Document:

Exhibit 10.40

 

AMENDMENT NUMBER ONE TO SECURITY AGREEMENT

 

This AMENDMENT NUMBER ONE TO SECURITY AGREEMENT (this “Amendment”),
dated as of July 6, 1999, is entered into by and between Santa Ana/Tustin
Physicians Group, Inc., a California professional medical corporation (“Physician
Group”), and Prospect Medical Systems, Inc., a Delaware corporation (“Manager”),
with reference to the following facts:

 

A.                                   Physician
Group and Manager have previously entered into that certain Security Agreement
(“Physician Group”), dated as of July 14, 1997 (as amended from time to
time, the “Agreement”);

 

B.                                     Physician
Group and Manager desire to amend the Agreement in accordance with the terms
and conditions hereof.

 

NOW, THEREFORE, the parties hereto hereby agree as follows:

 

1.                                       Defined
Terms.  All initially capitalized
terms used but not defined herein shall have the meanings assigned to such
terms in the Agreement.

 

2.                                       Amendments
to Section 1.

 

(a)                                  Section 1
of the Agreement is hereby amended to add the following definition:

 

“ ‘Deposit Account’ means any demand,
time, savings, passbook or like account now or hereafter maintained by or for
the benefit of Physician Group with a bank, savings & loan association, a
credit union or like organization, and all funds and amounts therein, whether
or not restricted or designated for a particular purpose.”

 

(b)                                 The
definition of “Collateral” set forth in Section 1 of the Agreement
is hereby amended in its entirety as follows:

 

“ ‘Collateral’ means any and all of
the Accounts, Deposit Accounts, and Physicians Group’s Books, in each case
whether now existing or hereafter acquired or created, and any proceeds or
products of any of the foregoing, or any portion thereof, and any and all
Accounts, money, or other tangible or intangible property, resulting from the
sale or disposition of the Accounts or Deposit Accounts, or any portion thereof
or interest therein and the

 

1

 

substitutions, replacements, additions, accessions, products and Proceeds
thereof.”

 

3.                                       Reaffirmation
of the Agreement.  The Agreement as
amended hereby and the Management Agreement shall continue to be in full force
and effect.

 

IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first hereinabove written.

 

	
   

  	
  PROSPECT
  MEDICAL SYSTEMS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ R.
  Stewart Kahn

  	
   

  
	
   

  	
  Name:

  	
   

  	
  R. STEWART
  KAHN

  	
   

  
	
   

  	
  Title:

  	
   

  	
  Executive
  Vice President

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SANTA.ANA/TUSTIN
  PHYSICIANS

  
	
   

  	
  GROUP,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ R.
  Stewart Kahn

  	
   

  
	
   

  	
  Name:

  	
   

  	
  R. STEWART
  KAHN

  	
   

  
	
   

  	
  Title:

  	
   

  	
  Asst Vice
  Pres.

  	
   

  
								

 

2Exhibit 10.41

 

SECURITY AGREEMENT

(GROUP)

 

This
SECURITY AGREEMENT,
dated as of October 1, 2003, is entered into between PROSPECT PROFESSIONAL
CARE MEDICAL GROUP, INC., a California professional corporation (“GROUP”) and PROSPECT MEDICAL SYSTEMS, INC., a
Delaware corporation (“MANAGER”), with reference to the following facts:

 

R E C I T A L S

 

A.  Manager and Group have entered into that
certain Management Services Agreement, effective October 1, 2003 (the
“MANAGEMENT AGREEMENT”), pursuant to which Manager is providing certain
management services to Group;

 

B.  Group has agreed to enter into this Security
Agreement in order to grant Manager a first priority security interest in the
Collateral (as hereinafter defined) to secure prompt payment and performance of
its obligations under the Management Agreement.

 

A G R E E M E N T

 

NOW,
THEREFORE, in consideration of the mutual promises, covenants, conditions,
representations, and warranties hereinafter set forth, and for other good and
valuable consideration, the parties hereto agree as follows:

 

1.  DEFINITIONS.  All initially capitalized terms used but not defined herein shall
have the meanings ascribed thereto in the Management Agreement.  In addition, as used herein, the following
terms shall have the following meanings:

 

“ACCOUNT
DEBTOR” means any person or entity who is or who may become obligated with
respect to, or on account of, an Account.

