Document:

Exhibit
10.79

 

FORBEARANCE
AGREEMENT

 

THIS FORBEARANCE AGREEMENT (the “Forbearance
Agreement”) is made and dated as of the 25th day of January, 2002,
by and between PROSPECT MEDICAL GROUP, INC., a California professional
corporation (“PMG”), and PROSPECT MEDICAL HOLDINGS, INC., a Delaware
corporation (“PMH”).

 

RECITALS

 

WHEREAS, as of September 30, 2001, PMH is indebted to
PMG in the amount of Ten Million  Eighty-Six
Thousand Six Hundred Nine Dollars ($10,086,609) (the “Debt”), which PMG has the
right to declare due and payable at any time;

 

WHEREAS, the California Department of Managed Care
adopted new regulations which require PMG to maintain a certain minimum
“tangible net equity”;

 

WHEREAS, “tangible net equity” is defined in Title 28,
Section 1300.76(e) of the California Code of Regulations to mean net equity
reduced by the value assigned to intangible assets including, but not limited
to, obligations of affiliates which are not fully secured;

 

WHEREAS, immediately prior to September 30, 2001, the
Debt was unsecured and therefore could not be included in the calculation of
tangible net equity;

 

WHEREAS, various health maintenance organizations
(“HMO’s”) with which PMG has contracted to provide medical services will
terminate such contracts unless PMG can satisfy the tangible net equity
requirements by a combination of declaring due and payable and collecting the
Debt and/or obtaining adequate collateral to secure the Debt;

 

WHEREAS, the HMO’s will compel PMG to declare the Debt
due and payable if PMG cannot otherwise satisfy the tangible net equity
requirements;

 

WHEREAS, it is in the best interests of PMH and PMG
that PMG satisfy the tangible net equity requirements in order to avoid the
termination of PMG’s HMO contracts;

 

WHEREAS, PMG has devised a plan to comply with the
tangible net equity requirements by paying off a portion of the Debt and
adequately collateralizing a portion of the Debt;

 

WHEREAS, simultaneously with the execution of this
Forbearance Agreement, PMH is withdrawing $1,750,000 from a money market
account and applying these funds to the repayment of a portion of the Debt;

 

WHEREAS, certain irrevocable letters of credit in face
amounts aggregating $500,000 have been issued by PMH under its line of credit
from Comerica Bank, on behalf of PMG, in favor of certain health plans and
HMO’s to secure PMG’s performance under its contracts with such health plans
and HMO’s, and such letters of credit may be included in the tangible net
equity calculation;

 

 

WHEREAS, pursuant to the terms of a letter agreement
between PMH and PMG executed simultaneously herewith, PMH has agreed to
dedicate $2,500,000 remaining under its $4,000,000 line of credit with Comerica
Bank solely for the purpose of: (i) paying the claims of PMG, or (ii) reducing
the Debt upon the demand of PMG;

 

WHEREAS, PMH is willing to make arrangements to obtain
the continuing guaranty (the “Continuing Guaranty”) of Foothill City Center
Ltd., a California Limited Partnership (“FCC”) as secured by a deed of trust
(“Deed of Trust”) on certain real property of FCC in order to collateralize a
$4,250,000 portion of the Debt, representing the remainder of the Debt required
to be collateralized under the tangible net equity regulations;

 

WHEREAS, FCC is willing to execute the Continuing
Guaranty and the Deed of Trust in favor of PMG in consideration of PMG’s and
PMH’s covenants contained in a Collateral Substitution Agreement executed
simultaneously herewith;

 

WHEREAS, PMH has requested PMG to forbear collection
of the Debt pursuant to the terms and conditions set forth herein in
consideration for arranging for the execution and delivery by FCC of the
Continuing Guaranty and the Deed of Trust;

 

WHEREAS, in consideration of the execution and
delivery by FCC of the Continuing Guaranty and the Deed of Trust, and subject
to the terms and conditions set forth herein, PMG is willing to forbear
declaring due and payable and collecting the Debt.

