Document:

Exhibit
10.16

 

EXECUTION COPY

 

AMENDED AND
RESTATED REVOLVING CREDIT AGREEMENT

 

 

dated as of

 

 

July 3, 1999

 

 

between

 

 

PROSPECT MEDICAL
HOLDINGS, INC.

(“Borrower”)

 

 

and

 

 

IMPERIAL BANK

(“Bank”)

 

 

$11,500,000

 

 

TABLE OF CONTENTS

 

	
  ARTICLE I

  	
  DEFINITIONS AND
  INTERPRETATIONS

  	
   

  
	
   

  	
  1.1

  	
  Definitions

  	
   

  
	
   

  	
   

  	
  Accrued
  Medical Claims

  	
   

  
	
   

  	
   

  	
  ADA

  	
   

  
	
   

  	
   

  	
  Affiliate

  	
   

  
	
   

  	
   

  	
  Agreement

  	
   

  
	
   

  	
   

  	
  Applicable
  Margin

  	
   

  
	
   

  	
   

  	
  Applicable
  Period

  	
   

  
	
   

  	
   

  	
  Asset

  	
   

  
	
   

  	
   

  	
  Asset Sale

  	
   

  
	
   

  	
   

  	
  Bank

  	
   

  
	
   

  	
   

  	
  Bank Expenses

  	
   

  
	
   

  	
   

  	
  Bankruptcy Code

  	
   

  
	
   

  	
   

  	
  Borrower

  	
   

  
	
   

  	
   

  	
  Borrowing

  	
   

  
	
   

  	
   

  	
  Business Day

  	
   

  
	
   

  	
   

  	
  Capital
  Expenditures

  	
   

  
	
   

  	
   

  	
  Capital Lease

  	
   

  
	
   

  	
   

  	
  Capital Lease Obligations

  	
   

  
	
   

  	
   

  	
  Champus

  	
   

  
	
   

  	
   

  	
  Change of
  Control

  	
   

  
	
   

  	
   

  	
  Claims
  Adjustment

  	
   

  
	
   

  	
   

  	
  Claims Expense

  	
   

  
	
   

  	
   

  	
  Closing Date

  	
   

  
	
   

  	
   

  	
  Collateral
  Assignment of Transaction Documents

  	
   

  
	
   

  	
   

  	
  Commitment Fee

  	
   

  
	
   

  	
   

  	
  Compliance
  Certificate

  	
   

  
	
   

  	
   

  	
  Consolidated
  EBITDA

  	
   

  
	
   

  	
   

  	
  Consolidated
  EBITDAR

  	
   

  
	
   

  	
   

  	
  Consolidated Interest
  Expense

  	
   

  
	
   

  	
   

  	
  Consolidated Lease Expense

  	
   

  
	
   

  	
   

  	
  Consolidated
  Net Income

  	
   

  
	
   

  	
   

  	
  Consolidated
  Net Worth

  	
   

  
	
   

  	
   

  	
  Coverage Ratio

  	
   

  
	
   

  	
   

  	
  Credit Succession Agreement

  	
   

  
	
   

  	
   

  	
  Current Assets

  	
   

  
	
   

  	
   

  	
  Current
  Liabilities

  	
   

  
	
   

  	
   

  	
  Current Ratio

  	
   

  
	
   

  	
   

  	
  Debt

  	
   

  
	
   

  	
   

  	
  Distributions

  	
   

  

 

i

 

	
   

  	
   

  	
  Dollars

  	
   

  
	
   

  	
   

  	
  ERISA

  	
   

  
	
   

  	
   

  	
  ERISA Event

  	
   

  
	
   

  	
   

  	
  ERISA Group

  	
   

  
	
   

  	
   

  	
  Event of
  Default

  	
   

  
	
   

  	
   

  	
  Fees

  	
   

  
	
   

  	
   

  	
  Financial
  Statement(s)

  	
   

  
	
   

  	
   

  	
  GAAP

  	
   

  
	
   

  	
   

  	
  Governing
  Documents

  	
   

  
	
   

  	
   

  	
  Governmental
  Authority

  	
   

  
	
   

  	
   

  	
  Guaranties

  	
   

  
	
   

  	
   

  	
  Guarantor(s)

  	
   

  
	
   

  	
   

  	
  Hazardous
  Materials

  	
   

  
	
   

  	
   

  	
  Health Service Plan License

  	
   

  
	
   

  	
   

  	
  IBNR Expense

  	
   

  
	
   

  	
   

  	
  Indemnified
  Person(s)

  	
   

  
	
   

  	
   

  	
  Insolvency
  Proceeding

  	
   

  
	
   

  	
   

  	
  Inter-Company Note
  (Guarantor)

  	
   

  
	
   

  	
   

  	
  Inter-Company
  Note (Physician Group Shareholder)

  	
   

  
	
   

  	
   

  	
  Inter-Company
  Security Agreement

  	
   

  
	
   

  	
   

  	
  Internal
  Revenue Code

  	
   

  
	
   

  	
   

  	
  Lag Studies

  	
   

  
	
   

  	
   

  	
  Late Payment
  Fee

  	
   

  
	
   

  	
   

  	
  Lending Rate

  	
   

  
	
   

  	
   

  	
  Letter(s)
  of Credit

  	
   

  
	
   

  	
   

  	
  Letter of Credit
  Application

  	
   

  
	
   

  	
   

  	
  Letter
  of Credit Fee

  	
   

  
	
   

  	
   

  	
  Letter
  of Credit Usage

  	
   

  
	
   

  	
   

  	
  Leverage Ratio

  	
   

  
	
   

  	
   

  	
  Lien

  	
   

  
	
   

  	
   

  	
  Loans

  	
   

  
	
   

  	
   

  	
  Loan
  Document(s)

  	
   

  
	
   

  	
   

  	
  Management Services
  Agreement

  	
   

  
	
   

  	
   

  	
  Manager

  	
   

  
	
   

  	
   

  	
  Material
  Adverse Effect

  	
   

  
	
   

  	
   

  	
  Maturity Date

  	
   

  
	
   

  	
   

  	
  Medicaid

  	
   

  
	
   

  	
   

  	
  Medicare

  	
   

  
	
   

  	
   

  	
  Multiemployer
  Plan

  	
   

  
	
   

  	
   

  	
  Note

  	
   

  
	
   

  	
   

  	
  Notice
  of Borrowing

  	
   

  
	
   

  	
   

  	
  Obligations

  	
   

  
	
   

  	
   

  	
  Old Lenders

  	
   

  

 

ii

 

	
   

  	
   

  	
  Operating
  Lease

  	
   

  
	
   

  	
   

  	
  Option
  Agreement

  	
   

  
	
   

  	
   

  	
  Optional Commitment
  Reduction

  	
   

  
	
   

  	
   

  	
  Participant

  	
   

  
	
   

  	
   

  	
  Pay-Off Letters

  	
   

  
	
   

  	
   

  	
  PBGC

  	
   

  
	
   

  	
   

  	
  Permitted
  Acquisition

  	
   

  
	
   

  	
   

  	
  Permitted Debt

  	
   

  
	
   

  	
   

  	
  Permitted
  Investments

  	
   

  
	
   

  	
   

  	
  Permitted
  Liens

  	
   

  
	
   

  	
   

  	
  Person

  	
   

  
	
   

  	
   

  	
  Physician
  Group

  	
   

  
	
   

  	
   

  	
  Physician Group Shareholder

  	
   

  
	
   

  	
   

  	
  Plan

  	
   

  
	
   

  	
   

  	
  Prime Rate

  	
   

  
	
   

  	
   

  	
  Private Insurance Company

  	
   

  
	
   

  	
   

  	
  Purchase
  Money Lien

  	
   

  
	
   

  	
   

  	
  Real
  Estate Leases

  	
   

  
	
   

  	
   

  	
  Reportable
  Event

  	
   

  
	
   

  	
   

  	
  Responsible
  Officer

  	
   

  
	
   

  	
   

  	
  Retiree
  Health Plan

  	
   

  
	
   

  	
   

  	
  Revolving Credit Commitment

  	
   

  
	
   

  	
   

  	
  Revolving
  Loans

  	
   

  
	
   

  	
   

  	
  Revolving Loans Daily
  Balances

  	
   

  
	
   

  	
   

  	
  Security Agreement
  (Borrower)

  	
   

  
	
   

  	
   

  	
  Security Agreement
  (Guarantor)

  	
   

  
	
   

  	
   

  	
  Security Agreement
  (Physician Group)

  	
   

  
	
   

  	
   

  	
  Solvent

  	
   

  
	
   

  	
   

  	
  Stock
  Pledge Agreement”

  	
   

  
	
   

  	
   

  	
  Subsidiary

  	
   

  
	
   

  	
   

  	
  Swaps

  	
   

  
	
   

  	
   

  	
  Taxes

  	
   

  
	
   

  	
   

  	
  Transaction
  Documents

  	
   

  
	
   

  	
   

  	
  Transferee

  	
   

  
	
   

  	
   

  	
  Unfunded
  Liabilities

  	
   

  
	
   

  	
   

  	
  Unmatured Event of Default

  	
   

  
	
   

  	
   

  	
  Unused
  Commitment Fee

  	
   

  
	
   

  	
   

  	
  Warrants

  	
   

  
	
   

  	
   

  	
  Working Capital Sublimit

  	
   

  
	
   

  	
  1.2

  	
  Accounting Terms
  and Determinations

  	
   

  
	
   

  	
  1.3

  	
  Computation of Time Periods

  	
   

  
	
   

  	
  1.4

  	
  Construction

  	
   

  
	
   

  	
  1.5

  	
  Exhibits
  and Schedules

  	
   

  

 

iii

 

	
   

  	
  1.6

  	
  No Presumption Against
  Any Party

  	
   

  
	
   

  	
  1.7

  	
  Independence of Provisions

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE II

  	
  TERMS OF THE CREDIT

  	
   

  
	
   

  	
  2.1

  	
  [Intentionally
  Omitted]

  	
   

  
	
   

  	
  2.2

  	
  Revolving
  Loans

  	
   

  
	
   

  	
  2.3

  	
  Letters of
  Credit

  	
   

  
	
   

  	
  2.4

  	
  Notice of Borrowing
  Requirements

  	
   

  
	
   

  	
  2.5

  	
  Interest Rates;
  Payments of Interest

  	
   

  
	
   

  	
  2.6

  	
  Note;
  Statements of Obligations

  	
   

  
	
   

  	
  2.7

  	
  Holidays

  	
   

  
	
   

  	
  2.8

  	
  Time and Place of Payments.

  	
   

  
	
   

  	
  2.9

  	
  Commitment Fee
  and Unused Commitment Fee

  	
   

  
	
   

  	
  2.10

  	
  Optional Commitment
  Reductions

  	
   

  
	
   

  	
  2.11

  	
  Reduction in Revolving
  Loans

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE III

  	
  CONDITIONS PRECEDENT

  	
   

  
	
   

  	
  3.1

  	
  Conditions to
  Loans or Letters of Credit

  	
   

  
	
   

  	
  3.2

  	
  Conditions
  to all Loans and Letters of Credit

  	
   

  
	
   

  	
  3.3

  	
  Additional
  Conditions to Loans for Permitted Acquisitions

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IV

  	
  REPRESENTATIONS AND
  WARRANTIES

  	
   

  
	
   

  	
  4.1

  	
  Legal Status

  	
   

  
	
   

  	
  4.2

  	
  No Violation; Compliance

  	
   

  
	
   

  	
  4.3

  	
  Authorization;
  Enforceability

  	
   

  
	
   

  	
  4.4

  	
  Approvals;
  Consents

  	
   

  
	
   

  	
  4.5

  	
  Liens

  	
   

  
	
   

  	
  4.6

  	
  Debt

  	
   

  
	
   

  	
  4.7

  	
  Litigation

  	
   

  
	
   

  	
  4.8

  	
  No Default

  	
   

  
	
   

  	
  4.9

  	
  Subsidiaries

  	
   

  
	
   

  	
  4.10

  	
  Taxes

  	
   

  
	
   

  	
  4.11

  	
  Correctness of
  Financial Statements

  	
   

  
	
   

  	
  4.12

  	
  ERISA

  	
   

  
	
   

  	
  4.13

  	
  Other
  Obligations

  	
   

  
	
   

  	
  4.14

  	
  Public Utility
  Holding Company Act

  	
   

  
	
   

  	
  4.15

  	
  Investment
  Company Act

  	
   

  
	
   

  	
  4.16

  	
  Patents, Trademarks,
  Copyrights, and Intellectual Property, etc

  	
   

  
	
   

  	
  4.17

  	
  Environmental Condition

  	
   

  
	
   

  	
  4.18

  	
  Real Estate
  Leases

  	
   

  
	
   

  	
  4.19

  	
  Compliance
  With ADA

  	
   

  
	
   

  	
  4.20

  	
  Physician Groups;
  Transaction Documents

  	
   

  
	
   

  	
  4.21

  	
  Billing Practices

  	
   

  

 

iv

 

	
   

  	
  4.22

  	
  Character
  of Business

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE V

  	
  AFFIRMATIVE
  COVENANTS

  	
   

  
	
   

  	
  5.1

  	
  Punctual Payments

  	
   

  
	
   

  	
  5.2

  	
  Books and
  Records

  	
   

  
	
   

  	
  5.3

  	
  Financial
  Statements

  	
   

  
	
   

  	
  5.4

  	
  Existence;
  Preservation of Licenses; Compliance with Law

  	
   

  
	
   

  	
  5.5

  	
  Insurance

  	
   

  
	
   

  	
  5.6

  	
  Assets

  	
   

  
	
   

  	
  5.7

  	
  Taxes and Other Liabilities

  	
   

  
	
   

  	
  5.8

  	
  Notice to Bank

  	
   

  
	
   

  	
  5.9

  	
  Employee
  Benefits

  	
   

  
	
   

  	
  5.10

  	
  Further
  Assurances

  	
   

  
	
   

  	
  5.11

  	
  Bank Accounts

  	
   

  
	
   

  	
  5.12

  	
  Environment

  	
   

  
	
   

  	
  5.13

  	
  Real
  Estate Leases

  	
   

  
	
   

  	
  5.14

  	
  ADA

  	
   

  
	
   

  	
  5.15

  	
  Billing
  Practices

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VI

  	
  NEGATIVE COVENANTS

  	
   

  
	
   

  	
  6.1

  	
  Use of
  Funds; Margin Regulation

  	
   

  
	
   

  	
  6.2

  	
  Debt

  	
   

  
	
   

  	
  6.3

  	
  Liens

  	
   

  
	
   

  	
  6.4

  	
  Merger, Consolidation, Transfer of
  Assets

  	
   

  
	
   

  	
  6.5

  	
  Leases

  	
   

  
	
   

  	
  6.6

  	
  Sales
  and Leasebacks

  	
   

  
	
   

  	
  6.7

  	
  Asset Sales

  	
   

  
	
   

  	
  6.8

  	
  Investments;
  Permitted Acquisitions

  	
   

  
	
   

  	
  6.9

  	
  Character
  of Business

  	
   

  
	
   

  	
  6.10

  	
  Distributions

  	
   

  
	
   

  	
  6.11

  	
  Guaranty

  	
   

  
	
   

  	
  6.12

  	
  Capital
  Expenditures

  	
   

  
	
   

  	
  6.13

  	
  Transactions with
  Affiliates

  	
   

  
	
   

  	
  6.14

  	
  Change of
  Control

  	
   

  
	
   

  	
  6.15

  	
  Stock Issuance

  	
   

  
	
   

  	
  6.16

  	
  Financial
  Condition

  	
   

  
	
   

  	
  6.17

  	
  Transactions Under ERISA

  	
   

  
	
   

  	
  6.18

  	
  Transaction
  Documents

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VII

  	
  EVENTS OF DEFAULT AND REMEDIES

  	
   

  
	
   

  	
  7.1

  	
  Events of
  Default

  	
   

  
	
   

  	
  7.2

  	
  Remedies

  	
   

  
	
   

  	
  7.3

  	
  Remedies
  Cumulative

  	
   

  

 

v

 

	
  ARTICLE VIII

  	
  TAXES

  	
   

  
	
   

  	
  8.1

  	
  Taxes on
  Payments

  	
   

  
	
   

  	
  8.2

  	
  Indemnification For Taxes

  	
   

  
	
   

  	
  8.3

  	
  Evidence
  of Payment

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IX 

  	
  MISCELLANEOUS

  	
   

  
	
   

  	
  9.1

  	
  Notices

  	
   

  
	
   

  	
  9.2

  	
  No Waivers

  	
   

  
	
   

  	
  9.3

  	
  Bank Expenses;
  Documentary Taxes; Indemnification.

  	
   

  
	
   

  	
  9.4

  	
  Amendments
  and Waivers

  	
   

  
	
   

  	
  9.5

  	
  Successors
  and Assigns; Participations; Disclosure

  	
   

  
	
   

  	
  9.6

  	
  Counterparts;
  Effectiveness; Integration

  	
   

  
	
   

  	
  9.7

  	
  Severability

  	
   

  
	
   

  	
  9.8

  	
  Governing Law

  	
   

  
	
   

  	
  9.9

  	
  Judicial
  Reference

  	
   

  

 

vi

 

	
  EXHIBITS AND SCHEDULES

  
	
   

  	
   

  	
   

  	
   

  
	
  Exhibit 1.1C

  	
  -

  	
   

  	
  Form
  of Collateral Assignment of Transaction Documents

  
	
   

  	
   

  	
   

  	
   

  
	
  Exhibit 1.1G

  	
  -

  	
   

  	
  Form of Guaranty

  
	
   

  	
   

  	
   

  	
   

  
	
  Exhibit 1.1I-1

  	
  -

  	
   

  	
  Form of
  Inter-Company Note (Guarantor)

  
	
   

  	
   

  	
   

  	
   

  
	
  Exhibit 1.1I-2

  	
  -

  	
   

  	
  Form
  of Inter-Company Note (Physician Group Shareholders)

  
	
   

  	
   

  	
   

  	
   

  
	
  Exhibit 1.1I-3

  	
  -

  	
   

  	
  Form of
  Inter-Company Security Agreement

  
	
   

  	
   

  	
   

  	
   

  
	
  Exhibit 1.1S-1

  	
  -

  	
   

  	
  Form of Security
  Agreement (Guarantor)

  
	
   

  	
   

  	
   

  	
   

  
	
  Exhibit 1.1S-2

  	
  -

  	
   

  	
  Form of Security Agreement (Physician
  Group)

  
	
   

  	
   

  	
   

  	
   

  
	
  Exhibit 1.1S-3

  	
  -

  	
   

  	
  Form of Stock
  Pledge Agreement (Borrower)

  
	
   

  	
   

  	
   

  	
   

  
	
  Exhibit 1.1S-4

  	
  -

  	
   

  	
  Form of
  Stock Pledge Agreement (Guarantor)

  
	
   

  	
   

  	
   

  	
   

  
	
  Exhibit 2.4(b)

  	
  -

  	
   

  	
  Form of Notice of Borrowing

  
	
   

  	
   

  	
   

  	
   

  
	
  Exhibit 5.3(d)

  	
  -

  	
   

  	
  Form of Compliance
  Certificate

  
	
   

  	
   

  	
   

  	
   

  
	
  Schedule 1.1P

  	
  -

  	
   

  	
  Permitted Debt

  
	
   

  	
   

  	
   

  	
   

  
	
  Schedule 4.7

  	
  -

  	
   

  	
  Litigation

  
	
   

  	
   

  	
   

  	
   

  
	
  Schedule 4.9

  	
  -

  	
   

  	
  Subsidiaries

  
	
   

  	
   

  	
   

  	
   

  
	
  Schedule 4.12

  	
  -

  	
   

  	
  Employee
  Benefit Plans

  
	
   

  	
   

  	
   

  	
   

  
	
  Schedule 4.18

  	
  -

  	
   

  	
  Real Estate
  Leases

  
	
   

  	
   

  	
   

  	
   

  
	
  Schedule 4.20

  	
  -

  	
   

  	
  Physician Groups; Transaction
  Documents.

  
	
   

  	
   

  	
   

  	
   

  
	
  Schedule 5.11

  	
  -

  	
   

  	
  Deposit
  Accounts

  

 

vii

 

AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT

 

This AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT, dated as of
July 3, 1999, is entered into between Borrower and Bank.

 

WHEREAS, Bank and Borrower have previously entered into that certain
Revolving Credit Agreement, dated as of July 3, 1997, as the same has been
amended by that certain Amendment Number One to Revolving Credit Agreement,
dated July 14, 1997, that certain Amendment Number Two to Revolving Credit
Agreement, dated as of September 25, 1997, and that certain Amended and
Restated Amendment Number Three to Revolving Credit Agreement, dated as of
February 6, 1998 (as so amended, the “Prior Agreement”); and

 

WHEREAS, Bank and Borrower desire to further amend and restate the
Prior Agreement in accordance with the terms and conditions of this Agreement,
and to waive compliance with certain covenants in the Prior Agreement.

 

NOW THEREFORE, the parties hereto agree to amend and restate the Prior
Agreement in its entirety as follows:

 

ARTICLE I 

DEFINITIONS AND
INTERPRETATIONS

 

1.1                                 Definitions.  The following terms, as used herein, shall
have the following meanings:

 

“Accrued Medical Claims”
means the amount calculated as the sum of the total estimated claims reserves
for incurred but not reported medical expenses payable disclosed in the most
recent Lag Studies for all of the Physician Groups, multiplied by 1.1
and reported as Accrued Medical Claims on Borrower’s balance sheet.

 

“ADA” means the Americans with Disabilities
Act, 42 U.S.C. § 12101, et. 
seq., and all applicable rules and regulations promulgated
thereunder.

 

“Affiliate”
means any Person (i) that, directly or indirectly, controls, is controlled by
or is under common control with Borrower or any Subsidiary; (ii) which directly
or indirectly beneficially owns or controls five percent (5 %) or more of any
class of voting stock of Borrower or any Subsidiary; or (iii) five percent (5%)
or more of the voting stock of which is directly or indirectly beneficially
owned or held by Borrower or any Subsidiary. 
For purposes of the foregoing, “control” (including “controlled by” and
“under common control with”) shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
a Person, whether through the ownership of voting securities, by contract or
otherwise.

 

1

 

“Agreement” means this Amended and
Restated Revolving Credit Agreement, together with any concurrent or subsequent
rider, amendment, schedule or exhibit to this Amended and Restated
Revolving Credit Agreement.

 

“Applicable Margin” means the
margin set forth in the table below opposite the applicable Leverage Ratio, as
disclosed in the latest Compliance Certificate delivered pursuant to
Section 5.3(d):

 

	
  Leverage Ratio

  	
   

  	
  Margin

  
	
   

  	
   

  	
   

  
	
  3.5:1.0
  or greater

  	
   

  	
  150 basis points

  	
   

  
	
  greater
  than 3.0:1.0 but less than 3.5:1.0

  	
   

  	
  100 basis points

  	
   

  
	
  less
  than 3.0:1.0

  	
   

  	
  50 basis points

  	
   

  

 

“Applicable Period” means for
purposes of calculating the Coverage Ratio and the Leverage Ratio, Borrower’s
fiscal quarter ending on the date of determination.

 

“Asset” means any interest of a Person in
any kind of property or asset, whether real, personal, or mixed real and
personal, and whether tangible or intangible.

 

“Asset Sale” means any sale, transfer
or other disposition of Borrower’s or any Subsidiary’s businesses
or Asset(s) now owned or hereafter acquired, including shares of stock and
indebtedness of any Subsidiary, receivables and leasehold interests.

 

“Bank” means Imperial Bank, a California
banking corporation.

 

“Bank Expenses” means (i) all
expenses of Bank paid or incurred in connection with Bank’s due diligence and
investigation of Borrower, including appraisal, filing, recording,
documentation, publication and search fees and other such expenses, and all
attorneys’ fees and expenses (including attorneys’ fees incurred pursuant to
proceedings arising under the Bankruptcy Code) incurred in connection with the
structuring, negotiation, drafting, preparation, execution and delivery of this
Agreement, the Loan Documents, and any and all other documents, instruments and
agreements entered into in connection herewith; (ii) all expenses of Bank,
including attorneys’ fees and expenses (including attorneys’ fees incurred
pursuant to proceedings arising under the Bankruptcy Code) paid or incurred in
connection with the negotiation, preparation, execution and delivery of any
waiver, forbearance, consent, amendment or addition to this Agreement or any
Loan Document, or the termination hereof and thereof; (iii) all costs or
expenses paid or advanced by Bank which are required to be paid by Borrower
under this Agreement or the Loan Documents, including taxes and insurance
premiums of every nature and kind of Borrower; and (iv) if an Event of Default
occurs, all expenses paid or incurred by Bank, including attorneys’ fees and
expenses (including attorneys’ fees incurred pursuant to proceedings arising
under the Bankruptcy Code), costs of collection, suit, arbitration, judicial
reference and other enforcement proceedings, and any other out-of-pocket
expenses incurred in connection therewith or resulting therefrom, whether or
not suit is brought, or in connection with any refinancing or restructuring of
the Obligations and the liabilities of Borrower under this

 

2

 

Agreement,
any of the Loan Documents, or any other document, instrument or agreement
entered into in connection herewith in the nature of a “workout.”

 

“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.

 

“Borrower” means Prospect Medical
Holdings, Inc., a Delaware corporation.

 

“Borrowing”
means a borrowing of a Revolving Loan pursuant to the terms and conditions
hereof.

 

“Business
Day” means any day other than a Saturday, a Sunday, or a day on which
commercial banks in the City of Los Angeles, California are authorized or
required by law or executive order or decree to close.

 

“Capital Expenditures” means expenditures
made in cash, or financed with long term debt, by any Person for the
acquisition of any fixed Assets or improvements, replacements, substitutions,
or additions thereto that have a useful life of more than one (1) year,
including the direct or indirect acquisition of such Assets by way of increased
product or service charges, offset items, or otherwise, and the principal
portion of payments with respect to Capital Lease Obligations, calculated in
accordance with GAAP.

 

“Capital
Lease” means any lease of an Asset by a Person as lessee which would,
in conformity with GAAP, be required to be accounted for as an Asset and
corresponding liability on the balance sheet of that Person.

 

“Capital Lease Obligations” of a
Person means the amount of the obligations of such Person under all Capital
Leases which would be shown as a liability on a balance sheet of such Person
prepared in accordance with GAAP.

 

“Champus”
means the Civilian Health and Medical Program of the Uniformed Service, a
program of medical benefits covering retirees and dependents of a member or a
former member of a uniformed service, provided, financed and supervised by the
United States Department of Defense established by 10 U.S.C. §§ 1071, et
seq.

 

“Change of Control” shall be
deemed to have occurred at such time as any “person” or “group” (within the
meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934)
becomes the “beneficial owner” (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934), directly or indirectly, of more than twenty percent
(20%) of the total voting power of all classes of stock then outstanding of
Borrower normally entitled to vote in the election of directors.

 

3

 

“Claims Adjustment” means the
adjustment necessary to reconcile the total Accrued Medical Claims on
Borrower’s balance sheet to that of the Accrued Medical Claims shown in the Lag
Studies as of the date of such balance sheet.

 

“Claims Expense” means medical
claims incurred or received and reported as medical expenses for such period in
accordance with GAAP.

 

“Closing Date” means the date when
all of the conditions set forth in Section 3.1 have been fulfilled to the
satisfaction of Bank and its counsel.

 

“Collateral
Assignment of Transaction Documents” means each Collateral
Assignment of Transaction Documents now or hereafter executed by a Guarantor in
favor of Bank, substantially in the form of Exhibit 1.1C.

 

“Commitment Fee” has the meaning
set forth in Section 2.9(a).

 

“Compliance Certificate”
means a certificate of compliance to be delivered quarterly in accordance with
Section 5.3(d), substantially in the form of Exhibit 5.3(d).

 

“Consolidated EBITDA” means,
with respect to any period, the sum of (without duplication) (i) Consolidated
Net Income for such period (excluding extraordinary gains and losses); (ii)
Consolidated Interest Expense during such period; (iii) accrued federal and
state income taxes payable by Borrower, the Subsidiaries and the Physician
Groups during such period which are included in the determination of
Consolidated Net Income; and (iv) Borrower’s, the Subsidiaries’ and the
Physician Groups consolidated depreciation and amortization during such period;
calculated in accordance with GAAP.

 

“Consolidated EBITDAR” means,
with respect to any period, the sum of Consolidated EBITDA for such period, plus
Consolidated Lease Expense for such period.

 

“Consolidated Interest
Expense” means, with respect to any period, the current interest
accrued during such period in accordance with GAAP on the aggregate amount of
Borrower’s, the Subsidiaries and the Physician Groups’ consolidated Debt,
including the interest portion of Borrower’s, the Subsidiaries’ and the
Physician Groups’ consolidated Capital Lease Obligations.

 

“Consolidated Lease Expense”
means, with respect to any period, the aggregate amount of rent paid or
payable, on a consolidated basis, in connection with any and all Operating
Leases of Borrower, the Subsidiaries and the Physician Groups that is charged
against Consolidated Net Income during such period.

 

“Consolidated Net Income”
means, with respect to any period, the consolidated net income of Borrower, the
Subsidiaries and the Physician Groups reflected on Borrower’s Financial
Statement for such period, calculated in accordance with GAAP.

 

4

 

“Consolidated Net Worth”
means, as of the date of determination, Borrower’s, the Subsidiaries’ and the
Physician Groups consolidated net worth, calculated in accordance with GAAP.

 

“Coverage Ratio” means as of the
date of determination for the Applicable Period, the ratio of: (i) the sum of
(a) Consolidated EBITDAR for such period, and (b) 60% of the IBNR Expense
amount for such period, times (ii) 4; to (iii) the sum of (x) [the
product of the sum of (1) Consolidated Interest Expense for such Applicable
Period, and (2) the Consolidated Lease Expense for such Applicable Period, times
4], and (y) current maturities of Borrower’s, the Subsidiaries’ and the
Physician Groups’ consolidated long term Debt during such period (other than
the Obligations).

 

“Credit Succession Agreement”
means and includes (i) that certain Amended and Restated Credit Succession
Agreement, dated as of July 14, 1997, among Borrower, Bank, each
Guarantor, each Physician Group and each Physician Group Shareholder, and (ii)
each other Credit Succession Agreement now or hereafter entered into by and
among the foregoing parties.

 

“Current Assets” means, as of the
date of determination, the sum, calculated on a consolidated basis for
Borrower, the Subsidiaries and the Physician Groups of: (i) cash, (ii) accounts
receivable, (iii) inventory, (iv) the unused available amount of the Revolving
Credit Commitment, and (v) other Assets that are likely to be converted into
cash, sold, exchanged, or expensed in the ordinary course of their business, as
now conducted, within one year, calculated in accordance with GAAP.

 

“Current Liabilities” means,
as of the date of determination, the sum of Borrower’s, the Subsidiaries and
the Physician Groups’ consolidated Debt coming due within one year, calculated
in accordance with GAAP.

 

“Current Ratio” means, as of the
date of determination, the ratio of: (i) Current Assets as of such date; to
(ii) Current Liabilities as of such date.

 

“Debt” means, as of the date of
determination, the sum, but without duplication, of any and all of a Person’s:
(i) indebtedness heretofore or hereafter created, issued, incurred or assumed
by such Person (directly or indirectly) for or in respect of money borrowed;
(ii) Capital Lease Obligations; (iii) obligations evidenced by bonds, debentures,
notes, or other similar instruments; (iv) obligations for the deferred purchase
price of property or services; (v) current liabilities in respect of unfunded
vested benefits under any Plan; (vi) obligations under letters of credit; (vii)
obligations under acceptance facilities; (viii) obligations under all
guaranties, endorsements (other than for collection or deposit in the ordinary
course of business), and other contingent obligations to purchase, to provide
funds for payment, or supply funds to invest in any other Person, or otherwise
to assure a creditor against loss; (ix) obligations secured by any Lien,
whether or not such obligations have been assumed; and (x) Swaps.

 

“Distributions” means, with respect
to any Person, dividends or distributions of earnings made by such Person to
its owners.

 

5

 

“Dollars” or “$” means lawful
currency of the United States of America.

 

“ERISA” means the Employee Retirement Income
Security Act of 1974, as amended from time to time, or any successor statute,
and any and all regulations thereunder.

 

“ERISA Event” means (a) a Reportable
Event with respect to a Plan or Multiemployer Plan, (b) the withdrawal of a
member of the ERISA Group from a Plan during a plan year in which it was a
“substantial employer” (as defined in Section 4001(a)(2) of ERISA), (c)
the providing of notice of intent to terminate a Plan in a distress termination
(as described in Section 4041(c) of ERISA), (d) the institution by the
PBGC of proceedings to terminate a Plan or Multiemployer Plan, (e) any event or
condition (i) that provides a basis under Section 4042(a)(l), (2), or (3)
of ERISA for the termination of or the appointment of a trustee to administer,
any Plan or Multiemployer Plan, of (ii) that may result in termination of a
Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the partial or
complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA of a
member of the ERISA Group from a Multiemployer Plan, or (g) providing any
security to any Plan under Section 401(a)(29) of the IRC by a member of
the ERISA Group.

 

“ERISA
Group” means Borrower and all members of a controlled group of
corporations and all trades or business (whether or not incorporated) under
common control which, together with Borrower are treated as a single employer
under Section 414 of the Internal Revenue Code.

 

“Event of Default” has the meaning
set forth in Section 7.1.

 

“Fees” means the Commitment Fee, the Unused
Commitment Fee, the Letter of Credit Fees and the Late Payment Fee.

 

“Financial Statement(s)”
means, with respect to any accounting period of any Person, statements of
income and statements of cash flows of such Person for such period, and balance
sheets of such Person as of the end of such period, setting forth in each case
in comparative form figures for the corresponding period in the preceding
fiscal year or, if such period is a full fiscal year, corresponding figures
from the preceding annual audit, all prepared in reasonable detail and in accordance
with GAAP, subject to year-end adjustments in the case of monthly Financial
Statements.  Financial Statement(s)
shall include the schedules thereto and annual Financial Statements shall also
include the footnotes thereto.

 

“GAAP” means generally accepted accounting
principles in the United States of America, consistently applied, which are in
effect as of the date of this Agreement. 
If any changes in accounting principles from those in effect on the date
hereof are hereafter occasioned by promulgation of rules, regulations,
pronouncements or opinions by or are otherwise required by the Financial
Accounting Standards Board or the American Institute of Certified Public
Accountants (or successors thereto or agencies with similar functions), and any
of such changes results in a change in the method of calculation of, or affects
the results of such calculation of, any of the financial covenants, standards
or terms found herein, then the parties hereto agree to

 

6

 

enter
into and diligently pursue negotiations in order to amend such financial
covenants, standards or terms so as to equitably reflect such changes, with the
desired result that the criteria for evaluating financial condition and results
of operations of Borrower and the Subsidiaries shall be the same after such
changes as if such changes had not been made.

 

“Governing Documents” means the
certificate or articles of incorporation, by-laws, or other organizational or
governing documents of any Person.

 

“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.

 

“Guaranties” and “Guaranty”
means, individually or collectively as the context requires, each certain
Continuing Guaranty executed by a Guarantor in favor of Bank, substantially in
the form of Exhibit 1.1G.

 

“Guarantor(s)” means, individually or
collectively as the context requires, each Subsidiary and every other Person
who now or hereafter executes a Guaranty in favor of Bank with respect to the
Obligations.

 

“Hazardous Materials” means
all or any of the following: (a) substances that are defined or listed in, or
otherwise classified pursuant to, any applicable laws or regulations as
“hazardous substances,” “hazardous materials,” “hazardous wastes,” “toxic
substances,” or any other formulation intended to define, list, or classify
substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, reproductive toxicity, or “EP
toxicity” or are otherwise regulated for the protection of persons, property or
the environment; (b) oil, petroleum, or petroleum derived substances, natural
gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and
other wastes associated with the exploration, development, or production of
crude oil, natural gas, or geothermal resources; (c) any flammable substances
or explosives or any radioactive materials; and (d) asbestos in any form or
electrical equipment which contains any oil or dielectric fluid containing levels
of polychlorinated biphenyls in excess of fifty (50) parts per million.

 

“Health Service Plan License”
means a license issued by the California Department of Corporations or the
corresponding agency of another state, and/or any other applicable or successor
state agency or body, certifying that Borrower and/or Guarantors are qualified
to operate as a health service plan under applicable laws.

 

“IBNR Expense” means, for any period,
the amount of additional incurred but not reported medical expense posted by
Borrower as additional reserves against future medical expense liability in
excess of that amount expensed by Borrower as its Claims Expense and Claims
Adjustment, for such period.

 

“Imperial Bancorp” means Imperial Bancorp, a California
corporation.

 

7

 

“Indemnified Person(s)” has
the meaning given to such term in Section 9.3(c).

 

“Insolvency Proceeding”
means any proceeding commenced by or against any Person, under any provision of
the Bankruptcy Code, or under any other bankruptcy or insolvency law,
including, but not limited to, assignments for the benefit of creditors, formal
or informal moratoriums, compositions, or extensions with some or all
creditors.

 

“Inter-Company Note (Guarantor)”
means, with respect to any Permitted Acquisition, the promissory note executed
by the applicable Guarantor to Borrower to evidence the loan made by Borrower
to such Guarantor with respect thereto, substantially in the form of Exhibit
1.1I-1.

 

“Inter-Companv
Note (Physician Group Shareholder)” means, with respect to any
Permitted Acquisition, the promissory note executed by the applicable Physician
Group Shareholder to the order of the applicable Guarantor to evidence the loan
made by such Guarantor to such Physician Group Shareholder with respect
thereto, substantially in the form of Exhibit 1.1I-2.

 

“Inter-Companv Security Agreement”
means each certain Security Agreement now or hereafter executed between a
Guarantor and Borrower to secure the Inter-Company Note (Guarantor) executed by
such Guarantor, substantially in the form of Exhibit 1.1I-3.

 

“Internal Revenue Code” means
the Internal Revenue Code of 1986, as amended from time to time, or any
successor statute, and any and all regulations thereunder.

 

“Lag Studies” means the claims lag
analyses prepared by Borrower for each of the Physician Groups.

 

“Late Payment Fee” has the meaning
given to such term in Section 2.9(c).

 

“Lending Rate” means the per annum
rate equal to the Prime Rate plus the Applicable Margin.

 

“Letter(s) of Credit” means any
standby letter(s) of credit issued by Bank, pursuant to Section 2.3.

 

“Letter of Credit Application”
means Bank’s standard Application for Standby Letter of Credit and Security
Agreement, as the same may be from time to time amended or modified.

 

“Letter of Credit Fee” means,
with respect to each Letter of Credit, one and one-half percent (1.5%) plus
the Applicable Margin times the face amount of such Letter of Credit.

 

8

 

“Letter of Credit Usage”
means, on any date of determination, the aggregate maximum amounts available to
be drawn under all outstanding Letters of Credit, without regard to whether any
conditions to drawing could then be met.

 

“Leverage Ratio” means, as of the
date of determination, the ratio of: (i) Borrower’s and the Subsidiaries’
consolidated Debt as of such date; to (ii) the result of (x) the sum of (a) the
Consolidated EBITDA for the Applicable Period ending on the date of
determination, and (b) 60% of the IBNR Expense amount for such Applicable
Period, multiplied by (y) 4.

 

“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.

 

“Loans” means the Revolving Loans.

 

“Loan Document(s)” means each of
the following documents, instruments, and agreements individually or
collectively, as the context requires:

 

(i)                                     the Note;

 

(ii)                                  the Security Agreement (Borrower);

 

(iii)                               the Guaranties;

 

(iv)                              the Security Agreements (Guarantor);

 

(v)                                 the Stock Pledge Agreements (Borrower);

 

(vi)                              the Collateral Assignments of Transaction
Documents;

 

(vii)                           the Credit Succession Agreements;

 

(viii)                        the Letter of Credit Applications;

 

(ix)                                the Warrants; and

 

(x)                                   each certain Subordination and Note
Cancellation Agreement, now or hereafter entered into by and among Bank,
Borrower and any other party or parties;

 

(xi)                                each certain Subordination Agreement, now or hereafter entered into by
and among Bank, Borrower and any other party or parties;

 

(xii)                             such other documents, instruments, and agreements (including financing
statements and fixture filings) as Bank may reasonably request in connection
with the

 

9

 

transactions contemplated hereunder or to perfect or protect the liens
and security interests granted to Bank in connection herewith.

 

“Management Services
Agreement” means each certain Management Services Agreement now or
hereafter entered into between a Guarantor, on the one hand, and a Physician
Group, on the other hand, wherein such Guarantor agrees to provide management
services to such Physician Group.

 

“Manager” means, with respect to any
Physician Group, the Guarantor which is the party identified as “Manager” under
the Management Services Agreement to which such Physician Group is a party.

 

“Material Adverse Effect”
means a material adverse effect on (i) the business, Assets, condition
(financial or otherwise), results of operations, or prospects of Borrower, any
Subsidiary, or any Physician Group; (ii) the ability of Borrower to perform its
obligations under this Agreement (including, without limitation, repayment of
the Obligations as they come due), or the ability of any Guarantor to perform
its obligations under the Guaranty to which it is a party or (iii) the validity
or enforceability of this Agreement, the Loan Documents, or the rights or
remedies of Bank hereunder and thereunder.

 

“Maturity Date” means
October 3, 2000.

 

“Medicaid” means the medical assistance
program established by the Social Security Act and any statutes succeeding
thereto.

 

“Medicare” means the health insurance
program for the aged and disabled established by the Social Security Act and
any statutes succeeding thereto.

 

“Multiemployer Plan” means a
“multiemployer plan” as defined in § 4001(a)(3) of ERISA or § 3(37)
of ERISA to which any member of the ERISA Group has contributed, or was
obligated to contribute, within the preceding six plan years (while a member of
such ERISA Group) including for these purposes any Person which ceased to be a
member of the ERISA Group during such six year period.

 

“Note” means that certain Amended and
Restated Secured Revolving Note in the principal amount of Eleven Million Five
Hundred Thousand Dollars ($11,500,000), dated as of even date herewith,
executed by Borrower to the order of Bank.

 

“Notice of Borrowing” means an
irrevocable notice from Borrower to Bank of Borrower’s request for a Borrowing
pursuant to the terms of Section 2.4(b), substantially in the form of Exhibit
2.4(b).

 

“Obligations”
means any and all indebtedness, liabilities, and obligations of Borrower owing
to Bank and to its successors and assigns, previously, now, or hereafter
incurred, and howsoever evidenced, whether direct or indirect, absolute or
contingent, joint or several,

 

10

 

liquidated
or unliquidated, voluntary or involuntary, due or not due, legal or equitable,
whether incurred before, during, or after any Insolvency Proceeding, and
whether recovery thereof is or becomes barred by a statute of limitations or is
or becomes otherwise unenforceable or unallowable as claims in any Insolvency
Proceeding, together with all interest thereupon (including interest under
Section 2.5(b) and all interest accruing during the pendency of an
Insolvency Proceeding).  The Obligations
shall include, without limiting the generality of the foregoing, all principal and
interest owing under the Loans, all Bank Expenses, the Fees, any other fees and
expenses due hereunder, and all other indebtedness evidenced by this Agreement
and/or the Notes.

 

“Old Lenders” means, with respect to
any Permitted Acquisition, the existing lender(s) to the applicable Physician
Group.

 

“Operating Lease” means any lease
of an Asset by a Person which, in conformity with GAAP, is not a Capital Lease.

 

“Option Agreement” means each
certain Assignable Option Agreement heretofore or hereafter entered into by and
among a Physician Group, its Physician Group Shareholders and its Manager.

 

“Optional Commitment Reduction”
has the meaning given to such term in Section 2.10.

 

“Participant” has the meaning set
forth in Section 9.5(d).

 

“Pay-Off Letters” means those
certain letters, in form and substance reasonably satisfactory to Bank, from
Old Lenders respecting the amount necessary to repay in full all of the
obligations of Borrower owing to Old Lenders and obtain a termination or
release of all of the Liens existing in favor of Old Lenders in and to the
Assets of Borrower.

 

“PBGC” means the Pension Benefit Guaranty
Corporation or any entity succeeding to any or all of its functions under
ERISA.

 

“Permitted Acquisition” has
the meaning given to such term in Section 6.8(b).

 

“Permitted Debt” means (i) Debt
owing to Bank in accordance with the terms of this Agreement and the Loan
Documents; (ii) Debt which has been approved in writing by Bank and is listed
on Schedule 1.1P, but no voluntary prepayments, renewals,
extensions, or refinancing thereof; and (iii) Debt secured by a Purchase Money
Lien and Capital Lease Obligations up to a maximum aggregate principal amount
outstanding for all such Debt of Borrower and the Subsidiaries under this
clause (iii) of One Million Dollars ($1,000,000).

 

“Permitted Investments” means
any of the following investments denominated and payable in Dollars, maturing
within one year from the date of acquisition, selected by Borrower: (i)
marketable direct obligations issued or unconditionally guaranteed by the
United States

 

11

 

government
or issued by any agency thereof and backed by the full faith and credit of the
United States; (ii) marketable direct obligations issued by any state of the
United States or any political subdivision of any such state or any public
instrumentality thereof and, at the time of acquisition, having the highest
credit rating obtainable from either Standard & Poor’s Corporation
(“S&P”) or Moody’s Investors Service, Inc. (“Moody’s”); (iii) commercial
paper or corporate promissory notes bearing at the time of acquisition the
highest credit rating either of S&P or Moody’s issued by United States,
Canadian, European or Japanese bank holding companies or industrial or
financial companies; (iv) certificates of deposit issued by and bankers
acceptances of and interest bearing deposits with Bank; and (v) money market
funds organized under the laws of the United States or any state thereof that
invest predominantly in any of the foregoing investments permitted under
clauses (i), (ii), (iii) and (iv).

 

“Permitted Liens” means (i) Liens
for current taxes, assessments or other governmental charges which are not
delinquent or remain payable without any penalty, (ii) Liens in favor of Bank
in accordance with the Loan Documents, (iii) statutory Liens, such as inchoate
mechanics’, inchoate materialmen’s, landlord’s, warehousemen’s, and carriers’
liens, and other similar liens, other than those described in clause (i) above,
arising in the ordinary course of business with respect to obligations which
are not delinquent or are being contested in good faith by appropriate
proceedings, provided that, if delinquent, adequate reserves have been
set aside with respect thereto as required by GAAP and, by reason of
nonpayment, no property is subject to a material risk of loss or forfeiture;
(iv) Liens securing Debt described in clauses (iii) of the definition of
Permitted Debt in this Agreement, (v) judgment Liens that do not constitute an
Event of Default under Section 7.1(i), (vi) Liens, if they constitute
such, of any Operating Lease UCC filings permitted hereunder, and (vii) Liens
securing any Debt listed on Schedule 1.1P.

 

“Person”
means and includes natural persons, corporations, limited partnerships, general
partnerships, limited liability companies, limited liability partnerships,
joint stock companies, joint ventures, associations, companies, trusts, banks,
trust companies, land trusts, business trusts, or other organizations, irrespective
of whether they are legal entities, and governments and agencies and political
subdivisions thereof.

 

“Physician Group” means a
professional medical corporation, which has become affiliated with a Manager
pursuant to a Management Services Agreement.

 

“Physician Group Shareholder”
means, with respect to any Physician Group, a shareholder of such Physician
Group.

 

“Plan” means an “employee benefit plan” as
defined in § 3(3) of ERISA in which any personnel of any member of the
ERISA Group participate or from which any such personnel may derive a benefit
or with respect to which any member of the ERISA Group may incur liability,
excluding any Multiemployer Plan, but including any plan either established or
maintained by any member of the ERISA Group or to which such Person contributes
under the laws of any foreign country.

 

12

 

“Prime Rate” means the rate of interest
announced by Bank at its corporate headquarters as its prime rate and which
serves as the basis upon which effective rates of interest are calculated for
those loans making reference thereto. 
The Prime Rate is determined by Bank from time to time as a means of
pricing credit extensions to some customers and is neither directly tied to
some external rate of interest or index nor necessarily the lowest rate of
interest charged by Bank at any given time for any particular class of
customers or credit extensions.

 

“Private Insurance Company”
means any insurance company and/or managed care organization which provides
reimbursement for medical care or supplies provided by a Physician Group to its
patients.

 

“Purchase Money Lien” means a
Lien on any Asset acquired by Borrower or any of its Subsidiaries; provided
that (i) such Lien attaches only to the Asset being acquired; (ii) a
description of the Asset being acquired is furnished to Bank; and (iii) the
Debt incurred in connection with such acquisition does not exceed one hundred
percent (100%) of the purchase price of such Asset.

 

“Real Estate Leases” means all
leases, licenses, and any and all other agreements regarding a right of entry
to and/or a possessory interest in real property now or hereinafter entered
into by Borrower, any Subsidiary or any Physician Group as a tenant or
licensee, or which have been, or are in the future, being purchased, assigned
or sublet to Borrower, any Subsidiary or any Physician Group as a tenant or
licensee.

 

“Reportable Event” means any of
the events described in Section 4043(c) of ERISA other than a Reportable
Event as to which the provision of 30 days notice to the PBGC is waived under
applicable regulations.

 

“Responsible Officer” means
either the Chief Executive Officer, Chief Financial Officer, Executive Vice
President or Controller of a Person, or such other officer, employee, or agent
of such Person designated by a Responsible Officer in a writing delivered to
Bank.

 

“Retiree Health Plan” means an
“employee welfare benefit plan” within the meaning of Section 3(1) of
ERISA that provides benefits to individuals after termination of their
employment, other than as required by Section 601 of ERISA.

