Exhibit 10.5


 


ASSIGNABLE OPTION AGREEMENT


 


THIS ASSIGNABLE OPTION AGREEMENT (“Agreement”) is made as of the 13th
day of January, 2000, by and among Prospect Medical Systems, Inc. (“Buyer”), a
Delaware corporation, Prospect Medical Group, Inc., a California professional
medical corporation (“Seller”), together with Jacob Y. Terner, M.D.
(“Shareholder”), with reference to the following facts:


 


RECITALS


 


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


 


B.                                     Seller
and Buyer entered into that certain Asset Transfer Agreement dated June 4,
1996, pursuant to which Seller transferred certain non-professional assets to
Buyer (the “Asset Transfer Agreement”).


 


C.                                     Pursuant
to the terms of a proposed Agreement and Plan of Reorganization, Med-Search
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary
of Med-Search, Inc., a Delaware corporation, (“Med-Search”) merged with and
into Buyer (the “Merger”).


 


D.                                    Effective
as of the Closing of the Merger, Seller granted to Buyer, and Buyer acquired
from Seller, (i) an assignable option to purchase all of the remaining assets
of Seller, and (ii) the right to designate the purchaser (“Successor Physician”)
of all or part of the issued and outstanding stock in Seller.  When used in this Agreement, the term
“Assets” shall mean all of Seller’s and Shareholder right, title, interest and
estate in and to all the assets of every kind and description used in or
pertaining to the Practice, including but not limited to the assets set forth
on Exhibit A, not including any assets transferred to Seller pursuant to the
terms of the Asset Transfer Agreement. 
When used in this Agreement, the term “Stock” shall mean all of
Shareholder’s right, title, interest and estate in and to all of the issued and
outstanding stock in Seller, including any rights to any additional stock,
preemptive rights, warrants, and the like, as set forth on Exhibit B.


 


E.                                      On
September 2, 1998, Seller, Buyer and Gregg DeNicola, M.D., the sole
shareholder of Seller, entered into that certain Amended and Restated
Assignable Option Agreement, pursuant to which Buyer exercised its Stock Option
and designated Jacob Y. Terner, M.D. as the Successor Physician to Dr. DeNicola
on January 13, 2000; therefore Shareholder, Seller and Buyer now desire to
enter into this Agreement.


 


NOW, THEREFORE, in consideration of the foregoing promises and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged by the parties, Seller, Shareholder, and Buyer agree as
follows:


 

















 


1.                                       Grant
of Option.


 


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


 


1.2                                 Seller and Shareholder
hereby grant to Buyer the assignable right to designate a Successor Physician
or Successor Physicians, which person or persons must be duly licensed
physicians in the State of California or otherwise permitted by law to be a
shareholder in a professional corporation, to purchase all or part of the Stock
(the “Stock Option”), on the terms and subject to the conditions set forth
herein.  In its sole discretion, Buyer may
designate the amount of Stock which is to be purchased.  The Assets Option and the Stock Option are
collectively referred to herein as the “Option.”


 


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


 


1.4                                 Except as set forth in
the Amended and Restated Credit Succession Agreement, dated as of July 14,
1997, by and among Prospect Medical Holdings, Inc., a Delaware corporation,
Seller, Gregg DeNicola, M.D., Buyer, Santa Ana/Tustin Physicians Group, Inc., a
California professional corporation, and Imperial Bank, a California banking
corporation (“Imperial”), as amended (the “Credit Succession Agreement”),
Seller shall not recognize any share transfer or other action not in compliance
with the terms of this Agreement.


 


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


 


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


 


4.                                       Exercise
of Option.


 


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


 


4.2                                 Notwithstanding the
provisions of Section 4.1, if the Management Services Agreement is
terminated by either party, for any reason, Buyer’s right to exercise the
Option is automatically and


 


2

















 


immediately exercised as of the termination date of the Management
Services Agreement such that Buyer may exercise either the Assets Option or the
Stock Option, or both, at such time.


 


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


 


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


 


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


 


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


 


4.7                                 Seller and Shareholder
shall cooperate with Buyer in any due diligence.


 


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


 


6.                                       Purchase
Price of the Assets or Stock.


 


6.1                                 Purchase Price.


 


a.                                       Assets
Purchase Price.  The purchase price for
the Assets to be purchased pursuant to the exercise of the Assets Option shall
be $1,000 (“Assets Purchase Price”). 
The purchase price of any partial purchase of the Assets shall be a
pro-rata percentage of the full Assets Purchase Price.