 

NOW, THEREFORE, in consideration of the mutual
covenants and agreements set forth in the foregoing recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:

AGREEMENT

 

1.                                       Inducement
Representations by PMH.  In addition
to the other representations and warranties contained in this Forbearance
Agreement and the other terms and provisions hereof, to induce PMG to grant the
forbearance requested by PMH and to enter into this Forbearance Agreement, PMH
hereby represents and warrants, as of the Forbearance Effective Date (as such
term is defined in Paragraph 3 below) and through and including the date of
this Forbearance Agreement, that the Management Services Agreement dated as of
June 4, 1996 (the “Management Agreement”), between PMH’s wholly-owned
subsidiary, Prospect Medical Systems, Inc., a Delaware corporation (“PMS”), and
PMG, as subsequently amended or modified, is in full force and effect, and that
PMH is in compliance with the terms thereof.

 

2.                                       Agreement
to Forbear.  Subject to the terms
and conditions set forth herein, as of the Forbearance Effective Date and
indefinitely thereafter, PMG hereby agrees to forbear in the exercise of any
rights or remedies in respect of the Debt. 
The agreement of PMG to forbear in the exercise of its rights and
remedies in respect of the Debt shall continue indefinitely for so long as the
following conditions continue to be satisfied: 
(i) PMG continues to maintain compliance with the tangible net equity
requirements of the California Department of Managed

 

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Care (after taking into
consideration the Continuing Guaranty as secured by the Deed of Trust); (ii)
the Management Agreement remains in effect and no event of default shall exist
thereunder; and (iii) the continuing accuracy of PMH’s representations under
this Forbearance Agreement.  PMH agrees
that upon the failure of any term or condition of this Agreement to be
satisfied, PMG may, in its sole discretion and without further notice to PMH,
exercise any and all remedies available to it in order to collect the Debt.

 

3.                                       Conditions.  This Forbearance Agreement shall be deemed
effective as of September 30, 2001 (the “Forbearance Agreement Effective Date”)
provided that each of the following conditions shall have been satisfied or waived:

 

(a)                                  PMH
shall have delivered or shall have had delivered to PMG, in form and substance
satisfactory to PMG and its counsel, each of the following:

 

(i)                                     A
duly executed copy of this Forbearance Agreement;

 

(ii)                                  A
duly executed acknowledgment of this Forbearance Agreement from FCC;

 

(iii)                               All acts and conditions
(including, without limitation, the obtaining of any necessary regulatory
approvals and the making of any required filings, recordings or registrations)
required to be done and performed and to have happened precedent to the
execution, delivery and performance of this Forbearance Agreement and to
constitute the same legal, valid and binding obligations, enforceable in
accordance with their respective terms, shall have been done and performed and shall
have happened in due and strict compliance with all applicable laws; and

 

(iv)                              All
documentation, including, without limitation, documentation for corporate and
legal proceedings in connection with the transactions contemplated by this
Forbearance Agreement, shall be satisfactory in form and substance to PMG and
its counsel.

 

4.                                       Representations
and Warranties of PMH.  In addition
to the other representations and warranties of PMH contained in this
Forbearance Agreement, as an inducement to PMG to enter into this Forbearance
Agreement, PMH represents and warrants to PMG that:

 

(a)                                  No
Change.  Except as previously
disclosed to PMG, since September 30, 2001, there has been no material adverse
change in the business, operations, assets or financial or other condition of
PMH or PMH and its subsidiaries taken as a whole.

 

(b)                                 Corporate
Power; Authorization; Enforceable Obligations.  PMH has the corporate power and authority and the legal right to
execute and deliver this Forbearance Agreement and has taken all necessary
corporate action to authorize the execution, delivery and performance
thereof.  This Forbearance Agreement is
duly executed and delivered on behalf of PMH and constitutes the legal, valid
and binding obligation of PMH enforceable against PMH in accordance with its
terms, subject to the effect of applicable bankruptcy and other similar laws

 

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affecting the rights of
creditors generally and the effect of equitable principles whether applied in
an action at law or a suit in equity.

