Document:

Exhibit 10.22

 

AMENDED AND RESTATED SECURITY AGREEMENT

 

This
AMENDED AND RESTATED SECURITY AGREEMENT, dated as of September 24, 2003,
is entered into between PROSPECT MEDICAL HOLDINGS, INC. a Delaware corporation
(“Debtor”),  and COMERICA BANK, a Michigan banking
corporation, successor-by-merger to Comerica Bank-California, a California
banking corporation, successor-by-merger to Imperial Bank, a California banking
corporation (“Secured Party”),  with reference to the following facts:

 

RECITALS

 

A.                                   Debtor and Secured Party previously entered
into that certain Security Agreement, dated as of July 3, 1997 (the “Prior Security Agreement”),  in order to secure the obligations of
Debtor owing to Secured Party under the Loan Agreement (as hereinafter
defined);

 

B.                                     Concurrent herewith Debtor and Secured Party,
at the request of Debtor, are entering into that certain Sixth Amendment to
Amended and Restated Revolving Credit Agreement (the “Sixth Amendment”);  and

 

C.                                     In order to induce Secured Party to enter
into the Sixth Amendment, and in consideration thereof, Debtor has agreed to
enter into this Security Agreement in order amend and restate the Prior
Security Agreement in its entirety.

 

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, Chattel Paper or General Intangible.

 

“Accounts”means any and all of Debtor’s presently existing and hereafter
arising accounts (including health-care-insurance receivables, contract rights,
and all other forms of monetary obligations owing to Debtor, and all credit
insurance, guaranties, or security therefor), irrespective of whether earned by
performance.

 

“Chattel Paper”  means all of Debtor’s presently existing and hereafter
acquired or created chattel paper (including tangible chattel paper and
intangible chattel paper).

 

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“Code”  means
the California Uniform Commercial Code, as amended or supplemented from time to
time. 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, Chattel Paper, Commercial Tort Claims, Deposit Accounts, Documents,
Equipment, Instruments, Inventory, Investment Property, General Intangibles,
Letter of Credit Rights, Negotiable Collateral, Supporting Obligations,
Debtors’ Books, in each case whether now existing or hereafter acquired or
created, any money or other assets of any Debtor that now or hereafter come
into the possession, custody, or control of Secured Party and any Proceeds or
products of any of the foregoing, or any portion thereof.

 

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

 

“Commercial Tort Claims”  means all of Debtor’s presently existing
and hereafter acquired commercial tort claims (as such term is defined in the
Code).

 

“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 Collateral.

 

“Deposit Account”  means any demand, time, savings, passbook or similar
account now or hereafter maintained by or for the benefit of Debtor with an
organization that is engaged in the business of banking including a bank,
savings bank, savings and loan association, credit union and trust companies,
and all funds and amounts therein, whether or not restricted or designated for
a particular purpose.

 

“Documents”means any and all documents and documents of title, including
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 equipment, wherever located, including machinery, 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,

 

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automobiles,
trucks, tractors and other motor vehicles, rolling stock, jigs, and other goods
(other than Inventory, farm products, and consumer goods), including software
embedded in such goods, 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.

 

“Expenses”has the meaning of “Bank Expenses”  under the Loan Agreement and shall also
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
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.

 

“FEIN”  means
Federal Employer Identification Number.

 

“General Intangibles”  means any and all of Debtor’s presently
existing and hereafter acquired or arising general intangibles and any 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)                                 uncertificated certificates of deposit, and
interests in any joint ventures, partnerships or limited liability companies;

 

(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 Governmental 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;

 

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

 

(j)                                     payment intangibles; and

 

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

 

“Instruments”  means any and all negotiable instruments, and every other
writing which evidences a right to the payment of a monetary obligation, 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;

 

(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; and

 

(f)                                    Intellectual Property Collateral shall
include, without limitation, rights and interests pursuant to licensing or
other contracts in favor of Debtor pertaining to

 

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patents, trademarks, copyrights and other intellectual property
presently or in the future owned or used by third Persons.

 

“Inventory”means any and all of Debtor’s presently existing and hereafter
acquired goods (including software embedded in such 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”  means any and all of Debtor’s presently
existing and hereafter acquired investment property.

 

“Letter of Credit Rights”  means any and all of Debtor’s presently
existing and hereafter acquired letter of credit rights.

 

“Loan Agreement”  means that certain Amended and Restated Revolving Credit
Agreement, dated as of July 3, 1997, between Debtor and Secured Party, as
amended to date, including by the Sixth Amendment, and as may be at any time
hereafter further supplemented, modified, amended or restated.

