Document:

ex10-3.htm

    
      

    

    
      Exhibit
10.3

    

    
       

      GUARANTY

       

       

       

      THIS
UNLIMITED GUARANTY (“Guaranty”)
is made as of this 19th
day of February, 2008 in favor of FIFTH STREET MEZZANINE PARTNERS II, L.P., a
Delaware limited partnership (together with its successors and assigns, “Lender”)
by PET DRX CORPORATION, a Delaware corporation (“Guarantor”).

       

      BACKGROUND

       

      A.           XLNT
VETERINARY CARE, INC., a Delaware corporation (“Lead Borrower”) and ADLER
VETERINARY GROUP, INC., a California corporation, ANIMAL CLINIC OF YUCCA VALLEY,
INC., a California corporation, ANIMAL EMERGENCY CLINIC OF THE DESERT, INC., a
California corporation, ANIMAL MEDICAL HOSPITAL, INC., a California corporation,
BONITA PET HOSPITAL, INC., a California corporation, BRENTWOOD PET CLINIC, INC.,
a California corporation, ELDORADO ANIMAL HOSPITAL, INC., a California
corporation, JERAULD L. WOODRING, INC., a California corporation, LAWRENCE PET
HOSPITAL, INC., a California corporation, MCCONNELL & FENTON CORPORATION, a
California corporation, RAINBOW HAWK, INC., a California corporation, SAN CARLOS
VETERINARY HOSPITAL, INC., a California corporation, SOUTH BAY VETERINARY
SPECIALISTS, INC., a California corporation, SOUTH COUNTY EMERGENCY ANIMAL
CLINIC, INC., a California corporation, STANFORD PET CLINIC, INC., a California
corporation, TARVIN & LENEHAN, INC., a California corporation, VETS &
PETS, INCORPORATED, a California corporation, YUBA-SUTTER VETERINARY HOSPITAL,
INC., a California corporation, CALIFORNIA ANIMAL HOSPITAL VETERINARY SPECIALTY
GROUP, INC., a California corporation, VETSURG, INC., a California corporation,
BAY AREA VETERINARY SPECIALIST, INC., a California corporation and BRADSHAW
VETERINARY CLINIC, INC., a California corporation (jointly and severally,
individually and collectively, “Borrower”) and Lender have entered into a
certain Credit Agreement dated March 29, 2007, as amended by that certain First
Amendment to Credit Agreement and Loan Documents dated as of the even date
herewith (collectively, the “Loan
Agreement”) pursuant to which Lender has made a loan (“Loan”)
to Borrower in the amount of $12,000,000.00.  The Loan also is
evidenced by Borrower’s note to Lender dated March 29, 2007 (“Note”)
and secured by, among other things, a Security Agreement executed and delivered
by Borrower to Lender dated March 29, 2007 and that certain Security Agreement
executed and delivered by PET DRX CORPORATION, a
Delaware corporation, BAY AREA VETERINARY SPECIALIST, INC., a California
corporation and BRADSHAW VETERINARY CLINIC, INC., a California corporation to
Lender dated as of the even date herewith (collectively, the “Security
Instrument”) which grants to Lender, among other things, a first lien on
all business assets and property of Borrower.

       

      B.           Guarantor
will derive substantial benefit from Lender’s modification of the Loan to
Borrower.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

         

      

      C.           Lender
requires as a condition to the modification of the Loan that Guarantor agrees,
to guarantee for the benefit of Lender, and its successors and assigns, all
obligations and liabilities of Borrower with respect to the Loan.

       

      NOW,
THEREFORE, to induce Lender to modify the Loan to Borrower, and in consideration
of the substantial benefit Guarantor will derive from the Loan, and other good
and valuable consideration, the receipt and sufficiency of which are
acknowledged, and intending to be legally bound hereby, Guarantor hereby agrees
as follows:

       

      SECTION
1

      DEFINED
TERMS

       

      Defined
Terms.  Capitalized terms used in this Guaranty and not
specifically defined in this Guaranty have the meaning provided in the Loan
Agreement.

       

      SECTION
2

      OBLIGATION
GUARANTEED

       

      Guaranty
of Guaranteed Obligations.  Guarantor irrevocably and
unconditionally, guarantees to Lender the prompt payment when due, whether at
stated maturity, by acceleration or otherwise, of all obligations and
liabilities of Borrower to Lender, including, without limitation, (a) the due
and punctual payment of all amounts due under the Note and the Loan Agreement
and of all monetary payments required to be made under the Loan Documents (and
all renewals, extensions, modifications and rearrangements thereof); and (b) the
full and faithful performance of all of the terms, covenants, conditions,
agreements and other obligations of Borrower contained in the Loan Documents and
all renewals, extensions, modifications and rearrangements of said Loan
Documents (collectively, “Guaranteed
Obligations”).

       

      Unlimited
Nature of Guaranty.  This is a guaranty of payment and
performance and not of collection or collectibility only.  The
obligations under this Guaranty shall be unlimited, absolute, independent and
unconditional under any and all circumstances.  For purposes of this
Guaranty, the term Guaranteed Obligations is used in its most comprehensive
sense to include both monetary and non-monetary obligations of Borrower to
Lender and to include, without limitation, each and every debt, obligation and
liability of Borrower already, now or hereafter made, incurred or created in
favor of Lender.  The term also includes voluntary and involuntary
indebtedness however it arose or arises, whether it was or is a direct
obligation to Lender or was or is acquired by Lender by assignment, merger or
succession, whether it is due or not yet due, absolute or contingent, liquidated
or unliquidated or determined or undetermined, whether arising under a single
transaction or a series of transactions, whether arising before or after an
obligation of Borrower to Lender has been satisfied in full, and whether
Borrower may be liable for it individually or jointly with
others.

       

      Continuing
Obligation.  This Guaranty is a continuing guaranty and in full
force and effect and will be discharged only if and when the Loan has been paid
in full, and all obligations under the Loan Agreement and other Loan Documents
have been fully performed; provided,
however,
that notwithstanding any of the foregoing to the contrary, this Guaranty shall
remain in full force and effect for so long as any payment hereunder may be
voided in bankruptcy proceedings as a preference or for any other
reason.

       

      
        
          
          

        

        
          -2-

          
            

          

        

        
          
          

        

         

      

      Direct
Action Against Guarantor.    Lender has the right to
require Guarantor to pay, comply with and satisfy its obligations and
liabilities under this Guaranty, and shall have the right to proceed immediately
against Guarantor with respect thereto, without being required to attempt
recovery first from Borrower or any other party, without first suing on the Note
or any other Loan Document and without demonstrating that the collateral for the
Loan is inadequate security or that Lender has exercised (to any degree) or
exhausted any of Lender’s other rights and remedies with respect to Borrower or
any collateral for the Loan.

