Exhibit
10.42


 


THIRD
AMENDED AND RESTATED ASSIGNABLE OPTION AGREEMENT


 


THIS THIRD AMENDED AND RESTATED ASSIGNABLE
OPTION AGREEMENT (this “Agreement”)
is effective as of the 8th of August, 2007, by and among Prospect
Medical Systems, Inc., a Delaware corporation (“PMS”), Prospect Medical Group, Inc.,
a California professional corporation (“PMG”), and Jacob Y.
Terner, M.D. (“Shareholder”),
with reference to the following facts:


 


RECITALS


 


A.            PMG owns and operates a
professional corporation that is organized and operated as a medical group and
an independent practice association (the “Practice”).


 


B.            All of the issued and outstanding
shares of PMG are owned by Shareholder.


 


C.            Pursuant to the Assignable Option
Agreement effective as of January 13, 2000,  among the parties hereto, as amended and
restated by that Amended and Restated Assignable Option Agreement dated as of September 27,
2004 and by that Second Amended and Restated Assignable Option Agreement dated
as of June 1, 2007 (collectively, the Prior
Assignable Option Agreement”), PMG and Shareholder granted to
PMS and PMS acquired from PMG and Shareholder an assignable option to purchase
all of the assets of PMG and the right to designate the purchaser (“Successor Physician”) of all or part of
the issued and outstanding stock in PMG. 
When used in this Agreement, the term “Assets” shall mean all of PMG’s and Shareholder’s right,
title, interest and estate in and to all the assets of every kind and
description used in or pertaining to the Practice, including but not limited to
the assets set forth on Exhibit A. 
When used in this Agreement, the term “Stock” shall mean all of Shareholder’s right, title,
interest and estate in and to all of the issued and outstanding stock in PMG,
including any rights to any additional stock, preemptive rights, warrants, and
the like, as set forth on Exhibit B.


 


D.            PMS, PMG and Shareholder desire to
enter into this Agreement to incorporate within the terms, conditions and
provisions of one agreement all of the terms, conditions and provisions
governing assignable options to purchase all of the Assets and the right to
designate the Successor Physician of all or part of the issued and outstanding
Stock and to amend and restate the terms, conditions and provisions set forth
in the Prior Assignable Option Agreement.


 


NOW, THEREFORE, in consideration of the
foregoing promises and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties, PMS, PMG and
Shareholder agree to amend and restate the Prior Assignable Option Agreement in
its entirety to read as follows:


 


1.             Grant
of Option.


 


1.1           PMG
hereby grants to PMS an assignable option to purchase all or any part of the
Assets (the “Assets Option”),
on the terms and subject to the conditions set forth in this Agreement.


 


1.2           PMG and Shareholder hereby grant to PMS, the
assignable right to designate a Successor Physician or Successor Physicians,
which person or persons must be duly licensed 


 

















 


physicians in the State of California or otherwise
permitted by law to be a shareholder in a professional corporation, to purchase
all or part of the Stock (the “Stock
Option”), on the terms and subject to the conditions set forth
herein.  In its sole discretion, PMS may
designate the amount of Stock which is to be purchased.  The Assets Option and the Stock Option are
collectively referred to herein as the “Option.”


 


1.3           PMG and Shareholder represent and warrant that as
of the day and year first above written and during the term of this Agreement, Exhibit A
and Exhibit B are true and complete listings of the Assets and
Stock, respectively, as revised from time to time pursuant to this Agreement.


 


1.4           Except as set forth in (a) the First Lien
Pledge Agreement dated as of August 8, 2007 by and among Shareholder, PMG,
PMS, Prospect Medical Holdings, a Delaware corporation (“Holdings”)
and Bank of America, N.A., as Administrative Agent and (b) the Second Lien
Pledge Agreement dated as of August 8, 2007 by and among Shareholder, PMG,
PMS, Holdings and Bank of America, N.A., as Administrative Agent (collectively,
the “Pledge Agreements”), PMG shall
not recognize any share transfer or other action not in compliance with the
terms of this Agreement.  When used in
this Agreement, the term “Applicable
Management Company” shall mean (i) with respect to Sierra
Primary Care Medical Group, A Medical Corporation, a California professional
corporation (“Sierra Primary”),
Pegasus Medical Group, Inc., a California professional corporation
(“Pegasus”)
or Antelope Valley Medical Associates, Inc., a California
professional corporation (“Antelope”),
Sierra Medical Management, Inc., a Delaware corporation (“SMM”) (ii) with
respect to  PMG, Prospect Health Source Medical Group, Inc., a
California professional corporation (“Prospect
Health”), Prospect Professional Care Medical Group, Inc., a
California professional corporation (“Prospect
Professional”), Prospect NWOC Medical Group, Inc., a
California professional corporation (“Prospect
NWOC”), APAC Medical Group, Inc., a California professional
corporation (“APAC”),
StarCare Medical Group, Inc., a California professional corporation (“StarCare”), Genesis Healthcare of
Southern California, Inc., a Medical Group, a California professional
corporation (“Genesis”), Nuestra Familia Medical
Group, Inc., a California professional corporation (“Nuestra”) or Santa Ana/Tustin
Physicians Group, Inc., a California professional corporation (“Santa Ana/Tustin”), PMS
(iii) with respect to Pomona Valley Medical Group, Inc., a
California professional corporation (“Pomona Valley”)
and Upland Medical Group, A Professional Medical Corporation, a California
professional corporation, ProMed Health Care Administrators, a
California corporation (“PHCA”).