 


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


 


3

















 


6.2                                 Payment.  For the Assets, Buyer shall pay Seller the
Assets Purchase Price at Closing in the form of immediately available funds
transferred by wire to an account at a financial institution designated by
Seller.  For the Stock, Buyer shall
cause the Successor Physician to pay the Shareholder the Stock Purchase Price.


 


6.3                                 Closing.  The transactions contemplated by this
Agreement are to close forty-five (45) days after the date of either the Assets
Exercise Notice or the Stock Exercise Notice, as the case may be (“Closing”),
unless extended by Buyer.


 


7.                                       Additional
Obligations of Seller.


 


7.1                                 Affirmative
Covenants.  To the extent that
Seller and Shareholder participate in the Practice and own, control, or use the
Assets, Seller and Shareholder shall:


 


a.                                       Conduct of
Practice.  Conduct Seller’s business
efficiently and without voluntary interruption and preserve all rights,
privileges, and franchises held by Seller and Seller’s Practice, including the
maintenance of all contracts, copyrights, trademarks, licenses, registrations,
etc.;


 


b.                                      Use.  Make use of the Assets with reasonable care
to prevent diminution in value of the Practice and the Assets, and keep the
Assets in good repair;


 


c.                                       Value.  Perform all acts necessary to maintain,
preserve, and protect the Assets, and maintain fire and extended coverage
insurance on the Assets in the amounts and under policies acceptable to Buyer,
and provide Buyer with the original policies and certificates at Buyer’s
request;


 


d.                                      Financing
Statements.  Execute and deliver to
Buyer all financing statements and other documents that Buyer requests, in
order to put third parties on notice of this Agreement;


 


e.                                       Access.  Permit Buyer, its representatives, and its
agents to inspect the Assets at any time, and to make copies of records
pertaining to the Assets, at reasonable times at Buyer’s request;


 


f.                                         Reports.  Furnish Buyer any reports relating to the
Assets at Buyer’s request;


 


g.                                      Defaults.  Notify Buyer promptly in writing of any
default, potential default, or any development that might have a material
adverse effect on the Assets, the Stock, or the Practice, or of any litigation
that may have a material adverse effect on the Practice;


 


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


 


4

















 


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


 


j.                                          Taxes.  Pay promptly when due all taxes and
assessments owed in connection with the Assets and the Stock; and


 


k.                                       Delivery of
Certificates.  Deliver to Buyer all
certificates heretofore issued representing all of the shares of Seller’s
capital stock held of record or beneficially owned by Shareholder, and each
certificate hereafter issued representing any share of Seller’s capital stock,
with each certificate endorsed in blank for transfer.  Notwithstanding the foregoing, this Section 7.1.k shall only
apply in the event that the Credit Succession Agreement is no longer in effect.


 


7.2                                 Negative Covenants.  Except as required under the Credit
Succession Agreement, without the prior written consent of Buyer, Seller and
Shareholder shall not:


 


a.                                       Transfer.  Sell, lease, transfer, or otherwise dispose
of the Assets or Stock;


 


b.                                      Debt.  Incur, guarantee, assume or otherwise become
liable for any borrowing or increase any existing indebtedness; or discharge or
cancel any debt owed to Seller;


 


c.                                       No Further
Hypothecation.  Pledge, hypothecate,
encumber, redeem or dispose of the Assets, the Stock or any interest therein
until all of Seller’s obligations under this Agreement have been fully
satisfied or the Assets or the Stock has been released;


 


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


 


e.                                       Use.  Use the Assets or the Stock for any unlawful
purpose or in any way that would void any effective insurance;


 


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


 


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


 


8.                                       Confidentiality.  The parties shall use all good faith efforts
to keep the contents of this Agreement and all other aspects of the
negotiations preceding execution of this Agreement confidential.  Unless required by law, Seller, Shareholder,
and Buyer shall not disclose the contents of this Agreement or the


 


5

















 


negotiations leading to this Agreement to third parties without the
prior written consent of the other party. 
Buyer shall ensure that all of the assignees likewise comply with the
obligations of confidentiality imposed by this Section, except that Buyer and
the assignees may disclose the contents of such to their respective agents,
representatives, contractors, and employees to the extent necessary to exercise
their respective rights or perform their respective obligations hereunder.


 


9.                                       General.


 


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


 


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


 


9.3                                 Assignment.  All of Buyer’s rights and duties under this
Agreement may be assigned or delegated by Buyer or Prospect Medical Holdings,
Inc., including but not limited to an assignment to Imperial; provided,
however, that Buyer or Prospect Medical Holdings, Inc., shall give written
notice of any such assignment to the Seller and Shareholder within a reasonable
time period.  Notwithstanding any other
provision of this Agreement, neither this Agreement nor the rights and duties
of this Agreement may be assigned or delegated by Seller or Shareholder.  This Agreement binds the successors, heirs,
and authorized assignees of the parties.