       

      SECTION
3

      GENERAL
TERMS AND CONDITIONS

       

      Payments;
Interest on Amounts Payable Hereunder.  Amounts payable to
Lender under this Guaranty shall be immediately due and payable on Lender’s
written demand and shall be paid without reduction by set-off, defense,
counterclaim or cross-claim.  Interest at the lower of the Default
Rate or the maximum interest rate permitted by applicable law also shall accrue
on any judgment obtained by Lender in connection with the enforcement or
collection of amounts due under this Guaranty until such judgment is paid in
full.  Lender may apply all money received by Lender to payment or
reduction of the Loan or reimbursement of Lender’s expenses, in such priority
and proportions, and at such time or times as Lender may
elect.

       

      Cumulative
Remedies.  Guarantor acknowledges that following an Event of
Default, with respect to the Loan, Lender shall be entitled to accelerate the
Loan and exercise all other rights and remedies as have been provided to Lender
hereunder, under the other Loan Documents, by law or in equity including without
limitation enforcement of this Guaranty.  All rights and remedies are
cumulative and may be exercised independently, concurrently or successively in
Lender’s sole discretion and as often as occasion therefor shall
arise.  Lender’s delay or failure to accelerate the Loan or exercise
any other remedy upon the occurrence of an Event of Default with respect to the
Loan shall not be deemed a waiver of such right as remedy.  No partial
exercise by Lender of any right or remedy will preclude further exercise
thereof.  Notice or demand given to Borrower in any instance will not
entitle Borrower to notice or demand in similar or other circumstances nor
constitute Lender’s waiver of its right to take any future action in any
circumstance without notice or demand (except where expressly required by this
Guaranty to be given).  Lender may release other security for the
Loan, may release any party liable for the Loan, may grant extensions, renewals
or forbearances with respect thereto, may accept a partial or past due payment
or grant other indulgences, or may apply any other security held by it to
payment of the Loan, in each case without prejudice to its rights under this
Guaranty and without such action being deemed an accord and satisfaction or a
reinstatement of the Loan.  Lender will not be deemed as a consequence
of its delay or failure to act, or any forbearances granted, to have waived or
be estopped from exercising any of its rights or remedies.

       

      Enforcement
Costs. Guarantor hereby agrees to pay, on written demand by Lender, all
costs incurred by Lender in collecting any amount payable under this Guaranty or
enforcing or protecting its rights under the Guaranty in each case whether or
not legal proceedings are commenced.  Such fees and expenses include,
without limitation, reasonable fees for attorneys, paralegals and other hired
professionals, a reasonable assessment of the cost of services performed by
Lender’s default management staff, court fees, costs incurred in connection with
pre-trial, trial and appellate level proceedings (including discovery and expert
witnesses), costs incurred in post-judgment collection efforts or in any
bankruptcy proceeding.  Amounts incurred by Lender shall be
immediately due and payable, and shall bear interest at the Default Rate from
the date of disbursement until paid in full, if not paid in full within ten (10)
business days after Lender’s written demand for payment.

       

      
        
          
          

        

        
          -3-

          
            

          

        

        
          
          

        

         

      

      Unimpaired
Liability.  Guarantor acknowledges and agrees that all
obligations hereunder are and shall be absolute and unconditional under any and
all circumstances without regard to the validity, regularity or enforceability
of any or all of the Loan Documents or the existence of any other circumstance
which might otherwise constitute a legal or equitable discharge or defense of a
guarantor or surety.  Without limiting the foregoing, Guarantor
acknowledges and agrees that its respective liability hereunder shall in no way
be released, terminated, discharged, limited or impaired by reason of any of the
following (whether or not Guarantor has any knowledge or notice
thereof):  (a) Borrower’s lack of authority or lawful right to
enter into any of the Loan Documents; (b) any modification, supplement,
extension, consolidation, restatement, waiver or consent provided by Lender with
respect to any of the Loan Documents including, without limitation, approval of
a Transfer or the grant of extensions of time for payment or performance;
(c) failure to record any Loan Document or to perfect any security interest
intended to be provided thereby or otherwise to protect, secure or insure any
collateral for the Loan; (d) Lender’s failure to exercise, or delay in
exercising, any rights or remedies Lender may have under the Loan Documents or
under this Guaranty; (e) the release or substitution, in whole or in part,
of any collateral for the Loan or acceptance of additional collateral for the
Loan; (f) the release of Guarantor from performance, in whole or in part,
under this Guaranty or the release of Borrower from performance, in whole or in
part, under any of the Loan Documents, in each case whether by operation of law,
Lender’s voluntary act, or otherwise; (g) any bankruptcy, insolvency,
reorganization, adjustment, dissolution, liquidation or other like proceeding
involving or affecting Borrower,  any other guarantor or Lender;
(h) the termination or discharge of the Security Instrument or the exercise
of any rights or remedies thereunder; (i) the existence of any claim,
setoff, counterclaim, defense or other rights which Guarantor may have against
Borrower, any other guarantor or Lender, whether in connection with the Loan or
any other transaction; or (j) the accuracy or inaccuracy of the
representations and warranties made by Borrower in any of the Loan
Documents.

       

      Waivers.  Guarantor
hereby waives and relinquishes, to the fullest extent permitted by law:
(a) all rights or claims of right to cause a marshalling of assets or to
cause Lender to proceed against any of the collateral for the Loan before
proceeding under this Guaranty against it or any other guarantor; (b) all
rights and remedies accorded by applicable law to sureties or guarantors, except
any rights of subrogation and contribution (the exercise of which are subject to
the terms of this Guaranty); (c) the right to assert a counterclaim, other
than a mandatory or compulsory counterclaim, in any action or proceeding brought
by or against it; (d) notice of acceptance of this Guaranty and of any
action taken or omitted in reliance hereon; (e) presentment for payment,
demand, protest, notice of nonpayment or failure to perform or observe, or any
other proof, notice or demand to which it might otherwise be entitled with
respect to its obligations hereunder; and (f) all homestead or exemption
rights against the obligations hereunder and the benefits of any statutes of
limitation or repose.

       

      
        
          
          

        

        
          -4-

          
            

          

        

        
          
          

        

      

       

      Guarantor
Bound by Judgment Against Borrower.  Guarantor agrees that it
shall be bound conclusively, in any jurisdiction, by the judgment in any action
by Lender against Borrower in connection with the Loan Documents (wherever
instituted) as if such Guarantor were a party to such action even if not so
joined as a party.

       

      Certain
Consequences of Borrower’s Bankruptcy.

       

      (a)           If
Borrower shall be subject to the protection of the Bankruptcy Code or any
insolvency law the effect of which is to prevent or delay Lender from taking any
remedial action against Borrower, including the exercise of any option Lender
has to accelerate and declare the Loan immediately due and payable, Lender may,
as against Guarantor, nevertheless declare the Loan due and payable and enforce
any or all of its rights and remedies against Guarantor as provided
herein.