 

“ACCOUNTS”
means any and all of Group’s presently existing and hereafter arising accounts
and rights to payment arising out of the sale or lease of goods or the
rendition of services by Group, irrespective of whether earned by performance,
and all Instruments evidencing the same or arising in connection therewith.

 

“APPLICABLE
LAW” means all applicable provisions of constitutions, statutes, rules,
regulations and orders of all government bodies and all orders and decrees of
all courts, tribunals and arbitrators.

 

“BANKRUPTCY
CODE” means The Bankruptcy Reform Act of 1978 (Pub. L. No. 95-598; 11 U.S.C.),
as amended or supplemented from time to time, or any successor statute, and any
and all rules and regulations issued or promulgated in connection therewith.

 

 

“CODE”
means the California Uniform Commercial Code. 
Any and all terms used in this Security Agreement which are defined in
the Code shall be construed and defined in accordance with the meaning and
definition ascribed to such terms under the Code, unless otherwise defined
herein.

 

“COLLATERAL”
means any and all of the Accounts and Group’s Books, in each case whether now
existing or hereafter acquired or created, and any Proceeds or products of any
of the foregoing, or any portion thereof, and any and all Accounts, money, or
other tangible or intangible property, resulting from the sale or other
disposition of the Accounts, or any portion thereof or interest therein, and
the substitutions, replacements, additions, accessions, products and Proceeds
thereof.

 

“EXPENSES”
means any and all costs or expenses required to be paid by Group under this
Security Agreement which are paid or advanced by Manager; all costs and
expenses of Manager, including its attorneys’ fees and expenses (including
attorneys’ fees incurred pursuant to proceedings arising under the Bankruptcy
Code), incurred or expended to correct any default or enforce any provision of
this Security Agreement, or in gaining possession of, maintaining, handling,
preserving, storing, shipping, selling, preparing for sale, or advertising to
sell the Collateral, irrespective of whether a sale is consummated; and all costs
and expenses of suit incurred or expended by Manager, including its attorneys’
fees and expenses (including attorneys’ fees incurred pursuant to proceedings
arising under the Bankruptcy Code) in enforcing or defending this Security
Agreement, irrespective of whether suit is brought.

 

“GOVERNMENTAL
AUTHORITY” means any federal, state, local or other governmental department,
commission, board, bureau, agency, central bank, court, tribunal or other
instrumentality or authority or subdivision thereof, domestic or foreign,
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.

 

“HEALTH
CARE LAW” means any Applicable Law regulating the acquisition, construction,
operation, maintenance or management of a healthcare practice, facility,
provider or payor.

 

“INSTRUMENTS”
means any and all negotiable instruments, certificated securities and every
other writing which evidences a right to the payment of money, in each case
whether now existing or hereafter acquired.

 

“LIEN”
means any mortgage, deed of trust, pledge, security interest, hypothecation,
assignment, deposit arrangement or other preferential arrangement, charge or
encumbrance (including, any conditional sale or other title retention
agreement, or finance lease) of any kind.

 

“GROUP’S
BOOKS” means any and all presently existing and hereafter acquired or created
books and records of Group (excluding patient medical records and peer review
records), including all records (including maintenance and warranty records),
ledgers, computer programs,

 

 

disc
or tape files, printouts, runs, and other computer prepared information
indicating, summarizing, or evidencing the Accounts.

 

“PROCEEDS”
means whatever is receivable or received from or upon the sale, lease, license,
collection, use, exchange or other disposition, whether voluntary or
involuntary, of any Collateral or other assets of Group, including “proceeds”
as defined in Section 9306 of the Code, any and all proceeds of any
insurance, indemnity, warranty or guaranty payable to or for the account of
Group from time to time with respect to any of the Collateral, any and all
payments (in any form whatsoever) made or due and payable to Group from time to
time in connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral by any Governmental Authority
(or any person or entity acting under color of Governmental Authority), any and
all other amounts from time to time paid or payable under or in connection with
any of the Collateral or for or on account of any damage or injury to or
conversion of any Collateral by any person or entity, any and all other
tangible or intangible property received upon the sale or disposition of
Collateral, and all proceeds of proceeds.

 

“SECURED
OBLIGATIONS” shall mean any and all debts, liabilities, obligations, or
undertakings owing by Group to Manager arising under, advanced pursuant to, or
evidenced by the Management Agreement and this security Agreement, whether
direct or indirect, absolute or contingent, matured or unmatured, due or to
become due, voluntary or involuntary, whether now existing or hereafter
arising.

