Document:

Exhibit
10.4

 

 

PLEDGE
AGREEMENT

1.             GRANT OF
SECURITY INTEREST.  The
undersigned PROMED HEALTH SERVICES COMPANY, a California corporation (“Pledgor”)
hereby irrevocably and unconditionally grants a security interest in, a lien
upon and the right of set-off against, and assigns and transfers to Bank of
America, N.A., as administrative agent, and its successors and assigns
(collectively, the “Administrative Agent”), for the benefit of the
Administrative Agent and the Lenders (as defined below), all property referred
to in Exhibit A attached hereto and incorporated herein, as hereafter amended
or supplemented from time to time (the “Collateral”). The parties hereto
expressly agree that all rights, assets and property at any time held in or
credited to any securities account constituting Collateral shall be treated as
financial assets as defined in the Uniform Commercial Code as in effect in any
applicable state (the “UCC”).

2.             INDEBTEDNESS.

(a)           The Collateral secures and will
secure all Indebtedness of Pledgor to the Administrative Agent or any
Lender.  Each person or entity obligated
under any Indebtedness is sometimes referred to in this Agreement as a “Debtor.”

(b)           “Indebtedness”
means:

(i)            all debts, obligations or
liabilities to the Administrative Agent or any Lender, now or hereafter
existing or incurred whether absolute or contingent, arising under that certain
Credit Agreement dated of even date herewith among Prospect Medical Holdings,
Inc., Prospect Medical Group, Inc., the Administrative Agent and the other
financial institutions from time to time party thereto (the “Lenders”)
(the “Credit Agreement”) and all other instruments, documents and
agreements of every kind and nature now or hereafter executed in connection
with the Credit Agreement (including all renewals, increases, extensions,
restatements and replacements thereof and amendments and modifications of any
of the foregoing),

(ii)           all debts, obligations or liabilities
arising pursuant to any agreement between Pledgor and/or any Debtor and the
Administrative Agent, any Lender or any of their respective affiliates now
existing or hereafter entered into, which provides for an interest rate,
credit, commodity or equity swap, cap, floor, collar, forward foreign exchange
transaction, currency swap, cross currency rate swap, currency option,
securities puts, calls, collars, options or forwards or any combination of, or
option with respect to, these or similar transactions (each a “Hedge
Transaction”);

(iii)          all obligations and liabilities of
Pledgor to the Administrative Agent hereunder, and

(iv)          all
costs, attorneys’ fees and expenses incurred by the Administrative Agent in
connection with the collection or enforcement of any of the above.

3.             PLEDGOR’S COVENANTS, REPRESENTATIONS AND
WARRANTIES.  Pledgor covenants,
represents and warrants that unless compliance is waived by the Administrative
Agent in writing:

(a)           Pledgor is the legal and beneficial
owner of all the Collateral free and clear of any and all liens, encumbrances,
or interests of any third parties other than the security interest of the
Administrative Agent, and will keep the Collateral free of all liens, claims,
security interests and encumbrances of any kind or nature, whether voluntary or
involuntary, except the security interest of the Administrative Agent.

(b)           Pledgor shall, at Pledgor’s expense,
take all actions necessary or advisable from time to time to maintain the first
priority and perfection of the security interest of the Administrative Agent in
the Collateral and shall not take any actions that would alter, impair or
eliminate said priority or perfection.

(c)           Pledgor agrees to pay prior to
delinquency all taxes, charges, liens and assessments against the Collateral,
and upon the failure of Pledgor to do so, the Administrative Agent at its
option may pay any of them and shall be the sole judge of the legality or
validity thereof and the amount necessary to discharge the same.

(d)           If any of the Collateral is margin
stock as defined in Regulation U promulgated by the Board of Governors of the
Federal Reserve System of the United States (“FRB”), Pledgor will
provide the Administrative Agent a properly executed Form U-1 Purpose
Statement. The Administrative Agent and Pledgor will comply with the
requirements and restrictions imposed by Regulation U.

(e)           Pledgor’s exact legal name is
correctly set forth on the signature page hereof. Pledgor will notify the
Administrative Agent in writing at least 30 days prior to any change in Pledgor’s
name or identity.

(f)            If Pledgor is an individual, Pledgor
resides and has for the four month period preceding the date hereof resided, or
if Pledgor is not an individual, Pledgor’s chief executive office is, and has
been for the four-month period preceding the date hereof (or, if less, the
entire period of the existence of Pledgor) located, in the state specified on
the signature page hereof.  In addition,
if Pledgor is not an individual, Pledgor is an organization of the type and (if
an  unregistered entity), is incorporated
in or organized under the laws of the state specified on such signature
page.  Pledgor shall give the
Administrative Agent at least thirty (30) days notice before changing the
location of its residence or its chief executive office, type of organization,
business structure  or state of incorporation
or organization.

(g)           If Pledgor is not an individual,
Pledgor’s organizational identification number, if any, assigned by its state
of incorporation or organization is correctly set forth on the signature page
hereof.  Pledgor shall promptly notify
the Administrative Agent (i) 

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of
any change of its organizational identification number, or (ii) if Pledgor does
not have an organizational identification number and later obtains one, of such
organizational identification number.

4.             REPRESENTATIONS, WARRANTIES AND COVENANTS REGARDING
EQUITY SECURITIES COLLATERAL.  Pledgor
hereby represents, warrants and covenants the following with respect to any
equity securities comprising any or all of the Collateral (the “Equity
Securities”) and covenants and agrees to promptly notify the Administrative
Agent in writing in the event that any of the foregoing representations and
warranties is no longer true and correct:

(a)           The Equity Securities have been duly
authorized and validly issued and are fully paid and non-assessable.

(b)           There are no restrictions on the
pledge of the Equity Securities by Pledgor to the Administrative Agent nor on
the sale of the Equity Securities by Pledgor or the Administrative Agent
(whether pursuant to securities laws or regulations or any shareholder, lock-up
or other similar agreement or insider trading rules of the issuer).

(c)           Pledgor is not an “affiliate” of the
issuer of any of the Equity Securities, as such term is defined in Rule 144 of
the General Rules and Regulations under the Securities Act of 1933, as amended,
issued by the Securities Exchange Commission.

5.             ADMINISTRATIVE AGENT APPOINTED ATTORNEY IN FACT.  Upon the occurrence and during the
continuation of an Event of Default, Pledgor authorizes and irrevocably
appoints the Administrative Agent as Pledgor’s true and lawful attorney-in-fact
with full power of substitution to take any action and execute or otherwise
authenticate any record or other documentation that the Administrative Agent
considers necessary or advisable to accomplish the purposes of this Agreement,
including but not limited to, the following actions: (a) to endorse, receive,
accept and collect all checks, drafts, other payment orders and instruments
representing or included in the Collateral or representing any payment,
dividend or distribution relating to any Collateral or to take any other action
to enforce, collect or compromise any of the Collateral; (b) to transfer any
Collateral (including converting physical certificates to book-entry holdings)
into the name of the Administrative Agent or its nominee or any broker-dealer
(which may be an affiliate of the Administrative Agent) and to execute any
control agreement covering any Collateral on Pledgor’s behalf and as
attorney-in-fact for Pledgor in order to perfect the Administrative Agent’s
first priority and continuing security interest in the Collateral and in order
to provide the Administrative Agent with control of the Collateral, and Pledgor’s
signature on this Agreement or other authentication of this Agreement shall
constitute an irrevocable direction by Pledgor to any bank, custodian, broker
dealer, any other securities intermediary or commodity intermediary holding any
Collateral or any issuer of any letters of credit to comply with any
instructions or entitlement orders, of the Administrative Agent without further
consent of Pledgor; (c) to participate in any recapitalization,
reclassification, reorganization, consolidation, redemption, stock split,
merger or liquidation of any issuer of securities which constitute Collateral,
and in connection therewith the Administrative Agent may deposit or surrender
control of the Collateral, accept money or other property in exchange for the
Collateral, and take such action as it deems proper in connection therewith,
and any money or 

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property received on account of or in exchange for the
Collateral shall be applied to the Indebtedness or held by the Administrative
Agent thereafter as Collateral pursuant to the provisions hereof; (d)  to exercise any right, privilege or option
pertaining to any Collateral, but the Administrative Agent has no obligation to
do so; (e) to file any claims, take any actions or institute any proceedings
which the Administrative Agent determines to be necessary or appropriate to
collect or preserve the Collateral or to enforce the Administrative Agent’s
rights with respect to the Collateral; (f) to execute in the name or otherwise
authenticate on behalf of Pledgor any record reasonably believed necessary or
appropriate by the Administrative Agent for compliance with laws, rules or
regulations applicable to any Collateral, or in connection with exercising the
Administrative Agent’s rights under this Agreement; (g) to file any financing
statement relating to this Agreement electronically, and the Administrative
Agent’s transmission of Pledgor’s signature on and authentication of the
financing statement shall constitute Pledgor’s signature on and authentication
of the financing statement; (h) to make any compromise or settlement it deems
desirable or proper with reference to the Collateral; (i) to do and take any
and all actions with respect to the Collateral and to perform any of Pledgor’s
obligations under this Agreement; and (j) to execute any documentation
reasonably believed necessary by the Administrative Agent for compliance with
Rule 144 or any other restrictions, laws, rules or regulations applicable to
any Collateral hereunder that constitutes restricted or control securities
under the securities laws.  The foregoing
appointments are irrevocable and coupled with an interest and shall survive the
death or disability of Pledgor and shall not be revoked without the
Administrative Agent’s written consent. 
To the extent permitted by law, Pledgor hereby ratifies all said
attorney-in-fact shall lawfully do by virtue hereof.