 


PMS, SMM and PHCA are each a “Management Company” and collectively,
the “Management Companies”).
Prospect Hospital Advisory Services, Inc., a Delaware corporation (“PHA”), Prospect Advantage Network, Inc., a California
corporation (“PAN”) and ProMed Health Services
Company, a California corporation (“PHS”), and
together with PHA and PAN, each a “Non-Management Subsidiary”
and collectively, the “Non-Management
Subsidiaries”. PMG, Sierra Primary, Santa Ana/Tustin, Pegasus,
Antelope, Nuestra, Prospect Health, Prospect Professional, Prospect NWOC, APAC,
StarCare, Genesis, Prospect Physician, Pomona Valley, and Upland are each a “Professional
Corporation” and
collectively, the “Professional Corporations”).


 


2

















 


2.             Term
of Agreement. The term of this Agreement commences as of the
day and year first above written and continues for thirty (30) years (“Term”). 
So long as the term of that certain 
Amended and Restated Management Services Agreement, made and entered
into as of June 4, 1996, by and between PMS and PMG (as amended,
supplemented, restated or otherwise modified from time to time, the “Management Services Agreement”) is
automatically extended pursuant thereto, the term of this Agreement shall be
automatically extended for additional coextensive terms of ten (10) years
each.  In the event that the Management
Services Agreement is terminated pursuant to its terms, this Agreement shall
terminate upon the effective date of termination of said Management Services
Agreement.


 


3.             Option
Price. The purchase price for the Option (the “Option Price”) is One Hundred Dollars
($100) and PMG and Shareholder acknowledge receipt of such payment.


 


4.             Exercise
of Option.  Subject
to applicable Law:


 


4.1           During the Term of this Agreement, PMS may elect
to exercise the Option at any time.  In
the event of an election by PMS to exercise the Option, PMS may exercise either
the Assets Option or the Stock Option, or both, at PMS’s sole discretion.


 


4.2           Notwithstanding the provisions of Section 4.1
above, if the Management Services Agreement is terminated by either PMG or PMS,
for any reason, PMS’s right to exercise the Option is automatically and
immediately exercised as of the termination date of the Management Services
Agreement such that PMS may exercise either the Assets Option or the Stock
Option, or both, at such time.


 


4.3           To the extent that the Assets Option is exercised
by PMS, PMS will send PMG a written notice (the “Assets Exercise Notice”) specifying the Assets to be
purchased.  PMS may exercise the Assets
Option as many times as PMS elects in its sole discretion.


 


4.4           To the extent that the Stock Option is exercised
by PMS, PMS will send PMG a written notice (the “Stock Exercise Notice”) specifying the Stock to be
purchased.  PMS may designate the
Successor Physician(s) who will exercise the Stock Option as many times as
PMS elects in its sole discretion.


 


4.5           The Assets Option and the Stock Option are
independent of each other, and can be exercised at different times during the
Term.


 


4.6           PMS may cancel any Assets Exercise Notice or
Stock Exercise Notice at any time.


 


4.7           PMG and Shareholder shall cooperate with PMS in
any due diligence, and PMG and Shareholder shall cause each other Professional
Corporation and PC Shareholder to cooperate with PMS or any Applicable Management
Company in any due diligence.


 


4.8           PMG and Shareholder shall execute and deliver
such agreements, documents and instruments at Closing (as defined below) as PMS
may request evidencing or relating to the purchase of Assets or Stock, as the
case may be, each in form and substance satisfactory to PMS, 


 


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including without limitation, the
Non-Competition Agreement in the form of Exhibit C attached hereto.


 


5.             Assignment
of the Option.  PMS may
elect to assign either the Assets Option or the Stock Option or both to any
person, by a written assignment, signed by both PMS and the assignee, which
designates the Assets and/or Stock.  The
assignee shall agree as a condition of the assignment to be bound by the terms
of this Agreement.  Thereafter, only the
assignee named in the assignment shall have the right to exercise the
applicable Assets Option and/or the Stock Option as to the designated Assets
and/or Stock, and that assignee, rather than PMS, shall enter into a purchase
agreement upon exercise of the Assets Option and/or the Stock Option, as
applicable.  Written notice of any such
assignment shall be given by PMS to PMG and Shareholder within a reasonable
time period following execution of any assignment pursuant to this
Agreement.  When the context so requires
in this Agreement, the term “PMS” shall be deemed to refer to an assignee
holding an assignment of an Asset Option or Stock Option, and the terms “party”
and “parties” shall be deemed to include that assignee.


 


6.             Purchase
Price of the Assets or Stock.


 


6.1           Purchase Price.


 


(a)           Assets Purchase Price.  The purchase price for the Assets to be
purchased pursuant to the exercise of the Assets Option shall be $1,000 plus an
assumption of all liabilities and obligations of PMG, whether contingent,
liquidated or disputed (“Assets Purchase
Price”).  The purchase
price of any partial purchase of the Assets shall be a pro-rata percentage of
the full Assets Purchase Price.


 


(b)           Stock Purchase Price.  The purchase price for the Stock to be
purchased pursuant to the exercise of the Stock Option shall be $1,000 (“Stock Purchase Price”).  The purchase price of less than all of the
issued and outstanding Stock is a pro-rata percentage of the full Stock
Purchase Price.


 


6.2           Payment. For the Assets,
PMS shall pay to PMG the Assets Purchase Price at Closing (as defined below) in
the form of immediately available funds transferred by wire to an account at a
financial institution designated by PMG. 
For the Stock, PMS shall cause the Successor Physician to pay the
Shareholder the Stock Purchase Price.


 


6.3           Closing.  The transactions contemplated by this
Agreement are to close fifteen (15) days after the date of either the Assets
Exercise Notice or the Stock Exercise Notice, as the case may be (“Closing”), unless extended by PMS.


