Document:

Exhibit 10.1

ASSET PURCHASE AGREEMENT

 

dated as of November 22, 2004

by and between

 

SHARP HEALTH PLAN

and

MOLINA HEALTHCARE OF CALIFORNIA

ASSET PURCHASE AGREEMENT

          THIS ASSET
PURCHASE AGREEMENT (this “Agreement”), dated as of November 22, 2004, is
entered into by and between SHARP HEALTH PLAN, a California non-profit public
benefit corporation (“Sharp” or the “Seller”), and MOLINA HEALTHCARE OF
CALIFORNIA, a California corporation (“Molina” or the “Buyer”).  Seller and Buyer are referred to herein
individually as a “Party” and collectively as the “Parties.”

RECITALS

          WHEREAS,
Sharp is a non-profit Knox-Keene-licensed health maintenance organization
(“HMO”)  exempt from federal income tax
as an organization described in Section 501(c)(4) of the Internal Revenue Code
of 1986, as amended, with approximately 50,000 Medi-Cal enrollees in the San
Diego Geographic Managed Care Program (the “GMC Program”) and approximately
19,500 enrollees in the Healthy Families Program (the “Healthy Families Program”);   

          WHEREAS,
Molina is a for-profit Knox-Keene licensed HMO that arranges for the delivery
of health care services to persons in California eligible for Medi-Cal and
other programs for low-income families and individuals;

          WHEREAS,
Sharp wishes to sell, and Molina wishes to acquire, the contracts and provider
network associated with the GMC Program and the Healthy Families Program
(collectively, the “GMC Contracts” and the “Healthy Families Contracts,”
respectively); 

          WHEREAS,
Sharp is willing to provide to Molina, pursuant to the terms of a transition
services agreement, certain transition services and assistance related to the
assets being sold under this Agreement; 

          NOW,
THEREFORE, in consideration of the foregoing and of the mutual covenants,
agreements, representations, and warranties contained herein, and for other
good and valuable consideration, the Seller and the Buyer hereby agree as
follows:

ARTICLE
I

DEFINITIONS

          1.1 Definitions.
When used in this Agreement, these terms shall have these meanings:

          “Actions” means any action,
claim, suit, litigation, proceeding, arbitration action, audit, or
investigation by or before any Governmental Authority.

          “Affiliate”
means, with respect to any specified Person, a Person controlled by, under
common control with, or controlling such Person.  For purposes of this definition, “control” of a Person means the
possession, direct or indirect, of the power to (a) vote ten percent (10%) or more of the voting securities of such
Person, or (b) elect a majority of the governing body of such Person.

1

          “Asset Purchase” means
the sale by the Seller and the purchase by the Buyer of the Assets and the
assumption of the Assumed Obligations by the Buyer pursuant to this Agreement
and the Assignment and Assumption Agreement.

          “Assets”
means those assets and all of the rights accruing thereunder after the Closing
Date as more particularly described in Schedule 1(a) attached hereto and
incorporated herein by this reference.  

          “Assumed
Obligations” means all of the obligations and
liabilities arising under the Assets, including, without limitation, medical
service obligations, relating to any event or period at or after 12:01 a.m., local
time, on the Closing Date, and excluding the Excluded Obligations.

          “Assignment
and Assumption Agreement” means that agreement
substantially in the form attached hereto as Exhibit A, and subject to
such amendments as may be required in order to obtain the necessary
Governmental Authorizations, pursuant to which the Buyer agrees to assume the
Assumed Obligations on the Closing Date. 

          
“Business Day” means any day other than a Saturday
or Sunday or any other day on which commercial banks located in the State of
California generally are authorized to close for business other than the retail
depository business.

          “Closing”
means the closing of the sale, assignment, and purchase of the Assets and the
assumption of the Assumed Obligations by the Buyer effective as of the Closing
Date, in accordance with and subject to Article II and all of the terms and
conditions of this Agreement.

          “Closing Date” means
the date on which the Closing becomes effective.

          “Code” shall mean the Internal Revenue Code of 1986, as amended.

          “Earn Out” shall mean
the additional payment that may be made to the Seller pursuant to Section 2.3
hereof.

          “Enrollees”  means those beneficiaries enrolled in the GMC Program or the Healthy Families
Program and covered under the GMC Contract or the Healthy Families Contract,
respectively.

          “Excluded
Assets” means all right and interest in any
payments, including, but not limited to, payments upon settlement or
reconciliation of accounts, retroactive coverage determinations, or amounts
recoverable from a provider or facility in connection with an eligibility
determination, related to the Assets and arising before 12:01 a.m. local time
on the Closing Date, whether known or unknown, asserted or unasserted, accrued
or unaccrued.

          “Excluded
Obligations” means any and all claims and/or
claims payment liability arising from health services arranged for or provided
by the Seller before 12:01 a.m. local time on the Closing Date in connection
with the Assets, including obligations for Pre-Closing Admissions extending
beyond the Closing Date up to $75,000 as provided in Section 2.5 hereof, or
obligations that arise out of acts or omissions of the Seller that occurred
before the Closing Date.

          “Exhibits”  means the exhibits attached hereto by Seller and Buyer which form part of this
Agreement.

          “GMC
Contract” means that certain contract between the
Seller and the State of California regarding the GMC Program.  

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          “Governmental
Authority” means the government of the United
States of America, the government of the State of California, or any political
department, agency, or subdivision thereof, and any entity, body, or authority
exercising executive, legislative, judicial, regulatory, or administrative
functions of or pertaining to government, including quasi-governmental entities
established to perform such functions, including, but not limited to, those
Governmental Authorities listed in Schedule 1(b) attached hereto and
incorporated herein by reference. 

          “Governmental
Authorizations” means the licenses, permits,
consents, approvals, and other authorizations required by law or any
Governmental Authority to be held by a Person for a particular purpose,
including for the purposes of transferring or acquiring the Assets or for
service area expansion.  

          “Healthy
Families Contract” means that certain contract
between the Seller and the State of California regarding the Healthy Families
Program. 

          
“Laws” means all applicable federal, state, local,
and other laws, statutes, ordinances, rules, regulations, and judicial or
administrative orders, judgments, promulgations, and decisions.

          “Material
Adverse Effect” means, with respect to either
Party, any change, effect, or circumstance that, individually or in the
aggregate, is or is reasonably likely to be materially adverse to the financial
condition, results of operations, or membership of such Party; provided,
however, that the following shall not be taken into account in determining
whether there has been or would be a Material Adverse Effect on or with respect
to such Party: (a) any change, effect, or circumstance relating to conditions
affecting the economy of any part of the world generally, or any change,
effect, or circumstance relating to conditions generally affecting the health
care  industry, and, in either case, not
affecting such Party in a materially disproportionate manner, and (b) any
change, circumstance, or effect caused by the announcement or pendency of the
Asset Purchase.  

          “Person” means any individual, partnership, limited liability company, corporation,
estate, trust, unincorporated association, business, or other legal entity, and
any government or any governmental agency or political subdivision thereof.

          “Pre-Closing
Admissions” means all inpatient acute care
hospital admissions for an Enrollee occurring prior to 12:01 a.m. local time on
the Closing Date.   

          “Purchase
Price” means an aggregate amount of Twenty-Five
Million Dollars ($25,000,000), subject to adjustment as provided in Section 2.2
below.

          “Reasonable
Commercial Efforts” do not include the provision
of any consideration to any third party or the suffering of any economic
detriment to a Party’s ongoing operations for the procurement of any consent,
authorization, or approval required under this Agreement except for (i) the
costs of gathering and supplying data or other information or making any
filings; (ii) fees and expenses of counsel and consultants; and (iii) customary
fees and charges of Governmental Authorities and accreditation organizations.

          “Transaction
Documents” means this Agreement, the Transition
Services Agreement, the Assignment and Assumption Agreement, and all other
documents to be executed by the Parties hereto in connection with the
consummation of the transactions contemplated hereby. 

          “Transition
Services” means those transition services to be
provided by Seller to Buyer pursuant to the terms of a Transition Services
Agreement to be entered into between Seller and Buyer effective as of the
Closing Date, whereby Seller shall provide certain transition services and
assistance to Buyer as described in the Transition Services Agreement attached
as Exhibit B hereto, and
subject to such amendments as may be required in order to obtain the necessary
Governmental Authorizations. 