 

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

 

“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, including “proceeds” as defined in
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.

 

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“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 electronic Chattel Paper, General Intangibles,
Letter of Credit Rights, 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 Expenses which Debtor 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, as
amended or restated from time to time.

 

“Supporting Obligations”  has the meaning given to such term in the
Code.

 

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.

 

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, and Debtor hereby authorizes
Secured Party to file, all financing statements, continuation financing
statements, fixture filings, security agreements, chattel mortgages,
assignments, and all other documents that Secured Party may require, 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

 

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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 willful 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 shall: (i) at the request of Secured Party, mark conspicuously Debtor’s
Books with a legend, in form and substance satisfactory to Secured Party,
indicating that the Collateral is subject to the security interest granted
hereby; (ii) immediately mark all Chattel Paper with a conspicuous legend
indicating Secured Party’s security interest therein and otherwise in form and
substance satisfactory to Secured Party; and (iii) 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.

 

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 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                                 In the event that any Collateral is in the
possession of a third party, Debtor shall join with Secured Party in notifying
such third party of Secured Party’s security interest and obtaining an
acknowledgement from such third party that it is holding such Collateral for
the benefit of Secured Party.

 

4.5                                 Debtor shall deliver to Secured Party a duly
executed control agreement in form and substance satisfactory to Secured Party
with respect to all Deposit Accounts, electronic Chattel Paper, Investment
Property, and Letter of Credit Rights.

 

4.6                                 Debtor shall promptly notify Secured Party of
any Commercial Tort Claims it may bring against any Person, including the name
and address of each defendant, a summary of the facts, an estimate of Debtor’s
damages, copies of any complaint or demand letter submitted by Debtor, and such
other information as Secured Party may request, and in

 

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connection
therewith, at Secured Party’s request, Debtor and Secured Party shall enter
into an amendment to this Security Agreement granting a security interest to
Secured Party in each such Commercial Tort Claim to secured the Secured
Obligations.

 

5.                                       Representations and
Warranties. In order to
induce Secured Party to enter into the Sixth Amendment and to continue to make
Loans to Debtor and/or issue any Letter of Credit, in addition to the
representations and warranties of Debtor set forth in the Loan Agreement which
are incorporated herein by this reference, Debtor represents and warrants to
Secured Party that on the date hereof and thereafter on the date of each and every
Borrowing or issuance of a Letter of Credit:

 

5.1                                 Legal Name; State of
Organization; Location of Chief Executive Office and Collateral; FEIN. 
Debtor’s exact legal name, state of incorporation, FEIN and charter or
organizational identification number is accurately set forth in Schedule 1. Debtor’s chief executive
office is located at the address set forth in Schedule 1,
and all other locations where Debtor conducts business or Collateral
is kept are set forth in Schedule 1.

 

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

 

5.3                                 Trade Names and Trade
Styles.  All trade names and trade styles under which
Debtor presently conducts its business operations are set forth in Schedule 1, and, except as set forth
in Schedule 1, Debtor 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.  Debtor has rights in and the power to
transfer the Collateral, and Debtor’s title to the Collateral is free from all
Liens and restrictions other than Permitted Liens.

 

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

 

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5.6                                 Other Financing
Statements.  Other than financing statements in favor of
Secured Party and financing statements filed in connection with Permitted
Liens, no effective financing statement naming Debtor 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 Debtor’s reserves for uncollectible Rights to Payment;

 

(b)                                 to Debtor’s knowledge, 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)                                 Debtor has not assigned any of its rights
under the Rights to Payment other than to Secured Party pursuant to this
Security Agreement;

 

(e)                                  all statements made, all unpaid balances and
all other information in Debtor’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)                                    Debtor 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 Debtor, nor has any Inventory been consigned to
Debtor or consigned by Debtor to any Person or is held by Debtor for any Person
under any “bill and hold” or other arrangement.

 

5.9                                 Intellectual Property.

 

(a)                                  except as set forth in Schedule 1. 
Debtor (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;

 

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(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 Debtor’s knowledge, each of the patents is valid and
enforceable and Debtor has notified Secured Party in writing of all prior art
(including public uses and sales) of which it is aware;

 

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

 

(e)                                  Debtor 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 Debtor has not, does not and
will not infringe or violate any right, privilege or license agreement of or
with any other Person; and

 

(f)                                    Debtor 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 Debtor has
supplied Secured Party with all information and documentation necessary to make
all fixture filings required to perfect and protect the priority of Secured
Party’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.