6.             VOTING RIGHTS.

(a)           So long as no Event of Default shall
have occurred and is continuing and the Administrative Agent has not delivered
the notice specified in subsection (b) below, Pledgor shall be entitled to
exercise any and all voting and other consensual rights pertaining to the
Collateral or any part thereof for any purpose not inconsistent with the terms
of this Agreement or any document or agreement executed in connection herewith.

(b)           Upon the occurrence and during the
continuance of an Event of Default, at the option of the Administrative Agent
exercised in a writing sent to Pledgor, all rights of Pledgor to exercise the
voting and other consensual rights which it would otherwise be entitled to
exercise pursuant to subsection (a) above shall cease, and the Administrative
Agent shall thereupon have the sole right to exercise such voting and other
consensual rights.

7.             EVENTS OF DEFAULT;
REMEDIES.

(a)           Any one or more of the following
shall be a default hereunder (each an, “Event of Default”):

(i)            Pledgor or any Debtor fails to pay
any Indebtedness when due, after giving effect to any applicable grace period.

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(ii)           Pledgor or any Debtor fails to cure a
breach of any collateral maintenance provisions set forth in this Agreement or
in any agreement governing or executed or delivered in connection with any
Indebtedness within the applicable cure period specified therein.

(iii)          Pledgor or any Debtor breaches any
term, provision, warranty or representation under this Agreement not
specifically referred to in subsection (a) of this Section or breaches any
term, provision, warranty or representation of any other agreement or
instrument evidencing, securing or executed or delivered in connection with the
Indebtedness beyond any grace period provided with respect thereto.

(iv)          A receiver or similar official is
appointed for a substantial portion of any business or other property of
Pledgor, any Debtor or any guarantor of any Indebtedness, or their business is
terminated, or, if Pledgor, any Debtor or any such guarantor is anything other
than a natural person, such Pledgor, Debtor or guarantor is liquidated or
dissolved.

(v)           Pledgor, any Debtor, or any guarantor
of any Indebtedness files a bankruptcy petition, a bankruptcy petition is filed
against any of the foregoing parties, or Pledgor, any Debtor, or any such
guarantor makes a general assignment for the benefit of creditors.

(vi)          Any control agreement covering any
Collateral is breached, or any party to such control agreement terminates or
notifies the Administrative Agent or Pledgor of its intention to terminate the
control agreement or denies the enforceability of the control agreement.

(vii)         If any Indebtedness is an obligation or
liability of any kind (including any renewals, extensions or modifications
thereof) arising out of or relating to any Hedge Transaction, any termination
event, event of default or other similar event occurs under such Indebtedness.

(viii)        The occurrence of a default or event of
default under any agreement of Pledgor, any Debtor or any other person or
entity executed or delivered in connection with the Indebtedness.

(ix)           Any involuntary lien of any kind or
character attaches to any of the Collateral.

(b)           If an Event of Default occurs, the
Administrative Agent may do any one or more of the following:

(i)            Declare any Indebtedness immediately
due and payable, without notice or demand.

(ii)           Exercise as to any or all of the
Collateral all the rights, powers and remedies of an owner, subject to the
Section entitled “VOTING RIGHTS”.

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(iii)          Enforce the security interest given
hereunder pursuant to the UCC and any other applicable law.

(iv)          Sell all or any part of the Collateral
at public or private sale in accordance with the UCC, without advertisement, in
such manner and order as the Administrative Agent may elect.  The Administrative Agent may purchase the
Collateral for its own account at any such sale. The Administrative Agent shall
give Pledgor such notice of any public or private sale as may be required by
the UCC, provided that to the extent notice of any such sale is required by the
UCC or other applicable law, Pledgor agrees that at least 10 days notice to
Pledgor of the time and place of any public sale or the time after which any
private sale is to be made shall constitute reasonable notification and
provided further that, if the Administrative Agent fails to comply with this
sentence in any respect, its liability for such failure shall be limited to the
liability (if any) imposed on it as a matter of law under the UCC or other
applicable law.  Pledgor acknowledges
that Collateral may be sold at a loss to Pledgor, and that, in such event, the
Administrative Agent shall have no liability or responsibility to Pledgor for
such loss.  Pledgor further acknowledges
that a private sale may result in prices and other terms less favorable to the
seller than if such sale were a public sale and, notwithstanding such
circumstances, agrees that no such private sale shall, to the extent permitted
by applicable law, be deemed not to be “commercially reasonable” solely as a
result of such prices and other sale terms. 
Upon any such sale, the Administrative Agent shall have the right to
deliver, assign and transfer to the buyer thereof the Collateral so sold.  Each buyer at any such sale shall hold the
Collateral so sold absolutely and free from any claim or right of whatsoever
kind, including any equity or right of redemption of Pledgor that may be waived
or any other right or claim of Pledgor, and Pledgor, to the extent permitted by
law, hereby specifically waives all rights of redemption, stay or appraisal
that Pledgor has or may have under any law now existing or hereafter adopted.

Without limiting any
other rights and remedies available to the Administrative Agent, Pledgor expressly
acknowledges and agrees that with respect to Collateral consisting of notes,
bonds or other securities  which are not
sold on a recognized market , the Administrative Agent shall be deemed to have
conducted a commercially reasonable sale of such Collateral if (a) such sale is
conducted by any nationally recognized broker-dealer (including any
affiliate of the Administrative Agent), investment banker or any other method
common in the securities industry, and (b) if the purchaser is the Administrative
Agent or any affiliate of the Administrative Agent, the sale price received by
the Administrative Agent in connection with such sale is reasonably supported
by quotations received from one or more other nationally recognized
broker-dealers, investment bankers or other financial institutions.

(v)           Enforce the security interest of the
Administrative Agent in any deposit account which is part of the Collateral by
applying such account to the Indebtedness.

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(vi)          Exercise any other remedy provided
under this Agreement or by any applicable law.

(vii)         Comply with any applicable state or
federal law requirements in connection with a disposition of the Collateral and
such compliance will not be considered to affect adversely the commercial
reasonableness of any sale or other disposition of the Collateral.

(viii)        Sell the Collateral without giving any
warranties as to the Collateral.  The
Administrative Agent may specifically disclaim any warranties of title or the
like.  This procedure will not be
considered to affect adversely the commercial reasonableness of any sale or
other disposition of the Collateral.

8.             RIGHT TO CURE; LIMITATION ON ADMINISTRATIVE AGENT’S
DUTIES.  If Pledgor fails to perform any
agreement contained herein, the Administrative Agent may perform or cause
performance of such agreement and the expenses of the Administrative Agent
incurred in connection therewith shall be payable by Pledgor or Debtor under
the Section entitled “COSTS”. 
Any powers conferred on the Administrative Agent hereunder are solely to
protect its interest in the Collateral and shall not impose any duty upon it to
exercise any such powers.  Except for
reasonable care in the custody of any Collateral in its possession and the
accounting for moneys actually received by it hereunder, the Administrative
Agent shall have no duty as to any Collateral or as to the taking of any
necessary steps to preserve rights against prior parties or any other rights
pertaining to any Collateral.  The
Administrative Agent shall be deemed to have exercised reasonable care in the
custody and preservation of the Collateral in its possession if the Collateral
is accorded treatment substantially equal to that which the Administrative
Agent accords its own property, it being understood that the Administrative
Agent shall not have any responsibility for (a) ascertaining, exercising or
taking other action or giving Pledgor notice with respect to subscription
rights, calls, conversions, exchanges, maturities, lenders or other matters
relative to any Collateral, whether or not the Administrative Agent has or is
deemed to have knowledge of such matters, or (b) taking any necessary steps to
preserve rights against any parties with respect to any Collateral.  The Administrative Agent shall not be liable
for any loss to the Collateral resulting from acts of God, war, civil
commotion, fire, earthquake, or other disaster or for any other loss or damage
to the Collateral except to the extent such loss is determined by a court of
competent jurisdiction by final and nonappealable judgment to have resulted
from the Administrative Agent’s gross negligence or willful misconduct.