 

“Revolving Credit Commitment”
means, from the date hereof and through the close of business, July 2,
2000, Eleven Million Five Hundred Thousand Dollars ($11,500,000), and
thereafter means Ten Million Five Hundred Thousand Dollars ($10,500,000).

 

“Revolving Loans” has the meaning
given to such term in Section 2.2.

 

“Revolving Loans Daily
Balances” means the amount determined by taking the amount of the
obligations owed under the Revolving Loans at the beginning of a given day,
adding any new Revolving Loans advanced or incurred on such date, and
subtracting any payments or

 

13

 

collections
on the Revolving Loans which are deemed to be paid on that date under the
provisions of this Agreement.

 

“Security Agreement (Borrower)”
means that certain Security Agreement, dated as of even date herewith, between
Borrower and Bank.

 

“Security Agreement
(Guarantor)” means each certain Security Agreement now or hereafter
entered into between a Guarantor, on the one hand, and Bank, on the other hand,
substantially in the form of Exhibit 1.1S-1, to secure the Guaranty to
which such Guarantor is a party.

 

“Security Agreement
(Physician Group)” means each certain Security Agreement now or
hereafter entered into between a Physician Group, on the one hand, and its
Manager, on the other hand, substantially in the form of Exhibit 1.1S-2,
to secure the Management Services Agreement to which they are parties.

 

“Solvent” means, with respect to any
Person on the date any determination thereof is to be made, that on such date:
(a) the present fair valuation of the Assets of such Person is greater than
such Person’s probable liability in respect of existing debts; (b) such Person
does not intend to, and does not believe that it will, incur debts beyond such
Person’s ability to pay as such debts mature; and (c) such Person is not
engaged in business or a transaction, and is not about to engage in business or
a transaction, which would leave such Person with Assets remaining which would
constitute unreasonably small capital after giving effect to the nature of the
particular business or transaction.  For
purposes of this definition (i) the “fair valuation” of any property or assets
means the amount realizable within a reasonable time, either through collection
or sale of such Assets at their regular market value, which is the amount
obtainable by a capable and diligent Person from an interested buyer willing to
purchase such property or assets within a reasonable time under ordinary
circumstances; and (ii) the term “debts” includes any payment obligation,
whether or not reduced to judgment, equitable or legal, matured or unmatured,
liquidated or unliquidated, disputed or undisputed, secured or unsecured,
absolute, fixed or contingent.

 

“Stock Pledge Agreement”
means each certain Security Agreement-Stock Pledge, now or hereafter entered
into between a Borrower or a Guarantor, on the one hand, and Bank, on the other
hand, substantially in the form of Exhibit 1.1 S-3 or Exhibit 1.1S-4,
as applicable.

 

“Subsidiary”
means any corporation, limited liability company, partnership, trust or other
entity (whether now existing or hereafter organized or acquired) of which Borrower
or one or more Subsidiaries of Borrower at the time owns or controls directly
or indirectly more than 50% of the shares of stock or partnership or other
ownership interest having general voting power under ordinary circumstances to
elect a majority of the board of directors, managers or trustees or otherwise
exercising control of such corporation, limited liability company, partnership,
trust or other entity (irrespective of whether at the time stock or any other
form of ownership of any other class or classes shall have or might have voting
power by reason of the happening of any contingency).

 

14

 

“Swaps” means payment obligations with
respect to interest rate swaps, currency swaps and similar obligations
obligating a Person to make payments, whether periodically or upon the
happening of a contingency.  For the
purposes of this Agreement, the amount of the obligation under any Swap shall
be the amount determined, in respect thereof as of the end of the then most
recently ended fiscal quarter of Borrower, based on the assumption that such
Swap had terminated at the end of such fiscal quarter, and in making such
determination, if any agreement relating to such Swap provides for the netting
of amounts payable by and to each party thereto or if any such agreement
provides for the simultaneous payment of amounts by and to each party, then in
each such case, the amount of such obligation shall be the net amount so
determined.

 

“Taxes”
has the meaning set forth in Section 8.1.

 

“Transaction Documents”
means all material agreements, instruments and documents heretofore or
hereafter entered into by and among Borrower, a Manager, a Physician Group, the
Physician Group Shareholders, and certain other parties, relating to the
Permitted Acquisition with respect to such Physician Group and/or the
management of such Physician Group by its Manager, and all of the other
transactions relating thereto.  Without
limiting the generality of the foregoing, the Transaction Documents with
respect to each Physician Group include the acquisition agreements, instruments
and documents among such Physician Group, its Physician Group Shareholders, its
Manager and a seller, a Management Services Agreement, an Inter-Company Note
(Physician Group Shareholder), an Inter-Company Note (Guarantor), an
Inter-Company Security Agreement, a Security Agreement (Physician Group), and
an Option Agreement.

 

“Transferee” has the meaning set forth
in Section 9.5(e).

 

“Unfunded Liabilities” means,
with respect to any Plan at any time, the amount (if any) by which (i) the
present value of all benefits under such Plan exceeds (ii) the fair market
value of all Plan assets allocable to such benefits (excluding any accrued but
unpaid contributions), all determined as of the then most recent valuation date
for such Plan, but only to the extent that such excess represents a potential
liability of a member of the ERISA Group to the PBGC or an appointed trustee
under Title IV of ERISA.

 

“Unmatured Event of Default”
means any condition or event which with the giving of notice or lapse of time
or both would, unless cured or waived, become an Event of Default.

 

“Unused Commitment Fee” has
the meaning given to such term in Section 2.9(b).

 

“Warrants” means (i) that certain Second
Amended and Restated Warrant, dated as of July 3, 1997, executed by
Borrower in favor of Imperial Bancorp, (ii) that certain Second Amended and
Restated Warrant, dated as of February 6, 1998, executed by Borrower in
favor of Imperial Bancorp, and (iii) that certain Warrant, dated as of even
date herewith, executed by Borrower in favor of Imperial Bancorp.

 

15

 

“Working Capital Sublimit”
means Three Million Five Hundred Thousand Dollars ($3,500,000).

 

1.2                                 Accounting Terms and Determinations. 
Unless otherwise specified herein, all accounting terms used herein
shall be interpreted, all accounting determinations hereunder shall be made,
and all financial statements required to be delivered hereunder shall be
prepared in accordance with GAAP.

 

1.3                                 Computation
of Time Periods.  In
this Agreement, with respect to the computation of periods of time from a
specified date to a later specified date, the word “from” means “from and
including” and the words “to” and “until” each mean “to but excluding.” Periods
of days referred to in this Agreement shall be counted in calendar days unless
otherwise stated.

 

1.4                                 Construction.  Unless the context of this
Agreement clearly requires otherwise, references to the plural include the
singular and to the singular include the plural, references to any gender
include any other gender, the part includes the whole, the term “including” is
not limiting, and the term “or” has, except where otherwise indicated, the
inclusive meaning represented by the phrase “and/or.”  References in this Agreement to “determination” by Bank include
good faith estimates by Bank (in the case of quantitative determinations), and
good faith beliefs by Bank (in the case of qualitative determinations).  The words “hereof,” “herein,” “hereby,”
“hereunder,” and similar terms in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement.  Article, section, subsection, clause,
exhibit and schedule references are to this Agreement, unless otherwise
specified.  Any reference in this
Agreement or any of the Loan Documents to this Agreement or any of the Loan
Documents includes any and all permitted alterations, amendments, changes,
extensions, modifications, renewals, or supplements thereto or thereof, as
applicable.

 

1.5                                 Exhibits
and Schedules.  All
of the exhibits and schedules attached hereto shall be deemed incorporated
herein by reference.

 

1.6                                 No
Presumption Against Any Party. 
Neither this Agreement, any of the Loan Documents, any other document,
agreement, or instrument entered into in connection herewith, nor any
uncertainty or ambiguity herein or therein shall be construed or resolved using
any presumption against any party hereto, whether under any rule of construction
or otherwise.  On the contrary, this
Agreement, the Loan Documents, and the other documents, instruments, and
agreements entered into in connection herewith have been reviewed by each of
the parties and their counsel and shall be construed and interpreted according
to the ordinary meanings of the words used so as to accomplish fairly the
purposes and intentions of all parties hereto.

 

1.7                                 Independence
of Provisions.  All
agreements and covenants hereunder, under the Loan Documents, and the other documents,
instruments, and agreements entered into in connection herewith shall be given
independent effect such that if a particular action or condition is prohibited
by the terms of any such agreement or covenant, the fact that such action

 

16

 

or
condition would be permitted within the limitations of another agreement or
covenant shall not be construed as allowing such action to be taken or
condition to exist.

 

ARTICLE II

TERMS OF THE CREDIT

 

2.1                                 [Intentionally
Omitted].

 

2.2                                 Revolving
Loans. 
Provided that no Event of Default or Unmatured Event of Default has
occurred, and subject to the other terms and conditions hereof, Bank agrees to
make revolving loans (“Revolving Loans”) to Borrower, upon notice in accordance
with Section 2.4(b), from the Closing Date up to but not including the
Maturity Date, the proceeds of which shall be used only for the purposes
allowed in Section 6.1, subject to the following conditions and
limitations:

 

(a)                                  the aggregate principal amount of Revolving
Loans outstanding after giving effect to any proposed Borrowing plus the Letter
of Credit Usage on such date shall not exceed the amount of the Revolving
Credit Commitment then in effect;

 

(b)                                 Borrower shall not be permitted to borrow,
and Bank shall not be obligated to make, any Revolving Loans to Borrower,
unless and until all of the conditions for a Borrowing set forth in
Section 3.2, and Section 3.3 in the case of a Borrowing for a
Permitted Acquisition, have been met to the satisfaction of Bank in its sole
and absolute discretion;

 

(c)                                  Borrowings shall be in minimum amounts each
of Five Hundred Thousand Dollars ($500,000), plus increments of One Hundred
Thousand Dollars ($100,000) in excess of such minimum amount; and

 

(d)                                 the aggregate amount of Revolving Loans for
working capital outstanding after giving effect to any proposed Borrowing plus
the Letter of Credit Usage on such date shall not exceed the Working Capital
Sublimit;

 

All
repayments of Revolving Loans shall be without penalty or premium.  On the Maturity Date, Borrower shall pay to
Bank the entire unpaid principal balance of the Revolving Loans together with
all accrued but unpaid interest thereon.

 

2.3                                  Letters of
Credit. 
Subject to the terms and conditions hereof, Borrower may request Bank to
issue Letters of Credit for the account of Borrower, subject, in each case, to
the following limitations:

 

(a)                                  Each Letter of Credit shall be issued only
upon satisfaction of each of the following conditions:

 

17

 

(i)                                     The face amount of the Letter of Credit
requested if and when issued must not cause the sum of the aggregate principal
amount outstanding of all Revolving Loans plus the Letter of Credit
Usage to exceed the Revolving Credit Commitment then in effect;

 

(ii)                                  The face amount of the Letter of Credit
requested if and when issued must not cause the Letter of Credit Usage plus
the aggregate amount of Borrowings outstanding on such date for working capital
to exceed the Working Capital Sublimit;

 

(iii)                               The Letter of Credit may not have an expiry
date or draw period which extends beyond the date which is thirty (30) days
prior to the Maturity Date;

 

(iv)                              The conditions specified in
Section 3.2(b) and (c) have been satisfied on the date of issuance of such
Letter of Credit;

 

(v)                                 Borrower shall have submitted a Letter of
Credit Application, and executed such other documents, instruments and
agreements as may be required by Bank, all in form and substance satisfactory
to Bank; provided, however, that the execution, delivery and
performance of such Letter of Credit Application and other documents,
instruments and agreements must not constitute an Unmatured Event of Default or
an Event of Default and, in the event of any conflict between the provisions
hereof and such Letter of Credit Application and other documents, instruments
and agreements, the provisions hereof shall control; and

 

(vi)                                Borrower shall pay any and all charges of
Bank, arising in connection with the issuance or amendment of any Letter of
Credit.

 

(b)                                 Borrower shall pay to Bank the Letter of
Credit Fee upon issuance of each Letter of Credit plus all of Bank’s
standard and customary fees with respect to each Letter of Credit.

 

(c)                                  In determining whether to pay under any Letter
of Credit, only Bank shall be responsible for determining that the documents
and certificates required to be delivered under the Letter of Credit have been
delivered and that they comply on their face with the requirements of such
Letter of Credit.

 

(d)                                 With respect to all Letters of Credit
outstanding upon the occurrence of an Unmatured Event of Default or Event of
Default, Borrower shall either replace such Letters of Credit, whereupon such
Letters of Credit shall be canceled, with letters of credit issued by another
issuer acceptable to the beneficiary of such Letter of Credit, or provide Bank,
as security for such Letters of Credit, with a cash deposit in an amount equal
to the Letter of Credit Usage for so long as such Letters of Credit remain outstanding
during the continuance of such Unmatured Event of Default or Event of Default.

 

18

 

(e)                                  Any and all amounts paid by Bank under any
Letter of Credit shall constitute a Borrowing.

 

2.4                                 Notice
of Borrowing Requirements.

 

(a)                                  Each Borrowing shall be made on a Business
Day.

 

(b)                                 Each Borrowing shall be made upon telephonic
notice given by a Responsible Officer of Borrower, followed by a Notice of
Borrowing, given by facsimile or personal service, delivered to Bank at the
address set forth in the Notice of Borrowing. 
Bank shall be given such notice no later than 11:00 a.m., California
time, on the day on which such Borrowing is to be made, and such notice shall
state the amount thereof (subject to the limitations set forth in
Section 2.2).  Any Notice of
Borrowing (or telephonic notice in respect thereof) shall be irrevocable and
Borrower shall be bound to borrow in accordance therewith.

 

(c)                                  Bank shall not incur any liability to
Borrower in acting upon any telephonic notice which Bank believes in good faith
to have been given by a Responsible Officer of Borrower, or for otherwise
acting in good faith under this Section 2.4, and in making any Revolving
Loans pursuant to telephonic notice.

 

(d)                                 So long as all of the conditions for a
Borrowing set forth herein have been satisfied, Bank shall make the proceeds of
such Borrowing available to Borrower on the applicable Borrowing date by
transferring same day funds, equal to the amount of such Borrowing, in accordance
with written disbursement instructions given by Borrower to Bank, in form and
substance satisfactory to Bank and otherwise consistent with Section 6.1.

 

2.5                                 Interest
Rates; Payments of Interest.

 

(a)                                  Interest Rate.  The
unpaid principal balance of all Loans shall bear interest at the Lending Rate.

 

(b)                                 Default Rate.  If
any payment of principal or interest on the Loans shall not be paid when due
(whether at the stated maturity, by acceleration or otherwise), in addition to
and not in substitution of any of Bank’s other rights and remedies with respect
to such nonpayment, the entire unpaid principal balance of the Loans shall bear
interest at the Lending Rate plus five hundred (500) basis points until
such overdue payment is paid in full. 
In addition, interest, Bank Expenses, the Fees, and other amounts due
hereunder not paid when due shall bear interest at the Lending Rate plus
five hundred (500) basis points until such overdue payment is paid in full.

 

(c)                                  Computation of Interest.  All
computations of interest shall be calculated on the basis of a year of three
hundred sixty (360) days for the actual days elapsed.  In the event that the Prime Rate announced is, from time to time,
changed, adjustment in the rate of interest payable hereunder on the Loans shall
be made as of 12:01 a.m.  (California
time) on

 

19

 

the
effective date of the change in the Prime Rate.  Interest shall accrue from the Closing Date to the date of
repayment of the Loans in accordance with the provisions of this Agreement.

 

(d)                                 Maximum Interest Rate.  In
no event shall the interest rate and other charges hereunder exceed the highest
rate permissible under any law which a court of competent jurisdiction shall,
in a final determination, deem applicable hereto.  In the event that such a court determines that Bank has received
interest and other charges hereunder in excess of the highest rate applicable
hereto, such excess shall be deemed received on account of, and shall
automatically be applied to reduce, the Obligations, other than interest, in
the inverse order of maturity, and the provisions hereof shall be deemed
amended to provide for the highest permissible rate.  If there are no Obligations outstanding, Bank shall refund to
Borrower such excess.

 

(e)                                  Payments of Interest.  All
accrued but unpaid interest on the Loans, calculated in accordance with this
Section 2.5, shall be due and payable, in arrears, on the first Business
Day of each and every month.

 

(f)                                    Change in Applicable Margin.  Changes in the Applicable Margin, resulting from a change in the
Leverage Ratio, shall become effective on the 45th day following the last day
of each fiscal quarter of Borrower, and shall be based on the Leverage Ratio
disclosed in the Compliance Certificate with respect to such fiscal quarter; provided,
however, for purposes of determining the aforementioned margins, (i)
until Borrower accurately completes and delivers to Bank the first Compliance
Certificate due hereunder, the Leverage Ratio shall be conclusively presumed to
be greater than 3.5:1.0 and (ii) if Borrower fails to deliver to Bank an
accurately completed Compliance Certificate within forty-five (45) days
following the end of each fiscal quarter of Borrower, the Leverage Ratio shall
be conclusively presumed to be greater than 3.5:1.0 until the applicable
Compliance Certificate has been so completed and delivered to Bank.

 

2.6                                 Note:
Statements of Obligations.  The
Revolving Loans and Borrower’s obligation to repay the same shall be evidenced
by the Note, this Agreement and the books and records of Bank.  Bank shall render monthly statements of the
Loans to Borrower, including statements of all principal and interest owing on
the Loans, and all Fees and Bank Expenses owing, and such statements shall be
presumed to be correct and accurate and constitute an account stated between
Borrower and Bank unless, within thirty (30) days after receipt thereof by
Borrower, Borrower delivers to Bank, at the address specified in
Section 9.1, written objection thereof specifying the error or errors, if
any, contained in any such statement.

 

2.7                                 Holidays.  Any principal or interest in respect of the
Loans which would otherwise become due on a day other than a Business Day,
shall instead become due on the next succeeding Business Day and such
adjustment shall be reflected in the computation of interest; provided, however,
that in the event that such due date shall, subsequent to the specification
thereof by Bank, for any reason no longer constitute a Business Day, Bank may
change such specified due date in accordance with this Section 2.7.

 

20

 

2.8                                 Time
and Place of Payments.

 

(a)                                  All payments due hereunder shall be made
available to Bank in immediately available Dollars, not later than 12:00 p.m.,
Los Angeles time, on the day of payment, to the following address or such other
address as Bank may from time to time specify by notice to Borrower:

 

IMPERIAL BANK

9920 South La Cienega Blvd., Ste. 628

Inglewood, California 90301

Attention: Lending Services Department

 

(b)                                 Borrower hereby authorizes Bank to charge any
account which Borrower maintains with Bank for the amount of any payment due or
past due hereunder.

 

(c)                                  In addition, Borrower hereby authorizes Bank
at its option, without prior notice to Borrower, to advance a Revolving Loan
for any payment due or past due hereunder, including principal and interest
owing on the Loans, the Fees and all Bank Expenses, and to pay the proceeds of
such Revolving Loan to Bank for application toward such due or past due
payment.

 

2.9                                 Commitment Fee and Unused Commitment Fee.

 

(a)                                  On the Closing Date, Borrower shall pay to
Bank a fully earned, non-refundable Commitment Fee (the “Commitment Fee”)
in the amount of Seventy-Six Thousand Eight Hundred Seventy-Five Dollars
($76,875), of which Bank has received Fifteen Thousand Dollars ($15,000) prior
to the date hereof, in consideration of Bank’s agreement to enter into this
Agreement upon the terms and conditions set forth herein.

 

(b)                                 Borrower shall pay to Bank an unused
commitment fee (the “Unused Commitment Fee”) in an aggregate amount
equal to one-half of one percent (0.5%) per annum of the average daily amount
of the Revolving Credit Commitment minus the Revolving Loans Daily
Balances.  The Unused Commitment Fee
shall begin to accrue on the Closing Date and shall be due and payable on the
first Business Day of each month and the Maturity Date.

 

(c)                                  Late Payment Fee.  If
any payment due hereunder, whether for principal, interest, or otherwise, is
not paid on or before the tenth day after the date such payment is due, in
addition to and not in substitution of any of Bank’s other rights and remedies
with respect to such nonpayment, Borrower shall pay to Bank, a late payment fee
(“Late Payment Fee”) equal to five percent (5 %) of the amount of such
overdue payment.  The Late Payment Fee
shall be due and payable on the eleventh day after the due date of the overdue
payment with respect thereto.

 

2.10                           Optional
Commitment Reductions. 
Borrower may terminate or permanently reduce the Revolving Credit
Commitment at any time, upon three (3) Business Days’ notice to

 

21

 

Bank
(an “Optional Commitment Reduction”), and Borrower shall concurrently
therewith pay Bank in immediately available funds, an amount equal to the
amount by which the aggregate outstanding principal balance of the Revolving
Loans exceeds the amount of the Revolving Credit Commitment as so reduced, plus
all accrued interest on such amount. 
Optional Commitment Reductions shall be in minimum increments of Five
Hundred Thousand Dollars ($500,000).

 

2.11                           Reduction
in Revolving Loans.  On
July 3, 2000, Borrower shall pay to Bank, in immediately available funds,
an amount sufficient to reduce the principal balance of the Revolving Loans to
$10,500,000, to the extent required.

 

ARTICLE III

 

CONDITIONS PRECEDENT

 

3.1                                 Conditions to Loans or Letters of Credit. 
Bank’ s obligation to make Loans or issue Letters of Credit is subject
to and contingent upon the fulfillment of each of the following conditions to
the satisfaction of Bank and its counsel:

 

(a)                                  receipt by Bank of this Agreement, the Note,
the Warrants and guaranty reaffirmations, all duly executed by Borrower and
Guarantors, as applicable, in form and substance satisfactory to Bank in its
sole and absolute discretion;

 

(b)                                 receipt by Bank of a duly executed opinion of
Borrower’s and Guarantors’ counsel, dated as of the Closing Date, substantially
in the form of the opinion rendered in connection with the Prior Agreement and
otherwise in form and substance satisfactory to Bank in its sole and absolute
discretion;

 

(c)                                  receipt by Bank of a certificate of the
Secretary of Borrower, dated as of the Closing Date, certifying (i) the
incumbency and signatures of the Responsible Officers of Borrower who are
executing this Agreement and the documents required by Section 3.1 (a)
hereof on behalf of Borrower; and (ii) the resolutions of the Board of
Directors of Borrower as being true and correct and in full force and effect,
authorizing the execution and delivery of this Agreement and the Loan Documents
being executed in connection herewith, and authorizing the transactions
contemplated hereunder and thereunder, and authorizing the Responsible Officers
of Borrower to execute the same on behalf of Borrower;

 

(d)                                 receipt by Bank of a certificate signed by
the Chief Executive Officer and Chief Financial Officer of Borrower, dated as
of the Closing Date, certifying to Bank that (i) both immediately before and immediately
after giving effect to the transactions contemplated by this Agreement and the
Loan Documents, Borrower is and will be Solvent; (ii) the representations and
warranties of Borrower contained in this Agreement and the Loan Documents are
true and correct and (iii) both immediately before and immediately after giving
effect to the transactions contemplated by this Agreement and the Loan
Documents, no Event of Default or Unmatured Event of Default is continuing or
shall occur;

 

22

 

(e)                                  receipt by Bank of a certificate of the
Secretary of each Guarantor, dated as of the Closing Date, certifying (i) the
incumbency and signatures of the Responsible Officers of such Guarantor who are
executing the documents required in Section 3.  l(a) hereof on behalf of such Guarantor, and (ii) the resolutions
of the Board of Directors of such Guarantor as being true and correct and in
full force and effect, authorizing the execution and delivery of the Loan
Documents being executed in connection herewith, and authorizing the
transactions contemplated thereunder, and authorizing the Responsible Officers
of such Guarantor to execute the same on behalf of such Guarantor;

 

(f)                                    receipt by Bank of a certificate signed by
the Chief Executive Officer and Chief Financial Officer of each Guarantor,
dated as of the Closing Date, certifying to Bank that (i) both immediately
before and immediately after giving effect to the transactions contemplated by
this Agreement and the Loan Documents, such Guarantor is and will be Solvent;
(ii) to the best of their knowledge after due and diligent inquiry, the
representations and warranties of such Guarantor contained in the Loan
Documents are true and correct and (iii) to the best of their knowledge after
due and diligent inquiry, both immediately before and immediately after giving
effect to the transactions contemplated by the Loan Documents, no Event of
Default or Unmatured Event of Default is continuing or shall occur;

 

(g)                                 receipt by Bank of (i) the Commitment Fee and
(ii) all Bank Expenses owing on the Closing Date;

 

(h)                                 no Material Adverse Effect shall have
occurred;

 

(i)                                      the Closing Date shall have occurred on or
before July 6, 1999.

 

3.2                                 Conditions to all Loans and Letters of Credit.  Bank’s obligation hereunder
to make any Loans to Borrower (including the initial Loan), or issue any
Letters of Credit (including the initial Letter of Credit), is further subject
to and contingent upon the fulfillment of each of the following conditions to the
satisfaction of Bank:

 

(a)                                  in the case of a Borrowing, receipt by Bank
of a Notice of Borrowing as required by Section 2.4(b) and written
disbursement instructions to Bank consistent with Section 6.1;

 

(b)                                 in the case of a Borrowing or Letter of
Credit Application, the fact that, immediately before and after such Borrowing
or issuance of Letter of Credit, as the case may be, no Event of Default or
Unmatured Event of Default shall have occurred; and

 

(c)                                  in the case of a Borrowing or Letter of
Credit Application, the fact that the representations and warranties of
Borrower contained in this Agreement shall be true on and as of the date of
such Borrowing, or issuance of Letter of Credit, as the case may be.

 

3.3                                 Additional Conditions to Loans for Permitted Acquisitions. 
Bank’s obligation hereunder to make any Loans to Borrower for a
Permitted Acquisition with respect to

 

23

 

any
Physician Group, is further subject to and contingent upon the fulfillment of
each of the following conditions to the satisfaction of Bank:

 

(a)                                  satisfaction of all of the conditions set
forth in Section 6.8(b); and

 

(b)                                 receipt by Bank of Pay-Off Letters from the
Old Lenders, if any, and such UCC-2 Termination Statements and other Lien releases
as Bank shall require, duly executed by such Old Lenders, all of the foregoing
in form and substance satisfactory to Bank; and

 

(c)                                  receipt by Bank of such other agreements,
instruments and documents as Bank may reasonably require in connection with
such Borrowing, in form and substance satisfactory to Bank in its sole and
absolute discretion.

 

ARTICLE IV

REPRESENTATIONS AND
WARRANTIES

 

In order to induce Bank to enter into this Agreement and to make Loans
and/or issue any Letters of Credit, Borrower represents and warrants to Bank
that on the Closing Date and on the date of each Borrowing or issuance of a
Letter of Credit:

 

4.1                                 Legal Status.  Borrower is a corporation
duly organized and existing under the laws of the state of Delaware.  Borrower and each Subsidiary has the power
and authority to own its own Assets and to transact the business in which it is
engaged, and is properly licensed, qualified to do business and in good
standing in every jurisdiction in which it is doing business where failure to
so qualify could have a Material Adverse Effect.

 

4.2                                 No Violation: Compliance.

 

(a)                                  The execution, delivery and performance of
this Agreement and the Loan Documents and the Transaction Documents to which
Borrower is a party are within Borrower’s powers, are not in conflict with the
terms of the Governing Documents of Borrower, and do not result in a breach of
or constitute a default under any contract, obligation, indenture or other
instrument to which Borrower is a party or by which Borrower is bound or
affected.  There is no law, rule or
regulation (including Regulations T, U and X of the Federal Reserve Board and
laws relating to the practice of medicine), nor is there any judgment, decree
or order of any court or Governmental Authority binding on Borrower which would
be contravened by the execution, delivery, performance or enforcement of this
Agreement and the Loan Documents and the Transaction Documents to which
Borrower is a party.

 

(b)                                 The execution, delivery and performance of
the Loan Documents and the Transaction Documents to which each Guarantor is a
party are within such Guarantor’s powers, are not in conflict with the terms of
the Governing Documents of such Guarantor, and do not result in a breach of or
constitute a default under any contract, obligation, indenture or other
instrument to which such Guarantor is a party or by which such Guarantor is
bound or

 

24

 

affected.  There is no law, rule or regulation
(including Regulations T, U and X of the Federal Reserve Board and laws
relating to the practice of medicine), nor is there any judgment, decree or
order of any court or Governmental Authority binding on any Guarantor which
would be contravened by the execution, delivery, performance or enforcement of
the Loan Documents and the Transaction Documents to which any Guarantor is a
party.

 

4.3                                 Authorization;
Enforceability.

 

(a)                                  Borrower has taken all corporate action
necessary to authorize the execution and delivery of this Agreement and the Loan
Documents and the Transaction Documents to which Borrower is a party, and the
consummation of the transactions contemplated hereby and thereby.  Upon their execution and delivery in
accordance with the terms hereof, this Agreement and the Loan Documents and the
Transaction Documents to which Borrower is a party will constitute legal, valid
and binding agreements and obligations of Borrower enforceable against Borrower
in accordance with their respective terms, except as enforceability may be
limited by bankruptcy, insolvency, and similar laws and equitable principles
affecting the enforcement of creditors’ rights generally.

 

(b)                                 Each Guarantor has taken all corporate action
necessary to authorize the execution and delivery of the Loan Documents and the
Transaction Documents to which such Guarantor is a party, and the consummation
of the transactions contemplated thereby. 
Upon their execution and delivery in accordance with the terms hereof,
the Loan Documents and the Transaction Documents to which each Guarantor is a
party will constitute legal, valid and binding agreements and obligations of
such Guarantor enforceable against such Guarantor in accordance with their
respective terms, except as enforceability may be limited by bankruptcy,
insolvency, fraudulent conveyance, and similar laws and equitable principles
affecting the enforcement of creditors’ rights generally.

 

4.4                                 Approvals;
Consents.  No
approval, consent, exemption or other action by, or notice to or filing with,
any Governmental Authority is necessary in connection with the execution,
delivery; performance or enforcement of this Agreement, the Loan Documents or
the Transaction Documents.

 

4.5                                 Liens.  Borrower, each Subsidiary and
each Physician Group has good and marketable title to, or valid leasehold
interests in, all of its Assets, free and clear of all Liens or rights of
others, except for Permitted Liens.

 

4.6                                 Debt.  Borrower, each Subsidiary and each Physician
Group has no Debt other than Permitted Debt.

 

4.7                                 Litigation.  Except as set forth in Schedule 4.7,
there are no suits, proceedings, claims or disputes pending or, to the
knowledge of Borrower after due inquiry, threatened, against or affecting
Borrower, any Subsidiary or any Physician Group, or any of Borrower’s Assets,
or any of any Subsidiary’s Assets or any of any Physician Group’s Assets,

 

25

 

which
are not fully covered by applicable insurance and as to which no reservation of
rights has been taken by the insurer thereunder.

 

4.8                                 No Default.  No Event of Default or Unmatured Event of
Default is continuing or would result from the incurring of obligations by
Borrower or any Subsidiary under this Agreement or the Loan Documents.

 

4.9                                 Subsidiaries.  Set forth in Schedule 4.9
is a complete and accurate list of the Subsidiaries, showing the jurisdiction
of incorporation of each and showing the percentage of Borrower’s ownership of
the outstanding stock of each Subsidiary. 
All of the outstanding capital stock of each Subsidiary has been validly
issued, is fully paid and nonassessable, and is owned by Borrower free and
clear of all Liens except Permitted Liens.

 

4.10                           Taxes.  All tax returns required to be filed by
Borrower, the Subsidiaries and the Physician Groups in any jurisdiction have in
fact been filed, and all taxes, assessments, fees and other governmental
charges upon Borrower, the Subsidiaries and the Physician Groups or upon any of
their Assets, income or franchises, which are due and payable have been paid.  The provisions for taxes on the books of
Borrower and each of the Subsidiaries and Physician Groups’ are adequate for
all open years, and for Borrower’s and each of the Subsidiaries and Physician
Groups’ current fiscal period.

 

4.11                           Correctness of Financial Statements. 
Borrower’s consolidated unaudited Financial Statement as of the fiscal
year to date period ended April 30, 1999, and all information and data
furnished by Borrower to Bank in connection therewith, are complete and correct
and accurately and fairly present the financial condition and results of
operations of Borrower, the Subsidiaries and the Physician Groups as of their
respective dates.  Any forecasts of
future financial performance delivered by Borrower to Bank have been made in
good faith and are based on reasonable assumptions and investigations by
Borrower.  Said Financial Statement has
been prepared in accordance with GAAP. 
Since the date of such Financial Statement, there has been no change in
Borrower’s, the Subsidiaries’ or the Physician Groups’ financial condition or
results of operations sufficient to have a Material Adverse Effect.  Borrower, the Subsidiaries and the Physician
Groups have no contingent obligations, liabilities for taxes or other
outstanding financial obligations which are material in the aggregate, except
as disclosed in such statements, information and data.

 

4.12                           ERISA.  Neither Borrower nor any member of the ERISA
Group maintains or contributes to any Plan or Multiemployer Plan, other than
those listed on Schedule 4.12. 
Borrower and each member of the ERISA Group have satisfied the minimum
funding standards of ERISA and the Internal Revenue Code with respect to each
Plan and Multiemployer Plan to which it is obligated to contribute.  No ERISA Event has occurred nor has any
other event occurred that may result in an ERISA Event that reasonably could be
expected to result in a Material Adverse Effect.  None of Borrower, any member of the ERISA Group, or any fiduciary
of any Plan is subject to any direct or indirect liability with respect to any
Plan (other than to make regularly scheduled required contributions and to pay
Plan benefits in the normal course) under any applicable law, treaty, rule,
regulation, or agreement.  Neither
Borrower nor any

 

26

 

member
of the ERISA Group is required to provide security to any Plan under
Section 401(a)(29) of the Internal Revenue Code.  Each Plan will be able to fulfill its benefit obligations as they
come due in accordance with the Plan documents and under GAAP.

 

4.13                           Other
Obligations. 
Except as disclosed on Schedule 4.13,  Borrower and each of the Subsidiaries and
Physicians Groups is not in default on any Debt, and Borrower and each of the
Subsidiaries and Physicians Groups is not in default on any other lease,
commitment, contract, instrument or obligation which is material to the
operation of its business.

 

4.14                           Public
Utility Holding Company Act. 
Borrower is not a “holding company,” or an “affiliate” of a “holding
company” or a “subsidiary company” of a “holding company,” within the meaning
of the Public Utility Holding Company Act of 1935, as amended.

 

4.15                           Investment
Company Act. 
Borrower is not an “investment company,” or a company “controlled” by an
“investment company,” within the meaning of the Investment Company Act of 1940,
as amended.

 

4.16                           Patents,
Trademarks, Copyrights,
and Intellectual Property, etc.  Borrower and each Subsidiary has all
necessary, patents, patent rights, licenses, trademarks, trademark rights,
trade names, trade name rights, copyrights, permits, and franchises in order
for it to conduct its business and to operate its Assets, without known
conflict with the rights of third Persons, and all of same are valid and
subsisting.  The consummation of the
transactions contemplated by this Agreement will not alter or impair any of
such rights of Borrower or any Subsidiary. 
Borrower and each Subsidiary has not been charged or, to the best of
Borrower’s knowledge after due inquiry, threatened to be charged with any
infringement or, after due inquiry, infringed on any, unexpired trademark,
trademark registration, trade name, patent, copyright, copyright registration,
or other proprietary right of any Person.

 

4.17                           Environmental
Condition, (i) None of Borrower’s, any Subsidiary’s or
any Physician Group’s Assets has ever been used by such Borrower, such
Subsidiary or any Physician Group or by previous owners or operators in the
disposal of, or to produce, store, handle, treat, release, or transport, any
Hazardous Materials, other than medical supplies used in the ordinary course of
a Physician Group’s practice as presently conducted in accordance with all
applicable laws, rules and regulations; (ii) none of Borrower’s, any
Subsidiary’s or any Physician Group’s Assets has ever been designated or
identified in any manner pursuant to any environmental protection statute as a
Hazardous Materials disposal site, or a candidate for closure pursuant to any
environmental protection statute; (iii) no Lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned or operated by Borrower, any Subsidiary nor any Physician Group;
and (iv) neither Borrower, any Subsidiary or any Physician Group has received a
summons, citation, notice, or directive from the Environmental Protection
Agency or any other federal or state governmental agency concerning any action
or omission by Borrower, any Subsidiary or any Physician Group resulting in the
releasing or disposing of Hazardous Materials into the environment.

 

27

 

4.18                           Real Estate
Leases.  All
of the Real Estate Leases are listed on Schedule 4.18.  All of the Real Estate Leases are currently
in full force and effect, and true and correct copies of all Real Estate
Leases, together with all amendments, exhibits and schedules thereto, have been
delivered to Bank.  Except as disclosed
on Schedule 4.13,  neither
the landlord nor the tenant therein, as the case may be, is in default on any
of its obligations thereunder, and no event has occurred which, with the
passage of time or the giving of notice, or both, would constitute such a
default.

 

4.19                           Compliance
With ADA.

 

(a)                                  Borrower’s, the Subsidiaries’ and the
Physician Group’s premises are presently used for administrative, office, and
other commercial purposes, and no portions of Borrower’s, any Subsidiaries’ or
any Physician Group’s premises are used as or for a “public accommodation,” as
described and defined in the ADA.

 

(b)                                 Borrower, each Subsidiary and each Physician
Group has made all modifications and/or provided all accommodations which may
be required to be made or provided by Borrower, such Subsidiary and each
Physician Group to their premises pursuant to the ADA in order to accommodate the
needs and requirements of any disabled employees of Borrower, such Subsidiary
and each Physician Group.

 

(c)                                  Borrower, the Subsidiaries and the Physician
Groups have received no notice or complaint regarding any noncompliance with
the ADA of their premises or of Borrower’s, any Subsidiary’s and the Physician
Group’s employment practices and, to the best of Borrower’s knowledge, there
has been no threatened litigation alleging any such noncompliance by Borrower,
the Subsidiaries, the Physician Groups or their premises.

 

4.20                           Physician
Groups; Transaction
Documents.

 

(a)                                  Each of the Physician Groups is listed on Schedule 4.20
including with respect to each Physician Group, its full legal name and all
trade names and fictitious business names, state of organization, and all
locations where such Physician Group conducts its business.  Each of the Transaction Documents executed
in connection with the formation or acquisition of such Physician Group and
currently in effect, and transactions by and among such Physician Group, its
Physician Group Shareholders, Borrower and any Subsidiary, are listed by title,
date and parties in Schedule 4.20.

 

(b)                                 Each Physician Group is a professional
medical corporation, duly organized and existing under the laws of the state of
its organization.  Each Physician Group
has the power and authority to own its own Assets and to transact the business
in which it is engaged, and is properly licensed to practice medicine in
accordance with applicable laws.

 

(c)                                  The execution, delivery and performance of
the Transaction Documents to which each Physician Group is a party are within
such Physician Group’s powers, are not in conflict with the terms of any
charter, bylaw, the articles or certificate of incorporation

 

28

 

or
other organization papers of such Physician Group, and do not result in a
breach of or constitute a default under any material contract, obligation,
indenture or other instrument to which such Physician Group or its Physician Group
Shareholders is a party or by which such Physician Group its Physician Group
Shareholders is bound or affected.  To
the knowledge of Borrower, there is no law, rule or regulation, whether
relating to the practice of medicine or otherwise, nor is there any judgment,
decree or order of any court or Governmental Authority binding on any Physician
Group or any Physician Group Shareholder which would be contravened by the
execution, delivery, performance or enforcement of the Transaction Documents to
which such Physician Group and such Physician Group Shareholder is a party.

 

(d)                                 Each Physician Group has taken all corporate
action necessary to authorize the execution and delivery of the Transaction
Documents to which such Physician Group is a party, and the consummation of the
transactions contemplated thereby.

 

4.21                           Billing
Practices.  To
the knowledge of Borrower, all billing practices of each Guarantor with third
party payors of each Physician Group, including Medicare, Medicaid, Champus and
Private Insurance Companies, are true and correct and in compliance with all
applicable laws, regulations, policies and agreements, except where the failure
to so comply is not reasonably likely to have a Material Adverse Effect.

 

4.22                           Character
of Business. 
Borrower is a holding company engaged in no business activities or
operations other than the funding or financing of Permitted Acquisitions and
the acquisition, ownership and management of the Subsidiaries, and the
Subsidiaries are not engaged in any business activities or operations other
than the management of the Physician Groups and other activities incidental
thereto.

 

ARTICLE V

AFFIRMATIVE COVENANTS

 

Borrower covenants and agrees that from the Closing Date and thereafter
until the indefeasible payment, performance and satisfaction in full of the
Obligations and all of Bank’s obligations hereunder have been terminated,
Borrower shall:

 

5.1                                 Punctual
Payments. 
Punctually pay the interest and principal on the Loans, the Fees and all
Bank Expenses and any other fees and liabilities due under this Agreement and
the Loan Documents at the times and place and in the manner specified in this
Agreement or the Loan Documents.

 

5.2                                 Books and
Records. 
Maintain, and cause each of its Subsidiaries to maintain, adequate books
and records in accordance with GAAP, and permit any officer, employee or agent
of Bank, at any time and from time to time, to inspect, audit and examine such
books and records, and to make copies of the same.

 

29

 

5.3                                 Financial
Statements. 
Deliver to Bank the following, all in form and detail satisfactory to
Bank and in such number of copies as Bank may request:

 

(a)                                  as soon as available but not later than
forty-five (45) days after and as of the close of each monthly accounting
period, a consolidated internally prepared Financial Statement for Borrower,
its Subsidiaries and each Physician Group which shall include Borrower’s, its
Subsidiaries’ and each Physician Group’s consolidated balance sheet as of the close
of such period, and Borrower’s, its Subsidiaries’ and each Physician Group’s
consolidated statement of income and retained earnings and statement of cash
flow for such period and year to date, certified by the Chief Financial Officer
or the Executive Vice President of Borrower, to the best of his or her
knowledge after due and diligent inquiry, as being complete and correct and
fairly presenting in all material respects Borrower’s, its Subsidiaries’ and
each Physician Group’s financial condition and results of operations for such
period;

 

(b)                                 as soon as available but not later than
forty-five (45) days after and as of the close of each quarterly accounting
period, a consolidated and consolidating internally prepared Financial
Statement for Borrower, its Subsidiaries and each Physician Group which shall
include Borrower’s, its Subsidiaries’ and each Physician Group’s consolidated
and consolidating balance sheet as of the close of such period, and Borrower’s,
its Subsidiaries’ and each Physician Group’s consolidated statement of income
and retained earnings and statement of cash flow for such period and year to
date, certified by the Chief Financial Officer or the Executive Vice President
of Borrower, to the best of his or her knowledge after due and diligent
inquiry, as being complete and correct and fairly presenting Borrower’s, its
Subsidiaries’ and each Physician Group’s financial condition and results of
operations;

 

(c)                                  as soon as available but not later than
forty-five (45) days after and as of the close of each quarterly accounting
period, a report, certified by a Responsible Officer of Borrower, to the best
of his or her knowledge after due and diligent inquiry, as being complete and
correct, setting forth all of the following information with respect to such
quarterly accounting period with respect to Borrower, the Subsidiaries and the
Physician Groups, both in the aggregate and by Physician Group: (i) an accounts
receivable aging by payor class, (ii) number of member lives and number of
doctors employed, (iii) monthly capitation rate for commercial lives, Medicare
risk lives and Medical/Medicaid lives, (iv) medical loss ratio; and (v) an
analysis of incurred but not reported medical expenses.

 

(d)                                 as soon as available but not later than
forty-five (45) days after and as of the end of each quarterly accounting
period, a Compliance Certificate from the Chief Financial Officer or the
Executive Vice President of Borrower, stating, among other things, that he or
she has reviewed the provisions of this Agreement and the Loan Documents and
that, to the best of his or her knowledge after due and diligent inquiry there
exists no Event of Default or Unmatured Event of Default, and containing the
calculations and other details necessary to demonstrate compliance with
Sections 6.12 and 6.16;

 

(e)                                  as soon as available but not later than
forty-five (45) days after the end of each quarterly accounting period, the Lag
Studies for all of Borrower’s Physician Groups

 

30

 

for
such quarterly accounting period, with the Accrued Medical Claims disclosed in
such Lag Studies fully reconciled to Borrower’s balance sheet for such fiscal
quarter delivered under Section 5.3(b);

 

(f)                                    as soon as available but not later than
ninety (90) days after and as of the end of each fiscal year, a complete copy
of Borrower’s, the Subsidiaries’ and the Physician Groups’ consolidated audited
Financial Statement and all work papers and supporting documents thereunder
which Bank may request, which shall include at least Borrower’s, the
Subsidiaries’ and the Physician Groups’ balance sheet as of the close of such
fiscal year, and Borrower’s, the Subsidiaries’ and the Physician Groups’
statement of income and retained earnings and statement of cash flow for such
fiscal year, certified by a certified public accountant selected by Borrower
and satisfactory to Bank, which certificate shall not be qualified in any
manner whatsoever, and shall include or be accompanied by a statement from such
accountant that during the examination, solely with respect to accounting and
auditing matters herein, there was observed no Event of Default or Unmatured
Event of Default, or a statement of such Event of Default or Unmatured Event of
Default if any is found and the actions taken or to be taken with respect
thereto;

 

(g)                                 as soon as available but not later than
thirty (30) days prior to the last day of each fiscal year, a Capital
Expenditure budget for the following fiscal year of Borrower, the Subsidiaries
and the Physician Groups, approved by the Board of Directors of Borrower, in
form and content satisfactory to Bank;

 

(h)                                 as soon as available, but no later than ten
(10) days after submission thereof to the Department of Corporations and/or any
other applicable or successor state agency or body, all reports and/or
financial statements required under Borrower’s or any Guarantor’s Health
Service Plan License, if any;

 

(i)                                     promptly upon receipt by Borrower, copies of
any and all reports and management letters submitted to Borrower or any
Subsidiary by any certified public accountant in connection with any
examination of Borrower’s or any Subsidiary’s financial records made by such
accountant; and

 

(j)                                     from time to time annual budgets, operating
statistics, operating plans and any other information as Bank may reasonably
request, promptly upon such request.

 

5.4                                 Existence;
Preservation of Licenses:
Compliance with Law.  Preserve and maintain, and cause each
Subsidiary to preserve and maintain, its corporate existence and good standing
in the state of its organization, qualify and remain qualified, and cause each
Subsidiary to qualify and remain qualified, as a foreign corporation in every
jurisdiction where the failure to be so qualified could have a Material Adverse
Effect; and preserve, and cause each of the Subsidiaries to preserve, all of
its licenses, permits, governmental approvals, rights, privileges and
franchises required for its operations; and comply, and cause each of the
Subsidiaries to comply, with the provisions of its Governing Documents; and
comply, and cause each of the Subsidiaries to comply, with the requirements of
all applicable laws, rules, regulations, orders of any Governmental Authority
having authority or jurisdiction over it, except for such laws, rules

 

31

 

and
regulations where the failure to so comply could not have a Material Adverse
Effect, and comply, and cause each of the Subsidiaries to comply, with all
requirements for the maintenance of its business, insurance, licenses, permits,
governmental approvals, rights, privileges and franchises; and timely file, and
cause each of its Subsidiaries to timely file, to the Department of
Corporations, all required reports and financial statements required under its
Health Service Plan License, if any.

 

5.5                                 Insurance.

 

(a)                                  Maintain and keep in force, and cause each
Subsidiary and each Physician Group to maintain and keep in force, insurance of
the types and in amounts customarily carried by companies engaged in the same
or similar business, or similarly situated, including fire, extended coverage,
public liability, business interruption, property damage, medical liability and
workers’ compensation insurance, and deliver to Bank from time to time at
Bank’s request schedules setting forth all insurance then in effect.  All insurance required herein shall be
written by companies which are authorized to do insurance business in the State
of California.  All hazard insurance and
such other insurance as Bank shall specify, shall contain a California Form
438BFU (NS) endorsement, or an equivalent endorsement satisfactory to Bank,
showing Bank as sole loss payee thereof, and shall contain a waiver of
warranties.  Every policy of insurance
referred to in this Section 5.5 shall contain an agreement by the insurer
that it will not cancel such policy except after 30 days prior written notice
to Bank and that any loss payable thereunder shall be payable notwithstanding
any act or negligence of Borrower or Bank which might, absent such agreement,
result in a forfeiture of all or a part of such insurance payment.

 

(b)                                 Original policies or certificates thereof
satisfactory to Bank evidencing such insurance shall be delivered to Bank at
least 30 days prior to the expiration of the existing or preceding
policies.  Borrower shall give Bank
prompt notice of any loss covered by such insurance, and Bank shall have the
right to adjust any loss.  Bank shall
have the exclusive right to adjust all losses payable under any such insurance
policies without any liability to Borrower whatsoever in respect of such
adjustments.  Any monies received as
payment for any loss under any insurance policy including the insurance
policies mentioned above, shall be paid over to Bank to be applied at the
option of Bank either to the prepayment of the Obligations without premium, in
such order or manner as Bank may elect, or shall be disbursed to Borrower under
stage payment terms satisfactory to Bank for application to the cost of
repairs, replacements, or restorations. 
All repairs, replacements, or restorations shall be effected with
reasonable promptness and shall be of a value at least equal to the value of
the items or property destroyed prior to such damage or destruction.  Upon the occurrence of an Event of Default,
Bank shall have the right to apply all prepaid premiums to the payment of the
Obligations in such order or form as Bank shall determine.  Borrower shall, concurrently with the
financial information required to be delivered by Borrower pursuant to
Section 5.3(b), deliver to Bank, as Bank may request, copies of
certificates describing all insurance of Borrower then in effect.