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ARTICLE
II

SALE AND PURCHASE OF ASSETS

          2.1 Transfer
of Assets. 
At the Closing, on the terms and conditions set forth in this Agreement,
Seller shall sell, convey, assign, transfer, and deliver without recourse
(except as expressly provided herein) to the Buyer, and the Buyer shall
purchase and acquire from the Seller, the Assets, and the Buyer shall also
assume the Assumed Obligations.  Seller
shall not transfer and shall retain all rights to the Excluded Assets, and
shall remain obligated with respect to the Excluded Obligations. 

          2.2 Purchase
Price and Payment.

          (a) As
payment for the Assets, on the Closing Date, the Seller shall cause the
Purchase Price to be paid to the Buyer and the Buyer shall assume the Assumed
Obligations.  Payment of the Purchase
Price to the Buyer shall be made by the Seller in lawful currency of the United
States of America in immediately available funds by wire transfer to the
account of the Buyer, designated by the Buyer in writing.  In the event the Closing Date is not a
Business Day, the Purchase Price shall be delivered on the first Business Day thereafter.  

          (b) The
final adjusted Purchase Price for the Assets shall be conditioned upon the
aggregate monthly premium revenues under both the GMC Contract and the Healthy
Families Contract (the “Monthly Premium Revenues”), consistently measured at
all relevant periods.  If, as of the
Closing Date, there has been a material change in the Monthly Premium Revenues
for the calendar month immediately preceding the Closing Date (without giving
effect to any per Enrollee premium increases occurring between the baseline
month and the Closing Date), the Purchase Price shall be adjusted as provided
herein.  For purposes of this Section, a
material change in Monthly Premium Revenues shall mean an increase or a decrease
greater than fifteen percent (15%) of the Monthly Premium Revenues for the
baseline month of August 2004, which baseline amount is $6,248,388 (the
“Baseline Revenue Amount”), or $937,258 (the “Material Change Amount”).  All calculations in reference to the
Baseline Revenue Amount described in this Article II shall be proportionally
adjusted to reflect that August is a 31-day month, e.g., 30/31st of
the Baseline Revenue Amount with respect to revenues for the 30-day months
April, June, etc.  

          (c) No
later than forty-five (45) days following the Closing Date, the Seller shall
provide the Buyer with its monthly Remittance Advices (as defined in Section
3.6 hereof) indicating the Monthly Premium Revenues for the calendar month
immediately preceding the Closing Date (the “Closing Date Revenue
Amount”).  The Buyer shall have ten (10)
Business Days to review such Remittance Advices.  In the event the Buyer does not object to the Closing Date
Revenue Amount as provided by the Seller within such ten (10) Business Day
period, the Buyer shall be deemed to have accepted the Closing Date Revenue
Amount.  In the event the Buyer objects
to the Closing Date Revenue Amount within such ten (10) Business Day period,
the Buyer and the Seller shall negotiate in good faith to resolve any such
disputes within ten (10) Business Days. 
In the event the Buyer and the Seller cannot resolve such disputes
within such ten (10) Business Day period, the Closing Date Revenue Amount as
provided by the Seller, together with the objections submitted by the Buyer,
shall be submitted to an independent third party professional with recognized
expertise and experience in government-sponsored health programs as mutually
agreed by the Parties for determination of the Closing Date Revenue Amount,
which determination shall be made within twenty (20) Business Days and shall be
final and binding on the Parties.  The
Buyer and the Seller shall each pay one half of the cost of any such
determination by such designated third party. 

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          (d) No
adjustment to the final Purchase Price shall be made for any difference between
the Baseline Revenue Amount and the Closing Date Revenue Amount that is less
than or equal to the Material Change Amount. 
In the event the Closing Date Revenue Amount is less than the Baseline
Revenue Amount by more than the Material Change Amount, the Seller shall refund
to the Buyer from the previously paid Purchase Price, within three (3) Business
Days after final determination of the Closing Date Revenue Amount pursuant to
Section 2.2(c) above, an amount equal to the product obtained by multiplying
the Purchase Price amount by a fraction, the numerator of which shall be the
difference between (i) the Closing Date Revenue Amount, and (ii) the Baseline
Revenue Amount less the Material Change Amount, and the denominator of which
shall be the Baseline Revenue Amount less the Material Change Amount.  In the event the Closing Date Revenue Amount
exceeds the Baseline Revenue Amount by more than the Material Change Amount, the
Buyer shall pay to the Seller in addition to the previously paid Purchase
Price, within three (3) Business Days after final determination of the Closing
Date Revenue Amount pursuant to Section 2.2(c) above, an amount equal to the
product obtained by multiplying the Purchase Price amount by a fraction, the
numerator of which shall be the difference between (i) the Closing Date Revenue
Amount, and (ii) the Baseline Revenue Amount plus the Material Change Amount,
and the denominator of which shall be the Baseline Revenue Amount plus the
Material Change Amount.

          2.3 Earn-Out.

          (a) Independent
of any amounts paid by Buyer to Seller under Section 2.2 hereof, the Parties
intend to provide for the possible payment by the Buyer of additional
consideration to the Seller based on the financial performance of the GMC
Program and the Healthy Families Program as operated by the Buyer during the 36
months following the Closing Date (the “Earn-Out”).

          (b) The
Seller’s Earn-Out shall be based on the aggregate premium revenues under both
the GMC Contract and the Healthy Families Contract, less aggregate medical
expenses under the GMC Contract and the Healthy Families Contract, each
determined in a manner consistent with Buyer’s historical ordinary course
practices (the “Gross Margin Amount”). 
The Gross Margin Amount shall be measured over the twelve-month period
immediately following the Closing Date, and over the next two successive
twelve-month periods (each such twelve-month measuring period being referred to
herein as an “Earn-Out Period”).  

          (c) If
the Gross Margin Amount during any Earn-Out Period is less than $8,800,000,
then the Buyer shall not pay the Seller any Earn-Out payment for that Earn-Out
Period.  If the Gross Margin Amount
equals or exceeds $8,800,000 during the applicable Earn-Out Period, then the
Buyer shall pay the Seller fifteen percent (15%) of the Gross Margin Amount for
such Earn-Out Period.  

          (d) In
no event shall the aggregate Earn-Out payments paid by the Buyer to the Seller
exceed $3,500,000.  In the event the
aggregate Earn-Out payments to the Seller have equaled $3,500,000, or in the
event that 36 months have elapsed since the Closing Date, no further Earn-Out
payments shall be made by the Buyer to the Seller.    

          (e) Within
90 days of the end of each applicable Earn-Out Period, the Buyer shall deliver
to the Seller a written calculation of the Earn-Out payment, if any, for the
applicable Earn-Out Period, together with a check representing the amount of
the Earn-Out payment, if any.   The
Buyer shall also give reasonable access to the Seller and its accountants and
financial consultants, upon reasonable notice, to review the work papers and
calculations used by the Buyer in its determination of the Earn-Out payment,
including but not limited to review of historical and current incurred but not
reported calculations.

5

          (f) If
the Seller disputes the Buyer’s calculation of the Earn-Out payment, the Seller
shall so notify the Buyer in writing within ten days after receipt of the
written calculation referred to in this Section 2.3.  The Parties shall then attempt to resolve such dispute regarding
the Earn-Out payment within ten days. 
If the Parties are unable to resolve their dispute, the Parties shall
then submit the matter to a mutually agreed-upon accounting firm (“Accounting
Firm”), who shall calculate the Earn-Out payment as described above.  The Accounting Firm shall submit its written
calculation of the Earn-Out to the Parties within 45 days.  If the Accounting Firm’s calculation shows
the Earn-Out payment to be equal to or less than the amount determined by the
Buyer, then the Seller shall pay the Accounting Firm’s fees and expenses.  If the Accounting Firm’s calculation shows
the Earn-Out payment to be greater than the amount determined by the Buyer,
then the Buyer shall pay the Accounting Firm’s fees and expenses.  

          2.4 Assumption
of Obligations.  At 12:01 a.m., local time, on the Closing
Date, the Buyer shall assume the Assumed Obligations.  Buyer agrees to pay, perform, and discharge, as the case may be,
when due any and all duties, obligations, liabilities, and restrictions
pertaining to the Assumed Obligations 
The Buyer shall not assume any Excluded Obligations and the Seller will
retain all responsibility and liability, monetary or otherwise, for any and all
Excluded Obligations.