9.             WAIVERS.  The
Administrative Agent shall be under no duty or obligation whatsoever and
Pledgor waives any right to require the Administrative Agent to (i) make or
give any presentment, demands for performances, notices of nonperformance,
protests, notices of protest or notices of dishonor in connection with any
obligations or evidences of indebtedness held by the Administrative Agent as
Collateral, or in connection with any obligation or evidences of indebtedness
which constitute in whole or in part the Indebtedness, (ii) proceed against any
person or entity, (iii) proceed against or exhaust any collateral, or (iv)
pursue any other remedy in the Administrative Agent’s power; and Pledgor waives
any defense arising by reason of any disability or other defense of Debtor or
any other person, or by reason of the cessation from any cause whatsoever of
the liability of Debtor or any other person. 
Until the Indebtedness is paid in 

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full, Pledgor waives any right of subrogation,
reimbursement, indemnification, and contribution (contractual, statutory or
otherwise), including without limitation any claim or right of subrogation
under the Bankruptcy Code (Title 11 of the U.S. Code) or any successor statute,
arising from the existence or performance of this Agreement, and Pledgor waives
any right to enforce any remedy which the Administrative Agent now has or may
hereafter have against Debtor or against any other person and waives any
benefit of and any right to participate in any Collateral or security
whatsoever now or hereafter held by the Administrative Agent.  If Pledgor is not also a Debtor with respect
to a specified Indebtedness, Pledgor authorizes the Administrative Agent
without notice or demand and without affecting Pledgor’s liability hereunder,
from time to time to:  (i) renew, extend,
accelerate or otherwise change the time for payment of or otherwise change the
terms of the Indebtedness or any part thereof, including increase or decrease
of the rate of interest thereon; (ii) take and hold security, other than the
Collateral, for the payment of the Indebtedness or any part thereof, and
exchange, enforce, waive and release the Collateral or any part thereof or any
such other security; and (iii) release or substitute Debtor or any one or more
of them, or any of the endorsers or guarantors of the Indebtedness or any part
thereof, or any other parties thereto and Pledgor consents to the taking of, or
failure to take, any action by the Administrative Agent which might in any
manner or to any extent vary the risks of Pledgor under this Agreement or
which, but for this provision, might operate as a discharge of Pledgor.  Pledgor agrees that it is solely responsible
for keeping itself informed as to the financial condition of Debtor and of all
circumstances which bear upon the risk of nonpayment or the risk of a margin
call or liquidation of the Collateral.

10.           TRANSFER, DELIVERY
AND RETURN OF COLLATERAL.

(a)           Pledgor shall immediately deliver or
cause to be delivered to the Administrative Agent (or the Securities
Intermediary, if any) (i) any certificates or instruments now or hereafter
representing or evidencing Collateral and such certificates and instruments shall
be in suitable form for transfer without restriction or stop order by delivery,
or shall be accompanied by duly executed instruments of transfer or assignment
in blank in form and substance satisfactory to the Administrative Agent, and
(ii) in the same form as received (with any necessary endorsement), all
dividends and other distributions paid or payable in cash in respect of any
Collateral and any such amounts, if received by Pledgor, shall be received in
trust for the benefit of the Administrative Agent and be segregated from the
other property or funds of Pledgor.

(b)           The Administrative Agent may at any
time deliver the Collateral or any part thereof to Pledgor and the receipt by
Pledgor shall be a complete and full acquittance for the Collateral so delivered,
and the Administrative Agent shall thereafter be discharged from any liability
or responsibility therefor.

(c)           Upon the transfer of all or any part
of the Indebtedness, the Administrative Agent may transfer all or any part of
the Collateral and shall be fully discharged thereafter from all liability and
responsibility with respect to such Collateral so transferred, and the
transferee shall be vested with all the rights and powers of the Administrative
Agent hereunder with respect to such Collateral so transferred; but with
respect to any Collateral not so transferred the Administrative Agent shall
retain all rights and powers hereby given. 
Pledgor agrees that the Administrative Agent may disclose to 

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any
prospective purchaser or transferee and any purchaser or transferee of all or
part of the Indebtedness any and all information in the Administrative Agent’s
possession concerning Pledgor, this Agreement and the Collateral.

11.           CONTINUING AGREEMENT
AND POWERS.

(a)           This is a continuing Agreement and
all the rights, powers and remedies hereunder shall, unless otherwise limited
herein, apply to all past, present and future Indebtedness of Debtor or any one
or more of them to the Administrative Agent and the Lenders, including that
arising under successive transactions which shall either continue the
Indebtedness, increase or decrease it, or from time to time create new
Indebtedness after all or any prior Indebtedness has been satisfied, and
notwithstanding the death, incapacity, cessation of business, dissolution or
bankruptcy of Debtor or any one or more of them, or any other event or
proceeding affecting Debtor or any one or more of them.

(b)           Until all Indebtedness shall have
been paid in full and the Administrative Agent and the Lenders shall have no obligation
to extend credit to any Debtor, the power of sale and all other rights, powers
and remedies granted to the Administrative Agent hereunder shall continue to
exist and may be exercised by the Administrative Agent at the time specified
hereunder irrespective of the fact that the Indebtedness or any part thereof
may have become barred by any statute of limitations, or that the personal
liability of Debtor or any one or more of them may have ceased.  Pledgor waives the benefit of any statute of
limitations as applied to this Agreement.

12.           SECURITIES INTERMEDIARY.  Upon the occurrence and during the
continuation of an Event of Default, if permitted by the Administrative Agent,
some or all of the Collateral may be held at a broker or other securities intermediary
(the “Securities Intermediary”).  Pledgor
shall pay to the Securities Intermediary any charges or costs imposed by the
Securities Intermediary.  Pledgor at no
time shall request that the Securities Intermediary release any Collateral to
Pledgor, except as expressly permitted by the Administrative Agent.  The Administrative Agent may require that
Pledgor obtain a control agreement, signed by the Securities Intermediary, in
form and substance acceptable to the Administrative Agent.  The Administrative Agent may, at any time but
in accordance with the terms of this Agreement and any control agreement,
require the Securities Intermediary to do any or all of the following: (a)
disburse any or all of the Collateral to the Administrative Agent; (b) allow
the Administrative Agent (and not Pledgor) to exercise any rights relating to
the Collateral; (c) sell some or all of the Collateral and remit the sales
proceeds (less the Securities Intermediary’s normal sales charge) to the
Administrative Agent; and (d) buy and sell Collateral only upon the
instructions of the Administrative Agent (and not Pledgor).  If the Administrative Agent assigns or
transfers its rights under this Agreement and the Administrative Agent is the
Securities Intermediary for any or all of the Collateral, Pledgor agrees that
the Administrative Agent, in such capacity, is irrevocably directed by Pledgor
to comply with instructions or entitlement orders with respect to such
Collateral originated by any assignee or transferee of this Agreement without
further consent of Pledgor.

13.           COSTS.  All advances, charges, costs and expenses,
including reasonable attorneys’ fees, incurred or paid by the Administrative
Agent in exercising any right, power or 

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remedy conferred by this Agreement or in the
enforcement thereof, and including the charges and expenses of the
Administrative Agent’s custody unit or of any Securities Intermediary, shall
become a part of the Indebtedness secured hereunder and shall be paid to the
Administrative Agent by Debtor and Pledgor immediately and without demand, with
interest thereon at an annual rate equal to the highest rate of interest of any
Indebtedness secured by this Agreement (or, if there is no such interest rate,
at the maximum interest rate permitted by law for interest on judgments).  Such costs and attorneys’ fees shall include
the allocated cost of in-house counsel to the extent permitted by law.

14.           NOTICES.  Unless otherwise provided or agreed to herein
or required by law, notice and communications provided for in this Agreement
shall be in writing and shall be mailed, telecopied or delivered to Pledgor to
the address or facsimile number for notices set forth for Pledgor below or
across from its signature below or at such other address or facsimile number as
shall be designated by Pledgor in a written notice to the Administrative Agent
at the address for notices set forth for the Administrative Agent below or
across from the Administrative Agent’s signature below.  If Pledgor’s address or facsimile number for notices
is not entered below and Pledgor has not otherwise designated such address or
facsimile number to the Administrative Agent in writing, then the address
and/or facsimile number for Pledgor in the Administrative Agent’s records shall
be deemed the address or facsimile for notices to Pledgor.  Notices and other communications sent by (a)
first class mail shall be deemed delivered on the earlier of actual receipt or
on the fourth business day after deposit in the U.S. mail, postage prepaid, (b)
overnight courier shall be deemed delivered on the next business day after
deposit with the overnight courier, (c) facsimile shall be deemed delivered
when transmitted and (d) any other method, shall be deemed delivered when
delivered.  To the extent that oral notification
is provided for or agreed to herein, such oral notification may be made by
telephone to any of the number(s) set forth on the signature page for Pledgor;
provided that any oral notification in person or at any other telephone number
shall constitute notification hereunder.