 


7.             Additional
Obligations of PMG and Shareholder.


 


7.1           Affirmative Covenants.  To the extent that PMG or Shareholder
participate in the Practice and own, control, or use the Assets, PMG and
Shareholder shall, and shall cause each other Professional Corporation and PC
Shareholder to:


 


(a)           Conduct of Practice.  Conduct PMG’s and each such other
Professional Corporation’s business efficiently and without voluntary
interruption and preserve all rights, 


 


4

















 


privileges, and franchises held by PMG and
each such other Professional Corporation and by PMG’s Practice and the practice
of each such other Professional Corporation, including the maintenance of all
contracts, copyrights, trademarks, licenses, registrations, etc.;


 


(b)           Use.  Make use of the Assets and the assets of each
such other Professional Corporation with reasonable care to prevent diminution
in value of the Practice and the practice of each such other Professional
Corporation and the Assets and the assets of each such other Professional
Corporation, and keep the Assets and the assets of each such other Professional
Corporation in good repair;


 


(c)           Value.  Perform all acts necessary to maintain,
preserve, and protect the Assets and the assets of each such other Professional
Corporation, and maintain fire and extended coverage insurance on the Assets in
the amounts and under policies acceptable to PMS and the Applicable Management
Companies, and provide PMS and the Applicable Management Companies with the
original policies and certificates at PMS’s or the Applicable Management
Company’s request;


 


(d)           Financing Statements.  Execute and deliver to PMS and the Applicable
Management Companies, all financing statements and other documents that PMS or
any Applicable Management Company requests, in order to put third parties on
notice of this Agreement;


 


(e)           Access.  Permit PMS and each Applicable Management
Company, its representatives, and its agents to inspect the Assets and the
assets of the each other Professional Corporations at any time, and to make
copies of records pertaining to the Assets and the assets of each other
Professional Corporation, at reasonable times at the applicable Management
Company’s request;


 


(f)            Reports.
Furnish PMS and the Applicable Management Companies any reports relating to the
Assets and the assets of each other Professional Corporation at PMS’s or at the
Applicable Management Company’s request;


 


(g)           Defaults. Notify PMS and
the Applicable Management Companies promptly in writing of any default,
potential default, or any development that might have a material adverse effect
on the Assets, the assets of each other Professional Corporation, the Stock or
the equity interest in any other Professional Corporation, or the Practice or
any practice of any other Professional Corporation, or of any litigation that
may have a material adverse effect on the Practice or any practice of any other
Professional Corporation;


 


(h)           Expenses.  Pay all expenses, including attorneys’ fees,
incurred by PMS in the perfection, preservation, realization, enforcement, and
exercise of its rights under this Agreement, including but not limited to
accounting, correspondence, collection efforts, filing, recording, and recordkeeping;


 


(i)            Indemnity.  Indemnify PMS against losses, liabilities, or
damages, costs and expenses of any and, including reasonable attorneys’ fees,
caused to PMS by reason of its interest in the Assets and/or the Stock;


 


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(j)            Taxes.  Pay promptly when due all taxes and
assessments owed in connection with the Assets and the assets of each other
Professional Corporation and the Stock and the equity interest in each other
Professional Corporation; and


 


(k)           Delivery of Certificates.  Deliver to PMS, all certificates heretofore
issued representing all of the shares of PMG’s capital stock held of record or
beneficially owned by Shareholder, and each certificate hereafter issued
representing any share of the PMG’s’ capital stock, with each certificate
endorsed in blank for transfer. 
Notwithstanding the foregoing, this Section 7.1(k) shall
only apply in the event that the Pledge Agreements are no longer in effect.


 


7.2           Negative Covenants.  Except as required under the Pledge
Agreements or under the First Lien Credit Agreement, dated as of the date
hereof (as amended, supplemented, restated or modified from time to time, the “First Lien Credit Agreement”),
among Holdings, PMG, Bank of America, N.A., as First Lien Administrative Agent,
and the Lenders party thereto, and the Second Lien Credit Agreement, dated as
of the date hereof (as amended, supplemented, restated or modified from time to
time, the “Second Lien Credit Agreement”
and together with the First Lien Credit Agreement, the “Credit Agreements”)
among Holdings, PMG, Bank of America, N.A., as Second Lien Administrative
Agent, and the Lenders party thereto, and the other loan documents executed in
connection with the Credit Agreements, without the prior written consent of PMS
or the Applicable Management Companies, PMG and Shareholder shall not (and
shall not permit any other Professional Corporation or Successor Physician to):


 


(a)           Transfer.  Sell, lease, transfer, or otherwise dispose
of the Assets or the assets of any other Professional Corporation or Stock or
the equity interest in any other Professional Corporation;


 


(b)           Debt.  Incur, guarantee, assume or otherwise become
liable for any borrowing or increase any existing indebtedness; or discharge or
cancel any debt owed to PMG or any other Professional Corporation;


 


(c)           No Further Hypothecation.  Except as contemplated by the Credit
Agreements and related loan documents, pledge, hypothecate, encumber, redeem or
dispose of the Assets or any of the assets of any other Professional
Corporation, the Stock or any interest therein, or any equity interest in any
other Professional Corporation or an interest therein until all of PMG’s
obligations under this Agreement have been fully satisfied or the Assets or the
Stock has been released;


 


(d)           Location.  Move the Assets from their present locations
without the prior written consent of the PMS;


 


(e)           Use.  Use the Assets, or the assets of other
Professional Corporations, or the Stock, or any equity interest in any other
Professional Corporations, for any unlawful purpose or in any way that would
void any effective insurance;


 


(f)            Name and Location
Changes.  Change
the name or place of business or use a fictitious business name without the
prior express consent of PMS; and


 


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(g)           Issuance of Stock; Change in Ownership; Mergers
and Consolidation.  Permit
any issuance of Stock, any equity interest in any other Professional
Corporation, other equity, or debt; permit any change in the composition or
respective percentage ownership of PMG or any other Professional Corporation;
permit PMG or any other Professional Corporation to be merged, consolidated or
otherwise reorganized with or into any other corporation, partnership, trade,
business, or the like; amend or otherwise modify its articles of incorporation
and bylaws; dissolve; or enter into any agreement with any person to do any of
the foregoing.