 

5.11                           Deposit Accounts.  The names and addresses of all financial institutions at which Debtor
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 Debtor set
forth in the Loan Agreement which are incorporated herein by this reference,
Debtor agrees that from the date hereof and thereafter until the payment,
performance and satisfaction in full, in cash, of the Secured Obligations, and
all of Secured Party’s obligations under the Loan Agreement to Debtor have been
terminated and no Letters of Credit are outstanding:

 

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

 

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

 

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

 

6.5                                 Location of
Collateral.  Debtor shall keep the Inventory and Equipment
only at the locations identified on Schedule 1;
provided, however, that Debtor may amend Schedule 1 so long as (i) such amendment occurs by
written notice to Secured Party 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, Debtor executes and delivers any financing statements or
fixture filings necessary to perfect and continue perfected Secured Party’s
security interests in such Assets and also obtains for Secured Party such duly
executed Collateral Access Agreement as Secured Party shall require with
respect to such new location.

 

6.6                                 Change in Name, Trade Name,
Trade Style or FEIN.  Debtor shall not change its legal 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 Debtor
may amend Schedule 1 so long
as (i) such amendment occurs by written notice to Secured Party 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 time of such written notification,
Debtor executes and delivers any financing statement amendments or fixture
filing amendments necessary to continue perfected Secured Party’s security interests
in the Collateral.

 

6.7                                 State of Incorporation or
Formation.  Debtor shall not change the state of its
incorporation or formation.

 

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6.8                                 Maintenance of
Records.  Debtor shall keep separate, accurate and
complete Debtor’s Books, disclosing Secured Party’s security interest
hereunder.

 

6.9                                 Disposition of
Collateral.  Debtor shall not surrender or lose possession
of (other than to Secured Party), sell, lease, rent, license, or otherwise
dispose of or transfer any of the Collateral or any right or interest therein.

 

6.10                           Liens.  Debtor shall keep the Collateral free of all Liens except Permitted
Liens.

 

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

 

6.12                           Rights to Payment. Debtor 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 Secured Party;

 

(c)                                  if, to the knowledge of Debtor, 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 Debtor
or otherwise), disclose such fact fully to Secured Party in Debtor’s Books
relating to such Account or other Right to Payment and in connection with any
report furnished by Debtor to Secured Party relating to such Right to Payment;

 

(d)                                 furnish to Secured Party such information and
reports regarding the Rights to Payment as Secured Party may request, and upon
request of Secured Party make such demands and requests for information and
reports as Debtor 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 Secured Party shall require.

 

6.13                           Inventory. Debtor shall:

 

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

 

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

 

12

 

(c)                                  not store any Inventory with a bailee,
warehouseman or similar Person or on premises leased to Debtor without
obtaining for Secured Party such Collateral Access Agreements as Secured Party
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 Secured Party prior written notice thereof.

 

6.14                           Equipment.  Debtor shall, upon Secured Party’s request, deliver to Secured Party a
report of each item of Equipment, in form and substance satisfactory to Secured
Party.

 

6.15                           Intellectual Property
Collateral.  Debtor
shall:

 

(a)                                  not enter into any agreement (including any
license or royalty agreement) pertaining to any Intellectual Property
Collateral without in each case giving Secured Party 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 Secured Party notice of any
rights Debtor 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

 

(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. Secured Party shall
have the right at any time (i) to notify the Account Debtors to make payments
directly to Secured Party or a lockbox account as set forth in clause (iii) of
this Section 7, (ii) to enforce Debtor’s rights against the Account
Debtors, and (iii) to require that all payments made by Account Debtors be deposited
directly into a lockbox account as Secured Party may specify, pursuant to a
lockbox agreement in form and substance satisfactory to Secured Party, with a
lockbox servicing Secured Party acceptable to Secured Party.

 

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

 

13

 

9.                                       Rights and Remedies.

 

9.1                                 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 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;

 

(d)                                 Without notice to Debtor (such notice being
expressly waived), and without constituting a retention of any collateral in
satisfaction of an obligation), 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;

 

14

 

(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. Secured Party shall have no obligation to clean-up or otherwise
prepare the Collateral for sale. 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 10.1 of the Loan
Agreement, at least ten (10) days before the date fixed for the sale, or at
least ten (10) 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;

 

(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 ten (10) 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.