          2.5 Pre-Closing
Admissions. 
Notwithstanding the fact that patient Pre-Closing Admissions extend
beyond the Closing Date, Seller shall remain solely liable for claims payment
liability for all Pre-Closing Admissions in a total amount not to exceed
$75,000.  Pre-Closing Admission claims
payment liability exceeding the aggregate $75,000 limitation and any and all
other liability for services provided after the date of discharge or transfer
to another facility shall be the sole responsibility of the Buyer.  The Seller shall adjudicate benefits and
claims and remit appropriate claim payments to providers and facilities in
accordance with Seller’s policies and procedures for all Pre-Closing
Admissions.  Seller will invoice the
Buyer for any Pre-Closing Admission claims payment liability in excess of the
aggregate $75,000 limitation.  Buyer
shall reimburse Seller within three (3) business days of receipt of invoice.

          2.6 Purchase
Price Allocation. 
The Seller and the Buyer agree to cooperate with each other in meeting
the requirements of §1060 of the Internal Revenue Code of 1986, as amended, and
each agree to file Internal Revenue Service Form 8594 in accordance with the
allocation of the Purchase Price to the Assets to be agreed upon by the Parties
within ninety (90) days following the Closing Date.  

          2.7 The
Closing.  Subject to the terms and conditions
of this Agreement, the Closing shall take place on (a) the date on which the
Buyer is permitted pursuant to the required Governmental Authorizations to
commence the providing of its services to Enrollees under the GMC Contract and
the Healthy Families Contract; or (b) on such other date as the Seller and the
Buyer shall agree in writing.  Upon consummation, the effective time of the
Closing shall be deemed to have taken place at 12:01 a.m. on the Closing Date.

6

ARTICLE
III

REPRESENTATIONS
AND WARRANTIES OF SELLER

          The
Seller represents and warrants to Buyer that, except as specifically noted in a
Schedule hereto, as of the date of execution of this Agreement:

          3.1 Organization,
Standing, and Power.  Seller is a corporation duly organized, validly existing, and in
good standing under the laws of the State of California, has the requisite
power and authority to own and operate its properties and to carry on its
business as now being conducted, except where the failure to be so organized,
existing, and in good standing or to have such power and authority would not
reasonably be expected to have a Material Adverse Effect on Seller. 

          3.2 Authority;
No Conflicts.

          (a) Seller
has all requisite corporate power and authority to enter into this Agreement
and to consummate the transactions contemplated hereby.  The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Seller and the
statutory members.  This Agreement has
been duly executed and delivered by Seller and constitutes a valid and binding
agreement of Seller, enforceable against it in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium, and similar laws relating to or affecting creditors
generally or by general equity principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law) or by an
implied covenant of good faith and fair dealing. 

          (b) The
execution and delivery of this Agreement by Seller does not or will not, as the
case may be, and the consummation by Seller of the transactions contemplated
hereby, and the performance of its obligations hereunder will not conflict with
or result in any violation of, or constitute a default under any provision of
the articles of incorporation or bylaws of Seller, or, any loan or credit
agreement, security agreement, note, mortgage, bond, indenture, lease,  or other agreement, obligation, instrument,
permit, concession,  license, judgment,
order, decree, statute, law, ordinance, rule, or regulation applicable to
Seller or its properties or assets. 

          3.3 No
Violation of Law; Licenses, Permits, and Registrations.  The Seller is not in violation of, and has
not been given notice or been charged with any violation of, any law, statute,
order, rule, regulation, ordinance, or judgment (including, without limitation,
any applicable environmental law, ordinance, or regulation) of any Governmental
Authority, except where such violation could not reasonably be expected to have
a Material Adverse Affect on the Assets. 
As of the date of this Agreement, no investigation or review by any
Governmental Authority is pending or, to the Seller’s knowledge, threatened
involving the Seller, nor has any Governmental Authority indicated an intention
to conduct any such investigation or review. 
The Seller has all permits, licenses, approvals, and authorizations of,
and registrations with and under, all federal, state, local, and foreign laws,
and from all applicable Governmental Authorities, required thereby to carry on
the GMC Program and Healthy Families Program as currently conducted, except
where the failure to have any such permits, licenses, approvals, authorizations,
or registrations could not reasonably be expected to have a Material Adverse
Affect on the Assets.  The Seller is
currently performing, and has previously performed, under the GMC Contract and
the Healthy Families Contract in compliance with the laws, statutes, orders,
rules, regulations, ordinances, and judgments of all federal, state, local, and
foreign governmental and regulatory bodies and authorities.

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          3.4 Approvals
and Consents. Except for such approvals as may be
required by the Governmental Authorities on Schedule 1(b), no permit,
consent, approval, or authorization of, or declaration or notice to, or report
of filing with, any Governmental Authority is required in connection with the
execution, delivery, or performance by the Seller of this Agreement.  

          3.5 Litigation;
Compliance with Laws.   With the exception of those listed on Schedule
3.5, there are no Actions
pending or, to Seller’s knowledge, threatened, against or affecting Seller
having, or which would reasonably be expected to have, a Material Adverse
Effect on the Assets, nor is there is any judgment, decree, injunction, rule,
or order of any Governmental Authority or arbitrator outstanding against Seller
having, or which would reasonably be expected to have, a Material Adverse
Effect on the Assets.  

          3.6 Remittance
Advices.  The Seller has provided to the Buyer
complete and accurate copies of the program invoices, reports, worksheets,
calculation documents, and remittance advices provided to it by DHS, MRMIB,
and/or DMHC (collectively, the “Remittance Advices”) with respect to the Assets
reflecting monthly enrollment figures, capitation fees, and amounts paid to the
Seller by the State of California for each of the months of August 2003 through
August 2004.  Such Remittance Advices are sufficient to
establish for the Seller’s purposes the aggregate monthly premium revenues
received by the Seller under both the GMC Contract and the Healthy Families
Contract for the respective periods indicated. 
For the month ended
August 31, 2004, the Seller’s aggregate monthly premium revenues from the GMC
Contracts and the Healthy Families Contracts were $6,248,388.  The Remittance Advices fairly present the
aggregate revenues of the Seller for the GMC Contract and the Healthy Families
Contract for the respective periods indicated. 
The Seller shall provide to the Buyer on a monthly basis additional
Remittance Advices with respect to the Assets as and when they become available
after the date of this Agreement and before the Closing Date. 

          3.7 Statement
of Revenues and Expenses.   Seller has delivered to Buyer its
unaudited statements of revenue and expenses, and its statements of
underwriting income, for the month of August 2004, and for each quarter from
the quarter ended December 31 2002 through the quarter ended June 30, 2004
(collectively, the “Seller Financial Statements”).  The Seller Financial Statements have been prepared on a
consistent basis throughout the periods presented and are consistent with each
other.  The Seller Financial Statements
fairly and accurately present the revenues and expenses, and the underwriting
income, of the Seller as of the dates, and for the periods, indicated therein,
subject to normal year-end adjustments and the absence of footnotes.  Seller maintains a system of internal
accounting controls sufficient to provide reasonable assurance that
transactions are executed with management’s general or specific authorizations,
and transactions are recorded as necessary to permit preparation of the Seller
Financial Statements.  

          3.8 Good
Title to and Use of Assets.  The Seller has good
and marketable title to the Assets.  The
Assets are being utilized by the Seller in conformity with all applicable
federal, local, and state health care related and imposed rules, regulations,
laws, statutes, and permits applicable to the Assets, except where failure to
so conform would not have a Material Adverse Effect on the Assets.  Seller has not created nor suffered to exist
any pledge of, security interest in, or encumbrance on, any of the Assets or
any current or future revenues resulting from the Assets.

8

          3.9 Individual
and Physician Agreements.  As of the execution of this Agreement, the
Seller has in effect standard physician agreements with licensed physicians in
the GMC Program and the Healthy Families Program, the form of which agreements
have been provided or will be provided to the Buyer as soon as
practicable.  The Seller has not
received or given notice of any default or claimed or purported or alleged
default or state of facts which, with notice or lapse of time or both, would
constitute a default on the part of any party in the performance or payment of
any obligation to be performed or paid by any party under any such
agreement.  

