**EXHIBIT 2.11**

**STOCKPURCHASE AGREEMENT**

**Among**

**PROSPECTMEDICAL GROUP, INC.,**

**ACALIFORNIA PROFESSIONAL CORPORATION**

**Purchaser**

**And**

**GENESISHEALTHCARE OF SOUTHERN**

**CALIFORNIA,INC., A MEDICAL GROUP, A**

**CALIFORNIAPROFESSIONAL CORPORATION**

**Company**

**And**

**MITCHELL W.LEW, M.D.**

**Seller**

November 1, 2005

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**STOCKPURCHASE AGREEMENT**

This StockPurchase Agreement (the “Agreement”) is entered into this 1st day of November,2005 by and among Prospect Medical Group, Inc., a California professionalcorporation (“*Purchaser*”),Mitchell W. Lew, M.D. (*“Seller”*),and Genesis Healthcare of Southern California, Inc., a Medical Group, aCalifornia professional corporation (*“Company”*).

# **RECITALS**

A.            Company is a licensedCalifornia professional corporation that operates as an independent practiceassociation and, as such, contracts with physicians (*“Company Provider Contracts*”) and providers of ancillaryservices (*“Company Ancillary ServiceContracts”*) to provide professional medical services to patients (*“Company Enrollees”*) through capitated contractswith health maintenance organizations (*“CompanyHealth Plans”*).

B.            Company is authorized to issue (i)Five Hundred Thousand (500,000) shares of its no par value Class A commonstock, of which 10,000 may be designated as Class A — Series One common stockand 490,000 may be designated as Class A — Series Two common stock, of which6,000 shares of Class A — Series One, and 262,500 shares of Class A — SeriesTwo, are presently issued and outstanding; and (ii) Five Hundred Thousand(500,000) shares of its no par value Class B common stock, of which no sharesare presently issued and outstanding (such issued and outstanding common stockof the Company is hereinafter referred to as the *“Stock”*).

C.            Seller owns of record andbeneficially all of the issued and outstanding Stock.

D.            Purchaser is alicensed California professional corporation that operates as an independentpractice association and as such provides professional medical services topatients primarily through capitated contracts with health maintenanceorganizations.

E.             Prospect Medical Holdings, Inc., aDelaware corporation, through its wholly owned subsidiary Prospect MedicalSystems, Inc., a Delaware corporation, provides management and administrativeservices to Purchaser pursuant to a long-term management services agreement.

F.             Seller desires to sell andPurchaser desires to purchase all of the Stock of Seller, on the terms andconditions set forth in this Purchase Agreement, making Company a wholly ownedsubsidiary of Purchaser.

**NOW**,**THEREFORE**, in consideration of thecovenants and conditions contained herein and for other valuable consideration,the receipt and sufficiency of which are hereby acknowledged, the partieshereby agree as follows:

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**AGREEMENT**

NOW, THEREFORE, inreliance on the foregoing recitals and in and for the consideration andrepresentations, warranties, agreements and covenants set forth herein, theparties hereto hereby agree as follows:

**ARTICLE1**

**PURCHASEAND SALE OF STOCK**

1.1           Closing Date. The consummationof the sale of the Stock to Purchaser and the other transactions contemplatedby this Agreement (collectively, the *“Transaction”*),shall take place simultaneous with the execution of this Agreement (the *“Closing”)*on November 1, 2005 (the *“Closing Date”*).

1.2           Transfer of Stock. At theClosing, the Seller will deliver to Purchaser one or more certificatesrepresenting all of the Stock, as set forth in Schedule 1.2. Such stockcertificates will be duly endorsed in blank for transfer or shall be presentedwith stock powers duly endorsed in blank, with such other documents as may bereasonably required by Purchaser to effect a valid transfer of such the Stockby the Seller, free and clear of any claims, demands, liens, mortgages,encumbrances, pledges, security interests, and restrictions of any kind(collectively, *“Liens”*).

1.3           Purchase Price and Payment.  Subject to the terms and conditions of thisAgreement, in reliance on the representations, warranties and covenants of theparties hereto and in consideration of the sale and transfer of the Stock,Purchaser shall pay to Seller, a total purchase price of EightMillion Dollars ($8,000,000) on the Closing Date (the *“Purchase Price”*).The Purchase Price shall be paid by way of a wiretransfer of immediately available funds into a deposit account designated inwriting by Seller prior to the Closing Date.

1.4           Non-Competition Agreement. Asadditional consideration for the execution of this Agreement and theTransaction, Seller shall enter into a non-competition agreement in the form setforth in *Exhibit**A* attached hereto, which, among otherthings, will contain a restriction on competition with Purchaser andPurchaser’s affiliates for a period of 3 years following the Closing Date (the *“Non-Competition Agreement”*).

1.6           Purchase Price Allocation.  The parties agree that they shall allocatethe Purchase Price as shown in Schedule 1.6, and agree that they shalluse such allocation for purposes of federal and state tax reporting, includingForm 8594.

1.7           Fair Market Value.  The parties agree that the Purchase Pricereflects the aggregate fair market value of the Stock and the Non-CompetitionAgreement.

1.8           Sales and TransferTaxes on the Sale of the Stock. Any sales andtransfer taxes, if any, related to the sale of the Stock shall be borne bySeller.

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**ARTICLE2**

**REPRESENTATIONSAND WARRANTIES**

**OFTHE COMPANY**

In order to induce Purchaser to enter intothis Agreement and to consummate the Transaction, Company and Seller, jointlyand severally, make the representations and warranties set forth in thisArticle 2.

2.1           Organization; Subsidiaries.Company is a California professional corporation duly organized, validlyexisting and in good standing under the laws of the State of California.Company has all requisite corporate power and authority to own, lease, andoperate its business and to carry on its business as currently being conducted.Company is duly qualified to transact its business in the State of Californiaand does not conduct business in any other state. Company has nopartially-owned or wholly-owned subsidiaries.

2.2           Minute Book and Stock Records.The minute books and stock records of Company are complete and accurate in allmaterial respects and all signatures included therein are the genuinesignatures of the persons indicated as signing. True, correct and completecopies of Company’s minute books and stock records, including Company’sArticles of Incorporation and By-laws and all amendments to both, havepreviously been delivered to Purchaser. Company is not in default under or inviolation of any provision of its Articles of Incorporation or its By-laws.

2.3           Authorization. Company has thecorporate power and authority to enter into this Agreement and to consummatethe Transaction. All actions on the part of Seller and Company necessary forthe authorization, execution, delivery and performance of this Agreement andthe consummation of the Transaction has been or will be taken prior to theClosing Date, and this Agreement (including exhibits, schedules and theancillary agreements) constitutes the legal, valid and binding obligation ofCompany and Seller, enforceable in accordance with its terms, except asenforceability may be restricted, limited or delayed by applicable bankruptcy,insolvency, fraudulent conveyance, or other laws affecting creditor’s rightsgenerally and except as enforceability is subject to general principles ofequity.

2.4           No Consent Required. Neitherthe execution and delivery of this Agreement nor the performance by it of itsobligations under this Agreement requires the consent, approval, order orauthorization of, or registration, declaration or filing with any governmentalentity or any third party that has not been obtained and delivered toPurchaser.

2.5           No Violation of Other Agreements;No Conflicts.

(a)           Neither this Agreement nor any of thetransactions contemplated hereunder violates, conflicts with or results in abreach of, or shall violate, conflict with or result in a breach of any lease,contract, document or agreement to which Company or Seller is a party or bywhich Company or Seller may be bound.

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(b)           Neither the execution and delivery ofthis Agreement nor the consummation or performance of the transactionscontemplated herein, will, directly or indirectly (with or without the givingof notice, or lapse of time, or both):

(i)            contravene, conflict with, or resultin a violation of any provision of the organizational documents of Company;

(ii)           contravene, conflict with, or resultin a violation of any order, judgment or decree to which Company or Seller maybe subject; or

(iii)          contravene, conflict with or result ina violation of any of the terms or requirements, or give any governmental bodythe right to revoke, withdraw, suspend, cancel, terminate or modify, anygovernmental authorization that is held by Company.

2.6           Capital Structure.The authorized capital stock of Company consists of One Million (1,000,000)shares of common stock, of which Five Hundred Thousand (500,000) sharesconstitute Class A common stock, no par value, and FiveHundred Thousand (500,000) constitute Class B common stock.  Of the 500,000 shares of ClassA common stock authorized, 10,000 may be designated as Class A — Series Onecommon stock and 490,000 may be designated as Class B — Series Two commonstock. There are currently 6,000 shares of Class A — Series One, and 262,500shares of Class A — Series Two, presently issued and outstanding Noshares of Class B common stock are issued and outstanding. All outstandingshares are validly issued, fully paid and nonassessable and are owned bySeller. There are no shares of Company’s capital stock held in Company’streasury. There are no options, warrants, rights, shareholder agreements orother instruments or agreements outstanding giving any person the right toacquire any shares of capital stock of Company, nor are there any commitmentsto issue or execute any such options, warrants, rights, shareholder agreementsor other instruments or agreements. There are no outstanding stock appreciationrights or similar rights outstanding with respect to any of the capital stockof Company nor are there any instruments, or agreements giving anyone the rightto acquire any such rights.