15.           INDEMNITY.  Pledgor shall indemnify, hold harmless and
defend the Administrative Agent and its directors, officers, agents and
employees, from and against any and all claims, actions, obligations,
liabilities and expenses, including defense costs, investigative fees and
costs, and legal fees and damages arising from their execution of or
performance under this Agreement or any control agreement executed by the
Administrative Agent in connection with the Collateral, except to the extent
that such claim, action, obligation, liability or expense is determined by a
court of competent jurisdiction by final and nonappealable judgment to have
resulted from the gross negligence or willful misconduct of such indemnified
person. This indemnification shall survive the termination of this Agreement.

16.           MISCELLANEOUS.

(a)           This Agreement (i) may be waived,
altered, modified or amended only by an instrument in writing, duly executed by
the party or parties sought to be charged or bound thereby, and (ii) may be executed in any number of identical
counterparts, each of which shall be deemed an original for all purposes and
all of which constitute, collectively, one agreement; but, in making proof of
this Agreement, it shall not be necessary to produce or account for more than
one such counterpart.  Any waiver,
express or implied, of any provision hereof and any delay or failure by the
Administrative Agent to enforce any 

 10
 

provision
shall not preclude the Administrative Agent from enforcing any such provision
thereafter.

(b)           Pledgor hereby irrevocably authorizes
the Administrative Agent to file one or more financing statements describing
all or part of the Collateral, and continuation statements, or amendments
thereto, relative to all or part of the Collateral as authorized by applicable
law.  Such financing statements,
continuation statements and amendments will contain any other information
required by the UCC for the sufficiency or filing office acceptance of any
financing statement, continuation statement or amendment, including whether
Pledgor is an organization, the type of organization and any organizational
identification number issued to Pledgor. 
Pledgor agrees to furnish any such information to the Administrative
Agent promptly upon request.  Pledgor
also ratifies its authorization for the Administrative Agent to have filed any
initial financing statement or amendments thereto filed prior to the date
hereof.

(c)           From time to time, Pledgor and Debtor
shall, at the request of the Administrative Agent, execute such other
agreements, documents or instruments or take any other actions in connection
with this Agreement as the Administrative Agent may reasonably deem necessary
to evidence or perfect the security interests granted herein, to maintain the
first priority of the security interests, or to effectuate the rights granted
to the Administrative Agent herein, but their failure to do so shall not limit
or affect any security interest or any other rights of the Administrative Agent
in and to the Collateral.  Pledgor will
execute and deliver to the Administrative Agent any stock powers, instructions
to any securities intermediary, issuer or transfer agent, proxies, or any other
documents of transfer that the Administrative Agent requests in order to
perfect, obtain control or otherwise protect the Administrative Agent’s
security interest in the Collateral or to effect the Administrative Agent’s
rights under this Agreement.  Such powers
or documents may be executed in blank or completed prior to execution, as
requested by the Administrative Agent.

(d)           This Agreement shall be governed by
and construed according to internal laws of the State of California, to the
jurisdiction of which the parties hereto submit, except as otherwise required
by mandatory provisions of law and except to the extent that remedies are
governed by the laws of any other jurisdiction.

(e)           Any term used or defined in the UCC
and not defined herein has the meaning given to the term in the UCC, when used
in this Agreement.

(f)            This Agreement shall benefit the
Administrative Agent’s successors and assigns and shall bind Pledgor’s
successors and assigns, except that Pledgor may not assign its rights and
obligations under this Agreement.  This
Agreement shall bind all parties who become bound as a Debtor with respect to
the Indebtedness.

(g)           All rights and remedies herein
provided are cumulative and not exclusive of any rights or remedies otherwise
provided by law.  Any single or partial
exercise of any right or remedy shall not preclude the further exercise of any
other right or remedy.

 11
 

(h)           In all cases where more than one
party executes this Agreement, all words used herein in the singular shall be
deemed to have been used in the plural where the context and construction so
require, and all obligations and undertakings hereunder of such parties are
joint and several.

(i)            The illegality, invalidity or
unenforceability of any provision of this Agreement shall not in any way affect
or impair the legality, validity or enforceability of the remaining provisions
of this Agreement.

(j)            This Agreement and any other
documents executed or delivered in connection herewith constitute the entire
agreement of the parties hereto with respect to the subject matter hereof and
shall supersede any prior expressions of intent or understandings with respect
to this transaction.

17.           FINAL AGREEMENT.  BY SIGNING THIS DOCUMENT EACH PARTY
REPRESENTS AND AGREES THAT:  (A) THIS
DOCUMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE
SUBJECT MATTER HEREOF, (B) THIS DOCUMENT SUPERSEDES ANY COMMITMENT LETTER, TERM
SHEET, OR OTHER WRITTEN OUTLINE OF TERMS AND CONDITIONS RELATING TO THE SUBJECT
MATTER HEREOF, UNLESS SUCH COMMITMENT LETTER, TERM SHEET, OR OTHER WRITTEN
OUTLINE OF TERMS AND CONDITIONS EXPRESSLY PROVIDES TO THE CONTRARY, (C) THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES, AND (D) THIS DOCUMENT MAY
NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OR UNDERSTANDINGS OF THE PARTIES.

 12
 

Executed as of the 1st day of June, 2007.

BANK OF AMERICA, N.A., as administrative agent

By:_____________________________________________ 

Name:___________________________________________ 

Title:____________________________________________ 

Address:

Bank of America, N.A.

Agency Management

Mail Code:  WA1-501-32-37

800 Fifth Avenue, Floor 32

Seattle, WA 98104

Attention:        Tiffany
Shin

 

	
  Pledgor’s Chief Executive
  Office:

  400 Corporate Pointe, Suite 525

  Culver City, California  90230

   

  	
  PLEDGOR:

  PROMED HEALTH SERVICES COMPANY, a Delaware
  corporation

  By:                                                                                          

  Name:     Jacob
  Y. Terner, M.D.  

  Title:       Vice President

   

  
	
   

  	
   

  

 

	
  Pledgor’s type of
  organization:  Corporation

  

  Pledgor’s state of incorporation or organization (if Pledgor

  is a corporation, limited partnership, limited liability

  company or other registered entity): 
  California

   

  	
  Pledgor’s organizational identification number if
  any, assigned by the state of incorporation or organization  (If no organizational identification number
  has been assigned enter “None”):

   

  
	
   

  	
   

  

 

 13

Exhibit A to
Pledge Agreement

Description of
Collateral

Pledged Equity:

	
  Pledged Entity

  	
   

  	
  Class of Stock

  	
   

  	
  Stock

  Certificate #

  	
   

  	
  Number of

  Shares

  	
   

  	
  Percentage of

  Outstanding

  Shares

  	
   

  
	
  ProMed Health Care
  Administrators, a California corporation

  	
   

  	
  Common

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  100

  	
  %

  

 

The Pledged Equity includes
all present and future income, proceeds, earnings, increases, and substitutions
from or for the Collateral of every kind and nature, including without
limitation all payments, interest, profits, distributions, benefits, rights,
options, warrants, dividends, stock dividends, stock splits, stock rights,
regulatory dividends, subscriptions, monies, claims for money due and to become
due, proceeds of any insurance on the Collateral, shares of stock of different
par value or no par value issued in substitution or exchange for shares
included in the Collateral, and all other property Pledgor is entitled to
receive on account of such Collateral, including accounts, documents,
instruments, chattel paper, and general intangibles.

 1Exhibit
10.5

 

 

PLEDGE
AGREEMENT

1.             GRANT OF
SECURITY INTEREST.  The
undersigned Prospect Medical Group, Inc., a California professional corporation
(“Pledgor”) hereby irrevocably and unconditionally grants a security
interest in, a lien upon and the right of set-off against, and assigns and
transfers to Bank of America, N.A., as administrative agent, and its successors
and assigns (collectively, the “Administrative Agent”), for the benefit
of the Administrative Agent and the Lenders (as defined below), all property
referred to in Exhibit A attached hereto and incorporated herein, as hereafter
amended or supplemented from time to time (the “Collateral”). The
parties hereto expressly agree that all rights, assets and property at any time
held in or credited to any securities account constituting Collateral shall be
treated as financial assets as defined in the Uniform Commercial Code as in
effect in any applicable state (the “UCC”).

2.             INDEBTEDNESS.

(a)           The Collateral secures and will
secure all Indebtedness of Pledgor to the Administrative Agent or any
Lender.  Each person or entity obligated
under any Indebtedness is sometimes referred to in this Agreement as a “Debtor.”