       

      (b)           Any
payment made on the Loan, whether made by Borrower or any Guarantor or any other
Person, that is required to be refunded or recovered from Lender as a preference
or a fraudulent transfer or is otherwise set-aside pursuant to the Bankruptcy
Code or any insolvency or other debtor relief law shall not be considered as a
payment made on the Loan or under this Guaranty.  Guarantor’s
liability under this Guaranty shall continue with respect to any such payment,
or be deemed reinstated, with the same effect as if such payment had not been
received by Lender, notwithstanding any notice of revocation of this Guaranty
prior to such avoidance or recovery or payment in full of the Loan, until such
time as all periods have expired within which Lender could be required to return
any amount paid at any time on account of the Guaranteed
Obligations.

       

      (c)           Until
payment in full of the Loan (including interest accruing on the Note after the
commencement of a proceeding by or against Borrower under the Bankruptcy Code,
which interest the parties agree remains a claim that is prior and superior to
any claim of Guarantor notwithstanding any contrary practice, custom or ruling
in cases under the Bankruptcy Code generally), Guarantor agrees not to accept
any payment or satisfaction of any kind of indebtedness of Borrower to Guarantor
and hereby assigns such indebtedness to Lender, including the right (but not the
obligation) to file proof of claim and to vote in any other bankruptcy or
insolvency action, including the right to vote on any plan of reorganization,
liquidation or other proposal for debt adjustment under Federal or state
law.

       

      Subrogation
and Contribution.  Guarantor agrees that no payment by it under
this Guaranty shall give rise to (a) any rights of subrogation against
Borrower or the collateral for the Loan, or (b) any rights of contribution
against any other guarantor, in each case unless and until Lender has received
full and indefeasible payment of the Loan.  If the deferral of such
rights shall be unenforceable for any reason, Guarantor agrees that (a) its
rights of subrogation shall be junior and subordinate to Lender’s rights against
Borrower and the collateral for the Loan, and (b) its rights of
contribution against any other guarantor shall be junior and subordinate to
Lender’s rights against Guarantor.

       

      
        
          
          

        

        
          -5-

          
            

          

        

        
          
          

        

      

       

      Subordination
of Borrower’s Obligations to Guarantor.  Any indebtedness of
Borrower to Guarantor, now or hereafter existing, together with any interest
thereon, shall be and hereby is deferred, postponed and subordinated to the
prior payment in full of the Loan.  Further, Guarantor agrees that
should such Guarantor receive any payment, satisfaction or security for any
indebtedness owed by Borrower to it, the same shall be delivered to Lender in
the form received (endorsed or assigned as may be appropriate) for application
on account of, or as security for, the Loan and until so delivered to Lender,
shall be held in trust for Lender as security for the Loan.

       

      Lender
Transferees; Secondary Market Activities.  Guarantor
acknowledges and agrees that Lender, without notice to Guarantor or Guarantor’s
prior consent, may assign all or any portion of its rights hereunder in
connection with any sale, assignment or participation of the
Loan.

       

      SECTION
4

      REPRESENTATIONS
AND WARRANTIES

       

      Guarantor
Due Diligence and Benefit.  Guarantor represents and warrants
to Lender that (a) the Loan and this Guaranty are for commercial purposes,
(b) it has had adequate opportunity to review the Loan Documents,
(c) it is fully aware of obligations of Borrower thereunder and of the
financial condition, assets and prospects of Borrower, and (d) it is
executing and delivering this Guaranty based solely upon Guarantor’s own
independent investigation of the matters contemplated by clauses (a)-(c)
and in no part upon any representation, warranty or statement of Lender with
respect thereto.

       

      General.  Guarantor
represents and warrants that:

       

      (a)           Authority.  Guarantor
has the full power and authority to execute and deliver this Guaranty and to
perform its obligations hereunder and that (i) Guarantor is duly organized,
validly existing and in good standing under the laws of the state of its
formation, and (ii) the execution, delivery and performance of this
Guaranty by Guarantor has been duly and validly authorized and the person(s)
signing this Guaranty on Guarantor’s behalf has been validly authorized and
directed to sign this Guaranty.

       

      (b)           Valid
and Binding Obligation.  This Guaranty constitutes Guarantor’s
legal, valid and binding obligation, enforceable against it in accordance with
its terms.

       

      (c)           No
Conflict with Other Agreement.  Guarantor’s execution, delivery
and performance of this Guaranty will not (i) violate Guarantor’s
organizational documents, (ii) result in the breach of, or conflict with,
or result in the acceleration of, any obligation under any guaranty, indenture,
credit facility or other instrument to which Guarantor or any of its assets may
be subject, or (iii) violate any order, judgment or decree to which
Guarantor or any of its assets is subject.

       

      (d)           No
Pending Litigation.  No action, suit, proceeding or
investigation currently is pending or, to the best of Guarantor’s knowledge,
threatened against Guarantor which, either in any one instance or in the
aggregate, may have a material, adverse effect on Guarantor’s ability to perform
its obligations under this Guaranty.

       

      
        
          
          

        

        
          -6-

          
            

          

        

        
          
          

        

      

       

      (e)           Consideration.  Guarantor
will derive substantial benefit from the Loan to Borrower.

       

      SECTION
5

      MISCELLANEOUS

       

      Notices.  All
notices and other communications under this Guaranty are to be in writing and
addressed in the case of Lender to the address as set forth in the Loan
Agreement and in the case of Guarantor, as set forth below Guarantor’s signature
hereto.  Default or demand notices shall be deemed to have been duly
given upon the earlier of: (a) actual receipt; (b) one (1) business
day after having been timely deposited for overnight delivery, fee prepaid, with
a reputable overnight courier service, having a reliable tracking system;
(c) one (1) business day after having been sent by telecopier (with answer
back acknowledged) provided an additional notice is given pursuant to (b); or
(d) three (3) business days after having been deposited in any post office
or mail depository regularly maintained by the U.S. Postal Service and sent by
certified mail, postage prepaid, return receipt requested, and in the case of
clauses (b) and (d) irrespective of whether delivery is
accepted.  A new address for notice may be established by written
notice to the other parties; provided, however, that no address change will be
effective until written notice thereof actually is received by the party to whom
such address change is sent.

       

      Entire
Agreement; Modification.  This Guaranty is the entire agreement
between the parties hereto with respect to the subject matter hereof, and
supersedes and replaces all prior discussions, representations, communications
and agreements (oral or written).  This Guaranty shall not be
modified, supplemented, or terminated, nor any provision hereof waived, except
by a written instrument signed by the party against whom enforcement thereof is
sought, and then only to the extent expressly set forth in such
writing.

       

      Binding
Effect.  This Guaranty is binding upon and inures to the
benefit of Guarantor, Lender and their respective heirs, executors, legal
representatives, successors, and assigns, whether by voluntary action of the
parties or by operation of law.  Guarantor may not delegate or
transfer its obligations under this Guaranty.

       

      Unenforceable
Provisions.  Any provision of this Guaranty which is determined
by a court of competent jurisdiction or government body to be invalid,
unenforceable or illegal shall be ineffective only to the extent of such
determination and shall not affect the validity, enforceability or legality of
any other provision, nor shall such determination apply in any circumstance or
to any party not controlled by such determination.