2.7           Financial Statements. Sellerhas previously delivered to Purchaser all financial statements, books, andrecords related to the operations of Company, including but not limited to, (i)the balance sheets and income statements of Company (the *“Year End Financial Statements”*), for theyears ended December 31, 2002, December 31, 2003 and December 31, 2004 (thelatter being the *“December 2004 Year EndFinancial Statements”*) and (ii) the interim balance sheets andincome statements of Company for the subsequent monthly periods (the *“Interim Financial Statement”*) through andincluding September 2005 (the *“September2005 Interim Financial Statement”*) and all supporting documents andschedules for the Interim Financial Statements. The Year End FinancialStatements (including the December 2004 Year End Financial Statements) and theInterim Financial Statements (including the September 2005 Interim FinancialStatements) be collectively referred to herein from time to time as the *“Financial Statements”*.  The Financial Statements fairly andaccurately represent the financial condition and results of operation ofCompany as of the date and for the periods set forth therein and the FinancialStatements do not contain any statement that is false or misleading withrespect to any material fact or omit to state any material fact required to bestated therein or necessary to make the statements therein not misleading. TheFinancial Statements have been prepared in accordance with GAAP applied on aconsistent basis throughout the periods covered thereby. As

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used herein, “GAAP” meansU.S. generally accepted accounting principles consistently applied. Since thedate of the December 2004 Year End Financial Statements there has not been anymaterial adverse change to the financial condition of Company as shown on theDecember 2004 Year End Financial Statements.

2.8           No Undisclosed Liabilities. Companydoes not have any liabilities or obligations of any nature (whether absolute,accrued, contingent, or otherwise) except for those shown on the September 2005Interim Financial Statement.

2.9           Tax Matters. From the date ofincorporation until December 31, 2001, Company was a C corporation.

Commencing January1, 2002, Company has been a validly elected S corporation within the meaning ofInternal Revenue Code Sections 1361 and 1362 for federal and state purposes andwill continue to be a S corporation up through the Closing Date. Since its dateof incorporation, Company has timely filed all income and franchise tax returnsrequired to be filed by it and has timely paid in full all Taxes (definedbelow) owed by it for the periods ending on December 31, 2004 and has properlyaccrued, in accordance with generally accepted accounting principles, on theFinancial Statements all Taxes for all periods thereafter up to and includingSeptember 2005. Company has accrued all Taxes owing for the period commencing January1, 2005 through the Closing Date.  Alltax returns filed by or on behalf of Company are true, accurate and complete inall material respects. Except as provided in Schedule 2.9, (i) no actionor proceeding for the assessment or collection of any Taxes is pending againstCompany, (ii) no deficiency, assessment or other formal claim for any Taxes hasbeen asserted or made against Company that has not been fully paid or finallysettled; and (iii) no issue has been formally raised by any taxing authority inconnection with an audit or examination of any return of Taxes. No federal orstate income tax returns of Company have been audited or examined, and thereare no outstanding agreements or waivers extending the applicable statutoryperiods of limitation for such Taxes for any period.  All Taxes that Company has been required tocollect or withhold have been duly withheld or collected and, to the extentrequired, have been paid to the proper taxing authority. “Taxes” means taxes,charges, fees, levies, or assessments including, without limitation, income,excise, property, withholding, payroll, sales and franchise taxes, imposed byfederal, state, county, local or foreign government or subdivision or agencythereof, and including any interest, penalties or additions.

2.10         Title to the Stock. Seller isthe owner, beneficially and of record, of one hundred percent (100%) of theoutstanding capital stock of Company. Seller owns the Stock free and clear ofall Liens. At the Closing, Purchaser will acquire good title to the Stock freeand clear of all Liens.

2.11         Real Property.

(a)           Company does not own any realproperty, nor has it ever owned any real property.

(b)           Schedule 2.11(b) contains atrue, correct and complete list and summary of all leases, subleases and otheragreements under which Company uses or has the right to occupy any realproperty.

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2.12         Tangible Personal Property.

(a)           Company has good, marketable andvalid title to all tangible personal property owned by it free and clear of allLiens.

(b)           Each item of furniture, equipment andother tangible personal property with an original cost of $500 or more that isowned by Company and used in the conduct of its business is listed in Schedule2.12(b) (the *“Tangible PersonalProperty”*).

(c)           All items constituting the TangiblePersonal Property have been retained by Company and considered part of theTransaction. None of the Tangible Personal Property is being be sold nor is itencumbered by a Lien except as specifically contemplated by this Agreement. Allof the Tangible Personal Property are in working condition and operating in theordinary course of business of Company.

2.13         Intellectual Property. Schedule2.13 lists all intellectual property owned by Company. Except for the nameEdward Medical Group II, Inc., Company has not operated during the past five(5) years under any name other than the name as set forth in the preamblelocated on the first page of this Agreement. Company has applied for andreceived a fictitious name permit from the California Medical Board to use thename Genesis Healthcare of Southern California, a Medical Group, which permitis outstanding and active as of the Closing Date. Company does not, nor does itknow of any reason it would be obligated to pay, any royalties, license fees orother amounts to any person or entity as a result of the use of its name. Tothe knowledge of Company, its use of such name does not infringe on the rightsof any third party.

2.14         Contracts. Schedule 2.14sets forth a list of all contracts, agreements, leases, documents, instruments,loan agreements, security agreements, arrangements, and commitments (whetheroral or written) to which Company is bound (the *“Contracts”*), which Contracts shall specifically include allContracts with the Company Health Plans, all Company Provider Contracts and theCompany Ancillary Service Contracts. Company has delivered to Purchaser acorrect and complete copy of each Contract; except in the case of the CompanyProvider Contracts and the Company Ancillary Service Contracts where Companyhas provided Purchaser the form of each such contract. Company represents thatthe Company Provider Contracts are identical, except for the name of thephysician and such physician’s rates, to one of the following forms provided toPurchaser (i) (PCP (Individual) — Capitated, (ii) PCP (Group) — Capitated,(iii) Specialist Physician Agreement — Fee for Service and (iv) SpecialistAgreement — Capitated. Company represents that each Company Ancillary ServiceContract is identical to the Ancillary Services Agreement — Fee for Serviceform provided to Purchaser, except for the name of the ancillary provider, thedescription of the particular ancillary services to be provided thereunder, andsuch provider’s rates. Each of the Contracts is a legal, valid, binding,enforceable agreement of Company, in full force and effect, and have beenentered into in the ordinary course of business or otherwise, consistent withpast practice, except as enforceability may be restricted, limited or delayedby applicable bankruptcy, insolvency, fraudulent conveyance, or other lawsaffecting creditor’s rights generally, and except as enforceability is subjectto general principles of equity. There is not now and, to the knowledge ofCompany, there has not been claimed or alleged by any person or entity, that adefault exists, or an event that with notice or lapse of time or both wouldconstitute a default or event of default, on the part of Company, or to theknowledge of Company, any other party. Except for the consent of the CompanyHealth Plans to the Transaction, no consent from, or notice to any third personor governmental entity is required

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in order to maintain infull force and effect any of the Contracts, other than consents that have beenobtained and are unconditional and in full force and effect, except asenforceability may be restricted, limited or delayed by applicable bankruptcy,insolvency, fraudulent conveyance, or other laws affecting creditor’s rightsgenerally, and except as enforceability is subject to general principles ofequity, or consents that will be obtained which will be unconditional and infull force and effect, except as enforceability may be restricted, limited ordelayed by applicable bankruptcy, insolvency, fraudulent conveyance, or other lawsaffecting creditor’s rights generally, and except as enforceability is subjectto general principles of equity.  To theknowledge of the Company, there are (i) no material disputes, facts orcircumstances that would jeopardize Company’s right to payment under anyContract with the Company Health Plans, and (ii) no revocations, suspensions orthreatened revocations or suspensions of any Contract with Company HealthPlans. To the knowledge of Company, the transaction contemplated herein shallnot result in the termination, revocation, suspension, alteration or otherwiseof any of the Contracts with Company Health Plans. Attached as *Exhibit B*is a true, correct andcomplete copy of the management agreement between American Medical Management,Inc. (*“Management Company”*) andCompany (the *“Management Agreement”*),as amended effective November 1, 2005.

2.15         Legal Proceedings. Exceptas set forth on Schedule 2.15 (*“Existing/ThreatenedClaims”*), there is no pending claim, suit, action, legal oradministrative proceeding (*“Proceeding”*),and, to the knowledge of Company, no person, entity or authority (including,but not limited to, any employee, agent, contractor or provider of Company) hasthreatened to commence any Proceeding or any investigation that could lead to aProceeding: (i) against or relating to Company (including, without limitation,any workers’ compensation, Equal Employment Opportunity Commission or AmericansWith Disability Act claims) or Company’s shareholders or employees ; or (ii)that challenges, or that may have the effect of preventing, delaying, makingillegal, or otherwise interfering with, any part of the Transaction. To theknowledge of Company, no person, entity or authority (including, but notlimited to, any employee, agent, contractor or provider of Company) hasthreatened to commence any Proceeding or any investigation that could lead to aProceeding against any employee, agent, contractor or provider of any ofCompany for conduct which would give rise to a potential indemnification obligationof Company. There is no outstanding order, judgment, writ, injunction or decreeof any court or any federal, state, local or other governmental department,commission, board, bureau, agency or instrumentality, to which Company or anyof the other assets owned or used by Company, is subject that has not beenfully complied with to the satisfaction of such governmental entity. Theinsurance coverage of Company as of the date hereof is sufficient to fullycover all fees, expenses and costs, including attorney fees relating to thedefense of the Existing/Threatened Claims and all settlement and judgmentamounts pertaining to such actions, subject to the policy deductibles andpolicy limits. The parties acknowledge the indemnification obligation of Sellerfor the Existing/Threatened Claims as set forth in Article 7 of this Agreement.Irrespective of Seller’s indemnification obligations, the parties agree that onand after the Closing Date, Purchaser and Company shall be entitled to, andSeller shall reasonably cooperate in providing, status reports of suchExisting/Threatened Claims from the insurance carrier and/or defense counsel,as applicable.