 

9.2                                 Secured Party shall have no obligation to
attempt to satisfy the Secured Obligations by collecting them from any third
Person which may be liable for them or any portion thereof, and Secured Party
may release, modify or waive any collateral provided by any other Person as
security for the Secured Obligations or any portion thereof, all without
affecting Secured Party’s rights against Debtor. Debtor waives any right it may
have to require Secured Party to pursue any third Person for any of the Secured
Obligations.

 

9.3                                 Secured Party may comply with any applicable
state or federal law requirements in connection with a disposition of the
Collateral, and Secured Party’s compliance therewith will not be considered to
adversely affect the commercial reasonableness of any sale of the Collateral.

 

15

 

9.4                                 Secured Party may sell the Collateral without
giving any warranties as to the Collateral. 
Secured Party may specifically disclaim any warranties of title or the
like. This procedure will not be considered to adversely affect the commercial
reasonableness of any sale of the Collateral.

 

9.5                                 If Secured Party sells any of the Collateral
upon credit, Debtor will be credited only with payments actually made by the
purchaser, received by Secured Party and applied to the indebtedness of the
purchaser. In the event that the purchaser fails to pay for the Collateral,
Secured Party my resell the Collateral and Debtor will be credited with the
proceeds of such sale.

 

9.6                                 Secured Party shall be under no obligation to
marshal any assets in favor of Debtor, or against or in payment of the Secured
Obligations or any other obligation owned to Secured Party or any Lender by
Debtor or any other Person.

 

9.7                                 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.

 

9.8                                 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.

 

10.                                 Secured Party Not Liable. So long as Secured Party complies with the
obligations, if any, imposed by 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. Debtor bears the risk of loss or damage of the
Collateral.

 

11.                                 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

 

16

 

or
preferential. In the event that, for any reason, any portion of such payments
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.

 

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 9.1 of the Loan
Agreement.

 

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 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 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, Secured Party may disclose all
documents and information which Secured Party now or hereafter may have
relating to Debtor, Debtor’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 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.

 

13.4                           Amendments and
Waivers.  Any provision of this Security Agreement or
any of the Loan Documents to which Debtor 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 parties hereto and supersedes any and all prior agreements and
understandings, oral or written, relating to the 

 

17

 

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

 

13.6                           Severability.  The provisions of this Security Agreement are severable. The
invalidity, in whole or in part, of any provision of this Security 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.

 

13.7                           CHOICE OF
LAW AND VENUE; JURY TRIAL WAIVER.

 

(a)                                  THE VALIDITY OF THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE
CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE
CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE
RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING
HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER,
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA, WITHOUT REGARD FOR PRINCIPLES OF CONFLICTS OF LAWS.

 

(b)                                  THE PARTIES AGREE THAT ALL
ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER
LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL
COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, PROVIDED, HOWEVER, THAT ANY SUIT SEEKING
ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT SECURED
PARTY’S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SECURED PARTY ELECTS TO
BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND.
DEBTOR AND SECURED PARTY WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW,
ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY
PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13.7.

 

(c)                                  DEBTOR AND SECURED PARTY
HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE LOAN DOCUMENTS
OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN OR THEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. DEBTOR AND SECURED PARTY REPRESENT THAT EACH HAS REVIEWED
THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL

 

18

 

COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT
MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

 

13.8                           Amended and Restated
Security Agreement. This
Security Agreement shall amend and restate the Prior Security Agreement in its
entirety, and continue the Secured Obligations incurred by Debtor thereunder
and the grant of a security interest created thereunder.

 

remainder of this page intentionally left blank

 

19

 

 

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

 

 

	
  Debtor:

  	
  PROSPECT MEDICAL HOLDINGS,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/
  R. Stewart Kahn

  
	
   

  	
   

  	
  R.
  Stewart Kahn, Executive Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Secured Party:

  	
  COMERICA BANK

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/
  Stephanie D. McElroy

  
	
   

  	
   

  	
  Stephanie
  D. McElroy, Vice President

  
	
   

  	
   

  

 

20

 

SCHEDULE 1

 

	
  Section 5.1

  	
   

  	
  Legal Name, State of
  Organization, FEIN and Charter Identification Number

  
	
   

  	
   

  	
   

  
	
  Section 5.1

  	
   

  	
  Location of Chief
  Executive Office and Collateral

  
	
   

  	
   

  	
   

  
	
  Section 5.2

  	
   

  	
  Locations of Debtor’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

  

 

21Exhibit
10.24

 

AMENDED AND
RESTATED SECURITY AGREEMENT

(Prospect Medical Systems, Inc.)