       

      Duplicate
Originals; Counterparts.  This Guaranty may be executed in any
number of duplicate originals, and each duplicate original shall be deemed to be
an original. This Guaranty (and each duplicate original) also may be executed in
any number of counterparts, each of which shall be deemed an original and all of
which together constitute a fully executed Guaranty even though all signatures
do not appear on the same document.

       

      Construction
of Certain Terms.  Defined terms used in this Guaranty may be
used interchangeably in singular or plural form, and pronouns shall be construed
to cover all genders.  Section headings are for convenience only and
shall not be used in interpretation of this Guaranty.  The words
“herein,” “hereof” and “hereunder” and other words of similar import refer to
this Guaranty as a whole and not to any particular section, paragraph or other
subdivision; and the word “section” refers to the entire section and not to any
particular subsection, paragraph of other subdivision; and “Guaranty” and each
of the Loan Documents referred to herein mean the agreement as originally
executed and as hereafter modified, supplemented, extended, consolidated, or
restated from time to time.

       

      
        
          
          

        

        
          -7-

          
            

          

        

        
          
          

        

      

       

      GOVERNING
LAW.  THIS
GUARANTY AND EACH OF THE OTHER LOAN DOCUMENTS WHICH DOES NOT EXPRESSLY SET FORTH
APPLICABLE LAW SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW
YORK,
WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.

       

      CONSENT
TO JURISDICTION.  GUARANTOR
HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN
THE STATE OF NEW YORK AND IRREVOCABLY AGREE THAT, SUBJECT TO
LENDER’S  ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR
RELATING TO THIS GUARANTY OR THE OTHER LOAN DOCUMENTS  SHALL BE
LITIGATED IN SUCH COURTS. GUARANTOR EXPRESSLY SUBMITS AND CONSENTS TO THE
JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON
CONVENIENS.  GUARANTOR HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL
PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON GUARANTOR
BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO
GUARANTOR, AT THE ADDRESS SET FORTH IN THIS GUARANTY AND SERVICE SO MADE SHALL
BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED.  IN ANY
LITIGATION, TRIAL, ARBITRATION OR OTHER DISPUTE RESOLUTION PROCEEDING RELATING
TO THIS GUARANTY OR ANY OF THE OTHER LOAN DOCUMENTS, ALL DIRECTORS, OFFICERS,
EMPLOYEES AND AGENTS OF GUARANTOR OR ANY OF ITS AFFILIATES SHALL BE DEEMED TO BE
EMPLOYEES OR MANAGING AGENTS OF GUARANTOR FOR PURPOSES OF ALL APPLICABLE LAW OR
COURT RULES REGARDING THE PRODUCTION OF WITNESSES BY NOTICE FOR TESTIMONY
(WHETHER IN A DEPOSITION, AT TRIAL OR OTHERWISE).  GUARANTOR AGREES
THAT LENDER’S COUNSEL IN ANY SUCH DISPUTE RESOLUTION PROCEEDING MAY EXAMINE ANY
OF THESE INDIVIDUALS AS IF UNDER CROSS-EXAMINATION AND THAT ANY DISCOVERY
DEPOSITION OF ANY OF THEM MAY BE USED IN THAT PROCEEDING AS IF IT WERE AN
EVIDENCE DEPOSITION.  GUARANTOR IN ANY EVENT WILL USE ALL COMMERCIALLY
REASONABLE EFFORTS TO PRODUCE IN ANY SUCH DISPUTE RESOLUTION PROCEEDING, AT THE
TIME AND IN THE MANNER REQUESTED BY LENDER, ALL PERSONS, DOCUMENTS (WHETHER IN
TANGIBLE, ELECTRONIC OR OTHER FORM) OR OTHER THINGS UNDER THEIR CONTROL AND
RELATING TO THE DISPUTE.

       

      
        
          
          

        

        
          -8-

          
            

          

        

        
          
          

        

      

       

                 WAIVER
OF JURY TRIAL.  GUARANTOR
HEREBY WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF THIS GUARANTY AND THE OTHER LOAN DOCUMENTS. GUARANTOR
ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS
RELATIONSHIP, THAT EACH HAS RELIED ON THE WAIVER IN ENTERING INTO THIS GUARANTY
AND THE OTHER LOAN DOCUMENTS AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER
IN THEIR RELATED FUTURE DEALINGS.  GUARANTOR WARRANTS AND REPRESENTS
THAT EACH HAS HAD THE OPPORTUNITY OF REVIEWING THIS JURY WAIVER WITH LEGAL
COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL
RIGHTS.

       

      [Remainder
of page is blank; signatures appear on next page.]

       

      
        
          
          

        

        
          -9-

          
            

          

        

        
          
          

        

      

       

      IN
WITNESS WHEREOF, the undersigned hereby signs, seals and delivers this
Guaranty.

       

      
                                                                            PET
DRX CORPORATION,

                                                                              a
Delaware corporation

      

       

      
        	 	 	 	 
	 	 	 	 
	 	By:	/s/
      George Villasana
	 	 	Name:	George
      Villasana
	 	 	
                Title:

              	Secretary

      

       

      
        	 	 	 	 
	 	 	 	 
	 
      	 	
                Address
      for Notice:

              

      

       

      
        	 	 	 
	 	 	 
	 	 	Fax:	 
	 	 	Attn:	 

      

       

       

      
 

       

      -10-ex10-4.htm

    
      

    

    Exhibit
10.4

    
      SECURITY
AGREEMENT

       

       

       

      Date:   February
19, 2008

       

      THIS
SECURITY AGREEMENT (hereinafter, this “Agreement”) is made by and
between

       

      FIFTH
STREET MEZZANINE PARTNERS II, L.P., a Delaware limited partnership (the
“Secured Party”),

       

      and

       

      PET
DRX CORPORATION, a Delaware Corporation,
BAY
AREA VETERINARY SPECIALIST, INC., a California corporation and BRADSHAW
VETERINARY CLINIC, INC., a California corporation (jointly and severally,
individually and collectively, “Debtor”),

       

      in
consideration of the mutual covenants contained herein and benefits to be
derived herefrom.

       

      W
I T N E S S E T H:

       

      ARTICLE
1.         DEFINITIONS

       

      All
capitalized terms used herein shall have the meanings set forth in that certain
Credit Agreement dated March 29, 2007 by and between Secured Party and XLNT
Veterinary Care, Inc., a Delaware corporation (“Lead Borrower”) and each of the
other Borrowers named therein (collectively, “Original Borrower”), as amended by
that certain First Amendment to Credit Agreement and Loan Documents of even date
hereof by and among Original Borrower, Debtor and Secured Party (collectively,
the “Loan Agreement”).  In addition, as herein used, the following
terms have the following meanings or are defined in the section of this
Agreement so indicated:

       

      
        	
                 
      

              	
                “Account
      Debtor” has the meaning given that term in the
  Code.