2.16         Compliance with Laws. TheCompany is not is in violation of any law, rule, regulation or administrative orjudicial order pertaining to the assets or the business of Company (including,without limitation, licensing, health care, federal, state or local lawsrelating to

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kickbacks, illegalreferrals, illegal billings or the like, drug enforcement, securities, zoning,building, environmental, immigration, civil rights and occupational health andsafety laws, regulations, ordinances and codes) and there is no law, rule,regulation or administrative or judicial order applicable to any of Company (asopposed to a law, rule, regulation or administrative or judicial order onlyapplicable to the Purchaser) that any part of the Transaction would violate,which would have an adverse effect on the assets or the business of the Companyor would have the effect of delaying, making illegal or otherwise interferingwith, any part of the Transaction. To the best of its knowledge, Company has noreason to anticipate that existing circumstances are likely to result inviolations of any of the foregoing.

2.17         Employees. Set forth on Schedule2.17 are the following:

(a)           A complete and accurate list of thenames, titles, dates of hire and rates of pay of all employees of Company as ofthe date hereof. Except as set forth separately on Schedule 2.17, (1)all employees are “at will” employees and no written or oral employment,consultant or independent contractor agreement exists with respect to Companyto which Company may be bound, (2) no employees are members of a labor union inconnection with their employment with Company or subject to a collectivebargaining agreement with Company, and (3) to the knowledge of Company, noemployees are subject to or party to any contract or agreement restrictingtheir ability to freely engage or compete in any business.

(b)           A description of each employeebenefit or compensation plan, including without limitation, pension,retirement, deferred compensation, profit sharing, bonus or incentive, medical,dental, health insurance and life insurance or other employee benefit plans,arrangements or undertakings of Company applicable to its employees; and

(c)           A complete and accurate list of allholiday and vacation pay accrued as of September 30, 2005 for all employees ofCompany.

Except as setforth in Schedule 2.17, the Company is not a party to, bound by, nordoes it maintain or make any contribution to, nor has it incurred any expensewith respect to any employment agreement, pension, retirement, deferredcompensation, profit sharing, bonus or incentive plan, medical, dental or otherhealth insurance plan, life insurance plan, or other employee benefit plan,program, arrangement or undertaking, whether or not legally binding (including,without limitation, any “employee benefit plan” as defined in Section 3(3) ofthe federal Employee Retirement Income Security Act (*“ERISA”*)), under which employees of Company are eligible toparticipate or derive a benefit (collectively *“EmployeePlans” and individually “Employee Plan”*).

(d)           There is no liability of Companywhich has not been properly accrued on the Financial Statements for anyEmployee Plan or unpaid compensation, tax withholdings, wrongful termination,Federal Insurance Contribution Act and disability payments of any kind withrespect to any employee or independent contractor providing services to Company,including without limitation, vacation pay, sick leave pay, personal day pay,severance pay and bonus pay.

2.18         Insurance. Schedule 2.18 contains a list of allinsurance policies maintained by or for the benefit of Company through theClosing Date, including errors and omission, stop-loss

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(reinsurance),directors and officers, general liability, worker’s compensation andmalpractice insurance policies (the *“InsurancePolicies”*). All Insurance Policies are in full force and effect onthe date hereof as evidenced by certificates of insurance for each InsurancePolicy, of which true and correct copies of such have been delivered toPurchaser. Neither the Company nor the Seller has received any notificationfrom any insurance carrier regarding the possible cancellation or materiallimitation of any such Insurance Policies, all of which will be in effect atthe Closing Date unless provision has been made for the cancellation thereof asof the Closing Date with the consent of Purchaser.

2.19         Management; Powers of Attorney. Schedule2.19 sets forth all current appointed and acting officers and directors ofCompany (or other applicable managers or governing board members) and lists allgeneral and special powers of attorney granted by Company, including the namesof the attorneys-in-fact appointed under those powers of attorney and therespective dates in which those powers were granted.

2.20         No Bankruptcy Proceedings. TheCompany has not (i) made a general assignment for the benefit of creditors,(ii) filed any voluntary petition in bankruptcy or suffered the filing of aninvoluntary petition by its creditors, (iii) suffered the appointment of areceiver to take possession of all or substantially all of its assets, propertyor business, (iv) suffered the attachment or other judicial seizure of all orsubstantially all of its assets, property or business, (v) admitted in writingits inability to pay its debts as they come due, or (vi) made an offer ofsettlement, extension or compromise to its creditors generally.

2.21         Licensure. As of the datehereof, each of the employees or independent contractors of Company who isrequired to be licensed in connection with the delivery of health care servicesis duly licensed in the State of California without restriction.

2.22         Environmental. Company hascomplied with all federal, state and local environmental laws, rules andregulations as in effect on the date hereof applicable to its business and itsassets. To the knowledge of Company, no hazardous or toxic waste, substance,material or pollutant (as those or similar terms are defined under the Comprehensive Environmental Response,Compensation and Liability Act of 1980, as amended, 42 U.S.C. 9601 et seq.,Toxic Substances Control Act, 15 U.S.C. 2601 et seq., the Resource Conservationand Recovery Act of 1976, 42 U.S.C. 6901 et seq. or any other applicablefederal, state and local environmental law, statute, ordinance, order,judgment, rule or regulation relating to the environment or the protection ofhuman health (*“Environmental Laws”*)),including but not limited to, any asbestos or asbestos related products, oilsor petroleum-derived compounds, CFCs or PCBs, have been released, emitted ordischarged or are currently located in, on, under, or about the real propertyon which the assets or the business of the Company are located. The assets ofCompany and its use thereof, and the Company’s operation of its business, arenot in violation of any Environmental Laws nor any occupational, safety andhealth law now in effect.

2.23         Business Relations. To theknowledge of the Company, no Company Health Plan will cease to do business withthe Company or will materially decrease the volume of business with theCompany, after, or as a result of, the consummation of the Transaction byPurchaser.

2.24         Confidentiality and Non-CompeteArrangements. Except as set forth in Schedule 2.24, the Company isnot a party to, or bound or affected by, any confidentiality or non-compete

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agreements orarrangements, or any acquisition or sale or other agreements that contain anyconfidentiality or non-compete agreements or arrangements, that are currentlyin effect, or are contained in agreements or arrangements that have lapsed butwhich contain continuing confidentiality or non-compete obligations, agreementsor arrangements.

2.25         Inspections. Schedule 2.25sets forth accurately and fully describes (i) all inspections of the Company byany governmental agency or any consultant at any time during the previous five(5) years; (ii) all matters that were noted by any and all such governmentalagency or consultant as requiring correction or modifications that wererequested or recommended; and (iii) the present status of each such notedmatter.

2.26         Reimbursement. As of the datehereof, all billing practices by Company or by Management Company on itsbehalf, to all third party payors, have been true, fair and correct and incompliance with all applicable laws, regulations and policies of all such thirdparty payors, and Company has not billed for or received any payment orreimbursement in excess of amounts permitted by the Company Health Plans or thelaw.

2.27         Absence of Certain BusinessPractices. Neither Company nor any of its agents has directly or indirectly(i) offered to pay or solicited any remuneration, in cash or in kind, to, anypast or present customers, past or present suppliers, contractors, thirdparties, or third party payors of Company in order to obtain business orpayments from such persons; other than entertainment activities in the ordinaryand lawful course of business; (ii) given or received, or agreed to give orreceive, or is aware that there has been made or that there is any agreement tomake or receive, any gift or gratuitous payment of any kind, nature ordescription (whether in money, property or services) to any customer orpotential customer, supplier or potential supplier, contractors, third partypayor or any other person other than in connection with promotional orentertainment activities in the ordinary and lawful course of business; (iii)made or agreed to make, or is aware that there has been made or that there isany agreement to make any contribution, payment or gift of funds or propertyto, or for the private use of, any governmental official, employee or agentwhere either the contribution, payment or gift or the purpose of suchcontribution, payment or gift is or was illegal under the laws of the UnitedStates or under the laws of any state thereof or any other jurisdiction underwhich such payment, contribution or gift was made; (iv) established ormaintained any unrecorded fund or asset for any purpose or made any false orartificial entries on any of its books or records for any reason; or (v) madeor agreed to make or is aware that there has been made or that there is anyintention to make, any payment to any person with the intention orunderstanding that any part of such payment would be used for any purpose otherthan that described in the documents supporting such payment.

2.28         Permits. Schedule 2.28sets forth a list of all permits, licenses and approvals from federal, state,local and foreign governmental and regulatory bodies (collectively *“Permits”*) held by Company. Such Permitsconstitute all of the Permits necessary to conduct the business of Company inthe manner now conducted by Company. No breach of any such Permit currentlyexists, nor has any event occurred which through the passage of time or thegiving of notice or both, would constitute a breach thereunder. There is noproceeding pending or threatened that disputes the validity of any Permit or,to the knowledge of Company, may result in the revocation, cancellation orsuspension or any material adverse modification of any Permit.