 

5.6                                 Assets.  Maintain, keep and preserve, and cause each
Subsidiary to maintain, keep and preserve, all of its Assets (tangible or
intangible) which are necessary to its business in good repair and condition,
and from time to time make necessary repairs, renewals

 

32

 

and
replacements thereto so that such Assets shall be fully and efficiently
preserved and maintained.

 

5.7                                 Taxes
and Other Liabilities.  Pay
and discharge when due, and cause each Subsidiary to pay and discharge when
due, any and all assessments and taxes, both real or personal and including
federal and state income taxes, and any and all other Permitted Debt.

 

5.8                                 Notice to Bank.  Promptly, upon Borrower
acquiring knowledge thereof, give written notice to Bank of:

 

(a)                                  all litigation affecting Borrower or any
Subsidiary where the amount in controversy is in excess of applicable insurance
coverage;

 

(b)                                 any dispute which may exist between Borrower,
any Subsidiary or any Physician Group, on the one hand, and any Governmental
Authority, on the other;

 

(c)                                  any labor controversy resulting in or
threatening to result in a strike against Borrower or any Subsidiary;

 

(d)                                 any proposal by any public authority to
acquire the Assets or business of Borrower or any Subsidiary, or to compete
with Borrower or any Subsidiary;

 

(e)                                  all notices or claims which may be received
by Borrower or any Subsidiary and involving claims made by any Person as to any
alleged noncompliance of Borrower’s or such Subsidiary’s premises with the
requirements of the ADA;

 

(f)                                    any material notice from any Governmental
Authority pertaining to any Physician Group, the Transaction Documents or any
of them, or the transactions contemplated thereunder;

 

(g)                                 any notice of termination of any Management
Service Agreement or any other material notice from any Physician Group, or any
Physician Group Shareholder;

 

(h)                                 any Event of Default or Unmatured Event of
Default; and

 

(i)                                     any other matter which has resulted or could
result in a Material Adverse Effect.

 

5.9                                 Employee
Benefits. 
(a)(i) Promptly, and in any event within 10 Business Days after Borrower
or any of the Subsidiaries knows or has reason to know that an ERISA Event has
occurred that reasonably could be expected to result in a Material Adverse
Effect, deliver or cause to be delivered a written statement of the Chief
Financial Officer of Borrower describing such ERISA Event and any action that
is being taken with respect thereto by Borrower, any such Subsidiary, or member
of the ERISA Group, and any action taken or threatened by the IRS, Department
of Labor, or PBGC.  Borrower or such
Subsidiary, as applicable, shall be deemed

 

33

 

to
know all facts known by the administrator of any Plan of which it is the plan
sponsor; (ii) promptly and in any event within 3 Business Days after the filing
thereof with the IRS, a copy of each funding waiver request filed with respect
to any Plan and all communications received by Borrower, any member of the
ERISA Group with respect to such request; and (iii) promptly and in any event
within 3 Business Days after receipt by Borrower, any of its Subsidiaries or,
to the knowledge of Borrower, any member of the ERISA Group, of the PBGC’s
intention to terminate a Plan or to have a trustee appointed to administer a
Plan, copies of each such notice.

 

(b)                                 Cause to be delivered to Bank, upon Bank’s
request, each of the following: (i) a copy of each Plan (or, where any such
plan is not in writing, complete description thereof) (and if applicable,
related trust agreements of other funding instruments) and all amendments
thereto, all written interpretations thereof and written descriptions thereof
that have been distributed to employees or former employees of Borrower or its
Subsidiaries; (ii) the most recent determination letter issued by the IRS with
respect to each Plan; (iii) for the three most recent plan years, annual
reports on Form 5500 Series required to be filed with any governmental agency
for each Plan; (iv) all actuarial reports prepared for the last three plan
years for each Plan; (v) a listing of all Multiemployer Plans, with the aggregate
amount of the most recent annual contributions required to be made by Borrower
or any member of the ERISA Group to each such plan and copies of the collective
bargaining agreements requiring such contributions; (vi) any information that
has been provided to Borrower or any member of the ERISA Group regarding
withdrawal liability under any Multiemployer Plan; and (vii) the aggregate
amount of the most recent annual payments made to former employees of Borrower
or its Subsidiaries under any Retiree Health Plan.

 

5.10                           Further
Assurances. 
Execute and deliver, or cause to be executed and delivered, upon the
request of Bank and at Borrower’s expense, such additional documents,
instruments and agreements as Bank may reasonably determine to be necessary or
advisable to carry out the provisions of this Agreement and the Loan Documents,
and the transactions and actions contemplated hereunder and thereunder.

 

5.11                           Bank Accounts.  Maintain, and cause each
Subsidiary and each Physician Group to maintain, its cash on hand and cash
equivalent investments in deposit accounts at Bank, which deposits accounts
(other than the deposit accounts of the Physician Groups) shall be subject to
the security interests granted to Bank under the Security Agreement
(“Borrower”) and the Security Agreements (Guarantor), and all funds in the
deposit accounts of the Physician Groups shall be swept daily into the deposit
account of its Manager established at Bank; provided, however,
notwithstanding the foregoing, the Physician Groups listed on Schedule 5.11
shall be permitted to maintain the deposit accounts listed on Schedule 5.11
(and no others) so long as (i) all funds in such deposit accounts are at
all times subject to a perfected first priority security interest in favor of
Bank, subject only to Permitted Liens, and (ii) Borrower shall transfer, or
cause to be transferred, to the deposit account of the applicable Manager
maintained at Bank, any and all funds in such deposit accounts in the aggregate
for all such deposit accounts in excess of Fifty Thousand Dollars ($50,000) on
a daily basis.

 

34

 

5.12                           Environment.  Be and remain, and cause each
Subsidiary and each operator of any of Borrower’s or any Subsidiary’s Assets to
be and remain, in compliance with the provisions of all federal, state and
local environmental, health and safety laws, codes and ordinances, and all
rules and regulations issued thereunder; notify Bank immediately of any notice
of a hazardous discharge or environmental complaint received from any
Governmental Authority or any other Person; notify Bank immediately of any
hazardous discharge from or affecting its premises; immediately contain and
remove the same, in compliance with all applicable laws; promptly pay any fine
or penalty assessed in connection therewith; permit Bank to inspect the
premises, to conduct tests thereon, and to inspect all books, correspondence,
and records pertaining thereto; and at Bank’s-request, and at Borrower’s
expense, provide a report of a qualified environmental engineer, satisfactory
in scope, form and content to Bank, and such other and further assurances
reasonably satisfactory to Bank that the condition has been corrected.

 

5.13                           Real Estate
Leases. 
Perform all of its obligations under all of the Real Estate Leases and
promptly deliver to Bank a copy of all notices of default or breach under any
Real Estate Lease.

 

5.14                           ADA.  Observe and comply, and cause each
Subsidiary to observe and comply, in all material respects with all obligations
and requirements of the ADA as it applies to their premises, which shall
include, without limitation, installing or constructing all improvements or
alterations which may be necessary to cause such premises to be accessible to
all persons if the use of such premises or any part thereof becomes a “public
accommodation,” as defined in the ADA, or in the event additional building
improvements are added or incorporated into the existing improvements, and
making any reasonable accommodations which may be necessary to accommodate the
needs or requirements of any existing or future employee of Borrower and the
Subsidiaries, as applicable.

 

5.15                           Billing
Practices. 
Cause all billing practices of each Guarantor with third party payors of
each Physician Group, including Medicare, Medicaid, Champus and Private
Insurance Companies, to be true and correct in all material respects and in
material compliance with all applicable laws, regulations, policies and
agreements.

 

ARTICLE VI

 

NEGATIVE COVENANTS

 

Borrower further covenants and agrees that from the Closing Date and
thereafter until the indefeasible payment, performance and satisfaction in full
of the Obligations and all of Bank’s obligations hereunder have been
terminated, Borrower shall not:

 

6.1                                 Use of Funds:
Margin Regulation.

 

(a)                                  Use any proceeds of the Revolving Loans for
any purpose other than (i) for Permitted Acquisitions to the extent permitted
by Sections 3.3 and 6.8 and (ii) for working capital; or

 

35

 

(b)                                 Use any portion of the proceeds of the Loans
in any manner which might cause the Loans, the application of the proceeds
thereof, or the transactions contemplated by this Agreement to violate
Regulation T, U, or X of the Board of Governors of the Federal Reserve System,
or any other regulation of such board, or to violate the Securities and
Exchange Act of 1934, as amended or supplemented.

 

6.2                                 Debt.  Create, incur, assume or suffer to exist, or
permit any Subsidiary or any Physician Group to create, incur, assume or suffer
to exist, any Debt except Permitted Debt.

 

6.3                                 Liens.  Create, incur, assume or suffer to exist, or
permit any Subsidiary or any Physician Group to create, incur, assume or suffer
to exist, any Lien (including the lien of an attachment, judgment or execution)
on any of its Assets, whether now owned or hereafter acquired, except Permitted
Liens; or sign or file, or permit any Subsidiary or any Physician Group to sign
or file, under the Uniform Commercial Code as adopted in any jurisdiction, a
financing statement which names Borrower or any Subsidiary or any Physician
Group as a debtor, except with respect to Permitted Liens, or sign, or permit
any Subsidiary or any Physician Group to sign, any security agreement
authorizing any secured party thereunder to file such a financing statement,
except with respect to Permitted Liens.

 

6.4                                 Merger,
Consolidation, Transfer of Assets.  Wind up, liquidate or
dissolve, reorganize, merge or consolidate with or into any other Person, or
acquire all or substantially all of the Assets or the business of any other
Person, or permit any Subsidiary to do so, except for Permitted Acquisitions; provided,
however, upon prior written notice to Bank, any Subsidiary may merge
into or consolidate with or transfer Assets to any other Subsidiary.

 

6.5                                 Leases.  Create, incur, assume or suffer to exist, or
permit any Subsidiary to create, incur, assume or suffer to exist, any
obligation as a lessee for the rental or hire of any real or personal property,
other than (i) leases that have been or should be capitalized in accordance
with GAAP and (ii) leases (other than Capital Leases) that do not in the
aggregate require Borrower and its Subsidiaries on a consolidated basis to make
payments (including taxes, insurance, maintenance, and similar expenses which
Borrower or any Subsidiary is required to pay under the terms of any lease) in
excess of One Hundred Thousand Dollars ($100,000) in any fiscal year of
Borrower.

 

6.6                                 Sales and
Leasebacks. 
Sell, transfer, or otherwise dispose of, or permit any Subsidiary to
sell, transfer, or otherwise dispose of, any real or personal property to any
Person, and thereafter directly or indirectly leaseback the same or similar
property.

 

6.7                                 Asset Sales.  Conduct any Asset Sale, or permit any Subsidiary
to do so, other than the sale or other disposition of Assets which are worn,
obsolete, or no longer used or useful in the conduct of its business.

 

36

 

6.8                                 Investments; Permitted Acquisitions.

 

(a)                                  Make, or permit any Subsidiary to make, any
loans or advances to, or any investment in, any Person, except Permitted
Investments and loans evidenced by an Inter- Company Note (Guarantor) or an
Inter-Company Note (Physician Group) in accordance with a Permitted
Acquisition; or acquire, or permit any Subsidiary to acquire, any capital
stock, Assets, obligations, or other securities of, make any contribution to,
or otherwise acquire any interest in, any Person except in accordance with
Section 6,8(b); or acquire or form or permit any Subsidiary to acquire or
form, any new Subsidiary except in accordance with Section 6.8(b); or
participate, or permit any Subsidiary to participate, as a partner or joint
venturer with any other Person.

 

(b)                                 Notwithstanding Section 6.8(a), Borrower
shall be permitted to acquire or form a new Subsidiary in connection with the
funding by it or such Subsidiary of the acquisition of a physician group which
shall become a Physician Group in accordance with the Transaction Documents
with respect to such Physician Group (a “Permitted Acquisition”) so long as the
following conditions have been fulfilled to the satisfaction of Bank in its
sole and absolute discretion:

 

(i)                                     Such Subsidiary shall be a corporation,
wholly owned by Borrower;

 

(ii)                                  Bank shall have received not later than
thirty (30) days prior to the date of the proposed Permitted Acquisition, (x) a
written detailed description of the proposed Permitted Acquisition, in form and
substance satisfactory to Bank, including historical and projected financial
information, accounts receivable information and reconciliations, and such
other supporting information with respect to the applicable Physician Group and
proposed Permitted Acquisition as Bank shall require, including historical financial
statements and a listing of adjustments to physician compensation and other
ongoing expenses reflected in the projected Consolidated EBITDA for the
transaction; and (y) draft copies of all Transaction Documents with respect to
the proposed Permitted Acquisition, in form and substance satisfactory to Bank;

 

(iii)                               Bank shall have given its prior written
consent to such Permitted Acquisition if either (x) the total consideration to
be paid to the seller of the applicable Physician Group is Three Million
Dollars ($3,000,000) or more, or (y) the total consideration to be paid to the
seller of the applicable Physician Group is One Million Dollars ($1,000,000) or
more but less than Three Million Dollars ($3,000,000) and both (1) the
total consideration to be paid to the seller of the applicable Physician Group
is in excess of five times such Physician Group’s projected Consolidated EBITDA
and (2) the cash consideration to be paid to the seller of the applicable
Physician Group is in excess of three times such Physician Group’s projected
Consolidated EBITDA;

 

(iv)                              Bank shall have received, not later than one
(1) day prior to the date of the closing of such Permitted Acquisition, final
copies of all Transaction Documents with respect thereto, marked to show changes
from the drafts of same previously provided to Bank, and Bank shall be
satisfied with same;

 

37

 

(v)                                 Bank shall have received all of the following
Loan Documents with respect to such proposed Permitted Acquisition, in form and
substance satisfactory to Bank in its sole and absolute discretion:

 

(1)                                  a Guaranty duly executed by the applicable
Subsidiary;

 

(2)                                  a Security Agreement (Guarantor), duly
executed by the applicable Subsidiary;

 

(3)                                  a Stock Pledge Agreement with respect to the
capital stock of the applicable Subsidiary, duly executed by Borrower and
acknowledged by such Subsidiary;

 

(4)                                  a Collateral Assignment of Transaction
Documents (Guarantor), duly executed by the applicable Subsidiary and acknowledged
by each of the other Persons party to such Transaction Documents;

 

(5)                                  a Security Agreement (Physician Group) and
related financing statement(s) (Form UCC-1) as Bank shall require and financing
statement assignment (Form UCC-2 or UCC-3, as applicable), duly executed by the
applicable Physician Group and Subsidiary;

 

(6)                                  a Credit Succession Agreement or a joinder
agreement to an existing Credit Succession Agreement, duly executed by such
Subsidiary, Physician Group and the Physician Group Shareholders of such
Physician Group;

 

(7)                                  such UCC-1 financing statements and/or
fixture filings as Bank shall reasonably require in connection with the
foregoing Loan Documents, duly executed by Borrower or such Subsidiary, as
applicable;

 

(vi)                              Bank shall have received the original duly
executed Inter-Company Note (Guarantor), endorsed by allonge by Borrower to
Bank, and the original duly executed Inter-Company Note (Physician Group
Shareholder), endorsed by allonge by the applicable Guarantor to Bank,
evidencing the downstreaming of the funds from Borrower to the applicable
Guarantor to the applicable Physician Group Shareholder, together with the
original duly executed Inter-Company Security Agreement and UCC-1 Financing
Statements as Bank shall require with respect thereto, duly assigned to Bank,
all in form and substance satisfactory to Bank in its sole and absolute
discretion;

 

(vii)                           Bank shall have received the certificates
evidencing all of the capital stock of the applicable Physician Group together
with undated stock powers with respect thereto, duly executed in blank by the
applicable Physician Group Shareholder;

 

38

 

(viii)                        Bank shall have received the certificates
evidencing all of the capital stock of the applicable Subsidiary, together with
undated stock powers with respect thereto, duly executed in blank by Borrower;

 

(ix)                                Bank shall have received a favorable duly
executed opinion of Borrower’s and Guarantors’ counsel, dated as of the date of
the closing of the proposed Permitted Acquisition, with respect to the proposed
Permitted Acquisition, satisfactory to Bank in its sole and absolute
discretion;

 

(x)                                   Bank shall have received replacement
Schedules to this Agreement and the Loan Documents, as appropriate, in form and
substance satisfactory to Bank in its sole and absolute discretion;

 

(xi)                                Bank shall have received a Certificate of the
Secretary of the applicable Guarantor, dated as of the date of the closing of
the proposed Permitted Acquisition, certifying (i) the incumbency and
signatures of the Responsible Officers of such Guarantor who are executing the
Loan Documents on behalf of such Guarantor, (ii) the bylaws of such Guarantor
and all amendments thereto as being true and correct and in full force and effect,
and (iii) the resolutions of the Board of Directors of such Guarantor as being
true and correct and in full force and effect, authorizing the execution and
delivery of the Loan Documents, and authorizing the transactions contemplated
thereunder, and authorizing the Responsible Officers of such Guarantor to
execute the same on behalf of such Guarantor;

 

(xii)                             Bank shall have received a certificate of
status and good standing for the applicable Guarantor and Physician Group,
dated as of a recent date prior to the date of the closing of the proposed
Permitted Acquisition, showing that such Guarantor and Physician Group are in
good standing under the laws of the state of its organization;

 

(xiii)                          Bank shall have received the Articles or
Certificate of Incorporation and all amendments thereto of the applicable
Guarantor and Physician Group, certified by the Secretary of State of the
respective state of its organization;

 

(xiv)                         receipt by Bank of certificates of foreign
qualification and good standing with respect to the applicable Guarantor and
Physician Group, dated as of a recent date prior to the date of the closing of
the proposed Permitted Acquisition, showing that such Guarantor and Physician
Group are qualified to do business and are in good standing under the laws of
each state where the failure to be so qualified would have a Material Adverse
Effect;

 

(xv)                            receipt by Bank of a certificate signed by
the Chief Executive Officer and Chief Financial Officer of the applicable
Guarantor, dated as of the date of the closing of the proposed Permitted
Acquisition, certifying to Bank that (i) both immediately before and
immediately after giving effect to the transactions contemplated by the Loan
Documents, such Guarantor is and will be Solvent, (ii) to the best of their
knowledge after due and diligent inquiry, the representations and warranties of
such Guarantor contained in the Loan Documents are true and correct, (iii) to
the best of their knowledge after due and diligent inquiry, both immediately

 

39

 

before
and immediately after giving effect to the transactions contemplated by the
Loan Documents, no Event of Default or Unmatured Event of Default is continuing
or shall occur, and (iv) the business of such Guarantor and the practice of the
Physician Group which is the subject of such Permitted Acquisition are
substantially the same as all other Guarantors and Physician Groups;

 

(xvi)                         Bank shall have received payment in full of
all Bank Expenses pursuant to Section 9.3(a)(i) incurred in connection
with the proposed Permitted Acquisition;

 

(xvii)                      Bank shall have received copies of insurance
binders or insurance certificates evidencing Borrower’s having caused to be
obtained insurance in accordance with Section 5.5, including the lender’s
loss payee endorsements required by such Section;

 

(xviii)                   Bank shall have received Uniform Commercial
Code and other public record searches with respect to the applicable Guarantor
and Physician Group, in each case satisfactory to Bank in its sole and absolute
discretion; and

 

(xix)                           Bank shall have received such other
agreements, instruments and documents as Bank may reasonably require in
connection with such Permitted Acquisition, in form and substance satisfactory
to Bank in its sole and absolute discretion.

 

6.9                                 Character
of Business. 
Engage in any business activities or operations other than to fund and
finance Permitted Acquisitions and the acquisition, ownership and management of
the Subsidiaries, or permit the Subsidiaries to engage in any business
activities or operations other than the management of the Physician Groups in
accordance with the Management Service Agreements and other activities
incidental thereto.

 

6.10                           Distributions.  Declare or pay any
Distributions; or purchase, redeem, retire, or otherwise acquire for value any
of its ownership interests now or hereafter outstanding; or make any
distribution of Assets to its partners or shareholders, whether in cash,
Assets, or in obligations of Borrower; or allocate or otherwise set apart any
sum for the payment of any Distribution on, or for the purchase, redemption or
retirement of, any of its capital stock; or make any other distribution by
reduction of capital or otherwise in respect of any of its ownership interests;
or permit any Subsidiary to purchase or otherwise acquire for value any
ownership interests of Borrower or any other Subsidiary.

 

6.11                           Guaranty.  Assume, guaranty, endorse (other than checks
and drafts received by Borrower in the ordinary course of business so long as
an Event of Default has not occurred), or otherwise be or become directly or
contingently responsible or liable, or permit any Subsidiary to assume,
guaranty, endorse, or otherwise be or become directly or contingently
responsible or liable (including, any agreement to purchase any obligation,
stock, Assets, goods, or services or to supply or advance any funds, Assets,
goods, or services, or any agreement to maintain or cause such Person to
maintain, a minimum working capital or net worth, or otherwise to assure the
creditors of any Person against loss) for the obligations of any other Person;
or

 

40

 

pledge
or hypothecate, or permit any Subsidiary to pledge or hypothecate, any of its
Assets as security for any liabilities or obligations of any other Person; provided,
however, notwithstanding the foregoing, Borrower shall be permitted to
execute and deliver the guarantees listed on Schedule 1.1P.

 

6.12                           Capital
Expenditures. 
Make any Capital Expenditures, or any commitments therefor, in excess of
Seven Hundred Fifty Thousand Dollars ($750,000) in the aggregate in any fiscal
year.

 

6.13                           Transactions
with Affiliates. 
Enter into any transaction, including the purchase, sale, or exchange of
property or the rendering of any service, with any Affiliate, or permit any
Subsidiary to enter into any transaction, including the purchase, sale, or
exchange of property or the rendering of any service, with any Affiliate, other
than (i) in the ordinary course of and pursuant to the reasonable requirements
of Borrower’s or such Subsidiary’s business and upon fair and reasonable terms
no less favorable to Borrower or such Subsidiary than would obtain in a
comparable arm’s length transaction with a Person not an Affiliate; (ii) the
Transaction Documents; and (iii) the Tax Sharing Agreement among Borrower and
Guarantors previously approved by Bank.

 

6.14                           Change of
Control. 
Cause, permit or suffer, directly or indirectly any Change of Control.

 

6.15                           Stock Issuance.  Permit any Subsidiary to
issue any additional capital stock or other ownership interests.

 

6.16                           Financial
Condition. 
Permit or suffer:

 

(a)                                  the Current Ratio at any time, on or after
June 30, 1999, to be less than 0.60:1.0.

 

(b)                                 Consolidated Net Worth at the end of each
fiscal quarter beginning with the quarter ended June 30, 1999, to be less
than the sum of (i) $3,900,000, plus (ii) on a cumulative basis from
April 1, 1999, one hundred percent (100%) of all extraordinary gains,
proceeds from the sale of capital stock, and equity issued in connection with
any mergers and acquisitions permitted hereunder, and plus (iii) on a
cumulative basis from April 1, 1999, seventy percent (70%) of positive
Consolidated Net Income, plus (iv) on a cumulative basis from April 1,
1999, sixty percent (60%) of Borrower’s IBNR Expense for such period.

 

(c)                                  the Leverage Ratio at any time on or after
June 30, 1999 to exceed the ratio set forth in the table below during the
periods indicated:

 

	
  Period

  	
   

  	
  Maximum
  Leverage Ratio

  
	
   

  	
   

  	
   

  
	
  6/30/99
  through 9/30/99

  	
   

  	
  4.00:1.0

  
	
  10/1/99
  and thereafter

  	
   

  	
  3.50:1.0

  

 

41

 

(d)                                 the Coverage Ratio at any time, on or after
June 30, 1999, to be less than the ratio set forth in the table below
during the periods indicated:

 

	
  Period

  	
   

  	
  Minimum
  Coverage Ratio

  
	
   

  	
   

  	
   

  
	
  6/30/99
  through 9/30/99

  	
   

  	
  1.10:1.0

  
	
  10/1/99
  and thereafter

  	
   

  	
  1.25:1.0

  

 

6.17                           Transactions
Under ERISA. 
Directly or indirectly:

 

(a)                                  engage, or permit any Subsidiary of Borrower
to engage, in any prohibited transaction which is reasonably likely to result
in a civil penalty or excise tax described in Sections 406 of ERISA or 4975 of
the Internal Revenue Code for which a statutory or class exemption is not
available or a private exemption has not been previously obtained from the
Department of Labor;

 

(b)                                 permit to exist with respect to any Plan any
accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of
the Internal Revenue Code), whether or not waived;

 

(c)                                  fail, or permit any Subsidiary of Borrower to
fail, to pay timely required contributions or installments due with respect to
any waived funding deficiency to any Plan;

 

(d)                                 terminate, or permit any Subsidiary of
Borrower to terminate, any Plan where such event would result in any liability
of Borrower, any of its Subsidiaries or any member of ERISA Group under Title
IV of ERISA;

 

(e)                                  fail, or permit any Subsidiary of Borrower to
fail, to make any required contribution or payment to any Multiemployer Plan;

 

(f)                                    fail, or permit any Subsidiary of Borrower to
fail, to pay to a Plan or Multiemployer Plan any required installment or any
other payment required under Section 412 of the Internal Revenue Code on
or before the due date for such installment or other payment;

 

(g)                                 amend, or permit any Subsidiary of Borrower
to amend, a Plan resulting in an increase in current liability for the plan
year such that either of Borrower, any Subsidiary of Borrower or any the member
of the ERISA Group is required to provide security to such Plan under Section 401(a)(29)
of the Internal Revenue Code; or

 

(h) withdraw, or permit any Subsidiary of Borrower to withdraw, from
any Multiemployer Plan where such withdrawal is reasonably likely to result in
any liability of any such entity under Title IV of ERISA;

 

42

 

which,
individually or in the aggregate, results in or reasonably would be expected to
result in a claim against or liability of Borrower, any of its Subsidiaries or
any member of the ERISA Group in excess of Two Hundred Fifty Thousand Dollars
($250,000).

 

6.18                           Transaction
Documents.  (i)
Terminate any of the Transaction Documents, or permit any Subsidiary to do so,
or (ii) amend any of the Transaction Documents, or waive any of the provisions
thereof, or permit any Subsidiary to do so, in any respect which (x) adversely
affects Bank’s rights or remedies with respect thereto, or (y) could reasonably
be expected to have a Material Adverse Effect.

 

ARTICLE VII

 

EVENTS OF DEFAULT AND
REMEDIES

 

7.1                                 Events of
Default.  The
occurrence of any one or more of the following events, acts or occurrences
shall constitute an event of default (an “Event of Default”) hereunder:

 

(a)                                  Borrower fails to pay any payment of
principal or interest due on the Loans, the Fees, any Bank Expenses, or any
other amount payable hereunder or under any Loan Document;

 

(b)                                 Borrower fails to observe or perform any of
the covenants and agreements set forth in Article VI;

 

(c)                                  Borrower fails to observe or perform any
covenant or agreement set forth in this Agreement and the Loan Documents (other
than those covenants and agreements described in Sections 7.l(a) and 7.l(b)),
and such failure continues for fifteen (15) days after the earlier to occur of
(i) Borrower obtaining knowledge of such failure or (ii) Bank’s dispatch of
notice to Borrower of such failure;

 

(d)                                 Any representation, warranty or certification
made by Borrower or any Guarantor or any officer or employee of Borrower or any
Guarantor in this Agreement or any Loan Document, in any certificate, financial
statement or other document delivered pursuant to this Agreement or any Loan
Document proves to have been untrue in any material respect when made;

 

(e)                                  Borrower or any Guarantor fails to pay when
due any payment in respect of Debt or other extensions of credit or financial
arrangements (other than under this Agreement or any other Loan Document);

 

(f)                                    Any event or condition occurs that: (i)
results in the acceleration of the maturity of Debt or other financial
arrangements of Borrower or any Guarantor; or (ii) permits (or, with the giving
of notice or lapse of time or both, would permit) the holder or holders of such
Debt or extensions of credit or financial accommodations or any Person acting
on behalf of such holder or holders to accelerate the maturity thereof;

 

43

 

(g)                                 Borrower or any Guarantor commences a
voluntary Insolvency Proceeding seeking liquidation, reorganization or other
relief with respect to itself or its Debt or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official over it or
any substantial part of its property, or consents to any such relief or to the
appointment of or taking possession by any such official in an involuntary Insolvency
Proceeding or fails generally to pay its Debt as it becomes due, or takes any
action to authorize any of the foregoing;

 

(h)                                 An involuntary Insolvency Proceeding is
commenced against Borrower or any Guarantor seeking liquidation, reorganization
or other relief with respect to it or its Debt or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or any
substantial part of its property and any of the following events occur: (i) the
petition commencing the Insolvency Proceeding is not timely controverted; (ii)
the petition commencing the Insolvency Proceeding is not dismissed within
thirty (30) calendar days of the date of the filing thereof; (iii) an interim
trustee is appointed to take possession of all or a substantial portion of the
Assets of, or to operate all or any substantial portion of the business of,
such Borrower or such Guarantor; or (iv) an order for relief shall have been
issued or entered therein;

 

(i)                                     Borrower or any Guarantor suffers (i) any
money judgment in excess of applicable insurance coverage or (ii) any writ,
warrant of attachment, or similar process;

 

(j)                                     A judgment creditor obtains possession of any
of the Assets of Borrower or any Guarantor by any means, including levy,
distraint, replevin, or self-help, or any order, judgment or decree is entered
decreeing the dissolution of either Borrower or any Guarantor;

 

(k)                                  Any Management Services Agreement or any of
the other Transaction Documents is terminated or fails to be in full force and
effect for any reason, or a breach, a default or an event of default occurs
under any Transaction Document;

 

(l)                                     Any of the Loan Documents fails to be in full
force and effect for any reason, or Bank fails to have a perfected, first
priority Lien in and upon all of the collateral assigned or pledged to Bank
thereunder, or a breach, default or an event of default occurs under any Loan
Document; or

 

(m)                               Any other Material Adverse Effect occurs.

 

7.2                                 Remedies.

 

(a)                                  Acceleration. 
Upon the occurrence of any Event of Default described in
Section 7.l(g) or 7.l(h), the Obligations shall become immediately due and
payable without any election or action on the part of Bank without presentment,
demand, protest or notice of any kind, all of which Borrower hereby expressly
waives.  Upon the occurrence and
continuance of any other Event of Default, Bank may, at its election, without
notice of its election and without demand, immediately declare the Obligations
to be due and payable, whereupon the

 

44

 

Obligations
shall become immediately due and payable, without presentment, demand, protest
or notice of any kind, all of which Borrower hereby expressly waives.

 

(b)                                 Termination of Revolving Credit Commitment. 
Upon the occurrence of any Unmatured Event of Default or Event of
Default, Bank may, at its option, terminate the Revolving Credit Commitment and
cease making Revolving Loans to Borrower.

 

7.3                                 Remedies
Cumulative.  The
rights and remedies of Bank herein and in the Loan Documents are cumulative,
and are not exclusive of any other rights, powers, privileges, or remedies, now
or hereafter existing, at law, in equity or otherwise.

 

ARTICLE VIII

 

TAXES

 

8.1                                 Taxes on
Payments.  All
payments in respect of the Obligations shall be made free and clear of and
without any deduction or withholding for or on account of any present and
future taxes, levies, imposts, deductions, charges, withholdings, assessments
or governmental charges, and all liabilities with respect thereto, imposed by
the United States of America, any foreign government, or any political
subdivision or taxing authority thereof or therein, excluding any taxes,
imposed on Bank under the Internal Revenue Code or similar state and local laws
and determined by Bank’s net income, and any franchise taxes imposed on Bank by
the State of California (or any political subdivision thereof) (all such
non-excluded taxes, levies, imposts, deductions, charges, withholdings,
assessments, charges and liabilities being hereinafter referred to as “Taxes”).  If any Taxes are imposed and required by law
to be deducted or withheld from any amount payable to Bank, then Borrower shall
(i) increase the amount of such payment so that Bank will receive a net amount
(after deduction of all Taxes) equal to the amount due hereunder, and (ii) pay
such Taxes to the appropriate taxing authority for the account of Bank prior to
the date on which penalties attach thereto or interest accrues thereon; provided,
however, if any such penalties or interest shall become due, Borrower
shall make prompt payment thereof to the appropriate taxing authority.

 

8.2                                 Indemnification
For Taxes. 
Borrower shall indemnify Bank for the full amount of Taxes (including
penalties, interest, expenses and Taxes arising from or with respect to any
indemnification payment) arising therefrom or with respect thereto, whether or
not the Taxes were correctly or legally asserted.  This indemnification shall be made on demand.

 

8.3                                 Evidence of
Payment. 
Within thirty (30) days after the date of payment of any Taxes, Borrower
shall furnish to Bank the original or a certified copy of a receipt evidencing
payment thereof.  If no Taxes are
payable in respect of any payment due hereunder or under the Notes, Borrower
shall furnish to Bank a certificate from each appropriate taxing authority, or
an opinion of counsel acceptable to Bank, in either case stating that such
payment is exempt from or not subject to Taxes.

 

45

 

ARTICLE IX

 

MISCELLANEOUS

 

9.1                                 Notices.  All notices, requests and other
communications to any party hereunder shall be in writing (including facsimile
transmission or similar writing) and shall be given to such party at its
address or facsimile number set forth on the signature pages hereof or such
other address or facsimile number as such party may hereafter specify by notice
to the other party in accordance with this Section 9.1.  Each such notice, request or other
communication shall be deemed given on the second business day after mailing; provided
that actual notice, however and from whomever given or received, shall always
be effective on receipt; provided further that notices to Bank pursuant
to Article II shall not be effective until received by a Responsible
Officer of Bank; provided  further that notices sent by Bank in
connection with Sections 9504 or 9505 of the California Uniform Commercial Code
shall be deemed given when deposited in the mail or personally delivered, or,
where permitted by law, transmitted by facsimile.

 

9.2                                 No Waivers.  No failure or delay by Bank in exercising
any right, power or privilege hereunder or under any Loan Document shall
operate as a waiver thereof nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege.

 

9.3                                 Bank
Expenses; Documentary Taxes;
Indemnification.

 

(a)                                  Borrower shall pay all Bank Expenses on
demand.

 

(b)                                 Borrower shall pay all and indemnify Bank
against any and all transfer taxes, documentary taxes, assessments, or charges
made by any Governmental Authority and imposed by reason of the execution and
delivery of this Agreement, any of the Loan Documents, or any other document,
instrument or agreement entered into in connection herewith.

 

(c)                                  Borrower shall and hereby agrees to
indemnify, protect, defend and hold harmless Bank and its directors, officers,
agents, employees and attorneys (collectively, the “Indemnified Persons”
and individually, an “Indemnified Person”) from and against (i) any and
all losses, claims, damages, liabilities, deficiencies, judgments, costs and
expenses (including attorneys’ fees and attorneys’ fees incurred pursuant to
proceedings arising under the Bankruptcy Code) incurred by any Indemnified
Person (except to the extent that it is finally judicially determined to have
resulted from the gross negligence or willful misconduct of any Indemnified
Person) arising out of or by reason of any litigations, investigations, claims
or proceedings (whether administrative, judicial or otherwise), including
discovery, whether or not Bank is designated a party thereto, which arise out
of or are in any way related to (1) this Agreement, the Loan Documents or the
transactions contemplated hereby or thereby, (2) any actual or proposed use by
Borrower of the proceeds of the Loans, or (3) Bank’s entering into this
Agreement, the Loan Documents or any other agreements and documents relating
hereto; (ii) any such losses, claims, damages, liabilities, deficiencies,
judgments, costs and expenses arising out of or by reason of the use,
generation, manufacture, production, storage, release, threatened release,

 

46

 

discharge,
disposal or presence on, under or about Borrower’s operations or property or
property leased by Borrower of any material, substance or waste which is or
becomes designated as Hazardous Materials; (iii) any such losses, claims,
damages, liabilities, deficiencies, judgments, costs and expenses, penalties,
fines and other sanctions arising from any claim that Borrower’s or any
Subsidiaries’ premises is not in compliance with the requirements of the ADA;
and (iv) any such losses, claims, damages, liabilities, deficiencies,
judgments, costs and expenses incurred in connection with any remedial or other
action taken by Borrower or Bank in connection with compliance by Borrower with
any federal, state or local environmental laws, acts, rules, regulations,
orders, directions, ordinances, criteria or guidelines (except to the extent that
it is finally judicially determined to have resulted from the gross negligence
or willful misconduct of any Indemnified Person).  If and to the extent that the obligations of Borrower hereunder
are unenforceable for any reason, Borrower hereby agrees to make the maximum
contribution to the payment and satisfaction of such obligations of Bank which
is permissible under applicable law.

 

(d)                                 Borrower’s obligations under this
Section 9.3 and under Section 8.2 shall survive any termination of
this Agreement and the Loan Documents and the payment in full of the
Obligations, and are in addition to, and not in substitution of, any other of
its obligations set forth in this Agreement.

 

9.4                                 Amendments
and Waivers.  Any
provision of this Agreement or any of the Loan Documents to which Borrower 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.

 

9.5                                 Successors and Assigns; Participations; Disclosure.

 

(a)                                  This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, except that Borrower may not assign or transfer any of its rights or
obligations under this Agreement without the prior written consent of Bank and
any such prohibited assignment or transfer by Borrower shall be void.

 

(b)                                 Bank may make, carry or transfer the Loans
at, to or for the account of, any of its branch offices or the office of an
Affiliate of Bank or to any Federal Reserve Bank, all without Borrower’s
consent.

 

(c)                                  Bank may, at its own expense, assign to one
or more banks or other financial institutions all or a portion of its rights
(including voting rights) and obligations under this Agreement and the Loan
Documents.  In the event of any such
assignment by Bank pursuant to this Section 9.5(c), Bank’s obligations
under this Agreement arising after the effective date of such assignment shall
be released and concurrently therewith, transferred to and assumed by Bank’s
assignee to the extent provided for in the document evidencing such assignment,
and Bank shall give prompt notice of such assignment to Borrower.

 

47

 

(d)                                 Bank may at any time sell to one or more
banks or other financial institutions (each a “Participant”)
participating interests in the Loans, and in any other interest of Bank
hereunder.  In the event of any such
sale by Bank of a participating interest to a Participant, Bank’s obligations
under this Agreement shall remain unchanged, Bank shall remain solely
responsible for the performance thereof, and Borrower shall continue to deal
solely and directly with Bank in connection with Bank’s rights and obligations
under this Agreement.  Borrower agrees
that each Participant shall, to the extent provided in its participation
agreement, be entitled to the benefits of Article VIII with respect to its
participating interest.

 

(e)                                  Borrower authorizes Bank to disclose to any
assignee under Section 9.5(c) or any Participant (either, a “Transferee”)
and any prospective Transferee any and all financial information in Bank’s
possession concerning Borrower which has been delivered to Bank by Borrower
pursuant to this Agreement or which has been delivered to Bank by Borrower in
connection with Bank’s credit evaluation prior to entering into this Agreement.

 

9.6                                 Counterparts;
Effectiveness; Integration. 
This 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 Agreement shall be effective when executed by each of the parties
hereto.  This 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.

 

9.7                                 Severability.  The provisions of this
Agreement are severable.  The
invalidity, in whole or in part, of any provision of this Agreement shall not
affect the validity or enforceability of any other of its provisions.  If one or more provisions hereof shall be
declared invalid or unenforceable, the remaining provisions shall remain in
full force and effect and shall be construed in the broadest possible manner to
effectuate the purposes hereof.

 

9.8                                 Governing Law.  This 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, without regard to principles of
conflicts of law.

 

9.9                                 Judicial
Reference.

 

(a)                                  Other than (i) nonjudicial foreclosure and
all matters in connection therewith regarding security interests in real or
personal property; or (ii) the appointment of a receiver, or the exercise of
other provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is
not settled in writing within thirty (30) days after the “Claim Date”
(defined as the date on which a party subject to this Agreement gives written
notice to all other parties that a controversy, dispute or claim exists), will
be settled by a reference proceeding in California in accordance with the provisions
of Section 638 et  seq. 
of the California Code of Civil Procedure, or their successor
section (“CCP”), which shall constitute the exclusive remedy for
the settlement of any controversy, dispute or claim concerning

 

48

 

this
Agreement, including whether such controversy, dispute or claim is subject to
the reference proceeding and except as set forth above, the parties waive their
rights to initiate any legal proceedings against each other in any court or
jurisdiction other than the Superior Court in the County where any real
property collateral is located, or Los Angeles County, if none (the “Court”).  The referee shall be a retired Judge of the
Court selected by mutual agreement of the  parties, and if they cannot so agree within forty-five (45) days after
the Claim Date, the referee shall
be promptly selected by the Presiding Judge of the Court (or his or her
representative).  The referee shall be appointed to sit as a
temporary judge, with all of the powers for a temporary judge, as authorized by law, and upon
selection should take and subscribe to the oath of office as provided for in Rule 244 of the California
Rules of Court (or any subsequently enacted Rule).  Each
party shall have one peremptory challenge pursuant to CCP §170.6.  The referee shall (i)  be
requested to set the matter for hearing within sixty (60) days after the Claim
Date and (ii) try any and all
issues of law or fact and report a statement of decision upon them, if
possible, within ninety (90)
days of the Claim Date.  Any decision
rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP §644 in
any court in the State of California
having jurisdiction.  Any party may
apply for a reference proceeding at any time after thirty (30) days following notice to any
other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing
and/or trial.  All discovery permitted
by this Agreement shall be
completed no later than fifteen (15) days before the first hearing date
established by the referee.  The referee may extend such period in the
event of a party’s refusal to provide requested discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery
or unavailability of a witness due to absence or illness.  No party shall be entitled to “priority” in conducting discovery.  Depositions may be taken by either party
upon seven (7) days written
notice, and request for production or inspection of documents shall be
responded to within ten (10)
days after service.  All disputes
relating to discovery which cannot be resolved by the parties shall be submitted to the referee
whose decision shall be final and binding upon the parties.  Pending
appointment of the referee as provided herein, the Superior Court is empowered
to issue temporary and/or
provisional remedies, as appropriate.

 

(b)                                 Except as expressly set forth in this
Agreement, the referee shall determine the manner in which the reference
proceeding is conducted including the time and place of all hearings, the order
of presentation of evidence, and all other questions that arise with respect to
the course of the reference proceeding. 
All proceedings and hearings conducted before the referee, except for
trial, shall be conducted without a court reporter except that when any party
so requests, a court reporter will be used at any hearing conducted before the
referee.  The party making such a
request shall have the obligation to arrange for and pay for the court
reporter.  The costs of the court
reporter at the trial shall be borne equally by the parties.

 

(c)                                  The referee shall be required to determine
all issues in accordance with existing case law and the statutory laws of the
State of California.  The rules of
evidence applicable to proceedings at law in the State of California will be
applicable to the reference proceeding. 
The referee shall be empowered to enter equitable as well as legal
relief, to provide all temporary and/or provisional remedies and to enter
equitable orders that will be binding upon the parties.  The referee shall issue a single judgment at
the close of the reference proceeding which shall dispose of all of the claims
of the parties that are the subject of the reference.  The

 

49

 

parties
hereto expressly reserve the right to contest or appeal from the final judgment
or any appealable order or appealable judgment entered by the referee.  The parties hereto expressly reserve the
right to findings of fact, conclusions of laws, a written statement of
decision, and the right to move for a new trial or a different judgment, which
new trial, if granted, is also to be a reference proceeding under this
provision.

 

(d)                                 In the event that the enabling legislation
which provides for appointment of a referee is repealed (and no successor
statute is enacted), any dispute between the parties that would otherwise be
determined by the reference procedure herein described will be resolved and
determined by arbitration.  The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, §1280 through §1294.2 of the CCP as
amended from time to time.  The
limitations with respect to discovery as set forth hereinabove shall apply to
any such arbitration proceeding.

 

9.10                           Waivers.  Bank hereby waives compliance
by Borrower of Sections 6.16(a), (b), (c) and (d) of the Prior Agreement on
September 30, 1998, December 31, 1998 and March 31, 1999.  The waiver set forth hereinabove shall be
limited precisely as written and shall not be deemed to (a) be a waivers or
modification of any other term or condition of this Agreement or any Loan
Document or (b) prejudice any right or remedy which Bank may now have or may
have in the future (except to the extent such right or remedy is based upon the
foregoing covenant waivers for the dates indicated) under or in connection with
the Prior Agreement or any Loan Document. 
The waivers set forth in this Section 9.10 shall be retroactive to
September 30, 1998.

 

9.11                           Amended and Restated Agreement. 
This Agreement shall amend and restate in its entirety, and continue the
Obligations incurred under, the Prior Agreement.

 

[remainder of this page intentionally left
blank]

 

50

 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.

 

	
  BORROWER:

  	
   

  	
  PROSPECT
  MEDICAL HOLDINGS, INC.,

  a Delaware corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By

  	
  /s/
  R. Stewart Kahn

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Address
  for Notices:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  515
  S.  Flower Street

  Suite 1640

  Los Angeles, CA 90071

  
	
   

  	
   

  	
  Attn:

  	
  R.
  Stewart Kahn, Executive Vice President

  Jacob Y.  Terner, M.D.

  
	
   

  	
   

  	
  Telephone:  (213) 629-2185

  Facsimile: (213) 629-2272

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  BANK:

  	
   

  	
  IMPERIAL
  BANK

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By

  	
  /s/ John Harris

  	
   

  
	
   

  	
   

  	
   

  	
  John Harris, Senior Vice President

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Address
  for Notices:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  IMPERIAL
  BANK

  201 N.  Figueroa Street

  Los Angeles, CA 90012

  Attn:   Roc A.  Caldarone

  Telephone:  (213) 484-3738

  Facsimile: (213) 484-3721

  
						

 

51

 

Exhibit 1.1C

 

FORM OF

COLLATERAL ASSIGNMENT OF TRANSACTION DOCUMENTS

 

THIS COLLATERAL ASSIGNMENT OF TRANSACTION DOCUMENTS (this “Assignment”)
has been executed and delivered as of
             ,
199     , by and
between                  ,
a            corporation
(“Assignor”), and IMPERIAL BANK, a California banking corporation (“Bank”),
with reference to the following facts:

 

RECITALS

 

A.                                   Assignor is a party to certain transaction
documents pursuant to which, among other things, Assignor acquired or will
acquire the non-medical assets
of                  ,
a
                 professional
medical corporation (“Physician Group”), and provides management
services to Physician Group.

 

B.                                     Assignor [has previously executed\is
contemporaneously herewith executing] that certain Continuing Guaranty, dated
as of            ,
199      , in favor of Bank (as the same may be
amended, restated, supplemented or otherwise modified from time to time, the “Guaranty”)
pursuant to which Assignor guarantees the Guaranteed Obligations (as defined in
the Guaranty), including, without limitation, all obligations, indebtedness and
liabilities owed by Prospect Medical Holdings, Inc., a Delaware corporation (“Borrower”)
to Bank under that certain Amended and Restated Revolving Credit Agreement,
dated as of July 3, 1999 (as the same may be amended, restated,
supplemented or otherwise modified from time to time, the “Loan Agreement”).

 

C.                                     Assignor has executed and delivered that
certain Security Agreement, dated as of even date with the Guaranty (“Security
Agreement”), in order to secure the Guaranteed Obligations.

 

D.                                    Assignor has agreed to execute and deliver
this Assignment to Bank in order to supplement the terms of the Security
Agreement with respect to the Transaction Documents (as hereinafter defined).

 

E.                                      Assignor is a wholly-owned subsidiary of
Borrower which will directly and materially benefit from the Loans made by Bank
to Borrower under the Loan Agreement, and Assignor acknowledges that Bank would
not enter into the Loan Agreement absent Assignor’s agreements under the
Guaranty, the Security Agreement and hereunder.

 

1

 

AGREEMENT

 

In consideration of the premises and the mutual agreements herein set
forth, Assignor and Bank 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 Guaranty.

 

2.                                       Assignment.  As additional security for
the Guaranteed Obligations, Assignor hereby collaterally assigns and transfers
to Bank, and acknowledges that pursuant to the Security Agreement Assignor has
granted to Bank a security interest in:

 

2.1                                 Transaction Documents.  All
of Assignor’s right, title and interest in and to the following documents
(collectively, the “Transaction Documents”):

 

(a)                                                
Agreement, dated as of
              (the
“Purchase Agreement”), executed by and among Assignor and
                            ;

 

(b)                                 Management Services Agreement, dated as of
                      
, executed by and between Assignor and Physician Group;

 

(c)                                  Assignable Option Agreement executed by and
among Assignor, Physician Group and
              ;

 

(d)                                 Security Agreement, dated as
of                ,
executed by and between Assignor and Physician Group, together with UCC-1
Financing Statements with respect thereto (“Physician Group Security
Agreement”):

 

(e)                                  Secured Promissory Note, dated as of
           , in the
principal amount of
$          (“Note”),
executed by Physician Group to the order of Assignor[; and

 

(f)                                                                                   ].

 

2.2                                 Rights and Remedies.  All
of the rights, benefits, remedies, privileges and claims of Assignor with
respect to the Transaction Documents (collectively, the “Rights and Remedies”),
including, without limitation, (i) all rights to monies or payments owing to
Assignor under the Transaction Documents, and any and all security therefor and
for all other obligations owing to Assignor thereunder, (ii) any right that
Assignor may have to indemnification under the Transaction Documents, (iii) all
Rights and Remedies of Assignor with respect to any breach of the
representations, warranties and

 

2

 

covenants
set forth in the Purchase Agreement, and (iv) the proceeds thereof (the
Transaction Documents and the Rights and Remedies are collectively referred to
herein as, the “Collateral”).