          3.10 IPA/PHO/Medical
Groups and Hospital Services Agreements.  The Seller has provided or will provide to
the Buyer as soon as practicable true and complete copies of all agreements or
arrangements with all individual practice associations (“IPAs”), physician
hospital organizations (“PHOs”), provider service organizations (“PSOs”),
medical groups, or other physician groups or networks or hospitals, healthcare
systems, and other healthcare institutions. 
There is no default or state of facts which, with notice or lapse of
time or both, would constitute a default on the part of the Seller in the
performance of any obligation related to the Assets which is to be performed or
paid by any party under any such agreement. 
The Seller has not received or given notice of any default or claimed or
purported or alleged default or state of facts which, with notice or lapse of
time or both, would constitute a default on the part of any party in the
performance or payment of any obligation related to the Assets to be performed
or paid by any party under any such agreement.

          3.11 Accreditation.  The Seller has delivered or shall deliver to
the Buyer true, correct, and complete copies of: (i) the 2003 CAHPS Survey for
the Assets, and (ii) the 2003 HEDIS data for the Assets.  The Seller shall also provide the Buyer with
the 2004 CAHPS Survey and the 2004 HEDIS data for the Assets when they are
available.     

          3.12 True
and Complete Copies.  The Seller has made available for inspection
by the Buyer true and complete originals or copies of the Assets.

          3.13 No
Vote Required.  No vote or other action of the members of
Seller is required by law, Seller’s articles of incorporation or bylaws or
otherwise that has not been obtained in order for the Seller to consummate the
Asset Purchase and the transactions contemplated hereby and perform its
obligations hereunder.

          3.14 Disclosure.  None of the information and documents
provided to the Buyer during the Buyer’s due diligence investigations prior to
execution of this Agreement is false or misleading in any material respect.

          3.15 Survival of Representations and Warranties.  The
representations and warranties of the Seller contained herein shall survive for
a period of one (1) year following the Closing Date.

9

ARTICLE IV

REPRESENTATIONS
AND WARRANTIES OF BUYER

          The
Buyer represents and warrants to the Seller that, except as specifically noted
in a Schedule hereto, as of the date of execution of this Agreement:

          4.1 Organization,
Standing, and Power.  The Buyer is a corporation duly organized, validly existing, and
in good standing under the laws of  the
State of California, has the requisite power and authority to own and operate
its properties and to carry on its business as now being conducted, except
where the failure to be so organized, existing, and in good standing or to have
such power and authority would not reasonably be expected to have a Material
Adverse Effect on Buyer, and is duly qualified and in good standing to do
business in California.

          4.2 Authority;
No Conflicts.

          (a) Buyer
has all requisite corporate power and authority to enter into this Agreement
and to consummate the transactions contemplated hereby.  The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Buyer. This
Agreement has been duly executed and delivered by Buyer and constitutes a valid
and binding agreement of Buyer, enforceable against it in accordance with its
terms, except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and similar laws relating to or affecting creditors
generally or by general equity principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law) or by an
implied covenant of good faith and fair dealing. 

          (b) The
execution and delivery of this Agreement by Buyer does not or will not, as the
case may be, and the consummation by Buyer of the Asset Purchase and the other
transactions contemplated hereby will not, conflict with, or result in any
Violation pursuant to: (A) any provision of the articles of incorporation or bylaws
of Buyer, or (B) except as would not reasonably be expected to have a Material
Adverse Effect on Buyer, subject to obtaining or making the consents and
filings referred to in paragraph (c) below, any loan or credit agreement, note,
mortgage, bond, indenture, lease, benefit plan or other agreement, obligation,
instrument, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Buyer, or its
properties or assets. 

          (c) No
consent of or filing with any Governmental Authority is required by or with
respect to Buyer in connection with the execution and delivery of this
Agreement by Buyer or the consummation of the Asset Purchase and the other
transactions contemplated hereby, except for those required under or in
relation to, DHS, DMHC, MRMIB, and HSD.

          4.3 Litigation;
Compliance with Laws.   Except as disclosed in the Buyer Disclosure Schedule, there is no suit,
action, investigation, or proceeding pending or, to Buyer’s knowledge,
threatened against, or affecting the Buyer having, or which would reasonably be
expected to have, a Material Adverse Effect on the Buyer, nor is there any
judgment, decree, injunction, rule, or order of any Governmental Authority or
arbitrator outstanding against the Buyer having, or which would reasonably be
expected to have, a Material Adverse Effect on the Buyer.

10

          4.4 No Vote Required.  No
vote or other action of the stockholders of the Buyer is required by law, the
Buyer’s articles of incorporation or bylaws or otherwise in order for the Buyer
to consummate the Asset Purchase and the transactions contemplated hereby.

          4.5 Approvals
and Consents. Except for such approvals as may be required by
DHS, DMHC, MRMIB, and HSD, if and as required by law, no permit, consent, or
filing with any Governmental Authority is required in connection with the
execution, delivery, or performance by the Buyer of this Agreement.  The execution, delivery, and performance by
the Buyer of this Agreement does not conflict with, accelerate any amount owed
under, result in termination of, result in any breach or violation of any other
terms, conditions or provisions of, constitute a default under or result in the
creation of any lien upon, any of the Buyer’s assets under any charter
document, contract, or instrument.

          4.6 Availability
of Funds. The Buyer has cash, or the ability to
obtain cash by means of credit facilities with financially responsible third
parties, in an amount sufficient to enable it to perform all of its obligations
hereunder, including, without limitation, payment of the Purchase Price and
additional payment pursuant to the Earn Out to the Seller.

          4.7 Survival
of Representations and Warranties.  The
representations and warranties of the Buyer contained herein shall survive for
a period of one (1) year following the Closing Date.

ARTICLE V

CONDUCT OF SELLER PENDING CLOSING

          Prior to
the Closing Date hereunder or the earlier termination of this Agreement, except
to the extent that the Buyer shall otherwise consent in writing, the Seller
shall: 

          (a) conduct
its business activities related to the Assets in the ordinary course and
consistent with the past practice of the Seller;

          (b) not
sell, dispose of, or encumber any Assets, or enter into or terminate any
contract, agreement, commitment, or arrangement with respect to any of the
Assets, except in the ordinary course and consistent with the past practice of
the Seller; and  

          (c) preserve
intact the Assets and the goodwill associated therewith, and its relationships
with Enrollees, providers, vendors, and others having material business
relationships with the Assets.

ARTICLE VI

CLOSING
CONDITIONS

          6.1 Conditions
to Each Party’s Obligation to Effect the Asset Purchase.  The
obligation of each Party hereto to complete the Asset Purchase shall be subject
to the fulfillment and satisfaction on or prior to the Closing Date of the
following conditions, except that, to the extent permitted by applicable law,
such conditions may be waived in writing by the joint action of the Parties
hereto: 

11

          (a) No
Injunctions or Restraints; Illegality. No temporary restraining order,
preliminary or permanent injunction, or other order issued by any court of
competent jurisdiction or any other Governmental Authorities, or other legal or
regulatory restraint or prohibition preventing the consummation of the Asset
Purchase, shall be or remain in effect, nor shall there be any action taken, or
any law, statute, rule, regulation, decree, or order been enacted, adopted,
entered, enforced, or deemed applicable to the Asset Purchase, which remains in
effect and which makes the consummation of the Asset Purchase illegal.

          (b) Governmental
Authorizations and Consents. Any required Governmental Authorizations to
transfer the Assets and provide services to Enrollees under the GMC Contract
and the Healthy Families Contract, and for service area expansion into San
Diego County, shall have been obtained. 
The Seller and the Buyer shall have obtained from each Governmental
Authority or other Person all approvals, waivers, consents, and permits,
necessary for consummation of the Asset Purchase and the transactions
contemplated hereby.

          (c) Legal
Proceedings. There shall not be pending any Action by any Governmental
Authority or other Person: (i) challenging or seeking to restrain or prohibit
the consummation of the Asset Purchase; (ii) relating to the Asset Purchase and
seeking to obtain from the Seller, the Buyer, or their Affiliates, any damages
or other relief that would be material to any of the Seller or the Buyer or
their Affiliates; (iii) which would materially and adversely affect the right
of Buyer to own the Assets or to operate the Assets following the Closing; (iv)
seeking to compel the Seller or the Buyer or any of their Affiliates to dispose
of or hold separate any Assets, (v) which is reasonably likely to have a
Material Adverse Effect on the Assets or (vi) which is reasonably likely to
enjoin, restrain, or prohibit any integration of any operations of the Assets
with those of the Buyer.