 

This AMENDED AND RESTATED SECURITY AGREEMENT, dated as of
September 24, 2003, is entered into between PROSPECT MEDICAL SYSTEMS, INC.
a Delaware corporation (“Debtor”),  and COMERICA BANK, a Michigan banking
corporation, successor-by-merger to Comerica Bank-California, a California
banking corporation, successor-by-merger to Imperial Bank, a California banking
corporation (“Secured Party”),  with reference to the following facts:

 

RECITALS

 

A.                                   Debtor and Secured Party previously entered
into that certain Security Agreement, dated as of July 3, 1997 (the “Prior Security Agreement”),  in order to secure the obligations of
Debtor owing to Secured Party under that certain Continuing Guaranty, dated as
of even date with the Prior Security Agreement (as may be amended, restated,
supplemented or otherwise modified from time to time, the “Guaranty”);

 

B.                                     Concurrent herewith Borrower (as defined in
the Prior Security Agreement and the Guaranty) and Secured Party, at the
request of Borrower, are entering into that certain Sixth Amendment to Amended
and Restated Revolving Credit Agreement (the “Sixth
Amendment”);  and

 

C.                                     In order to induce Secured Party to enter
into the Sixth Amendment, and in consideration thereof, Debtor has agreed to
enter into this Security Agreement in order amend and restate the Prior
Security Agreement in its entirety.

 

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, Chattel Paper or
General Intangible.

 

“Accounts”  means any and all of Debtor’s presently
existing and hereafter arising accounts (including health-care-insurance
receivables, contract rights, and all other forms of monetary obligations owing
to Debtor, and all credit insurance, guaranties, or security therefor),
irrespective of whether earned by performance.

 

1

 

“Chattel Paper”  means all of Debtor’s presently existing
and hereafter acquired or created chattel paper (including tangible chattel paper
and intangible chattel paper).

 

“Code”  means the California Uniform Commercial
Code, as amended or supplemented from time to time. 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, Chattel Paper, Commercial Tort Claims, Deposit
Accounts, Documents, Equipment, Instruments, Inventory, Investment Property,
General Intangibles, Letter of Credit Rights, Negotiable Collateral, Supporting
Obligations, Debtors’ Books, in each case whether now existing or hereafter
acquired or created, any money or other assets of any Debtor that now or
hereafter come into the possession, custody, or control of Secured Party and
any Proceeds or products of any of the foregoing, or any portion thereof.

 

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

 

“Commercial Tort Claims”  means all of Debtor’s presently existing
and hereafter acquired commercial tort claims (as such term is defined in the
Code).

 

“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 Collateral.

 

“Deposit Account”  means any demand, time, savings, passbook
or similar account now or hereafter maintained by or for the benefit of Debtor
with an organization that is engaged in the business of banking including a
bank, savings bank, savings and loan association, credit union and trust
companies, and all funds and amounts therein, whether or not restricted or
designated for a particular purpose.

 

“Documents”  means any and all documents and documents
of title, including 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 equipment, wherever located, including
machinery, furniture, furnishings,

 

2

 

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), including software embedded in such goods,
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.

 

“Expenses”  has the meaning of “Bank Expenses”  under the Loan Agreement and shall also 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 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.

 

“FEIN”  means Federal Employer Identification
Number.

 

“General Intangibles”  means any and all of Debtor’s presently
existing and hereafter acquired or arising general intangibles and any 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)                                 uncertificated certificates of deposit, and
interests in any joint ventures, partnerships or limited liability companies;

 

(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 Governmental 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;

 

3

 

(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;

 

(j)                                     payment intangibles; and

 

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

 

“Instruments”  means any and all negotiable instruments,
and every other writing which evidences a right to the payment of a monetary
obligation, 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;

 

(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; and

 

4

 

(f)                                    Intellectual Property Collateral shall
include, without limitation, rights and interests pursuant to licensing or
other contracts in favor of Debtor pertaining to patents, trademarks, copyrights
and other intellectual property presently or in the future owned or used by
third Persons.

 

“Inventory”  means any and all of Debtor’s presently
existing and hereafter acquired goods (including software embedded in such
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”  means any and all of Debtor’s presently
existing and hereafter acquired investment property.

 

“Letter of Credit Rights”  means any and all of Debtor’s presently
existing and hereafter acquired letter of credit rights.