 


8.             Confidentiality;
Subordination.


 


8.1           Confidentiality.  The parties shall use all good faith efforts
to keep the contents of this Agreement and all other aspects of the
negotiations preceding execution of this Agreement confidential.  Unless required by law, PMS, PMG and
Shareholder shall not disclose the contents of this Agreement or the
negotiations leading to this Agreement to third parties without the prior
written consent of the other party.  PMS
shall ensure that all of the assignees likewise comply with the obligations of
confidentiality imposed by this Section, except that PMS and the
assignees may disclose the contents of such to their respective agents,
representatives, contractors, and employees to the extent necessary to exercise
their respective rights or perform their respective obligations hereunder.


 


8.2           Subordination.  Notwithstanding anything herein to the
contrary, each of PMG, PMS and Holdings hereby subordinates all of its rights
under this Agreement to the rights of the First Lien Administrative Agent and
the Second Lien Administrative Agent under the Pledge Agreements until the
indefeasible payment in full in cash of all Obligations (as such term is
defined in each of the respective Credit Agreements) and termination of all
commitments to lend under the First Lien Credit Agreement.


 


9.             General.


 


9.1           Compliance with Law.  PMG and Shareholder shall, and shall cause
each other Professional Corporation to, comply with all applicable requirements
of the Joint Commission on the Accreditation of Healthcare Organizations, the
Medicare and Medicaid programs, applicable state law and regulations, and other
licensing and accreditation authorities.


 


9.2           Relationship of Parties.  In the exercise of their respective rights
and the performance of their respective obligations under this Agreement, PMG
and Shareholder, on the one hand, and PMS (or any assignee), on the other hand,
are acting in the capacity of the grantor and grantee of an option to purchase
all or a portion of the Assets and/or Stock, and nothing in this Agreement is
intended nor shall be construed to create between the parties an
employer/employee relationship, a partnership or joint venture relationship or
a landlord/tenant relationship.


 


9.3           Assignment.  All of PMS’s rights and duties under this
Agreement may be assigned or delegated by PMS or Holdings, including but not
limited to an assignment to Bank of America, N.A., in its capacity as
Administrative Agent and/or Control Agent under the Credit Agreements (subject
to the terms of the Intercreditor Agreement as such term is defined in the
Credit Agreements); provided, however, that PMS or Holdings, shall give
written notice of any 


 


7

















 


such assignment to PMG and Shareholder within
a reasonable time period. 
Notwithstanding any other provision of this Agreement, neither this
Agreement nor the rights and duties of this Agreement may be assigned or
delegated by PMG or Shareholder.  This
Agreement binds the successors, heirs, and authorized assignees of the parties.


 


9.4           Entire Agreement.  Except as expressly provided in this
Agreement and the Pledge Agreements to the contrary, this Agreement, including
its incorporated exhibits, constitutes the entire agreement between the parties
with respect to the Option, and supersedes all other and prior agreements on
the same subject, whether written or oral and contains all of the covenants and
agreements between the parties with respect to the subject matter hereof.  Except as expressly provided in this
Agreement to the contrary, each party to this Agreement acknowledges that no
representations, inducements, promises, or agreements, orally or otherwise,
have been made by any other party hereto, or by anyone acting on behalf of any
party hereto, that are not embodied herein, and that no agreement, statement,
or promise not contained in this Agreement shall be valid or binding.  This Agreement amends and restates the
Prior Assignable Option Agreement in its entirety.  The parties hereto acknowledge and agree that
the rights and obligations under the Prior Assignable Option Agreement are in
all respects continuing under this Agreement with only the terms being modified
from and after the date hereof as provided in this Agreement.


 


9.5           Counterparts.  This Agreement, and any amendments hereto,
may be executed in counterparts, each of which shall constitute an original
document, but which together shall constitute one and the same instrument.


 


9.6           Headings.  The section headings contained in this
Agreement are inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Agreement.


 


9.7           Notices.  Any notices required or permitted to be given
hereunder by any party to another shall be in writing and shall be deemed
delivered upon personal delivery, twenty-four (24) hours following deposit with
a courier for overnight delivery or seventy two (72) hours following deposit in
the U.S. Mail, registered or certified mail, postage prepaid, return-receipt
requested, addressed to the parties at the following addresses or to such other
addresses as the parties may specify in writing:


 


	
  If to PMG

  	
   

  
	
  Or Shareholder:

  	
  c/o Prospect Medical
  Group, Inc.

  
	
   

  	
  1920 East 17th
  Street, Suite 200

  
	
   

  	
  Santa Ana, California

  
	
   

  	
  Attention: Jacob Y.
  Terner, M.D.

  
	
   

  	
   

  
	
  If to PMS:

  	
   

  
	
   

  	
   

  
	
   

  	
  c/o Prospect Medical Holdings, Inc.

  
	
   

  	
  400 Corporate Pointe, Suite 525

  
	
   

  	
  Culver City, California 90230

  
	
   

  	
  Attention: Mike Heather, Chief Financial Officer

  



 


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9.8           Governing Law.  This Agreement shall be governed by and
construed in accordance with the laws of the State of California.


 


9.9           Amendment.  This Agreement may be amended at any time by
agreement of the parties, provided that any amendment shall be in writing and
executed by all parties.


 


9.10         Severability.  If any provision of this Agreement is held by
a court of competent jurisdiction to be invalid or unenforceable, the remaining
provisions will nevertheless continue in full force and effect, unless such
invalidity or unenforceability would defeat an essential business purpose of
this Agreement.


 


9.11         Fees and Expenses.  PMS, PMG, and Shareholders each shall bear
their own expenses, including, without limitation, attorneys’ and accountants’
fees, incurred in connection with the preparation of this Agreement and the
transactions contemplated hereby.