          6.2 Conditions
to Obligation of the Seller to Effect the Asset Purchase.  The obligation of the Seller to effect the
Asset Purchase and the transactions contemplated under this Agreement shall be
further subject to the satisfaction and fulfillment, at or prior to the
Closing, of each of the following conditions, any of which may be waived in
writing by the Seller:

          (a) Compliance
With Agreements and Covenants.  The
Buyer shall have performed and complied in all material respects with all of
its covenants, obligations, and agreements contained in this Agreement to be
performed and complied with on or prior to the Closing Date.

          (b) Representations
and Warranties. The representations and warranties of the Buyer contained
herein (i) shall be true and correct in all material respects, on and as of the
date of this Agreement, and (ii) shall also be true and correct, on and as of
the Closing Date with the same force and effect as though made on and as of the
Closing Date (except for those representations and warranties limited by
materiality or the existence of a Material Adverse Effect, which shall be true
and correct in all respects). 

          (c) Closing
Certificate.  The Seller shall have
received a certificate of the President or an Executive Vice President of the
Buyer, dated the Closing Date, certifying that the conditions set forth in
Sections 6.2(a) and 6.2(b) have been satisfied; and the Seller shall also have
received a certificate of the Secretary of the Buyer, dated the Closing Date,
certifying as to the Buyer’s Articles, Bylaws, and the resolutions duly adopted
by the Buyer’s Board of Directors regarding the Asset Purchase.

          (d) Payment
of Purchase Price.  The Buyer shall
have delivered immediately available funds in the amount of the Purchase Price
to the Seller in accordance with Section 2.2 hereof.

12

          (e) Other
Closing Documents.  Each other
Transaction Document shall have been executed and delivered by Buyer and be in
full force and effect as of the Closing Date, including the Transition Services
Agreement and the Assignment and Assumption Agreement.

          6.3 Conditions
to Obligation of the Buyer to Effect the Asset Purchase.  The obligations of the Buyer to effect the
Asset Purchase and the transactions contemplated under this Agreement shall be
further subject to the satisfaction and fulfillment, at or prior to the
Closing, of each of the following conditions, any of which may be waived in
writing by the Buyer: 

          (a) Compliance
With Agreements and Covenants.  The
Seller shall have performed and complied in all material respects with all of
covenants, obligations, and agreements contained in this Agreement to be
performed and complied with on or prior to the Closing Date.

          (b) Representations
and Warranties. The representations and warranties of the Seller contained
herein (i) shall be true and correct in all material respects, on and as of the
date of this Agreement, and (ii) shall also be true and correct, on and as of
the Closing Date with the same force and effect as though made on and as of the
Closing Date (except for those representations and warranties limited by
materiality or the existence of a Material Adverse Effect, which shall be true
and correct in all respects). 

          (c) Closing
Certificate.  The Buyer shall have
received a certificate of the President or an Executive Vice President of the
Seller, dated the Closing Date, certifying that the conditions set forth in
Sections 6.3(a) and 6.3(b) have been satisfied; and the Buyer shall also have
received a certificate of the Secretary of the Seller, dated the Closing Date,
certifying as to the Seller’s Articles, Bylaws, and the resolutions duly
adopted by the Seller’s Board of Directors regarding the Asset Purchase.

          (d) Transfer
Documents.  The Buyer shall have
received: (i) assignments of the GMC Contract and the Healthy Families
Contract, (ii) assignments and/or consents to assign the provider agreements in
mutually agreeable form necessary as determined by DHS, DMHC, MRMIB, and HSD,
to transfer the Assets and provide services to Enrollees under the GMC Contract
and the Healthy Families Contract, and for service area expansion into San
Diego County, (iii) executed copies of the Amendments to the Seller’s
agreements with both Sharp HealthCare and Children’s Hospital & Health
Center; and (iv) such other documents and instruments for the transfer of the
Assets to the Buyer as shall be reasonably requested by the Buyer and its
counsel in order to effect and consummate the Asset Purchase and the
transactions contemplated hereby, in each case in form and substance reasonably
satisfactory to the Buyer and its counsel. 

          (e) No
Material Adverse Effect.  No
Material Adverse Effect shall have occurred with respect to the Assets. 

          (f) Other
Closing Documents.  Each other
Transaction Document shall have been executed and delivered by the Seller and
be in full force and effect as of the Closing Date, including the Transition
Services Agreement and the Assignment and Assumption Agreement. 

13

ARTICLE VII

ADDITIONAL
AGREEMENTS

          7.1 All Reasonable Efforts; Agreement to
Cooperate. 
Subject to the terms and conditions herein provided each of the Parties
hereto shall use all Reasonable Commercial Efforts to take, or cause to be
taken, all action and to do, or cause to be done, all things necessary, proper,
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including using its
Reasonable Commercial Efforts  to obtain
all necessary or appropriate waivers, consents, or permits of third parties
required in order to preserve material contractual relationships of the Buyer
and the Seller, to transition the Enrollees to the Buyer, and to lift any
injunction or other legal bar to the Asset Purchase (and, in such case, to
proceed with the Asset Purchase as expeditiously as possible).  Buyer and the Seller shall cooperate and
promptly prepare, file, and diligently pursue any applications, filings, or
approvals with or from DHS, DMHC, MRMIB, and HSD required for transfer of the
Assets, including, without limitation, approval for Buyer’s service area
expansion into San Diego County.

          7.2 Access
to Information.

          (a) Subject
to applicable law, the Seller and its counsel shall use their reasonable best
efforts to ensure that the Buyer and its advisors shall have reasonable access
during normal business hours to the Assets for the purposes of consummating the
Asset Purchase and effectuating the transition services, including, but not
limited to, access to such information as is specified in Exhibit A to the Transition
Services Agreement.  The Seller and its
counsel shall also use their reasonable best efforts to permit the Buyer on
prior notice to contact any key contracting parties under the GMC Contract, the
Healthy Families Contract, or any provider agreements to be transferred and
assigned as part of the Assets.  

          (b) The
Parties hereto acknowledge that Buyer and the Seller have previously executed a
Confidentiality Agreement, dated as of March 9, 2004 (the “Confidentiality
Agreement”), which shall continue in full force and effect in accordance with
its terms except as expressly modified by this Agreement.

          (c) Subject
to compliance with applicable law, from the date hereof until the Closing, each
of the Seller and the Buyer shall confer on a regular and frequent basis with
one or more representatives of the other Party to discuss and report material
operational matters of the Seller and the general status of ongoing operations
and other matters related to the Assets and the Asset Purchase.

          (d) No
information or knowledge obtained in any investigation pursuant to this Section
7.2 shall affect or be deemed to modify any representation or warranty
contained herein or the conditions to the obligations of the Parties to
consummate the transactions contemplated hereby.  Either Party may supplement or amend its disclosure schedule to
reflect information obtained pursuant to this Section 7.2; provided, however,
that, if the disclosure pursuant to such supplement or amendment would
constitute a basis pursuant to Section 6.2(b) or Section 6.3(b), as the case
may be, under which the Seller or the Buyer would have the right to not
consummate the Asset Purchase and the transactions contemplated hereby, then
the Seller or the Buyer, as the case may be, may terminate this Agreement prior
to the Closing. Notwithstanding any other provision hereof, if the Closing
occurs, any such supplement or amendment of a Party’s disclosure schedule will
be effective to cure and correct for all purposes any breach of any
representation, warranty, or covenant which would have existed by reason of a
Party’s not having made such supplement or amendment.

14

          7.
3 Trading Prohibitions.  The Seller and Buyer hereby acknowledge that
as a result of disclosures by the Parties contemplated under this Agreement,
the Parties and their Affiliates may, from time to time, have material,
non-public information concerning the other Parties and other Persons.  Each of the Seller and the Buyer confirms
that it and its Affiliates are aware and it has advised its representatives
that (a) the United States securities laws may prohibit a Person who has
material, non-public information from purchasing or selling securities of any
company to which such information relates, and (b) material non-public
information shall not be communicated to any other Person except as permitted
herein.