 

3.                                       Right and Remedies Generally. 
Prior to the occurrence of a breach or default of any of the agreements,
covenants and obligations of Assignor under the Guaranty (a “Default”),
Assignor will enforce all of its Rights and Remedies diligently and in good
faith.  Effective from and after the
occurrence of a Default, Assignor hereby irrevocably authorizes and empowers
Bank, in Bank’s own discretion, to assert as Bank may deem proper, either directly
or on behalf of Assignor, any of the Rights and Remedies which Assignor may
from time to time have under the Transaction Documents, and to receive and
collect all damages, awards and other monies resulting therefrom and to apply
the same on account of any of the Guaranteed Obligations.

 

4.                                       Further Assurances. 
Assignor shall execute and deliver to Bank concurrently with Assignor’s
execution of this Assignment, and from time to time at the request of Bank, all
financing statements, continuation financing statements, fixture filings,
security agreements, chattel mortgages, assignments, and all other documents
that Bank may request, in form satisfactory to Bank, to perfect and maintain
perfected Bank’s security interests in the Collateral and in order to
consummate fully all of the transactions contemplated by this Assignment.

 

5.                                       Transaction Documents. 
Concurrent herewith, Assignor is delivering to Bank possession of the
original Transaction Documents, together with any and all amendments thereto,
as in effect on the date hereof, including the Note and Physician Group
Security Agreement, duly endorsed to Bank pursuant to an allonge in form and
substance satisfactory to Bank, to hold in accordance with the terms of the
Security Agreement until the Security Agreement is terminated in accordance with
its terms.

 

6.                                       Attorney-In-Fact. 
Assignor hereby irrevocably makes, constitutes, and appoints Bank (and
Bank’s officers, employees, or agents) as Assignor’s true and lawful agent and
attorney-in-fact for the purposes of enabling Bank or its agent(s) after the
occurrence of a Default to (a) assert such Rights and Remedies and to collect
such damages, awards and other monies and to apply them in the manner set forth
hereinabove, and (b) to sign the name of Assignor on any documents which need
to be executed, recorded, or filed, and to do any and all things necessary in
the name and on behalf of Assignor in order to protect Bank’s interests in the
Transaction Documents.  Assignor agrees
that neither Bank, nor any of its designers or attorneys-in-fact, will be
liable for any act of commission or omission, or for any error of judgment or
mistake of fact or law with respect to the exercise of the power of attorney
granted under this Section 6, other than as a result of its or their gross
negligence or wilful misconduct.  The
power of attorney granted under this Section 6 is coupled with an interest
and shall be irrevocable until all of the Guaranteed Obligations have been paid
in full, the Guaranty terminated, and Assignor’s duties under this Assignment
have been discharged in full.

 

3

 

7.                                       Modification of Rights and Remedies. 
Assignor shall keep Bank informed of all circumstances bearing upon the
Rights and Remedies and shall immediately provide Bank with copies of any
notices delivered to Assignor in connection with the Transaction
Documents.  Assignor shall also provide
Bank with a copy of any notice sent by Assignor in connection with the
Transaction Documents, concurrently with the sending of any such notice.  Assignor shall not waive, amend, alter or
modify any of the Rights and Remedies in any material respect without the prior
written consent of Bank.  Assignor shall
not, without Bank’s prior written consent, amend, alter, modify or terminate
any of the Transaction Documents, or waive any of the provisions thereof, or do
or permit any act in contravention thereof.

 

8.                                       Assignor to Remain Liable. 
Notwithstanding the foregoing, Assignor expressly acknowledges and
agrees that it shall remain liable under the Transaction Documents to observe
and perform all of the conditions and obligations in the Transaction Documents
which Assignor is bound to observe and perform, and that neither this
Assignment, nor any action taken pursuant hereto, shall cause Bank to be under
any obligation or liability in any respect whatsoever to observe or perform any
of the representations, warranties, conditions, covenants, agreements or terms
of the Transaction Documents.

 

9.                                       Counterparts; Effectiveness. 
This Assignment may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original.  All of such counterparts, taken together,
shall constitute but one and the same agreement.  This Assignment shall become effective upon the execution of a
counterpart of this Assignment by each of the parties hereto.

 

10.                                 Notices.  All notices, requests and
other communications to any party hereunder shall be sent in accordance with
Section 15 of the Guaranty.

 

11.                                 Modifications and Amendments.  This
Assignment shall not be changed orally but shall be changed only by agreement
in writing signed by Assignor and Bank. 
No course of dealing between the parties, no usage of trade and no
parole or extrinsic evidence of any nature shall be used to supplement or
modify any of the terms or provisions of this Assignment.

 

12.                                 Severability.  If
any provision of this Assignment is held to be illegal, invalid or
unenforceable under present or future laws, the legality, validity and
enforceability of the remaining provisions of this Assignment shall not be
affected thereby, and this Assignment shall be liberally construed so as to
carry out the intent of the parties to it.

 

13.                                 Governing Law; Successors and Assigns; Entire
Agreement.  This Assignment (a) shall be governed and
construed according to the laws of the State of California, without regard to
principles of conflicts of law; (b) shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns; and
(c)

 

4

 

embodies
the entire agreement and understanding between the parties with respect to the
subject matter hereof and supersedes all prior agreements, consents and
understandings relating to such subject matter.

 

14.                                 Judicial Reference.

 

14.1                           Reference Proceeding. 
Other than (i) nonjudicial foreclosure and all matters in connection
therewith regarding security interests in real or personal property; or (ii)
the appointment of a receiver, or the exercise of other provisional remedies
(any and all of which may be initiated pursuant to applicable law), each
controversy, dispute or claim between the parties arising out of or relating to
this Assignment, which controversy, dispute or claim is not settled in writing
within thirty (30) days after the “Claim Date” (defined as the date on
which either Assignor or Bank gives written notice to the other that a
controversy, dispute or claim exists), will be settled by a reference
proceeding in California in accordance with the provisions of Section 638 et
seq. of the California Code of Civil Procedure, or their successor
section (“CCP”), which shall constitute the exclusive remedy for
the settlement of any controversy, dispute or claim concerning this Assignment,
including whether such controversy, dispute or claim is subject to the
reference proceeding and except as set forth above, the parties waive their
rights to initiate any legal proceedings against each other in any court or
jurisdiction other than the Superior Court in Los Angeles County (the “Court”).  The referee shall be a retired Judge of the
Court selected by mutual agreement of the parties, and if they cannot so agree
within forty-five (45) days after the Claim Date, the referee shall be promptly
selected by the Presiding Judge of the Court (or his representative).  The referee shall be appointed to sit as a
temporary judge, with all of the powers for a temporary judge, as authorized by
law, and upon selection should take and subscribe to the oath of office as
provided for in Rule 244 of the California Rules of Court (or any subsequently
enacted Rule).  Each party shall have
one peremptory challenge pursuant to CCP §170.6.  The referee shall (a) be requested to set the matter for hearing
within sixty (60) days after the date of selection of the referee and (b) try
any and all issues of law or fact and report a statement of decision upon them,
if possible, within ninety (90) days of the Claim Date.  Any decision rendered by the referee will be
final, binding and conclusive and judgment shall be entered pursuant to CCP
§644 in any court in the State of California having jurisdiction.  Any party may apply for a reference
proceeding at any time after thirty (30) days following notice to any other
party of the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial.  All
discovery permitted by this Assignment shall be completed no later than fifteen
(15) days before the first hearing date established by the referee.  The referee may extend such period in the
event of a party’s refusal to provide requested discovery for any reason
whatsoever, including, without limitation, legal objections raised to such
discovery or unavailability of a witness due to absence or illness.  No party shall be entitled to “priority” in
conducting discovery.  Depositions may
be taken by either party upon seven (7) days written notice, and request for
production or inspection of documents shall be responded to within ten (10)
days after service.  All disputes relating
to discovery which cannot be resolved by the parties shall be submitted to the
referee whose decision shall be final and binding upon the parties.  Pending appointment of the referee as

 

5

 

provided
herein, the Court is empowered to issue temporary and/or provisional remedies,
as appropriate.

 

14.2                           Manner of Reference Proceeding.  Except as expressly set forth
in this Assignment, the referee shall determine the manner in which the
reference proceeding is conducted including the time and place of all hearings,
the order of presentation of evidence, and all other questions that arise with
respect to the course of the reference proceeding.  All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter except that when any
party so requests, a court reporter will be used at any hearing conducted
before the referee.  The party making
such a request shall have the obligation to arrange for and pay for the court
reporter.  The costs of the court
reporter at the trial shall be borne equally by the parties.

 

14.3                           Duties of Referee.  The referee shall be required to determine
all issues in accordance with existing case law and the statutory laws of the
State of California.  The rules of
evidence applicable to proceedings at law in the State of California will be
applicable to the reference proceeding. 
The referee shall be empowered to enter equitable as well as legal
relief, to provide all temporary and/or provisional remedies and to enter
equitable orders that will be binding upon the parties.  The referee shall issue a single judgment at
the close of the reference proceeding which shall dispose of all of the claims
of the parties that are the subject of the reference.  The parties hereto expressly reserve the right to contest or
appeal from the final judgment or any appealable order or appealable judgment
entered by the referee.  The parties
hereto expressly reserve the right to findings of fact, conclusions of laws, a
written statement of decision, and the right to move for a new trial or a
different judgment, which new trial, if granted, is also to be a reference
proceeding under this provision.

 

14.4                           Arbitration Alternative.  In the event that the enabling legislation
which provides for appointment of a referee is repealed (and no successor
statute is enacted), any dispute between the parties that would otherwise be
determined by the reference procedure herein described will be resolved and
determined by arbitration.  The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, §1280 through §1294.2 of the CCP as
amended from time to time.  The

 

6

 

limitations
with respect to discovery as set forth hereinabove shall apply to any such
arbitration proceeding.

 

EXECUTED as of the date first above written.

 

	
   

  	
  “Assignor”

  
	
   

  	
   

  
	
   

  	
   

  	
  ,

  
	
   

  	
  a
                           corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  “Bank”

  
	
   

  	
   

  
	
   

  	
  IMPERIAL
  BANK,

  a California banking corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
								

 

7

 

Exhibit 1.1G

 

FORM OF

CONTINUING GUARANTY

 

This CONTINUING GUARANTY (this “Guaranty”), dated as of
         ,
199     , is executed and delivered
by                ,
a
                      
(“Guarantor”), with reference to the following facts:

 

RECITALS

 

A.                                   Prospect Medical Holdings, Inc., a Delaware
corporation (“Borrower”) and Imperial Bank, a California banking
corporation (“Bank”), have entered into that certain Amended and
Restated Revolving Credit Agreement, dated as of July 3, 1999 (as the same
may be amended, restated, supplemented or otherwise modified from time to time,
the “Loan Agreement”).

 

B.                                     Guarantor is materially interested in the
financial success of Borrower, agrees that the Loan Agreement is in Borrower’s
best interests, and acknowledges that the execution and delivery of this
Guaranty formed a material part of the consideration to Bank to induce Bank to
enter into the Loan Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing, Guarantor hereby
agrees, in favor of Bank, as follows:

 

1.                                       Definitions and Construction.

 

(a)                                  Definitions.  All initially capitalized
terms used but not defined herein shall have the meanings assigned to such
terms in the Loan Agreement.  In
addition, the following terms, as used in this Guaranty, shall have the
following meanings:

 

“Guaranteed Obligations” means any and all obligations,
indebtedness, or liabilities of any kind or character owed by Borrower to Bank
(including without limitation, all principal and interest owing under the
Loans, all Bank Expenses, the Fees, any other fees and expenses due under the
Loan Agreement, and all other indebtedness evidenced by the Loan Agreement and
the other Loan Documents), including all such obligations, indebtedness, or
liabilities, whether for principal, interest (including any interest which, but
for the application of the provisions of the Bankruptcy Code, would have accrued
on such amounts), premium, reimbursement obligations, fees, costs, expenses
(including, attorneys’ fees and attorneys’ fees incurred pursuant to
proceedings arising under the Bankruptcy Code), or indemnity obligations,
whether heretofore, now, or hereafter made, incurred, or created, whether
voluntarily or involuntarily made, incurred, or created, whether secured or
unsecured (and if secured, regardless of the nature or extent of the security),

 

1

 

whether
absolute or contingent, liquidated or unliquidated, determined or
indeterminate, whether Borrower is liable individually or jointly with others,
and whether recovery is or hereafter becomes barred by any statute of
limitations or otherwise becomes unenforceable for any reason whatsoever,
including any act or failure to act by Bank.

 

“Loan Documents” shall mean the Loan Agreement, this Guaranty,
and the other Loan Documents (as defined in the Loan Agreement).

 

(b)                                 Construction. 
Unless the context of this Guaranty clearly requires otherwise,
references to the plural include the singular, references to the singular
include the plural, and the term “including” is not limiting.  The words “hereof,” “herein,” “hereby,”
“hereunder,” and other similar terms refer to this Guaranty as a whole and not
to any particular provision of this Guaranty. 
Any reference herein to any of the Loan Documents includes any and all
alterations, amendments, extensions, modifications, renewals, or supplements
thereto or thereof, as applicable. 
Neither this Guaranty nor any uncertainty or ambiguity herein shall be
construed or resolved against Bank or Guarantor, whether under any rule of
construction or otherwise.  On the
contrary, this Guaranty has been reviewed by Guarantor, Bank, and their
respective counsel, and shall be construed and, interpreted according to the
ordinary meaning of the words used so as to fairly accomplish the purposes and
intentions of Bank and Guarantor.

 

2.                                       Guaranteed Obligations. 
Guarantor hereby irrevocably and unconditionally guarantees to Bank, as
and for Guarantor’s own debt, until final and indefeasible payment thereof has
been made, (a) payment of the Guaranteed Obligations, in each case when and as
the same shall become due and payable, whether at maturity, pursuant to a
mandatory prepayment requirement, by acceleration, or otherwise; it being the
intent of Guarantor that the guaranty set forth herein shall be a guaranty of
payment and not a guaranty of collection, and (b) the punctual and faithful performance,
keeping, observance, and fulfillment by Borrower of all of the agreements,
conditions, covenants, and obligations of Borrower contained in the Loan
Documents.

 

3.                                       Continuing Guaranty. 
This Guaranty includes Guaranteed Obligations arising under successive
transactions continuing, compromising, extending, increasing, modifying,
releasing, or renewing the Guaranteed Obligations, changing the interest rate,
payment terms, or other terms and conditions thereof, or creating new or
additional Guaranteed Obligations after prior Guaranteed Obligations have been
satisfied in whole or in part.  To the
maximum extent permitted by law, Guarantor hereby waives and agrees not to
assert any right Guarantor has under Section 2815 of the California Civil
Code, or otherwise, to revoke this Guaranty as to future indebtedness.

 

4.                                       Performance Under This Guaranty.  In
the event that Borrower fails to make any payment of any Guaranteed Obligations
on or before the due date thereof, or if Borrower shall fail to perform, keep,
observe, or fulfill any other obligation referred to in clause (b) of
Section 2 hereof in the manner provided in the Loan Documents, Guarantor

 

2

 

immediately
shall cause such payment to be made or each of such obligations to be
performed, kept, observed, or fulfilled.

 

5.                                       Primary Obligations. 
This Guaranty is a primary and original obligation of Guarantor, is not
merely the creation of a surety relationship, and is an absolute,
unconditional, and continuing guaranty of payment and performance which shall
remain in full force and effect without respect to future changes in
conditions, including any change of law or any invalidity or irregularity with
respect to the Loan Documents. 
Guarantor agrees that Guarantor is severally and not jointly and
severally liable, with any other guarantor of the Guaranteed Obligations, to
Bank, to the extent set forth in Section 2 hereof, that the obligations of
Guarantor hereunder are independent of the obligations of Borrower or any other
guarantor, and that a separate action may be brought against Guarantor whether
such action is brought against Borrower or any other guarantor or whether
Borrower or any such other guarantor is joined in such action.  Guarantor agrees that Guarantor’s liability
hereunder shall be immediate and shall not be contingent upon the exercise or
enforcement by Bank of whatever remedies it may have against Borrower or any
other guarantor, or the enforcement of any lien or realization upon any security
Bank may at any time possess.  Guarantor
agrees that any release which may be given by Bank to Borrower or any other
guarantor shall not release Guarantor. 
Guarantor consents and agrees that Bank shall be under no obligation to
marshal any assets of Borrower or any other guarantor in favor of Guarantor, or
against or in payment of any or all of the Guaranteed Obligations.

 

6.                                       Waivers.

 

(a)                                  Guarantor absolutely, unconditionally,
knowingly, and expressly waives:

 

(i)                                     (1) notice of acceptance hereof; (2) notice
of any loans or other financial accommodations made or extended under the Loan
Documents or the creation or existence of any Guaranteed Obligations; (3)
notice of the amount of the Guaranteed Obligations, subject, however, to
Guarantor’s right to make inquiry of Bank to ascertain the amount of the
Guaranteed Obligations at any reasonable time; (4) notice of any adverse change
in the financial condition of Borrower or of any other fact that might increase
Guarantor’s risk hereunder; (5) notice of presentment for payment, demand,
protest, and notice thereof as to any instruments among the Loan Documents; (6)
notice of any Unmatured Event of Default or Event of Default; and (7) all other
notices (except if such notice is specifically required to be given to
Guarantor hereunder or under the Loan Documents) and demands to which Guarantor
might otherwise be entitled.

 

(ii)                                  its right, under Sections 2845 or 2850 of the
California Civil Code, or otherwise, to require Bank to institute suit against,
or to exhaust any rights and remedies which Bank has or may have against,
Borrower or any third party, or against any collateral for the Guaranteed
Obligations provided by Borrower or any third party.  In this regard, Guarantor agrees that Guarantor is bound to the
payment of all Guaranteed

 

3

 

Obligations,
whether now existing or hereafter accruing, as fully as if such Guaranteed
Obligations were directly owing to Bank by Guarantor.  Guarantor further waives any defense arising by reason of any
disability or other defense (other than the defense that the Guaranteed
Obligations shall have been fully and finally performed and indefeasibly paid)
of Borrower or by reason of the cessation from any cause whatsoever of the liability
of Borrower in respect thereof.

 

(iii)                               (1) any rights to assert against Bank any
defense (legal or equitable), set-off, counterclaim, or claim which Guarantor
may now or at any time hereafter have against Borrower or any other party
liable to Bank; (2) any defense, set-off, counterclaim, or claim, of any kind
or nature, arising directly or indirectly from the present or future lack of
perfection, sufficiency, validity, or enforceability of the Guaranteed
Obligations or any security therefor; (3) any defense Guarantor has to
performance hereunder, and any right Guarantor has to be exonerated, provided
by Sections 2819, 2822, or 2825 of the California Civil Code, or otherwise,
arising by reason of: the impairment or suspension of Bank’s rights or remedies
against Borrower; the alteration by Bank of the Guaranteed Obligations; any
discharge of Borrower’s obligations to Bank by operation of law as a result of
Bank’s intervention or omission; or the acceptance by Bank of anything in
partial satisfaction of the Guaranteed Obligations; (4) the benefit of any
statute of limitations affecting Guarantor’s liability hereunder or the
enforcement thereof, and any act which shall defer or delay the operation of
any statute of limitations applicable to the Guaranteed Obligations shall
similarly operate to defer or delay the operation of such statute of
limitations applicable to Guarantor’s liability hereunder.

 

(b)                                 Guarantor absolutely, unconditionally,
knowingly, and expressly waives any defense arising by reason of or deriving
from (i) any claim or defense based upon an election of remedies by Bank
including any defense based upon an election of remedies by Bank under the
provisions of Sections 580a, 580b, 580d, and 726 of the California Code of
Civil Procedure or any similar law of California or any other jurisdiction; or
(ii) any election by Bank under Bankruptcy Code Section 1111(b) to limit
the amount of, or any collateral securing, its claim against Borrower.  Pursuant to Section 2856 of the
California Civil Code:

 

Guarantor waives all rights and defenses arising out of an election of
remedies by the creditor, even though that election of remedies, such as a
nonjudicial foreclosure with respect to security for a guaranteed obligation,
has destroyed Guarantor’s rights of subrogation and reimbursement against
Borrower by the operation of Section 580(d) of the California Code of
Civil Procedure or otherwise.

 

Guarantor waives all rights and defenses that Guarantor may have
because Borrower’s Obligations are secured by real property.  This means, among other things:

 

4

 

(1)                                  Bank may collect from Guarantor without first
foreclosing on any real or personal property collateral pledged by Borrower.

 

(2)                                  If Bank forecloses on any real property
collateral pledged by Borrower:

 

(A)                              The amount of the Guaranteed Obligations may
be reduced only by the price for which that collateral is sold at the
foreclosure sale, even if the collateral is worth more than the sale price.

 

(B)                                Bank may collect from Guarantor even if Bank,
by foreclosing on the real property collateral, has destroyed any right
Guarantor may have to collect from Borrower.

 

This is an unconditional and irrevocable waiver of any rights and
defenses Guarantor may have because Borrower’s Obligations are secured by real
property.  These rights and defenses
include, but are not limited to, any rights or defenses based upon
Section 580a, 580b, 580d, or 726 of the California Code of Civil
Procedure.

 

If
any of the Guaranteed Obligations at any time are secured by a mortgage or deed
of trust upon real property, Bank may elect, in its sole discretion, upon a
default with respect to the Guaranteed Obligations, to foreclose such mortgage
or deed of trust judicially or nonjudicially in any manner permitted by law,
before or after enforcing the Loan Documents, without diminishing or affecting
the liability of Guarantor hereunder except to the extent the Guaranteed
Obligations are repaid with the proceeds of such foreclosure.  Guarantor understands that (a) by virtue of
the operation of California’s antideficiency law applicable to nonjudicial
foreclosures, an election by Bank nonjudicially to foreclose such a mortgage or
deed of trust probably would have the effect of impairing or destroying rights
of subrogation, reimbursement, contribution, or indemnity of Guarantor against
Borrower or other guarantors or sureties, and (b) absent the waiver given by
Guarantor, such an election would prevent Bank from enforcing the Loan
Documents against Guarantor. 
Understanding the foregoing, and understanding that Guarantor is hereby
relinquishing a defense to the enforceability of the Loan Documents, Guarantor
hereby waives any right to assert against Bank any defense to the enforcement
of the Loan Documents, whether denominated “estoppel” or otherwise, based on or
arising from an election by Bank nonjudicially to foreclose any such mortgage
or deed of trust.  Guarantor understands
that the effect of the foregoing waiver may be that Guarantor may have
liability hereunder for amounts with respect to which Guarantor may be left
without rights of subrogation, reimbursement, contribution, or indemnity
against Borrower or other guarantors or sureties.  Guarantor also agrees that the “fair market value” provisions of
Section 580a of the California Code of Civil Procedure shall have no
applicability with respect to the determination of Guarantor’s liability under
the Loan Documents.

 

(c)                                  Guarantor hereby absolutely, unconditionally,
knowingly, and expressly waives:   (i)
any right of subrogation Guarantor has or may have as against

 

5

 

Borrower
with respect to the Guaranteed Obligations; (ii) any right to proceed against
Borrower or any other person or entity, now or hereafter, for contribution,
indemnity, reimbursement, or any other suretyship rights and claims, whether
direct or indirect, liquidated or contingent, whether arising under express or
implied contract or by operation of law, which Guarantor may now have or
hereafter have as against Borrower with respect to the Guaranteed Obligations;
and (iii) any right to proceed or seek recourse against or with respect to any
property or asset of Borrower.

 

(d)                                  WITHOUT LIMITING THE
GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS GUARANTY,
GUARANTOR HEREBY ABSOLUTELY, KNOWINGLY, UNCONDITIONALLY, AND EXPRESSLY WAIVES
AND AGREES NOT TO ASSERT ANY AND ALL BENEFITS OR DEFENSES ARISING DIRECTLY OR
INDIRECTLY UNDER ANY ONE OR MORE OF CALIFORNIA CIVIL CODE SECTIONS 2799, 2808,
2809, 2810, 2815, 2819, 2820, 2821, 2822, 2825, 2839, 2845, 2848, 2849, AND
2850, CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 580a, 580b, 580c, 580d, AND
726, AND CHAPTER 2 OF TITLE 14 OF PART 4 OF DIVISION 3 OF THE CALIFORNIA CIVIL
CODE.

 

7.                                       Releases.  Guarantor consents and agrees
that, without notice to or by Guarantor, and without affecting or impairing the
obligations of Guarantor hereunder, Bank may, by action or inaction:

 

(a)                                  compromise, settle, extend the duration or
the time for the payment of, or discharge the performance of, or may refuse to
or otherwise not enforce this Guaranty, the other Loan Documents, or any part
thereof, with respect to Borrower or any other Person;

 

(b)                                 release Borrower or any other Person or grant
other indulgences to Borrower or any other Person in respect thereof;

 

(c)                                  amend or modify in any manner and at any time
(or from time to time) any of the Loan Documents; or

 

(d)                                 release or substitute any other guarantor, if
any, of the Guaranteed Obligations, or enforce, exchange, release, or waive any
security for the Guaranteed Obligations or any other guaranty of the Guaranteed
Obligations, or any portion thereof.

 

8.                                       No Election.  Bank shall have all of the
rights to seek recourse against Guarantor to the fullest extent provided for
herein, and no election by Bank to proceed in one form of action or proceeding,
or against any party, or on any obligation, shall constitute a waiver of Bank’s
right to proceed in any other form of action or proceeding or against other

 

6

 

parties
unless Bank has expressly waived such right in writing.  Specifically, but without limiting the
generality of the foregoing, no action or proceeding by Bank under any document
or instrument evidencing the Guaranteed Obligations shall serve to diminish the
liability of Guarantor under this Guaranty except to the extent that Bank
finally and unconditionally shall have realized indefeasible payment by such
action or proceeding.

 

9.                                       Indefeasible Payment.  The
Guaranteed Obligations shall not be considered indefeasibly paid for purposes
of this Guaranty unless and until all payments to Bank are no longer subject to
any right on the part of any Person, including Borrower, Borrower as a debtor
in possession, or any trustee (whether appointed under the Bankruptcy Code or
otherwise) of any of Borrower’s assets, to invalidate or set aside such
payments or to seek to recoup the amount of such payments or any portion
thereof, or to declare same to be fraudulent or preferential.  Upon such full and final performance and
indefeasible payment of the Guaranteed Obligations, whether by Borrower
pursuant to the Loan Agreement or by any other Person, Bank shall have no
obligation whatsoever to transfer or assign its interests in the Loan Documents
to Guarantor.  In the event that, for
any reason, any portion of such payments to Bank is set aside or restored,
whether voluntarily or involuntarily, after the making thereof, then the
obligation intended to be satisfied thereby shall be revived and continued in
full force and effect as if said payment or payments had not been made, and
Guarantor shall be liable for the full amount Bank is required to repay plus
any and all costs and expenses (including attorneys’ fees and expenses and
attorneys’ fees and expenses incurred pursuant to proceedings arising under the
Bankruptcy Code) paid by Bank in connection therewith.

 

10.                                 Financial Condition of Borrower. 
Guarantor represents and warrants to Bank that Guarantor is currently
informed of the financial condition of Borrower and of all other circumstances
which a diligent inquiry would reveal and which bear upon the risk of
nonpayment of the Guaranteed Obligations. 
Guarantor further represents and warrants to Bank that Guarantor has
read and understands the terms and conditions of the Loan Documents.  Guarantor hereby covenants that Guarantor
will continue to keep informed of Borrower’s financial condition, the financial
condition of other guarantors, if any, and of all other circumstances which
bear upon the risk of nonpayment or nonperformance of the Guaranteed
Obligations.

 

11.                                 Subordination. 
Guarantor hereby agrees that any and all present and future indebtedness
of Borrower owing to Guarantor is postponed in favor of and subordinated to
payment, in full, in cash, of the Guaranteed Obligations.  In this regard, no payment of any kind
whatsoever shall be made with respect to such indebtedness until the Guaranteed
Obligations have been indefeasibly paid in full.

 

12.                                 Payments: Application.  All
payments to be made hereunder by Guarantor shall be made in lawful money of the
United States of America at the time of payment, shall be made in immediately
available funds, and shall be made without deduction (whether for taxes or
otherwise) or offset.  All payments made
by Guarantor hereunder shall

 

7

 

be
applied as follows: first, to all costs and expenses (including attorneys’ fees
and expenses and attorneys’ fees and expenses incurred pursuant to proceedings
arising under the Bankruptcy Code) incurred by Bank in enforcing this Guaranty
or in collecting the Guaranteed Obligations; second, to all accrued and unpaid
interest, premium, if any, and fees owing to Bank constituting Guaranteed
Obligations; and third, to the balance of the Guaranteed Obligations.

 

13.                                 Representations and Warranties. 
Guarantor hereby represents and warrants to Bank that: 

 

(a)                                  Guarantor is a corporation duly organized and
existing under the laws of                            and
has the power and authority to own its own properties and assets, and to
transact the business in which it is engaged, and is properly licensed,
qualified to do business and in good standing in every jurisdiction where the
conduct of its business requires it to be so qualified.

 

(b)                                 The execution, delivery and performance of
this Guaranty are within Guarantor’s powers, are not in conflict with the terms
of any charter, bylaw, [certificate/articles] of incorporation or other organization
papers of Guarantor, and do not result in a breach of or constitute a default
under any contract, obligation, indenture or other instrument to which
Guarantor is a party or by which Guarantor is bound or affected.  There is no law, rule or regulation, nor is
there any judgment, decree or order of any court or governmental authority
binding on Guarantor which would be contravened by the execution, delivery,
performance or enforcement of this Guaranty and the other Loan Documents to
which Guarantor is a party.

 

(c)                                  Guarantor has taken all corporate action
necessary to authorize the execution and delivery of this Guaranty and the
other Loan Documents to which Guarantor is a party, and the consummation of the
transactions contemplated hereby and thereby.  Upon their execution and delivery in accordance with their
respective terms, this Guaranty and the other Loan Documents to which Guarantor
is a party will constitute legal, valid and binding agreements and obligations
of Guarantor enforceable against Guarantor in accordance with their respective
terms, except as enforceability may be limited by bankruptcy, insolvency,
fraudulent conveyance, and similar laws and equitable principles affecting the
enforcement of creditors’ rights generally.

 

(d)                                 No approval, consent, exemption or other
action by, or notice to or filing with, any governmental authority is necessary
in connection with the execution, delivery, performance or enforcement of this
Guaranty and the other Loan Documents to which Guarantor is a party except as
may have been obtained by Guarantor and certified copies of which have been
delivered to Bank.

 

(e)                                  Guarantor has no Debt other than Debt owing
to Bank hereunder, and Guarantor covenants and agrees that until the
indefeasible payment,

 

8

 

performance
and satisfaction in full of the Guaranteed Obligations, Guarantor will not
create, incur, assume or suffer to exist any Debt without the prior written
consent of Bank.

 

14.                                 Attorneys’ Fees and Costs.  Guarantor
agrees to pay, on demand, all attorneys’ fees (including attorneys’ fees
incurred pursuant to proceedings arising under the Bankruptcy Code) and all
other costs and expenses which may be incurred by Bank in the enforcement of
this Guaranty or in any way arising out of, or consequential to the protection,
assertion, or enforcement of the Guaranteed Obligations (or any security
therefor), whether or not suit is brought.

 

15.                                 Notices.  All notices, requests and
other communications to any party hereunder shall be sent in accordance with
Section 9.1 of the Loan Agreement to the following addresses:

 

	
  If
  to Guarantor:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Facsimile
  No:
  (          )                

  	
   

  
	
   

  	
   

  	
  Telephone
  No:
  (        )                 

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  If
  to Bank:

  	
   

  	
  (as
  set forth in Section 9.1 of the Loan Agreement)

  

 

16.                                 Cumulative Remedies.  No
remedy under this Guaranty or under any Loan Document is intended to be
exclusive of any other remedy, but each and every remedy shall be cumulative
and in addition to any and every other remedy given hereunder or under any Loan
Document, and those provided by law or in equity.  No delay or omission by Bank to exercise any right under this
Guaranty shall impair any such right nor be construed to be a waiver
thereof.  No failure on the part of Bank
to exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any other
right.

 

17.                                 Books and Records. 
Guarantor agrees Bank’s books and records showing the account between
Bank and Borrower shall be admissible in any action or proceeding and shall be
binding upon Guarantor for the purpose of establishing the items therein set
forth and shall constitute prima facie proof thereof.

 

18.                                 Severability of Provisions.  If
any provision of this Guaranty is for any reason held to be invalid, illegal or
unenforceable in any respect, that provision shall not affect the validity,
legality or enforceability of any other provision of this Guaranty.

 

19.                                 Entire Agreement;  Amendments and Waivers.  This Guaranty constitutes the
entire agreement between Guarantor and Bank pertaining to the subject matter

 

9

 

contained
herein.  Any provision of this Guaranty
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.

 

20.                                 Security.  This Guaranty is secured by
that certain Security Agreement and Collateral Assignment of Transaction
Documents, each dated as of even date herewith, between Guarantor and Bank, as
the same may be amended from time to time.

 

21.                                 Successors and Assigns. 
This Guaranty shall bind the successors and assigns of Guarantor, and
shall inure to the benefit of the respective successors and assigns of Bank; provided,
however, Guarantor may not assign this Guaranty or delegate any of his
duties hereunder without Bank’s prior written consent and any such prohibited
assignment shall be absolutely null and void. 
Bank reserves its right to sell, assign, transfer, negotiate, or grant
participations in all or any part of, or any interest in, the rights and
benefits hereunder pursuant to and in accordance with the provisions of the
Loan Documents.  In connection
therewith, Bank may disclose all documents and information which Bank now or
hereafter may have relating to Guarantor, Guarantor’s business, or this
Guaranty to any such prospective or actual transferee.

 

22.                                 Governing Law. 
This Guaranty 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, without regard to principles of conflicts of law.

 

23.                                 Judicial Reference.

 

(a)                                  Other than (i) nonjudicial foreclosure and
all matters in connection therewith regarding security interests in real or
personal property; or (ii) the appointment of a receiver, or the exercise of
other provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the parties arising
out of or relating to this Guaranty, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the “Claim Date” (defined
as the date on either Guarantor or Bank gives written notice to the other that
a controversy, dispute or claim exists), will be settled by a reference
proceeding in California in accordance with the provisions of Section 638 et
seq.  of the California Code of
Civil Procedure, or their successor section (“CCP”), which shall
constitute the exclusive remedy for the settlement of any controversy, dispute
or claim concerning this Guaranty, including whether such controversy, dispute
or claim is subject to the reference proceeding and except as set forth above,
the parties waive their rights to initiate any legal proceedings against each
other in any court or jurisdiction other than the Superior Court in the County
where any real property collateral for this Guaranty is located or Los Angeles
County if none (the “Court”). 
The referee shall be a retired Judge of the Court selected by mutual
agreement of the parties, and if they cannot

 

10

 

so
agree within forty-five (45) days after the Claim Date, the referee shall be
promptly selected by the Presiding Judge of the Court (or his
representative).  The referee shall be
appointed to sit as a temporary judge, with all of the powers for a temporary
judge, as authorized by law, and upon selection should take and subscribe to
the oath of office as provided for in Rule 244 of the California Rules of Court
(or any subsequently enacted Rule). 
Each party shall have one peremptory challenge pursuant to CCP
§ 170.6.  The referee shall (a) be
requested to set the matter for hearing within sixty (60) days after the date
of selection of the referee and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety (90) days
of the Claim Date.  Any decision
rendered by the referee will be final, binding and conclusive and judgment
shall be entered pursuant to CCP § 644 in any court in the State of
California having jurisdiction.  Any
party may apply for a reference proceeding at any time after thirty (30) days
following notice to any other party of the nature of the controversy, dispute
or claim, by filing a petition for a hearing and/or trial.  All discovery permitted by this Guaranty
shall be completed no later than fifteen (15) days before the first hearing
date established by the referee.  The
referee may extend such period in the event of a party’s refusal to provide
requested discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery or unavailability of a witness due to
absence or illness.  No party shall be
entitled to “priority” in conducting discovery.  Depositions may be taken by either party upon seven (7) days
written notice, and request for production or inspection of documents shall be
responded to within ten (10) days after service.  All disputes relating to discovery which cannot be resolved by
the parties shall be submitted to the referee whose decision shall be final and
binding upon the parties.  Pending
appointment of the referee as provided herein, the Superior Court is empowered
to issue temporary and/or provisional remedies, as appropriate.

 

(b)                                 Except as expressly set forth in this
Guaranty, the referee shall determine the manner in which the reference
proceeding is conducted including the time and place of all hearings, the order
of presentation of evidence, and all other questions that arise with respect to
the course of the reference proceeding. 
All proceedings and hearings conducted before the referee, except for
trial, shall be conducted without a court reporter except that when any party
so requests, a court reporter will be used at any hearing conducted before the
referee.  The party making such a
request shall have the obligation to arrange for and pay for the court
reporter.  The costs of the court
reporter at the trial shall be borne equally by the parties.

 

(c)                                  The referee shall be required to determine
all issues in accordance with existing case law and the statutory laws of the
State of California.  The rules of
evidence applicable to proceedings at law in the State of California will be
applicable to the reference proceeding. 
The referee shall be empowered to enter equitable as well as legal
relief, to provide all temporary and/or provisional remedies and to enter
equitable orders that will be binding upon the parties.  The referee shall issue a single judgment at
the close of the reference proceeding which shall dispose of all of the claims
of the parties that are the subject of the reference.  The parties hereto expressly reserve the right to contest or
appeal from the

 

11

 

final
judgment or any appealable order or appealable judgment entered by the
referee.  The parties hereto expressly
reserve the right to findings of fact, conclusions of laws, a written statement
of decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a reference proceeding under this
provision.

 

(d)                                 In the event that the enabling legislation
which provides for appointment of a referee is repealed (and no successor
statute is enacted), any dispute between the parties that would otherwise be
determined by the reference procedure herein described will be resolved and
determined by arbitration.  The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, § 1280 through § 1294.2 of the
CCP as amended from time to time.  The
limitations with respect to discovery as set forth hereinabove shall apply to
any such arbitration proceeding.

 

[Remainder of this page intentionally left
blank.]

 

12

 

IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty
as of the date set forth in the first paragraph hereof.

 

	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
  ACCEPTED
  AND AGREED:

  	
   

  
	
   

  	
   

  
	
  IMPERIAL
  BANK,

  a California banking corporation

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By

  	
   

  	
   

  	
   

  
	
  Title

  	
   

  	
   

  	
   

  
									

 

13

 

Exhibit 1.1I-1

 

SECURED PROMISSORY
NOTE

[GUARANTOR]

 

	
  $                         

  	
  Los Angeles, California

                     ,
  199       

  

 

1.                                       FOR VALUE RECEIVED,
                                ,
a              
corporation (“Maker”), promises to pay to the order of PROSPECT MEDICAL
HOLDINGS, INC., a Delaware corporation (“Payee”), on or before the
Maturity Date unless sooner accelerated in accordance with the terms hereof,
the principal sum of
                       Dollars
($             ),
or such lesser sum as shall equal the aggregate outstanding principal amount of
the loans made by Payee to Maker hereunder. 
As used herein the term “Maturity Date” has the meaning given to
such term in that certain Amended and Restated Revolving Credit Agreement,
dated as of July 3, 1999, between Payee and Imperial Bank (as amended or
restated from time to time, the “Credit Agreement”).

 

2.                                       This Secured Promissory Note shall bear
interest at a per annum rate equal
to            percent
(        %).  All computations of interest shall be calculated on the basis of
a year of three hundred sixty-five (365) days for the actual days elapsed.  Interest shall accrue from the date of this
Secured Promissory Note to the date of repayment of this Secured Promissory Note
in accordance with the provisions hereof. 
Maker shall pay all accrued but unpaid interest on the principal balance
hereof, in arrears, on the first day of each and every month.

 

3.                                       Maker hereby authorizes Payee to record in
its books and records the date and amount of the loans made by Payee to Maker
hereunder, and of each payment of principal made by Maker, and Maker agrees
that all such notations shall, in the absence of manifest error, be conclusive
as to the matters so noted; provided, however, any failure by
Payee to make such notation with respect to any loan or payment thereof shall
not limit or otherwise affect Maker’s obligations under the Secured Promissory
Note.

 

4.                                       Maker shall make all payments hereunder in
lawful money of the United States of America and in immediately available funds
to the holder hereof (“Holder”) at Holder’ s office located
at                                                            ;
or to such other address as Holder may from time to time specify by notice to
Maker.

 

5.                                       In no event shall the interest rate and other
charges hereunder exceed the highest rate permissible under any law which a
court of competent jurisdiction shall, in a final determination, deem
applicable hereto.  In the event that
such a court determines that Holder has received interest and other charges
hereunder in excess of the highest rate applicable hereto, such excess shall be
deemed received on account of, and shall automatically

 

1

 

be
applied to reduce, the principal balance hereof, and the provisions hereof
shall be deemed amended to provide for the highest permissible rate.  If there is no principal balance
outstanding, Holder shall refund to Maker such excess.

 

6.                                       The unpaid principal balance hereof together
with all accrued but unpaid interest thereon shall be all due and payable upon
(i) failure by Maker to pay any installment of principal or interest due
hereunder when due, (ii) commencement of any proceeding by or against Maker
under any bankruptcy or insolvency laws, or (iii) the occurrence of an “Event
of Default” under the Credit Agreement.

 

7.                                       This Secured Promissory Note is secured by
that certain Security Agreement, dated as of event date herewith, between Maker
and Payee.

 

8.                                       Maker hereby waives presentment for payment,
notice of dishonor, protest and notice of protest.

 

9.                                       This Secured Promissory Note shall be
governed by and construed in accordance with the internal laws of the State of
California without regard to principles of conflicts of laws.

 

IN WITNESS WHEREOF, Maker has duly executed this Secured Promissory
Note as of the date first above written.

 

	
  Maker:

  	
   

  	
   

  
	
   

  	
  a                  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
  Title

  	
   

  	
   

  
					

 

2

 

ENDORSEMENT ALLONGE

 

Pay to the order of Imperial Bank, a California banking corporation,
located at 9920 South La Cienega Blvd., Suite #628, Inglewood, California 90301
the attached note
dated                    made
by
                              .

 

	
  Dated:             ,
  199   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PROSPECT
  MEDICAL HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Print
  Name:

  	
   

  	
   

  
	
   

  	
  Its:

  	
   

  	
   

  
						

 

3

 

Exhibit 1.1 I-2

 

PROMISSORY
NOTE

[PHYSICIAN
GROUP SHAREHOLDER]

 

	
  $                         

  	
  Los Angeles, California

                     ,
  199       

  

 

 

1.                                       FOR VALUE RECEIVED,
                          (“Maker”),  promises to pay to the order of
                             
                   ,
a
                              
corporation (“Payee”), on or before the Maturity Date unless sooner
accelerated in accordance with the terms hereof, the principal sum of
                          
Dollars ($               ),
or such lesser sum as shall equal the aggregate outstanding principal amount of
the loans made by Payee to Maker hereunder. 
As used herein the term “Maturity Date” has the meaning given to
such term in that certain Amended and Restated Revolving Credit Agreement,
dated as of July 3, 1999, between Prospect Medical Holdings, Inc., a
Delaware corporation, and Imperial Bank (as amended or restated from time to
time, the “Credit Agreement”).

 

2.                                       This Promissory Note shall bear interest at a
per annum rate equal to
             percent
(            %).  All computations of interest shall be
calculated on the basis of a year of three hundred sixty-five (365) days for
the actual days elapsed.  Interest shall
accrue from the date of this Promissory Note to the date of repayment of this
Promissory Note in accordance with the provisions hereof.  Maker shall pay all accrued but unpaid
interest on the principal balance hereof, in arrears, on the first day of each
and every month.

 

3.                                         Maker hereby authorizes Payee to record in
its books and records the date and amount of the loans made by Payee to Maker
hereunder, and of each payment of principal made by Maker, and Maker agrees
that all such notations shall, in the absence of manifest error, be conclusive
as to the matters so noted; provided, however, any failure by
Payee to make such notation with respect to any loan or payment thereof shall
not limit or otherwise affect Maker’s obligations under this Promissory Note.

 

4.                                       Maker shall make all payments hereunder in
lawful money of the United States of America and in immediately available funds
to the holder hereof (“Holder”) at Holder’s office located at                                                             ;
or to such other address as Holder may from time to time specify by notice to
Maker.

 

5.                                       In no event shall the interest rate and other
charges hereunder exceed the highest rate permissible under any law which a
court of competent jurisdiction shall, in a final determination, deem
applicable hereto.  In the event that
such a court determines that Holder has received interest and other charges
hereunder in excess of the highest rate applicable hereto, such excess shall be
deemed received on account of, and shall automatically be applied to reduce,
the principal balance hereof, and the provisions hereof shall be deemed

 

1

 

amended
to provide for the highest permissible rate. 
If there is no principal balance outstanding, Holder shall refund to
Maker such excess.

 

6.                                       The unpaid principal balance hereof together
with all accrued but unpaid interest thereon shall be all due and payable upon
(i) failure by Maker to pay any installment of principal or interest due
hereunder when due, (ii) commencement of any proceeding by or against Maker
under any bankruptcy or insolvency laws, or (iii) the occurrence of an “Event
of Default” under the Credit Agreement.

 

7.                                       Maker hereby waives presentment for payment,
notice of dishonor, protest and notice of protest.

 

8.                                       This Promissory Note shall be governed by and
construed in accordance with the internal laws of the State of California
without regard to principles of conflicts of laws.

 

IN WITNESS WHEREOF, Maker has duly executed this Promissory Note as of
the date first above written.

 

	
  Maker:

  	
   

  	
   

  
	
   

  	
  [a                  professional corporation]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
  Title

  	
   

  	
   

  
					

 

2

 

ENDORSEMENT ALLONGE

 

Pay to the order of Imperial Bank, a California banking corporation,
located at 9920 South La Cienega Blvd., Suite #628, Inglewood, California 90301
the attached note
dated                    made
by                          .

 

 

	
  Dated:             ,
  199   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Print
  Name:

  	
   

  	
   

  
	
   

  	
  Its:

  	
   

  	
   

  
							

 

3

 

Exhibit 1.1 I-3

 

FORM OF
INTER-COMPANY SECURITY AGREEMENT

 

This SECURITY AGREEMENT (“Security Agreement”), dated as of
                     ,
199   , is entered into between
                        ,
a                    
corporation (“Debtor”) and PROSPECT MEDICAL HOLDINGS, INC. (“Secured
Party”), with reference to the following facts:

 

RECITAL

 

Secured Party has made loan(s) to Debtor, evidenced by a Secured
Promissory Note (the “Note”), dated as
of                   .  The Note is secured by this Security
Agreement to insure prompt payment of the Note.

 

AGREEMENT

 

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 in this Security Agreement shall have the meanings
ascribed to such terms in the Loan Agreement. 
In addition, the following terms, as used in this Security Agreement
have the following meanings:

 

“Account Debtor” means any Person who is or who may become
obligated with respect to, or on account of, an Account.

 

“Accounts” means any and all of Debtor’s presently existing and
hereafter arising accounts and rights to payment, except those evidenced by
Negotiable Collateral, arising out of the sale or lease of goods or the
rendition of services by Debtor, irrespective of whether earned by performance.

 

“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.

 

“Chattel Paper” means all writings of whatever sort which
evidence a monetary obligation and a security interest in or lease of specific
goods, whether now existing or hereafter arising.

 

1

 

“Code” means the California Uniform Commercial Code except, to
the extent applicable, the Uniform Commercial Code as adopted by the
jurisdiction in which any of the Collateral is located.  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 the following, collectively: any and all of
the Accounts, Deposit Accounts, Equipment, Inventory, Investment Property,
General Intangibles, Negotiable Collateral, and Debtor’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, Deposit Accounts, Equipment, Inventory, Investment Property, General
Intangibles, Negotiable Collateral, money, or other tangible or intangible
property, resulting from the sale or other disposition of the Accounts, Deposit
Accounts, Equipment, Inventory, Investment Property, General Intangibles, or
Negotiable Collateral, or any portion thereof or interest therein, and the
substitutions, replacements, additions, accessions, products and Proceeds thereof.

 

“Debtor” means
                                                                  
, a
                    
corporation.

 

“Debtor’s Books” means any and all presently existing and
hereafter acquired or created books and records of Debtor, 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, Deposit
Accounts, Equipment, Inventory, Investment Property, General Intangibles and
Negotiable Collateral.

 

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

 

“Documents” means any and all documents of title, bills of
lading, dock warrants, dock receipts, warehouse receipts and other documents of
Debtor, whether or not negotiable, and includes all other documents which
purport to be issued by a bailee or agent and purport to cover goods in any
bailee’s or agent’s possession which are either identified or are fungible
portions of an identified mass, including such documents of title made
available to Debtor for the purpose of ultimate sale or exchange of goods or
for the purpose of loading, unloading, storing, shipping, transshipping,
manufacturing, processing or otherwise dealing with goods in a manner
preliminary to their sale or exchange, in each case whether now existing or
hereafter acquired.