(b)           “Indebtedness”
means:

(i)            all debts, obligations or
liabilities to the Administrative Agent or any Lender, now or hereafter
existing or incurred whether absolute or contingent, arising under that certain
Credit Agreement dated of even date herewith among Prospect Medical Holdings,
Inc., Prospect Medical Group, Inc., the Administrative Agent and the other
financial institutions from time to time party thereto (the “Lenders”)
(the “Credit Agreement”) and all other instruments, documents and
agreements of every kind and nature now or hereafter executed in connection
with the Credit Agreement (including all renewals, increases, extensions,
restatements and replacements thereof and amendments and modifications of any
of the foregoing),

(ii)           all debts, obligations or liabilities
arising pursuant to any agreement between Pledgor and/or any Debtor and the
Administrative Agent, any Lender or any of their respective affiliates now
existing or hereafter entered into, which provides for an interest rate,
credit, commodity or equity swap, cap, floor, collar, forward foreign exchange
transaction, currency swap, cross currency rate swap, currency option,
securities puts, calls, collars, options or forwards or any combination of, or
option with respect to, these or similar transactions (each a “Hedge
Transaction”);

(iii)          all obligations and liabilities of Pledgor
to the Administrative Agent hereunder, and

(iv)          all
costs, attorneys’ fees and expenses incurred by the Administrative Agent in
connection with the collection or enforcement of any of the above.

3.             PLEDGOR’S COVENANTS, REPRESENTATIONS AND WARRANTIES.  Pledgor covenants, represents and warrants
that unless compliance is waived by the Administrative Agent in writing:

(a)           Pledgor is the legal and beneficial
owner of all the Collateral free and clear of any and all liens, encumbrances,
or interests of any third parties other than the security interest of the
Administrative Agent, and will keep the Collateral free of all liens, claims,
security interests and encumbrances of any kind or nature, whether voluntary or
involuntary, except the security interest of the Administrative Agent.

(b)           Pledgor shall, at Pledgor’s expense,
take all actions necessary or advisable from time to time to maintain the first
priority and perfection of the security interest of the Administrative Agent in
the Collateral and shall not take any actions that would alter, impair or
eliminate said priority or perfection.

(c)           Pledgor agrees to pay prior to
delinquency all taxes, charges, liens and assessments against the Collateral,
and upon the failure of Pledgor to do so, the Administrative Agent at its
option may pay any of them and shall be the sole judge of the legality or
validity thereof and the amount necessary to discharge the same.

(d)           If any of the Collateral is margin
stock as defined in Regulation U promulgated by the Board of Governors of the
Federal Reserve System of the United States (“FRB”), Pledgor will
provide the Administrative Agent a properly executed Form U-1 Purpose
Statement. The Administrative Agent and Pledgor will comply with the
requirements and restrictions imposed by Regulation U.

(e)           Pledgor’s exact legal name is
correctly set forth on the signature page hereof. Pledgor will notify the
Administrative Agent in writing at least 30 days prior to any change in Pledgor’s
name or identity.

(f)            If Pledgor is an individual, Pledgor
resides and has for the four month period preceding the date hereof resided, or
if Pledgor is not an individual, Pledgor’s chief executive office is, and has
been for the four-month period preceding the date hereof (or, if less, the
entire period of the existence of Pledgor) located, in the state specified on
the signature page hereof.  In addition,
if Pledgor is not an individual, Pledgor is an organization of the type and (if
an  unregistered entity), is incorporated
in or organized under the laws of the state specified on such signature
page.  Pledgor shall give the
Administrative Agent at least thirty (30) days notice before changing the
location of its residence or its chief executive office, type of organization,
business structure  or state of
incorporation or organization.

(g)           If Pledgor is not an individual,
Pledgor’s organizational identification number, if any, assigned by its state
of incorporation or organization is correctly set forth on the signature page
hereof.  Pledgor shall promptly notify
the Administrative Agent (i) 

 2
 

of
any change of its organizational identification number, or (ii) if Pledgor does
not have an organizational identification number and later obtains one, of such
organizational identification number.

4.             REPRESENTATIONS, WARRANTIES AND COVENANTS REGARDING
EQUITY SECURITIES COLLATERAL.  Pledgor
hereby represents, warrants and covenants the following with respect to any
equity securities comprising any or all of the Collateral (the “Equity
Securities”) and covenants and agrees to promptly notify the Administrative
Agent in writing in the event that any of the foregoing representations and
warranties is no longer true and correct:

(a)           The Equity Securities have been duly
authorized and validly issued and are fully paid and non-assessable.

(b)           There are no restrictions on the
pledge of the Equity Securities by Pledgor to the Administrative Agent nor on
the sale of the Equity Securities by Pledgor or the Administrative Agent
(whether pursuant to securities laws or regulations or any shareholder, lock-up
or other similar agreement or insider trading rules of the issuer).

(c)           Pledgor is not an “affiliate” of the
issuer of any of the Equity Securities, as such term is defined in Rule 144 of
the General Rules and Regulations under the Securities Act of 1933, as amended,
issued by the Securities Exchange Commission.

5.             ADMINISTRATIVE AGENT APPOINTED ATTORNEY IN FACT.  Upon the occurrence and during the
continuation of an Event of Default, Pledgor authorizes and irrevocably appoints
the Administrative Agent as Pledgor’s true and lawful attorney-in-fact with
full power of substitution to take any action and execute or otherwise
authenticate any record or other documentation that the Administrative Agent
considers necessary or advisable to accomplish the purposes of this Agreement,
including but not limited to, the following actions: (a) to endorse, receive,
accept and collect all checks, drafts, other payment orders and instruments
representing or included in the Collateral or representing any payment,
dividend or distribution relating to any Collateral or to take any other action
to enforce, collect or compromise any of the Collateral; (b) to transfer any
Collateral (including converting physical certificates to book-entry holdings)
into the name of the Administrative Agent or its nominee or any broker-dealer
(which may be an affiliate of the Administrative Agent) and to execute any
control agreement covering any Collateral on Pledgor’s behalf and as
attorney-in-fact for Pledgor in order to perfect the Administrative Agent’s
first priority and continuing security interest in the Collateral and in order
to provide the Administrative Agent with control of the Collateral, and Pledgor’s
signature on this Agreement or other authentication of this Agreement shall
constitute an irrevocable direction by Pledgor to any bank, custodian, broker
dealer, any other securities intermediary or commodity intermediary holding any
Collateral or any issuer of any letters of credit to comply with any instructions
or entitlement orders, of the Administrative Agent without further consent of
Pledgor; (c) to participate in any recapitalization, reclassification,
reorganization, consolidation, redemption, stock split, merger or liquidation
of any issuer of securities which constitute Collateral, and in connection
therewith the Administrative Agent may deposit or surrender control of the
Collateral, accept money or other property in exchange for the Collateral, and
take such action as it deems proper in connection therewith, and any money or 

 3
 

property received on account of or in exchange for the
Collateral shall be applied to the Indebtedness or held by the Administrative
Agent thereafter as Collateral pursuant to the provisions hereof; (d)  to exercise any right, privilege or option
pertaining to any Collateral, but the Administrative Agent has no obligation to
do so; (e) to file any claims, take any actions or institute any proceedings
which the Administrative Agent determines to be necessary or appropriate to
collect or preserve the Collateral or to enforce the Administrative Agent’s
rights with respect to the Collateral; (f) to execute in the name or otherwise
authenticate on behalf of Pledgor any record reasonably believed necessary or
appropriate by the Administrative Agent for compliance with laws, rules or
regulations applicable to any Collateral, or in connection with exercising the
Administrative Agent’s rights under this Agreement; (g) to file any financing
statement relating to this Agreement electronically, and the Administrative
Agent’s transmission of Pledgor’s signature on and authentication of the
financing statement shall constitute Pledgor’s signature on and authentication
of the financing statement; (h) to make any compromise or settlement it deems
desirable or proper with reference to the Collateral; (i) to do and take any
and all actions with respect to the Collateral and to perform any of Pledgor’s
obligations under this Agreement; and (j) to execute any documentation
reasonably believed necessary by the Administrative Agent for compliance with
Rule 144 or any other restrictions, laws, rules or regulations applicable to
any Collateral hereunder that constitutes restricted or control securities
under the securities laws.  The foregoing
appointments are irrevocable and coupled with an interest and shall survive the
death or disability of Pledgor and shall not be revoked without the
Administrative Agent’s written consent. 
To the extent permitted by law, Pledgor hereby ratifies all said
attorney-in-fact shall lawfully do by virtue hereof.

6.             VOTING RIGHTS.

(a)           So long as no Event of Default shall
have occurred and is continuing and the Administrative Agent has not delivered
the notice specified in subsection (b) below, Pledgor shall be entitled to exercise
any and all voting and other consensual rights pertaining to the Collateral or
any part thereof for any purpose not inconsistent with the terms of this
Agreement or any document or agreement executed in connection herewith.

(b)           Upon the occurrence and during the
continuance of an Event of Default, at the option of the Administrative Agent
exercised in a writing sent to Pledgor, all rights of Pledgor to exercise the
voting and other consensual rights which it would otherwise be entitled to
exercise pursuant to subsection (a) above shall cease, and the Administrative
Agent shall thereupon have the sole right to exercise such voting and other
consensual rights.