          7.4 Public
Statements. 
Except as may be required by applicable law or any listing agreement
with a national securities exchange, the Parties shall consult with each other
prior to issuing any press release or any written public statement with respect
to this Agreement or the transactions contemplated hereby and shall not issue
any such press release or written public statement prior to such consultation.  With respect to any disclosures required by
applicable law or any listing agreement with a national securities exchange,
the Parties agree to use reasonable efforts to consult with one another about
the substance of any such required disclosure.

          7.5 Hiring
of Certain Employees.  In accordance with its own hiring practices and needs, Buyer
agrees to offer and subsequently employ, as Buyer deems necessary in its sole
discretion, certain of the Seller’s employees (the “Hired Employees”), provided
that Buyer shall have no liability for termination, severance benefits,
disability payments, worker’s compensation benefits, or any other payments on
account of or relating to the employment of any Hired Employees with respect to
any period before the Closing Date. 
Prior to Closing, Buyer and its Affiliates will review their operations
and hiring needs and determine the employees of the Seller to whom Buyer and
its Affiliates intend to offer employment, if any.  Buyer shall deliver to the Seller a list of the Hired Employees
on or before the Closing Date.

          7.6 Notification
of Certain Matters.  Each of the Seller and Buyer agrees to give prompt notice to the
other such Party of, and to use Reasonable Commercial Efforts to remedy (a) the
occurrence or failure to occur of any event which occurrence or failure to
occur would reasonably be expected to cause any of the representations or
warranties of the Seller or Buyer, as the case may be, in this Agreement to be
untrue or inaccurate at the Closing, and (b) any failure on the part of the
Seller or Buyer, as the case may be, to comply with or satisfy any covenant,
agreement or condition to be complied with or satisfied thereby hereunder;
provided, however, that the delivery of any notice pursuant to this Section 7.6
shall not limit or otherwise affect the remedies available hereunder to the
Party receiving such notice.

          7.7 Transfer
Taxes.  The
Seller and the Buyer shall cooperate in the preparation, execution, and filing
of all returns, questionnaires, applications, or other documents regarding any
property transfer or gains, sales, use, value added, stock transfer, and stamp
taxes, any transfer, recording, registration, and other fees or any similar
taxes that become payable in connection with the transactions contemplated by
this Agreement that are required or permitted to be filed on or before the
Closing. Each Party shall pay any such taxes or fees imposed on it by any
taxing authority (and any penalties and interest with respect to such taxes and
fees) that become payable in connection with the transactions contemplated by
this Agreement.

          7.8 Post-Closing
Information Accessibility.  Upon prior reasonable notice and at
reasonable times, the Parties shall be allowed access to any records of the
other Party relating to the Seller or the Assets in connection with any Action,
to meet any other legal obligation and for matters relating to accreditations
or regulatory compliance.

15

          7.9 Exclusivity.  The Seller will not, and will use all
Reasonable Commercial Efforts  to cause
its Affiliates not to, solicit, initiate, or encourage the submission of any
proposal or offer from any Person relating to the acquisition any of the Assets,
or participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any Person to do or seek any of the
foregoing.  In addition, as of the date
of this Agreement the Seller shall terminate discussions with any third parties
with respect to the foregoing.  

          7.10 Financial
Statements.  The Seller hereby agrees, upon the request
of Buyer, to cooperate with Buyer, and to cause their respective accountants
and other agents and representatives to cooperate with Buyer, and to use their
best efforts to assist Buyer in its preparation of financial statements for the
Assets for periods prior to the Closing Date and in Buyer’s efforts to obtain
or prepare such other financial information as may be required by Buyer to
fully comply with the requirements of Regulation S-X promulgated by the
Securities and Exchange Commission. 

          7.11 Covenant
Not To Compete.   Except as consented to in writing by the
Buyer, the Seller agrees that it will not, for a period of three years
following the Closing Date, directly or indirectly, alone or as a partner or
joint venturer, engage in, finance, or provide financial assistance with
respect to, any business activity relating to the provision of Medi-Cal HMO
insurance services or Healthy Families HMO insurance services in San Diego
County.  

ARTICLE VIII

TERMINATION

          8.1 Termination
by Mutual Consent.  This Agreement may be terminated and the Asset Purchase may be
abandoned at any time prior to the Closing by the mutual written agreement of
the Parties hereto.

          8.2 Termination
by the Seller and the Buyer.  This Agreement may be terminated and the
Asset Purchase may be abandoned by either the Seller or the Buyer if (a) the
Asset Purchase shall not have been consummated by June 2, 2005 (the
“Termination Date”); provided, that the terminating Party shall not have
breached its obligations under this Agreement in any manner that shall have
proximately contributed to the failure to consummate the Asset Purchase by the
Termination Date; or (b) a United States federal or state court of competent
jurisdiction or United States federal or state governmental, regulatory, or
administrative agency or commission shall have issued an order, decree, or
ruling or taken any other action permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement and such
order, decree, ruling, or other action shall have become final and
non-appealable (provided that the Party seeking to terminate this Agreement
pursuant to clause (b) above shall have used all reasonable efforts to remove
such order, decree, or ruling).

          8.3 Termination
by Buyer. 
This Agreement may be terminated and the Asset Purchase may be abandoned
at any time prior to the Closing by action of the Buyer’s Board if (a) there
has been a breach by the Seller of any material representation, warranty, or
covenant contained in this Agreement which breach has not been cured within 30
days following notice of the breach from Buyer to the Seller, or (b) a Material
Adverse Effect has occurred with respect to 
the Assets.

16

          8.4 Termination
by the Seller. 
This Agreement may be terminated and the Asset Purchase may be abandoned
at any time prior to the Closing by action of the Seller’s Board if there has
been a breach by Buyer of any material representation, warranty, or covenant
contained in this Agreement which breach has not been cured within 30 days
following notice of the breach from the Seller to Buyer.

          8.5 Effect
of Termination and Abandonment.  In the event of termination of this
Agreement and the abandonment of the Asset Purchase pursuant to this Article
VIII, no party hereto (or any of its directors or officers) shall have any
liability or further obligation to any party to this Agreement, except that
nothing herein will relieve any party from liability for any material breach of
this Agreement.

ARTICLE IX

INDEMNIFICATION

          9.1 Indemnification
by the Parties.

          (a) Indemnification by the Seller.  Subject to Section 9.2 below, the Seller
shall indemnify and hold the Buyer and its representatives (the “Buyer
Indemnified Parties”) harmless from and against any and all liabilities,
damages, losses, claims, demands, costs, or expenses (including interest,
penalties, reasonable attorneys’ fees and expenses, court costs and fees of
expert witnesses) (all of the foregoing hereinafter collectively referred to as
the “Claims”) which the Buyer Indemnified Parties shall suffer or incur as a
result of any action by a third party connected with or arising out of:

	
   
	
            (i) the
  Excluded Obligations;

	
   
	
   

	
   
	
            (ii) any
  breach of any representation or warranty of the Seller hereunder or in any
  document delivered by the Seller in connection herewith;  

	
   
	
   

	
   
	
            (iii) any
  breach or default in any covenant made by the Seller hereunder or in any
  document delivered by the Seller in connection herewith; and

	
   
	
   

	
   
	
            (iv) any
  claim by any Person for brokerage or finder’s fees or commissions or similar
  payments based upon any agreement or understanding alleged to have been made
  by any such Person with the Seller or any of its Affiliates in connection
  with the Asset Purchase.

          (b) Indemnification by Buyer.  Buyer shall indemnify and hold harmless the
Seller and its representatives (the “the Seller Indemnified Parties”) from and
against any and all Claims which the Seller Indemnified Parties shall suffer or
incur as a result of any action by a third party connected with or arising out
of:

	
   
	
            (i) the
  Assumed Obligations;

	
   
	
   

	
   
	
            (ii) any
  breach of any representation or warranty of the Buyer hereunder or in any
  document delivered by the Buyer in connection herewith; and 

	
   
	
   

	
   
	
            (iii) any
  breach or default in any covenant made by Buyer hereunder or in any document
  delivered by Buyer in connection herewith.

17

	
   
	
            (iv) any
  claim by any Person for brokerage or finder’s fees or commissions or similar
  payments based upon any agreement or understanding alleged to have been made
  by any such Person with the Buyer or any of its Affiliates in connection with
  the Asset Purchase.