              

      

       

      
        	
                 
      

              	
                “Agreement”
      is defined in the Preamble.

              

      

       

      
        	
                 
      

              	
                “Chattel
      Paper” has the meaning given that term in the
  Code.

              

      

       

      
        	
                 
      

              	
                “Collateral” is
      defined in Section 2.1.

              

      

       

      
        	
                 
      

              	
                “Contract
      Rights” includes, without limitation, “contract rights” as now or formerly
      defined in the Code and also any right to payment under a contract not yet
      earned by performance and not evidenced by an instrument or Chattel
      Paper.

              

      

      
      

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      
        	
                 
      

              	
                “Costs
      of Collection” includes, without limitation, all attorneys’ reasonable
      fees and reasonable out-of-pocket expenses incurred by the Secured Party’s
      attorneys (including in-house counsel), accounting, consulting, brokerage
      or other similar professional fees or expenses, and all reasonable costs
      incurred by the Secured Party in the administration of the Obligations
      and/or the Loan Documents, including, without limitation, reasonable costs
      and expenses associated with travel on behalf of the Secured Party, which
      costs and expenses are directly or indirectly related to or in respect of
      the Secured Party’s: administration and management of the Obligations;
      negotiation, documentation, and amendment of any Loan Document; or efforts
      to preserve, protect, collect, or enforce the Collateral, the Obligations,
      and/or the Secured Party’s Rights and Remedies and/or any of the Secured
      Party’s rights and remedies against or in respect of any guarantor or
      other person liable in respect of the Obligations (whether or not suit is
      instituted in connection with such efforts).  The Costs of
      Collection are Obligations, and at the Secured Party’s option may bear
      interest at the highest post-default rate which the Secured Party may
      charge the Debtor hereunder as if such had been lent, advanced, and
      credited by the Secured Party to, or for the benefit of, the
      Debtor.

              

      

      
        
        

         

      

      
        	
                 
      

              	
                “Debtor”
      is defined in the Preamble.

              

      

       

      
        	
                 
      

              	
                “Deposit
      Account” has the meaning given that term in the
  Code.

              

      

       

      
        	
                 
      

              	
                “Documents”
      has the meaning given that term in the
Code.

              

      

       

      
        	
                 
      

              	
                “Documents
      of Title” has the meaning given that term in the
  Code.

              

      

       

      
        	
                 
      

              	
                “Financial
      Asset” has the meaning given that term in the
  Code.

              

      

       

      
        	
                 
      

              	
                “Goods”
      has the meaning given that term in the
Code.

              

      

       

      
        	
                 
      

              	
                “Letter-of-Credit
      Right” has the meaning given that term in Code and also refers to any
      right to payment or performance under a letter of credit, whether or not
      the beneficiary has demanded or is at the time entitled to demand payment
      or performance.

              

      

      
        
          
          

           

        

      

      
        	
                 
      

              	
                “Payment
      Intangible” as defined in the Code and also any General Intangible under
      which the Account Debtor’s primary obligation is a monetary
      obligation.

              

      

       

      
        	
                 
      

              	
                “Proceeds”
      include, without limitation, “Proceeds” as defined in the Code, and each
      type of property described in Section
2.1.

              

      

       

      
        	
                 
      

              	
                “Receivables
      Collateral”: the
      Debtor’s Accounts, Accounts Receivable, Contract Rights, General
      Intangibles, Payment Intangibles, Chattel Paper, Instruments, Documents of
      Title, Documents, Securities, letters of credit for the benefit of the
      Debtor, and bankers’ acceptances held by the Debtor, and any rights to
      payment.

              

      

      
        
          
            
            

             

          

        

      

      
        	
                 
      

              	
                “Secured
      Party” is defined in Preamble.

              

      

       

      
        	
                 
      

              	
                “Secured
      Party’s Rights and Remedies” is defined in Section
  6.6.

              

      

       

       

      
        
          
          

        

        
          -2-

          
            

          

        

        
          
          

        

      

      
 

      
        	
                 
      

              	
                “Securities”
      has the meaning given that term in the
Code.

              

      

       

      
        	
                 
      

              	
                “Supporting
      Obligation” has the meaning given that term in the Code and also refers to
      a Letter-of-Credit Right or secondary obligation which supports the
      payment or performance of an Account, Chattel Paper, a Document, a General
      Intangible, an Instrument, or Investment
  Property. 

              

      

      
        
          
          

           

        

      

      
        	
                 
      

              	
                “Transfer”
      is defined in Section 4.1.

              

      

       

      ARTICLE
2.         GRANT OF SECURITY INTEREST

       

      2.1           Grant
of Security Interest.  To secure the Debtor’s prompt, punctual,
and faithful performance of all and each of the Obligations, the Debtor hereby
grants to the Secured Party a continuing security interest in and to, and
assigns to the Secured Party, the following, and each item thereof, whether now
owned or now due, or in which the Debtor has an interest, or hereafter acquired,
arising, or to become due, or in which the Debtor obtains an interest, and all
products, Proceeds, substitutions, and accessions of or to any of the following
(all of which, together with any other property in which the Secured Party may
in the future be granted a security interest, is referred to herein as the
“Collateral”): All assets of the Debtor, including, without limitation, all
Accounts and accounts receivable; Inventory; Contract Rights; Instruments;
Deposit Accounts; General Intangibles; Letter of Credit Rights, Payment
Intangibles, Supporting Obligations, Investment Property; Equipment; Goods;
Securities; Documents; Documents of Title; Fixtures; Chattel Paper; Financial
Assets, policies and certificates of insurance, money, cash, or other property;
all insurance proceeds, refunds, and premium rebates, including, without
limitation, proceeds of fire and credit insurance, whether any of such proceeds,
refunds, and premium rebates arise out of any of the foregoing; all liens,
guaranties, rights, remedies, and privileges pertaining to any of the foregoing
including the right of stoppage in transit all books, records, and information
relating to the Collateral and/or to the operation of the Debtor’s business, and
all rights of access to such books, records, and information, and all property
in which such books, records, and information are stored, recorded, and
maintained.

       

      2.2           Commercial
Tort Claims. If the Debtor shall at any time acquire a commercial tort
claim, the Debtor shall promptly notify the Secured Party in a writing signed by
the Debtor of the brief details thereof and grant to the Secured Party in such
writing a security interest therein and in the proceeds thereof, all upon the
terms of this Agreement, with such writing to be in form and substance
satisfactory to the Secured Party.

       

      2.3           Extent
and Duration of Security Interest. The within grant of a security
interest is in addition to, and supplemental of, any security interest
previously granted by the Debtor to the Secured Party and shall continue in full
force and effect applicable to all Obligations until all Obligations have been
paid and/or satisfied in full.

       

      2.4           Authorization
to File.  The Debtor hereby authorizes the Secured Party to
file financing statements, without notice to the Debtor, with all appropriate
jurisdictions in order to perfect or protect the Secured Party’s interest or
rights hereunder, which financing statements may indicate the Collateral as “all
assets of the Debtor” or words of similar effect, or as being of an equal or
lesser scope, or with greater detail, all in the Secured Party’s
discretion.