 

“SECURITY
AGREEMENT” shall mean this Security Agreement, any concurrent or subsequent
riders, exhibits or schedules to this Security Agreement, and any extensions,
supplements, amendments, or modifications to or in connection with this
Security Agreement, or to any such riders, exhibits or schedules.

 

2. 
CONSTRUCTION.  Unless the context of
this Security Agreement clearly requires otherwise, references to the plural
include the singular, references to the singular include the plural, the part
includes the whole, “including” is not limiting, and “or” has the inclusive
meaning represented by the phrase “and/or. 
References in this Security Agreement to “determination” by Manager
include reasonable estimates (absent manifest error) by Manager, as applicable
(in the case of quantitative determinations) and reasonable beliefs (absent
manifest error) by Manager, as applicable (in the case of qualitative
determinations).  The words “hereof,”
“herein,” “hereby,” “hereunder,” and similar terms in this Security Agreement
refer to this Security Agreement as a whole and not to any particular provision
of this Security Agreement. Article, section, subsection, exhibit, and
schedule references are to this Security Agreement unless otherwise
specified.

 

3. 
CREATION OF SECURITY INTEREST.  Group
hereby grants to Manager a continuing security interest in all presently
existing and hereafter acquired or arising Collateral in order to secure the
prompt payment and performance of all of the Secured Obligations.  Group acknowledges and affirms that such
security interest in the Collateral has attached to all Collateral without
further act on the part of Manager or Group.

 

 

4.  FURTHER ASSURANCES.

 

4.1  FURTHER ASSURANCES.  Group shall execute and deliver to Manager
concurrently with Group’s execution of this Security Agreement, and from time
to time at the request of Manager, all financing statements, continuation
financing statements, fixture filings, security agreements, chattel mortgages,
assignments, and all other documents that Manager may request, in form
satisfactory to Manager, to perfect and maintain perfected Manager’s security
interests in the Collateral and in order to consummate fully all of the
transactions contemplated by this Security Agreement and the Management
Agreement.

 

5.  REPRESENTATIONS AND WARRANTIES.  Group represents and warrants to Manager
that:

 

5.1  TRADE NAMES AND TRADE STYLES.  Group presently does not conduct its
business operations under any trade names or trade styles.

 

5.2  OWNERSHIP OF COLLATERAL.  Group is and shall continue to be the sole
and complete owner of the Collateral, free from any Lien, other than the Lien
granted to Manager hereunder.

 

5.3  ENFORCEABILITY; PRIORITY OF SECURITY
INTEREST.  This Agreement (i) creates a
security interest which is enforceable against the Collateral in which Group
now has rights and will create a security interest which is enforceable against
the Collateral in which Group hereafter acquires rights at the time Group
acquires any such rights, and (ii) Manager has a perfected security interest
(to the fullest extent perfection can be obtained by filing, notification to
third parties or possession) and a first priority security interest in the
Collateral in which Group now has rights, and will have a perfected and first
priority security interest in the Collateral in which Group hereafter acquires
rights at the time Group acquires any such rights, in each case securing the
payment and performance of the Secured Obligations.

 

5.4  OTHER FINANCING STATEMENTS.  Other than financing statements in favor of
Manager, no effective financing statement naming Group as debtor, assignor,
grantor, mortgagor, pledgor or the like and covering all or any part of the
Collateral is on file in any filing or recording office in any jurisdiction.

 

6.  COVENANTS. 
In addition to the covenants of Group set forth in the Management
Agreement which are incorporated herein by this reference, Group agrees that
from the date of this Security Agreement and thereafter until the indefeasible
payment, performance and satisfaction in full of the Secured Obligations, and
all of Group’s obligations under the Management Agreement to Manager have been
terminated:

 

6.1  DEFENSE OF COLLATERAL.  Group shall appear in and defend any action,
suit or proceeding which may affect its title to or right or interest in, or
Manager’s right or interest in, the Collateral.

 

6.2  PRESERVATION OF COLLATERAL.  Group shall do and perform all acts that may
be necessary and appropriate to maintain, preserve and protect the Collateral.

 

 

6.3  CHANGE IN NAME; ADOPTION OF TRADE NAME OR
TRADE STYLE.  Group shall give Manager
at least 30 days’ prior written notice of any changes in its name, or of the
adoption of any trade name or trade style.