          9.2 Procedure
for Indemnification Claims – Third Party Claims.  

          (a) Promptly
after receipt by a Person entitled to indemnification under Section 9.1 (the
“Indemnitee”) of notice of the commencement of any Action against it, such
Indemnitee will, if a claim is to be made against a party obligated to
indemnify under such Section (the “Indemnitor”), give notice to the Indemnitor
of the commencement of such Action, but the failure to notify the Indemnitor
will not relieve the Indemnitor of any liability that it may have to any
Indemnitee, except to the extent that the Indemnitor demonstrates that the defense
of such Action is materially prejudiced by the Indemnitee’s failure to give
such notice.

          (b) If
any Action is brought against an Indemnitee and it gives notice to the
Indemnitor of the commencement of the Action, the Indemnitor will be entitled
to participate in such Action and, to the extent that it wishes (unless (i) the
Indemnitor is also a party to such Action and the Indemnitee determines in good
faith that joint representation would be inappropriate, or (ii) the Indemnitor
fails to provide reasonable assurance to the Indemnitee of its financial
capacity to defend such Action and provide indemnification with respect to such
Action) to assume the defense of such Action with counsel satisfactory to the
Indemnitee and, after notice from the Indemnitor to the Indemnitee of its
election to assume the defense of such Action, the Indemnitor will not, as long
as it diligently conducts such defense, be liable to the Indemnitee under this
Article X for any fees or other counsel or any other expenses with respect to
the defense of such Action, in each case subsequently incurred by the
Indemnitee in connection with the defense of such Action, other than reasonable
costs of investigation.  If the
Indemnitor assumes the defense of an Action, (i) it will be conclusively
established for purposes of this Agreement that the claims made in that Action
are within the scope of and subject to indemnification; (ii) no compromise
or settlement of such claims may be effected by the Indemnitor without the Indemnitee’s
consent unless (1) there is no finding or admission of any violation of
any Law or order of any Governmental Authority or any violation of the rights
of any Person and no effect on any other claims that may be made against the
Indemnitee, and (2) the sole relief provided is monetary damages that are
paid in full by the Indemnitor; and (iii) the Indemnitor will have no
liability with respect to any compromise or settlement of such claims effected
without its consent.  If notice is given
to the Indemnitee of its election to assume the defense of such Action, the
Indemnitor will be bound by any determination made in such Action or any
compromise or settlement effected by the Indemnitee.  

          (c) Notwithstanding
the foregoing, if an Indemnitee determines in good faith that there is a
reasonable probability that an Action may adversely affect it or its Affiliates
other than as a result of monetary damages for which it would be entitled to
indemnification under this Agreement, the Indemnitee may, by notice to the
Indemnitor, assume the exclusive right to defend, compromise, or settle such
Action, but the Indemnitor will not be bound by any determination of an Action
so defended or any compromise or settlement effected without its consent (which
may not be unreasonably withheld).  

          (d) Indemnitor
hereby consents to the non-exclusive jurisdiction of any court in which an
Action is brought against any Indemnified Person for purposes of any claim that
as Indemnified Person may have under this Agreement with respect to such Action
or the matters alleged therein, and agree that process may be served on them
with respect to such a claim anywhere in the world.

18

          9.3 Waiver.  The waiver of any condition based on the
accuracy of any representation or warranty, or on the performance of or
compliance with any covenant or obligation, will not affect the right to
indemnification, reimbursement, or other remedy based on such representation,
warranty, covenant, or obligation.

          9.4 Limitations
on Liability. 
Notwithstanding the foregoing, the Seller shall not be obligated to
indemnify the Buyer under Section 9.1(a)(ii) or 9.1(a)(iii) and the Buyer shall
not be obligated to indemnify the Seller under Section 9.1(b)(ii) or
9.1(b)(iii) unless and until the aggregate amount of the applicable
Indemnitee’s Claims exceed $100,000.

ARTICLE X

DISPUTE RESOLUTION

          10.1 Dispute Resolution.  The Parties to this Agreement desire to
settle any and all disputes or concerns that arise out of this Agreement, or
the breach thereof, in as expeditious and non-confrontational manner as
possible.   Before invoking litigation,
the Parties shall first participate in mediation of any dispute arising under
this Agreement (whether in contract, tort or both). Therefore, the parties
agree to the following dispute resolution procedures:

          (a) Step
I - Informal Discussion.  Should any
dispute arise, the complaining Party shall first attempt to arrange for an
informal discussion with the other to come to a mutually agreeable
resolution.  

          (b) Step
II - Mediation.  Should the dispute
fail to be resolved by Step I, the Parties shall submit the dispute to
mediation in accordance with the Commercial Mediation Rules of the American
Arbitration Association (“AAA”).  Each
Party shall pay one-half of the mediation fees charged by the AAA.

          If
a Party has participated in the mediation and is dissatisfied with an outcome,
that Party may litigate the dispute and shall not be compelled to proceed with
arbitration by the other Party.  In any
litigation by which one Party either seeks to enforce its rights under this
Agreement or seeks a declaration of any rights or obligations under this
Agreement, the prevailing Party shall be awarded reasonable attorney fees, together
with any costs and expenses, to resolve the dispute and to enforce the final
judgment.

ARTICLE XI

GENERAL PROVISIONS

          11.1 Notices.  All notices and other communications
hereunder shall be in writing and shall be deemed provided to a Party hereto if
delivered personally, mailed by registered or certified mail (return receipt
requested) or sent via facsimile to such Party at the address therefore as
follows (or at such other address for such Party as shall be specified by
similar such notice):

	
   
	
  If to the
  Seller to:

	
   
	
   

	
   
	
  Sharp Health
  Plan 

  4305 University Ave. Ste. 200

  San Diego, CA 92105

19

	
   
	
  Attention:  Chief Executive Officer

  Fax:  (619) 228-2444

	
   
	
   

	
   
	
  with copies
  to:

	
   
	
   

	
   
	
  Sharp
  HealthCare

  8695 Spectrum Center Blvd.

  San Diego, CA  92123

  Attention:  Legal Affairs

  Fax:  (858) 499-4065

	
   
	
   

	
   
	
  Children’s
  Hospital and Health Center

  3020 Children’s Way, MC 5052

  San Diego, CA  92123

  Attention:  General Counsel

  Fax:  (858) 966-8531

	
   
	
   

	
   
	
  If to the
  Buyer, to:

	
   
	
   

	
   
	
  Molina
  Healthcare of California 

  One Golden Shore Drive

  Long Beach, CA  90802

  Attention: John C. Molina, Esq.

  Fax: (562) 495-7770

	
   
	
   

	
   
	
  with a copy
  to:

	
   
	
   

	
   
	
  Molina
  Healthcare, Inc.

  2277 Fair Oaks Blvd., Suite 440

  Sacramento, CA  95825

  Attn:  Mark L. Andrews, Esq.

  Fax:  (916) 646 4572

          11.2 Interpretation.  The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. 

          11.3 Rules
of Construction.  The Parties hereto agree that they have been
represented by counsel during the negotiation, preparation, and execution of
this Agreement, and therefore waive the application of any law, regulation,
holding, or rule of construction providing that ambiguities in an agreement or
other document will be construed against the Party drafting such agreement or
document.  

          11.4 Entire
Agreement. 
This Agreement, the Transition Services Agreement, and the Assignment
and Assumption Agreement (including the documents and instruments referred to herein
and the Exhibits and Schedules attached hereto) constitute the entire
agreement, and supersedes all other prior agreements and understandings (both
written and oral), among the Parties, or any of them, with respect to the
subject matter hereof.  This Agreement
shall not be assigned by operation of law or otherwise.  

          11.5 Governing
Law.  THIS
AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS EXECUTED AND TO BE PERFORMED
WHOLLY WITHIN SUCH STATE.

20

          11.6 Waiver
of Jury Trial. 
EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY
IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF THE
PARTIES HERETO IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT
HEREOF.

          11.7 Counterparts.  This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original but all of
which shall constitute one and the same agreement. 

          11.8 Severability.  Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction.  If any provision of this Agreement is deemed
unenforceable, such provision shall be deemed to be reformed and modified to
the minimum amount required to make such provision enforceable.

          11.9 Equitable
Relief. 
The Parties hereto agree that the remedies at law for any breach of the
terms of this Agreement may be inadequate. 
Accordingly, the Parties hereto consent and agree that an injunction may
be issued to restrain any breach or alleged breach of such provisions.  The Parties hereto agree that terms of this
Agreement shall be enforceable by a decree of specific performance.  Any such remedies shall be cumulative and
not exclusive and shall be in addition to any other remedies which the Parties
may have at law or in equity.