7.             EVENTS OF DEFAULT;
REMEDIES.

(a)           Any one or more of the following
shall be a default hereunder (each an, “Event of Default”):

(i)            Pledgor or any Debtor fails to pay
any Indebtedness when due, after giving effect to any applicable grace period.

 4
 

(ii)           Pledgor or any Debtor fails to cure a
breach of any collateral maintenance provisions set forth in this Agreement or
in any agreement governing or executed or delivered in connection with any
Indebtedness within the applicable cure period specified therein.

(iii)          Pledgor or any Debtor breaches any
term, provision, warranty or representation under this Agreement not
specifically referred to in subsection (a) of this Section or breaches any
term, provision, warranty or representation of any other agreement or
instrument evidencing, securing or executed or delivered in connection with the
Indebtedness beyond any grace period provided with respect thereto.

(iv)          A receiver or similar official is
appointed for a substantial portion of any business or other property of
Pledgor, any Debtor or any guarantor of any Indebtedness, or their business is
terminated, or, if Pledgor, any Debtor or any such guarantor is anything other
than a natural person, such Pledgor, Debtor or guarantor is liquidated or
dissolved.

(v)           Pledgor, any Debtor, or any guarantor
of any Indebtedness files a bankruptcy petition, a bankruptcy petition is filed
against any of the foregoing parties, or Pledgor, any Debtor, or any such
guarantor makes a general assignment for the benefit of creditors.

(vi)          Any control agreement covering any
Collateral is breached, or any party to such control agreement terminates or
notifies the Administrative Agent or Pledgor of its intention to terminate the
control agreement or denies the enforceability of the control agreement.

(vii)         If any Indebtedness is an obligation or
liability of any kind (including any renewals, extensions or modifications
thereof) arising out of or relating to any Hedge Transaction, any termination
event, event of default or other similar event occurs under such Indebtedness.

(viii)        The occurrence of a default or event of
default under any agreement of Pledgor, any Debtor or any other person or
entity executed or delivered in connection with the Indebtedness.

(ix)           Any involuntary lien of any kind or
character attaches to any of the Collateral.

(b)           If an Event of Default occurs, the
Administrative Agent may do any one or more of the following:

(i)            Declare any Indebtedness immediately
due and payable, without notice or demand.

(ii)           Exercise as to any or all of the
Collateral all the rights, powers and remedies of an owner, subject to the Section
entitled “VOTING RIGHTS”.

 5
 

(iii)          Enforce the security interest given
hereunder pursuant to the UCC and any other applicable law.

(iv)          Sell all or any part of the Collateral
at public or private sale in accordance with the UCC, without advertisement, in
such manner and order as the Administrative Agent may elect.  The Administrative Agent may purchase the
Collateral for its own account at any such sale. The Administrative Agent shall
give Pledgor such notice of any public or private sale as may be required by
the UCC, provided that to the extent notice of any such sale is required by the
UCC or other applicable law, Pledgor agrees that at least 10 days notice to
Pledgor of the time and place of any public sale or the time after which any
private sale is to be made shall constitute reasonable notification and
provided further that, if the Administrative Agent fails to comply with this
sentence in any respect, its liability for such failure shall be limited to the
liability (if any) imposed on it as a matter of law under the UCC or other
applicable law.  Pledgor acknowledges
that Collateral may be sold at a loss to Pledgor, and that, in such event, the
Administrative Agent shall have no liability or responsibility to Pledgor for
such loss.  Pledgor further acknowledges
that a private sale may result in prices and other terms less favorable to the
seller than if such sale were a public sale and, notwithstanding such
circumstances, agrees that no such private sale shall, to the extent permitted
by applicable law, be deemed not to be “commercially reasonable” solely as a
result of such prices and other sale terms. 
Upon any such sale, the Administrative Agent shall have the right to
deliver, assign and transfer to the buyer thereof the Collateral so sold.  Each buyer at any such sale shall hold the
Collateral so sold absolutely and free from any claim or right of whatsoever
kind, including any equity or right of redemption of Pledgor that may be waived
or any other right or claim of Pledgor, and Pledgor, to the extent permitted by
law, hereby specifically waives all rights of redemption, stay or appraisal
that Pledgor has or may have under any law now existing or hereafter adopted.

Without limiting any
other rights and remedies available to the Administrative Agent, Pledgor
expressly acknowledges and agrees that with respect to Collateral consisting of
notes, bonds or other securities  which
are not sold on a recognized market , the Administrative Agent shall be deemed
to have conducted a commercially reasonable sale of such Collateral if (a) such
sale is conducted by any nationally recognized broker-dealer (including
any affiliate of the Administrative Agent), investment banker or any other
method common in the securities industry, and (b) if the purchaser is the Administrative
Agent or any affiliate of the Administrative Agent, the sale price received by
the Administrative Agent in connection with such sale is reasonably supported
by quotations received from one or more other nationally recognized
broker-dealers, investment bankers or other financial institutions.

(v)           Enforce the security interest of the
Administrative Agent in any deposit account which is part of the Collateral by
applying such account to the Indebtedness.

 6
 

(vi)          Exercise any other remedy provided under
this Agreement or by any applicable law.

(vii)         Comply with any applicable state or
federal law requirements in connection with a disposition of the Collateral and
such compliance will not be considered to affect adversely the commercial
reasonableness of any sale or other disposition of the Collateral.

(viii)        Sell the Collateral without giving any
warranties as to the Collateral.  The
Administrative Agent may specifically disclaim any warranties of title or the
like.  This procedure will not be considered
to affect adversely the commercial reasonableness of any sale or other
disposition of the Collateral.

8.             RIGHT TO CURE; LIMITATION ON ADMINISTRATIVE AGENT’S
DUTIES.  If Pledgor fails to perform any
agreement contained herein, the Administrative Agent may perform or cause
performance of such agreement and the expenses of the Administrative Agent
incurred in connection therewith shall be payable by Pledgor or Debtor under
the Section entitled “COSTS”. 
Any powers conferred on the Administrative Agent hereunder are solely to
protect its interest in the Collateral and shall not impose any duty upon it to
exercise any such powers.  Except for
reasonable care in the custody of any Collateral in its possession and the accounting
for moneys actually received by it hereunder, the Administrative Agent shall
have no duty as to any Collateral or as to the taking of any necessary steps to
preserve rights against prior parties or any other rights pertaining to any
Collateral.  The Administrative Agent
shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral in its possession if the Collateral is accorded
treatment substantially equal to that which the Administrative Agent accords
its own property, it being understood that the Administrative Agent shall not
have any responsibility for (a) ascertaining, exercising or taking other action
or giving Pledgor notice with respect to subscription rights, calls,
conversions, exchanges, maturities, lenders or other matters relative to any Collateral,
whether or not the Administrative Agent has or is deemed to have knowledge of
such matters, or (b) taking any necessary steps to preserve rights against any
parties with respect to any Collateral. 
The Administrative Agent shall not be liable for any loss to the
Collateral resulting from acts of God, war, civil commotion, fire, earthquake,
or other disaster or for any other loss or damage to the Collateral except to
the extent such loss is determined by a court of competent jurisdiction by final
and nonappealable judgment to have resulted from the Administrative Agent’s
gross negligence or willful misconduct.

9.             WAIVERS.  The
Administrative Agent shall be under no duty or obligation whatsoever and
Pledgor waives any right to require the Administrative Agent to (i) make or
give any presentment, demands for performances, notices of nonperformance,
protests, notices of protest or notices of dishonor in connection with any
obligations or evidences of indebtedness held by the Administrative Agent as Collateral,
or in connection with any obligation or evidences of indebtedness which
constitute in whole or in part the Indebtedness, (ii) proceed against any
person or entity, (iii) proceed against or exhaust any collateral, or (iv)
pursue any other remedy in the Administrative Agent’s power; and Pledgor waives
any defense arising by reason of any disability or other defense of Debtor or
any other person, or by reason of the cessation from any cause whatsoever of
the liability of Debtor or any other person. 
Until the Indebtedness is paid in 

 7
 

full, Pledgor waives any right of subrogation,
reimbursement, indemnification, and contribution (contractual, statutory or
otherwise), including without limitation any claim or right of subrogation
under the Bankruptcy Code (Title 11 of the U.S. Code) or any successor statute,
arising from the existence or performance of this Agreement, and Pledgor waives
any right to enforce any remedy which the Administrative Agent now has or may
hereafter have against Debtor or against any other person and waives any
benefit of and any right to participate in any Collateral or security
whatsoever now or hereafter held by the Administrative Agent.  If Pledgor is not also a Debtor with respect
to a specified Indebtedness, Pledgor authorizes the Administrative Agent
without notice or demand and without affecting Pledgor’s liability hereunder,
from time to time to:  (i) renew, extend,
accelerate or otherwise change the time for payment of or otherwise change the
terms of the Indebtedness or any part thereof, including increase or decrease
of the rate of interest thereon; (ii) take and hold security, other than the
Collateral, for the payment of the Indebtedness or any part thereof, and
exchange, enforce, waive and release the Collateral or any part thereof or any
such other security; and (iii) release or substitute Debtor or any one or more
of them, or any of the endorsers or guarantors of the Indebtedness or any part
thereof, or any other parties thereto and Pledgor consents to the taking of, or
failure to take, any action by the Administrative Agent which might in any
manner or to any extent vary the risks of Pledgor under this Agreement or
which, but for this provision, might operate as a discharge of Pledgor.  Pledgor agrees that it is solely responsible
for keeping itself informed as to the financial condition of Debtor and of all
circumstances which bear upon the risk of nonpayment or the risk of a margin
call or liquidation of the Collateral.