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2.29         No Referrals.   Neither Company, its directors, officers,employees or agents, nor Seller are, or during the past twenty-four months havebeen, a party to any contract, lease, agreement or arrangement, including butnot limited to any joint venture or consulting agreement with any physician,hospital, nursing facility, home health agency or other person who is in aposition to make and did make, receive or influence referrals to or fromCompany, provide services, lease space, lease equipment or engage in any otherventure or activity in any manner which was not in compliance with applicablelaw.

2.30         Bank Accounts.** **A correct andcomplete list of all bank accounts of Company (*“BankAccounts”*) and the persons authorized to access such accounts and toincur indebtedness on behalf of Company, is set forth in Schedule 2.30(a)of this Agreement.  Except for cashsecuring letters of credit or certificates of deposits pledged as security forthe Company Health Plans as set forth on Schedule 2.30(b), all monies inthe Bank Accounts constitute “good funds” and are in cash (and not invested insecurities of any nature) and subject to immediate withdrawal by Purchaser onor after the Closing Date.  The Companyhas provided Merrill Lynch, which is the bank where all of the Bank Accountsare located (*“Bank”*) with alldocumentation required to be provided by Company to allow the Purchaser accessto the funds in the Bank Accounts upon the Closing Date.

2.31         Enrollment Information andEligibility Reports.   The enrollmentinformation of the Company set forth in the Financial Statements and/orpreviously provided to Purchaser was prepared from the eligibility reports ofthe Company Health Plans and are, to the best knowledge of Company, true,accurate and complete.

2.32         Conduct of Business Since September2005 Interim Financial Statements. From the date of the September 2005 Interim Financial Statements throughthe Closing Date, the Company has conducted the business of Company in theordinary course of business consistent with past practice.  Without limiting the generality of theforegoing, subsequent to September 30, 2005, the Company has not:

(a)           instituted any new method ofpurchase, sale, lease, management, accounting or operation or engaged in anytransaction or activity, entered into any agreement or made any commitment oramended any existing material agreement other than as contemplated by thisAgreement, except in the ordinary course of its business conducted in a mannerconsistent with past practice (including those activities or transactions whichoccurred as a result of Company’s obligations under the Management Agreement);

(b)           changed or amended its Articles ofIncorporation or By-Laws or proposed any such change or amendment;

(c)           offered, issued, authorized or sold any shares of thecapital stock or other securities (such term as used in this subsection shallinclude, without limitation, debt securities) of Company of any kindwhatsoever, or acquired directly or indirectly, by redemption or otherwise, anysuch capital stock, reclassified or split-up any such capital stock, declaredor paid any dividends thereon in cash, securities or other property, or madeany other distribution with respect thereto, or granted or entered into anystock options, warrants, or other rights to acquire securities of Company orentered into any other contracts or commitments of any kind with respectto the issuance of additional shares of capital stock or other securities ofCompany;

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(d)           (i)borrowed or agreed to borrow any funds, whether directly or by way of guarantyor otherwise,or(ii) except in the ordinary course of business conducted in a manner consistentwith past practice (including those activities or transactions whichoccurred as a result of Company’s obligations under the Management Agreement), incurred, or assumed or become subject toany obligation or liability (absolute or contingent);

(e)           paid,discharged, waived, satisfied, compromised or adjusted any claim, liability orobligation (absolute, accrued, contingent or otherwise) of an amount in excessof $500, other than as contemplated by this Agreement or which occurred in theordinary course of business conducted in a manner consistent with pastpractices (including those activities or transactions which occurred asa result of Company’s obligations under the Management Agreement);

(f)            prepaidany obligation having a fixed maturity of more than 90 days from the date suchobligation was incurred other than as contemplated by this Agreement or whichoccurred in the ordinary course of business conducted in a manner consistentwith past practice (including those activities or transactions whichoccurred as a result of Company’s obligations under the Management Agreement);

(g)           permittedor allowed any of its property or assets (real, personal or mixed, tangible orintangible) to be subjected to any mortgage, pledge, lien or other encumbranceexcept in the ordinary course of business conducted in a manner consistent withpast practice (including those activities or transactions which occurredas a result of Company’s obligations under the Management Agreement);

(h)           cancelledany debts or waived any claims or rights of substantial value or sold,transferred, or otherwise disposed of any of its properties or assets, exceptin the ordinary course of business conducted in a manner consistent with pastpractice (including those activities or transactions which occurred as aresult of Company’s obligations under the Management Agreement);

(i)            disposedof any rights to the use of any patent, trademark, service mark, trade name orcopyright, or dispose of or disclosed to any person any trade secret, formula,process or know-how not theretofore a matter of public knowledge;

(j)            grantedany general increase in the compensation of officers or employees (includingany such increase pursuant to any pension, profit sharing or other plan orcommitment) or any increase in the compensation payable or to become payable toany officer except (A) in the ordinary course of business conducted in a mannerconsistent with past practice (including those activities ortransactions which occurred as a result of Company’s obligations under theManagement Agreement) and (B) bonuses to certain or all of Company’s employees,including Seller;

(k)           appointed or removed from office any officers of Companyother than as contemplated by this Agreement;

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(l)            madeany payment to or sold, transferred or leased any properties or assets to, orentered into any agreement or arrangement with, any of the officers ordirectors of Company or any other affiliate thereof;

(m)          enteredinto any contract, commitment or transaction not in the usual and ordinarycourse of its business, other than transactions contemplated by, or referred toin, this Agreement;

(n)           changed,or initiated a change of, any of the banking, safe deposit or power of attorneyarrangements other than as contemplated by this Agreement;

(o)           wrotedown the value of any inventory (including write-downs by reason of shrinkageor mark-down) or wrote off as uncollectible any notes or accounts receivable,except for immaterial write-downs of inventory or accounts receivable in theordinary course of business conducted in a manner consistent with past practice(including those activities or transactions which occurred as a resultof Company’s obligations under the Management Agreement);

(p)           merged,consolidated, reorganized or liquidated Company;

(q)           filed a voluntary petition on behalfof Company under the U.S. Bankruptcy Code or any other bankruptcy or insolvencylaw or any other law for relief of debtors;

(r)            changed, amended or terminated anyCompany Provider Contract Company Ancillary ServiceContract and/or Company Health Plan, except in the ordinary course of itsbusiness conducted in a manner consistent with past practice (including thoseactivities or transactions which occurred as a result of Company’s obligationsunder the Management Agreement);

(s)           changed, amended or terminated any employment agreement orentered into any new employment agreements;

(t)            made any distribution of cash or other assets to theSeller except as contemplated by this Agreement;

(u)           used, reduced or otherwise appliedcash of Company to any purpose other than such use, reduction or application(i) as is necessary to operate Company in the ordinary course of businessconsistent with past practice, (ii) applied to pay bonuses to employees,including Seller, in an amount which will not cause the Company to violate theRequired Minimum Cash described in Section 4.9, and/or (iii) which correspondsdollar for dollar with liabilities that have been accrued on the FinancialStatements of Company and have been applied to correspondingly reduce suchaccrued liabilities;

(v)           agreed or committed, whether inwriting or otherwise, to do any of the foregoing.

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2.33         Records of the Company.  The Management Company has confirmed that itis in possession of: (A) the eligibility tapes for each Company Health Plan (B)the physician credentialing records of all the physicians who are a party tothe Company Provider Contracts (C) all patient records, including casemanagement reports and notes, claims paid history (at least 24 months), and (D)any and all data relating to Management Company’s management of Company.

2.34         Eligibility Reports.  The Management Company has confirmed that itis in possession of all eligibility reports provided by the HMOs through themost recent month end. Company represents that such eligibility reports aretrue, accurate and complete to the best of its knowledge.

2.35         Minimum Enrollment Numbers on theClosing Date.  As of the ClosingDate, the aggregate number of Company Enrollees is not less than 16,000.

2.36         Payables Incurred On or Before theClosing Date.  All payables incurredon or before the Closing Date, including but not limited to, payroll, payrolltaxes and other accrued expenses of Company have been properly accrued on theFinancial Statements by Company in the ordinary course of business inaccordance with GAAP.

2.37         Employees and Employee Obligations.  Company properly accrued on the FinancialStatements all obligations to employees of Company arising out of or inconnection with their employment through the Closing Date.

2.38         Cash on Hand.  On the Closing Date, Company has cash in anamount equal or exceeding the sum of the total dollar amount of liabilities(liabilities include but, are not limited to, IBNR claims payable, accountspayable, taxes payable, etc.) incurred, accrued or otherwise existing as of theClosing Date, and which amount shall include cash sufficient to pay the 338Taxes defined in Section 5.5(d) (the *“RequiredMinimum Cash”*).

2.39         Brokers’ and Finders’ Fees.  None of Company or the Seller has incurredany liability to any broker, finder or agent for any brokerage fees, finder’sfees or commissions with respect to the transactions contemplated by thisAgreement, and if Company or the Seller has incurred any such liability, suchliability shall be and remain the sole responsibility of Company, and Companyshall indemnify, defend and hold the Purchaser harmless from and against anyand all liabilities, losses, damages, claims, causes of action, costs andexpenses (including without limitation, reasonable attorneys’ fees), arisingout of or relating to such liability.