 

“Loan Agreement”  means that certain Amended and Restated
Revolving Credit Agreement, dated as of July 3, 1997, between Borrower and
Secured Party, as amended to date, including by the Sixth Amendment, and as may
be at any time hereafter further supplemented, modified, amended or restated.

 

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

 

“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, including
“proceeds” as defined in 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 electronic Chattel Paper, General Intangibles,
Letter of Credit Rights, 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 Expenses which Debtor 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, as
amended or restated from time to time.

 

“Supporting Obligations”  has the meaning given to such term in the
Code.

 

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.

 

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, and Debtor hereby authorizes
Secured Party to file, all financing statements, continuation financing
statements, fixture filings, security agreements, chattel mortgages,
assignments, and all other documents that Secured Party may require, 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

 

6

 

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 willful 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 shall: (i) at the request of Secured Party, mark conspicuously Debtor’s
Books with a legend, in form and substance satisfactory to Secured Party,
indicating that the Collateral is subject to the security interest granted
hereby; (ii) immediately mark all Chattel Paper with a conspicuous legend
indicating Secured Party’s security interest therein and otherwise in form and
substance satisfactory to Secured Party; and (iii) 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.

 

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 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                                 In the event that any Collateral is in the
possession of a third party, Debtor shall join with Secured Party in notifying
such third party of Secured Party’s security interest and obtaining an
acknowledgement from such third party that it is holding such Collateral for
the benefit of Secured Party.

 

4.5                                 Debtor shall deliver to Secured Party a duly
executed control agreement in form and substance satisfactory to Secured Party
with respect to all Deposit Accounts, electronic Chattel Paper, Investment
Property, and Letter of Credit Rights.

 

4.6                                 Debtor shall promptly notify Secured Party of
any Commercial Tort Claims it may bring against any Person, including the name
and address of each defendant, a summary of the facts, an estimate of Debtor’s
damages, copies of any complaint or demand letter submitted by Debtor, and such
other information as Secured Party may request, and in

 

7

 

connection
therewith, at Secured Party’s request, Debtor and Secured Party shall enter
into an amendment to this Security Agreement granting a security interest to
Secured Party in each such Commercial Tort Claim to secured the Secured
Obligations.

 

5.                                       Representations and
Warranties. In order to
induce Secured Party to enter into the Sixth Amendment and to continue to make
Loans to Borrower and/or issue any Letter of Credit, in addition to the
representations and warranties of Debtor set forth in the Guaranty which are
incorporated herein by this reference, Debtor represents and warrants to
Secured Party that on the date hereof and thereafter on the date of each and
every Borrowing or issuance of a Letter of Credit:

 

5.1                                 Legal Name; State of
Organization; Location of Chief Executive Office and Collateral; FEIN.  Debtor’s exact legal name, state of incorporation, FEIN and charter or
organizational identification number is accurately set forth in Schedule 1. 
Debtor’s chief executive office is located at the address set
forth in Schedule 1, and all
other locations where Debtor conducts business or Collateral is kept are set
forth in Schedule 1.

 

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

 

5.3                                 Trade Names and Trade
Styles.  All trade names and trade styles under which
Debtor presently conducts its business operations are set forth in Schedule 1, and, except as set forth
in Schedule 1, Debtor 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.  Debtor has rights in and the power to
transfer the Collateral, and Debtor’s title to the Collateral is free from all
Liens and restrictions other than Permitted Liens.

 

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

 

8

 

5.6                                 Other Financing Statements.  Other than financing statements in favor of Secured
Party and financing statements filed in connection with Permitted Liens, no
effective financing statement naming Debtor 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 Debtor’s reserves for uncollectible Rights to
Payment;

 

(b)                                 to Debtor’s knowledge,
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)                                 Debtor has not
assigned any of its rights under the Rights to Payment other than to Secured
Party pursuant to this Security Agreement;

 

(e)                                  all statements made,
all unpaid balances and all other information in Debtor’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)                                    Debtor 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 Debtor, nor has any Inventory been consigned to Debtor or
consigned by Debtor to any Person or is held by Debtor for any Person under any
“bill and hold” or other arrangement.

 

5.9                                 Intellectual Property.

 

(a)                                  except as set forth
in Schedule 1, Debtor
(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;

 

9

 

(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 Debtor’s knowledge, each
of the patents is valid and enforceable and Debtor has notified Secured Party
in writing of all prior art (including public uses and sales) of which it is
aware;

 

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

 

(e)                                  Debtor 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
Debtor has not, does not and will not infringe or violate any right, privilege
or license agreement of or with any other Person; and

 

(f)                                    Debtor 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 Debtor has supplied Secured Party with all information and
documentation necessary to make all fixture filings required to perfect and
protect the priority of Secured Party’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.