10.           TRANSFER, DELIVERY
AND RETURN OF COLLATERAL.

(a)           Pledgor shall immediately deliver or
cause to be delivered to the Administrative Agent (or the Securities
Intermediary, if any) (i) any certificates or instruments now or hereafter
representing or evidencing Collateral and such certificates and instruments
shall be in suitable form for transfer without restriction or stop order by
delivery, or shall be accompanied by duly executed instruments of transfer or
assignment in blank in form and substance satisfactory to the Administrative
Agent, and (ii) in the same form as received (with any necessary endorsement),
all dividends and other distributions paid or payable in cash in respect of any
Collateral and any such amounts, if received by Pledgor, shall be received in
trust for the benefit of the Administrative Agent and be segregated from the
other property or funds of Pledgor.

(b)           The Administrative Agent may at any
time deliver the Collateral or any part thereof to Pledgor and the receipt by
Pledgor shall be a complete and full acquittance for the Collateral so
delivered, and the Administrative Agent shall thereafter be discharged from any
liability or responsibility therefor.

(c)           Upon the transfer of all or any part
of the Indebtedness, the Administrative Agent may transfer all or any part of
the Collateral and shall be fully discharged thereafter from all liability and
responsibility with respect to such Collateral so transferred, and the
transferee shall be vested with all the rights and powers of the Administrative
Agent hereunder with respect to such Collateral so transferred; but with
respect to any Collateral not so transferred the Administrative Agent shall
retain all rights and powers hereby given. 
Pledgor agrees that the Administrative Agent may disclose to 

 8
 

any
prospective purchaser or transferee and any purchaser or transferee of all or
part of the Indebtedness any and all information in the Administrative Agent’s
possession concerning Pledgor, this Agreement and the Collateral.

11.           CONTINUING AGREEMENT
AND POWERS.

(a)           This is a continuing Agreement and
all the rights, powers and remedies hereunder shall, unless otherwise limited
herein, apply to all past, present and future Indebtedness of Debtor or any one
or more of them to the Administrative Agent and the Lenders, including that
arising under successive transactions which shall either continue the
Indebtedness, increase or decrease it, or from time to time create new
Indebtedness after all or any prior Indebtedness has been satisfied, and
notwithstanding the death, incapacity, cessation of business, dissolution or
bankruptcy of Debtor or any one or more of them, or any other event or
proceeding affecting Debtor or any one or more of them.

(b)           Until all Indebtedness shall have
been paid in full and the Administrative Agent and the Lenders shall have no
obligation to extend credit to any Debtor, the power of sale and all other
rights, powers and remedies granted to the Administrative Agent hereunder shall
continue to exist and may be exercised by the Administrative Agent at the time
specified hereunder irrespective of the fact that the Indebtedness or any part
thereof may have become barred by any statute of limitations, or that the
personal liability of Debtor or any one or more of them may have ceased.  Pledgor waives the benefit of any statute of
limitations as applied to this Agreement.

12.           SECURITIES INTERMEDIARY.  Upon the occurrence and during the
continuation of an Event of Default, if permitted by the Administrative Agent,
some or all of the Collateral may be held at a broker or other securities
intermediary (the “Securities Intermediary”). 
Pledgor shall pay to the Securities Intermediary any charges or costs
imposed by the Securities Intermediary. 
Pledgor at no time shall request that the Securities Intermediary
release any Collateral to Pledgor, except as expressly permitted by the
Administrative Agent.  The Administrative
Agent may require that Pledgor obtain a control agreement, signed by the
Securities Intermediary, in form and substance acceptable to the Administrative
Agent.  The Administrative Agent may, at
any time but in accordance with the terms of this Agreement and any control
agreement, require the Securities Intermediary to do any or all of the
following: (a) disburse any or all of the Collateral to the Administrative Agent;
(b) allow the Administrative Agent (and not Pledgor) to exercise any rights
relating to the Collateral; (c) sell some or all of the Collateral and remit
the sales proceeds (less the Securities Intermediary’s normal sales charge) to
the Administrative Agent; and (d) buy and sell Collateral only upon the
instructions of the Administrative Agent (and not Pledgor).  If the Administrative Agent assigns or
transfers its rights under this Agreement and the Administrative Agent is the
Securities Intermediary for any or all of the Collateral, Pledgor agrees that
the Administrative Agent, in such capacity, is irrevocably directed by Pledgor
to comply with instructions or entitlement orders with respect to such
Collateral originated by any assignee or transferee of this Agreement without
further consent of Pledgor.

13.           COSTS.  All advances, charges, costs and expenses,
including reasonable attorneys’ fees, incurred or paid by the Administrative
Agent in exercising any right, power or 

 9
 

remedy conferred by this Agreement or in the
enforcement thereof, and including the charges and expenses of the
Administrative Agent’s custody unit or of any Securities Intermediary, shall
become a part of the Indebtedness secured hereunder and shall be paid to the
Administrative Agent by Debtor and Pledgor immediately and without demand, with
interest thereon at an annual rate equal to the highest rate of interest of any
Indebtedness secured by this Agreement (or, if there is no such interest rate,
at the maximum interest rate permitted by law for interest on judgments).  Such costs and attorneys’ fees shall include
the allocated cost of in-house counsel to the extent permitted by law.

14.           NOTICES.  Unless otherwise provided or agreed to herein
or required by law, notice and communications provided for in this Agreement
shall be in writing and shall be mailed, telecopied or delivered to Pledgor to
the address or facsimile number for notices set forth for Pledgor below or
across from its signature below or at such other address or facsimile number as
shall be designated by Pledgor in a written notice to the Administrative Agent
at the address for notices set forth for the Administrative Agent below or
across from the Administrative Agent’s signature below.  If Pledgor’s address or facsimile number for
notices is not entered below and Pledgor has not otherwise designated such
address or facsimile number to the Administrative Agent in writing, then the
address and/or facsimile number for Pledgor in the Administrative Agent’s
records shall be deemed the address or facsimile for notices to Pledgor.  Notices and other communications sent by (a)
first class mail shall be deemed delivered on the earlier of actual receipt or
on the fourth business day after deposit in the U.S. mail, postage prepaid, (b)
overnight courier shall be deemed delivered on the next business day after
deposit with the overnight courier, (c) facsimile shall be deemed delivered
when transmitted and (d) any other method, shall be deemed delivered when
delivered.  To the extent that oral
notification is provided for or agreed to herein, such oral notification may be
made by telephone to any of the number(s) set forth on the signature page for
Pledgor; provided that any oral notification in person or at any other
telephone number shall constitute notification hereunder.

15.           INDEMNITY.  Pledgor shall indemnify, hold harmless and
defend the Administrative Agent and its directors, officers, agents and
employees, from and against any and all claims, actions, obligations,
liabilities and expenses, including defense costs, investigative fees and
costs, and legal fees and damages arising from their execution of or
performance under this Agreement or any control agreement executed by the
Administrative Agent in connection with the Collateral, except to the extent
that such claim, action, obligation, liability or expense is determined by a
court of competent jurisdiction by final and nonappealable judgment to have
resulted from the gross negligence or willful misconduct of such indemnified person.
This indemnification shall survive the termination of this Agreement.

16.           MISCELLANEOUS.

(a)           This Agreement (i) may be waived,
altered, modified or amended only by an instrument in writing, duly executed by
the party or parties sought to be charged or bound thereby, and (ii) may be executed in any number of identical
counterparts, each of which shall be deemed an original for all purposes and
all of which constitute, collectively, one agreement; but, in making proof of
this Agreement, it shall not be necessary to produce or account for more than
one such counterpart.  Any waiver,
express or implied, of any provision hereof and any delay or failure by the
Administrative Agent to enforce any 

 10
 

provision
shall not preclude the Administrative Agent from enforcing any such provision
thereafter.