2.40         Disclosure.  No representation or warranty by the Companyor the Seller contained in this Agreement or in respect of the exhibits,schedules, lists or other documents delivered to the Purchaser by Company orthe Seller and referred to herein or therein, and no statement contained in anycertificate furnished or to be furnished by or on behalf of Company or theSeller pursuant hereto or thereto, or in connection with the Transaction,contains, or will contain as of the date such representation or warranty ismade or such certificate is or will be furnished, any untrue statement of amaterial fact, or omits, or will omit to state as of the date suchrepresentation or warranty is made or such certificate is or will be furnished,any material fact necessary to make the statements contained herein or therein,in light of the circumstances under which they were made, not misleading.

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**ARTICLE3**

**REPRESENTATIONSAND WARRANTIES OF THE PURCHASER**

Inorder to induce Company and the Seller to enter into this Agreement and toconsummate the Transaction, Purchaser makes the representations and warrantiesset forth in this Article 3.

3.1           Organization.  Purchaser is a professional corporation dulyorganized, validly existing and in good standing under the laws of the State ofCalifornia.  Purchaser has all requisitecorporate power and authority to own, lease, and operate its business and tocarry on its business as currently being conducted.  Purchaser is duly qualified to transact itsbusiness in the State of California and does not conduct business in any otherstate.

3.2           Authorization.  Purchaser has the corporate power andauthority to enter into this Agreement and to consummate the Transaction.  All actions on the part of the Purchasernecessary for the authorization, execution, delivery and performance of thisAgreement and the consummation of the Transaction have been or will be takenprior to the Closing Date, andthis Agreement (including exhibits, schedules and the ancillary agreements)constitutes the legal, valid and binding obligation of Purchaser, enforceable againstthem in accordance with its terms, except as enforceability may be restricted,limited or delayed by applicable bankruptcy, insolvency, fraudulent conveyance,or other laws affecting creditor’s rights generally, and except asenforceability is subject to general principles of equity.

3.3           No Consent Required.  Neither the execution and delivery of thisAgreement by Purchaser nor the performance by it of its obligations under thisAgreement requires the consent, approval, order or authorization of, orregistration, declaration or filing with any governmental entity or any thirdparty that has not been obtained and delivered to Company.

3.4           No Violation of Other Agreements;No Conflicts.

(a)           Neither this Agreement nor any partof the Transaction violates, conflicts with or results in a breach of, or shallviolate, conflict with or result in a breach of any lease, contract, documentor agreement to which Purchaser is a party or by which Purchaser may be bound.

(b)           Neither the execution and delivery ofthis Agreement nor the consummation or performance of the Transaction will,directly or indirectly (with or without the giving of notice, or lapse of time,or both):

(i)            contravene, conflict with, or resultin a violation of any provision of the organizational documents of Purchaser orSystems;

(ii)           contravene, conflict with, or resultin a violation of, any legal requirement or any order, judgment or decree towhich either of the Purchaser may be subject; or

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(iii)          contravene, conflict with, or resultin a violation of any of the terms or requirements of, or give any governmentalbody the right to revoke, withdraw, suspend, cancel, terminate, or modify, anygovernmental authorization that is held by either of the Purchaser.

3.5           Legal Proceedings.  There is no pending Proceeding, and,to the knowledge of Purchaser, no person has threatened to commence anyProceeding that challenges, or that may have the effect of preventing,delaying, making illegal, or otherwise interfering with, any part of theTransaction.

3.6           Compliance with Laws.  Purchaser is not in violation of any rule,regulation or administrative or judicial order pertaining to the assets or thebusiness of Purchaser (including, without limitation, licensing, health care,federal, state or local laws relating to kickbacks, illegal referrals, illegalbillings or the like, drug enforcement, securities, zoning, building,environmental, immigration, civil rights and occupational health and safetylaws, regulations, ordinances and codes) and there is no law, rule, regulationor administrative or judicial order that any part of the Transaction wouldviolate which would have the effect of preventing, delaying, making illegal, orotherwise interfering with, any part of the Transaction.  To the best of its knowledge, Purchaser hasno reason to anticipate that existing circumstances are likely to result inviolations of any of the foregoing.

3.7           Brokers’ and Finders’ Fees.  Purchaser has not incurred any liability toany broker, finder or agent for any brokerage fees, finder’s fees orcommissions with respect to the transactions contemplated by this Agreement,and if Purchaser has incurred any such liability, such liability shall be andremain the sole responsibility of the Purchaser, and the Purchaser shall indemnify,defend and hold Company harmless from and against any and all liabilities,losses, damages, claims, causes of action, costs and expenses (includingwithout limitation, reasonable attorneys’ fees), arising out of or relating tosuch liability.

3.8           Disclosure. No representation or warranty byPurchaser contained in this Agreement or in respect of the exhibits, schedules,lists or other documents delivered to Company by Purchaser and referred toherein or therein, and no statement contained in any certificate furnished orto be furnished by or on behalf of Purchaser pursuant hereto or thereto, or inconnection with the transactions contemplated hereby, contains, or will containas of the date such representation or warranty is made or such certificate is orwill be furnished, any untrue statement of a material fact, or omits, or willomit to state as of the date such representation or warranty is made or suchcertificate is or will be furnished, any material fact which is known to theparty making the representation or warranty to be necessary to make thestatements contained herein or therein, in light of the circumstances underwhich they were made, not misleading.

### **ARTICLE 4**

[Intentionally omitted]

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**ARTICLE 5**

**ADDITIONAL AGREEMENTS OF THE PARTIES**

Inorder to induce the other party to enter into this Agreement and to consummatethe Transaction, Company, and the Seller, joint and severally on the one hand,and Purchaser on the other hand, enter into the agreements set forth in thisArticle 5.

5.1           Non-Competition Agreement.  As additionalconsideration for the Transaction, the Seller is simultaneously herewithexecuting the Non-Competition Agreement. The portion of the Purchase Price allocated to such Non-CompetitionAgreement is shown on Schedule 1.6 hereto (*“Covenant Allocation”*). The Covenant Allocation shall not be deemed an estimate or measurementof damages incurred or suffered by the Purchaser, the Company in the event of abreach of such Non-Competition Agreement by the Seller.

5.2           Employees.  The parties agree that the Purchaser andSeller are simultaneously herewith executing the employment agreement in theform attached hereto as *Exhibit C*and that  Purchaser is simultaneouslyherewith offering employment, on an at-will basis to two employees listed on Schedule5.2.

5.3           Good Faith.  The Company and the Purchaser agree that theywill perform their obligations under this Agreement in good faith.

5.4           Preservation of Relationship With Company Providers. Seller agrees to use reasonable commercial efforts to assist Purchaserin preserving the Company’s relationship with the Company Providers after theClosing Date.

5.5           Tax Matters; Liability;Preparation  and Filing of Tax Returns.

(a)           Adequate Provision for Taxes.The Financial Statements, including but not limited to the September 2005Interim Financial Statements, reflect that Company has made adequate provisionfor accrued but unpaid Taxes owing as of the date of such Financial Statementand the amount of the 338 Taxes referred to in Section 5.5(d).

(b)           Liability for Taxes.  Company has properly accrued on the December2004 Year End Financial Statements all Taxes imposed on Company (*which is a “S” corporation”*) or for whichCompany may otherwise be liable, for all periods up to and including December31, 2004 and has properly accrued on its books and records, all Taxes imposedon Company or for which Company may otherwise by liable, for the period fromJanuary 1, 2005 through the Closing Date (*“Company/SellerTax Period”*) and has accrued the amount of the 338 Taxes.  Additionally, Seller shall be liable for anyTaxes arising as a result of any breach of the representation contained inSection 2.9 and the covenants contained in this Section 5.5.

(c)           Tax Returns.  The Purchaser will be responsible for causingthe preparation and filing of all tax returns that are required to be filed byor with respect to Company for the periods commencing the Closing Date andwhich continue thereafter, and the Seller is responsible for causing thepreparation and filing of all tax returns that are required to be filed by orwith respect to Company for all periods prior to the Closing Date.  The Seller shall be responsible for and

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liable for any Taxes due,with respect to Company, for the Company/Seller Tax Period for the period endingon the Closing Date, including the 338 Taxes. No later than 30 days before the due date for filing any tax returndescribed in this subsection (c) which is required to be prepared by thePurchaser after Closing involving any Company/Seller Tax Period, the Purchaserwill deliver such tax return to Seller for Seller’s review. The Purchaser andSeller will attempt to resolve in good faith any disagreement arising out ofany tax return.  If any such disagreementcannot be resolved, the Purchaser and Seller will jointly select an independentaccounting firm to act as an arbitrator to resolve such disagreement inaccordance with the terms of this Agreement. The independent accounting firm’s determination with respect to any suchtax return will be final and binding upon the parties and all parties will file(or amend, if applicable) their respective tax returns in accordance with suchdetermination.  Any fees and expensesrelated to the engagement of the independent accounting firm will be sharedequally by the Purchaser, on the one hand, and Seller, on the other hand.