 


9.12         Exhibits and Schedules.  All exhibits and schedules attached to this
Agreement are incorporated herein by this reference and all references herein
to “Agreement” shall mean this Agreement together with all such exhibits and
schedules.


 


9.13         Time of Essence.  Time is expressly made of the essence of this
Agreement and each and every provision hereof of which time of performance is a
factor.


 


9.14         Dispute Resolution.  In the event the parties hereto are unable to
resolve any dispute in connection with this Agreement, the parties may mutually
agree to arbitrate as set forth below.


 


(a)           There shall be one arbitrator.  If the parties shall fail to select a
mutually acceptable arbitrator within ten (10) days after the demand for
arbitration is mailed, then the parties stipulate to arbitration before a
retired judge sitting on the Los Angeles, California, Judicial Arbitration
Mediation Services (JAMS) panel.


 


(b)           The substantive law of the State of California
shall be applied by the arbitrator.


 


(c)           Arbitration shall take place in Los Angeles,
California, unless the applicable Professional Corporation and a majority of
the other parties otherwise agree.  As
soon as reasonably practicable, a hearing with respect to the dispute or matter
to be resolved shall be conducted by the arbitrator.  As soon as reasonably practicable thereafter,
the arbitrator shall arrive at a final decision, which shall be reduced to
writing, signed by the arbitrator and mailed to each of the parties and their
legal counsel.


 


(d)           All decisions of the arbitrator shall be final,
binding and conclusive on the parties and shall constitute the only method of
resolving disputes or matters subject to arbitration pursuant to this
Agreement.  The arbitrator or a court of
appropriate jurisdiction may issue a writ of execution to enforce the
arbitrator’s judgment. Judgment may be entered upon such a decision in
accordance with applicable law in any court having jurisdiction thereof.


 


9

















 


(e)           Notwithstanding the foregoing, because time is of
the essence of this Agreement, the parties specifically reserve the right to
seek a judicial temporary restraining order, preliminary injunction, or other
similar short term equitable relief, and grant the arbitrator the right to make
a final determination of the parties’ rights, including whether to make
permanent or dissolve such court order.


 


(f)            Notwithstanding the foregoing, any and all
arbitration proceedings are conditional upon such proceedings being covered
within the parties’ respective risk insurance policies.


 


9.15         Attorneys’ Fees.  Should any of the parties hereto institute
any action or procedure to enforce this Agreement or any provision hereof
(including without limitation, arbitration), or for damages by reason of any
alleged breach of this Agreement or of any provision hereof, or for a
declaration of rights hereunder (including, without limitation, by means of
arbitration), the prevailing party in any such action or proceeding shall be
entitled to receive from the other party all costs and expenses, including
without limitation reasonable attorneys’ fees, incurred by the prevailing party
in connection with such action or proceeding.


 


9.16         Further Assurances.  The parties shall take such actions and
execute and deliver such further documentation as may reasonably be required in
order to give effect to the transactions contemplated by this Agreement and the
intentions of the parties hereto.


 


9.17         Rights Cumulative.  The various rights and remedies herein
granted to the respective parties hereto shall be cumulative and in addition to
any other rights any such party may be entitled to under law.  The exercise of one or more rights or
remedies by a party shall not impair the right of such party to exercise any
other right or remedy, at law or equity.


 


9.18         Spousal Consent.   Shareholder shall cause his spouse to
execute a Spousal Joinder and Consent, substantially in the form of Exhibit A
attached hereto, signifying such spouse’s consent to this Agreement and such
spouse’s agreement that any rights that such spouse may have, as a result of a
community property or other interest in the Stock, shall be subject to the
provisions of this Agreement.  It is
intended by this Agreement that Shareholder shall subject his entire interest
in the Stock to the terms of this Agreement, irrespective of any community
property or other interest of his spouse.


 


<The remainder of the page is intentionally
blank.>


 


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IN
WITNESS WHEREOF, PMS, PMG and Shareholder execute this Agreement by their duly
authorized representatives as set forth below.


 


	
  “PMS”

  	
   

  	
  “PMG”

  
	
   

  	
   

  	
   

  
	
  PROSPECT MEDICAL SYSTEMS, INC., a

  Delaware corporation

  	
   

  	
  PROSPECT MEDICAL GROUP, INC., a

  California professional corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:
  

  	
   

  	
   

  	
   

  	
  By:
  

  	
   

  
	
  Name:

  	
   Mike Heather 

  	
   

  	
   

  	
   

  	
   

  	
  Name:

  	
    Jacob Y. Terner, M.D.

  
	
  Title:

  	
     Chief
  Financial Officer

  	
   

  	
   

  	
   

  	
   

  	
  Title:

  	
      Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  “SHAREHOLDER”

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  JACOB Y. TERNER

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Jacob Y. Terner, individually

  
												



 


[Signature Page to the Third Amended and Restated


Assignable
Option Agreement]


 

















 


SPOUSAL JOINDER AND
CONSENT


 


I
am the spouse of Jacob Y. Terner, M.D., a shareholder (the “Shareholder”) of Prospect Medical Group, Inc.,
a California professional medical corporation (“PMG”).  To the
extent that I have any interest in any of the Assets (as that term is defined
in the Third Amended and Restated Assignable Option Agreement (the “Assignable Option Agreement”), entered
into as of this date, by and among Shareholder, PMG and Prospect
Medical Systems, Inc., a Delaware corporation (“PMS”),
I hereby join in the Assignable Option Agreement and agree to be bound by its
terms and conditions to the same extent as my spouse.  I have read the Assignable Option Agreement, understand
its terms and conditions, and to the extent that I have felt it necessary, have
retained independent legal counsel to advise me concerning the legal effect of
the Assignable Option Agreement and this Spousal Joinder and Consent.