 

5.11                           Deposit Accounts.  The
names and addresses of all financial institutions at which Debtor 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 Debtor set forth in the Guaranty which are
incorporated herein by this reference, Debtor agrees that from the date hereof
and thereafter until the payment, performance and satisfaction in full, in
cash, of the Secured Obligations, and all of Secured Party’s obligations under
the Loan Agreement to Borrower have been terminated and no Letters of Credit
are outstanding;

 

10

 

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

 

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

 

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

 

6.5                                 Location of Collateral.  Debtor shall keep the Inventory and Equipment only at
the locations identified on Schedule 1;
provided, however, that Debtor may amend Schedule 1 so long as (i) such amendment occurs by
written notice to Secured Party 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, Debtor executes and delivers any financing statements or
fixture filings necessary to perfect and continue perfected Secured Parry’s
security interests in such Assets and also obtains for Secured Party such duly
executed Collateral Access Agreement as Secured Party shall require with
respect to such new location.

 

6.6                                 Change in Name, Trade Name, Trade Style or FEIN. Debtor
shall not change its legal 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 Debtor may amend Schedule 1 so long as (i) such
amendment occurs by written notice to Secured Party 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 time of such written notification, Debtor executes
and delivers any financing statement amendments or fixture filing amendments
necessary to continue perfected Secured Party’s security interests in the Collateral.

 

6.7                                 State of Incorporation or Formation.  Debtor shall not change the state
of its incorporation or formation.

 

11

 

6.8                                 Maintenance of Records. Debtor shall keep separate, accurate and
complete Debtor’s Books, disclosing Secured Party’s security interest
hereunder.

 

6.9                                 Disposition of
Collateral.  Debtor shall not surrender or lose possession
of (other than to Secured Party), sell, lease, rent, license, or otherwise
dispose of or transfer any of the Collateral or any right or interest therein.

 

6.10                           Liens.  Debtor shall keep the Collateral free of all Liens except Permitted
Liens.

 

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

 

6.12                           Rights to Payment. Debtor 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 Secured Party;

 

(c)                                  if, to the knowledge of Debtor, 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 Debtor
or otherwise), disclose such fact fully to Secured Party in Debtor’s Books
relating to such Account or other Right to Payment and in connection with any
report furnished by Debtor to Secured Party relating to such Right to Payment;

 

(d)                                 furnish to Secured Party such information and
reports regarding the Rights to Payment as Secured Party may request, and upon
request of Secured Party make such demands and requests for information and
reports as Debtor 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 Secured Party shall require.

 

6.13                           Inventory. Debtor shall:

 

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

 

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

 

12

 

(c)                                  not store any Inventory with a bailee,
warehouseman or similar Person or on premises leased to Debtor without
obtaining for Secured Party such Collateral Access Agreements as Secured Party
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 Secured Party prior written notice thereof.

 

6.14                           Equipment.  Debtor shall, upon Secured Party’s request, deliver to Secured Party a
report of each item of Equipment, in form and substance satisfactory to Secured
Party.

 

6.15                           Intellectual Property Collateral.
Debtor shall:

 

(a)                                  not enter into any agreement (including any
license or royalty agreement) pertaining to any Intellectual Property
Collateral without in each case giving Secured Party 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 Secured Party notice of any
rights Debtor 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

 

(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.  Secured Party shall have the right at any
time (i) to notify the Account Debtors to make payments directly to Secured
Party or a lockbox account as set forth in clause (iii) of this Section 7,
(ii) to enforce Debtor’s rights against the Account Debtors, and (iii) to
require that all payments made by Account Debtors be deposited directly into a
lockbox account as Secured Party may specify, pursuant to a lockbox agreement
in form and substance satisfactory to Secured Party, with a lockbox servicing
Secured Party acceptable to Secured Party.

 

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

 

13

 

9.                                              Rights and Remedies.

 

9.1                                                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 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;

 

(d)                                 Without notice to Debtor (such notice being
expressly waived), and without constituting a retention of any collateral in
satisfaction of an obligation), 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;

 

14

 

(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. Secured Party
shall have no obligation to clean-up or otherwise prepare the Collateral for
sale. 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 10.1 of the Loan
Agreement, at least ten (10) days before the date fixed for the sale, or at
least ten (10) 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;

 

(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 ten (10) 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.