 

(c)                                  No
Legal Bar.  The execution, delivery
and performance of this Forbearance Agreement will not violate any requirement
of law or any contractual obligation of PMH or any of its subsidiaries the
violation of which could have a material adverse effect on the business or
financial conditions of PMH or result in the creation of any lien on any assets
of PMH or any of its subsidiaries.

 

5.                                       Miscellaneous
Provisions.

 

(a)                                  Cumulative
Rights; Waivers Limited.  The
rights, powers and remedies of PMG hereunder are cumulative and in addition to
all rights, power and remedies provided under any and all agreements between
PMG and PMH, at law, in equity or otherwise. 
The forbearance granted by this Forbearance Agreement is specific and
limited to its terms.  Neither such
forbearance nor any delay or failure by PMG to exercise any right, power or
remedy shall constitute a waiver of any right, power or privilege by PMG (other
than as specifically provided in this Forbearance Agreement), and no single or
partial exercise by PMG of any right, power or remedy shall preclude other or
further exercise thereof or any exercise of any other rights, powers or
remedies.

 

(b)                                 Entire
Agreement.  This Forbearance
Agreement embodies the entire agreement and understanding between the parties
hereto and supersede all prior agreements and understandings relating to the
subject matter hereof and thereof.

 

(c)                                  Governing
Law.  This Forbearance Agreement
shall be governed by and construed in accordance with the internal laws of the
State of California without giving effect to its choice of law rules.

 

(d)                                 Counterparts.  This Forbearance Agreement may be executed
in any number of counterparts, all of which together shall constitute one
agreement.

 

(e)                                  Severability.  The illegality or unenforceability of any
provision of this Forbearance Agreement or any instrument or agreement required
hereunder or thereunder shall not in any way affect or impair the legality or
enforceability of the remaining provisions hereof or thereof.

 

[CONTINUES ON NEXT PAGE]

 

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

 

	
   

  	
  PROSPECT MEDICAL HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ R. Stewart Kahn

  	
   

  
	
   

  	
  Its:

  	
  Executive Vice President

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PROSPECT MEDICAL GROUP, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jacob Y. Terner

  	
   

  
	
   

  	
  Its:

  	
  Sole Shareholder

  	
   

  
						

 

5

 

ACKNOWLEDGMENT
OF GUARANTOR

 

 

The undersigned Guarantor hereby acknowledges and
consents to the terms of, and consents to the execution, delivery and
performance, of the foregoing Forbearance Agreement, and further acknowledges
that Guarantor’s agreement to execute the Guaranty and the Deed of Trust is a
material inducement to PMG to enter into the foregoing Forbearance Agreement.

 

BY
AFFIXING ITS SIGNATURE HERETO, GUARANTOR REPRESENTS THAT IT HAS HAD AN
OPPORTUNITY TO CONSULT WITH ITS OWN LEGAL COUNSEL REGARDING THE TERMS OF THIS
FORBEARANCE AGREEMENT, THE CONTINUING GUARANTY AND THE DEED OF TRUST AND IS NOT
RELYING ON MILLER & HOLGUIN, LEGAL COUNSEL TO PROSPECT MEDICAL GROUP, INC.,
FOR LEGAL ADVICE IN CONNECTION WITH THE EXECUTION, DELIVERY AND PERFORMANCE  OF SUCH AGREEMENTS.

 

	
   

  	
  FOOTHILL CITY CENTER, LTD.,

  
	
   

  	
  A CALIFORNIA LIMITED PARTNERSHIP

  
	
   

  	
   

  
	
   

  	
  By:

  	
  DUTTON & ASSOCIATES

  
	
   

  	
   

  	
  General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Ted W. Dutton

  	
   

  
	
   

  	
   

  	
   

  	
  Ted W. Dutton

  
	
   

  	
   

  	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jacob Y. Terner

  	
   

  
	
   

  	
   

  	
  Jacob Y. Terner

  
	
   

  	
   

  	
  General Partner

  
						

 

6Exhibit 10.80

 

AMENDMENT TO FORBEARANCE AGREEMENT

 

 

This Amendment
to Forbearance Agreement (“Amendment”) is effective as of the 30th  day of May, 2003 (the “Effective Date”) by
and between PROSPECT MEDICAL GROUP, INC., a California professional corporation
(“PMG”), and PROSPECT MEDICAL HOLDINGS, INC., a Delaware corporation (“PMH”).