 


I
understand and acknowledge that PMS is significantly relying on the validity and accuracy of this
Spousal Joinder and Consent in entering into the Assignable Option Agreement.


 


Executed this
         day of August, 2007.


 


 


	
  Signature:

  	
   

  	
   

  
	
   

  
	
  Printed
  or Typed Name: Sandra W. Terner

  



 


[Signature Page to the Spousal
Joinder and Consent to the  Amended and
Restated


Assignable Option Agreement]


 

















 


EXHIBIT A


 


ASSETS


 


1.                                       All contracts and agreements, including all payor contracts,
vendor contracts, loan agreements, leases and subleases.


 


2.                                       All risk pool or other incentive arrangement payments relating to
the Practice, including hospital incentive funds, and any capitation advances
to physicians.


 


3.                                       All cash, bank balances, monies in possession of any bank, other
cash items, marketable securities of PMG and prepaid deposits relating to the
Practice.


 


4.                                       All accounts receivable of PMG (“Accounts Receivable”) relating to the Practice.  As used herein, “Accounts Receivable” shall
include all rights to payment for goods or services rendered, whether or not
yet earned by performance, all other obligations and receivables from others no
matter how evidenced relating to the Practice, including purchase orders,
notes, instruments, drafts and acceptances and all guarantees of the foregoing
and security therefor, relating to the Practice.


 


5.                                       All supplies and inventory relating to the Practice.


 


6.                                       All patient records, files and X-rays relating to the Practice.


 


7.                                       All of PMG’s goodwill relating to the Practice, which may include
location goodwill, name recognition goodwill, patient allegiance, etc.


 


8.                                       All business, financial and accounting records and books of
account relating to the Practice, exclusive of PMG’s Articles, Bylaws,
corporate minutes, stock shares and general ledger.


 


9.                                       PMG’s right to reimbursement for all professional services
provided to managed care and fee-for-service patients relating to the Practice.


 


10.                                 All of PMG’s furniture, fixtures, leasehold improvements,
machinery, equipment, inventories, supplies and other like tangible personal
property used in the Practice.


 


11.                                 All trademarks, trade names, fictitious business names,
copyrights, logos, licenses, ownership interests in telephone numbers at the
Practice, or related items of PMG that in any way pertain to the Practice.


 

















 


EXHIBIT B


 


STOCK


 


4,000
shares of common stock of Prospect Medical Group, Inc., a California
professional corporation (“PMG”) representing 100% of the outstanding shares of
PMG.  All of the foregoing stock of PMG
has been pledged to the First Lien Administrative Agent pursuant to the terms
of that certain First Lien Pledge Agreement, dated as of August 8, 2007 executed in favor of the First
Lien Administrative Agent by Jacob Y. Terner, as
the same may be amended, supplemented, restated or otherwise modified from time
to time, and to the Second Lien Administrative Agent pursuant to the terms of
that certain Second Lien Pledge Agreement, dated as of August 8, 2007
created in favor of the Second Lien Administrative Agent by Jacob Y. Terner, as
the same may be amended, supplemented, restated or otherwise modified from time
to time.


 

















 


EXHIBIT C


 


NON-COMPETITION AGREEMENT


 


THIS
NON-COMPETITION AGREEMENT (“Agreement”) is made as of this
      th day of [                        ],
and is effective as of                          ,
        , by and between Prospect
Medical Systems, Inc., a Delaware corporation (“Systems”), Prospect
Medical Group, Inc., a California professional corporation (“PC”), Jacob
Y. Terner, M.D. (“Professional”), and
                                  
(“Successor Physician”).


 


All
capitalized terms used herein and not otherwise expressly defined shall have
the same meanings set forth in the Assignable Option Agreement (defined below).


 


RECITALS


 


A.                                   Systems is in the business of managing medical groups in the State
of California, including PC.


 


B.                                     On                      ,
      , Systems exercised its Option to designate
Successor Physician to acquire the stock or assets of PC under the terms of
that certain Third Amended and restated Assignable Option Agreement, dated August     ,
2007 by and between Systems, PC and Professional (as the same may be amended,
supplemented, restated or otherwise modified from time to time, the “Assignable
Option Agreement”).


 


C.                                     Pursuant to the terms of System’s Option, Professional is to sell
either the assets or the stock of PC in accordance with the terms of that
certain acquisition agreement by and between PC, Professional and Successor
Physician (“Acquisition Agreement”).


 


D.                                    In consideration for Professional’s sale of PC’s stock or assets
to Successor Physician, the parties desire to enter into this Agreement.


 


AGREEMENT


 


NOW,
THEREFORE, in consideration of the foregoing promises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows.


 


1.                                       Professional’s Covenants.  As a material inducement for Successor
Physician to acquire the stock or assets of PC from Professional and contingent
on the full and faithful performance of the obligations of the parties under
the Acquisition Agreement, for a period of twenty-four (24) months commencing
as of the date when Professional sells, hypothecates, or otherwise transfers (i) his
stock in the PC or (ii) a material portion of the assets of the PC (the “Effective
Date”), Professional covenants as follows:


 


1.1                                 That Professional will not, directly or indirectly (whether as a
sole proprietor, partner, stockholder, director, officer, employee, independent
contractor or in any other capacity as principal or agent) (i) establish,
operate or provide professional medical services within ten (10) miles of
any location at which PC conducts business or any location at which other 


 

















 


professional
corporations managed by Systems as of the Effective Date conduct business; or (ii) compete
with Systems in the provision of the same services or services substantially
similar to those services provided by Systems. Professional shall be deemed to
compete with Systems if Professional provides to any medical association(s) or
group(s) of physicians within ten (10) miles of any location at which
PC conducts business during the term of this Agreement any services that are
the same or substantially similar to any services provided by Systems pursuant
to the terms of its management services agreements.