       

       

      
        
          
          

        

        
          -3-

          
            

          

        

        
          
          

        

         

      

      ARTICLE
3.        
REPRESENTATIONS, WARRANTIES AND COVENANTS

       

      The
Debtor, in addition to all other representations, warranties and covenants made
by the Debtor in any other Loan Document, makes those covenants included in this
Agreement.  To induce Secured Party to enter into the Loan Documents
and to make the Loan, Debtor represents, warrants and covenants to Secured Party
that:

       

      3.1           Due
Organization  Authorization; No Conflicts.

       

      (a)           The
Debtor presently is and shall hereafter remain in good standing in its
jurisdiction of formation and is and shall hereafter remain duly qualified and
in good standing in every other State in which, by reason of the nature or
location of the Debtor’s assets or operation of the Debtor’s business, such
qualification may be necessary, except where the failure to be so qualified
could reasonably be expected to have a Material Adverse Effect.

       

      (b)           The
Debtor has all requisite power and authority to execute and deliver to the
Secured Party all and singular the Loan Documents to which the Debtor is a party
and has and will hereafter retain all requisite corporate power to perform all
and singular the Obligations.

       

      (c)           The
Loan Documents have been duly executed and delivered by Debtor and are the
legal, valid and binding obligations of the Debtor, enforceable against the
Debtor in accordance with their respective terms, subject to limitations as to
enforceability which might result from bankruptcy, insolvency, moratorium and
other similar laws affecting creditors’ rights generally and subject to
limitations on the availability of equitable remedies.

       

      3.2           Additional
Assurances.  The Debtor shall execute and deliver to the
Secured Party such instruments, documents, and papers, and shall do all such
things from time to time hereafter as the Secured Party may reasonably request
to carry into effect the provisions and intent of this Agreement and to comply
with all applicable statutes and laws.  The Debtor shall execute all
such instruments as reasonably may be required by the Secured Party with respect
to the recordation and/or perfection of the security interests created
herein.

       

      ARTICLE
4.         NEGATIVE
COVENANTS

       

      Debtor
covenants and agrees that Debtor will not do any of the following:

       

      4.1           Dispositions.  Convey,
sell, lease, transfer or otherwise dispose of (collectively, a “Transfer”), all
or any part of its business or property, other than Transfers: (i) of inventory
in the ordinary course of business; (ii) of non-exclusive licenses and similar
arrangements for the use of the property of Debtor in the ordinary course of
business; (iii) that constitute payment of normal and usual operating expenses
in the ordinary course of business; (iv) of worn-out or obsolete equipment; or
(v) permitted by Section 3.7 of the Credit Agreement.

       

      
        
          
          

        

        
          -4-

          
            

          

        

        
          
          

        

      

       

      4.2           Location
of Collateral.  The Debtor hereby certifies that no Collateral
is in the possession of any third party bailee (such as at a
warehouse).  In the event that the Debtor, after the date hereof,
intends to store or otherwise deliver the Collateral to such a bailee, then
Debtor shall use reasonable best efforts to secure in writing from such bailee
an acknowledgment that the bailee is holding such Collateral for the benefit of
the Secured Party.

       

      ARTICLE
5.         EVENTS
OF DEFAULT

       

      Upon the
occurrence of any Event of Default, all Obligations of the Debtor to the Secured
Party shall become immediately due and payable, at the option of the Secured
Party and without notice or demand.  The occurrence of any Event of
Default shall also constitute, without notice or demand, a default under all
other agreements between the Secured Party and the Debtor and instruments and
papers given the Secured Party by the Debtor, whether such agreements,
instruments, or papers now exist or hereafter arise.

       

      ARTICLE
6.         RIGHTS AND REMEDIES UPON DEFAULT

       

      In
addition to all of the rights, remedies, powers, privileges, and discretions
which the Secured Party is provided under the Loan Documents or applicable law
prior to the occurrence of an Event of Default, the Secured Party shall have the
following rights and remedies upon the occurrence and during the continuance of
any Event of Default.

       

      6.1           Rights
of Enforcement. The Secured Party shall have all of the rights and
remedies of a secured party upon default under the Code, in addition to which
the Secured Party shall have all and each of the following rights and
remedies:

       

      (a)           To
collect the Receivables Collateral with or without the taking of possession of
any of the Collateral.

       

      (b)           To
apply the Receivables Collateral or the proceeds of the Collateral towards (but
not necessarily in complete satisfaction of) the Obligations.

       

      (c)           To
take possession of all or any portion of the Collateral.

       

      (d)           To
sell, lease, or otherwise dispose of any or all of the Collateral, in its then
condition or following such preparation or processing as the Secured Party
reasonably deems necessary and with or without the taking of possession of any
of the Collateral.

       

      (e)           To
exercise all or any of the rights, remedies, powers, privileges, and discretions
under all or any of the Loan Documents.

       

      (f)           To
apply to the Obligations any balances and deposits in any Deposit Accounts of
the Debtor which the Secured Party holds or is in control of.

       

      
        
          
          

        

        
          -5-

          
            

          

        

        
          
          

        

         

      

      6.2           Sale
of Collateral.

       

      (a)           Any
sale or other disposition of the Collateral may be at public or private sale
upon such terms and in such manner as the Secured Party deems advisable, having
due regard to compliance with any statute or regulation which might affect,
limit, or apply to the Secured Party’s disposition of the
Collateral.

       

      (b)           Unless
the Collateral is perishable or threatens to decline speedily in value, or is of
a type customarily sold on a recognized market (in which event the Secured Party
shall provide the Debtor with such notice as may be practicable under the
circumstances), the Secured Party shall give the Debtor at least
ten  (10) days prior written notice of the date, time, and place of
any proposed public sale, and of the date after which any private sale or other
disposition of the Collateral may be made.  The Debtor agrees that
such written notice shall satisfy all requirements for notice to the Debtor
which are imposed under the Code or other applicable law with respect to the
Secured Party’s exercise of the Secured Party’s rights and remedies upon
default.

       

      (c)           The
Secured Party may purchase the Collateral, or any portion of it at any sale held
under this Article.

       

      (d)           The
Secured Party shall apply the proceeds of any exercise of the Secured Party’s
Rights and Remedies under this Article towards the Obligations in such manner,
and with such frequency, as the Secured Party determines.

       

      6.3           Occupation
of Business Location. In connection with the Secured Party’s exercise of
the Secured Party’s rights under this Article, the Secured Party may enter upon,
occupy, and use any premises owned or occupied by the Debtor, and may exclude
the Debtor from such premises or portion thereof as may have been so entered
upon, occupied, or used by the Secured Party.  The Secured Party shall
not be required to remove any of the Collateral from any such premises upon the
Secured Party’s taking possession thereof, and may render any Collateral
unusable to the Debtor.  In no event shall the Secured Party be liable
to the Debtor for use or occupancy by the Secured Party of any premises pursuant
to this Article, nor for any charge (such as wages for the Debtor’s employees
and utilities) incurred in connection with the Secured Party’s exercise of the
Secured Party’s Rights and Remedies.