(d)           338 Election and 338 Taxes.  Purchaser intends to make an election underSection 338(h)(10) of the Internal Revenue Code of 1986, as amended (the“Code”) to treat the sale of the Stock (each, a “338 Corporation”) as a sale ofassets by each such 338 Corporation for income and franchise tax purposes.  Purchaser and the Seller shall duly andtimely file, or cause to be duly and timely filed, any document necessary toeffectuate such election including without limitation, federal Form 8023 (andany similar forms required under state or local laws relating to taxes) inaccordance with the requirements of Section 338 of the Code (or state or locallaws relating to the taxes, as the case may be). The parties shall report thedeemed sale consistent with such allocation for all financial, tax or otherpurposes, shall not take any position inconsistent therewith and shallcooperate with each other to take all actions necessary and appropriate as may berequired to effect and preserve such election. Anything contained in this Agreement to the contrary notwithstanding,the Seller makes no representation or warranty concerning the effectivenessunder the Code (or other comparable provision of law) of any election madepursuant to this Section 5.5(d); and, except where such failure is due to abreach by such party of its obligations under this Section 5.5(d), in no eventshall the Seller be liable to Purchaser for the failure of any such election tobe effective under the Code (or other comparable provision of law).  As between Purchaser on the one hand andSeller on the other hand, Seller shall be responsible for all Taxes payable byCompany that are attributable to the Section **338(**h)(10) election, including anyfederal, state, local or foreign **Tax**attributableto an election under federal, state, local or foreign law similar to the **election** available under Section **338(**h)(10) of the Code (*“338 Taxes”*).  Seller has caused Company to accrue on itsFinancial Statements, a dollar amount sufficient to cover all 338 Taxes.  The parties acknowledge that Seller andSeller’s accountant have completed a preliminary allocation of the PurchasePrice to the assets of Company to calculate an estimate of the 338 Taxes andderived an estimate of Three Hundred Ninety Thousand Dollars ($390,000) (the *“Estimated 338 Tax Amount”*).  The parties acknowledge that Company’saccrual of the 338 Taxes will be an amount equal to the Estimated 338 TaxAmount.  However, if it is determinedthat the actual amount of the 338 Taxes is greater than the Estimated 338 TaxAmount, Purchaser shall notify Seller and within thirty (30) days of suchnotice, Seller shall pay Purchaser that amount by which such 338 Taxes actuallyowed exceeded the Estimated 338 Tax Amount. If it is determined that the actual amount of the 338 Taxes is less thanthe Estimated 338 Tax Amount, Purchaser shall notify Seller and within thirty(30) days of such notice, Purchaser shall pay Seller the amount by which suchEstimated 338 Tax Amount exceeded the amount of 338 Taxes actually owing.

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(e)           Contest Provisions.  Promptly after receipt by the Purchaser orSeller of written notice of the assertion or commencement of any claim, audit,examination or other proposed change or adjustment by the Internal RevenueService or any state, local or foreign taxing authority having jurisdictionover Company or any of its assets (*“TaxAuthority”*) relating to Taxes of Company with respect to aCompany/Seller Tax Period (a *“Tax Claim”*),the recipient will promptly notify the Purchaser or Seller, as applicable.  Such notice will contain factual information(to the extent known) describing the asserted Tax Claim in reasonable detailand will include copies of any notice or other document received from anyTaxing Authority in respect of any such asserted Tax Claim.  The Seller will have the right to representthe Company’s interests in any Tax audit or administrative or court proceedingrelating to any Company/Seller Tax Period as to any issues that couldmaterially affect the Seller’s liability for Taxes or indemnificationobligations, and to employ counsel (reasonably acceptable to the Purchaser) ofthe Seller’s choice at its expense; provided, however, that the Purchaser andtheir representatives will be permitted, at their expense, to be present at anysuch audit or proceeding. Notwithstanding the foregoing, Seller will not be able to settle, eitheradministratively or after the commencement of litigation, any claim for Taxesthat would adversely affect the liability for Taxes of any of the Purchaser,the Company without the written consent of the Purchaser, which consent shallnot be unreasonably withheld, unless the Seller makes adequate provision to thesatisfaction of the Purchaser to indemnify the Purchaser against the effects ofany such settlement.  In order to allowthe Seller to respond to a Tax Claim involving any Company/Seller Tax Period,the Purchaser agrees to allow Seller reasonable access to the books and recordsof the Company for periods on or before the Closing Date.

(f)            Assistance and Cooperation.  After the Closing Date, Seller and thePurchaser will:

(i) timely sign and deliver such certificates or formsas may be necessary or appropriate to establish an exemption from (or otherwisereduce), or file tax returns or other reports with respect to sales, transferand similar Taxes;

(ii) assist the other party in preparing any taxreturn which such other party is responsible for preparing and filing inaccordance with this Section 5.5 (including providing the other party withreasonable access to financial records for such purposes);

(iii) cooperate fully in preparing for any audits of,or disputes with taxing authorities regarding, any tax returns of Company; and

(iv) make available to the other party and to anytaxing authority as reasonably requested all information, records, anddocuments relating to Taxes of Company.

5.6           IBNR Closing Date Reserve Amount.For purpose of determining the accrued IBNR of Company for the Closing Date,Purchaser and Seller have completed an IBNR calculation as of October 31, 2005,based upon the formula set forth on Schedule 5.6 (*“Required Closing Date IBNR Reserve”*).  Seller represents that the IBNR Reserve ofCompany on the Closing Date is not less than the Required Closing Date IBNRReserve.

5.7           Post-Closing IBNR Reconciliation.  Purchaser, as owner of Company after theClosing Date, shall, for the period commencing on the Closing Date and endingtwelve (12)

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months thereafter, keepan account of claims received on or after the Closing Date for dates of serviceprior to the Closing Date that are paid from the IBNR funds (*“IBNR Related Claims”*).  On or prior to the date that is one hundredfifty (150) days after the first anniversary of the Closing Date or the firstbusiness day thereafter if such date falls on a Saturday, Sunday or state orfederal holiday (the *“Reconciliation Date”*),Purchaser and Seller shall effect a reconciliation of the IBNR funds, such thatany IBNR Reserve that existed on the Closing Date which was not used to payIBNR Related Claims shall be paid to Seller, and any shortfall in amount of theIBNR Reserve (any amount insufficient to cover all IBNR Related Claims),notwithstanding that on the Closing Date the IBNR Reserve satisfied the amountof the Required Closing Date IBNR Reserve, shall be paid to Purchaser.  Any and all payments owing to the other partyunder this Section 5.7 shall be paid within fifteen (15) days of theReconciliation Date.  Amounts owing toeither party as a result of the Reconciliation shall have no effect on theIndemnification Cap described in Article 7 hereunder.

5.8           Hospital Incentive Pool Amounts.

(a) Cash RiskPool Amounts (Calendar Year 2005): Purchaser and Seller agree that Companyshall receive a minimum of one hundred fifty thousand dollars ($150,000) ofCash In Hand from risk pools for the calendar year ending December 31,2005.  For purposes of this subsection(b), “Cash In Hand” is defined as the surplus in a particular pool that exceedsany deficit in that pool, resulting in a cash payment to Company (and thereforeindirectly to Purchaser).  If the totalCash In Hand received by the Company from the Company Health Plans for thecalendar year ending December 31, 2005 is in an amount less than one hundredfifty thousand dollars ($150,000), Seller agrees to repay Purchaser fivehundred thousand dollars ($500,000) of the Purchase Price (“*Deficit Cash Risk Pool Refund Credit*”).  Purchaser and Seller agree, that withinthirty (30) days of the date that the Company, or Purchaser on behalf of theCompany, knows the amount of Cash In Hand for the calendar year ending December31, 2005, Purchaser on behalf of the Company shall provide notice to Seller ofthe amount of the Cash In Hand received by Company for the calendar year endedDecember 31, 2005 and the parties shall meet within thirty (30) days of suchnotice to complete a reconciliation (“*CashRisk Pool Reconciliation Date*”). If on the Cash Risk Pool Reconciliation Date the amount of the Cash In Handreceived by the Company for the calendar year ended December 31, 2005 is lessthan one hundred fifty thousand dollars ($150,000), Seller shall pay Purchaserfive hundred thousand dollars ($500,000), constituting the Deficit Cash RiskPool Refund Credit, within ten (10) calendar days of such Cash Risk PoolReconciliation Date.  Those risk poolsthat are in deficit for the calendar year ending December 31, 2005 shall be thesole responsibility of Purchaser. Purchaser and Seller agree that calendar year 2005 Cash In Hand throughthe Closing Date is zero.  Amounts owingby Seller to Purchaser as a result of the Cash Risk Pool Reconciliation shallhave no effect on the Indemnification Cap described in Article 7 hereunder.

(b) Risk PoolAccounting: As part of its due diligence review of Company, Purchaser hasexpressed its belief to Seller that the Company’s risk pool accountingpractices, as reflected on the Final Statements of Company, should berevised.  Seller has therefore agreed torevise its risk pool accounting practices and, accordingly, has revised itsFinancial Statements (the “Risk Pool Accounting Revisions”).  Company has agreed that in the event the RiskPool Accounting Revisions are challenged by any taxing authority, thatPurchaser shall indemnify, pursuant to the terms of Section 7.3 hereof, theamount of any interest or penalties incurred by Seller (given the

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Company’s Sub S status)to a taxing authority, as a result of the Risk Pool Accounting Revisions madepursuant to this Section 5.8(b).