 


1.2                                 That Professional will not, directly or indirectly, (whether as a
sole proprietor, partner, stockholder, director, officer, employee, independent
contractor or in any other capacity as principal or agent) (i) hire or
induce any party to recruit or hire any person who is an employee or
independent contractor of PC or Systems or any of their affiliates; (ii) whether
for himself or any other person or entity, call upon, solicit, divert or take
away, or attempt to solicit, call upon, divert or take away any customers,
business or clients of PC or Systems or their affiliates (including, without
limitation, any third party payors); (iii) solicit, or induce any party to
solicit, any contractors of PC or Systems or their affiliates, to enter into
the same or a similar type of contract with any other party; (iv) for
himself or for any other entity, solicit, divert or take away or attempt to
solicit, divert or take away any of PC’s patients; or (v) disrupt, damage,
impair or interfere with the business of PC or Systems or their affiliates.


 


These
covenants on the part of Professional shall be construed as an agreement
independent of any other provision in this Agreement; and the existence of any
claim or cause of action of Professional against PC or Systems, whether
predicated on this Agreement or otherwise, shall not constitute a defense to
the enforcement by PC or Systems of these covenants.


 


It
is agreed by the parties hereto that if any portion of the covenants specified
in subparagraphs 1.1 and 1.2 above are held to be unreasonable, arbitrary or
against public policy, the covenants herein shall be considered divisible both
as to time and geographic area; and each month of the specified period shall be
deemed a separate period of time, and each quarter mile shall be deemed a
separate geographic area so that the lesser period of time or geographic area
shall remain effective as along as the time or geographic area are not
unreasonable, arbitrary, or against public policy.  The parties hereto agree that, in the event
any court determines the specified time period or the specified geographic area
to be unreasonable, arbitrary or against public policy, a lesser time period or
geographic area which is determined to he reasonable, nonarbitrary and not
against public policy may be enforced against Professional, where such
provisions shall be deemed reformed to the maximum time or geographic or other
limitations permitted by applicable law, as determined by such court in such
action.


 


The
parties agree that the remedy at law for any breach of such covenant or of the
related covenants set forth herein would be inadequate, and that therefore PC,
Systems or any other person entitled to enforce such covenants shall be
entitled to seek injunctive relief thereon in addition to its rights to
monetary damages.


 


2.                                       Confidentiality


 


2.1                                 PC’s Confidential and Proprietary Information.  In the course of
Professional’s engagement by PC, Professional has had access to certain
confidential or proprietary information 


 

















 


relating
to the patients and operations of PC including, without limitation, patient
lists, training material, brochures, practice development aids, techniques and
other trade secrets, which information will become the confidential and
proprietary information of PC (collectively, the “PC’s Confidential and
Proprietary Information”).  Professional
shall maintain all of PC’s Confidential and Proprietary Information in the
strictest confidence and shall not directly or indirectly use such information
at any time, or divulge any of PC’s Confidential and Proprietary Information at
any time to any third parties, other than (i) PC, Systems or their
respective representatives who have a reasonable need for such information and
who have similarly agreed to hold such information in confidence, without the
express prior written consent of PC; (ii) as may be reasonably necessary
in connection with any litigation or dispute in relation to Professional’s
prior operation of the practice through Practice; or (iii) upon court
order to do so.  Professional shall not
remove from any of PC’s practice sites or make copies or other reproductions of
any of PC’s Confidential and Proprietary Information without the express prior
written consent of PC. Upon the Effective Date of this Agreement, Professional
shall immediately return any and all original documents and materials
containing any of PC’s Confidential and Proprietary Information, including any
and all copies or other reproductions thereof, to PC.


 


2.2                                 Systems’ Confidential and Proprietary Information.


 


2.2.1                        Professional recognizes the proprietary interest of Systems in any
of Systems’ Confidential and Proprietary Information (as hereinafter defined).
Professional acknowledges and agrees that any and all Confidential and
Proprietary Information of Systems communicated to, learned of, or otherwise
acquired by Professional in the course of Professional’s engagement by the PC
shall be the property of Systems. 
Professional further acknowledges and understands that Professional’s
use or disclosure of Systems’ Confidential and Proprietary Information will
result in irreparable injury and damage to Systems.  As used herein, “Systems’ Confidential and
Proprietary Information” means all trade secrets and other confidential and/or
proprietary information of Systems and its affiliates, including information
derived from reports, investigations, research, work in progress, codes,
marketing and sales programs, financial projections, costs summaries, pricing
formula, contract analysis, financial information, projections, confidential
filings with any state or federal agency, and all other confidential concepts,
methods of doing business, ideas, materials or information (other than the PC’s
patient records) of Systems whether prepared for, by or on behalf of Systems or
its employees, officers, directors, agents, representatives, or consultants.


 


2.2.2                        Professional acknowledges and agrees that Systems is entitled to
prevent the disclosure or improper use of any of Systems’ Confidential and
Proprietary Information.  Professional
agrees at all times to hold in strictest confidence and not to disclose to any
person, firm or corporation and not to use, except in the pursuit of the
business of PC or Systems, Systems’ Confidential and Proprietary Information,
without the prior written consent of Systems; unless (i) such information
becomes known or available to the public generally through no wrongful act of
Professional or (ii) disclosure is required by law or the rule, regulation
or order of any governmental authority under color of law; provided, that prior
to disclosing any of Systems’ Confidential and Proprietary Information pursuant
to this clause (ii), Professional shall, if possible, give prior written notice
thereof to Systems and provide Systems with the opportunity to contest such
disclosure.  Professional shall take all
necessary and proper 


 

















 


precautions
against disclosure of any of Systems’ Confidential and Proprietary Information
to unauthorized persons.  Upon execution
of this Agreement, Professional shall cease all use of any of Systems’
Confidential and Proprietary Information and shall execute such documents as
may be reasonably necessary to evidence abandonment of any claim thereto.