       

      6.4           Grant
of Nonexclusive License. The Debtor hereby grants to the Secured Party a
royalty free nonexclusive irrevocable license to use, apply, and affix any
trademark, tradename, logo, or the like in which the Debtor now or hereafter has
rights, such license being with respect to the Secured Party’s exercise of the
rights hereunder including, without limitation, in connection with any
completion of the manufacture of Inventory or sale or other disposition of
Inventory.

       

      6.5           Assembly
of Collateral. The Secured Party may require the Debtor to assemble the
Collateral and make it available to the Secured Party at the Debtor’s sole risk
and expense at a place or places which are reasonably convenient to both the
Secured Party and Debtor.

       

      
        
          
          

        

        
          -6-

          
            

          

        

        
          
          

        

      

       

      6.6           Rights
and Remedies. The rights, remedies, powers, privileges, and discretions
of the Secured Party hereunder (herein, the “Secured Party’s Rights and
Remedies”) shall be cumulative and not exclusive of any rights or remedies which
it would otherwise have.  No delay or omission by the Secured Party in
exercising or enforcing any of the Secured Party’s Rights and Remedies shall
operate as, or constitute, a waiver thereof.  No waiver by the Secured
Party of any Event of Default or of any default under any other agreement shall
operate as a waiver of any other default hereunder or under any other
agreement.  No single or partial exercise of any of the Secured
Party’s Rights or Remedies, and no express or implied agreement or transaction
of whatever nature entered into between the Secured Party and any person, at any
time, shall preclude the other or further exercise of the Secured Party’s Rights
and Remedies.  No waiver by the Secured Party of any of the Secured
Party’s Rights and Remedies on any one occasion shall be deemed a waiver on any
subsequent occasion, nor shall it be deemed a continuing waiver.  All
of the Secured Party’s Rights and Remedies and all of the Secured Party’s
rights, remedies, powers, privileges, and discretions under any other agreement
or transaction are cumulative, and not alternative or exclusive, and may be
exercised by the Secured Party at such time or times and in such order of
preference as the Secured Party in its sole discretion may
determine.  The Secured Party’s Rights and Remedies may be exercised
without resort or regard to any other source of satisfaction of the
Obligations.

       

      ARTICLE
7.         GENERAL

       

      7.1           Successors
and Assigns. This Agreement shall be binding upon the Debtor and the
Debtor’s representatives, successors and assigns and shall inure to the benefit
of the Secured Party and the Secured Party’s successors and assigns; provided,
however, no trustee or other fiduciary appointed with respect to the Debtor
shall have any rights hereunder.

       

      7.2           Severability.
Any determination that any provision of this Agreement or any application
thereof is invalid, illegal, or unenforceable in any respect in any instance
shall not affect the validity, legality, or enforceability of such provision in
any other instance, or the validity, legality, or enforceability of any other
provision of this Agreement.

       

      7.3           Integration;
Amendments; Course of Dealing.  This Agreement and the other
Loan Documents are intended by the parties as the final, complete and exclusive
statement of the transactions evidenced by this Agreement and the other Loan
Documents.  All prior or contemporaneous promises, agreements and
understandings, whether oral or written, express or implied, are deemed to be
superceded by this Agreement and the other Loan Documents, and no party is
relying on any promise, agreement or understanding not set forth in this
Agreement and the other Loan Documents.  No such discussions,
negotiations, custom, usage, or course of dealings shall limit, modify, or
otherwise affect the provisions thereof.  This Agreement may not be
amended or modified except by a written instrument describing such amendment or
modification executed by Debtor and Secured Party.  No failure by the
Secured Party to give notice to the Debtor of the Debtor’s having failed to
observe and comply with any warranty or covenant included in any Loan Document
shall constitute a waiver of such warranty or covenant or the amendment of the
subject Loan Document.

       

      
        
          
          

        

        
          -7-

          
            

          

        

        
          
          

        

         

      

      7.4           Power
of Attorney.  The Debtor hereby irrevocably constitutes and
appoints the Secured Party (acting through any officer of the Secured Party)
as  Debtor’s true and lawful attorney, with full power of
substitution, following the occurrence and during the continuation of an Event
of Default. The rights and powers granted the Secured Party by this appointment
include but are not limited to the right and power to: (i) prosecute, defend,
compromise, or release any action relating to the Collateral; (ii) sign change
of address forms to change the address to which the Debtor’s mail is to be sent
to such address as the Secured Party shall designate; receive and open the
Debtor’s mail; (iii) endorse the name of the relevant Debtor in favor of the
Secured Party upon any and all checks, drafts, notes, acceptances, or other
items or instruments; sign and endorse the name of the relevant Debtor on, and
receive as secured party, any of the Collateral, any invoices, schedules of
Collateral, freight or express receipts, or bills of lading, storage receipts,
warehouse receipts, or other documents of title respectively relating to the
Collateral; (iv) sign the name of the Debtor on any notice to the Debtor’s
Account Debtors or; sign the Debtor’s name on any Proof of Claim in Bankruptcy
against Account Debtors, and on notices of lien, claims of mechanic’s liens, or
assignments or releases of mechanic’s liens securing the Accounts; (v) take all
such action as may be necessary to obtain the payment of any letter of credit
and/or banker’s acceptance of which the Debtor is a beneficiary; (vi) repair,
manufacture, assemble, complete, package, deliver, alter or supply goods, if
any, necessary to fulfill in whole or in part the purchase order of any customer
of the Debtor and (vii) use, license or transfer any or all General Intangibles
of the Debtor.  In connection with all powers of attorney described
above, the Debtor hereby grants unto the Secured Party (acting through any of
its officers) full power to do any and all things necessary or appropriate in
connection with the exercise of such powers as fully and effectually as the
Debtor might or could do, hereby ratifying all that said attorney shall do or
cause to be done by virtue of this Agreement.  No power of attorney
set forth above shall be affected by any disability or incapacity suffered by
the Debtor and each shall survive the same.   All powers
conferred upon the Secured Party herein, being coupled with an interest, shall
be irrevocable until this Agreement is terminated by a written instrument
executed by a duly authorized officer of the Secured
Party.  Notwithstanding anything herein to the contrary, Debtor hereby
appoints Secured Party its power of attorney to sign Debtor’s name on any
documents necessary to perfect or continue the perfection of any security
interest regardless of whether an Event of Default has occurred until all
Obligations have been satisfied in full and Secured Party is under no further
obligation to make loans or advances hereunder.