 

a.                                       PMH
and PMG previously entered into a Forbearance Agreement dated as of January 25,
2002 (the “Forbearance Agreement”).

 

b.                                      Pursuant
to the terms of the Forbearance Agreement, PMH was obligated to arrange for the
execution of a continuing guaranty backed by collateral to secure payment of a
portion of the Debt as defined and described therein (the “Security”), in
exchange for PMG’s agreement to forbear on the collection of said Debt.

 

c.                                       The
parties desire to allow for a substitution of guarantors and collateral which
serves as the Security required by the Forbearance Agreement.

 

FOR GOOD AND
VALUABLE CONSIDERATION, the receipt of which is hereby acknowledged, PMH and
PMG agree to and hereby amend the Forbearance Agreement in the following
respects.

 

1.                                      References
to Continuing Guaranty and Deed of Trust. 
References to the  Continuing
Guaranty and the Deed of Trust in the Forbearance Agreement shall be modified
to mean references to that Continuing Guaranty and that Pledge Agreement
executed by Jacob Y. Terner, M.D. effective May 30, 2003.

 

2.                                      References
to Portion of Debt Being Collateralized. 
References to the  portion of the
Debt being collateralized shall be modified to mean that dollar amount which is
required to provide PMG with a positive net tangible equity (the “TNE
Guaranteed Amount”).  The TNE Guaranteed
Amount is derived by deducting the then net worth of PMG from the Debt. For the
fiscal year ended September 30, 2001, the Debt was $10,086,609 and the TNE
Guaranteed Amount was $4,250,000.  For
the fiscal year ended September 30, 2002, the TNE Guaranteed Amount had been
reduced to $3,616,400.

 

3.                                      Forbearance
Agreement Continued.  Except as
modified by this Amendment, the Forbearance Agreement is ratified and shall
continue in all respects.

 

 

                                                IN
WITNESS WHEREOF, PMH and PMG have executed this Amendment as of the date set
forth above.

 

	
  “PMH”

  	
  “PMG”

  
	
   

  	
   

  
	
  PROSPECT MEDICAL HOLDINGS

  	
  PROSPECT MEDICAL GROUP

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ R.
  Stewart Kahn

  	
   

  	
  /s/ Jacob Y.
  Terner

  	
   

  
	
   

  	
  R. Stewart
  Kahn

  	
  Jacob Y.
  Terner, M.D.

  
	
   

  	
  Executive
  Vice President

  	
  Chief
  Executive Officer

  
					

 

2

 

ACKNOWLEDGMENT OF GUARANTOR

 

 

The
undersigned Guarantor hereby acknowledges and consents to the terms of, and
consents to the execution, delivery and performance, of the Forbearance
Agreement, as amended by the Amendment, and further acknowledges that
Guarantor’s agreement to execute the Continuing Guaranty and the Pledge Agreement
is a material inducement to PMG to enter into the foregoing Amendment.

 

BY AFFIXING HIS SIGNATURE HERETO, GUARANTOR
REPRESENTS THAT HE HAS HAD AN OPPORTUNITY TO CONSULT WITH HIS OWN LEGAL COUNSEL
REGARDING THE TERMS OF THIS FORBEARANCE AGREEMENT, AS AMENDED, THE CONTINUING
GUARANTY AND THE PLEDGE AGREEMENT AND IS NOT RELYING ON MILLER & HOLGUIN,
LEGAL COUNSEL TO PROSPECT MEDICAL GROUP, INC., FOR LEGAL ADVICE IN CONNECTION
WITH THE EXECUTION, DELIVERY AND PERFORMANCE OF SUCH AGREEMENTS.

 

 

	
   

  	
  /s/ Jacob Y.
  Terner

  	
   

  
	
   

  	
  Jacob Y.
  Terner, M.D.

  

 

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