 

“Equipment” means any and all of Debtor’s presently existing and
hereafter acquired machinery, equipment, furniture, furnishings, fixtures, computer
and other

 

2

 

electronic
data processing equipment and other office equipment and supplies, computer
programs and related data processing software, spare parts, tools, motors,
automobiles, trucks, tractors and other motor vehicles, rolling stock, jigs,
and other goods (other than Inventory, farm products, and consumer goods), of
every kind and description, wherever located, together with any and all parts,
improvements, additions, attachments, replacements, accessories, and
substitutions thereto or therefor, and all other rights of Debtor relating
thereto, whether in the possession and control of Debtor, or in the possession
and control of a third party for the account of Debtor.

 

“Event of Default” has the meaning set forth in Section 5.

 

“General Intangibles” means any and all of Debtor’s presently
existing and hereafter acquired or arising general intangibles and other
intangible personal property of every kind and description, including:

 

(a)                                  contracts and contract rights, noncompetition
covenants, licensing and distribution agreements, indemnity agreements,
guaranties, insurance policies, franchise agreements and lease agreements;

 

(b)                                 deposit accounts, uncertificated certificates
of deposit, uncertificated securities, and interests in any joint ventures,
partnerships or limited liability companies;

 

(c)                                  choices in action and causes of action
(whether legal or equitable, whether in contract or tort or otherwise, and
however arising);

 

(d)                                 licenses, approvals, permits or any other
authorizations issued by any Government Authority;

 

(e)                                  Intellectual Property Collateral;

 

(f)                                    computer software, magnetic media, electronic
data processing files, systems and programs;

 

(g)                                 rights of stoppage in transit, replevin and
reclamation, rebates or credits of every kind and nature to which Debtor may be
entitled;

 

(h)                                 purchase orders, customer lists, subscriber
lists and goodwill;

 

(i)                                     monies due or recoverable from pension funds,
refunds and claims for tax or other refunds against any Governmental Authority;
and

 

(j)                                     other contractual, equitable and legal rights
of whatever kind and nature.

 

3

 

(k)                                  “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.

 

“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.

 

“Intellectual Property Collateral” means the following Assets
owned or held by Debtor or in which Debtor otherwise has any interest, now
existing or hereafter acquired or arising:

 

(a)                                  all patents and patent applications, domestic
or foreign, all licenses relating to any of the foregoing and all income and
royalties with respect to any licenses, all rights to sue for past, present or
future infringement thereof, all rights arising therefrom and pertaining
thereto and all reissues, divisions, continuations, renewals, extensions and
continuations in-part thereof;

 

(b)                                 all copyrights and applications for
copyright, domestic or foreign, together with the underlying works of
authorship (including titles), whether or not the underlying works of
authorship have been published and whether said copyrights are statutory or
arise under the common law, and all other rights and works of authorship, all
rights, claims and demands in any way relating to any such copyrights or works,
including royalties and rights to sue for past, present or future infringement,
and all rights of renewal and extension of copyright;

 

(c)                                  all state (including common law), federal and
foreign trademarks, service marks and trade names, and applications for
registration of such trademarks, service marks and trade names, all licenses
relating to any of the foregoing and all income and royalties with respect to
any licenses, whether registered or unregistered and wherever registered, all
rights to sue for past, present or future infringement or unconsented use
thereof, all rights arising therefrom and pertaining thereto and all reissues,
extensions and renewals thereof;

 

(d)                                 all trade secrets, confidential information,
customer lists, license rights, advertising materials, operating manuals,
methods, processes, know-how, sales literature, sales and operating plans,
drawings, specifications, blue prints, descriptions, inventions, name plates
and catalogs; and

 

(e)                                  the entire goodwill of or associated with the
businesses now or hereafter conducted by Debtor connected with and symbolized
by any of the aforementioned properties and assets.

 

4

 

“Inventory” means any and all of Debtor’s presently existing and
hereafter acquired goods of every kind and description (including goods in
transit) which are held for sale or lease, or to be furnished under a contract
of service or which have been so leased or furnished, or other disposition,
wherever located, including those held for display or demonstration or out on
lease or consignment or are raw materials, work in process, finished materials,
or materials used or consumed, or to be used or consumed, in Debtor’s business,
and the resulting product or mass, and all repossessed, returned, rejected,
reclaimed and replevied goods, together with all materials, parts, supplies,
packing and shipping materials used or usable in connection with the
manufacture, packing, shipping, advertising, selling or furnishing of such
goods; and all other items hereafter acquired by Debtor by way of substitution,
replacement, return, repossession or otherwise, and all additions and
accessions thereto, and any Document representing or relating to any of the
foregoing at any time.

 

“Investment Property” has the meaning given to such term in the
Code.

 

“Loan Agreement” means that certain Amended and Restated
Revolving Credit Agreement, dated as of July 3, 1999.

 

“Negotiable Collateral” means any and all of Debtor’s presently
existing and hereafter acquired or arising letters of credit, advises of
credit, certificates of deposit, notes, drafts, Instruments, Documents and
Chattel Paper.

 

“Person” means and includes natural persons, corporations,
limited partnerships, general partnerships, limited liability companies,
limited liability partnerships, joint stock companies, joint ventures,
associations, companies, trusts, banks, trust companies, land trusts, business
trusts, or other organizations, irrespective of whether they are legal
entities, and governments and agencies and political subdivisions thereof.

 

“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 Debtor,
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 Debtor 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 Debtor
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 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, any and all other
tangible or intangible property received upon the sale or disposition of
Collateral, and all proceeds of proceeds.

 

5

 

“Rights to Payment” means all Accounts and any and all rights
and claims to the payment or receipt of money or other forms of consideration
of any kind in, to and under all General Intangibles, Negotiable Collateral and
Proceeds thereof.

 

“Secured Obligations” shall have the meaning of “Obligations”
under the Loan Agreement and shall also mean any and all debts, liabilities,
obligations, or undertakings owing by Debtor to Secured Party arising under,
advanced pursuant to, or evidenced by 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, and
including all interest not paid when due and all Secured Party Expenses which
Debtor is required to pay or reimburse pursuant to this Security Agreement, the
Loan Agreement, the other Loan Documents or by law.

 

“Secured Party” means Prospect Medical Holdings, Inc., a
Delaware banking corporation.

 

“Secured Party Expenses” shall mean: any and all costs or
expenses required to be paid by Debtor under this Security Agreement which are
paid or advanced by Secured Party; all costs and expenses of Secured Party,
including its attorneys’ fees and expenses (including attorneys’ fees incurred
pursuant to proceedings arising under the Secured 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 Secured Party, 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.

 

“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 Secured
Party include reasonable estimates (absent manifest error) by Secured Party, as
applicable (in the case of quantitative determinations) and reasonable beliefs
(absent manifest error) by Secured Party, 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.

 

6

 

3.                                       Creation of Security Interest. 
Debtor hereby grants to Secured Party 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.  Debtor acknowledges and
affirms that such security interest in the Collateral has attached to all
Collateral without further act on the part of Secured Party or Debtor.

 

4.                                       Further Assurances.

 

4.1                                 Debtor shall execute and deliver to Secured
Party concurrently with Debtor’s execution of this Security Agreement, and from
time to time at the request of Secured Party, all financing statements,
continuation financing statements, fixture filings, security agreements,
chattel mortgages, assignments, and all other documents that Secured Party may
request, in form satisfactory to Secured Party, to perfect and maintain
perfected Secured Party’s security interests in the Collateral and in order to
consummate fully all of the transactions contemplated by this Security
Agreement and the Loan Agreement. 
Debtor hereby irrevocably makes, constitutes, and appoints Secured Party
(and Secured Party’s officers, employees, or agents) as Debtor’s true and
lawful attorney with power to sign the name of Debtor on any of the
above-described documents or on any other similar documents which need to be
executed, recorded, or filed, and to do any and all things necessary in the
name and on behalf of Debtor in order to perfect, or continue the perfection
of, Secured Party’s security interests in the Collateral.  Debtor agrees that neither Secured Party,
nor any of its designees or attorneys-in-fact, will be liable for any act of
commission or omission, or for any error of judgment or mistake of fact or law
with respect to the exercise of the power of attorney granted under this
Section 4.1, other than as a result of its or their gross negligence or
wilful misconduct.  THE POWER OF ATTORNEY GRANTED UNDER THIS SECTION 4.1
IS COUPLED WITH AN INTEREST AND SHALL BE IRREVOCABLE UNTIL ALL OF THE SECURED
OBLIGATIONS HAVE BEEN INDEFEASIBLY PAID IN FULL, THE LOAN AGREEMENT TERMINATED,
AND ALL DEBTOR’S DUTIES HEREUNDER AND THEREUNDER HAVE BEEN DISCHARGED IN FULL.

 

4.2                                 Without limiting the generality of the
foregoing Section 4.1 or any of the provisions of the Loan Agreement,
Debtor will:  (i) at the request of
Secured Party, mark conspicuously all of its records pertaining to the Collateral
with a legend, in form and substance satisfactory to Secured Party, indicating
that the Collateral is subject to the security interest granted hereby; (ii) at
the request of Secured Party, appear in and defend any action or proceeding
which may affect Debtor’s title to, or the security interest of Secured Party
in, any of the Collateral; and (iii) upon demand of Secured Party, allow
inspection of Collateral by Secured Party or Persons designated by Secured
Party at any time during normal business hours.

 

4.3                                 With respect to the Negotiable Collateral
(other than drafts received in the ordinary course of business so long as no
Event of Default is continuing), Debtor shall, immediately upon request by
Secured Party, endorse (where appropriate) and

 

7

 

assign
the Negotiable Collateral over to Secured Party, and deliver to Secured Party
actual physical possession of the Negotiable Collateral to Secured Party
together with any instruments of transfer or assignment, all in form and
substance satisfactory to Secured Party, in order to fully perfect the security
interest therein of Secured Party.

 

4.4                                 Debtor shall cooperate with Secured Party in
obtaining a control agreement in form and substance satisfactory to Secured
Party with respect to all Deposit Accounts and Investment Property.

 

5.                                        Event of Default. 
Failure by Debtor to make any payment required under the Note when due,
whether for principal, interest, or otherwise, shall constitute an Event of
Default under this Security Agreement.

 

6.                                        Rights and Remedies.

 

6.1                                 During the continuance of an Event of
Default, Secured Party, without notice or demand, may do any one or more of the
following, all of which are authorized by Debtor:

 

(a)                                  Settle or adjust disputes and claims directly
with Account Debtors for amounts and upon terms which Secured Party considers
advisable, and in such cases, Secured Party will credit the Secured Obligations
with only the net amounts received by Secured Party in payment of such disputed
Accounts after deducting all Secured Party Expenses incurred or expended in
connection therewith;

 

(b)                                 Cause Debtor to hold all returned Inventory
in trust for Secured Party, segregate all returned Inventory from all other
property of Debtor or in Debtor’s possession and conspicuously label said
returned Inventory as the property of Secured Party;

 

(c)                                  Without notice to or demand upon Debtor or
any guarantor, make such payments and do such acts as Secured Party considers
necessary or reasonable to protect its security interests in the Collateral.  Debtor agrees to assemble the Collateral if
Secured Party so requires, and to make the Collateral available to Secured
Party as Secured Party may designate. 
Debtor authorizes Secured Party to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or
any part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or Lien that in Secured Party’s determination appears to conflict with
its security interests and to pay all expenses incurred in connection
therewith.  With respect to any of
Debtor’s owned or leased premises, Debtor hereby grants Secured Party a license
to enter into possession of such premises and to occupy the same, without
charge, for up to 120 days in order to exercise any of Secured Party’s rights
or remedies provided herein, at law, in equity, or otherwise;

 

8

 

(d)                                 Without notice to Debtor (such notice being
expressly waived), and without constituting a retention of any collateral in
satisfaction of an obligation (within the meaning of Section 9505 of the
Code), set off and apply to the Secured Obligations any and all (i) balances
and Deposit Accounts of Debtor held by Secured Party, or (ii) indebtedness at
any time owing to or for the credit or the account of Debtor held by Secured
Party;

 

(e)                                  Hold, as cash collateral, any and all
balances and Deposit Accounts of Debtor held by Secured Party, to secure the
full and final repayment of all of the Secured Obligations;

 

(f)                                    Ship, reclaim, recover, store, finish,
maintain, repair, prepare for sale, advertise for sale, and sell (in the manner
provided for herein) the Collateral. 
Secured Party is hereby granted a license or other right to use, without
charge, Debtor’s labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and Debtor’s
rights under all licenses and all franchise agreements shall inure to Secured
Party’s benefit;

 

(g)                                 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 Debtor’s
premises) as Secured Party determines is commercially reasonable.  It is not necessary that the Collateral be
present at any such sale;

 

(h)                                 Secured Party shall give notice of the
disposition of the Collateral as follows:

 

(i)                                     Secured Party shall give Debtor and each
holder of a security interest in the Collateral who has filed with Secured
Party a written request for notice, a notice in writing of the time and place
of public sale, or, if the sale is a private sale or some other disposition
other than a public sale is to be made of the Collateral, then the time on or
after which the private sale or other disposition is to be made;

 

(ii)                                  The notice shall be personally delivered or
mailed, postage prepaid, to Debtor as provided in Section 9 of this
Security Agreement, at least 5 days before the date fixed for the sale, or at
least 5 days before the date on or after which the private sale or other
disposition is to be made; no notice needs to be given prior to the disposition
of any portion of the Collateral that is perishable or threatens to decline
speedily in value or that is of a type customarily sold on a recognized
market.  Notice to Persons other than Debtor
claiming an interest in the Collateral shall be sent to such addresses as they
have furnished to Secured Party;

 

9

 

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

 

(i)                                     Secured Party may credit bid and purchase at
any public sale; and

 

(j)                                     Any deficiency that exists after disposition of
the Collateral as provided above will be paid immediately by Debtor.  Any excess will be returned, without
interest and subject to the rights of third Persons, by Secured Party to
Debtor.

 

6.2                                 Upon the exercise by Secured Party 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, Debtor agrees to execute and deliver, or will
cause the execution and delivery of, all applications, certificates,
instruments, assignments, and other documents and papers that Secured Party or
any purchaser of the Collateral may be required to obtain for such governmental
consent, approval, registration, qualification, or authorization.

 

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

 

7.                                       Secured Party Not Liable.  So
long as Secured Party complies with the obligations, if any, imposed by
Section 9207 of the Code, Secured Party shall not otherwise be liable or
responsible in any way or manner for: (a) the safekeeping of the Collateral;
(b) any loss or damage thereto occurring or arising in any manner or fashion or
from any cause; (c) any diminution in the value thereof; or (d) any act or
default of any carrier, warehouseman, bailee, forwarding agency, or other
person whomsoever.

 

8.                                       Indefeasible Payment.  The
Secured Obligations shall not be considered indefeasibly paid for purposes of this
Security Agreement unless and until all payments to Secured Party are no longer
subject to any right on the part of any Person, including Debtor, Debtor as a
debtor in possession, or any trustee (whether appointed under the Bankruptcy
Code or otherwise) of Debtor or Debtor’s Assets to invalidate or set aside such
payments or to seek to recoup the amount of such payments or any portion
thereof, or to declare same to be fraudulent or preferential.  In the event that, for any reason, any
portion of such payments

 

10

 

to
Secured Party is set aside or restored, whether voluntarily or involuntarily,
after the making thereof, then the obligation intended to be satisfied thereby
shall be revived and continued in full force and effect as if said payment or
payments had not been made.

 

9.                                       Notices.  All notices, requests and
other communications to any party hereunder shall be in writing (including
facsimile transmission or similar writing) and shall be given to such party at
its address or facsimile number set forth on the signature pages hereof or such
other address or facsimile number as such party may hereafter specify by notice
to the other party in accordance with this Section 9.  Each such notice, request or other
communication shall be deemed given on the second business day after mailing; provided
that actual notice, however and from whomever given or received, shall always
be effective on receipt; provided further that notices sent by Secured
Party in connection with Sections 9504 or 9505 of the California Uniform
Commercial Code shall be deemed given when deposited in the mail or personally
delivered, or, where permitted by law, transmitted by facsimile.

 

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 Debtor and Secured Party; provided,
however, that Debtor may not assign this Security Agreement nor delegate
any of its duties hereunder without Secured Party’s prior written consent and
any prohibited assignment or delegation shall be absolutely void.  No consent by Secured Party to an assignment
by Debtor shall release Debtor from the Secured Obligations.  Secured Party may assign this Security
Agreement and delegate its duties hereunder, if any, from time to time to
Imperial Bank or its assigns without prior notice to, or the consent of Debtor
and Debtor agrees to recognize such lender as Secured Party’s assignee under
this Security Agreement.

 

10.2                           Exhibits and Schedules.  All
of the exhibits and schedules attached hereto shall be deemed incorporated by
reference.

 

10.3                           No Presumption Against Any Party. 
Neither this Security Agreement nor any uncertainty or ambiguity herein
shall be construed or resolved against Secured Party or Debtor, 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.

 

10.4                           Amendments and Waivers.  Any
provision of this Agreement 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.

 

11

 

10.5                           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
Secured Party.

 

10.6                           Severability.  The
provisions of this Agreement are severable. 
The invalidity, in whole or in part, of any provision of this Agreement
shall not affect the validity or enforceability of any other of its provisions.  If one or more provisions hereof shall be
declared invalid or unenforceable, the remaining provisions shall remain in
full force and effect and shall be construed in the broadest possible manner to
effectuate the purposes hereof.

 

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, without regard to principles of conflicts of law.

 

12.                                 Subordination of Security Interest. 
Secured Party hereby expressly agrees that the security interests
granted to it under this Security Agreement (“Subordinate Liens”) in the
Collateral shall be second, junior and inferior to any and all liens, rights,
powers, titles and interests of Imperial Bank or its assigns in the Collateral
(“Senior Liens”) granted by Debtor pursuant to that certain Security
Agreement, dated as of
                                       ,
between Debtor and Imperial Bank, and Secured Party agrees that all Senior
Liens shall be unconditionally first, prior and superior to any and Subordinate
Liens in the Collateral.  Secured Party
further agrees that any and all Subordinate Liens shall be and remain expressly
subject and subordinate to any renewal, extension, refinancing, consolidation,
modification or supplement of the liens, rights, titles and interests of the
Senior Liens, as well as any and all increases thereof.

 

[Remainder of this page intentionally left
blank.]

 

12

 

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

 

	
   

  	
   

  	
   ,

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address for Notices:

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Telephone:

  	
   

  	
   

  
	
   

  	
  Facsimile:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PROSPECT MEDICAL HOLDINGS, INC.,

  a Delaware
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address for Notices:

  
	
   

  	
   

  
	
   

  	
  Prospect Medical
  Holdings, Inc.

  515 S.  Flower St.

  Suite 1640

  Los Angeles 90071

  Attn: Jacob Y.  Terner, M.D.

  
	
   

  	
  Telephone:

  	
   

  	
   

  
	
   

  	
  Facsimile:

  	
   

  	
   

  
										

 

13

 

Exhibit 1.1S-1

 

FORM OF

SECURITY
AGREEMENT

(Guarantor)

 

This SECURITY AGREEMENT, dated as of
                   ,
199    , is entered into between
              ,
a               (“Guarantor”)
and Imperial Bank, a California banking corporation (“Bank”), with reference to
the following facts:

 

RECITALS

 

A.                                   Prospect Medical Holdings, Inc., a Delaware
corporation (“Borrower”), and Bank have entered into the Loan Agreement;
and

 

B.                                     In order to induce Bank to continue to make
Loans under the Loan Agreement and as a condition thereof, Guarantor has
executed that certain Continuing Guaranty, of even date herewith (as the same
may be amended, restated, supplemented or otherwise modified from time to time,
the “Guaranty”), pursuant to which Guarantor guarantees the full payment
and performance of all obligations owing to Bank by the Borrower under the Loan
Agreement; and

 

C.                                     In order to induce Bank to continue to make
Loans under the Loan Agreement and as a condition thereof, Guarantor has agreed
to enter into this Security Agreement in order to grant to Bank a first
priority security interest in the Collateral to secure prompt payment and
performance of the Secured Obligations.

 

AGREEMENT

 

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 Loan Agreement.  In addition, as
used herein, the following terms shall have the following meanings:

 

“Account Debtor” means any Person who is or who may become
obligated with respect to, or on account of, an Account.

 

“Accounts” means any and all of Guarantor’s presently existing
and hereafter arising accounts and rights to payment, except those evidenced by
Negotiable Collateral, arising out of the sale or lease of goods or the
rendition of services by Guarantor, irrespective of whether earned by
performance.

 

1

 

 

“Bank” means Imperial Bank, a California banking corporation.

 

“Bank Expenses” shall mean: any and all costs or expenses
required to be paid by Guarantor under this Security Agreement which are paid
or advanced by Bank; all costs and expenses of Bank, 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
Bank, 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.

 

“Guarantor’s Books” means any and all presently existing and
hereafter acquired or created books and records of Guarantor, 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, Deposit
Accounts, Equipment, Inventory, Investment Property, General Intangibles and
Negotiable Collateral.

 

“Chattel Paper” means all writings of whatever sort which
evidence a monetary obligation and a security interest in or lease of specific
goods, whether now existing or hereafter arising.

 

“Code” means the California Uniform Commercial Code except, to
the extent applicable, the Uniform Commercial Code as adopted by the
jurisdiction in which any of the Collateral is located.  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 the following, collectively: any and all of
the Accounts, Deposit Accounts, Equipment, Inventory, Investment Property,
General Intangibles, Negotiable Collateral, and Guarantor’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, Deposit Accounts, Equipment, Inventory, Investment Property, General
Intangibles, Negotiable Collateral, money, or other tangible or intangible
property, resulting from the sale or other disposition of the Accounts, Deposit
Accounts, Equipment, Inventory, Investment Property, General Intangibles, or
Negotiable Collateral, or any portion thereof or interest therein, and the
substitutions, replacements, additions, accessions, products and Proceeds
thereof.

 

“Collateral Access Agreement” means a landlord waiver, mortgagee
waiver, bailee letter, or acknowledgement agreement of any warehouseman,
processor,

 

2

 

lessor,
consignee, or other Person in possession of, having a Lien upon, or having
rights or interests in the Equipment or Inventory, in each case, in form and
substance satisfactory to Bank.

 

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

 

“Documents” means any and all documents of title, bills of
lading, dock warrants, dock receipts, warehouse receipts and other documents of
Guarantor, whether or not negotiable, and includes all other documents which
purport to be issued by a bailee or agent and purport to cover goods in  any bailee’s or agent’s possession which
are either identified or are fungible portions of an identified mass, including
such documents of title made available to Guarantor for the purpose of ultimate
sale or exchange of goods or for the purpose of loading, unloading, storing,
shipping, transshipping, manufacturing, processing or otherwise dealing with
goods in a manner preliminary to their sale or exchange, in each case whether
now existing or hereafter acquired.

 

“Equipment” means any and all of Guarantor’s presently existing
and hereafter acquired machinery, equipment, furniture, furnishings, fixtures,
computer and other electronic data processing equipment and other office
equipment and supplies, computer programs and related data processing software,
spare parts, tools, motors, automobiles, trucks, tractors and other motor
vehicles, rolling stock, jigs, and other goods (other than Inventory, farm
products, and consumer goods), of every kind and description, wherever located,
together with any and all parts, improvements, additions, attachments,
replacements, accessories, and substitutions thereto or therefor, and all other
rights of Guarantor relating thereto, whether in the possession and control of
Guarantor, or in the possession and control of a third party for the account of
Guarantor.

 

“FEIN” means Federal Employer Identification Number.

 

“General Intangibles” means any and all of Guarantor’s presently
existing and hereafter acquired or arising general intangibles and other
intangible personal property of every kind and description, including:

 

(a)                                  contracts and contract rights, noncompetition
covenants, licensing and distribution agreements, indemnity agreements,
guaranties, insurance policies, franchise agreements and lease agreements;

 

(b)                                 deposit accounts, uncertificated certificates
of deposit, uncertificated securities, and interests in any joint ventures,
partnerships or limited liability companies;

 

3

 

(c)                                  choses in action and causes of action
(whether legal or equitable, whether in contract or tort or otherwise, and
however arising);

 

(d)                                 licenses, approvals, permits or any other
authorizations issued by any Government Authority;

 

(e)                                  Intellectual Property Collateral;

 

(f)                                    computer software, magnetic media, electronic
data processing files, systems and programs;

 

(g)                                 rights of stoppage in transit, replevin and
reclamation, rebates or credits of every kind and nature to which Guarantor may
be entitled;

 

(h)                                 purchase orders, customer lists, subscriber
lists and goodwill;

 

(i)                                     monies due or recoverable from pension funds,
refunds and claims for tax or other refunds against any Governmental Authority;
and

 

(j)                                     other contractual, equitable and legal rights
of whatever kind and nature.

 

“Guaranty” has the meaning set forth in Recital B hereto.

 

“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.

 

“Intellectual Property Collateral” means the following Assets
owned or held by Guarantor or in which Guarantor otherwise has any interest,
now existing or hereafter acquired or arising:

 

(a)                                  all patents and patent applications, domestic
or foreign, all licenses relating to any of the foregoing and all income and
royalties with respect to any licenses, all rights to sue for past, present or
future infringement thereof, all rights arising therefrom and pertaining thereto
and all reissues, divisions, continuations, renewals, extensions and
continuations in-part thereof;

 

(b)                                 all copyrights and applications for
copyright, domestic or foreign, together with the underlying works of
authorship (including titles), whether or not the underlying works of
authorship have been published and whether said copyrights are statutory or
arise under the common law, and all other rights and works of authorship, all
rights, claims and demands in any way relating to any such copyrights or works,
including

 

4

 

royalties
and rights to sue for past, present or future infringement, and all rights of
renewal and extension of copyright;

 

(c)                                  all state (including common law), federal and
foreign trademarks, service marks and trade names, and applications for
registration of such trademarks, service marks and trade names, all licenses
relating to any of the foregoing and all income and royalties with respect to
any licenses, whether registered or unregistered and wherever registered, all
rights to sue for past, present or future infringement or unconsented use
thereof, all rights arising therefrom and pertaining thereto and all reissues,
extensions and renewals thereof;

 

(d)                                 all trade secrets, confidential information,
customer lists, license rights, advertising materials, operating manuals,
methods, processes, know-how, sales literature, sales and operating plans,
drawings, specifications, blue prints, descriptions, inventions, name plates
and catalogs; and

 

(e)                                  the entire goodwill of or associated with the
businesses now or hereafter conducted by Guarantor connected with and
symbolized by any of the aforementioned properties and assets.

 

“Inventory” means any and all of Guarantor’s presently existing and
hereafter acquired goods of every kind and description (including goods in
transit) which are held for sale or lease, or to be furnished under a contract
of service or which have been so leased or furnished, or other disposition,
wherever located, including those held for display or demonstration or out on
lease or consignment or are raw materials, work in process, finished materials,
or materials used or consumed, or to be used or consumed, in Guarantor’s
business, and the resulting product or mass, and all repossessed, returned,
rejected, reclaimed and replevied goods, together with all materials, parts,
supplies, packing and shipping materials used or usable in connection with the
manufacture, packing, shipping, advertising, selling or furnishing of such
goods; and all other items hereafter acquired by Guarantor by way of
substitution, replacement, return, repossession or otherwise, and all additions
and accessions thereto, and any Document representing or relating to any of the
foregoing at any time.

 

“Investment Property” has the meaning given to such term in the
Code.

 

“Loan Agreement” means that certain Amended and Restated
Revolving Credit Agreement, dated as of July 3, 1999, between Borrower and
Bank, as may be at any time hereafter supplemented, modified, amended or
restated.

 

“Negotiable Collateral” means any and all of Guarantor’s
presently existing and hereafter acquired or arising letters of credit, advises
of credit, certificates of deposit, notes, drafts, Instruments, Documents and
Chattel Paper.

 

5

 

“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
Guarantor, 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 Guarantor 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 Guarantor 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 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, any
and all other tangible or intangible property received upon the sale or
disposition of Collateral, and all proceeds of proceeds.

 

“Rights to Payment” means all Accounts and any and all rights
and claims to the payment or receipt of money or other forms of consideration
of any kind in, to and under all General Intangibles, Negotiable Collateral and
Proceeds thereof.

 

“Secured Obligations” shall have the meaning of “Guaranteed
Obligations” under the Guaranty and shall also mean any and all debts,
liabilities, obligations, or undertakings owing by Guarantor to Bank arising
under, advanced pursuant to, or evidenced by 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, and including all interest not paid when due and all Bank Expenses
which Guarantor is required to pay or reimburse pursuant to this Security
Agreement, the Loan Agreement, the other Loan Documents or by law.

 

“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 Bank
include reasonable estimates (absent manifest error) by Bank, as applicable (in
the case of quantitative determinations) and reasonable beliefs (absent
manifest error) by Bank, 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.

 

6

 

3.                                       Creation of Security Interest. 
Guarantor hereby grants to Bank 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.  Guarantor acknowledges and
affirms that such security interest in the Collateral has attached to all
Collateral without further act on the part of Bank or Guarantor.

 

4.                                       Further Assurances.

 

4.1                                 Guarantor shall execute and deliver to Bank
concurrently with Guarantor’s execution of this Security Agreement, and from
time to time at the request of Bank, all financing statements, continuation
financing statements, fixture filings, security agreements, chattel mortgages,
assignments, and all other documents that Bank may request, in form
satisfactory to Bank, to perfect and maintain perfected Bank’s security
interests in the Collateral and in order to consummate fully all of the
transactions contemplated by this Security Agreement and the Loan
Agreement.  Guarantor hereby irrevocably
makes, constitutes, and appoints Bank (and Bank’s officers, employees, or
agents) as Guarantor’s true and lawful attorney with power to sign the name of
Guarantor on any of the above-described documents or on any other similar
documents which need to be executed, recorded, or filed, and to do any and all
things necessary in the name and on behalf of Guarantor in order to perfect, or
continue the perfection of, Bank’s security interests in the Collateral.  Guarantor agrees that neither Bank, nor any
of its designees or attorneys-in-fact, will be liable for any act of commission
or omission, or for any error of judgment or mistake of fact or law with
respect to the exercise of the power of attorney granted under this
Section 4.1, other than as a result of its or their gross negligence or
wilful misconduct.  THE POWER OF ATTORNEY GRANTED UNDER THIS
SECTION 4.1 IS COUPLED WITH AN INTEREST AND SHALL BE IRREVOCABLE UNTIL ALL
OF THE SECURED OBLIGATIONS HAVE BEEN INDEFEASIBLY PAID IN FULL, THE LOAN
AGREEMENT TERMINATED, AND ALL GUARANTOR’S DUTIES HEREUNDER AND THEREUNDER HAVE
BEEN DISCHARGED IN FULL.

 

4.2                                 Without limiting the generality of the
foregoing Section 4.1 or any of the provisions of the Loan Agreement,
Guarantor will:  (i) at the request of
Bank, mark conspicuously all of its records pertaining to the Collateral with a
legend, in form and substance satisfactory to Bank, indicating that the
Collateral is subject to the security interest granted hereby; (ii) at the
request of Bank, appear in and defend any action or proceeding which may affect
Guarantor’s title to, or the security interest of Bank in, any of the
Collateral; and (iii) upon demand of Bank, allow inspection of Collateral by
Bank or Persons designated by Bank at any time during normal business hours.

 

4.3                                 With respect to the Negotiable Collateral
(other than drafts received in the ordinary course of business so long as no
Event of Default is continuing), Guarantor shall, immediately upon request by
Bank, endorse (where appropriate) and assign the Negotiable Collateral over to
Bank, and deliver to Bank actual physical possession of the Negotiable
Collateral to Bank together with any instruments of transfer or assignment, all
in

 

7

 

form
and substance satisfactory to Bank, in order to fully perfect the security
interest therein of Bank.

 

4.4                                 Guarantor shall cooperate with Bank in
obtaining a control agreement in form and substance satisfactory to Bank with
respect to all Deposit Accounts and Investment Property.

 

5.                                       Representations and Warranties.  In
order to induce Bank to enter into the Loan Agreement and to make Loans to
Borrower, in addition to the representations and warranties of Guarantor set forth
in the Guaranty which are incorporated herein by this reference, Guarantor
represents and warrants to Bank that on the Closing Date and thereafter on the
date of each and every Borrowing:

 

5.1                                 Location of Chief Executive office and
Collateral; Fein.  Guarantor’s chief executive office is located at the address set
forth in Schedule 1,  and
all other locations where Guarantor conducts business or Collateral is kept are
set forth in Schedule 1. 
Guarantor’s Fein
is                                                   .

 

5.2                                 Locations
of Guarantor’s Books.  All
locations where Guarantor’s Books are kept, including all equipment necessary
for accessing Guarantor’s Books and the names and addresses of all service
bureaus, computer or data processing companies and other Persons keeping
Guarantor’s Books or collecting Rights to Payment for Guarantor, are set forth
in Schedule 1.

 

5.3                                 Trade Names
and Trade Styles.  All
trade names and trade styles under which Guarantor presently conducts its
business operations are set forth in Schedule 1, and, except as set forth in Schedule 1.  Guarantor has not, at any time during the
preceding five years: (i) been known as or used any other corporate, trade or
fictitious name; (ii) changed its name; (iii) been the surviving or resulting
corporation in a merger or consolidation; or (iv) acquired through asset
purchase or otherwise any business of any Person.

 

5.4                                 Ownership of Collateral. 
Guarantor is and shall continue to be the sole and complete owner of the
Collateral, free from any Lien other than Permitted Liens.

 

5.5                                 Enforceability; Priority of Security
Interest, (i) This Agreement
creates a security interest which is enforceable against the Collateral in
which Guarantor now has rights and will create a security interest which is
enforceable against the Collateral in which Guarantor hereafter acquires rights
at the time Guarantor acquires any such rights, and (ii) Bank has a perfected
security interest (to the fullest extent perfection can be obtained by filing,
notification to third parties, possession or control) and a first priority
security interest in the Collateral in which Guarantor now has rights (subject
only to Permitted Liens), and will have a perfected and first priority security
interest in the Collateral in which Guarantor hereafter acquires rights at the
time Guarantor acquires any such rights (subject only to

 

8

 

Permitted
Liens), in each case securing the payment and performance of the Secured
Obligations.

 

5.6                                 Other Financing Statements. 
Other than financing statements in favor of Bank and financing
statements filed in connection with Permitted Liens, no effective financing
statement naming Guarantor 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.

 

5.7                                 Rights to Payment.

 

(a)                                  the Rights to Payment represent valid,
binding and enforceable obligations of the Account Debtors or other Persons obligated
thereon, representing undisputed, bona fide transactions completed in
accordance with the terms and provisions contained in any documents related
thereto, and are and will be genuine, free from Liens, adverse claims,
counterclaims, setoffs, defaults, disputes, defenses, retainages, holdbacks and
conditions precedent of any kind of character, except to the extent reflected
by Guarantor’s reserves for uncollectible Rights to Payment;

 

(b)                                 all Account Debtors and other obligors on the
Rights to Payment are Solvent and generally paying their debts as they come
due;

 

(c)                                  all Rights to Payment comply with all
applicable laws concerning form, content and manner of preparation and
execution, including where applicable any federal and state consumer credit laws;

 

(d)                                 Guarantor has not assigned any of its rights
under the Rights to Payment other than to Bank pursuant to this Agreement;

 

(e)                                  all statements made, all unpaid balances and
all other information in Guarantor’s Books and other documentation relating to
the Rights to Payment are true and correct and in all respects what they
purport to be; and

 

(f)                                    Guarantor has no knowledge of any fact or
circumstance which would impair the validity or collectibility of any of the
Rights to Payment.

 

5.8                                 Inventory.  No Inventory is stored with
any bailee, warehouseman or similar Person or on any premises leased to
Guarantor, nor has any Inventory been consigned to Guarantor or consigned by
Guarantor to any Person or is held by Guarantor for any Person under any “bill and
hold” or other arrangement.

 

9

 

5.9                                 Intellectual
Property.

 

(a)                                  except as set forth in Schedule 1,
Guarantor (directly or through any Subsidiary) does not own, possess or use
under any licensing arrangement any patents, copyrights, trademarks, service
marks or trade names, nor is there currently pending before any Governmental
Authority any application for registration of any patent, copyright, trademark,
service mark or trade name;

 

(b)                                 all patents, copyrights, trademarks, service
marks and trade names are subsisting and have not been adjudged invalid or
unenforceable in whole or in part;

 

(c)                                  all maintenance fees required to be paid on
account of any patents have been timely paid for maintaining such patents in
force, and, to the best of Guarantor’s knowledge, each of the patents is valid
and enforceable and Guarantor has notified Bank in writing of all prior art
(including public uses and sales) of which it is aware;

 

(d)                                 to the best of Guarantor’s knowledge, no
infringement or unauthorized use presently is being made of any Intellectual
Property Collateral by any Person;

 

(e)                                  Guarantor is the sole and exclusive owner of
the Intellectual Property Collateral and the past, present and contemplated
future use of such Intellectual Property Collateral by Guarantor has not, does
not and will not infringe or violate any right, privilege or license agreement
of or with any other Person; and

 

(f)                                    Guarantor owns, has material rights under, is
a party to, or an assignee of a party to all material licenses, patents, patent
applications, copyrights, service marks, trademarks, trademark applications,
trade names and all other intellectual property Collateral necessary to
continue to conduct its business as heretofore conducted.

 

5.10                           Equipment.

 

(a)                                  none of the Equipment or other Collateral is
affixed to real property, except Collateral with respect to which Guarantor has
supplied Bank with all information and documentation necessary to make all
fixture filings required to perfect and protect the priority of Bank’s security
interest in all such Collateral which may be fixtures as against all Persons
having an interest in the premises to which such property may be affixed; and

 

(b)                                 none of the Equipment is leased from or to
any Person, except as set forth in Schedule 1.

 

10

 

5.11                           Deposit Accounts.  The names and addresses of
all financial institutions at which Guarantor maintains its Deposit Accounts,
and the account numbers and account names of such Deposit Accounts, are set
forth in Schedule 1.

 

5.12                           Investment
Property.  All
Investment Property is set forth and described in Schedule 1,  and all financial institutions or financial
intermediaries holding or in possession of such Investment Property are set
forth in Schedule 1.

 

6.                                       Covenants.  In addition to the covenants
of Guarantor set forth in the Loan Agreement which are incorporated herein by
this reference, Guarantor agrees that from the Closing Date and thereafter
until the indefeasible payment, performance and satisfaction in full of the
Secured Obligations, and all of Bank’s obligations under the Loan Agreement to
Guarantor have been terminated:

 

6.1                                 Defense of Collateral. 
Guarantor shall appear in and defend any action, suit or proceeding
which may affect its title to or right or interest in, or Bank’s right or
interest in, the Collateral.

 

6.2                                 Preservation of Collateral. 
Guarantor shall do and perform all acts that may be necessary and
appropriate to maintain, preserve and protect the Collateral.

 

6.3                                 Compliance with Laws, Etc. 
Guarantor shall comply with all laws, regulations and ordinances, and
all policies of insurance, relating to the possession, operation, maintenance
and control of the Collateral.

 

6.4                                 Location of Guarantor’s Books and Chief
Executive Office.  Guarantor shall: (i) keep all Guarantor’s
Books at the locations set forth in Schedule 1; and (ii) maintain
the location of Guarantor’s chief executive office or principal place of
business at the location set forth in Schedule 1; provided, however,
that Guarantor may amend Schedule 1 so long as (i) such amendment
occurs by written notice to Bank not less than 30 days prior to the date on
which the location of Guarantor’s Books or Guarantor’s chief executive office
or principal place of business is changed, and (ii) at the time of such written
notification, Guarantor executes and delivers any financing statement
amendments or fixture filing amendments necessary to perfect or continue
perfected Bank’s security interests in the Collateral and also obtains for Bank
such duly executed Collateral Access Agreement as Bank shall require with
respect to such new location.

 

6.5                                 Location of Collateral. 
Guarantor shall keep the Inventory and Equipment only at the locations
identified on Schedule 1; provided, however, that
Guarantor may amend Schedule 1 so long as (i) such amendment occurs
by written notice to Bank not less than 30 days prior to the date on which the
Inventory or Equipment is moved to such new location, (ii) such new location is
within the continental United States, and (iii) at the time of such written
notification, Guarantor executes and delivers any financing statements or
fixture filings necessary to perfect and continue perfected Bank’s security interests
in such

 

11

 

Assets
and also obtains for Bank such duly executed Collateral Access Agreement as
Bank shall require with respect to such new location.

 

6.6                                 Change in Name, Trade Name, Trade Style or
FEIN.  Guarantor shall not change its name, trade
names, trade styles or FEIN, or add any new trade names or trade styles from
those listed on Schedule 1; provided, however, that
Guarantor may amend Schedule 1 so long as (i) such amendment occurs
by written notice to Bank not less than 30 days prior to the date on which such
new name, trade name, trade style or FEIN becomes effective, and (ii) at the
tune of such written notification, Guarantor executes and delivers any
financing statement amendments or fixture filing amendments necessary to
continue perfected Bank’s security interests in the Collateral.

 

6.7                                 Maintenance of Records. 
Guarantor shall keep separate, accurate and complete Guarantor’s Books,
disclosing Bank’s security interest hereunder.

 

6.8                                 Disposition of Collateral. 
Guarantor shall not surrender or lose possession of (other than to
Bank), sell, lease, rent, or otherwise dispose of or transfer any of the
Collateral or any right or interest therein, except to the extent permitted by
the Loan Agreement.

 

6.9                                 Liens.  Guarantor shall keep the
Collateral free of all Liens except Permitted Liens.

 

6.10                           Leased Premises.  At Bank’s request, Guarantor shall obtain
from each Person from whom Guarantor leases any premises at which any
Collateral is at any time present, such Collateral Access Agreements as Bank
may require.

 

6.11                           Rights to Payment.  Guarantor shall:

 

(a)                                  perform and observe all terms and provisions
of the Rights to Payment and all obligations to be performed or observed by it
in connection therewith and maintain the Rights to Payment in full force and
effect;

 

(b)                                 enforce all Rights to Payment strictly in
accordance with their terms, and take all such action to such end as may be
from time to time reasonably requested by Bank;

 

(c)                                  if, to the knowledge of Guarantor, any
dispute, setoff, claim, counterclaim or defense shall exist or shall be
asserted or threatened with respect to a Right to Payment (whether with or
against Guarantor or otherwise), disclose such fact fully to Bank in
Guarantor’s Books relating to such Account or other Right to Payment and in
connection with any report furnished by Guarantor to Bank relating to such
Right to Payment;

 

12

 

(d)                                 furnish to Bank such information and reports
regarding the Rights to Payment as Bank may request, and upon request of Bank
make such demands and requests for information and reports as Guarantor is
entitled to make in respect of the Rights to Payment; and

 

(e)                                  upon the occurrence of any Event of Default,
establish such lockbox or similar arrangements for the payment of the Rights to
Payment as Bank shall require.

 

6.12                           Inventory.  Guarantor shall:

 

(a)                                  at such times as Bank shall request, prepare
and deliver to Bank periodic reports pertaining to the Inventory, in form and
substance satisfactory to Bank;

 

(b)                                 upon the request of Bank, take a physical
listing of the Inventory and promptly deliver a copy of such physical listing
to Bank;

 

(c)                                  not store any Inventory with a bailee,
warehouseman or similar Person
or on premises leased to Guarantor without obtaining for Bank such Collateral
Access Agreements as Bank shall require; and

 

(d)                                 not dispose of any Inventory on a
bill-and-hold, guaranteed sale, sale and return, sale on approval, consignment
or similar basis, nor acquire any Inventory from any Person on any such basis,
without in each case giving Bank prior written notice thereof.

 

6.13                           Equipment.  Guarantor shall, upon Bank’s request,
deliver to Bank a report of each item of Equipment, in form and substance
satisfactory to Bank.

 

6.14                           Intellectual Property Collateral.  Guarantor shall:

 

(a)                                  not enter into any agreement (including any
license or royalty agreement) pertaining to any Intellectual Property
Collateral without in each case giving Bank prior notice thereof;

 

(b)                                 not allow or suffer any Intellectual Property
Collateral to become abandoned, nor any registration thereof to be terminated,
forfeited, expired or dedicated to the public;

 

(c)                                  promptly give Bank notice of any rights
Guarantor may obtain to any new patentable inventions, trademarks,
servicemarks, copyrightable works or other new Intellectual Property
Collateral, prior to the filing of any application for registration thereof;
and

 

13

 

(d)                                 diligently prosecute all applications for
patents, copyrights and trademarks, and file and prosecute any and all
continuations, continuations-in-part, applications for reissue, applications
for certificate of correction and like matters as shall be reasonable and
appropriate in accordance with prudent business practice, and promptly and
timely pay any and all maintenance, license, registration and other fees, taxes
and expenses incurred in connection with any Intellectual Property Collateral.

 

7.                                       Collection of Rights to Payment. 
Guarantor or its agents shall endeavor in the first instance to collect
all amounts due or to become due on or with respect to the Rights to
Payment.  At the request of Bank after
the occurrence of an Event of Default, all remittances received by Guarantor
shall be held in trust for Bank, and, in accordance with Bank’s instructions,
remitted to Bank or deposited to an account with Bank in the form received
(with any necessary endorsements or instruments of assignment or transfer).

 

8.                                       Events of Default.  The
occurrence of any Event of Default under the Loan Agreement shall constitute an
event of default (“Event of Default”) under this Security Agreement.

 

9.                                       Rights and Remedies.

 

9.1                                 During the continuance of an Event of Default,
Bank, without notice or demand, may do any one or more of the following, all of
which are authorized by Guarantor:

 

(a)                                  Settle or adjust disputes and claims directly
with Account Debtors for amounts and upon terms which Bank considers advisable,
and in such cases, Bank will credit the Secured Obligations with only the net
amounts received by Bank in payment of such disputed Accounts after deducting
all Bank Expenses incurred or expended in connection therewith;

 

(b)                                 Cause Guarantor to hold all returned Inventory
in trust for Bank, segregate all returned Inventory from all other property of
Guarantor or in Guarantor’s possession and conspicuously label said returned
Inventory as the property of Bank;

 

(c)                                  Without notice to or demand upon Guarantor or
any guarantor, make such payments and do such acts as Bank considers necessary
or reasonable to protect its security interests in the Collateral.  Guarantor agrees to assemble the Collateral
if Bank so requires, and to make the Collateral available to Bank as Bank may
designate.  Guarantor authorizes Bank to
enter the premises where the Collateral is located, to take and maintain
possession of the Collateral, or any part of it, and to pay, purchase, contest,
or compromise any encumbrance, charge, or Lien that in Bank’s determination
appears to conflict with its security interests and to pay all expenses
incurred in connection therewith.  With
respect to any of Guarantor’s owned or leased premises, Guarantor hereby grants
Bank

 

14

 

a
license to enter into possession of such premises and to occupy the same,
without charge, for up to 120 days in order to exercise any of Bank’s rights or
remedies provided herein, at law, in equity, or otherwise;

 

(d)                                 Without notice to Guarantor (such notice
being expressly waived), and without constituting a retention of any collateral
in satisfaction of an obligation (within the meaning of Section 9505 of
the Code), set off and apply to the Secured Obligations any and all (i) balances
and Deposit Accounts of Guarantor held by Bank, or (ii) indebtedness at any
time owing to or for the credit or the account of Guarantor held by Bank;

 

(e)                                  Hold, as cash collateral, any and all
balances and Deposit Accounts of Guarantor held by Bank, to secure the full and
final repayment of all of the Secured Obligations;

 

(f)                                    Ship, reclaim, recover, store, finish,
maintain, repair, prepare for sale, advertise for sale, and sell (in the manner
provided for herein) the Collateral. 
Bank is hereby granted a license or other right to use, without charge,
Guarantor’s labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and Guarantor’s
rights under all licenses and all franchise agreements shall inure to Bank’s
benefit;

 

(g)                                 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 Guarantor’s
premises) as Bank determines is commercially reasonable.  It is not necessary that the Collateral be
present at any such sale;

 

(h)                                 Bank shall give notice of the disposition of
the Collateral as follows:

 

(i)                                     Bank shall give Guarantor and each holder of
a security interest in the Collateral who has filed with Bank a written request
for notice, a notice in writing of the time and place of public sale, or, if
the sale is a private sale or some other disposition other than a public sale
is to be made of the Collateral, then the time on or after which the private
sale or other disposition is to be made;

 

(ii)                                  The notice shall be personally delivered or
mailed, postage prepaid, to Guarantor as provided in Section 15 of
the Guaranty, at least 5 days before the date fixed for the sale, or at least 5
days before the date on or after which the private sale or other disposition is
to be made; no notice needs to be given prior to the disposition of any portion
of the Collateral that is perishable or threatens to decline speedily in value
or that is of a type customarily sold on a recognized market.  Notice to Persons other

 

15

 

than
Guarantor claiming an interest in the Collateral shall be sent to such
addresses as they have furnished to Bank;

 

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

 

(i)                                     Bank may credit bid and purchase at any
public sale; and

 

(j)                                     Any deficiency that exists after disposition of the Collateral
as provided above will be paid immediately by Guarantor.  Any excess will be returned, without
interest and subject to the rights of third Persons, by Bank to Guarantor.

 

9.2                                 Upon the exercise by Bank 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, Guarantor agrees to execute and deliver, or will cause
the execution and delivery of, all applications, certificates, instruments,
assignments, and other documents and papers that Bank or any purchaser of the
Collateral may be required to obtain for such governmental consent, approval,
registration, qualification, or authorization.