(b)           Pledgor hereby irrevocably authorizes
the Administrative Agent to file one or more financing statements describing
all or part of the Collateral, and continuation statements, or amendments
thereto, relative to all or part of the Collateral as authorized by applicable
law.  Such financing statements,
continuation statements and amendments will contain any other information
required by the UCC for the sufficiency or filing office acceptance of any
financing statement, continuation statement or amendment, including whether
Pledgor is an organization, the type of organization and any organizational
identification number issued to Pledgor. 
Pledgor agrees to furnish any such information to the Administrative
Agent promptly upon request.  Pledgor
also ratifies its authorization for the Administrative Agent to have filed any
initial financing statement or amendments thereto filed prior to the date
hereof.

(c)           From time to time, Pledgor and Debtor
shall, at the request of the Administrative Agent, execute such other
agreements, documents or instruments or take any other actions in connection
with this Agreement as the Administrative Agent may reasonably deem necessary
to evidence or perfect the security interests granted herein, to maintain the
first priority of the security interests, or to effectuate the rights granted
to the Administrative Agent herein, but their failure to do so shall not limit
or affect any security interest or any other rights of the Administrative Agent
in and to the Collateral.  Pledgor will
execute and deliver to the Administrative Agent any stock powers, instructions
to any securities intermediary, issuer or transfer agent, proxies, or any other
documents of transfer that the Administrative Agent requests in order to
perfect, obtain control or otherwise protect the Administrative Agent’s
security interest in the Collateral or to effect the Administrative Agent’s
rights under this Agreement.  Such powers
or documents may be executed in blank or completed prior to execution, as
requested by the Administrative Agent.

(d)           This Agreement shall be governed by
and construed according to internal laws of the State of California, to the
jurisdiction of which the parties hereto submit, except as otherwise required by
mandatory provisions of law and except to the extent that remedies are governed
by the laws of any other jurisdiction.

(e)           Any term used or defined in the UCC
and not defined herein has the meaning given to the term in the UCC, when used
in this Agreement.

(f)            This Agreement shall benefit the
Administrative Agent’s successors and assigns and shall bind Pledgor’s
successors and assigns, except that Pledgor may not assign its rights and
obligations under this Agreement.  This
Agreement shall bind all parties who become bound as a Debtor with respect to
the Indebtedness.

(g)           All rights and remedies herein
provided are cumulative and not exclusive of any rights or remedies otherwise
provided by law.  Any single or partial
exercise of any right or remedy shall not preclude the further exercise of any
other right or remedy.

 11
 

(h)           In all cases where more than one
party executes this Agreement, all words used herein in the singular shall be
deemed to have been used in the plural where the context and construction so
require, and all obligations and undertakings hereunder of such parties are
joint and several.

(i)            The illegality, invalidity or
unenforceability of any provision of this Agreement shall not in any way affect
or impair the legality, validity or enforceability of the remaining provisions
of this Agreement.

(j)            This Agreement and any other
documents executed or delivered in connection herewith constitute the entire
agreement of the parties hereto with respect to the subject matter hereof and
shall supersede any prior expressions of intent or understandings with respect
to this transaction.

17.           FINAL AGREEMENT.  BY SIGNING THIS DOCUMENT EACH PARTY
REPRESENTS AND AGREES THAT:  (A) THIS
DOCUMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE
SUBJECT MATTER HEREOF, (B) THIS DOCUMENT SUPERSEDES ANY COMMITMENT LETTER, TERM
SHEET, OR OTHER WRITTEN OUTLINE OF TERMS AND CONDITIONS RELATING TO THE SUBJECT
MATTER HEREOF, UNLESS SUCH COMMITMENT LETTER, TERM SHEET, OR OTHER WRITTEN
OUTLINE OF TERMS AND CONDITIONS EXPRESSLY PROVIDES TO THE CONTRARY, (C) THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES, AND (D) THIS DOCUMENT MAY
NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OR UNDERSTANDINGS OF THE PARTIES.

 12
 

Executed as of the 1st day of June, 2007.

BANK OF AMERICA, N.A., as administrative agent

By:_____________________________________________ 

Name:___________________________________________ 

Title:____________________________________________ 

Address:

Bank of America, N.A.

Agency Management

Mail Code:  WA1-501-32-37

800 Fifth Avenue, Floor 32

Seattle, WA 98104

Attention: 
              Tiffany
Shin

 

	
  Pledgor’s Chief Executive
  Office:

  400 Corporate Pointe, Suite 525

  Culver City, California  90230

   

  	
  PLEDGOR:

  PROSPECT MEDICAL GROUP, INC., a California
  professional corporation

  

  By:                                                                                          

  Name:     Jacob
  Y. Terner, M.D.  

  Title:       Chief Executive
  Officer

   

  
	
   

  	
   

  

 

	
  Pledgor’s type of
  organization:  Corporation

  Pledgor’s state of incorporation or organization (if
  Pledgor is a corporation, limited partnership, limited liability company or
  other registered entity):  California

   

  	
  Pledgor’s organizational identification number if
  any, assigned by the state of incorporation or organization  (If no organizational identification number
  has been assigned enter “None”): 
  C1388087

   

  
	
   

  	
   

  

 

 13

Exhibit A to
Pledge Agreement

Description of
Collateral

Pledged Equity:

	
  Pledged Entity

  	
   

  	
  Class of Stock

  	
   

  	
  Stock

  Certificate #

  	
   

  	
  Number of

  Shares

  	
   

  	
  Percentage of

  Outstanding

  Shares

  	
   

  
	
  Antelope Valley Medical
  Associates, Inc., a California professional corporation

  	
   

  	
  Common

  	
   

  	
  1

  	
   

  	
  1,000

  	
   

  	
  100

  	
  %

  
	
  APAC Medical Group,
  Inc., a California professional corporation

  	
   

  	
  Common

  	
   

  	
  2

  	
   

  	
  1,000

  	
   

  	
  100

  	
  %

  
	
  Nuestra Familia Medical
  Group, Inc., a California professional corporation

  	
   

  	
  Common

  	
   

  	
  100

  	
   

  	
  839.02

  	
   

  	
  55.02

  	
  %

  
	
  Pegasus Medical Group,
  Inc., a California professional corporation

  	
   

  	
  Common

  	
   

  	
  1

  	
   

  	
  100

  	
   

  	
  100

  	
  %

  
	
  Prospect Health Source
  Medical Group, Inc., a California professional corporation

  	
   

  	
  Common

  	
   

  	
  1

  	
   

  	
  50,000

  	
   

  	
  100

  	
  %

  
	
  Prospect NWOC Medical
  Group, Inc., a California professional corporation

  	
   

  	
  Common

  	
   

  	
  26

  	
   

  	
  1,000

  	
   

  	
  100

  	
  %

  
	
  Prospect Professional
  Care Medical Group, Inc., a California professional corporation

  	
   

  	
  Common

  	
   

  	
  39

  	
   

  	
  1,000

  	
   

  	
  100

  	
  %

  
	
  Santa Ana/Tustin
  Physicians Group, Inc., a California professional corporation

  	
   

  	
  Common

  	
   

  	
  2

  	
   

  	
  1,000

  	
   

  	
  100

  	
  %

  
	
  Sierra Primary Care
  Medical Group, A Medical Corporation, a California professional corporation

  	
   

  	
  Common

  	
   

  	
  5

  	
   

  	
  1,000

  	
   

  	
  100

  	
  %

  
	
  StarCare Medical Group,
  Inc., a California professional corporation

  	
   

  	
  Common

  	
   

  	
  2

  	
   

  	
  1,000

  	
   

  	
  100

  	
  %

  
	
  Genesis Healthcare of
  Southern CA

  	
   

  	
  Common

  	
   

  	
   

  	
   

  	
  1,000

  	
   

  	
  100

  	
  %

  
	
  Prospect Physician
  Associates, Inc.

  	
   

  	
  Common

  	
   

  	
  1

  	
   

  	
  1,000

  	
   

  	
  100

  	
  %

  
	
  Pomona Valley Medical
  Group, Inc.

  	
   

  	
  Common

  	
   

  	
   

  	
   

  	
  1,000

  	
   

  	
  100

  	
  %

  
	
  Upland Medical Group, Inc.

  	
   

  	
  Common

  	
   

  	
   

  	
   

  	
  1,000

  	
   

  	
  100

  	
  %

  

 

The Pledged Equity includes
all present and future income, proceeds, earnings, increases, and substitutions
from or for the Collateral of every kind and nature, including without
limitation all payments, interest, profits, distributions, benefits, rights,
options, warrants, dividends, stock dividends, stock splits, stock rights,
regulatory dividends, subscriptions, monies, claims for money due and to become
due, proceeds of any insurance on the Collateral, shares of stock of different
par value or no par value issued in substitution or exchange for shares
included in the Collateral, and all other property Pledgor is entitled to
receive on account of such Collateral, including accounts, documents,
instruments, chattel paper, and general intangibles.

 1

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