 

6.4  MAINTENANCE OF RECORDS.  Group shall keep separate, accurate and
complete Group’s Books, disclosing Manager’s security interest hereunder.

 

6.5  DISPOSITION OF COLLATERAL. Group shall not
surrender or lose possession of (other than to Manager), sell, lease, rent, or
otherwise dispose of or transfer any of the Collateral or any right or interest
therein.

 

6.6  LIENS. 
Group shall keep the Collateral free of all Liens, other than the Lien
granted to Manager hereunder.

 

7. EVENTS
OF DEFAULT.  The occurrence of any of
the following shall constitute an event of default (“Event of Default”) under
this Security Agreement:

 

7.1  BREACH OF MANAGEMENT AGREEMENT.  Group shall breach, or be in default of, any
of its agreements, covenants and obligations under the Management Agreement;

 

7.2  BREACH OF SECURITY AGREEMENT.  Group shall breach, or be in default of, any
of its agreements, covenants and obligations under this Security Agreement; or

 

7.3  BREACH OF REPRESENTATIONS OR
WARRANTIES.  Any representation or
warranty made by Group in this Security Agreement shall have been untrue in any
material respect when made.

 

8. RIGHTS
AND REMEDIES, ETC.

 

8.1  RIGHTS AND REMEDIES.  During the continuance of an Event of
Default, Manager, without notice or demand, may do any one or more of the
following, all of which are authorized by Group:

 

(a)  Make such payments and do such acts as it
considers necessary or reasonable to protect Manager’s security interest in the
Collateral. Group agrees to assemble and make available any or all of the
Collateral if Manager so requires. Group authorizes Manager to enter the
premises where the Collateral is located, take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise any
encumbrance, charge, or lien which, in the opinion of the Manager, appears to
be prior or superior to Manager’s security interest, and to pay all costs and
expenses incurred in connection therewith;

 

(b)  Sell the Collateral, at either a public or
private sale, or both, by way of one or more contracts or transactions, for
cash or on terms, in such manner and at such places (including Group’s
premises) as is commercially reasonable, and apply any proceeds of any sale

 

 

or
other disposition of the Collateral in the order provided in Section 9504
of the Code, including the payment of Expenses.  It is not necessary that the Collateral be present at any such
sale;

 

(c)  Without constituting a retention of
collateral in satisfaction of indebtedness as provided for in Section 9505
of the Code, notify account debtors and other obligors of Group of Manager’s
security interests in the Collateral, and proceed to collect the same and apply
the net cash proceeds therefrom to the Secured Obligations;

 

(d)  Manager shall give notice of any disposition
of the Collateral as follows:

 

(i) 
Manager shall give Group and each holder of a security interest in the
Collateral who has filed with Manager a written request for notice, a written
notice stating the time and place of a public sale, or, if the disposition is
to be either a private sale or some other disposition that is not a public
sale, the time on or after which the private sale or other disposition is to be
made;

 

(ii)  The notice described in the immediately
preceding paragraph shall be delivered to Group as provided in Section 8.3
of the Management Agreement at least five (5) calendar days before the date
fixed for a sale.  Notice to persons
other than Group claiming an interest in the Collateral shall be sent to such
addresses as such persons have furnished to Manager prior to the date of such
notice;

 

(iii)  If the disposition is to be a public sale,
Manager shall also give notice of the time and place of said sale by publishing
a notice at least five (5) calendar days before the date of the sale in a
newspaper of general circulation, if one exists, in the county in which the
sale is to be held;

 

(e)  Manager may, in its own name, or in the name
of a designee or nominee, credit bid and purchase at any public sale;

 

(f)  Group shall pay all Expenses; and

 

(g)  Any portion of the Secured Obligations which
remains unpaid after disposition of the Collateral as provided above shall be
paid immediately by Group.  Any excess
which exists after disposition of the Collateral and payment in full of the
Secured Obligations shall be returned promptly, without interest and subject to
the rights of third persons, to Group by Manager.

 

8.2  FURTHER DOCUMENTATION.  Upon the exercise by Manager of any power,
right, privilege, or remedy pursuant to this Security Agreement which requires
any consent, approval, registration, qualification, or authorization of any
Governmental Authority, Group agrees to execute and deliver, or will cause the
execution and delivery of, all applications, certificates, instruments,
assignments, and other documents and papers that Manager or any

 

 

purchaser
of the Collateral may be required to obtain for such governmental consent,
approval, registration, qualification, or authorization.