 

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

 

10.                                 Bank Not Liable.  So
long as Bank complies with the obligations, if any, imposed by
Section 9207 of the Code, Bank shall not otherwise be liable or responsible
in any way or manner for: (a) the safekeeping of the Collateral; (b) any loss
or damage thereto occurring or arising in any manner or fashion or from any
cause; (c) any diminution in the value thereof; or (d) any act or default of
any carrier, warehouseman, bailee, forwarding agency, or other person
whomsoever.

 

11.                                 Indefeasible Payment.  The
Secured Obligations shall not be considered indefeasibly paid for purposes of
this Security Agreement unless and until all payments to Bank are no longer
subject to any right on the part of any Person, including Guarantor, Guarantor
as a debtor in possession, or any trustee (whether appointed under the
Bankruptcy Code or otherwise) of Guarantor or Guarantor’s Assets to invalidate
or set aside such payments or to seek to recoup the amount of such payments or
any portion thereof, or to

 

16

 

declare
same to be fraudulent or preferential. 
In the event that, for any reason, any portion of such payments to Bank
is set aside or restored, whether voluntarily or involuntarily, after the
making thereof, then the obligation intended to be satisfied thereby shall be
revived and continued in full force and effect as if said payment or payments
had not been made.

 

12.                                 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 and to the addresses set forth in Section 15 of the
Guaranty.

 

13.                                 General Provisions.

 

13.1                           Successors and Assigns.  This Security Agreement shall bind and inure
to the benefit of the respective successors and assigns of Guarantor and Bank; provided,
however, that Guarantor may not assign this Security Agreement nor
delegate any of its duties hereunder without Bank’s prior written consent and
any prohibited assignment or delegation shall be absolutely void.  No consent by Bank to an assignment by
Guarantor shall release Guarantor from the Secured Obligations.  Bank reserves its right to sell, assign,
transfer, negotiate, or grant participations in all or any part of, or any
interest in, the rights and benefits hereunder pursuant to and in accordance
with the provisions of the Loan Agreement. 
In connection therewith, Bank may disclose all documents and information
which Bank now or hereafter may have relating to Guarantor, Guarantor’s
business, or the Collateral to any such prospective or actual Transferee,
subject to the terms of Section 9.5(e) of the Loan Agreement.

 

13.2                           Exhibits and Schedules.  All of the exhibits and schedules attached
hereto shall be deemed incorporated by reference.

 

13.3                           No Presumption Against Any Party.  Neither this Security
Agreement nor any uncertainty or ambiguity herein shall be construed or
resolved against Bank or Guarantor, 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.

 

13.4                           Amendments and Waivers.  Any provision of this Agreement or any of
the Loan Documents to which Guarantor 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.

 

13.5                           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

 

17

 

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 Bank.

 

13.6                           Severability.  The provisions of this Agreement are
severable.  The invalidity, in whole or
in part, of any provision of this Agreement shall not affect the validity or
enforceability of any other of its provisions. 
If one or more provisions hereof shall be declared invalid or
unenforceable, the remaining provisions shall remain in full force and effect
and shall be construed in the broadest possible manner to effectuate the
purposes hereof.

 

14.                                 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, without regard to principles of conflicts of law.

 

15.                                 Judicial Reference.

 

15.1                           Other than (i) nonjudicial foreclosure and all matters in connection
therewith regarding security interests in real or personal property; or (ii)
the appointment of a receiver, or the exercise of other provisional remedies
(any and all of which may be initiated pursuant to applicable law), each
controversy, dispute or claim between the parties arising out of or relating to
this Security Agreement, which controversy, dispute or claim is not settled in
writing within thirty (30) days after the “Claim Date” (defined as the date on
which Guarantor or Bank gives written notice to the other that a controversy,
dispute or claim exists), will be settled by a reference proceeding in
California in accordance with the provisions of Section 638 et seq.  of the California Code of Civil Procedure,
or their successor section (“CCP”), which shall constitute the exclusive
remedy for the settlement of any controversy, dispute or claim concerning this
Security Agreement, including whether such controversy, dispute or claim is
subject to the reference proceeding and except as set forth above, the parties
waive their rights to initiate any legal proceedings against each other in any
court or jurisdiction other than the Superior Court in the County where any
real property Collateral is located or Los Angeles County if none (the
“Court”).  The referee shall be a retired
Judge of the Court selected by mutual agreement of the parties, and if they
cannot so agree within forty-five (45) days after the Claim Date, the referee
shall be promptly selected by the Presiding Judge of the Court (or his
representative).  The referee shall be
appointed to sit as a temporary judge, with all of the powers for a temporary
judge, as authorized by law, and upon selection should take and subscribe to
the oath of office as provided for in Rule 244 of the California Rules of Court
(or any subsequently enacted Rule). 
Each party shall have one peremptory challenge pursuant to CCP
§170.6.  The referee shall (a) be
requested to set the matter for hearing within sixty (60) days after the Claim
Date and (b) try any and all issues of law or fact and report a statement of
decision upon them, if possible, within ninety (90) days of the Claim
Date.  Any decision rendered by the
referee

 

18

 

will
be final, binding and conclusive and judgment shall be entered pursuant to CCP
§644 in any court in the State of California having jurisdiction.  Any party may apply for a reference
proceeding at any time after thirty (30) days following notice to any other
party of the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial.  All
discovery permitted by this Security Agreement shall be completed no later than
fifteen (15) days before the first hearing date established by the
referee.  The referee may extend such
period in the event of a party’s refusal to provide requested discovery for any
reason whatsoever, including, without limitation, legal objections raised to
such discovery or unavailability of a witness due to absence or illness.  No party shall be entitled to “priority” in
conducting discovery.  Depositions may
be taken by either party upon seven (7) days written notice, and request for
production or inspection of documents shall be responded to within ten (10)
days after service.  All disputes
relating to discovery which cannot be resolved by the parties shall be
submitted to the referee whose decision shall be final and binding upon the
parties.  Pending appointment of the
referee as provided herein, the Superior Court is empowered to issue temporary
and/or provisional remedies, as appropriate.

 

15.2                           Except as expressly set forth in this Security Agreement, the referee
shall determine the manner in which the reference proceeding is conducted
including the time and place of all hearings, the order of presentation of
evidence, and all other questions that arise with respect to the course of the
reference proceeding.  All proceedings
and hearings conducted before the referee, except for trial, shall be conducted
without a court reporter except that when any party so requests, a court
reporter will be used at any hearing conducted before the referee.  The party making such a request shall have
the obligation to arrange for and pay for the court reporter.  The costs of the court reporter at the trial
shall be borne equally by the parties.

 

15.3                           The referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the State of California.  The rules of evidence applicable to
proceedings at law in the State of California will be applicable to the
reference proceeding.  The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will
be binding upon the parties.  The
referee shall issue a single judgment at the close of the reference proceeding
which shall dispose of all of the claims of the parties that are the subject of
the reference.  The parties hereto
expressly reserve the right to contest or appeal from the final judgment or any
appealable order or appealable judgment entered by the referee.  The parties hereto expressly reserve the
right to findings of fact, conclusions of laws, a written statement of
decision, and the right to move for a new trial or a different judgment, which
new trial, if granted, is also to be a reference proceeding under this
provision.

 

15.4                           In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration.  The arbitration will be conducted by a
retired judge of the Court, in accordance with the California Arbitration Act,
§1280 through §1294.2

 

19

 

of
the CCP as amended from time to time. 
The limitations with respect to discovery as set forth hereinabove shall
apply to any such arbitration proceeding.

 

[Remainder of this page intentionally left
blank.]

 

20

 

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

 

	
   

  	
                                                                    ,

  
	
   

  	
  a               
                 corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
  IMPERIAL
  BANK,

  
	
   

  	
  a
  California banking corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
						

 

21

 

	
  SCHEDULE 1

  
	
   

  	
   

  
	
  Section 5.1

  	
  Location
  of Chief Executive Office and Collateral

  
	
   

  	
   

  
	
  Section 5.2

  	
  Locations
  of Guarantor’s Books

  
	
   

  	
   

  
	
  Section 5.3

  	
  Trade
  Names or Trade Styles

  
	
   

  	
   

  
	
  Section 5.9

  	
  Intellectual
  Property

  
	
   

  	
   

  
	
  Section 5.10

  	
  Equipment Leases

  
	
   

  	
   

  
	
  Section 5.11

  	
  Deposit Accounts

  
	
   

  	
   

  
	
  Section 5.12

  	
  Investment
  Property

  

 

22

 

Exhibit 1.1S-2

 

FORM OF
SECURITY AGREEMENT

(Physician Group)

 

This SECURITY AGREEMENT, dated as
of                  ,
199  , is entered into between
                                                           ,
a professional medical corporation (“Physician Group”)
and                                                           ,
a
               
corporation (“Manager”), with reference to the following facts:

 

RECITALS

 

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

 

B.                                       Physician 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.

 

AGREEMENT

 

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 Physician 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 Physician 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.

 

1

 

“Code” means the
                                    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 Physician
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 Physician 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.

 

2

 

“Physician Group’s Books” means any and all presently existing
and hereafter acquired or created books and records of Physician Group, 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 Physician 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 Physician 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 Physician 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 Physician 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

 

3.                                       Creation of Security Interest. 
Physician 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.  Physician 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
Physician Group.

 

4.                                       Further Assurances.

 

4.1                                 Further Assurances. 
Physician Group shall execute and deliver to Manager concurrently with
Physician 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. 
Physician Group represents and warrants to Manager that:

 

5.1                                 Trade Names and Trade Styles Physician Group presently does not conduct
its business operations under any trade names or trade styles other than
                                           .

 

5.2                                 Ownership of Collateral. 
Physician 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 Physician Group now has rights and will create
a security interest which is enforceable against the Collateral in which
Physician Group hereafter acquires rights at the time Physician 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 Physician Group now has rights, and will have a perfected and first
priority security interest in the Collateral in which Physician Group hereafter
acquires rights at the time Physician 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 Physician 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.

 

4

 

6.                                       Covenants.  In addition to the covenants
of Physician Group set forth in the Management Agreement which are incorporated
herein by this reference, Physician 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 Physician
Group’s obligations under the Management Agreement to Manager have been
terminated:

 

6.1                                 Defense of Collateral. 
Physician 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. 
Physician 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.  Physician 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. 
Physician Group shall keep separate, accurate and complete Physician
Group’s Books, disclosing Manager’s security interest hereunder.

 

6.5                                 Disposition of Collateral. 
Physician 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.  Physician 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. 
Physician 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. 
Physician 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 Physician Group in this Security Agreement
shall have been untrue in any material respect when made.

 

5

 

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 Physician Group:

 

(a)                                  Make such payments and do such acts as it
considers necessary or reasonable to protect Manager’s security interest in the
Collateral.  Physician Group agrees to
assemble and make available any or all of the Collateral if Manager so
requires.  Physician 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 Physician
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 Physician 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 Physician 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 Physician 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 Physician 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)

 

6

 

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)                                    Physician 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 Physician 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 Physician 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, Physician 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 Physician 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            of
the Management Agreement to the following addresses:

 

7

 

	
   

  	
  If
  to Physician Group:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Facsimile
  No:(      )

  
	
   

  	
   

  	
  Telephone
  No:(      )

  
	
   

  	
   

  	
   

  
	
   

  	
  If
  to Manager:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Facsimile
  No:(      )

  
	
   

  	
   

  	
  Telephone
  No:(      )

  

 

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 Physician Group and
Manager; provided,  however, that Physician 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 Physician Group shall release Physician 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, Physician Group, and Physician
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 Physician 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 Physician 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

 

8

 

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
                 
                
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
                          .

 

12.                                 No Violation of Applicable Law.  To
the extent that any lien or security interest on any Asset(s) granted by
Physician 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 Physician 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.]

 

9

 

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

 

 

	
   

  	
                                                                                           
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  Title:

  	
   

  
						

 

10

 

Exhibit 1.1S-3

 

FORM OF

SECURITY AGREEMENT - STOCK PLEDGE (BORROWER)

 

This SECURITY AGREEMENT - STOCK PLEDGE (this “Agreement”), dated
as of
                    ,
199  , is entered into by and between PROSPECT MEDICAL HOLDINGS,
INC., a Delaware corporation (“Pledgor”), and IMPERIAL BANK, a
California banking corporation (“Pledgee”), with reference to the
following facts:

 

RECITALS

 

A.                                   Pledgor and Pledgee have entered into that
certain Amended and Restated Revolving Credit Agreement, dated as of
July 3, 1999 (as the same may be amended, restated, modified or
supplemented from time to time in accordance with its terms, the “Loan
Agreement”).

 

B.                                     Pledgor has agreed to provide additional
security for its obligations under the Loan Agreement by pledging to Pledgee
all of Pledgor’s right, title and interest-in and to the Collateral (as
hereinafter defined), to secure the Secured Obligations (as hereinafter
defined).

 

AGREEMENT

 

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 mutually agree as follows:

 

1.                                       Definitions and Construction.

 

(a)                                  Definitions.  All initially capitalized
terms used but not defined in this Agreement shall have the meanings ascribed
to such terms in the Loan Agreement.  In
addition, the following terms, as used in this Agreement, have the following
meanings:

 

“Certificated Security, “Endorsement”, “Registered
Form”, “Security”, “Security Certificate”, and “Uncertificated
Security” have the meanings ascribed to such terms in Division 8 of the Code.

 

“Code” means the California Uniform Commercial Code, as amended
and supplemented from time to time, and any successor statute.

 

“Collateral” means all of the following:

 

(i)                                                                             (    )
shares of the outstanding Common Stock of Company, which shares constitute one
hundred percent (100%) of the capital stock of Company, and all of the
hereafter-acquired shares of Common Stock of Company in

 

1

 

which
Pledgor has an interest at any time while this Agreement is in effect
(collectively, the “Shares”);

 

(ii)                                  All of Pledgor’s presently existing and
hereafter arising stock subscription warrants, stock options, or other rights
to purchase Company’s capital stock and all rights represented thereby (the “Options”);
and

 

(iii)                               The proceeds of each of the foregoing,
including any and all dividends, cash, stock, instruments, and other property
from time to time received, receivable, or otherwise distributed in respect of
or in exchange for any of the Shares or Options (the “Proceeds”).

 

“Company” means
                                                               
, a
                                    
corporation.

 

“Event of Default” has the meaning given to such term in Section 11.

 

“Secured Obligations” means Obligations (as defined in the Loan
Agreement) and the obligations of Pledgor hereunder.

 

“33 Act” means the Securities Act of 1933, as amended and
supplemented from time to time, and any successor statute, and any and all
rules promulgated in connection therewith.

 

(b)                                 Construction. 
Unless the context of this 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 Agreement to “determination” by Pledgee include reasonable
estimates (absent manifest error) by Pledgee, as applicable (in the case of quantitative
determinations) and reasonable beliefs (absent manifest error) by Pledgee, as
applicable (in the case of qualitative determinations).  The words “hereof,” “herein,” “hereby,”
“hereunder,” and similar terms in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement.  Article, section, subsection, exhibit, and
schedule references are to this Agreement unless otherwise specified.

 

2.                                       Pledge.  As security for the prompt
and complete payment and performance of the Secured Obligations, Pledgor hereby
delivers, pledges, and grants to Pledgee a continuing security interest in all
of Pledgor’s now-owned or hereafter-acquired right, title, and interest in and
to the Collateral.

 

3.                                       Control of Collateral. 
Pledgor shall promptly deliver to Pledgee any and all Certificated
Securities comprising all or any portion of the Collateral for Pledgee to hold
pursuant to the terms hereof, and if such Certificated Securities are in
Registered Form, (i) such

 

2

 

Certificated
Securities shall be endorsed in blank by an effective undated Endorsement, in
form and substance satisfactory to Pledgee in its sole and absolute discretion,
or (ii) Pledgor shall cause the Company or the Company’s transfer agent to
transfer such Securities into the name of Pledgee and issue a replacement
Security Certificate evidencing the same in the name of Pledgee.  In the event that all or any portion of the
Collateral consists of Uncertificated Securities, Pledgor shall cause the
Company to enter into a control agreement with respect to such Uncertificated
Securities, in form and substance satisfactory to Pledgee in its sole and
absolute discretion.

 

4.                                       Further Assurances. 
Pledgor agrees that it shall cooperate with Pledgee and shall execute
and deliver, or cause to be executed and delivered, to Pledgee all stock
powers, proxies, assignments, financing statements, instruments, control
agreements and other documents, and shall take all further action, at the
expense of Pledgor, from time to time requested by Pledgee, in order to
maintain a continuing, first-priority, perfected security interest in the
Collateral in favor of Pledgee, and to enable Pledgee to exercise and enforce
its rights and remedies hereunder with respect to the Collateral, and Pledgor
agrees that it shall execute and deliver to Pledgee at Pledgee’s request any
further applications, agreements, documents and instruments, and shall perform
any and all acts deemed necessary by Pledgee to carry into effect the terms,
conditions, and provisions of this Agreement and the transactions connected
herewith.  Should Pledgor fail to
execute or deliver any such applications, agreements, documents, financing statements
and instruments, or to perform any such acts, Pledgor acknowledges that Pledgee
may execute and deliver the same and perform such acts in the name of Pledgor
and on its behalf as its attorney-in-fact in accordance with Section 13.

 

5.                                       Pledgee’s Duties. 
Pledgee shall not have any duties with respect to the Collateral other
than the duty to use reasonable care if the Collateral is in its
possession.  In accordance with
Section 9207 of the Code, Pledgee shall be deemed to have used reasonable
care if it observes substantially the same standard of care with respect to the
custody or preservation of the Collateral as it observes with respect to
similar assets owned by Pledgee. 
Without limiting the generality of the foregoing, Pledgee shall be under
no obligation to take any steps necessary to preserve rights in the Collateral
against any other parties, to sell the same if it threatens to decline in
value, or to exercise any rights represented thereby (including rights with
respect to calls, conversions, exchanges, maturities, or tenders); provided,
however, that Pledgee may, at its option, do so, and any and all
expenses incurred in connection therewith shall be for the account of Pledgor.

 

6.                                       Voting Rights; Dividends; Etc.

 

6.1                                 During the term of this Agreement, and as
long as no Event of Default is continuing:

 

(a)                                  Pledgor shall be entitled to exercise any and
all voting and other consensual rights pertaining to the Shares or any part
thereof; provided, however, no vote shall be cast or any consent,
waiver or ratification given or any action taken which would violate

 

3

 

or
be inconsistent with the terms of this Agreement, the Loan Agreement or any
other instrument or agreement referred to therein or herein, or which could
have the effect of impairing the value of the Collateral or any part thereof or
the position or interest of Pledgee therein.

 

(b)                                 Pledgor shall be entitled to receive and
retain any and all dividends and distributions paid in respect of the Shares
not otherwise prohibited by the Loan Agreement; provided, however,
that any and all:

 

(i)                                     dividends and distributions paid or payable
other than in cash in respect of, and any and all additional Shares or
instruments or other property received, receivable, or otherwise distributed in
respect of, or in exchange for, any Shares;

 

(ii)                                  dividends and distributions paid or payable
in cash in respect of any Shares in connection with a partial or total
liquidation or dissolution, merger, consolidation of the Company, or any
exchange of stock, conveyance of assets, or similar corporate reorganization;
and

 

(iii)                               cash paid with respect to, payable, or
otherwise distributed on redemption of, or in exchange for, any Shares,

 

shall be forthwith delivered to Pledgee to hold as Collateral and
shall, if received by Pledgor, be received in trust for the benefit of Pledgee,
be segregated from the other property or funds of Pledgor, and be forthwith
delivered to Pledgee as Collateral in the same form as so received (with any
necessary endorsement), and, if deemed appropriate by Pledgee, Pledgor shall
take such actions, including the actions described in Section 2, as
Pledgee may require.

 

6.2                                 Upon the occurrence of an Event of Default or
if any amounts shall be due and payable (whether by acceleration, maturity, or
otherwise) under any of the Secured Obligations, all rights of Pledgor to
exercise the voting and other consensual rights that it would otherwise be
entitled to exercise pursuant to Section 6.1 (a) and to receive the
dividends and distributions that it would otherwise be authorized to receive
and retain pursuant to Section 5.1(b) shall, at Pledgee’s option, cease,
and all such rights shall, at Pledgee’s option, thereupon become vested in
Pledgee, and Pledgee shall, at its option, thereupon have the sole right to
exercise such voting and other consensual rights and to receive and hold as
Collateral such dividends and interest payments.  Any payments received by Pledgor contrary to the provisions of
this Section 6.2 shall be held in trust by Pledgor for the benefit of
Pledgee, shall be segregated from other funds of Pledgor, and shall be promptly
paid over to Pledgee, with any necessary endorsement.

 

7.                                       Representations, Warranties, and Covenants.  In
order to induce Pledgee to enter into the Loan Agreement and make and continue
to make Loans to Pledgor, Pledgor hereby warrants, represents, and covenants
that:

 

4

 

7.1                                 There are no restrictions upon the transfer
of any of the Collateral to or by Pledgee and Pledgor is the sole beneficial
owner of the Collateral and has the right to pledge and grant a security
interest in or otherwise transfer such Collateral free of any encumbrances or
rights of third Persons.

 

7.2                                 All of the Collateral is and shall remain
free from all Liens except as created hereby. 
Pledgor shall not, without Pledgee’s prior written consent,
sell or otherwise dispose of any of the Collateral.

 

7.3                                 The execution and delivery of this Agreement,
and the completion of the actions described in Section 3, creates a valid,
perfected and first-priority security interest in the Collateral in favor of
Pledgee, and all actions necessary or desirable to such perfection have been
duly taken.

 

7.4                                 No authorization or other action by, and no
notice to or filing with, any Governmental Authority is required either: (a)
for the grant by Pledgor of the security interest granted hereby or for the
execution, delivery, or performance of this Agreement by Pledgor; (b) for the
perfection of or exercise by Pledgee of its rights and remedies hereunder
except as may be required in connection with a disposition of the Collateral by
laws affecting the offering and sale of securities generally; or (c) for the
exercise by Pledgee of the voting or other rights provided for in this
Agreement or the remedies in respect of the Collateral pursuant to this
Agreement except as may be required in connection with a disposition of the
Collateral by laws affecting the offering and sale of securities generally.

 

7.5                                 The pledge of the Collateral pursuant to this
Agreement, and the making of the loans in accordance with the terms of the Loan
Agreement, does not violate Regulation T, U, or X of the Board of Governors of
the Federal Reserve System.

 

7.6                                 The Company presently has issued and outstanding
                                         
(                )
shares of Common Stock of which one hundred percent (100%) is owned by Pledgor
and they constitute, respectively, all of the capital stock of Company and the
Shares referenced herein.

 

7.7                                 There are no presently existing Options.

 

7.8                                 All of the outstanding Shares have been duly
and validly issued by the Company, and they are fully paid and nonassessable.

 

7.9                                 Pledgor has made its own arrangements for
keeping informed of changes or potential changes affecting the Collateral
(including, but not limited to, rights to convert, rights to subscribe, payment
of dividends, reorganization or other exchanges, tender offers, and voting
rights), and Pledgor agrees that Pledgee shall not have any responsibility or
liability for informing Pledgor of any such changes or potential changes or for
taking any action or omitting to take any action with respect thereto.

 

5

 

7.10                           Pledgor shall at all times keep its books and
records concerning the Collateral at its chief executive office.  Pledgor shall not change the location of its
chief executive office without giving Pledgee at least thirty (30) days’ prior
written notice thereof.

 

7.11                           Pledgor shall prevent the Company from
issuing any additional Shares or Options.

 

8.                                       Share Adjustments.  In
the event that during the term of this Agreement any reclassification,
readjustment, or other change is declared or made in the capital structure of
any Company, Pledgor shall give Pledgee prompt written notice thereof and all
new substituted and additional shares or other Securities, issued or issuable
to Pledgor by reason of any such change or exercise shall be subject to the
security interest created hereby and Pledgor shall as soon as practicable but
in no event more than 10 days thereafter, take all of the actions required
under Section 3 with respect thereto.

 

9.                                       Options.  In the event that during the
term of this Agreement Options shall be issued or exercised in connection with
the Collateral, Pledgor shall give Pledgee prompt written notice thereof and
such Options acquired by Pledgor shall be immediately assigned by Pledgor to
Pledgee pursuant to an assignment agreement in form and substance satisfactory
to Pledgee in its sole and absolute discretion, and all new shares or other
Securities so acquired by Pledgor shall also be subject to the security
interest created hereby and Pledgor shall as soon as practicable but in no
event more than 10 days thereafter, take all of the actions required under
Section 3 with respect thereto.

 

10.                                 Consent.  Pledgor hereby consents that,
from time to time, before or after the occurrence or existence of any Event of
Default with or without notice to or assent from Pledgor, any other security at
any time held by or available to Pledgee for any of the Secured Obligations or
any other security at any time held by or available to Pledgee of any other
person, firm, or corporation secondarily or otherwise liable for any of the
Secured Obligations, may be exchanged, surrendered, or released and any of the
Secured Obligations may be changed, altered, renewed, extended, continued,
surrendered, compromised, waived, or released, in whole or in part, as Pledgee
may see fit.  Pledgor shall remain bound
under this Agreement notwithstanding any such exchange, surrender, release,
alteration, renewal, extension, continuance, compromise, waiver, or inaction,
or extension of further credit.

 

11.                                 Events of Default.  The
occurrence of an Event of Default under the Loan Agreement shall constitute an
event of default (“Event of Default”) under this Agreement.

 

12.                                 Remedies Upon Default.

 

12.1                           Upon the occurrence of an Event of Default,
Pledgee shall have, in addition to any other rights given by law or in this Agreement,
in the Loan Agreement, or in any other agreement between Pledgee and Pledgor,
all of the rights and remedies with respect

 

6

 

to
the Collateral of a secured party under the Code, and also shall have, without
limitation, the following rights, which Pledgor hereby agrees to be
commercially reasonable:

 

(a)                                  to receive all amounts payable in respect of
the Collateral to Pledgor under Section 6.1 (b) hereof;

 

(b)                                 to register all or any part of the Collateral
on the books of the Company in Pledgee’s name or the name of its nominee or
nominees;

 

(c)                                  to vote all or any part of the Shares
(whether or not transferred into
the name of the Pledgee) in accordance with Section 6.2 hereof, and give
all consents, waivers and ratifications in respect of the Collateral and
otherwise act with respect thereto as though it were the outright owner
thereof; PLEDGOR HEREBY IRREVOCABLY
CONSTITUTES AND APPOINTS PLEDGEE THE PROXY AND ATTORNEY-IN-FACT OF PLEDGOR,
COUPLED WITH AN INTEREST, WITH FULL POWER OF SUBSTITUTION FOR ANY AND ALL OF
SUCH PURPOSES; WHICH PROXY AND POWER OF ATTORNEY SHALL CONTINUE IN FULL FORCE
AND EFFECT AND TERMINATE UPON THE EARLIER TO OCCUR OF (a) UPON THE INDEFEASIBLE
PAYMENT IN FULL OF THE SECURED OBLIGATIONS, AND (b) TEN (10) YEARS FROM THE
DATE HEREOF.

 

(d)                                 at any time or from time to time, to sell,
assign and deliver, or grant options to purchase, all or any part of the
Collateral, or any interest therein, at any public or private sale, without
demand of performance, advertisement or notice of intention to sell or of the
time or place of sale or adjournment thereof or to redeem or otherwise (all of
which are hereby waived by Pledgor), for cash, on credit or for other property,
for immediate or future delivery without any assumption of credit risk, and for
such price or prices and on such terms as the Pledgee in its absolute
discretion may determine; provided, that at least five (5) days notice
of the time and place of any such sale shall be given to Pledgor.  Pledgee shall not be obligated to make any
such sale of Collateral regardless of whether any such notice of sale has
therefore been given.  Pledgor hereby
waives any other requirement of notice, demand, or advertisement for sale, to
the extent permitted by law.  Pledgor
hereby waives and releases to the fullest extent permitted by law any right or
equity of redemption with respect to the Collateral, whether before or after
sale hereunder, and all rights, if any, of marshalling the Collateral and any other
security for the Secured Obligations or otherwise.  At any such sale, unless prohibited by applicable law, Pledgee
may bid for and purchase all or any part of the Collateral so sold free from
any such right or equity of redemption. 
Pledgee shall not be liable for failure to collect or realize upon any
or all of the Collateral or for any delay in so doing nor shall Pledgee be
under any obligation to take any action whatsoever with regard thereto;

 

(e)                                  to buy the Collateral, in its own name, or in
the name of a designee or nominee. 
Pledgee shall have the right to execute any document or form, in its
name or in the name of the Pledgor, that may be necessary or desirable in
connection with such sale of the Collateral.

 

7

 

(f)                                    to sell all or any part of the Collateral by
a private placement, restricting bidders and prospective purchasers to those
who will represent and agree that they are purchasing for investment only and
not for distribution.  In so doing,
Pledgee may solicit offers to buy the Collateral, or any part of it for cash,
from a limited number of investors deemed by Pledgee, in its reasonable
judgment, to be responsible parties who might be interested in purchasing the
Collateral.  If Pledgee shall solicit
such offers from not less than four (4) such investors, then the acceptance by
Pledgee of the highest offer obtained therefore shall be deemed to be a
commercial reasonable method of disposition of such Collateral, even though the
sales price established and/or obtained may be substantially less than the
price that would be obtained pursuant to a public offering.  Notwithstanding the foregoing, should
Pledgee determine that, prior to any public offering of any securities
contained in the Collateral, such securities should be registered under the ‘33
Act and/or registered or qualified under any other federal or state law, and
that such registration and/or qualification is not practical, Pledgor agrees
that it will be commercially reasonable if a private sale is arranged so as to
avoid a public offering even if offers are solicited from fewer than four (4)
investors, and even though the sales price established and/or obtained may be
substantially less than the price that would be obtained pursuant to a public
offering.

 

13.                                 Pledgee as Pledgor’s Attorney-in Fact. 
Pledgor hereby irrevocably appoints Pledgee as its attorney-in-fact,
coupled with an interest, (i) to arrange for the register, at any time after
the occurrence of an Event of Default, of the Collateral on the books of the
Company to the name of Pledgee or to the name of Pledgee’s nominee and (ii) to
receive, endorse and collect all instruments made payable to Pledgor of any
dividend, distribution or other payment on account of the Collateral, or any
part thereof, and to give full discharge for the same and to execute and file
governmental notifications and reporting forms.  Pledgor hereby further authorizes Pledgee to perform any and all
acts which Pledgee deems necessary for the protection and preservation of the
Collateral or of the value of Pledgee’s security interest therein, including
but not limited to receiving income thereon as additional security hereunder,
and all expenses paid or incurred by Pledgee in connection therewith shall constitute
Bank Expenses.  Pledgor hereby further
grants to Pledgee a power of attorney coupled with an interest to execute all
agreements, forms, applications, documents and instruments and to take all
actions and do all things as could be executed, taken, or done by Pledgor in
connection with the protection and preservation of the Collateral or this
Agreement.  This power of attorney is
irrevocable and authorizes Pledgee to act for Pledgor in connection with the
matters described herein without notice to or demand upon Pledgor.

 

14.                                 General Provisions.

 

14.1                           Cumulative Remedies; No Prior Recourse to
Collateral.  The enumeration herein of Pledgee’s rights
and remedies is not intended to be exclusive, and such rights and remedies are
in addition to and not by way of limitation of any other rights or remedies
that the Pledgee may have under the Loan Agreement, the Loan Documents, the
Code, or other applicable law.  Pledgee
shall have the right, in its sole discretion, to determine which

 

8

 

rights
and remedies are to be exercised and in which order.  The exercise of one right or remedy shall not preclude the
exercise of any others, all of which shall be cumulative.

 

14.2                           No Implied Waivers.  No
act, failure, or delay by Pledgee shall constitute a waiver of any of its
rights and remedies.  No single or
partial waiver by Pledgee of any provision of this Agreement or any other Loan
Document, or of a breach or default hereunder or thereunder, or of any right or
remedy which the Pledgee may have, shall operate as a waiver of any other
provision, breach, default, right, or remedy or of the same provision, breach,
default, right, or remedy on a future occasion.  No waiver by Pledgee shall affect its rights to require strict performance
of this Agreement.

 

14.3                           Notices.  All notices or demands by any
party hereto to the other party and relating to this Agreement shall be sent in
accordance with the terms of Section 9.1 of the Loan Agreement.

 

14.4                           Successors and Assigns. 
This Agreement shall bind the successors and assigns of Pledgor, and
shall inure to the benefit of the successors and assigns of Pledgee; provided,
however, that Pledgor may not assign this Agreement nor delegate any of
its duties hereunder without Pledgee’s prior written consent and any prohibited
assignment shall be absolutely void. 
Pledgee may assign this Agreement and its rights and duties hereunder
and no consent or approval by Pledgor is required in connection with any such
assignment.  Pledgee reserves the right
to sell, assign, transfer, negotiate, or grant participations in all or any
part of, or any interest in Pledgee’s rights and benefits hereunder.  In connection with any such assignment or
participation, Pledgee may disclose all documents and information which Pledgee
now or hereafter may have relating to Pledgor or Pledgor’s business to any
prospective or actual Transferee, subject to the terms of Section 9.5(e)
of the Loan Agreement.

 

14.5                           Exhibits and Schedules.  All
of the exhibits and schedules attached hereto shall be deemed incorporated by
reference.

 

14.6                           No Presumption Against Any Party. 
Neither this Agreement nor any uncertainty or ambiguity herein shall be
construed or resolved against Pledgor or Pledgee, whether under any rule of
construction or otherwise.  On the
contrary, this 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.

 

14.7                           Section Headings. 
Headings and numbers have been set forth herein for convenience
only.  Unless the contrary is compelled
by the context, everything contained in each section applies equally to
this entire Agreement.

 

14.8                           Severability of Provisions.  If
any provision of this Agreement is for any reason held to be invalid, illegal
or unenforceable in any respect, that provision shall not affect the validity,
legality or enforceability of any other provision of this Agreement.

 

9

 

14.9                           Entire Agreement; Amendments and Waivers. 
This Agreement constitutes the entire agreement between Pledgor and
Pledgee pertaining to the subject matter contained herein.  Any provision of this Agreement 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.

 

14.10                     Counterparts; Telefacsimile Execution. 
This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, shall be deemed to be an original, and all of which, when taken
together, shall constitute but one and the same Agreement.  Delivery of an executed counterpart of this
Agreement by telefacsimile shall be equally as effective as delivery of a
manually executed counterpart of this Agreement.  Any party delivering an executed counterpart of this Agreement by
telefacsimile also shall deliver a manually executed counterpart of this
Agreement but the failure to deliver a manually executed counterpart shall not
affect the validity, enforceability, and binding effect of this Agreement.

 

14.11                     Termination By Pledgee. 
After termination of the Loan Agreement and when Pledgee has received
payment and performance, in full, of the Secured Obligations, Pledgee shall
execute and deliver to Pledgor a termination of all of the security interests
granted by Pledgor hereunder and, to the extent they have been delivered to
Pledgee and not disposed of in accordance with this Agreement, certificates
evidencing the Shares.

 

15.                                 Governing Law; Judicial Reference.

 

15.1                           Governing Law. 
This 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, without regard to principles of conflicts of law.

 

15.2                           Judicial Reference.

 

(a)                                  Other than (i) nonjudicial foreclosure and
all matters in connection therewith regarding security interests in real or
personal property; or (ii) the appointment of a receiver, or the exercise of
other provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is
not settled in writing within thirty (30) days after the “Claim Date”
(defined as the date on which a party subject to this Agreement gives written
notice to all other parties that a controversy, dispute or claim exists), will
be settled by a reference proceeding in California in accordance with the
provisions of Section 638 et  seq.  of the California Code of Civil Procedure, or their successor
section (“CCP”), which shall constitute the exclusive remedy for
the settlement of any controversy, dispute or claim concerning this Agreement,
including whether such controversy,

 

10

 

dispute
or claim is subject to the reference proceeding and except as set forth above,
the parties waive their rights to initiate any legal proceedings against each
other in any court or jurisdiction other than the Superior Court in the County
where the Real Property, if any, is located or Los Angeles County if none (the
“Court”).  The referee shall be a
retired Judge of the Court selected by mutual agreement of the parties, and if
they cannot so agree within forty-five (45) days after the Claim Date, the
referee shall be promptly selected by the Presiding Judge of the Court (or his
representative).  The referee shall be
appointed to sit as a temporary judge, with all of the powers for a temporary
judge, as authorized by law, and upon selection should take and subscribe to
the oath of office as provided for in Rule 244 of the California Rules of Court
(or any subsequently enacted Rule). 
Each party shall have one peremptory challenge pursuant to CCP
§ 170.6.  The referee shall (a) be
requested to set the matter for hearing within sixty (60) days after the date
of selection of the referee and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety (90) days
of the Claim Date.  Any decision
rendered by the referee will be final, binding and conclusive and judgment
shall be entered pursuant to CCP §644 in any court in the State of California
having jurisdiction.  Any party may
apply for a reference proceeding at any time after thirty (30) days following
notice to any other party of the nature of the controversy, dispute or claim, by
filing a petition for a hearing and/or trial. 
All discovery permitted by this Agreement shall be completed no later
than fifteen (15) days before the first hearing date established by the
referee.  The referee may extend such
period in the event of a party’s refusal to provide requested discovery for any
reason whatsoever, including, without limitation, legal objections raised to
such discovery or unavailability of a witness due to absence or illness.  No party shall be entitled to “priority” in
conducting discovery.  Depositions may
be taken by either party upon seven (7) days written notice, and request for
production or inspection of documents shall be responded to within ten (10)
days after service.  All disputes
relating to discovery which cannot be resolved by the parties shall be
submitted to the referee whose decision shall be final and binding upon the
parties.  Pending appointment of the
referee as provided herein, the Superior Court is empowered to issue temporary
and/or provisional remedies, as appropriate.

 

(b)                                 Except as expressly set forth in this
Agreement, the referee shall determine the manner in which the reference
proceeding is conducted including the time and place of all hearings, the order
of presentation of evidence, and all other questions that arise with respect to
the course of the reference proceeding. 
All proceedings and hearings conducted before the referee, except for
trial, shall be conducted without a court reporter except that when any party
so requests, a court reporter will be used at any hearing conducted before the
referee.  The party making such a
request shall have the obligation to arrange for and pay for the court
reporter.  The costs of the court
reporter at the trial shall be borne equally by the parties.

 

(c)                                  The referee shall be required to determine
all issues in accordance with existing case law and the statutory laws of the
State of California.  The rules of
evidence applicable to proceedings at law in the State of California will be
applicable to the reference proceeding. 
The referee shall be empowered to enter equitable as well as legal
relief, to provide all temporary and/or provisional remedies and to enter
equitable orders that will be binding upon the parties.  The referee shall issue a single judgment at
the close of the reference

 

11

 

proceeding
which shall dispose of all of the claims of the parties that are the subject of
the reference.  The parties hereto
expressly reserve the right to contest or appeal from the final judgment or any
appealable order or appealable judgment entered by the referee.  The parties hereto expressly reserve the
right to findings of fact, conclusions of laws, a written statement of decision,
and the right to move for a new trial or a different judgment, which new trial,
if granted, is also to be a reference proceeding under this provision.

 

(d)                                 In the event that the enabling legislation
which provides for appointment of a referee is repealed (and no successor
statute is enacted), any dispute between the parties that would otherwise be
determined by the reference procedure herein described will be resolved and
determined by arbitration.  The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, §1280 through §1294.2 of the CCP
as-amended from time to time.  The
limitations with respect to discovery as set forth hereinabove shall apply to
any such arbitration proceeding.

 

IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first written above.

 

	
   

  	
  “PLEDGOR”

  
	
   

  	
   

  
	
   

  	
  PROSPECT
  MEDICAL HOLDINGS, INC.,

  a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  “Pledgee”

  
	
   

  	
   

  
	
   

  	
  IMPERIAL
  BANK,

  
	
   

  	
  a
  California banking corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
					

 

12

 

CONTROL AGREEMENT

 

                                                                                ,
a                    
corporation (“Company”) hereby acknowledges the terms of the foregoing
Security Agreement - Stock Pledge (the “Agreement”), dated as of
                                  ,
199   , by and between Prospect Medical Holdings, Inc., a
Delaware corporation (“Pledgor”), and Imperial Bank, a California
banking corporation (“Pledgee”). 
Company agrees that it will comply with all instructions from Pledgee
with respect to transfers of all or any part of the Collateral (as defined in
the Agreement), whether by sale or otherwise, without further consent from
Pledgor.  Company further acknowledges
and agrees that it has received a copy of the Agreement and has registered the
pledge of the Collateral (as defined in the Agreement) in the name of
Pledgee.  Company acknowledges that, in
entering into the Loan Agreement (as defined in the Agreement), Pledgee is
relying on the Agreement and on Company’s agreement herein; and Company agrees
that any offset or claim Company may now or hereafter have against Pledgor (or
against Pledgor’s interests, claims or rights) shall be subordinate to the
claims, rights and interests of Pledgee under the Agreement.  The signatories below hereby represent and
warrant to Pledgee that they are duly authorized to execute and deliver this
Control Agreement to Pledgee and thereby bind the Company as set forth herein.

 

 

	
  Dated: 
                     ,
  199   

  	
                                                         ,

  
	
   

  	
  a
                     
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
					

 

13

 

Exhibit 1.1S-4

 

FORM OF

SECURITY AGREEMENT - STOCK PLEDGE (GUARANTOR)

 

This SECURITY AGREEMENT - STOCK PLEDGE (this “Agreement”), dated
as of
                              
, 199  , is entered into by and between                                                   ,
a
                               
corporation (“Pledgor”), and IMPERIAL BANK, a California banking
corporation (“Pledgee”), with reference to the following facts:

 

RECITALS

 

A.                                   Prospect Medical Holdings, Inc., a Delaware
corporation (“Borrower”), and Imperial Bank, a California banking
corporation (“Bank”), have entered into that certain Amended and
Restated Revolving Credit Agreement, dated as of July 3, 1999 (as the same
may be amended, restated, supplemented or otherwise modified from time to time,
the “Loan Agreement”); and

 

B.                                     In order to induce Bank to continue to make
Loans to Borrower under the Loan Agreement and extend financial accommodations
to Borrower, Pledgor has executed that certain Continuing Guaranty, of even
date herewith (as the same may be amended, restated, supplemented or otherwise
modified from time to time, the “Guaranty”), pursuant to which Pledgor
guarantees the full payment and performance of all obligations owing to Bank by
Borrower under the Loan Agreement; and

 

C.                                     In order to induce Bank to continue to make
Loans to Borrower under the Loan Agreement, Pledgor has agreed to enter into
this Agreement in order to grant to Bank a first priority security interest in
the Collateral to secure the Secured Obligations.

 

AGREEMENT

 

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 mutually agree as follows:

 

1.                                       Definitions and Construction.

 

(a)                                  Definitions.  All initially capitalized
terms used but not defined in this Agreement shall have the meanings ascribed
to such terms in the Loan Agreement.  In
addition, the following terms, as used in this Agreement, have the following
meanings:

 

“Certificated Security, “Endorsement”, “Registered
Form”, “Security”, “Security Certificate”, and “Uncertificated
Security” have the meanings ascribed to such terms in Division 8 of the
Code.

 

“Code” means the California Uniform
Commercial Code, as amended and supplemented from time to time, and any
successor statute.

 

1

 

“Collateral” means all of the following:

 

(i)                                                                                   (      )
shares of the outstanding Common Stock of Company, which shares constitute one
hundred percent of (100%) the capital stock of Company, and all of the
hereafter-acquired shares of Common Stock of Company in which Pledgor has an
interest at any time while this Agreement is in effect (collectively, the “Shares”);

 

(ii)                                  All of Pledgor’s presently existing and
hereafter arising stock subscription warrants, stock options, or other rights
to purchase Company’s capital stock and all rights represented thereby (the “Options”);
and

 

(iii)                               The proceeds of each of the foregoing,
including any and all dividends, cash, stock, instruments, and other property
from time to time received, receivable, or otherwise distributed in respect of
or in exchange for any of the Shares or Options (the “Proceeds”).

 

“Company” means
                                                           
                                                                                                    .

 

“Event of Default” has the meaning given to such term in
Section 11.

 

“Secured Obligations” means the Guaranteed Obligations (as
defined in the Guaranty) and the obligations of Pledgor hereunder.

 

“33 Act” means the Securities Act of 1933, as amended and
supplemented from time to time, and any successor statute, and any and all
rules promulgated in connection therewith.

 

(b)                                 Construction. 
Unless the context of this 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 Agreement to “determination” by Pledgee include reasonable
estimates (absent manifest error) by Pledgee, as applicable (in the case of
quantitative determinations) and reasonable beliefs (absent manifest error) by
Pledgee, as applicable (in the case of qualitative determinations).  The words “hereof,” “herein,” “hereby,”
“hereunder,” and similar terms in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement.  Article, section, subsection, exhibit, and
schedule references are to this Agreement unless otherwise specified.

 

2.                                       Pledge.  As security for the prompt
and complete payment and performance of the Secured Obligations, Pledgor hereby
delivers, pledges, and grants to Pledgee a continuing security interest in all
of Pledgor’s now-owned or hereafter-acquired right, title, and interest in and
to the Collateral.

 

2

 

3.                                       Control of Collateral. 
Pledgor shall promptly deliver to Pledgee any and all Certificated
Securities comprising all or any portion of the Collateral for Pledgee to hold
pursuant to the terms hereof, and if such Certificated Securities are in
Registered Form, (i) such Certificated Securities shall be endorsed in blank by
an effective undated Endorsement, in form and substance satisfactory to Pledgee
in its sole and absolute discretion, or (ii) Pledgor shall cause the Company or
the Company’s transfer agent to transfer such Securities into the name of
Pledgee and issue a replacement Security Certificate evidencing the same in the
name of Pledgee.  In the event that all
or any portion of the Collateral consists of Uncertificated Securities, Pledgor
shall cause the Company to enter into a control agreement with respect to such
Uncertificated Securities, in form and substance satisfactory to Pledgee in its
sole and absolute discretion.

 

4.                                       Further Assurances. 
Pledgor agrees that it shall cooperate with Pledgee and shall execute
and deliver, or cause to be executed and delivered, to Pledgee all stock
powers, proxies, assignments, financing statements, instruments, control
agreements and other documents, and shall take all further action, at the
expense of Pledgor, from time to time requested by Pledgee, in order to
maintain a continuing, first-priority, perfected security interest in the
Collateral in favor of Pledgee, and to enable Pledgee to exercise and enforce
its rights and remedies hereunder with respect to the Collateral, and Pledgor
agrees that it shall execute and deliver to Pledgee at Pledgee’s request any
further applications, agreements, documents and instruments, and shall perform
any and all acts deemed necessary by Pledgee to carry into effect the terms,
conditions, and provisions of this Agreement and the transactions connected
herewith.  Should Pledgor fail to
execute or deliver any such applications, agreements, documents, financing
statements and instruments, or to perform any such acts, Pledgor acknowledges
that Pledgee may execute and deliver the same and perform such acts in the name
of Pledgor and on its behalf as its attoraey-in-fact in accordance with
Section 13.

 

5.                                       Pledgee’s Duties. 
Pledgee shall not have any duties with respect to the Collateral other
than the duty to use reasonable care if the Collateral is in its
possession.  In accordance with
Section 9207 of the Code, Pledgee shall be deemed to have used reasonable
care if it observes substantially the same standard of care with respect to the
custody or preservation of the Collateral as it observes with respect to
similar assets owned by Pledgee. 
Without limiting the generality of the foregoing, Pledgee shall be under
no obligation to take any steps necessary to preserve rights in the Collateral
against any other parties, to sell the same if it threatens to decline in
value, or to exercise any rights represented thereby (including rights with
respect to calls, conversions, exchanges, maturities, or tenders); provided,
however, that Pledgee may, at its option, do so, and any and all
expenses incurred in connection therewith shall be for the account of Pledgor.

 

6.                                       Voting Rights; Dividends; Etc.

 

6.1                                 During the term of this Agreement, and as
long as no Event of Default is continuing:

 

(a)                                  Pledgor shall be entitled to exercise any and
all voting and other consensual rights pertaining to the Shares or any part
thereof; provided, however, no vote

 

3

 

shall
be cast or any consent, waiver or ratification given or any action taken which
would violate or be inconsistent with the terms of this Agreement, the Loan
Agreement or any other instrument or agreement referred to therein or herein,
or which could have the effect of impairing the value of the Collateral or any
part thereof or the position or interest of Pledgee therein.

 

(b)                                 Pledgor shall be entitled to receive and
retain any and all dividends and distributions paid in respect of the Shares
not otherwise prohibited by the Loan Agreement; provided, however,
that any and all:

 

(i)                                     dividends and distributions paid or payable
other than in cash in respect of, and any and all additional Shares or
instruments or other property received, receivable, or otherwise distributed in
respect of, or in exchange for, any Shares;

 

(ii)                                  dividends and distributions paid or payable
in cash in respect of any Shares in connection with a partial or total
liquidation or dissolution, merger, consolidation of the Company, or any
exchange of stock, conveyance of assets, or similar corporate reorganization;
and

 

(iii)                               cash paid with respect to, payable, or
otherwise distributed on redemption of, or in exchange for, any Shares, shall
be forthwith delivered to Pledgee to hold as Collateral and shall, if received
by Pledgor, be received in trust for the benefit of Pledgee, be segregated from
the other property or funds of Pledgor, and be forthwith delivered to Pledgee
as Collateral in the same form as so received (with any necessary endorsement),
and, if deemed appropriate by Pledgee, Pledgor shall take such actions,
including the actions described in Section 2, as Pledgee may require.