5.9           Attorney Fees of Christensen &Auer. The legal fees incurred by Company or Seller in negotiating anddrafting documentation in connection with the Transaction shall be paid  (i) with respect to fees incurred prior tothe Closing, by the Company in a manner so as not to violate the RequiredMinimum Cash requirements set forth in Section 4.9, or (ii) with respect tofees incurred on or after the Closing, by Seller out of Seller’s funds.

5.10         Further Assurances.  The Company and the Purchaser agree that at anytime and from time to time after the Closing Date they will execute and deliverto any other party such further instruments or documents as may reasonably berequired to give effect to the Transaction.

**ARTICLE 6**

**DELIVERIES AND CONDITIONS**

6.1           Deliveries by Company and theSeller.  Company and the Seller havedelivered the following to the Purchaser:

(a)           A copy of the Articles ofIncorporation of Company, with all amendments thereto, and certificate of goodstanding from the State of California, both of which shall be certified as of adate within twenty days prior to the Closing Date by the Secretary of State ofCalifornia.

(b)           Acertificate of tax good standing of Company from the Franchise Tax Board issuedas of a date within twenty days of the Closing Date.

(c)           A certificate of the Secretary ofCompany dated the Closing Date and accompanying resolutionsreflecting that the necessary corporate action by the Board of Directorsof Company has been taken to authorize the consummation by Company of the Transaction.

(d)           The stock books and records,corporate minute books (containing, in all material respects, the originals ofall minutes and resolutions ever adopted or consented to or agreed to by theSellers, directors or any committee of directors of Company) and the corporateseal, if any, of Company.

(e)           Spousal Consent of Seller for thisAgreement.

(f)            Letters of resignation of allofficers and directors of Company dated the Closing Date, excepting only theresignation of Seller from his officer position as President/CEO of Companygiven that Seller shall remain President/CEO of Company after the Closingsubject to the terms and conditions of the Employment Agreement.

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(g)           Originalstock certificates representing the Stock duly endorsed in blank for transferand presented with stock powers duly endorsed in blank.

(h)                                 TheNon-Competition Agreement.

(i)            The EmploymentAgreement.

(j)            alegal opinion from counsel to Company as to the matters set forth in *Exhibit D*.

(k)           documentationfor filing with the California Medical Board to cancel the fictitious namepermit in the name of Seller for the trade name of Company.

6.2           Deliveries by Purchaser on theClosing Date.  Purchaser hasdelivered the following to Company.

(a)           Certificate of the secretary ofPurchaser dated the Closing Date, and accompanying resolutions reflecting thatthe necessary corporate action by the Board of Directors of Purchaser toauthorize the consummation by Purchaser of the Transaction.

(b)           TheNon-Competition Agreement.

(c)           The Employment Agreement.

(d)           The Purchase Pricedescribed in Section 1.5 hereof.

**ARTICLE 7**

## **INDEMNIFICATION; REMEDIES**

7.1           IndemnificationPeriod. ** **As used in this Article 7, the *“IndemnificationPeriod”* shall be that period of time commencing on theClosing Date and continuing for 2 years thereafter.

7.2           Indemnification of Company andPurchaser. Seller shall indemnify, defend and hold harmless Company andPurchaser and their directors, officers, employees, agents and affiliates fromand against any and all damage, loss, liability and expense (including withoutlimitation (A) reasonable expenses of investigation and reasonable attorneys’fees and reasonable expenses in connection with any action, suit or proceeding,(B) any fees and expenses in connection with the retention of counsel to pursueinsurance coverage, (C) any amounts paid to defend, litigate, settle, satisfy ajudgment, or otherwise resolve disputes with the insurance carrier, if any, orthe claimant; and (D) all amounts not covered by insurance) incurred or sufferedby Company or Purchaser arising out of (i) any breach of the representations,warranties, covenants or agreements of Company and/or Seller set forth herein;(ii) any failure by Company or the Seller to perform or comply with anycovenant or agreement contained in this Agreement that is required to beperformed or complied with by Company or the Seller as

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set forth herein; (iii)the Existing/Threatened Cases**and/or(iv) any action against Company arising from or based upon allegations ofintentional tortious conduct by Seller, or any officer, employee or agent(including independent contractors) of Company (including, but not limited to,any claims of wrongful termination, sexual harassment, racial or sexualdiscrimination) (*collectively, the“Purchaser Indemnifiable Damages”*). Notwithstanding the foregoing, Seller shall not be obligated toindemnify Company or Purchaser for any Purchaser Indemnifiable Damages thatexceed singly or in the aggregate, $1,500,000, with such $1,500,000 amountdecreasing at the rate of 1/24 per month for each month after the Closing Date(the *“Indemnification Cap”*).  Company and Purchaser may obtainindemnification for any Purchaser Indemnifiable Damages to which this Section7.2 relates only if it makes a claim for indemnification within theIndemnification Period defined in Section 7.1, except as otherwise provided inSection 7.4.  Notwithstanding theforegoing, claims subject to the Indemnification Cap shall toll both theIndemnification Period and the dollar amount of the Indemnification Cap at thetime each such claim is made (i.e., the Indemnification Period will not expireif the covered claim was made prior to the end of the 2 year period but theclaim is still in existence at the end of such 2 year period due to the need toinvestigate the claim, litigation regarding the claim, etc.) and the amount ofthe Indemnification Cap will not be reduced (i.e., if a covered claim is madein month 1 when the Indemnification Cap is $1,500,000 but due to the need toinvestigate, litigation, etc., the claim is still in existence in month 24, theamount of the Indemnification Cap is tolled at $1,500,000 and is not reduced to1/24 of such amount).  Such tolling shalloccur with respect to each covered claim separately, when made.  Thus, the first claim made shall not toll theIndemnification Period or the dollar limit of the Indemnification Cap for anysubsequent covered claims.  As such, thedollar amount covered under the Indemnification Cap will differ depending uponthe time when each covered claim is made.

7.3           Indemnification of the Seller.  Company and Purchaser, joint and severally,agree to hold harmless, defend and indemnify Seller from and against any andall damage, loss, liability and expense (including without limitation (A) reasonableexpenses of investigation and reasonable attorneys’ fees and reasonableexpenses in connection with any action, suit or proceeding, (B) any fees andexpenses in connection with the retention of counsel to pursue insurancecoverage, (C) any amounts paid to defend, litigate, settle, satisfy a judgment,or otherwise resolve disputes with the insurance carrier, if any, or theclaimant; and (D) all amounts not covered by insurance) incurred or suffered bySeller arising out of (i) any breach of the representations, warranties,covenants or agreements of Purchaser set forth herein (ii) any failure byPurchaser and Systems to perform or comply with any covenant contained in thisAgreement that is required to be performed or complied with by Purchaser as setforth herein (the *“Seller IndemnifiableDamages”*).  Notwithstandingthe foregoing, neither Company nor Purchaser shall be obligated to indemnifySeller for Seller Indemnifiable Damages that exceed the IndemnificationCap.  The Seller may obtain indemnificationfor any Seller Indemnificable Damages to which this Section 7.3 relates only ifit makes a claim for indemnification within the Indemnification Period definedin Section 7.1.

7.4           Exclusion of PurchaserIndemnifiable Damages from Indemnification Period and Indemnification Cap.Notwithstanding anything in this Agreement to the contrary, neither theIndemnification Period nor the Indemnification Cap shall apply to limitPurchaser Indemnifiable Damages with respect to claims of the Company orPurchaser:

(i)                                     underSection 7.2(iii);

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(ii)                                  underSection 7.2(iv);

(iii)                               arisingout of or related to a breach of the representations, warranties, covenants oragreements set forth in Sections  2.9,2.10, 2.38, 5.5(b), 5.5(d) and fraud.

7.5           Indemnification Procedures.  A party seeking indemnification (the“Indemnitee”) shall use its best efforts to minimize any liabilities, damages,deficiencies, claims, judgments, assessments, costs and expenses in respect ofwhich indemnity may be sought under this Agreement.  The Indemnitee shall give prompt writtennotice to the party from whom indemnification is sought (the “Indemnitor”) ofthe assertion of a claim for indemnification, but in no event longer thantwenty (20) days after service of process in the event litigation is commencedagainst the Indemnitee by a third party. No such notice of assertion of a claim shall satisfy the requirements ofthis Section 7.5 unless it describes in reasonable detail and in good faith thefacts and circumstances, to the extent known by Indemnitee, upon which theasserted claim for indemnification is based. If any action or proceeding shall be brought in connection with anyliability or claim to be indemnified hereunder, the Indemnitee shall provide theIndemnitor twenty (20) calendar days to decide whether to defend such liabilityor claim.  During such period, theIndemnitee shall take all necessary steps to protect the interests of itselfand the Indemnitor, including the filing of any necessary responsive pleadings,the seeking of provisional relief or other action necessary to maintain thestatus quo, subject to reimbursement from the Indemnitor of its expenses indoing so.  The Indemnitor shall (with, ifnecessary, reservation of rights) defend such action or proceeding at itsexpense, using counsel selected by the insurance company insuring against anysuch claim and undertaking to defend such claim, or by other counsel selectedby it and approved by the Indemnitee, which approval shall not be unreasonablywithheld or delayed.  The Indemnitorshall keep the Indemnitee fully apprised at all times of the status of thedefense and shall consult with the Indemnitee prior to the settlement of anyindemnified matter.  The Indemniteeagrees to use reasonable efforts to cooperate with the Indemnitor in connectionwith its defense of indemnifiable claims. In the event the Indemnitee has a claim or claims against any thirdparty arising out of or connected with the indemnified matter, then uponreceipt of indemnification, the Indemnitee shall fully assign to the Indemnitorthe entire claim or claims to the extent of the indemnification actually paidby the Indemnitor and the Indemnitor shall thereupon be subrogated with respectto such claim or claims of the Indemnitee.