          11.10 Expenses.  Buyer and the Seller shall each pay their
own costs and expenses relating to this Agreement, the negotiations leading up
to this Agreement, and the performance of this Agreement.

          11.11 Assignment.  Prior to the Closing, neither Party may
assign or delegate any rights or obligations set forth in this Agreement
without the prior written consent of the other Party; provided, that Buyer shall
have the right to assign its rights and delegate its obligations, without
relieving itself of any obligations hereunder, to one or more Affiliates which
shall take title to the Assets.  This
Agreement shall be binding upon the Parties hereto and their respective
successors and permitted assigns.

          11.12 Prorations.  In the event that the Seller is required,
under the terms of any GMC Contract or Healthy Families Contract, to make any
payment prior to the Closing Date that applies, in whole or in part, to a
period following the Closing Date, the Parties shall prorate such expense as of
the Closing Date and Buyer shall reimburse the Seller at  the same time that it delivers the Purchase
Price for the portion of such expense relating to the period on or after the
Closing Date. In the event that, as of the Closing Date, the Seller has been
paid premiums or other payments under GMC Contract or Healthy Families Contract
that relate in whole or part to the period following the Closing Date, the
Parties shall prorate such payments as of the Closing Date and the Seller shall
pay Buyer at the same time that Buyer pays Seller the Purchase Price for the
portion of any such payments relating to the period on or after the Closing
Date.  The prorations shall be based on
the number of days elapsed during the relevant period. 

21

          11.13 No
Third Party Beneficiaries.  This Agreement is for the sole benefit of
the Buyer and the Seller and is not for the benefit of any third party.  Nothing contained in this Agreement is
intended to relieve or discharge the obligations or liability of any third
party to the Seller or Buyer, nor shall this Agreement give any third party any
right of subrogation or action over or against the Seller or Buyer.

          11.14 Further
Assurances and Records.  From time to time after the Closing Date, Buyer or the Seller, at
the request of the other and without further consideration, shall sign and
deliver or cause to be signed and delivered such other instruments of transfer
and take such other actions as reasonably may be requested by the other in
order further to effectuate the consummation of the Asset Purchase.  In addition, Buyer and the Seller
acknowledge that there may be occasions in the future when a Party or
Affiliates of a Party will need access to certain documentation of the other in
order to prepare financial statements, tax returns or other reports to third
parties, or in order to facilitate audits or legal proceedings, comply with
laws or Governmental Authorizations or otherwise conduct its affairs in a
proper manner.  Accordingly, Buyer and
the Seller shall exercise their respective best efforts to achieve the purposes
of this Section.

          11.15 Effective
Date. This Agreement shall become effective
immediately upon signing.

          11.16 Amendments and Waivers.  No amendment of any provision of
this Agreement shall be valid unless the same shall be in writing signed by the
Buyer and the Seller.  No waiver by any
Party of any provision of this Agreement or any default, misrepresentation, or
breach of warranty or covenant hereunder, whether intentional or not, shall be
valid unless the same shall be in writing and signed by the Party making such
waiver nor shall such waiver be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.

SIGNATURES
ON NEXT PAGE

22

          IN
WITNESS WHEREOF, the Buyer and the Seller have caused
this Agreement to be signed as of the date that appears in its first paragraph.

	
   
	
  SHARP HEALTH PLAN 

	
   
	
   

	
   
	
   

	
   
	
  /s/ Kathlyn Mead

	
   
	
  By: Kathlyn
  Mead

	
   
	
  Title:  President and Chief Executive Officer

	
   
	
   

	
   
	
  MOLINA HEALTHCARE OF CALIFORNIA

	
   
	
   

	
   
	
   

	
   
	
  /s/ Joann Zarza-Garrido

	
   
	
  By:  Joann Zarza-Garrido

	
   
	
  Title:  President and Chief Executive Officer

23

SCHEDULE
1(A)

LIST
OF ASSETS

          (a) All
of the Seller’s rights under both the GMC Contract and the Healthy Families
Contract. 

          (b) Seller’s
current GMC Program and Healthy Families Program Enrollee lists and mailing
lists; medical, claim, and utilization management records of GMC Program and
Healthy Families Program Enrollees who receive services from the Seller to the
extent reasonably necessary to transfer the care of such Enrollees to the Buyer
at Closing; and the books, records, information, and documents of the Seller
reasonably related and necessary to the administration of the GMC Contracts and
the Healthy Families Contracts after the Closing. 

          (c) The
provider contracts necessary, as determined by the California Department of Health
Services, the California Department of Managed Health Care, the California
Managed Risk Medical Insurance Board, and Healthy San Diego, to provide
services to GMC Program and Healthy Families Program Enrollees after the
Closing (if MHC has not entered into its own agreements with these providers on
or before the Closing Date).  

24

SCHEDULE
1(b)

GOVERNMENTAL
AUTHORITIES

          The California Department of Health Services (“DHS”)

          The California Department of Managed Health Care (“DMHC”)

          The California Managed Risk Medical Insurance Board (“MRMIB”)

          Healthy San Diego (“HSD”)

          California Office of the Attorney General (“AG”)

25

EXHIBIT A

ASSIGNMENT
AND ASSUMPTION AGREEMENT

 

[intentionally omitted]

26

EXHIBIT
B

TRANSITION SERVICES AGREEMENT

 

[intentionally omitted]

27<PAGE>

                                   EXHIBIT 4.1

<PAGE>
<TABLE>
<CAPTION>
<S>                                                                           <C>

NUMBER                                                                                                                  COMMON STOCK
       ------------

                                              FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
                                        INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

THIS CERTIFIES THAT

IS THE OWNER OF

                          FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE OF

FIRST FEDERAL BANC OF THE SOUTHWEST, INC. (the "Corporation"), a Delaware corporation. The shares represented by this certificate
are transferable only on the stock transfer books of the Corporation by the holder of record hereof, or by his duly authorized
attorney or legal representative, upon the surrender of this certificate properly endorsed. THIS SECURITY IS NOT A DEPOSIT OR
ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED.

        IN WITNESS WHEREOF, the Corporation has caused this certificate to be executed by its duly authorized officers and has
caused its corporate seal to be hereunto affixed.

DATED
       ------------------------------------

--------------------------------------------                       -------------------------------------------------------------
Ronald D. Rogers, Secretary                                        Aubrey L. Dunn, Jr., President and Chief Executive Officer

                                                               [Seal]
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
<S>                                                                           <C>

                                              FIRST FEDERAL BANC OF THE SOUTHWEST, INC.

        The shares represented by this certificate are issued subject to all the provisions of the certificate of incorporation and
bylaws of FIRST FEDERAL BANC OF THE SOUTHWEST, INC.. (the "Corporation") as from time to time amended (copies of which are on file
at the principal executive offices of the Corporation).

        The Corporation will furnish to any stockholder upon request and without charge a full statement of the powers,
designations, preferences and relative participating, optional or other special rights of each authorized class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences and/or rights, to the extent that the same have been
fixed, and of the authority of the board of directors to designate the same with respect to other series. Such request may be made
to the Corporation or to its transfer agent and registrar.

        The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or regulations:

                                  UNIF GIFT MIN ACT           Custodian          Under Uniform Gift to Minors Act -
                                                    ---------           --------                                    ----------------
                                                      (Cust)             (Minor)                                    (State)

                                  UNIF GIFT MIN ACT           Custodian          Under Uniform Gift to Minors Act -
                                                    ---------           --------                                    ----------------
                                                      (Cust)             (Minor)                                    (State)

TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN  - as joint tenants with right of
          survivorship and not as tenants
          in common

                               Additional abbreviations may also be used though not in the above list.
</TABLE>

<PAGE>

For Value Received, _____ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

------------------------------
------------------------------

________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________ Shares
of Common Stock represented by the within certificate, and do hereby irrevocably
constitute and appoint

_______________________________________________________________________ Attorney
to transfer the said shares on the books of the within named Corporation with
full power of substitution in the premises.

Dated _______________________________

                              __________________________________________________
                      NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
                              WITH THE NAME AS WRITTEN UPON THE FACE OF THE
                              CERTIFICATE IN EVERY PARTICULAR, WITHOUT
                              ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER

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