 

6.2                                 Upon the occurrence of an Event of Default or
if any amounts shall be due and payable (whether by acceleration, maturity, or
otherwise) under any of the Secured Obligations, all rights of Pledgor to
exercise the voting and other consensual rights that it would otherwise be
entitled to exercise pursuant to Section 6.1(a) and to receive the
dividends and distributions that it would otherwise be authorized to receive
and retain pursuant to Section 5.l(b) shall, at Pledgee’s option, cease,
and all such rights shall, at Pledgee’s option, thereupon become vested in
Pledgee, and Pledgee shall, at its option, thereupon have the sole right to
exercise such voting and other consensual rights and to receive and hold as Collateral
such dividends and interest payments. 
Any payments received by Pledgor contrary to the provisions of this
Section 6.2 shall be held in trust by Pledgor for the benefit of Pledgee,
shall be segregated from other funds of Pledgor, and shall be promptly paid
over to Pledgee, with any necessary endorsement.

 

7.                                       Representations, Warranties, and Covenants.  In
order to induce Pledgee to continue to make Loans to Borrower under the Loan
Agreement, Pledgor hereby warrants, represents, and covenants that:

 

4

 

7.1                                 There are no restrictions upon the transfer
of any of the Collateral to or by Pledgee and Pledgor is the sole beneficial
owner of the Collateral and has the right to pledge and grant a security interest
in or otherwise transfer such Collateral free of any encumbrances or rights of
third Persons.

 

7.2                                 All of the Collateral is and shall remain
free from all Liens except as created hereby. 
Pledgor shall not, without Pledgee’s prior written consent, sell or
otherwise dispose of any of the Collateral.

 

7.3                                 The execution and delivery of this Agreement,
and the completion of the actions described in Section 3, creates a valid,
perfected and first-priority security interest in the Collateral in favor of
Pledgee, and all actions necessary or desirable to such perfection have been
duly taken.

 

7.4                                 No authorization or other action by, and no
notice to or filing with, any Governmental Authority is required either: (a)
for the grant by Pledgor of the security interest granted hereby or for the
execution, delivery, or performance of this Agreement by Pledgor; (b) for the
perfection of or exercise by Pledgee of its rights and remedies hereunder
except as may be required in connection with a disposition of the Collateral by
laws affecting the offering and sale of securities generally; or (c) for the
exercise by Pledgee of the voting or other rights provided for in this
Agreement or the remedies in respect of the Collateral pursuant to this
Agreement except as may be required in connection with a disposition of the
Collateral by laws affecting the offering and sale of securities generally.

 

7.5                                 The pledge of the Collateral pursuant to this
Agreement, and the making of the loans in accordance with the terms of the Loan
Agreement, does not violate Regulation T, U, or X of the Board of Governors of
the Federal Reserve System.

 

7.6                                 The Company presently has issued and
outstanding
                                             
(                )
shares of Common Stock of which one hundred percent (100%) is owned by Pledgor
and they constitute, respectively, all of the capital stock of Company and the
Shares referenced herein.

 

7.7                                 There are no presently existing Options.

 

7.8                                 All of the outstanding Shares have been duly
and validly issued by the Company, and they are fully paid and nonassessable.

 

7.9                                 Pledgor has made its own arrangements for
keeping informed of changes or potential changes affecting the Collateral
(including, but not limited to, rights to convert, rights to subscribe, payment
of dividends, reorganization or other exchanges, tender offers, and voting
rights), and Pledgor agrees that Pledgee shall not have any responsibility or
liability for informing Pledgor of any such changes or potential changes or for
taking any action or omitting to take any action with respect thereto.

 

5

 

7.10                           Pledgor shall at all times keep its books and
records concerning the Collateral at its chief executive office.  Pledgor shall not change the location of its
chief executive office without giving Pledgee at least thirty (30) days’ prior
written notice thereof.

 

7.11                           Pledgor shall prevent the Company from
issuing any additional Shares or Options.

 

8.                                       Share Adjustments.  In
the event that during the term of this Agreement any reclassification,
readjustment, or other change is declared or made in the capital structure of
any Company, Pledgor shall give Pledgee prompt written notice thereof and all
new substituted and additional shares or other Securities, issued or issuable
to Pledgor by reason of any such change or exercise shall be subject to the
security interest created hereby and Pledgor shall as soon as practicable but
in no event more than 10 days thereafter, take all of the actions required
under Section 3 with respect thereto.

 

9.                                       Options.  In the event that during the
term of this Agreement Options shall be issued or exercised in connection with
the Collateral, Pledgor shall give Pledgee prompt written notice thereof and
such Options acquired by Pledgor shall be immediately assigned by Pledgor to
Pledgee pursuant to an assignment agreement in form and substance satisfactory
to Pledgee in its sole and absolute discretion, and all new shares or other
Securities so acquired by Pledgor shall also be subject to the security
interest created hereby and Pledgor shall as soon as practicable but in no
event more than 10 days thereafter, take all of the actions required under
Section 3 with respect thereto.

 

10.                                 Consent.  Pledgor hereby consents that,
from time to time, before or after the occurrence or existence of any Event of
Default with or without notice to or assent from Pledgor, any other security at
any time held by or available to Pledgee for any of the Secured Obligations or
any other security at any time held by or available to Pledgee of any other
person, firm, or corporation secondarily or otherwise liable for any of the
Secured Obligations, may be exchanged, surrendered, or released and any of the
Secured Obligations may be changed, altered, renewed, extended, continued,
surrendered, compromised, waived, or released, in whole or in part, as Pledgee
may see fit.  Pledgor shall remain bound
under this Agreement notwithstanding any such exchange, surrender, release,
alteration, renewal, extension, continuance, compromise, waiver, or inaction,
or extension of further credit.

 

11.                                 Event of Default.  The
occurrence of an Event of Default under the Loan Agreement shall constitute an
event of default (“Event of Default”) under this Agreement.

 

12.                                 Remedies Upon Default.

 

12.1                           Upon the occurrence of an Event of Default,
Pledgee shall have, in addition to any other rights given by law or in this
Agreement, in the Loan Agreement, or in any other agreement between Pledgee and
Pledgor, all of the rights and remedies with respect to the Collateral of a
secured party under the Code, and also shall have, without limitation, the
following rights, which Pledgor hereby agrees to be commercially reasonable:

 

6

 

(a)                                  to receive all amounts payable in respect of
the Collateral to Pledgor under Section 6.1(b) hereof;

 

(b)                                 to register all or any part of the Collateral
on the books of the Company in Pledgee’s name or the name of its nominee or
nominees;

 

(c)                                  to vote all or any part of the Shares
(whether or not transferred into the name of the Pledgee) in accordance with
Section 6.2 hereof, and give all consents, waivers and ratifications in
respect of the Collateral and otherwise act with respect thereto as though it
were the outright owner thereof; PLEDGOR
HEREBY IRREVOCABLY CONSTITUTES AND APPOINTS PLEDGEE THE PROXY AND
ATTORNEY-IN-FACT OF PLEDGOR, COUPLED WITH AN INTEREST, WITH FULL POWER OF
SUBSTITUTION FOR ANY AND ALL OF SUCH PURPOSES; WHICH PROXY AND POWER OF ATTORNEY
SHALL CONTINUE IN FULL FORCE AND EFFECT AND TERMINATE UPON THE EARLIER TO OCCUR
OF (a) UPON THE INDEFEASIBLE PAYMENT IN FULL OF THE SECURED OBLIGATIONS, AND
(b) TEN  (10) YEARS FROM THE DATE
HEREOF.

 

(d)                                 at any time or from time to time, to sell,
assign and deliver, or grant options to purchase, all or any part of the
Collateral, or any interest therein, at any public or private sale, without
demand of performance, advertisement or notice of intention to sell or of the
time or place of sale or adjournment thereof or to redeem or otherwise (all of
which are hereby waived by Pledgor), for cash, on credit or for other property,
for immediate or future delivery without any assumption of credit risk, and for
such price or prices and on such terms as the Pledgee in its absolute
discretion may determine; provided, that at least five (5) days notice of the time and place of any such
sale shall be given to Pledgor.  Pledgee
shall not be obligated to make any such sale of Collateral regardless of
whether any such notice of sale has therefore been given.  Pledgor hereby waives any other requirement
of notice, demand, or advertisement for sale, to the extent permitted by
law.  Pledgor hereby waives and releases
to the fullest extent permitted by law any right or equity of redemption with
respect to the Collateral, whether before or after sale hereunder, and all
rights, if any, of marshalling the Collateral and any other security for the
Secured Obligations or otherwise.  At any
such sale, unless prohibited by applicable law, Pledgee may bid for and
purchase all or any part of the Collateral so sold free from any such right or
equity of redemption.  Pledgee shall not
be liable for failure to collect or realize upon any or all of the Collateral
or for any delay in so doing nor shall Pledgee be under any obligation to take
any action whatsoever with regard thereto;

 

(e)                                  to buy the Collateral, in its own name, or in
the name of a designee or nominee. 
Pledgee shall have the right to execute any document or form, in its name
or in the name of the Pledgor, that may be necessary or desirable in connection
with such sale of the Collateral.

 

(f)                                    to sell all or any part of the Collateral by
a private placement, restricting bidders and prospective purchasers to those
who will represent and agree that they are purchasing for investment only and
not for distribution.  In so doing,
Pledgee may solicit offers to buy the Collateral, or any part of it for cash,
from a limited number of investors

 

7

 

deemed
by Pledgee, in its reasonable judgment, to be responsible parties who might be
interested in purchasing the Collateral. 
If Pledgee shall solicit such offers from not less than four (4) such
investors, then the acceptance by Pledgee of the highest offer obtained
therefore shall be deemed to be a commercial reasonable method of disposition
of such Collateral, even though the sales price established and/or obtained may
be substantially less than the price that would be obtained pursuant to a
public offering.  Notwithstanding the
foregoing, should Pledgee determine that, prior to any public offering of any
securities contained in the Collateral, such securities should be registered
under the ‘33 Act and/or registered or qualified under any other federal or
state law, and that such registration and/or qualification is not practical,
Pledgor agrees that it will be commercially reasonable if a private sale is
arranged so as to avoid a public offering even if offers are solicited from
fewer than four (4) investors, and even though the sales price established
and/or obtained may be substantially less than the price that would be obtained
pursuant to a public offering.

 

13.                                 Pledgee as Pledgor’s Attorney-in Fact. 
Pledgor hereby irrevocably appoints Pledgee as its attorney-in-fact,
coupled with an interest, (i) to arrange for the register, at any time after
the occurrence of an Event of Default, of the Collateral on the books of the
Company to the name of Pledgee or to the name of Pledgee’s nominee and (ii) to
receive, endorse and collect all instruments made payable to Pledgor of any
dividend, distribution or other payment on account of the Collateral, or any
part thereof, and to give full discharge for the same and to execute and file
governmental notifications and reporting forms.  Pledgor hereby further authorizes Pledgee to perform any and all
acts which Pledgee deems necessary for the protection and preservation of the
Collateral or of the value of Pledgee’s security interest therein, including but
not limited to receiving income thereon as additional security hereunder, and
all expenses paid or incurred by Pledgee in connection therewith shall
constitute Bank Expenses.  Pledgor
hereby further grants to Pledgee a power of attorney coupled with an interest
to execute all agreements, forms, applications, documents and instruments and
to take all actions and do all things as could be executed, taken, or done by
Pledgor in connection with the protection and preservation of the Collateral or
this Agreement.  This power of attorney
is irrevocable and authorizes Pledgee to act for Pledgor in connection with the
matters described herein without notice to or demand upon Pledgor.

 

14.                                 General Provisions.

 

14.1                           Cumulative Remedies; No Prior Recourse to
Collateral.  The enumeration herein of Pledgee’s rights
and remedies is not intended to be exclusive, and such rights and remedies are
in addition to and not by way of limitation of any other rights or remedies
that the Pledgee may have under the Loan Agreement, the Loan Documents, the
Code, or other applicable law.  Pledgee
shall have the right, in its sole discretion, to determine which rights and
remedies are to be exercised and in which order.  The exercise of one right or remedy shall not preclude the
exercise of any others, all of which shall be cumulative.

 

14.2                           No Implied Waivers.  No
act, failure, or delay by Pledgee shall constitute a waiver of any of its
rights and remedies.  No single or
partial waiver by Pledgee of any provision of this Agreement or any other Loan
Document, or of a breach or default hereunder or thereunder, or of any right or
remedy which the Pledgee may have, shall operate

 

8

 

as
a waiver of any other provision, breach, default, right, or remedy or of the
same provision, breach, default, right, or remedy on a future occasion.  No waiver by Pledgee shall affect its rights
to require strict performance of this Agreement.

 

14.3                           Notices.  All notices or demands by any
party hereto to the other party and relating to this Agreement shall be sent in
accordance with the terms of Section 15 of the Guaranty.

 

14.4                           Successors and Assigns. 
This Agreement shall bind the successors and assigns of Pledgor, and
shall inure to the benefit of the successors and assigns of Pledgee; provided,
however, that Pledgor may not assign this Agreement
nor delegate any of its duties hereunder without Pledgee’s prior written
consent and any prohibited assignment shall be absolutely void.  Pledgee may assign this Agreement and its
rights and duties hereunder and no consent or approval by Pledgor is required
in connection with any such assignment. 
Pledgee reserves the right to sell, assign, transfer, negotiate, or
grant participations in all or any part of, or any interest in Pledgee’s rights
and benefits hereunder.  In connection
with any such assignment or participation, Pledgee may disclose all documents
and information which Pledgee now or hereafter may have relating to Pledgor or
Pledgor’s business to any prospective or actual Transferee, subject to the
terms of Section 9.5(e) of the Loan Agreement.

 

14.5                           Exhibits and Schedules.  All
of the exhibits and schedules attached hereto shall be deemed incorporated by
reference.

 

14.6                           No Presumption Against Any Party. 
Neither this Agreement nor any uncertainty or ambiguity herein shall be
construed or resolved against Pledgor or Pledgee, whether under any rule of
construction or otherwise.  On the
contrary, this 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.

 

14.7                           Section Headings. 
Headings and numbers have been set forth herein for convenience
only.  Unless the contrary is compelled
by the context, everything contained in each section applies equally to
this entire Agreement.

 

14.8                           Severability of Provisions.  If
any provision of this Agreement is for any reason held to be invalid, illegal
or unenforceable in any respect, that provision shall not affect the validity,
legality or enforceability of any other provision of this Agreement.

 

14.9                           Entire Agreement; Amendments and Waivers. 
This Agreement constitutes the entire agreement between Pledgor and
Pledgee pertaining to the subject matter contained herein.  Any provision of this Agreement 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.

 

9

 

14.10                     Counterparts; Telefacsimile Execution. 
This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, shall be deemed to be an original, and all of which, when taken
together, shall constitute but one and the same Agreement.  Delivery of an executed counterpart of this
Agreement by telefacsimile shall be equally as effective as delivery of a
manually executed counterpart of this Agreement.  Any party delivering an executed counterpart of this Agreement by
telefacsimile also shall deliver a manually executed counterpart of this
Agreement but the failure to deliver a manually executed counterpart shall not
affect the validity, enforceability, and binding effect of this Agreement.

 

14.11                     Termination By Pledgee. 
After termination of the Loan Agreement and when Pledgee has received
payment and performance, in full, of the Secured Obligations, Pledgee shall
execute and deliver to Pledgor a termination of all of the security interests
granted by Pledgor hereunder and, to the extent they have been delivered to Pledgee
and not disposed of in accordance with this Agreement, certificates evidencing
the Shares.

 

15.                                 Governing Law; Judicial Reference.

 

15.1                           Governing Law. 
This 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, without regard to principles of conflicts of law.

 

15.2                           Judicial Reference.

 

(a)                                  Other than (i) nonjudicial foreclosure and
all matters in connection therewith regarding security interests in real or
personal property; or (ii) the appointment of a receiver, or the exercise of
other provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is
not settled in writing within thirty (30) days after the “Claim Date” (defined
as the date on which a party subject to this Agreement gives written notice to
all other parties that a controversy, dispute or claim exists), will be settled
by a reference proceeding in California in accordance with the provisions of
Section 638 et  seq. 
of the California Code of Civil Procedure, or their successor
section (“CCP”), which shall constitute the exclusive remedy for
the settlement of any controversy, dispute or claim concerning this Agreement,
including whether such controversy, dispute or claim is subject to the
reference proceeding and except as set forth above, the parties waive their
rights to initiate any legal proceedings against each other in any court or
jurisdiction other than the Superior Court in the County where the Real
Property, if any, is located or Los Angeles County if none (the “Court”).  The referee shall be a retired Judge of the
Court selected by mutual agreement of the parties, and if they cannot so agree
within forty-five (45) days after the Claim Date, the referee shall be promptly
selected by the Presiding Judge of the Court (or his representative).  The referee shall be appointed to sit as a
temporary judge, with all of the powers for a temporary judge, as authorized by
law, and upon selection should take and subscribe to the oath of office as
provided for in Rule 244 of the California Rules of Court (or

 

10

 

any
subsequently enacted Rule).  Each party
shall have one peremptory challenge pursuant to CCP § 170.6.  The referee shall (a) be requested to set
the matter for hearing within sixty (60) days after the date of selection of
the referee and (b) try any and all issues of law or fact and report a
statement of decision upon them, if possible, within ninety (90) days of the
Claim Date.  Any decision rendered by
the referee will be final, binding and conclusive and judgment shall be entered
pursuant to CCP §644 in any court in the State of California having
jurisdiction.  Any party may apply for a
reference proceeding at any time after thirty (30) days following notice to any
other party of the nature of the controversy, dispute or claim, by filing a
petition for a hearing and/or trial. 
All discovery permitted by this Agreement shall be completed no later
than fifteen (15) days before the first hearing date established by the
referee.  The referee may extend such
period in the event of a party’s refusal to provide requested discovery for any
reason whatsoever, including, without limitation, legal objections raised to
such discovery or unavailability of a witness due to absence or illness.  No party shall be entitled to “priority” in
conducting discovery.  Depositions may
be taken by either party upon seven (7) days written notice, and request for
production or inspection of documents shall be responded to within ten (10)
days after service.  All disputes
relating to discovery which cannot be resolved by the parties shall be
submitted to the referee whose decision shall be final and binding upon the
parties.  Pending appointment of the
referee as provided herein, the Superior Court is empowered to issue temporary
and/or provisional remedies, as appropriate.

 

(b)                                 Except as expressly set forth in this
Agreement, the referee shall determine the manner in which the reference
proceeding is conducted including the time and place of all hearings, the order
of presentation of evidence, and all other questions that arise with respect to
the course of the reference proceeding. 
All proceedings and hearings conducted before the referee, except for
trial, shall be conducted without a court reporter except that when any party
so requests, a court reporter will be used at any hearing conducted before the
referee.  The party making such a
request shall have the obligation to arrange for and pay for the court
reporter.  The costs of the court
reporter at the trial shall be borne equally by the parties.

 

(c)                                  The referee shall be required to determine
all issues in accordance with existing case law and the statutory laws of the
State of California.  The rules of
evidence applicable to proceedings at law in the State of California will be
applicable to the reference proceeding. 
The referee shall be empowered to enter equitable as well as legal
relief, to provide all temporary and/or provisional remedies and to enter
equitable orders that will be binding upon the parties.  The referee shall issue a single judgment at
the close of the reference proceeding which shall dispose of all of the claims
of the parties that are the subject of the reference.  The parties hereto expressly reserve the right to contest or
appeal from the final judgment or any appealable order or appealable judgment
entered by the referee.  The parties
hereto expressly reserve the right to findings of fact, conclusions of laws, a
written statement of decision, and the right to move for a new trial or a
different judgment, which new trial, if granted, is also to be a reference
proceeding under this provision.

 

(d)                                 In the event that the enabling legislation which
provides for appointment of a referee is repealed (and no successor statute is
enacted), any dispute between the parties that would otherwise be determined by
the reference procedure herein described will be resolved and determined by
arbitration.  The arbitration will be
conducted by

 

11

 

a
retired judge of the Court, in accordance with the California Arbitration Act,
§1280 through § 1294.2 of the CCP as amended from time to time.  The limitations with respect to discovery as
set forth hereinabove shall apply to any such arbitration proceeding.

 

[Remainder of this page intentionally left
blank.]

 

12

 

IN WITNESS WHEREOF, the parties have executed this
Agreement on the date first written above.

 

	
   

  	
  “PLEDGOR”

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
                                                  ,

  	
   

  
	
   

  	
  a              corporation

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  “Pledgee”

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  IMPERIAL
  BANK,

  	
   

  
	
   

  	
  a
  California banking corporation

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  	
   

  
						

 

13

 

CONTROL AGREEMENT

 

                                                      ,
a
                  corporation
(“Company”) hereby acknowledges the terms of the foregoing Security Agreement -
Stock Pledge (the “Agreement”), dated as of
                     ,
199   , by and between
                                 ,
a         corporation (“Pledgor”),
and Imperial Bank, a California banking corporation (“Pledgee”).  Company agrees that it will comply with all
instructions from Pledgee with respect to transfers of all or any part of the
Collateral (as defined in the Agreement), whether by sale or otherwise, without
further consent from Pledgor.  Company
further acknowledges and agrees that it has received a copy of the Agreement
and has registered the pledge of the Collateral (as defined in the Agreement)
in the name of Pledgee.  Company
acknowledges that, in entering into the Loan Agreement (as defined in the
Agreement), Pledgee is relying on the Agreement and on Company’s agreement
herein; and Company agrees that any offset or claim Company may now or
hereafter have against Pledgor (or against Pledgor’s interests, claims or
rights) shall be subordinate to the claims, rights and interests of Pledgee
under the Agreement.  The signatories
below hereby represent and warrant to Pledgee that they are duly authorized to
execute and deliver this Control Agreement to Pledgee and thereby bind the
Company as set forth herein.

 

	
  Dated:                   ,199    

  	
                                                               ,

  
	
   

  	
  a
                        corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

14

 

Exhibit 2.4(b)

 

FORM OF

NOTICE OF BORROWING

 

To:                                                                              IMPERIAL BANK

201 N.  Figueroa Street

Los Angeles, California 90012

Attn: Roc A. Caldorone

 

This Notice of Borrowing is given pursuant to
Section 2.4(b) of that certain Amended and Restated Revolving Credit
Agreement, dated as of July 3, 1999 (the “Agreement”), by and between
Prospect Medical Holdings, Inc. a Delaware corporation (“Borrower”), and
Imperial Bank.  All initially
capitalized terms used but not defined in this Notice of Borrowing shall have
the meanings assigned to such terms in the Agreement.

 

The undersigned hereby requests a Borrowing
consisting of a Revolving Loan as follows:

 

	
  $
                           
  Minimum of $500,000, plus
  increments of $100,000 in excess of minimum

  

 

The undersigned requests that such Borrowing(s) be made available on
          ,
19   .

 

The undersigned certifies that, as of the date of the requested
Borrowing(s):

 

(a)                                  the representations and warranties of
Borrower contained in the Agreement and the Credit Documents are true and
correct on and as of such date, except to the extent such representations and
warranties expressly relate solely to an earlier date;

 

(b)                                 no Event of Default or Unmatured Event of
Default has occurred or will result from the proposed Borrowing;

 

(c)                                  after giving effect to any Revolving Loan
requested hereby, the aggregate principal amount of Revolving Loans outstanding
plus the Letter of Credit Usage will not exceed the Revolving Credit
Commitment;

 

(d)                                 after giving effect to any Revolving Loan
requested hereby, the aggregate amount of Revolving Loans for working capital outstanding
plus the Letter of Credit Usage shall not exceed the Working Capital
Sublimit;

 

(e)                                  the proceeds of the Revolving Loan requested
hereby shall be used only for the purposes permitted under, and shall not
violate the terms of, Section 6.1 of the Agreement; and

 

1

 

(f)                                    Borrower has satisfied all conditions under
the Agreement to be performed or satisfied by it on or before such date.

 

	
  Dated:        , 19    

  	
  PROSPECT MEDICAL HOLDINGS, INC.,

  
	
   

  	
  a
  Delaware corporation

  
	
   

  	
   

  
	
   

  	
  By.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

2

 

Exhibit 5.3(d)

 

COMPLIANCE
CERTIFICATE

 

To:                              IMPERIAL BANK

201 N Figueroa Street

Los Angeles, CA 90012

Attn:  Mr. Roc A. Caldorone

 

This Compliance Certificate is given pursuant to
Section 5.3(d) of that certain Amended and Restated Revolving Credit
Agreement, dated as of July 3, 1999 (the “Agreement”), by and
between Prospect Medical Holdings, Inc., a Delaware corporation (“Borrower”),
and IMPERIAL BANK, a California banking corporation.  All initially capitalized terms used but not defined in this
Compliance Certificate shall have the meanings assigned to such terms in the
Agreement.

 

THE UNDERSIGNED HEREBY
CERTIFIES THAT:

 

(1)                                  He/She is the duly elected Chief Financial
Officer of Borrower;

 

(2)                                  He/She reviewed the terms of the Agreement
and has made, or has caused to be made under his/her supervision, a detailed
review of the transactions and condition of Borrower during the accounting
period covered by the attached financial statements;

 

(3)                                  The examinations described in Paragraph (2)
above did not disclose, and he/she has no knowledge of, the existence of any
condition or event which constitutes an Unmatured Event of Default or Event of
Default during, or at the end of, the accounting period covered by the attached
financial statements or as of the date of this Compliance Certificate, except
as set forth below; and

 

(4)                                  Schedule 1 attached hereto and incorporated herein by
this reference sets forth financial data and computations evidencing Borrower’s
compliance with those covenants set forth in Sections 6.12 and 6.16 of the
Agreement, all of which data and computations are true, complete and correct.

 

1

 

Described below are the exceptions, if any, to Paragraph (3) above
which list, in detail, the nature of the condition or event, the period during
which it has existed and the action which Borrower has taken, is taking, or
proposes to take with respect to each such condition or event:

 

 

This Compliance Certificate, together with the
computations set forth in Schedule 1 hereto and the financial
statements delivered concurrently herewith in support hereof, are made and
delivered this
                   
day of                          ,
199    .

 

 

	
   

  	
   

  
	
   

  	
  Chief
  Financial Officer

  
	
   

  	
  Prospect
  Medical Holdings, Inc.

  

 

2

 

COMPLIANCE
CERTIFICATE

 

SCHEDULE 1

 

Schedule of Compliance

for the fiscal quarter
ended             ,
199   

 

	
  I.

  	
   

  	
  Section 6.12 - Capital Expenditures

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Borrower’s Capital Expenditures for the
  period from the beginning of the current fiscal year to the end of the
  subject fiscal quarter:

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Permitted
  Capital Expenditures for the subject fiscal year:

  	
   

  	
  $

  	
  750,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  II.

  	
   

  	
  Section 6.16(a) - Current Ratio

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  A.

  	
  Current
  Assets at the end of the subject fiscal quarter:

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  B.

  	
  Current
  Liabilities at the end of the subject fiscal quarter:

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Ratio
  of Current Assets to Current Liabilities (Line A divided by Line B):

  	
   

  	
  :1.0

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Minimum
  required Current Ratio:

  	
   

  	
  0.60:1.0

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  III.

  	
   

  	
  Section 6.16(b) - Consolidated Tangible Net Worth

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  A.

  	
  Current
  fiscal quarter end Consolidated Net Worth:

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  B.

  	
  Base:

  	
   

  	
  $

  	
  3,900,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  C.

  	
  plus; on
  a cumulative basis from 4/1/99, one hundred percent (100%) of all
  extraordinary gains, proceeds from the sale of capital stock, and equity
  issued in connection with any mergers and acquisitions permitted under the
  Agreement:

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  D.

  	
  plus; on
  a cumulative basis from 4/1/99, seventy percent (70%) of positive
  Consolidated Net Income:

  	
   

  	
  $

  	
   

  	
   

  
										

 

3

 

	
   

  	
   

  	
  E.

  	
  plus;
  on a cumulative basis from 4/1/99, sixty percent (60%) of Borrower’s IBNR Expense for the current
  fiscal quarter:

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  F.

  	
  Sum
  of (Lines B, C, D and E):

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  G.

  	
  Is
  Line A less than the number on Line F above?

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  IV.

  	
   

  	
  Section 6.16(c) - Leverage Ratio

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  A.

  	
  Borrower’s
  and Subsidiaries’ consolidated Debt:

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  B.

  	
  Consolidated
  EBITDA for the current fiscal quarter:

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  C.

  	
  plus;
  sixty percent (60%) of the IBNR Expense amount for the current fiscal
  quarter:

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  D.

  	
  Sum
  of B plus C:

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  E.

  	
  Amount
  in Line D multiplied by 4:

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  F.

  	
  Ratio
  of line A to line E:

  	
   

  	
       : 1.0

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  G.

  	
  Maximum
  Leverage Ratio Allowed for the period of 06/30/99 to 9/30/99:

  	
   

  	
  4.00:1.0

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  H.

  	
  Maximum
  Leverage Ratio Allowed for the period of 10/1/99 and thereafter:

  	
   

  	
  3.50:1.00

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  V.

  	
   

  	
  Section 6.16(d) - Coverage Ratio

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  A.

  	
  Consolidated
  EBITDAR for the current fiscal quarter plus
  sixty  percent (60%) of the
  IBNR Expense amount for the current fiscal quarter multiplied by 4:

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  B.

  	
  Consolidated
  Interest Expense for the current fiscal quarter plus; Consolidated Lease Expense multiplied by 4:

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  C.

  	
  plus; current
  maturities of Borrower’s, Subsidiaries’ and the Physician Group’s
  consolidated long term Debt for the current fiscal quarter (other than the
  Obligations):

  	
   

  	
  $

  	
   

  	
   

  

 

4

 

	
   

  	
   

  	
  D.

  	
  Sum
  of B and C:

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  E.

  	
  Ratio
  of Line A to D: (Line A divided by Line D)

  	
   

  	
        :1.0

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  F.

  	
  Minimum
  Coverage Ratio Allowed for the period of 6/30/99 through 9/30/99:

  	
   

  	
  1.10:1.0

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  G.

  	
  Minimum
  Coverage Ratio Allowed for the period of 10/1/99 and thereafter:

  	
   

  	
  1.25:1.0

  	
   

  

 

5

 

[Supporting
Calculations]

 

6

 

REVOLVING
CREDIT AGREEMENT

 

Schedule 1.1P

Permitted Debt

 

1.                                       Obligation of Prospect Medical Group, Inc.,
under a Loan and Security Agreement, made and entered into effective
June 15, 1995, by and between Prospect Medical Group, Inc., and Western
Medical Center relating to Drs. Joseph Cruz, Karen Fong, Chester Mojica and
Glen Jabola.  Prospect Medical Group,
Inc. believes that no amount remains to be paid under this Agreement.

 

2.                                       Obligation of Prospect Medical Group, Inc.,
under certain Relocation Agreements, by and between Irvine Medical Center and
each of Drs.  Regina Mojica, Joseph
Cerny, Farid Hassanpour and Mira Mogler. 
Prospect Medical Group, Inc. believes that no amount remains to be paid
under these Agreements.  *

 

3.                                       Obligation of Prospect Medical Group, Inc.,
under certain Revolving Credit and Security Agreements, by and between
Saddleback Memorial Medical Center and each of Drs. Vijay Reddy and Alireza
Etemadi.  Prospect Medical Group, Inc.
believes that no amounts remain to be paid under these Agreements.  *

 

4.                                       Obligation of Prospect Medical Group, Inc.,
under a Group Physician Recruitment Agreement with St. Jude Medical Center
relating to Dr. Stephanie Strunk. 
Prospect Medical Group, Inc. believes that no amount remains to be paid
under this Agreement.

 

5.                                       Promissory Note dated June 4, 1996, made
by Prospect Medical Systems, Inc., to Prospect Medical Group, Inc., for the
principal amount of $212,343.

 

6.                                       Santa Ana/Tustin Physicians Group, Inc., may
be obligated to United Western Medical Centers for approximately $111,000 as
described below.  A default may exist
under the Lease Agreement between Santa Ana/Tustin Physicians Group, Inc., and
United Western Medical Centers, dated September 9, 1991 and as extended on
December 8, 1996, relating to the office space occupied by Santa
Ana/Tustin Physicians Group, Inc.  This
Lease Agreement was terminated as of November 13, 1998.  This potential default is a result of

 

*                                         Prospect Medical Group, Inc. had an oral
obligation to repay to Irvine Medical Center and Saddleback Memorial Medical
Center, respectively, amounts paid under these agreements to the respective
physicians.

 

 

Santa Ana/Tustin Physicians Group, Inc., withholding approximately
seventy thousand dollars ($70,000) in rent for the months of August 1996,
September 1996, October 1996, November 1996 and
December 1996.  These payments were
not made so that Santa Ana/Tustin Physicians Group, Inc., would have adequate
funds to pay PacifiCare their portion of any over payments which have been made
to United Western Medical Centers. 
Approximately seventy thousand dollars ($70,000) represents PacifiCare’s
one-half portion of approximately one hundred forty thousand dollars ($140,000)
in overpayments which PacifiCare made to United Western Medical Centers for the
years 1995 and 1996 and which is anticipated to be returned by United Western
Medical Centers to the hospital control pools. 
As of December 31, 1997, approximately $650,000 in overpayments (for
the years 1995 through 1997 inclusive) were due and owing by United Western
Medical Centers.  Additionally, there
may be approximately another $41,000 overdue and owing by Santa Ana/Tustin
Physicians Group, Inc., to United Western Medical Centers for miscellaneous
expenses.  The seller of Santa
Ana/Tustin Physicians Group, Inc. agreed to indemnify Prospect Medical Group,
Inc. until July 2000 against liabilities, losses, damages and other claims
arising from the conduct of the business of Santa Ana/Tustin Physicians Group,
Inc. prior to July 14, 1997.

 

7.                                       Contingent Promissory Note, dated the Sierra
Closing Date, made by Prospect Medical Group, Inc., to
Sinnadurai E. Moorthy, M.D. and the related Subordinate Guaranty
executed on September 25, 1997 (the “Sierra Closing Date”) by Prospect
Medical Holdings, Inc., for the outstanding principal amount of $675,000.

 

8.                                       Contingent Promissory Note, dated the Sierra
Closing Date, made by Prospect Medical Group, Inc., to Karunyan Arulanantham,
M.D. and the related Subordinate Guaranty executed on the Sierra Closing Date
by Prospect Medical Holdings, Inc. for the outstanding principal amount of
$675,000.

 

9.                                       Subordinated Promissory Note dated the Sierra
Closing Date made by Prospect Medical Holdings, Inc. to J. Jayakumar for
the outstanding principal amount of $150,000.

 

10.                                 Senior Loan and Security Agreement No. 3422
dated as of September 11, 1997 between Prospect Medical Systems, Inc. and
Phoenix Leasing Incorporated and the related Continuing Guaranty by Prospect
Medical Holdings, Inc. which was executed after the

 

2

 

Sierra Closing Date.  This
agreement relates to equipment financing providing for a maximum credit not to
exceed $716,000.  As of April 30,
1998, Prospect Medical Systems, Inc. owed approximately $419,000.00 under this
agreement.

 

11.                                 Secured Promissory Note (Prospect Medical
Systems, Inc.), dated October 31, 1997, made by Prospect Medical Systems,
Inc., to Prospect Medical Holdings, Inc.

 

12.                                 Promissory Note ( Prospect Medical Group,
Inc.), dated October 31, 1997, made by Prospect Medical Group, Inc., to
Prospect Medical Systems, Inc.

 

13.                                 Promissory Note (Pegasus Medical Group,
Inc.), dated October 31, 1997, made by Pegasus Medical Group, Inc., to
Prospect Medical Group, Inc.

 

14.                                 Lease for telephone equipment, entered into
on or about October 16, 1998, by and between Prospect Medical Systems,
Inc. and Inter-Tel Leasing, Inc., together with the related guarantee by
Prospect Medical Holdings, Inc.

 

15.                                 Obligation of Prospect Medical Group to pay a
total of $70,000 to Drs. Ryack, Birken and Svedlow pursuant to a Mutual Release
Agreement entered into on April 30, 1999, of which approximately $35,000
remained outstanding as of July 2, 1999.

 

3

 

Schedule 4.7

Litigation

 

Prospect
Medical Group, Inc.

 

Prospect
Medical Group, Inc. received a demand in 1997 on behalf of a physician seeking
$25,000 in purported damages relating to an address listing for an office suite
shared by Prospect Medical Group, Inc., and the physician.  As of April 15, 1999, Prospect Medical
Group, Inc. had not received any further response from the plaintiff in this
matter.

 

Kelly
vs.  Prospect Medical Group

 

Orange
County Superior Court Case No. 783596

 

This
was an action for malpractice against physician Russell Ewing.  Dr. Ewing is a physician for Yorba Linda
Medical Group.  Prospect Medical Group
believed that it was an improperly named defendant.  No answer was filed on behalf of Prospect Medical Group.  Plaintiffs counsel, Douglas R.  MacLeith, dismissed Prospect Medical Group
as a defendant on March 23, 1998. 
It is possible that Prospect Medical Group could be re-named in the case
in the future if evidence arises that Prospect Medical Group was involved in
the lack of treatment.  Damages are
claimed in excess of $900,000 for both plaintiff and his wife.  As Prospect Medical Group does not have
liability insurance coverage for this case, it is at risk for the entire amount
if it is rejoined in the case. 
Management believes the likelihood that Prospect Medical Group will be
rejoined in the case is remote.

 

Pediatrix
vs.  Prospect Medical Group

 

Orange
County Superior Court Case No. 794829

 

Pediatrix
has filed a complaint against Prospect Medical Group for damages in the amount
of $115,849.28 for alleged services provided but not paid.  The sum demanded arises over a dispute as to
which rates Prospect Medical Group should pay to Pediatrix.  During 1997 Pediatrix held what can only be
called a monopoly on all Neo-natology that was to be performed at St.  Jude Hospital in Fullerton.  St. 
Jude’s internal policy required every new born baby to be seen by a
Neo-natologist.  Pediatrix has the
exclusive contract at the St.  Jude
facility.  After purchasing the medical
practices of several physicians, at some point in time Pediatrix attempted to
unilaterally cancel the contracts held by these several physicians that were
working with Prospect Medical Group at St. 
Jude’s.  The contracts have never
been cancelled by the physicians party thereto.  Subsequent to this attempted cancellation, Pediatrix immediately
began billing at 100% rates.  Prospect
Medical Group did not recognize the contract terminations and has continued to
pay the

 

4

 

“old”
contract rates.  The claim by Pediatrix
represents the difference between the “old” rates and the 100% rate.

 

Prospect
Medical Group is determined to vigorously defend this lawsuit.  It is Prospect Medical Group’s firm belief
that Pediatrix has dealt in bad faith. 
Accordingly on or about July 8, 1998, Prospect Medical Group filed
a cross-complaint requesting preliminary and permanent injunctive relief.  In addition, the cross-complaint asserts
claims for relief under Business and Professions Code §17200 and breach of
contract.

 

Prospect
Medical Group, Inc. v. Alireza Etemadi, H.D. and Southwestern Medical Group,
Inc.

 

Orange
County Superior Court Case No. 797537

 

On
July 30, 1998, Prospect Medical Group filed a lawsuit against one of its
former employee-physicians, Alireza Etemadi, M.D.  and Southwestern Medical Group, Inc. Dr. Etemadi was employed by
Prospect Medical Group commencing on January 1, 1995.  He was terminated on July 23, 1998 for
breach of his employment agreement. 
Prospect Medical Group has alleged ten separate causes of action,
including misappropriation of confidential information, unfair competition,
breach of contract and breach of fiduciary duty, among others.  Prospect Medical Group seeks compensatory
damages of $300,000 in the form of restitution, or in the alternative, lost
profits from the patients that Dr. Etemadi solicited and converted to his
present practice with SW Medical Group, Inc. Prospect Medical Group also seeks
punitive damages in an amount to be determined by the court or jury.

 

On
September 16, 1998, Dr. Etemadi and SW Medical Group, Inc., dba
Southwestern Medical Group filed a cross-complaint against Prospect Medical
Group and Dr. DeNicola alleging eight separate causes of action, including
breach of contract, wrongful termination and contravention of public policy,
breach of the covenant of good faith and fair dealing, defamation, wrongful
interference with business expectancy/contract, unfair competition, invasion of
privacy and violation of the Labor Code. 
The causes of action are based upon allegations that include retaliatory
action with regard to complaints by Dr. Etemadi regarding (i) the “apparent
misrepresentations and coverups being performed by Prospect” and [Dr.] DeNicola
as to the true financial status of Prospect during an alleged public offering
of stock of Prospect Medical Group during Dr. 
Etemadi’s employment at Prospect Medical Group, including allegations of
fraud, (ii) the legality of certain billing practices being performed by
Prospect Medical Group, and (iii)

 

5

 

illegal
employment practices, including sexual harassment, racial discrimination,
retaliation and public policy violations. 
Dr.  Etemadi seeks general and
special damages according to proof, attorneys fees, costs of suit, punitive
damages, an accounting, treble damages pursuant to Labor Code Sections 1050 and
1054 and a temporary restraining order, preliminary injunction and a permanent
injunction.  An answer to the
cross-complaint was filed on behalf of Prospect Medical Group and Dr.  DeNicola.

 

Prospect
Medical Group and SW Medical Group, Inc. have negotiated a confidential mutual
release and settlement agreement pursuant to which each of them agrees to “walk
away” from the litigation.  The
settlement agreement has been executed and dismissals have been filed.

 

Dr.  Etemadi was deposed on June 3,
1999.  As of July 2, 1999, Dr.  Etemadi and Prospect Medical Group agreed in
principle to dismiss their lawsuit.

 

Jekums
v.  Prospect Medical Group

 

On
or about October 13, 1998, Dr. 
Jekums, who is a contracting physician with Prospect Medical Group,
filed a claim for arbitration under his agreement with Prospect Medical Group,
alleging that there was no good cause for his termination.  He is seeking an award of $135,000, plus
attorneys fees and costs.  An
arbitration hearing is scheduled for September 22 and 23, 1999.

 

Ryan
v.  Prospect Medical Group, Inc.

 

Dr.  Ryan has filed a lawsuit in Orange County
Superior Court against Prospect Medical Group, Inc. seeking unspecified damages
for alleged contract and tort claims. 
Dr.  Ryan’s claims are based upon
his exclusion from a contract to provide medical services through a specialist
provider network in Orange County. 
Prospect Medical Group has turned this matter over to its insurer,
SCPIE, which has agreed to defend the matter. 
SCPIE has sent a letter to Prospect Medical Group in which SCPIE
expressly stated that it was not exercising a reservation of rights; however,
the letter set forth a number of exclusions to payment of claims.  SCPIE has retained Beam, Brobeck & West
in Santa Ana, California to represent Prospect Medical Group, Inc. in this
matter.  In response to defendant’s
demurrer, plaintiff has amended his complaint. 
Counsel of record has advised us that they intend to move to compel
arbitration pursuant to the agreement between the parties.

 

6

 

Andorka
Claim

 

Prospect
Medical Group has received a letter from counsel for Dr.  Andorka demanding $132,968.51 based upon
alleged moneys due and owing under a specialist agreement entered into in
1994.  The parties have agreed in
principle to settle the dispute, pursuant to which Prospect Medical Group will
pay $5,000 in return for Dr.  Andorka’s
release.

 

Other

 

See
also Schedule 1.1P, Item No. 6 regarding a potential default under Santa
Ana/Tustin Physicians Group, Inc.’s Lease Agreement with United Western Medical
Centers.

 

Pegasus
Medical Group

 

Dr.  Bansi Vora dba The Women’s Clinic v.  A. 
V.  Western Medical Group, et al.

Los
Angeles Superior Court Case No.  MC 009
440

 

This
action was filed on May 5, 1998.  The
complaint was amended on August 4, 1998 to name Doe No.l as Pegasus
Medical Group (“Pegasus”), successor-in-interest of defendant A.V.  Western Medical Group (“A.V.  Western”). 
The complaint asserts claims for Breach of Contract, Open Book Account
and Recovery of Claim under the Bulk Sale Laws arising out of an oral
agreement, wherein it is alleged that plaintiff agreed to provide professional
services as a physician to A.V. 
Western’s patients and A.V. 
Western agreed to pay the reasonable value of the billed services to the
plaintiff.  Plaintiff is seeking damages
in the amount of $38,426.00.  Plaintiffs
services were provided on or before September 1997.

 

On
October 31, 1997, Pegasus acquired the assets of A.V.  Western. 
Schedule 2.2.  of the Asset
Purchase Agreement which governed the transaction unequivocally provides that
Pegasus did not assume any liabilities other than those expenses and
liabilities associated with the ownership and operation of the business
incurred on or after the Closing Date, October 31, 1997.  Because the Complaint filed by Dr.  Bansi Vora does not allege that professional
services were provided on or after the closing date, Pegasus has no obligation
to render payment for the services alleged in plaintiffs complaint.  Accordingly, Pegasus will file a motion to
be dismissed from this action.

 

7

 

Schedule 4.9

Subsidiaries

 

	
  Prospect
  Medical Systems, Inc., a Delaware corporation

  	
   

  	
  100

  	
  %

  
	
   

  	
   

  	
   

  	
   

  
	
  Prospect
  Medical Management, Inc., a Delaware corporation

  	
   

  	
   

  	
  (1)

  
	
   

  	
   

  	
   

  	
   

  
	
  Sierra
  Medical Management, Inc., a Delaware corporation

  	
   

  	
  100

  	
  %(2)

  

 

(1)                                  Prospect
Medical Management, Inc., was formed as a Delaware Corporation, Currently no
shares have been issued.  All shares to
be issued will be issued to Prospect Medical Holdings,Inc.

 

(2)                                  Sierra
Medical Management, Inc., a Delaware corporation was merged with and into
Prospect Acquisition Corporation, Inc., a Delaware corporation.  Prospect Acquisition Corporation, Inc., is a
wholly-owned subsidiary of Prospect Medical Holdings, Inc., a Delaware
corporation.  Pursuant to the
Certificate of Merger of Sierra Medical Management, Inc.  Into Prospect Acquisition Corporation, Inc.,
filed on September 25, 1997 with the Delaware Secretary of State, Prospect
Acquisition Corporation, Inc., changed its name to Sierra Medical Management,
Inc.

 

8

 

Schedule 4.12

Employee Benefit Plans

 

Prospect
Medical Group, Inc. 401(k) Plan, including affiliates of Prospect Medical
Group, Inc., with Prospect Medical Holdings, Inc., as sponsor, and Reliance
Trust Company, as plan trustee, effective October 1, 1998.

 

9

 

Schedule 4.13

Other Obligations

 

See
Schedule 1.1P, Item No. 6 regarding a potential default under Santa
Ana/Tustin Physicians Group’s Lease Agreement with United Western Medical
Centers.

 

10

 

Schedule 4.18

Real Estate Leases

 

A.                                   Prospect Medical Holdings, Inc.: Prospect
Medical Group, Inc. entered into a lease described under Item No.  C.2 of this Schedule on behalf of
Prospect Medical Holdings, Inc.; the leased space will be used by Prospect
Medical Holdings, Inc.

 

B.                                     Real Estate Leases for Prospect Medical
Systems, Inc., are set forth below:

 

1.                                       Standard Office Lease - Gross, dated, for
reference purposes only, July 1, 1998, by and between John C.  Thomson and Prospect Medical Systems, Inc.
(for 1920 East Seventeenth Street, Suite 200, Santa Ana, California).

 

C.                                     Real Estate Leases for Prospect Medical
Group, Inc., are set forth below:

 

1.                                       Standard Form Lease - Multi-Tenant Commercial
Building, commencing May 1, 1999 by and between Plaza del Oro, Ltd.  and Prospect Medical Holdings, Inc. (for
Plaza del Oro, Building B, Suite B165, 351 S. 
Hitchcock, Santa Barbara, CA);

 

2.                                       Office Lease, dated August 5, 1997, by
and between Shuwa Investments Corporation and Prospect Medical Group, Inc. (for
515 S.  Flower Street, Suite 1650, Los
Angeles, CA 90071);

 

See
Schedule 1.1P, Item No. 6 regarding a potential default under Santa
Ana/Tustin Physicians Group Inc’s Lease Agreement with United Western Medical
Centers.