 

8.3  CUMULATIVE REMEDIES; WAIVERS.  The rights and remedies of Manager under
this Security Agreement, the Management Agreement, and all other agreements
contemplated hereby and thereby shall be cumulative.  Manager shall have all other rights and remedies not inconsistent
herewith as provided under the Code, by law, or in equity.  No exercise by Manager of any one right or
remedy shall be deemed an election of remedies, and no waiver by Manager of any
default on Group’s part shall be deemed a continuing waiver of any further
defaults.  No delay by Manager shall
constitute a waiver, election or acquiescence with respect to any right or
remedy.

 

9. 
NOTICES.  All notices or demands by any
party hereto to the other party and relating to this Security Agreement shall
be made in the manner set forth in Section 14.6 of the Management
Agreement.

 

10.
GENERAL PROVISIONS.

 

10.1   SUCCESSORS AND ASSIGNS.  This Security Agreement shall bind and inure
to the benefit of the respective successors and assigns of Group and Manager;
PROVIDED, HOWEVER, that Group may not assign this Security Agreement nor
delegate any of its duties hereunder without Manager’s prior written consent
and any prohibited assignment or delegation shall be absolutely void.  No consent by Manager to an assignment by
Group shall release Group from the Secured Obligations.  Manager may assign this Security Agreement
and delegate its duties hereunder, if any, from time to time to its lender or
lenders or to its parent’s lender or lenders, without prior notice to, or the
consent of, Group, and Group agrees to recognize such lender or lenders as
Manager’s assignee under this Security Agreement.

 

10.2   NO PRESUMPTION AGAINST ANY PARTY.  Neither this Security Agreement nor any
uncertainty or ambiguity herein shall be construed or resolved against Manager
or Group, whether under any rule of construction or otherwise.  On the contrary, this Security Agreement has
been reviewed by each of the parties and their counsel and shall be construed
and interpreted according to the ordinary meaning of the words used so as to
accomplish fairly the purposes and intentions of all parties hereto.

 

10.3   AMENDMENTS AND WAIVERS.  Any provision of this Security Agreement or
any of the Loan Documents to which Group is a party may be amended or waived
if, but only if, such amendment or waiver is in writing and is signed by the
party asserted to be bound thereby, and then such amendment or waiver shall be
effective only in the specific instance and specific purpose for which given.

 

10.4   COUNTERPARTS; INTEGRATION;
EFFECTIVENESS.  This Security Agreement
may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were
upon the same instrument.  This Security
Agreement constitutes the entire agreement and understanding among the parties
hereto and supersedes any and all prior agreements and understandings, oral or
written, relating to the

 

 

subject
matter hereof.  This Security Agreement
shall become effective when executed by each of the parties hereto and
delivered to Manager.

 

11.  GOVERNING LAW.  This Security Agreement shall be deemed to have been made in the
State of California and the validity, construction, interpretation, and
enforcement hereof, and the rights of the parties hereto, shall be determined
under, governed by, and construed in accordance with the internal laws of the
State of California.

 

12.  NO VIOLATION OF APPLICABLE LAW.  To the extent that any lien or security
interest on any Asset(s) granted by Group herein violates any applicable Health
Care Law, the grant of such lien or security interest on such Asset(s) shall be
automatically null and void; provided however, that to the extent such lien or
security interest at any time hereafter no longer violates any applicable
Health Care Law, then such lien or security interest shall automatically and
without any further action attach and become fully effective at that time
(giving effect to any retroactive effect to any change in applicable law or
regulation); and, provided further, that the liens or security interests on
other Asset(s) granted by Group herein that do not violate any applicable
Health Care Law shall remain at all times in full force and effect.

 

Remainder of this page intentionally left blank.

 

IN
WITNESS WHEREOF, the parties have executed this Security Agreement as of the date
first set forth above.

 

	
  PROSPECT
  PROFESSIONAL CARE MEDICAL GROUP, INC.

  a California professional corporation

  
	
   

  
	
  /s/ Jacob Y. Terner

  	
   

  
	
  Jacob
  Y. Terner

  
	
  President
  & Chief Executive Officer

  
	
   

  
	
   

  
	
  PROSPECT MEDICAL SYSTEMS, INC.

  a Delaware corporation

  
	
   

  
	
  /s/ Jacob Y. Terner

  	
   

  
	
  Jacob
  Y. Terner

  
	
  President
  & Chief Executive Officer

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