 


9.4                                 Entire Agreement.  Except as expressly provided in this
Agreement to the contrary, this Agreement, including its incorporated exhibits,
constitutes the entire agreement between the parties with respect to the
Option, and supersedes all other and prior agreements on the same subject,
whether written or oral and contains all of the covenants and agreements
between the parties with respect to the subject matter hereof.  Except as expressly provided in this
Agreement to the contrary, each party to this Agreement acknowledges that no
representations, inducements, promises, or agreements, orally or otherwise,
have been made by any other party hereto, or by anyone acting on behalf of any
party hereto, that are not embodied herein, and that no agreement, statement,
or promise not contained in this Agreement shall be valid or binding.  This Agreement incorporates the Original
Agreement, together with all amendments previously made and to be made to the
date of execution hereof, and is deemed to have been effective as of the date
of the Original Agreement.


 


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


 


6

















 


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


 


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


 


	
  If to Seller or Shareholder:

  	
  Prospect Medical Group, Inc.

  
	
   

  	
  18200 Yorba Linda Blvd., Suite 409

  
	
   

  	
  Yorba Linda, CA 92886

  
	
   

  	
  Attention:  President &
  Shareholder

  
	
   

  	
   

  
	
  If to Buyer:

  	
  Prospect Medical Systems, Inc.

  
	
   

  	
  18200 Yorba Linda Blvd., Suite 409

  
	
   

  	
  Yorba Linda, CA 92886

  
	
   

  	
  Attention:  President

  



 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


7

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


8

















 


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


 


	
  “BUYER”

  	
  “SELLER”

  
	
   

  	
   

  
	
  Prospect Medical Systems, Inc., a

  Delaware corporation

  	
  Prospect Medical Group, Inc.,

  a California professional corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Jacob Y. Terner

  	
   

  	
  By:

  	
  /s/ Jacob Y. Terner

  	
   

  
	
   

  	
  Jacob Y. Terner, Chief Executive Officer

  	
   

  	
  Jacob Y. Terner

  
	
   

  	
  Its:

  	
  President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  “SHAREHOLDER”

  
	
   

  	
  (Jacob Y. Terner, M.D.)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Jacob Y. Terner, M.D

  	
   

  
						



 


9

















 


SPOUSAL JOINDER AND CONSENT


 


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


 


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


 


Executed this 13th day of January, 2000.


 


 


	
  Signature:

  	
  /s/ Sandra W. Terner

  	
   

  
	
   

  	
   

  	
   

  
	
  Printed or Typed Name: Sandra W. Terner

  



 

















 


EXHIBIT A


 


ASSETS


 


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


 


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


 


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


 


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


 


5.                                       All
supplies and inventory relating to the Practice.


 


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


 


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


 


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


 


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


 


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


 


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


 

















 


EXHIBIT B


 


STOCK


 


Stock has been pledged to Imperial Bank, a
California banking corporation (“Bank”), pursuant to the terms of that certain
Amended and Restated Credit Succession Agreement, dated as of July 14, 1997,
by and among Bank, Prospect Medical Holdings, Inc., a Delaware corporation,
Prospect Medical Systems, Inc., a Delaware corporation, Prospect Medical Group,
Inc., a California professional corporation, Santa Ana/Tustin Physicians Group,
Inc., a California professional corporation, and Gregg DeNicola, M.D.


 

















 


EXHIBIT C


 


 


NON-COMPETITION
AGREEMENT


 


THIS NON-COMPETITION AGREEMENT (“Agreement”) is made as of this 26th
day of January, 2000, and is effective as of
                            ,
          , by and between
Prospect Medical Systems, Inc., a Delaware corporation (“Systems”), Prospect
Medical Group, Inc., a California professional corporation (“PC”), Jacob Y.
Terner, M.D. (“Professional”), and                                     
(“Successor Physician”).


 


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


 


R E C I T A
L S


 


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


 


B.                                     On
                      ,        ,
Systems exercised its Option to designate Successor Physician to acquire the
stock or assets of PC under the terms of that certain Assignable Option
Agreement dated January 13, 2000 by and between Systems, PC and
Professional (the “Assignable Option Agreement”).


 


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


 


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


 


A G R E E M
E N T


 


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


 


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


 

















 


1.1                                 That
Professional will not, directly or indirectly (whether as a sole proprietor,
partner, stockholder, director, officer, employee, independent contractor or in
any other capacity as principal or agent) (i) establish, operate or provide
professional medical services within ten (10) miles of any location at which PC
conducts business or any location at which other professional corporations
managed by Systems as of the Effective Date conduct business; or (ii) compete
with Systems in the provision of the same services or services substantially
similar to those services provided by Systems. 
Professional shall be deemed to compete with Systems if Professional
provides to any medical association(s) or group(s) of physicians within ten
(10) miles of any location at which PC conducts business during the term of this
Agreement any services that are the same or substantially similar to any
services provided by Systems pursuant to the terms of its management services
agreements.