       

      7.5           Secured
Party’s Costs and Expenses. The Debtor shall pay on demand all Costs of
Collection and all reasonable expenses of the Secured Party in connection with
the preparation, execution, and delivery of this Agreement, and any and all
documents, instruments and agreements delivered to the Secured Party in
connection herewith, whether evidencing the Obligations, or granting the Secured
Party certain rights with respect to the Debtor, or its shares of stock, and of
any Loan Documents, whether now existing or hereafter arising, and all other
reasonable expenses which may be incurred by the Secured Party in preparing or
amending this Agreement and all other agreements, instruments, and documents
related thereto, or otherwise incurred with respect to the
Obligations.

       

      7.6           Copies
and Facsimiles. This Agreement and all documents which relate thereto,
which have been or may be hereinafter furnished the Secured Party may be
reproduced by the Secured Party by any photographic, microfilm, xerographic,
digital imaging, or other process, and the Secured Party may destroy any
document so reproduced.  Any such reproduction shall be admissible in
evidence as the original itself in any judicial or administrative proceeding
(whether or not the original is in existence and whether or not such
reproduction was made in the regular course of business).

       

      
        
          
          

        

        
          -8-

          
            

          

        

        
          
          

        

      

       

      7.7           New
York Law.  EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE
LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY
AND PERFORMANCE, THE LOAN DOCUMENTS AND THE OBLIGATIONS SHALL BE GOVERNED BY,
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN THAT STATE AND ANY
APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.  DEBTOR HEREBY
CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN NEW YORK COUNTY,
CITY OF NEW YORK, NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE DEBTOR AND SECURED PARTY PERTAINING
TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING
OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS; PROVIDED
THAT DEBTOR AND  SECURED PARTY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE
COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF NEW YORK COUNTY AND;
PROVIDED,
FURTHER,
THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE SECURED
PARTY FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION
TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO
ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF SECURED
PARTY.  DEBTOR EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH
JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND DEBTOR
HEREBY WAIVES ANY OBJECTION THAT IT MAY HAVE BASED UPON LACK OF PERSONAL
JURISDICTION, IMPROPER VENUE OR FORUM
NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR
EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT.  DEBTOR
HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS
ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS,
COMPLAINTS AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL
ADDRESSED TO DEBTOR AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE
EARLIER OF DEBTOR’S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN
THE UNITED STATES MAILS, PROPER POSTAGE PREPAID.

       

      7.8           Right
of Set-Off.  Debtor and any guarantor hereby grant to Secured
Party, a lien, security interest and right of setoff as security for all
Obligations and obligations to Secured Party, whether now existing or hereafter
arising upon and against all deposits, credits, collateral and property, now or
hereafter in the possession, custody, safekeeping or control of Secured Party or
any entity under the control of the Secured Party and its successors and assigns
or in transit to any of them.  At any time, without demand or notice
(any such notice being expressly waived by Debtor), Secured Party may set off
the same or any part thereof and apply the same to any liability or obligation
of Debtor and any guarantor even though unmatured and regardless of the adequacy
of any other collateral securing the loan.  ANY AND ALL RIGHTS TO
REQUIRE SECURED PARTY TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY
OTHER COLLATERAL WHICH SECURES THE LOAN, PRIOR TO EXERCISING ITS RIGHT OF SETOFF
WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF THE DEBTOR, ARE
HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.

       

      
        
          
          

        

        
          -9-

          
            

          

        

        
          
          

        

         

      

      7.9           Waivers.

       

      (a)           The
Debtor (and all guarantors, endorsers, and sureties of the Obligations) make
each of the waivers included in Subsection (b), below, knowingly, voluntarily,
and intentionally, and understands that the Secured Party, in entering into the
financial arrangements contemplated hereby and in providing loans and other
financial accommodations to or for the account of the Debtor as provided herein,
whether now or in the future, is relying on.

       

      (b)           THE
DEBTOR, AND EACH SUCH GUARANTOR, ENDORSER, AND SURETY RESPECTIVELY KNOWINGLY,
VOLUNTARILY AND INTEN-TIONALLY WAIVE
THE FOLLOWING:

       

      (i)           Except
as otherwise specifically required hereby or by any other Loan Document, notice
of non-payment, demand, presentment, protest and all forms of demand and notice,
both with respect to the Obligations.

       

      (ii)           Except
as otherwise specifically required hereby or by any other Loan Document, the
right to notice and/or hearing prior to the Secured Party’s exercising of the
Secured Party’s rights upon the occurrence and continuation of an Event of
Default.

       

      (iii)           DEBTOR
AND SECURED PARTY MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE
THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT
OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENTS
CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT,
COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY
PARTY (WHETHER SUCH CASE OR CONTROVERSY IS INITIATED BY OR AGAINST THE SECURED
PARTY OR IN WHICH THE SECURED PARTY IS JOINED AS A PARTY LITIGANT), INCLUDING,
WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR
ACTIONS OF SECURED PARTY RELATING TO THE ADMINISTRATION OF THE LOAN OR
ENFORCEMENT OF THE LOAN DOCUMENTS, AND AGREE THAT NEITHER PARTY WILL SEEK TO
CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT
BE OR HAS NOT BEEN WAIVED.  EXCEPT AS PROHIBITED BY LAW, DEBTOR HEREBY
WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION ANY SPECIAL,
EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN
ADDITION TO, ACTUAL DAMAGES.

       

       

      
        
          
          

        

        
          -10-

          
            

          

        

        
          
          

        

         

        This Security
Agreement is executed as of the date first written above.

      

       

                                              “Debtor”

       

                                              PET
DRX CORPORATION,

                                              a
Delaware Corporation

       

      
         

                                                                                                                               
By: /s/ George
Villasana                                                            

        
                                                                                                                                 
Name: George
Villasana                                                       

                                                  Title: Secretary

           

        

      

      
         

        
           

                                                  BAY
AREA VETERINARY SPECIALISTS, INC., 

                                                  a
California corporation

           

          
            
               

                                                                                                                                     
By: /s/ George
Villasana                                                            

              
                                                                                                                                       
Name: George
Villasana                                                       

                                                        Title: Secretary

                 

              

            

          

           

                                                  BRADSHAW
VETERINARY CLINIC, INC., 

                                                  a
California corporation

           

          
            
               

                                                                                                                                     
By: /s/ George
Villasana                                                            

              
                                                                                                                                       
Name: George
Villasana                                                       

                                                        Title: Secretary

                 

              

            

          

           

                                                  “Secured
Party”

        

         

                                                FIFTH
STREET MEZZANINE PARTNERS II, L.P.,

        
          
                                                    a
Delaware limited partnership

             

                                                    By:          Fifth
Street Mezzanine Partners II GP, LLC,

                                        a
Delaware limited liability company,

                                                                its
general partner

            
               

               

                                                                                                                                                     
By: /s/ Bernard D.
Berman                                        

              
                                                                                                                                                       
Name: Bernard
D. Berman

                                                                       
Title:   Executive Vice President and

                                                                                   
Secretary

              

            

          

        

      

       

       

      Signature Page
to

      Security Agreement
(Borrower)

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