 

9.2                                 Secured Party shall have no obligation to
attempt to satisfy the Secured Obligations by collecting them from any third
Person which may be liable for them or any portion thereof, and Secured Party
may release, modify or waive any collateral provided by any other Person as
security for the Secured Obligations or any portion thereof, all without
affecting Secured Party’s rights against Debtor. Debtor waives any right it may
have to require Secured Party to pursue any third Person for any of the Secured
Obligations.

 

9.3                                 Secured Party may comply with any applicable
state or federal law requirements in connection with a disposition of the
Collateral, and Secured Party’s compliance therewith will not be considered to
adversely affect the commercial reasonableness of any sale of the Collateral.

 

15

 

9.4                                 Secured Party may sell the Collateral without
giving any warranties as to the Collateral. Secured Party may specifically
disclaim any warranties of title or the like. 
This procedure will not be considered to adversely affect the commercial
reasonableness of any sale of the Collateral.

 

9.5                                 If Secured Party sells any of the Collateral
upon credit, Debtor will be credited only with payments actually made by the
purchaser, received by Secured Party and applied to the indebtedness of the
purchaser. In the event that the purchaser fails to pay for the Collateral,
Secured Party my resell the Collateral and Debtor will be credited with the
proceeds of such sale.

 

9.6                                 Secured Party shall be under no obligation to
marshal any assets in favor of Debtor, or against or in payment of the Secured
Obligations or any other obligation owned to Secured Party or any Lender by
Debtor or any other Person.

 

9.7                                 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.

 

9.8                                 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.

 

10.                                 Secured Party Not
Liable.  So long as Secured Party complies with the
obligations, if any, imposed by 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. Debtor
bears the risk of loss or damage of the Collateral.

 

11.                                 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

 

16

 

or preferential. In the event that, for any reason, any portion of such
payments 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.

 

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 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 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,
Secured Party may disclose all documents and information which Secured Party
now or hereafter may have relating to Debtor, Debtor’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 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.

 

13.4                           Amendments and
Waivers.  Any provision of this Security Agreement or
any of the Loan Documents to which Debtor 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 parties hereto and supersedes any and all prior agreements and
understandings, oral or written, relating to the

 

17

 

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

 

13.6                           Severability.  The provisions of this Security Agreement are severable. The
invalidity, in whole or in part, of any provision of this Security 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.

 

13.7                           CHOICE OF
LAW AND VENUE; JURY TRIAL WAIVER.

 

(a)                                  THE VALIDITY OF THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE
CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE
CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE
RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING
HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER,
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA, WITHOUT REGARD FOR PRINCIPLES OF CONFLICTS OF LAWS.

 

(b)                                  THE PARTIES AGREE THAT ALL
ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER
LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL
COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, PROVIDED, HOWEVER, THAT ANY SUIT SEEKING
ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT SECURED
PARTY’S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SECURED PARTY ELECTS TO
BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND.
DEBTOR AND SECURED PARTY WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW,
ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY
PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13.7.

 

(c)                                  DEBTOR AND SECURED PARTY
HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE LOAN DOCUMENTS
OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN OR THEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. DEBTOR AND SECURED PARTY REPRESENT THAT EACH HAS REVIEWED
THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL

 

18

 

COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT
MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

 

13.8                           Amended and Restated
Security Agreement.  This Security Agreement shall amend and
restate the Prior Security Agreement in its entirety, and continue the Secured
Obligations incurred by Debtor thereunder and the grant of a security interest
created thereunder.

 

remainder of this page intentionally left blank

 

19

 

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

 

	
  Debtor:

  	
  PROSPECT MEDICAL SYSTEMS,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/ R. Stewart Kahn

  
	
   

  	
   

  	
  R. Stewart Kahn, Executive
  Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Secured Party:

  	
  COMERICA BANK

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/ Stephanie D. McElroy

  
	
   

  	
  Stephanie
  D. McElroy, Vice President

  

 

20

 

SCHEDULE 1

 

	
  Section 5.1

  	
   

  	
  Legal Name, State of
  Organization, FEIN and Charter Identification Number

  
	
   

  	
   

  	
   

  
	
  Section 5.1

  	
   

  	
  Location of Chief
  Executive Office and Collateral

  
	
   

  	
   

  	
   

  
	
  Section 5.2

  	
   

  	
  Locations of Debtor’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

  

 

21

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