied by the Company
promptly after receipt of written notice from Employee; or

 

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(b) Employee’s Annual Base Salary is reduced (i) within a Protected Period, from
that in effect immediately prior to the commencement of a Protected Period or as
the same may be increased from time to time thereafter, or (ii) other than
within a Protected Period, from that which was in effect prior to such action
unless such reduction is part of a general reduction in compensation within the
officer ranks due to economic or company-wide considerations; or

(c) The Company (i) within a Protected Period, fails to continue in effect any
benefit or compensation plan, including, but not limited to, the annual bonus
plan, qualified retirement plan, executive life insurance plan and/or health and
accident plan, in which Employee is participating immediately prior to the
commencement of the Protected Period, or plans providing, in the sole reasonable
judgment of Employee, Employee with substantially similar benefits, or the
Company takes any action that would adversely affect Employee’s participation in
or reduce Employee’s benefits under any of such plans (excluding any such action
by the Company that is required by law), or (ii) other than within a Protected
Period, takes any action to materially reduce or eliminate Employee’s
participation in the Company’s benefit or compensation plans unless such
reduction or elimination is part of a general reduction in benefits within the
officer ranks due to economic or company-wide considerations; or

(d) The Company requires the Employee to take any action that Employee
reasonably concludes would violate or conflict ethical rules governing attorney
conduct or other applicable law; or

(e) The Company requires Employee at any time to relocate more than 50 miles
from Houston, Texas; or

(f) The amendment, modification or repeal of any provision of the Certificate of
Formation of the Company, the Partnership Agreement or any other governing
document of the Company that was in effect immediately prior to the commencement
of a Protected Period, if such amendment, modification or repeal would
materially adversely affect Employee’s rights to indemnification by the Company;
or

(g) The Company shall violate or breach any obligation of the Company
(regardless whether such obligation be set forth in the Partnership Agreement
and/or in this Agreement or any other separate agreement entered into between
the Company and Employee) to indemnify Employee against any claim, loss, expense
or liability sustained or incurred by Employee by reason, in whole or in part,
of the fact that Employee is or was an officer or director of the Company; or

(h) The Company shall violate or breach any other material obligation of the
Company owing to Employee relating to Employee’s employment with the Company,
provided that in the event of a violation or breach that is reasonably subject
to being cured by the Company, Good Reason shall only occur if the Company shall
fail or refuse to commence a cure within 15 days after written notice thereof is
given by Employee to the Company or shall thereafter fail to diligently
prosecute such cure to completion; or

(h) The Company shall fail to keep in force, for the benefit of Employee,
directors’ and officers’ insurance policy with coverage amounts and scope at
least equal to the coverage amounts in effect on the date hereof; or

 

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(i) The Company shall fail to obtain from a successor (including a successor to
a material portion of the business or assets of the Company) a satisfactory
assumption in writing of the Company’s obligations under this Agreement; or

(j) The Company shall fail to provide Employee with office space, related
facilities and support personnel (including, but not limited to, administrative
and secretarial assistance) that are both commensurate with the Employee’s
position and Employee’s responsibilities to and position with the Company and
not materially dissimilar to the office space, related facilities and support
personnel provided to other executive officers of the Company; or

(k) The Company notifies Employee of the Company’s intention not to observe or
perform one or more of the material obligations of the Company under this
Agreement.

“Person” means any individual, corporation, trust, partnership, limited
partnership, foundation, association, limited liability company, joint stock
association or other legal entity.

“Protected Period” means the period of time beginning with a Change of Control
and ending six months following such Change of Control; provided, however, that
if any event has occurred which could reasonably be expected to result in a
Change of Control and a Change of Control occurs within six months after such
event, then the Protected Period will begin on the date of such event.

“Restricted Period” means the period beginning on the date of the termination or
resignation of Employee’s employment with the Company and its Affiliates and
ending as follows, as applicable:

(i) one (1) year after the termination of Employee’s employment if Employee is
not entitled to benefits under Section 7(a) or 10(c); or;

(ii) two (2) years after the termination of Employee’s employment, if Employee
receives all of the benefits under Section 7(a) or 10(c) (after giving effect to
any permissible setoff).

 

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