**ARTICLE 8**

**MISCELLANEOUS**

8.1           Entire Agreement.  This Agreement, together with all exhibitsand schedules hereto, and all documents referred to herein, constitutes theentire agreement between the parties with respect to the subject matter hereof,supersedes all other and prior agreements on the same subject, whether writtenor oral, and contains all of the covenants and agreements between the parties with respectto the subject matter hereof.  Each partyto this Agreement acknowledges that no representations, inducements, promises,or agreements orally or otherwise, have been made by the party(ies), or byanyone acting on behalf of any party, that are not identified herein, and thatno other agreement, statement, or promise not contained in this Agreement shallbe valid or binding.

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8.2           Arbitration. In the event of adispute under this Agreement which is not resolved  after good faith negotiation, either thePurchaser or Company may demand arbitration of the matter and the matter shallbe settled by arbitration conducted by a single neutral arbitrator.  Any such arbitration shall be held in LosAngeles County, California under the rules then in effect of the JudicialArbitration and Mediation Association (JAMS). The decision shall be written andshall be supported by, as agreed by the parties, either a reasoned award orfindings of fact and conclusions which shall set forth the award, judgment,decree or order awarded by the arbitrator. The prevailing party to an arbitration shall be entitled to recoveryfrom the non-prevailing party of its expenses, the fees of the arbitrator, theadministrative costs of the arbitration, and the expenses, including, withoutlimitation, reasonable attorneys’ fees and costs, reasonably incurred by it inconnection with the arbitration. Judgment upon any award rendered by the arbitrator may be entered in anycourt having jurisdiction. Notwithstanding the foregoing, the parties shall have the rights todiscovery in accordance with California Code of Civil Procedure Section1283.05.

8.3           Successors and Assigns.  This Agreement and all documents andagreements referred to herein shall be binding upon and shall inure to thebenefit of the parties and their respective heirs (as applicable), legalrepresentatives, and permitted successors and assigns.  No party may assign this Agreement or therights, interests or obligations hereunder; provided, however, that to theextent permitted by applicable law, the Purchaser may (i) assign any or all ofits rights and interests hereunder to one or more of its affiliates or anaffiliate of Jacob Y. Terner, M.D., the sole shareholder of Purchaser;provided, however, that the Purchaser shall remain liable under this Agreement,(ii) designate one or more of its affiliates to perform its obligationshereunder, and (iii) collaterally assign its rights under this Agreement to itslender(s) for collateral purposes.  Anyassignment or delegation in contravention of this Section shall be null andvoid.

8.4           No Waiver.  No waiver ofany term, provision or condition of this Agreement, whether by conduct orotherwise, in any one or more instances, shall be deemed to be or be construedas a further or continuing waiver of any such term, provision or condition oras a waiver of any other term, provision or condition of this Agreement.

8.5           Counterparts.  This Agreement, and anyamendments hereto, may be executed in counterparts, each of which shall constitute an original document, butwhich together shall constitute one and the same instrument.

8.6           Headings.  The section headings contained in this Agreement areinserted for convenience only and shall not affect in any way the meaning orinterpretation of this Agreement.

8.7           Notices.  Any notices required or permitted to be given hereunder byany party to the other shall be in writing and shall be deemed delivered uponpersonal delivery; twenty-four (24) hours followingdeposit with a courier for overnight delivery; or five (5) business days hoursfollowing deposit in the U.S. Mail, registered or certified mail, postageprepaid, return- receipt requested, addressed to the parties at the followingaddresses or to such other addresses as the parties may specify in writing:

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|          | If to Seller:    | Mitchell Lew, M.D.                    |
|----------|------------------|---------------------------------------|
|     |             | 500 Peralta Hills Dr.                 |
|     |             | Anaheim, CA 92807                     |
|     |             |                                  |
|     | With a copy to:  | Stephen G. Auer, Esq.                 |
|     |             | Christensen & Auer                |
|     |             | 225 South Lake Avenue, 9th Floor |
|     |             | Pasadena, California 91101            |
|     |             |                                  |
|     | If to Purchaser: | Prospect Medical Group, Inc.          |
|     |             | 1920 East 17th Street Suite 200  |
|     |             | Santa Ana, California 92705           |
|     |             | Attn: Jacob Y. Terner, M.D.           |
|     |             |                                  |
|     | With a copy to:  | Prospect Medical Holdings, Inc.       |
|     |             | 400 Corporate Pointe, #525            |
|     |             | Culver City, CA 90230                 |
|     |             | Attn: Jacob Y. Terner, M.D.           |
|     |             |                                  |
| * * | *and*            | Miller & Holguin                  |
|     |             | 1801 Century Park East, 7th Floor     |
|     |             | Los Angeles, CA 90067                 |
|     |             | Attn: Dale S. Miller, Esq.            |

 

8.8           Governing Law.  This Agreementshall be governed by and construed in accordance with the laws of the State ofCalifornia.

8.9           Amendment.  This Agreement may beamended at any time by agreement of the parties, provided that any amendmentshall be in writing and executed by all parties.

8.10         Severability.  If any provision of thisAgreement is held by a court of competent jurisdiction to be invalid orunenforceable, the remaining provisions will nevertheless continue in fullforce and effect, unless such invalidity or unenforceability would defeat anessential business purpose of this Agreement.

8.11         Fees and Expenses.  Except as otherwiseexplicitly set forth herein, each party shall bear its own expenses including,without limitation, attorneys’ and accountants’ fees inconnection with the preparation of this Agreement and the transactionscontemplated hereby.

8.12         Exhibits and Schedules.  Allexhibits and schedules attached to this Agreement are incorporated herein bythis reference and all referencesherein to “Agreement” shall mean this Agreement together with all such exhibitsand schedules to be delivered at the execution of this Agreement or upon theClosing Date.

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8.13         Time of Essence.  Time isexpressly made of the essence of this Agreement and each and every provisionhereof of which time of performance is a factor.

8.14         Attorneys’ Fees.  Should any partyinstitute any action or procedure to enforce this Agreement or any provisionhereof, or for damages by a declaration of rights hereunder including withoutlimitation arbitration, the prevailing party in any such action or proceedingshall be entitled to receive from the other party all costs and expenses,including without limitation reasonable attorneys’ fees, incurred by theprevailing party in connection with such action or proceeding.

8.15         Further Assurances.  Theparties shall take such actions and execute and deliver such furtherdocumentation as may reasonably be required in order to give effect to thetransaction contemplated by this Agreement and the intentions of the parties hereto.

8.16         Referencesto Dollars.  All references to“dollars” and “$” shall mean United States dollars.

8.17         Construction.  Whenever in this Agreement the context sorequires, references to the masculine shall be deemed to include the feminineand the neuter, reference to the neuter shall be deemed to include themasculine and feminine, references to the plural shall be deemed to include thesingular and the singular to include the plural and references to the words“and” and “or” shall be deemed to include the inclusive usage “and/or.”

[SIGNATURE PAGEIMMEDIATELY FOLLOWS]

 

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INWITNESS WHEREOF, the undersigned have executed this Agreement as of the datefirst written above.
|        | “Purchaser”                                             |
|--------|-------------------------------------------------------------------|
|   |                                                              |
|   | PROSPECT MEDICAL GROUP, INC.                                      |
|   |                                                              |
|   | By:                                                               |   |
|   |                                                              | Jacob Y. Terner, M.D., |
|   |                                                              | Chief Executive Officer |
|   |                                                              |
|   | “Company”                                               |
|   |                                                              |
|   | GENESIS HEALTHCARE OF SOUTHERN  CALIFORNIA, INC., A MEDICAL GROUP |
|   |                                                              |
|   | By:                                                               |   |
|   |                                                              | Mitchell W. Lew, M.D., |
|   |                                                              | Chief Executive Officer |
|   |                                                              |
|   | “Seller”                                                |
|   |                                                              |
|   |                                                              |
|   | Mitchell W. Lew, M.D.                                             |

 

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SPOUSALJOINDER AND CONSENT TO STOCK PURCHASE AGREEMENT

I am the spouse of MitchellW. Lew, M.D., Seller.  To the extent thatI have any interest in any of the Stock (as that term is defined in the StockPurchase Agreement dated November 1, 2005 between my spouse as Seller, GenesisHealthcare of Southern California, a Medical Group, and Prospect Medical Group,Inc., as Purchaser (the “Agreement”)), I hereby join in the Agreement and agreeto be bound by its terms and conditions to the same extent as my spouse. I haveread the Agreement, understand its terms and conditions, and to the extent thatI have felt it necessary, I have retained independent legal counsel to adviseme concerning the legal effect of this Agreement and this Spousal Joinder andConsent.

I understand andacknowledge that Purchaser is significantly relying on the validity andaccuracy of this Spousal Joinder and Consent in entering into this Agreement.

Executed this 1st  day of November, 2005
| Signature: |   |   |
|------------|--------|--------|

 
| Printed or Typed Name: |   |   |
|---------------------------------------|--------|--------|

 

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