 


2.2.3                        Upon the execution of this Agreement, and at any time upon the
request of Systems, Professional will promptly deliver or cause to be delivered
to Systems all documents, data and other information in their possession that
contains or is related to any of Systems’ Confidential and Proprietary
Information regarding Systems or its affiliates.  Professional shall not take or retain any
documents or other information, or any reproduction or excerpt thereof,
containing any of Systems’ Confidential and Proprietary Information.


 


3.                                       Professional’s Representation.  Professional specifically acknowledges,
represents, and warrants that (i) each of Professional’s covenants set
forth in this Agreement are being made in connection with the Acquisition
Agreement; (ii) such covenants are reasonable and necessary to protect the
legitimate interests of Systems, PC and their respective affiliates; and (iii) Successor
Physician would not have entered into the Acquisition Agreement in the absence
of such restrictions.


 


4.                                       Miscellaneous.


 


4.1                                 Successors and Assigns.  This Agreement shall be binding upon and
shall inure to the benefit of the parties and their respective heirs (as
applicable), legal representatives, and permitted successors and assigns.  No party may assign this Agreement or the
rights, interests or obligations hereunder; provided, however, each of Systems
and PC may assign any or all of its respective rights and interests hereunder
to one or more of its respective affiliates. Any assignment in contravention of
this Section shall be null and void.


 


4.2                                 Counterparts.  This Agreement, and any amendments thereto,
may be executed in counterparts, each of which shall constitute an original
document, but which together shall constitute one and the same instrument.


 


4.3                                 Headings.  The section headings contained in this
Agreement are inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Agreement.


 


4.4                                 Amendment.  This Agreement may not be amended except by a
writing executed by all parties.


 


4.5                                 Time of Essence.  Time is expressly made of the essence of this
Agreement and each and every provision hereof of which time of performance is a
factor.


 


4.6                                 Notices.  Any notices required or permitted to be given
hereunder by any party to the other shall be in writing and shall be deemed
delivered upon personal delivery; twenty-four (24) hours following deposit with
a courier for overnight delivery; or five (5) days following deposit in
the U.S. Mail, registered or certified mail, postage prepaid, return-receipt
requested, addressed to the parties at the following addresses or to such other
addresses as the parties may specify in writing:


 

















 


	
  If to Professional:

  	
   

  	
  Jacob Y. Terner, M.D.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  If
  to Systems:

  	
   

  	
  Prospect
  Medical Systems, Inc.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  If
  to PC:

  	
   

  	
  Prospect
  Medical Group, Inc.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  If
  to Successor Physician:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  



 


4.7                                 Governing Law.  This Agreement shall be governed by and
construed in accordance with the laws of the State of California without
reference to the conflict of laws provisions thereof.


 


4.8                                 Injunctive Relief.  The parties hereto acknowledge and agree that
a breach by Professional of this Agreement will cause irreparable damage to
Systems or PC, as applicable, the exact amount of which will be difficult to
ascertain, and that remedies at law for any such breach will be
inadequate.  Accordingly, Professional
agrees that if Professional breaches this Agreement, then Systems and PC, as
appropriate, shall be entitled to injunctive relief, and Professional agrees
not to assert in any proceeding that Systems or PC, as applicable, has an
adequate remedy at law.  Professional
shall pay the reasonable fees and expenses, including attorneys fees, incurred
by Systems, PC or any successor or assign in enforcing this Agreement.


 


4.9                                 Severability.  If any provision or portion of this Agreement
is held by a court of competent jurisdiction to be invalid or unenforceable,
the remainder of this Agreement will nevertheless continue in full force and
effect and shall not be invalidated or rendered unenforceable or otherwise
adversely affected, unless such invalidity or unenforceability would defeat an
essential business purpose of this Agreement. 
Without limiting the generality of the foregoing, if the provisions of
this Agreement shall be deemed to create a restriction, which is unreasonable
as to either duration or geographical area or both, the parties agree that the
provisions of this Agreement shall be enforced for such duration and in such
geographic area as any court of competent jurisdiction may determine to be
reasonable.


 


4.10                           Attorneys’ Fees.  Should any of Systems, PC or Professional
institute any action or procedure to enforce this Agreement or any provision
hereof, or for damages by reason of any alleged breach of this Agreement or of
any provision hereof, or for a declaration of rights hereunder (including
without limitation arbitration), the prevailing party(ies) in any such action 


 

















 


or
proceeding shall be entitled to receive from the other party all costs and
expenses, including without limitation reasonable attorneys’ fees, incurred by
the prevailing party(ies) in connection with such action or proceeding.


 


4.11                           Professional’s Practice of Medicine.  Notwithstanding anything to the contrary in
this Agreement, nothing herein is meant to limit or restrict Professional’s
ability to practice medicine as a physician within any radius, including within
10 miles of any PC location, in the State of California.


 


 


[The remainder of the page is
intentionally blank.]


 

















 


IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day
and year first written above.


 


	
  “Systems”

  	
   

  
	
  PROSPECT MEDICAL SYSTEMS, INC.

  	
   

  
	
  a Delaware corporation

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  Mike Heather

  	
   

  
	
  Title:

  	
  Chief Financial Officer

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  “PC”

  	
   

  
	
  PROSPECT MEDICAL GROUP, INC.,

  	
   

  
	
  a California professional corporation

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  Jacob Y. Terner, M.D.

  	
   

  
	
  Title:

  	
  Sole Shareholder

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  “PROFESSIONAL”

  	
   

  
	
  JACOB Y. TERNER, M.D.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Jacob Y. Terner, M.D., as an individual

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  “SUCCESSOR PHYSICIAN”