 

D.                                    Real Estate Leases for Sierra Medical
Management, Inc. and Sierra Primary Care Medical Group, Inc. are set forth
below:

 

1.                                       Commercial Lease (General Form) made and
entered into on August 1, 1996 by and between M.  Paramesvaran and Sierra Primary Care Medical Group, Inc., as
amended by the Amendment to Lease, entered into by and among M.  Paramesvaran and Sierra Primary Care Medical
Group, Inc. and Sierra Medical Management, Inc. (for 44714 10th Street West,
Lancaster, California 93534);

 

2.                                       Lease dated September 15, 1993, by and
between Sinnadurai E.  Moorthy,
M.D.  and Claudia Shanthi Moorthy, as
Trustees of the Moorthy Family Trust, and Karunyan Arulanantham, M.D and
Impamani Arulanantham, as Trustees of the Arulanantham Family Trust and Sierra
Primary Care Medical Group, Inc., as amended by the Amendment to Lease, entered
into by and among Sinnadurai E. 
Moorthy, M.D.  and Claudia
Shanthi Moorthy, as Trustees of the Moorthy Family Trust, and Karunyan
Arulanantham, M.D.  and Impamani
Arulanantham, as Trustees of the Arulanantham Family Trust and Sierra Primary
Care Medical

 

11

 

Group, Inc. and Sierra Medical Management, Inc. (for 44471 10th Street
West, Lancaster, California 93534);

 

3.                                       Lease dated January 1, 1991 by and
between Sinnadurai E.  Moorthy,
M.D.  and Claudia Shanthi Moorthy, as
Trustees of the Moorthy Family Trust, and Karunyan Arulanantham, M.D.  and Impamani Arulanantham, as Trustees of
the Arulanantham Family Trust and Sierra Primary Care Medical Group, Inc., as
amended by the (i) letter dated October 1, 1996, from J.  Jayakumar, Administrator to S.E. Moorthy,
M.D., Trustee, Moorthy Family Trust and K. 
Arulanantham, M.D., Trustee, Arul Family Trust, and (ii) Amendment to
Lease, entered into by and among Sinnadurai E. 
Moorthy, M.D.  and Claudia
Shanthi Moorthy, as Trustees of the Moorthy Family Trust, and Karunyan
Arulanantham, M.D.  and Impamani
Arulanantham, as Trustees of the Arulanantham Family Trust and Sierra Primary
Care Medical Group, Inc. and Sierra Medical Management, Inc. (for 44469 10th
Street West, Lancaster, California 93534);

 

4.                                       Real Estate Lease dated December 1, 1996
by and between M.  Paramesvaran,
Trustee, Moorthy Children’s Trust, DBA Ana Verde Medical Center and Sierra
Primary Care Medical Group, Inc., as amended by the Amendment to Lease, entered
into by and among M.  Paramesvaran,
Trustee, Moorthy Children’s Trust, DBA Ana Verde Medical Center and Sierra
Primary Care Medical Group, Inc. and Sierra Medical Management, Inc. (for 1037
East Palmdale Blvd., Palmdale, California 93550).

 

5.                                       Land Lease, by and among Sierra Medical
Group, Inc. and Philip H. Guenther and Elizabeth A. Guenther, Co-Trustees of
“The Philip and Elizabeth Guenther 1991 Trust” UDT dated January 14, 1991;
Olen V. Fetter and Sylvia R. Fetter, Co-Trustees of “The Fetter Trust” UDT
dated January 24, 1987; Lynda L. Lang, Trustee of “The
Lynda L. Lang 1994 Trust” UDT dated March 16, 1994; and Raymond
Lenzen and Judith L. Lenzen, Co-Trustees of “The Lenzen Living Trust UDT dated
3/3/95”, each as to an undivided 1/4 interest (for Lot 5
of Tract 15688 in the City of Palmdale, County of Los Angeles, State of
California; Section 25, Township 6 North, Range 12 West, San Bernardino
Base and Meridian).  The parties
executed this Land Lease shortly after the Sierra Closing Date;

 

6.                                       Lease for 44515 10th Street West, Lancaster,
California 93531.

 

12

 

E.                                      Real Estate Leases for Pegasus Medical Group,
Inc.:

 

1.                                       West Lancaster Plaza Lease commencing on
November 1, 1997 by and between The Prudential Insurance Company of
America, Inc., a New Jersey Corporation and Pegasus Medical Group, Inc., a
California Corporation (for 2783 West Avenue L, Space A-2, Lancaster,
California 93536);

 

2.                                       Lease for 2151 East Palmdale Boulevard,
Palmdale, California by and between 22nd Street Plaza, a California Limited
Partnership and Pegasus Medical Group, Inc.

 

13

 

Schedule 4.20

Physician Groups; Transaction Documents

 

1.                                       Santa Ana/Tustin Physicians Group, Inc., a
California professional corporation, conducting its business at the addresses
listed on Schedule 4.18 to the Revolving Credit Agreement.

 

Transaction Documents include:

 

a.                                       Escrow Instructions dated June 16,1997,
by and among Prospect Medical Group, Inc., Santa Ana/Tustin Physicians Group,
Inc., Melvin L. Reich, D.O. and First American Trust Company;

 

b.                                      Agreement for the Purchase and Sale of Stock
of Santa Ana/Tustin Physicians Group, Inc. entered into on June 23, 1997,
by and among Prospect Medical Group, Inc., a California corporation, Santa
Ana/Tustin Physicians Group, Inc., a California professional corporation and
Melvin Reich, D.O., as sole shareholder of the stock of Santa Ana/Tustin
Physicians Group, Inc.;

 

c.                                       Agreement to Provide Funding, dated
June 23, 1997, by and between Jacob Y. Terner, M.D. and Prospect Medical
Group, Inc. (expires upon closing of acquisition);

 

d.                                      Assignment of Option to Purchase Premier IPA,
dated July 14, 1997, executed by Santa Ana/Tustin Physicians Group, Inc.;

 

e.                                       Consent of United Western Medical Center
(Tenet Health Care Corporation);

 

f.                                         Consent of PacifiCare of California;

 

g.                                      Consent of United HealthCare of California,
Inc. (formerly known as Metra Health Insurance Company);

 

h.                                      Employment Agreement dated July 14, 1997
by and between Santa Ana/Tustin Physicians Group, Inc. and Geoffrey Furman,
M.D.;

 

14

 

i.                                          Non-Competition Agreement, dated
July 14, 1997, by and between Prospect Medical Group, Inc., and Melvin
L.  Reich, D.O.;

 

j.                                          Employment Agreement between Santa Ana/Tustin
Physicians Group, Inc. and Melvin L. Reich, D.O., dated July 14, 1997;

 

k.                                       Personal Guaranty of Payment and Performance
made by Melvin L. Reich, D.O., in favor of Prospect Medical Group, Inc., dated
July 14, 1997;

 

l.                                          Employment Agreements, each dated
July 14, 1997, between Prospect Medical Systems and

 

	
  i.

  	
   

  	
  D.  Constantine;

  
	
  ii.

  	
   

  	
  E.  Espinoza;

  
	
  iii.

  	
   

  	
  V.  Leath; and

  
	
  iv.

  	
   

  	
  C.  Stienstra.

  

 

m.                                    Personal Guaranty of Payment and Performance,
dated June 23, 1997, by and between Jacob Y. Terner, M.D. and Santa
Ana/Tustin Physicians Group, Inc. and Melvin L. Reich, D.O. (expires upon
closing of acquisition);

 

n.                                      Amended and Restated Management Services
Agreement, effective as of July 14, 1997, between Prospect Medical
Systems, Inc. and Santa Ana/Tustin Physicians Group, Inc.;

 

o.                                      Amended and Restated Assignable Option
Agreement, effective as of July 14, 1997, by and among Prospect Medical
Systems, Inc., Prospect Medical Group, Inc. and Santa Ana/Tustin Physicians
Group, Inc.;

 

p.                                      Contracts with Health Maintenance
Organizations and Preferred Provider Organizations (including any amendments
executed to the date hereof but not separately described below):

 

15

 

(i)                                     IPA Medicare Shared Risk Services Agreement
effective on September 1, 1989, by and between PacifiCare of California
and Santa Ana-Tustin Physicians’ Group, Inc.;

 

(ii)                                  IPA Commercial Services Agreement, made and
entered into on January 1, 1990, by and between PacifiCare of California
and Santa Ana-Tustin Physicians’ Group, Inc.;

 

(iii)                               PacifiCare PPO Provider Agreement
(Physician), effective December 1, 1993, by and between PacifiCare of
California, a California corporation, and Santa Ana-Tustin Physicians’ Group,
Inc.;

 

(iv)                              Contract for Health Care Provider Services,
entered into as of August 4, 1995, by and between Cal OPTIMA and Santa
Ana-Tustin Physicians’ Group, Inc.;

 

(v)                                 IPA Service Agreement between Metlife
Healthcare Network of California, Inc. and Santa Ana-Tustin Physicians’ Group,
Inc., effective on August 1, 1988;

 

(vi)                              Provider Agreement by and between Benefit
Panel Services, Inc. and Santa Ana-Tustin Physicians’ Group, Inc., effective on
April 1, 1988;

 

(vii)                           Metropolitan Life Insurance Company Medical
Group Agreement- Santa Ana-Tustin Physicians’ Group entered into as of May 1,
1990; this agreement was assigned to MetraHealth Insurance Company, which was
later acquired by and conducts its business under the name of United HealthCare
of California, Inc.;

 

(viii)                        Blue Cross of California Prudent Buyer Plan
Participating Physician Group Agreement by and between Santa Ana-Tustin
Physicians’ Group, Inc. and Blue Cross of California effective on July 8,
1994.

 

16

 

q.                                      Acquisition of Certain Assets of Premier
Medical Group of Orange County, Inc.

 

(i)                                     Agreement for the Purchase and Sale of
Assets, made and entered into as of June 1, 1999, by and among Santa
Ana/Tustin Physicians Group, Inc., Premier Medical Group, Inc., and AlphAmerica
Health Systems, Inc.

 

(ii)                                  Agreement entered into by and among Universal
Care, Santa Ana/Tustin Physicians Group, Inc., and Premier Medical Group.

 

(iii)                               Amendment entered into by and among
CareAmerica-Southern California, Inc., Premier Medical Group of Orange County,
and Santa Ana/Tustin Physicians Group, Inc. (re: HMO Per Diem Physician Group
Service Agreement).

 

(iv)                              Amendment entered into by and among
CareAmerica-Southern California, Inc., Premier Medical Group of Orange County,
and Santa Ana/Tustin Physicians Group, Inc. (re: CMP Physician Group Service
Agreement).

 

(v)                                 Agreement entered into by and among
PacifiCare of California, Inc., as successor to FHP, Inc., Santa Ana/Tustin
Physicians Group, Inc., and Premier Medical Group of Orange County.

 

(vi)                              Assignment Agreement entered into by and
among Santa Ana/Tustin Physicians Group, Inc., Premier Medical Group of Orange
County, and Maxicare. (Commercial)

 

(vii)                           Assignment Agreement entered into by and
among Santa Ana/Tustin Physicians Group, Inc., Premier Medical Group of Orange
County, and Maxicare. (Senior)

 

(viii)                        Contracts with Health Maintenance
Organizations (including any amendments executed to the date hereof but not
separately described below):

 

17

 

A.                                   Capitated Medical Group Agreement between
Universal Care and Premier Medical Group of Orange County entered into
February 1, 1993. (Commercial)

 

B.                                     HMO Per Diem Physician Group Service
Agreement between CareAmerica - Southern California, Inc. and Premier Medical
Group of Orange County dated July 1, 1996, as amended on July 1,
1996, November 1, 1996 and January 1, 1997. (Commercial)

 

C.                                     CMP Physician Group Service Agreement between
CareAmerica-Southern California, Inc. and Premier Medical Group of Orange
County dated February 1, 1996, as amended on February 1, 1996.
(Senior)

 

D.                                    Physician Network Agreement by and between
MaxiCare and Premier Medical Group, effective September 1, 1995.
(Commercial)

 

E.                                      Physician Network Medicare Risk Agreement by
and between MaxiCare and Premier Medical Group, effective July 1, 1994.
(Senior)

 

F.                                      Agreement between PacifiCare, Inc., as
successor to FHP, Inc., and Premier Medical Group of Orange County dated
July 1, 1994, as amended January 1, 1997. (For both Commercial and
Senior)

 

2.                                       Prospect Medical Group, Inc., a California
professional corporation, conducting its business at the addresses listed on Schedule 4.18
to the Revolving Credit Agreement and under the names Prospect Physicians,
Prospect Medical Associates and Prospect Pediatrics.

 

Transaction Documents include:

 

a.                                       Asset Transfer Agreement, made and entered
into as of June 4, 1996, by and between Prospect Medical Systems and
Prospect Medical Group;

 

18

 

b.                                      Promissory Note, executed on June 4,
1996, by Prospect Medical Systems;

 

c.                                       Bill of Sale, Assumption and Assignment,
executed on June 4, 1996, by and between Prospect Medical Group and
Prospect Medical Systems;

 

d.                                      Amended and Restated Management Services
Agreement, effective as of June 4, 1996, by and between Prospect Medical
Systems and Prospect Medical Group;

 

e.                                       Amended and Restated Assignable Option
Agreement, effective as of June 5, 1996, by and between Prospect Medical
Systems and Prospect Medical Group;

 

f.                                         Non-Competition Agreement, dated as of
June 5, 1996, by and between Prospect Medical Group and Gregg DeNicola,
M.D.;

 

g.                                      Consents to Assignment;

 

h.                                      Contracts with Health Maintenance
Organizations and Preferred Provider Organizations (including any amendments
executed to the date hereof but not separately described below)(3):

 

	
  (i)

  	
   

  	
  Aetna
  Health Plan of America, Inc. 
  Agreement, dated March 1, 1997, by and between Prospect Medical
  Group and Aetna/US Healthcare;

  
	
   

  	
   

  	
   

  
	
  (ii)

  	
   

  	
  Senior
  Health Plan IPA Service Agreement, dated March 1, 1997 (for Aetna
  Senior), by and between Aetna Health Plan and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (iii)

  	
   

  	
  Blue
  Shield of California HMO IPA Agreement, dated November 1, 1995, by and
  between Blue Shield and Prospect Medical Group;

  

 

(3)                                  All
contracts listed in (i) through (xxvi) relate to operations in Orange County
and Ventura County; (xxvii) through (xxx) relate to operations in Ventura
County, (xxxi) relates to operations in Santa Barbara County and (xxxii)
relates to operations in Los Angeles County.

 

19

 

	
  (iv)

  	
   

  	
  Blue
  Shield of California HMO IPA Medi-cal Agreement, dated May 1, 1997, by and
  between Blue Shield Medi-Cal St. Jude and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (v)

  	
   

  	
  Blue
  Shield of California HMO IPA Medi-cal Agreement, dated May 1, 1997, by and
  between Blue Shield Medi-Cal Martin Luther and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (vi)

  	
   

  	
  IPA/Group
  Medical Services Agreement, dated October 1, 1995, by and between BPS
  and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (vii)

  	
   

  	
  California
  Care Medical Services Agreement, dated December 1, 1994, by and between
  California Care and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (viii)

  	
   

  	
  Blue
  Cross Medicare Risk Medical Agreement, dated March 1, 1997, by and
  between Blue Cross Senior Secure and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (ix)

  	
   

  	
  Health
  Plan and Physician Group Service Agreement, dated December 1, 1993, by
  and between Care America Martin Luther and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (x)

  	
   

  	
  Capitated
  Physician Service Agreement between Care America Southern California (St.
  Jude) and Prospect Medical Group, dated February 1, 1996;

  
	
   

  	
   

  	
   

  
	
  (xi)

  	
   

  	
  CMP
  Physician Group Service Agreement, by and between Care America Southern
  California (Senior) and Prospect Medical Group, dated August 1, 1994;

  
	
   

  	
   

  	
   

  
	
  (xii)

  	
   

  	
  Extended
  Medical Services Capitation Agreement, dated April 10, 1990, by and
  between Cigna and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xiii)

  	
   

  	
  Extended
  Medical Services Capitation Agreement, dated January 1, 1994 by and
  between Cigna and Prospect Medical Group (for seniors);

  

 

20

 

	
  (xiv)

  	
   

  	
  Agreement
  between FHP and Prospect Medical Group, dated September 1, 1993 (including
  an amendment regarding senior members);

  
	
   

  	
   

  	
   

  
	
  (xv)

  	
   

  	
  Professional
  Group Provider Agreement, dated August 1, 1994, by and between
  Foundation Health and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xvi)

  	
   

  	
  Agreement
  between Foundation Health, a California Health Plan and Prospect Medical
  Group, dated March 1, 1995 (for senior members);

  
	
   

  	
   

  	
   

  
	
  (xvii)

  	
   

  	
  Physician
  Agreement, dated September 19, 1996, by and between Greater Pacific
  Healthcare and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xviii)

  	
   

  	
  Health
  Net Provider Services Agreement for Prospect Medical Group, Inc., dated
  October 1, 1993, by and between Health Net and Prospect Medical Group,
  Inc.;

  
	
   

  	
   

  	
   

  
	
  (xix)

  	
   

  	
  Medical
  Services Agreement between HMO California and Prospect Medical Group, dated
  October 1, 1995;

  
	
   

  	
   

  	
   

  
	
  (xx)

  	
   

  	
  Shared
  Risk Agreement between Maxicare and Prospect Medical Group, dated
  November 10, 1995;

  
	
   

  	
   

  	
   

  
	
  (xxi)

  	
   

  	
  Metlife
  Healthcare Network of California, Inc., IPA Agreement Prospect Medical Group,
  Inc., dated September 1, 1994, by and between Metra Health and Prospect
  Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xxii)

  	
   

  	
  PacifiCare
  IPA Commercial Risk Services Agreement, dated January 1, 1992, by and
  between PacifiCare-St. Jude and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xxiii)

  	
   

  	
  Medicare
  Partial Risk Services Agreement, dated August 1, 1993, by and between
  PacifiCare (Secure Horizons) and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xxiv)

  	
   

  	
  Managed
  Medical Provider Organization Agreement, dated July 1, 1988, by and
  between Prudential and Prospect Medical Group;

  

 

21

 

	
  (xxv)

  	
   

  	
  Managed
  Medical Provider Organization Agreement, dated January 1, 1994, by and
  between Prudential Senior and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xxvi)

  	
   

  	
  Capitated
  Medical Group Provider Agreement, dated June 1, 1992, by and between
  Universal Care and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xxvii)

  	
   

  	
  Blue
  Shield of California HMO IPA Agreement, dated May 1, 1992, by and between
  Blue Shield and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xxviii)

  	
   

  	
  Extended
  Medical Services Capitation Agreement, dated January 1, 1996, by and
  between Cigna and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xxix)

  	
   

  	
  Physician
  Network Agreement dated January 1, 1991, by and between Maxicare and
  Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xxx)

  	
   

  	
  Medical
  Services Agreement, dated January 1, 1995, by and between United Health
  Plan and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xxxi)

  	
   

  	
  California
  Care Medical Services Agreement, dated May 1, 1997, by and between California
  Care and Prospect Medical Group (amendment to existing agreement to include
  Santa Barbara County);

  
	
   

  	
   

  	
   

  
	
  (xxxii)

  	
   

  	
  Shared
  Risk Services Agreement between PacifiCare of California and Prospect Medical
  Group, dated February 1, 1997;

  
	
   

  	
   

  	
   

  
	
  (xxxiii)

  	
   

  	
  PPO
  and/or EPO IPA/Medical Group Participation Agreement, dated August 21,
  1995, between Admar and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xxxiv)

  	
   

  	
  IPA/PPO
  Agreement, dated August 2, 1991, between AIC and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xxxv)

  	
   

  	
  Blue
  Shield of California Physician Member Group Agreement for Managed Care, dated
  October 25, 1996, between Blue Shield and Prospect Medical Group;

  

 

22

 

	
  (xxxvi)

  	
   

  	
  Provider
  Agreement, dated September 26, 1994, by and between Benefit Panel
  Services, Inc. and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xxxvii)

  	
   

  	
  CCN
  Professional Care Provider Agreement, dated March 1, 1989, between CCN
  and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xxxviii)

  	
   

  	
  Group
  Practice Managed Care Agreement, dated September 1, 1994, between Cigna
  and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xxxix)

  	
   

  	
  Professional
  Provider PPO Agreement, dated January 6, 1994, between Foundation Health
  and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xl)

  	
   

  	
  Health
  Care Provider Agreement, dated October 25, 1996, between Integrated
  Health and Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xli)

  	
   

  	
  Physician
  Participation Application and Agreement for IPA, Medical Group and Physician
  Associations, dated May 30, 1990, between Interplan and Prospect Medical
  Group;

  
	
   

  	
   

  	
   

  
	
  (xlii)

  	
   

  	
  PacificCare
  PPO Provider Agreement, dated January 1, 1994, between PacifiCare and
  Prospect Medical Group;

  
	
   

  	
   

  	
   

  
	
  (xliii)

  	
   

  	
  Preferred
  Provider Organization Participating Practitioner Agreement for Physician
  Group, dated September 10, 1990, between Prudential and Prospect Medical
  Group;

  
	
   

  	
   

  	
   

  
	
  (xliv)

  	
   

  	
  August Healthcare
  Services, Inc., Participating Physician IPA Agreement, dated June 19,
  1991 between United Managed Care and Prospect Medical Group.

  

 

3.                                       Sierra Primary Care Medical Group, Inc., a
California professional corporation, conducting its business at the addresses
listed on Schedule 4.18 to the Revolving Credit Agreement and under the
names Sierra Primary Care Associates, Sierra Medical Group, Sierra Urgent Care
and Sierra Physical Therapy.

 

23

 

 

Transaction Documents include:

 

a.                                       Memorandum of Intent, dated February 18,
1997, by and among Prospect Medical Group, Prospect Medical Holdings, Inc.,
Sierra Primary Care Medical Group, Inc., Karunyan Arulanantham, M.D. and
Sinnadurai E. Moorthy, M.D.;

 

b.                                      Agreement for the Purchase and Sale of Stock
of Sierra Primary Care Medical Group, Inc. made and entered into as of
September 23, 1997, by and among Sierra Primary Care Medical Group, Inc.,
a California professional corporation, Karunyan Arulanantham, M.D., Sinnadurai
E. Moorthy, M.D., Karunyan Arulanantham as Trustee of the Arulanantham
Charitable Remainder Trust and Prospect Medical Group, Inc., a California
professional corporation;

 

c.                                       Agreement and Plan of Reorganization made and
entered into as of September 23, 1997, by and among Sierra Medical
Management, Inc., a Delaware corporation, Prospect Medical Holdings, Inc., a
Delaware corporation, Sinnadurai E. Moorthy, M.D., Karunyan Arulanantham, M.D.
and Jayaratnam Jayakumar;

 

d.                                      Certificate of Merger of Sierra Medical
Management, Inc. into Prospect Acquisition Corporation, Inc. filed with the
Delaware Secretary of State on September 25, 1997 (the “Sierra Closing
Date”);

 

e.                                       Assignment of Partnership Interest, entered
into on September 25, 1997, by and between Sierra Primary Care Medical
Group, Inc. and each of the following:

 

(i)   Sinnadurai E. Moorthy,
M.D.;

(ii)  Karunyan Arulanantham,
M.D.; and

(iii)  Sung Chul Yang, M.D.

 

f.                                         Agreement of Termination of Cross Purchase
Agreement, made as of the Sierra Closing Date, executed by Sierra Primary Care
Medical Group, Inc. Dr. Karunyan Arulanantham, Dr. Sinnadurai E. Moorthy and
Dr. Karunyan Arulanantham and Inpamani S. Arulanantham as Trustees of the
Arulanantham Charitable Remainder Trust;

 

24

 

g.                                      Consents to Assignment of Employment
Agreements between Sierra Medical Group, a California general partnership, and
each of the following employees:

 

(i)                                     Dr. Karunyan Arulanantham, executed on
September 5, 1997;

(ii)                                  Jon W. MacLean, D.O., executed on
September 9, 1997;

(iii)                               Philip L. Carroll, M.D., executed on
September 5, 1997;

(iv)                              Wain Lin Chu, M.D., executed on
September 4, 1997;

(v)                                 Deepal M. Ekanayake, M.D., executed on
September 5, 1997;

(vi)                              Tommy K. Leong, M.D., executed on
September 5, 1997;

(vii)                           Dr. S.E. Moorthy , executed on
September 9, 1997;

(viii)                        Pradeep K. Singh, M.D., executed on
September 5, 1997;

(ix)                                Kyaw Lyn, M.D., executed on September 5,
1997;

(x)                                   Sung Yang, M.D., executed on
September 9, 1997; and

(xi)                                Vickrum Chodri, M.D., executed on
September 9, 1997.

 

h.                                      Consent Agreement, made and entered into as
of September 9, 1997, by and among Maxicare, Prospect Medical Group, Inc.,
Sierra Primary Care Medical Group, Inc., Sinnadurai E.  Moorthy, M.D., Karunyan Arulanantham,
M.D.  and Karunyan Arulanantham, M.D.  as Trustee of the Arulanantham Charitable
Remainder Trust;

 

i.                                          Consent Agreement executed by Antelope Valley
Hospital Medical Center, Inc. effective on September 15, 1997;

 

j.                                          Notice from Sierra Primary Care Medical
Group, Inc. to HealthNet executed on September 11, 1997 and acknowledgment
letter dated September 15, 1997 from HealthNet;

 

k.                                       Amendments to Leases executed as of the
Sierra Closing Date by and among Sierra Medical Management, Inc., Sierra
Primary Care Medical Group, Inc. and each of the following lessors:

 

(i)                                     M. Paramesvaran for 44714 10th Street West,
Lancaster, California 93534;

 

25

 

(ii)                                  Sinnadurai E. Moorthy, M.D. and Claudia
Shanthi Moorthy, as Trustees of the Moorthy Family Trust, and Karunyan
Arulanantham, M.D. and Impamani Arulanantham, as Trustees of the Arulanantham
Family Trust for 44471 10th Street West, Lancaster, California 93534;

 

(iii)                               Sinnadurai E.  Moorthy, M.D. and Claudia Shanthi Moorthy, as Trustees of the
Moorthy Family Trust, and Karunyan Arulanantham, M.D. and Impamani
Arulanantham, as Trustees of the Arulanantham Family Trust for 44469 10th
Street West, Lancaster, California 93534;

 

(iv)                              M. Paramesvaran, Trustee, Moorthy Children’s
Trust, DBA Ana Verde Medical Center for 1037 East Palmdale Blvd., Palmdale,
California 93550.

 

l.                                          Options to Purchase Common Stock of Prospect
Medical Holdings, Inc., dated the Sierra Closing Date, executed by Prospect
Medical Holdings for each of:

 

(i)                                     Dr. Karunyan Arulanantham;

(ii)                                  Dr. S.E. Moorthy; and

(iii)                               Jayaratnam Jayakumar. 

 

m.                                    Subordinate Guarantees dated as of the Sierra
Closing Date executed by Prospect Medical Holdings, Inc., in favor of:

 

(i)                                     Dr. Karunyan Arulanantham; and

(ii)                                  Dr. Sinnadurai E. Moorthy.

 

n.                                      Security Agreement (Guarantor) dated as of
the Sierra Closing Date entered into between Prospect Medical Holdings, Inc.
and Karunyan Arulanantham, M.D., as agent;

 

o.                                      Contingent Promissory Notes dated the Sierra
Closing Date executed by Prospect Medical Group, Inc. payable in the principal
amount of $1,125,000 to each of:

 

(i)                                     Dr. Karunyan Arulanantham; and

(ii)                                  Dr. Sinnadurai E. Moorthy.

 

26

 

p.                                      Second Amended and Restated Management
Services Agreement effective as of the Sierra Closing Date between Sierra
Medical Management, Inc. and Sierra Primary Care Medical Group, Inc.;

 

q.                                      Power of Agency executed by Sierra Medical
Management, Inc. and Sierra Primary Care Medical Group, Inc. effective as of
the Sierra Closing Date;

 

r.                                         Amended and Restated Assignable Option
Agreement, effective as of the Sierra Closing Date by and among Sierra Primary
Care Medical Group, Inc., Sierra Medical Management, Inc. and Prospect Medical
Group, Inc.;

 

s.                                       Employment Agreements executed on the Sierra
Closing Date by and between Sierra Primary Care Medical Group, Inc. and each
of:

 

(i)                                     Dr. Karunyan Arulanantham; and

(ii)                                  Dr. Sinnadurai E. Moorthy.

 

t.                                         Non-Competition Agreements effective as of
the Sierra Closing Date between Prospect Medical Group and each of:

 

(i)                                     Dr. Karunyan Arulanantham; and

(ii)                                  Dr. Sinnadurai E. Moorthy.

 

u.                                      Employment Agreement executed on the Sierra
Closing Date between Sierra Medical Management, Inc., a Delaware corporation
formerly known as Prospect Acquisition Corporation, Inc. and Jayaratnam
Jayakumar;

 

v.                                      Non-Competition Agreement effective as of the
Sierra Closing Date between Sierra Medical Management, Inc., a Delaware
corporation formerly known as Prospect Acquisition Corporation, Inc. and
Jayaratnam Jayakumar;

 

w.                                    Subordinated Promissory Note executed on the
Sierra Closing Date for $250,000 from Prospect Medical Holdings, Inc. to Jayaratnam
Jayakumar;

 

x.                                        Security Agreement dated as of the Sierra
Closing Date entered into between Prospect Medical Holdings, Inc. and
Jayaratnam Jayakumar;

 

27

 

y.                                      Agreements with Health Maintenance Organizations
and Preferred Provider Organizations (including any amendments executed to the
date hereof but not separately described below):

 

(i)                                     Admar Corporation Med Network Primary
Care/Medical Group Agreement entered into on April 20, 1989, by and
between Admar Corporation and Sierra Primary Care Medical Group;

 

(ii)                                  Aetna Health Plans of Southern California,
Inc. IPA Service Agreement - Sierra Medical Group, Inc. entered into on
November 1, 1993, by and between Aetna Health Plans of Southern
California, Inc. and Sierra Medical Group, Inc.;

 

(iii)                               Aetna Health Plans of California, Inc. Senior
Health Plan IPA Service Agreement - Sierra Medical Group, Inc. effective on
January 1, 1996, by and between Aetna Health Plans of California, Inc. and
Sierra Medical Group, Inc.;

 

(iv)                              Provider Agreement entered into on
September 15, 199    , by and between Allied Medical
Groups, an Association of Physicians, Hospitals, and other health care
professionals and Sierra Medical Group;

 

(v)                                 Agreement for Medical Services to Commercial
Plan Members entered into on October 21, 1987, by and between Foundation
Health, a California Health Plan, as successor to AmeriMed, and Sierra Primary
Care Associates;

 

(vi)                              Physician Service Agreement effective on
January 1, 1993, by and between Antelope Valley Hospital Medical Center
Employee Group Health Care Plan and Sierra Medical Group;

 

(vii)                           Preferred Provider Agreement effective on
November 1, 1993, by and between Beech Street of California, Inc., a
Georgia corporation and Sierra Medical Group;

 

28

 

(viii)                        Participating Physician Group Agreement -
Prudent Buyer Plan entered into on September 2, 1994, by and between Blue
Cross of California and Sierra Medical Group, a Medical Corporation;

 

(ix)                                Agreement between BPS and Sierra Medical
Group dated on or before September 21, 1993;

 

(x)                                   Agreement for Managed Care entered into on
March 19, 1993, between California Physicians’ Service, doing business as
Blue Shield of California and Sierra Medical Group, Inc.;

 

(xi)                                Extended Medical Services Capitation
Agreement entered into on February 1, 1990, by and between Ross Loos
Medical Group, Inc. and Ross-Loos Healthplan of Southern California, Inc.,
California Corporations doing business as CIGNA Private Practice Plan and
Sierra Medical Group, a California Corporation;

 

(xii)                             Agreement Between FHP and Sierra Primary Care
Medical Group entered into on October 13, 1989, by and between FHP, Inc.,
a California corporation and Sierra Primary Care Medical Group;

 

(xiii)                          Participating Medical Services Agreement -
Medical Group/Individual Practice Association entered into on December 7,
1993, by and between Foundation Health Benefit Life Insurance Company, an
insurance company and Sierra Medical Group;

 

(xiv)                         1994 Health Net Provider Services Agreement,
effective on September 1, 1994, by and between Health Net, a California
for-profit corporation, and Sierra Medical Group, as a Participating Medical
Group;

 

(xv)                            Interplan Physician Participation Application
and Agreement for IPA, Medical Group and Physician Associations entered into on
August 16, 1993, by and between Interplan Corporation and Sierra Medical
Group;

 

29

 

(xvi)                         Memorandum of Understanding Between Inter Valley
Health Plan and Sierra Primary Care Medical Group, a Medical Corporation dba
Sierra Medical Group, effective on January 1, 1995, by and between Inter
Valley Health Plan, a Federally Qualified Health Maintenance Organization and
Sierra Primary Care Medical Group, a Medical Corporation dba Sierra Medical
Group;

 

(xvii)                      Physician Network Agreement effective
July 1, 1994, by and between Maxicare, a California corporation and Sierra
Medical Group, a California corporation;

 

(xviii)                   Independent Practice Association Agreement
effective September 1, 1984, by and between Maxicare, a California
corporation and Sierra Primary Care Medical Group, a Medical Corporation;

 

(xix)                           PacifiCare IPA Commercial Services Agreement
entered into on January 1, 1990, by and between PacifiCare of California,
a California corporation, and Sierra Medical Group, a California corporation
and Individual Practice Association, Karunyan Arul, M.D. and S.E. Moorthy,
M.D.;

 

(xx)                              PacifiCare IPA Medicare Shared Risk Services
Agreement entered into on August     , 1990, by and
between PacifiCare of California, a California corporation and Sierra Medical
Group, a California Corporation and Individual Practice Association;

 

(xxi)                           Preferred Health Network Health Care
Professional Participation and Services Agreement effective
on                         ,
by and between Sierra Medical Group and Preferred Network, Inc. a California
corporation;

 

z.                                        Acquisition of Assets of PrimeCare Medical
Group of Antelope Valley, Inc., a California professional corporation;

 

(i)                                     Agreement for the Purchase and Sale of
Assets/Transfer of Member Responsibility, made and entered into as of May 13,
1998, by and among

 

30

 

PrimeCare International, Inc., Prospect Medical Holdings, Inc., Sierra
Primary Care Medical Group, a Medical Corporation (“Sierra Medical Group”), and
PrimeCare Medical Group of Antelope Valley, Inc., a California professional
corporation (“Antelope Valley Medical Group”), as amended;

 

(ii)                                  Certain Amendments to Provider Service
Agreements for providers dated as of February 25, 1998, and related
documents;

 

(iii)                               Non-Competition Agreement dated as of
June 1, 1998, by and among Sierra Medical Group, Antelope Valley Medical
Group, PrimeCare International, Inc., and Prospect Medical Holdings, Inc.;

 

(iv)                              Interim Services Agreement, dated as of
June 1, 1998, by and among PrimeCare Medical Network, Inc., Antelope
Valley Medical Group, and Sierra Medical Group;

 

(v)                                 Subordination Agreement dated as of
June 1, 1998, by and among PrimeCare International, Inc., Prospect Medical
Holdings, Inc., and Imperial Bank;

 

(vi)                              Subordinate Promissory Note executed as of
June 1, 1998, by Prospect Medical Holdings, Inc., payable in the principal
amount of $500,000 delivered to PrimeCare International, Inc.;

 

(vii)                           Assignment and Assumption Agreement made and
entered into as of June 1,1998, by and between Prospect Medical Holdings,
Inc., and Sierra Medical Management, Inc.;

 

4.                                       Pegasus Medical Group, Inc. , a California
professional corporation, with a fictitious business name of A.V. Western
Medical Group, Inc., conducting its business at the addresses listed on
Schedule 4.18 to the Revolving Credit Agreement;

 

31

 

a.                                       Asset Purchase Agreement, dated as of
October 29, 1997, by and among Pegasus Medical Group, Inc., Marvin
L. Ginsburg, M.D., Medical Corporation, d/b/a A.V. Western Medical Group,
Inc. and J. Robert West, M.D.;

 

b.                                      Amended and Restated Management Services
Agreement, effective as of October 31, 1997, by and between Pegasus
Medical Group, Inc. and Sierra Medical Management, Inc.;

 

c.                                       Amended and Restated Assignable Option
Agreement, effective as of October 31, 1997, by and among Pegasus Medical
Group, Inc., Sierra Medical Management, Inc. and Prospect Medical Group.

 

d.                                      Agreements with Health Maintenance
Organizations and Preferred Provider Organizations (including any amendments
executed to the date hereof but not separately described below):

 

(i)                                     HMO Full Service Medical Group Agreement made
and entered into as of January 1, 1991, by and between California
Physicians’ Service d.b.a. Blue Shield of California and Marvin L. Ginsberg,
M.D., Medical Corporation, d/b/a A.V. Western Medical Group, Inc., a California
corporation (“Western Medical Group”);

 

(ii)                                  Health Plan and IPA Service Agreement made
and entered into as of November 1, 1989, by and between
CareAmerica-Southern California and Western Medical Group;

 

(iii)                               Extended Medical Services Capitation
Agreement made and entered into as of January 1, 1996, by and between
CIGNA Healthcare of California and Western Medical Group;

 

(iv)                              Ancillary Provider Service Agreement made and
entered into as of January 1, 1997, by and between Western Medical Group
and Molina Medical Centers;

 

(v)                                 Group Provider Service Agreement by and
between Western Medical Group and Molina Medical Centers;

 

32

 

(vi)                              Primary Care Provider Service Agreement, by
and between Western Medical Group and Molina Medical Centers;

 

(vii)                           Managed Medical Provider Organization
Agreement made and entered into as of July 1, 1991, by and between Western
Medical Group and Prudential Health Care Plan of California.

 

33

 

Schedule 5.11

Bank Accounts

 

	
  Pegasus
  Medical Group, Inc.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Account
  Name:

  	
   

  	
  Pegasus
  Medical Group

  
	
  Bank:

  	
   

  	
  Antelope
  Valley Bank

  
	
  Address:

  	
   

  	
  1667
  E.  Palmdale Blvd.

  
	
   

  	
   

  	
  Palmdale,
  CA 93550

  
	
  Telephone:

  	
   

  	
  (661)
  273-9400

  
	
  Account
  No.:

  	
   

  	
  052-031705

  
	
   

  	
   

  	
   

  
	
  Sierra
  Primary Care Medical Group, Inc.

  
	
   

  	
   

  	
   

  
	
  Account
  Name:

  	
   

  	
  Sierra
  Medical Group

  
	
  Bank:

  	
   

  	
  Bank
  of America — Lancaster Branch

  
	
  Address:

  	
   

  	
  730
  W.  Lancaster Blvd.

  
	
   

  	
   

  	
  Lancaster,
  CA 93534

  
	
  Telephone:

  	
   

  	
  (661)
  940-9597

  
	
  Account
  No.:

  	
   

  	
  01720-09221

  
	
   

  	
   

  	
   

  
	
  Account
  Name:

  	
   

  	
  Sierra
  Medical Group Palmdale

  
	
  Bank:

  	
   

  	
  Bank
  of America — Palmdale Branch

  
	
  Address:

  	
   

  	
  839
  E.  Palmdale Blvd.

  
	
   

  	
   

  	
  Palmdale,
  CA 93550

  
	
  Telephone:

  	
   

  	
  (661)
  947-7575

  
	
  Account
  No.:

  	
   

  	
  01733-19553

  
	
   

  	
   

  	
   

  
	
  Account
  Name:

  	
   

  	
  Sierra
  Medical Group Urgent Care Palmdale

  
	
  Bank:

  	
   

  	
  Bank
  of America — Palmdale Branch

  
	
  Address:

  	
   

  	
  839
  E.  Palmdale Blvd.

  
	
   

  	
   

  	
  Palmdale,
  CA 93550

  
	
  Telephone:

  	
   

  	
  (661)
  947-7575

  
	
  Account
  No.:

  	
   

  	
  01734-19548

  
	
   

  	
   

  	
   

  
	
  Acccount
  Name:

  	
   

  	
  Sierra
  Medical Group Physical Therapy Palmdale

  
	
  Bank:

  	
   

  	
  Bank
  of America — Palmdale Branch

  
	
  Address:

  	
   

  	
  839
  E.  Palmdale Blvd.

  
	
   

  	
   

  	
  Palmdale,
  CA 93550

  
	
  Telephone:

  	
   

  	
  (661)
  947-7575

  
	
  Account
  No.:

  	
   

  	
  01736-19547

  

 

34Exhibit
10.17

 

FIRST AMENDMENT

TO

AMENDED AND RESTATED REVOLING CREDIT AGREEMENT

 

This First Amendment to Amended and Restated
Revolving Credit Agreement (“Amendment”) is entered into as of October 25,
2000, between Imperial Bank (the “Bank”) and Prospect Medical Holdings,
Inc.  (the “Borrower”).

 

RECITALS

 

This Amendment is being entered into in reference to the following
facts:

 

The Borrower and the Bank entered into an Amended and Restated
Revolving Credit Agreement, dated as of July 3, 1999 (as modified,
amended, and supplemented to the date hereof, the “Credit Agreement”).  Capitalized terms used, but not defined
herein, shall have the meanings ascribed thereto in the Credit Agreement.  The Bank and the Borrower desire to amend
the Credit Agreement in certain respects subject to the terms and conditions
hereof.

 

NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereto hereby agree as follows.

 

ARTICLE 1 - AMENDMENTS

 

1.1                                 Amendment of “Applicable Margin.” 
The definition of “Applicable Margin,” contained in Section 1.1 of
the Credit Agreement is hereby amended and restated to read in its entirety as
follows:

 

‘“Applicable Margin’
means three percent (3%).”

 

1.2                                 Amendment of “Loans.” 
The definition of “Loans,” contained in Section 1.1 of the Credit
Agreement, is hereby amended and restated to read in its entirety as follows:

 

“‘Loans’ means the
Revolving Loans and the Term Loan.”

 

1.3                                 Amendment of “Loan Documents.” 
The definition of “Loan Documents,” contained in Section 1.1 of the
Credit Agreement, is hereby amended by the addition of a new clause, numbered
“(xii),” which shall read in its entirety as follows:

 

“(xii) the Term Note.”

 

1.4                                 Amendment of “Maturity Date.” 
The definition of “Maturity Date, contained in Section 1.1 of the
Credit Agreement, is hereby amended and restated to read in its entirety as
follows:

 

1

 

‘“Maturity Date’
means November 3, 2001.”

 

1.5                                 Amendment of “Note.”  The
term “Note,” contained in Section 1.1 of the Credit Agreement, is hereby
amended and restated to read in its entirety as follows:

 

“‘Note’ means the
Amended and Restated Secured Revolving Note, dated as of July 3, 1999,
executed by Borrower to the order of Bank, as amended by the First Amendment to
Amended and Restated Secured Revolving Note, dated as of October 25, 2000,
executed by Borrower and Bank.”

 

1.6                                 Amendment of “Revolving Credit Commitment.” 
The term “Revolving Credit Commitment,” contained in Section 1.1 of
the Credit Agreement, is hereby amended and restated to read in its entirety as
follows:

 

‘“Revolving Credit
Commitment’ means $4,000,000.”

 

1.7                                 Deletion of “Working Capital Sublimit” 
Section 1.1 of the Credit Agreement is hereby amended by the
deletion therefrom of the definition of “Working Capital Sublimit.”

 

1.8                                 Amendment of Section 1.1. 
Section 1.1 of the Credit Agreement is hereby amended by the
addition of six new definitions, which shall read in their entirety as follows:

 

“ ‘Account Debtor’
means each Person obligated in any way on or in connection with an Account.

 

‘Accounts’ means all
of Borrower’s now owned or hereafter acquired or arising accounts, and any
other rights to payment for the sale or lease of goods or rendition of
services, whether or not they have been earned by performance.

 

‘Collection Account’
means Borrower’s account, number 07-111-770, with Bank.

 

‘Unused Letter of Credit
Sublimit” means $ 145,000 minus the sum of (a) the aggregate undrawn
amount of all outstanding Letters of Credit, plus (b) the aggregate
amount of unpaid reimbursement obligations with respect to all Letters of
Credit.

 

‘Term Loan’ has the
meaning ascribed thereto in Section 2.1 hereof.

 

2

 

‘Term Note’ means the
Term Loan Note, dated as of October 25, 2000, in the original principal
sum of $5,000,000, executed by Borrower to the order of Bank.”

 

1.9                                 Amendment of Section 2.1. 
Section 2.1 of the Credit Agreement is hereby amended and restated
to read in its entirety as follows:

 

“2.1                           Term Loan.

 

(a)                                  Bank will make a term loan to Borrower in an
aggregate principal amount of $5,000,000 (the ‘Term Loan’).  Borrower acknowledges that the Term Loan has
been fully funded.  The Term Loan shall
be repayable in accordance with the terms of the Term Loan Note.

 

(b)                                 The Borrower shall prepay the Term Loan by
the amount equal to one-half (1/2) of the sums arising
from the 2000 calendar year shared bonus pools actually paid to Borrower by
health plans on or before September 1, 2001, as and when such sums are
received by Borrower.  Such prepayment
shall be due and payable in full by no later than September 1, 2001.

 

1.10                           Deletion of Section 2.2(d). 
Section 2.2(d) of the Credit Agreement is hereby deleted therefrom
in its entirety and shall be of no further force or effect.

 

1.11                           Amendment of Section 2.3(a)(ii). 
Section 2.3(a)(ii) of the Credit Agreement is hereby amended and
restated to read in its entirety as follows:

 

“(ii)                            The face amount of the Letter of Credit
requested shall not exceed the Unused Letter of Credit Sublimit at such time.”

 

1.12                             Deletion of Section 2.5(f).   Section 2.5(f) of the
Credit Agreement is hereby deleted therefrom and shall be of no further force
or effect.

 

1.13                             Amendment of Article 2.  Article 2 of the Credit
Agreement is hereby amended by the addition of a new section, numbered 2.12,
which shall read in its entirety as follows:

 

3

 

“2.12 Collection of
Accounts.

 

(a)                                  Until Bank notifies Borrower to the contrary,
Borrower shall collect all Accounts for Bank, shall receive all payments
thereon, including all capitation payments, as Bank’s trustee, and shall
immediately deliver to Bank such payments in the form received, duly indorsed
in blank, for deposit into the Collection Account, or deposit them in the
Collection Account, or, to the extent practicable, instruct and cause all
Account Debtors to transfer to directly to Bank all Account payments by means
of wire transfer or otherwise, for deposit to the Collection Account.  Bank or Bank’s designee may, at any time,
notify Account Debtors that the Accounts have been assigned to Bank and of
Bank’s security interest therein, and may collect them directly and charge the
collection costs and expenses to Borrower’s loan account as a Revolving
Loan.  Notwithstanding the termination
of this Agreement, until all Obligations shall have been fully paid and
satisfied, Borrower shall continue to deposit, or cause to be deposited, into
the Collection Account all collections of the Accounts.

 

(b)                                 All collections received in the Collection
Account or directly by Borrower, Bank, and all funds in the Collection Account
or other account to which such Account collections are deposited, shall be the
sole property of Bank and subject to Bank’s sole control.  Borrower authorizes Bank to deduct all funds
deposited into the Collection Account without further action or consent by
Borrower.  Bank shall credit to
Borrower’s loan account (conditional upon final collection) all funds deducted
therefrom by Bank in such order and in such amounts as Bank shall determine in
its sole discretion, except as expressly provided otherwise in the Loan
Documents.”

 

ARTICLE 2 - CONDITIONS
PRECEDENT

 

2.1                                 Conditions Precedent. 
This Amendment shall be effective upon satisfaction of all of the
following conditions precedent, as determined by the Bank in its sole
discretion:

 

(a)                                  the Bank shall have received a signed copy of
the following documents, all in form and content acceptable to the Bank in it
sole discretion, duly executed and delivered by an authorized representative of
the Borrower: (i) this Amendment; (ii) the First Amendment to Amended and
Restated Secured Revolving Note, dated as of October 25, 2000; and (iii)
the Term Loan Note;

 

4

 

(b)                                 the Borrower shall have paid to the Bank, is
cash, a loan extension fee of $47,500; and

 

(c)                                  the Borrower shall have taken such other
actions as may be requested by the Bank to more fully document the transaction
evidenced hereby.

 

ARTICLE 3 –
REPRESENTATIONS AND WARRANTIES

 

3.1                                 Borrower’s Representations and Warranties.  In
order to induce the Bank to enter into this Amendment, the Borrower represents
and warrants to the Bank that:

 

(a)                                  The Borrower has the power and authority and
has taken all action necessary to execute, deliver and perform this Amendment
and all other agreements and instruments executed or delivered to be executed
or delivered in connection herewith and therewith and this Amendment and such
other agreements and instruments constitute the valid, binding and enforceable
obligations of the Borrower.

 

(b)                                 The Borrower’s representations and warranties
contained in the Credit Agreement are true and correct in all respects on and
as of the date hereof as though made on and as of the date hereof and no Event
of Default or Unmatured Event of Default has occurred and is continuing as of
the date hereof.

 

3.2                                 Acknowledgment of Borrower.  The
Borrower expressly acknowledges and agrees that as of the date of this
Amendment, it has no offsets, claims or defenses whatsoever against any of the
Obligations owing to the Bank.

 

ARTICLE 4 – GENERAL
PROVISIONS

 

4.1                                 Full Force and Effect. 
Except as expressly amended hereby, the Credit Agreement and all other
documents, agreements and instruments relating to thereto are and shall remain
unmodified and in full force and effect.

 

4.2.                                  Counterparts. 
This Amendment may be executed in any number of counterparts, each of
which when so executed and delivered shall be deemed to be an original and that
all of which taken together shall constitute one and the same instrument,
respectively.  Delivery of an executed
counterpart of this Amendment by facsimile shall be equally effective as
delivery of a manually executed counterpart of this Amendment.  Any party delivering an executed counterpart
by facsimile shall also deliver a manually executed counterpart of this
Amendment, but failure to do so shall not effect the validity, enforceability,
of binding effect of this Amendment.

 

4.3                                      Final Agreement. 
This Amendment is intended by the Borrower and the Bank to be the final,
complete, and exclusive expression of the agreement between them with respect

 

5

 

to
the subject matter hereof.  This
Amendment supersedes any and all prior oral or written agreements relating to
the subject matter hereof.

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their duly authorized officers as of the date first above
written.

 

	
  “BANK”

  	
  “BORROWER”

  
	
  Imperial
  Bank

  	
  Prospect
  Medical Holdings, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Thomas Turner

  	
   

  	
  By:

  	
  /s/ R. Stewart Kahn

  	
   

  
	
   

  	
  Thomas
  Turner,

  	
   

  	
  R.
  Stewart Kahn,

  
	
   

  	
  Vice
  President

  	
   

  	
  Executive
  Vice President

  
						

 

6

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