 


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


 


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


 


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


 


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


 


 


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2.                                       Confidentiality


 


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


 


2.2                                 Systems’
Confidential and Proprietary Information.


 


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


 


2.2.2                        Professional
acknowledges and agrees that Systems is entitled to prevent the disclosure or
improper use of any of Systems’ Confidential and Proprietary Information.  Professional agrees at all times to hold in
strictest confidence and not to disclose to any person, firm or corporation and
not to use, except in the pursuit of the business of PC or Systems, Systems’
Confidential and Proprietary Information, without the prior written consent of
Systems; unless (i) such information becomes known or available to the public
generally through no wrongful act of Professional or (ii) disclosure is
required by law


 


15

















 


or
the rule, regulation or order of any governmental authority under color of law;
provided, that prior to disclosing any of Systems’ Confidential and Proprietary
Information pursuant to this clause (ii), Professional shall, if possible, give
prior written notice thereof to Systems and provide Systems with the
opportunity to contest such disclosure. 
Professional shall take all necessary and proper precautions against
disclosure of any of Systems’ Confidential and Proprietary Information to
unauthorized persons.  Upon execution of
this Agreement, Professional shall cease all use of any of Systems’  Confidential and Proprietary Information and
shall execute such documents as may be reasonably necessary to evidence
abandonment of any claim thereto.


 


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


 


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


 


4.                                       Miscellaneous.


 


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


 


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


 


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


 


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


 


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


 


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


 


	
  If
  to Professional:

  	
  Jacob
  Y. Terner, M.D.

  
	
   

  	
  Prospect
  Medical Holdings, Inc.

  
	
   

  	
  515
  South Flower Street, Suite 1640

  
	
   

  	
  Los
  Angeles, California 90071

  
	
   

  	
   

  
	
  If
  to Systems:

  	
  Prospect
  Medical Systems, Inc.

  
	
   

  	
  515
  South Flower Street, Suite 1640

  
	
   

  	
  Los
  Angeles, California 90071

  
	
   

  	
  Attn:
  R. Stewart Kahn

  
	
   

  	
   

  
	
  If
  to PC:

  	
  Prospect
  Medical Group, Inc.

  
	
   

  	
  515
  South Flower Street, Suite 1640

  
	
   

  	
  Los
  Angeles, California 90071

  
	
   

  	
  Attn:
  R. Stewart Kahn

  
	
   

  	
   

  
	
  If
  to Successor Physician:

  	
  Prospect
  Medical Group, Inc.

  
	
   

  	
  515
  South Flower Street, Suite 1640

  
	
   

  	
  Los
  Angeles, California 90071

  



 


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


 


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


 


4.9                                 Severability.  If any provision or portion of this
Agreement is held by a court of competent jurisdiction to be invalid or
unenforceable, the remainder of this Agreement will nevertheless continue in
full force and effect and shall not be invalidated or rendered unenforceable or
otherwise adversely affected, unless such invalidity or unenforceability would
defeat an essential business purpose of this Agreement.  Without limiting the generality of the
foregoing, if the provisions of this Agreement shall be deemed to create


 


17

















 


a
restriction, which is unreasonable as to either duration or geographical area
or both, the parties agree that the provisions of this Agreement shall be
enforced for such duration and in such geographic area as any court of
competent jurisdiction may determine to be reasonable.


 


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


 


[The remainder of the page is intentionally blank.]


 


18

















 


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


 


	
  “Systems”

  
	
  PROSPECT MEDICAL SYSTEMS, INC.

  
	
  a Delaware corporation

  
	
   

  
	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  R. Stewart Kahn

  
	
  Title:

  	
  Executive Vice President

  
	
   

  
	
   

  
	
  “PC”

  
	
  PROSPECT MEDICAL GROUP, INC.,

  
	
  a California professional corporation

  
	
   

  
	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  Jacob Y. Terner, M.D.

  
	
  Title:

  	
  Sole Shareholder

  
	
   

  
	
   

  
	
  “PROFESSIONAL”

  
	
  JACOB Y. TERNER, M.D.

  
	
   

  
	
   

  	
   

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

  
	
   

  
	
   

  	
   

  
	
  “SUCCESSOR PHYSICIAN”

  
	
   

  
	
   

  	
   

  
				



 


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