Document:

Exhibit
10.55

 

AMENDMENT
NUMBER ONE TO SECURITY AGREEMENT

 

This AMENDMENT NUMBER ONE TO SECURITY
AGREEMENT (this “Amendment”), dated as of July 6, 1999, is entered
into by and between Sierra Primary Care Medical Group, Inc., a California
professional medical corporation (“Physician  Group”), and Sierra
Medical Management, Inc., a Delaware corporation (“Manager”), with
reference to the following facts:

 

A.            Physician Group and Manager have previously
entered into that certain Security Agreement (“Physician Group”), dated as of
September 25,  1997 (as
amended from time to time, the “Agreement”);

 

B.            Physician Group and Manager desire to amend
the Agreement in accordance with the terms and conditions hereof.

 

NOW, THEREFORE, the parties hereto hereby
agree as follows:

 

1.             Defined Terms.  All initially capitalized terms used but not
defined herein shall have the meanings assigned to such terms in the Agreement.

 

2.             Amendments to Section 1.

 

(a)           Section 1 of the Agreement is hereby
amended to add the following definition:

 

“ ‘Deposit
Account’ means any demand, time, savings, passbook or like account now or
hereafter maintained by or for the benefit of Physician Group with a bank,
savings & loan association, a credit union or like organization, and all
funds and amounts therein, whether or not restricted or designated for a
particular purpose.”

 

(b)           The definition of “Collateral” set
forth in Section 1 of the Agreement is hereby amended in its entirety as
follows:

 

“ ‘Collateral’
means any and all of the Accounts, Deposit Accounts, and Physicians Group’s
Books, in each case whether now existing or hereafter acquired or created, and
any proceeds or products of any of the foregoing, or any portion thereof, and
any and all Accounts, money, or other tangible or intangible property,
resulting from the sale or disposition of the Accounts or Deposit Accounts, or
any portion thereof or interest therein and the

 

1

 

substitutions, replacements, additions,
accessions, products and Proceeds thereof.”

 

3.             Reaffirmation of the Agreement.  The Agreement as amended hereby and the
Management Agreement shall continue to be in full force and effect.

 

IN WITNESS WHEREOF, the parties hereto have
executed and delivered this Amendment as of the date first hereinabove written.

 

	
   

  	
  SIERRA MEDICAL MANAGEMENT,

  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ R.
  Stewart Kahn

  	
   

  
	
   

  	
  Name:

  	
   

  	
  R. STEWART
  KAHN

  	
   

  
	
   

  	
  Title:

  	
   

  	
  Executive
  Vice Pres.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SIERRA PRIMARY CARE MEDICAL

  GROUP, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ R.
  Stewart Kahn

  	
   

  
	
   

  	
  Name:

  	
   

  	
  R. STEWART
  KAHN

  	
   

  
	
   

  	
  Title:

  	
   

  	
  Asst. Vice
  Pres.

  	
   

  
								

 

2Exhibit
10.57

 

AMENDED AND
RESTATED MANAGEMENT SERVICES AGREEMENT

 

THIS
AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT (“Agreement”) is made and
entered into as of September 15, 1998, and deemed to have been effective as of
October 31, 1997, by and between SIERRA MEDICAL MANAGEMENT, INC., a Delaware
corporation (“Manager”), and PEGASUS MEDICAL GROUP, INC., a California
professional corporation (“GROUP”).

 

RECITALS

 

A.                                   GROUP is a California professional medical
corporation duly organized under the laws of the State of California and
operated as a medical group, which enters into agreements with organizations
such as health care service plans (HMOs), preferred provider organizations
(PPOs), exclusive provider organizations (EPOs), and other purchasers of medical
services (hereinafter collectively referred to as “Plans”) for the arrangement
of the provision of health care services (the “Practice”) to subscribers or
enrollees of said Plans (“Members”); and

 

B.                                     Manager has special expertise and experience
in the operation, management and marketing aspects of medical groups of the
type operated or intended to be operated by GROUP.  Manager has made a significant investment in the development of a
system of operations, management and marketing necessary for management of the
functions desired by GROUP to be undertaken by Manager; and

 

C.                                     GROUP desires to devote all of its time to
arranging for the delivery of health care services to Plan subscribers or
enrollees, and in connection therewith desires to obtain the professional
assistance of Manager in managing the business aspects of the Practice; and

 

D.                                    Manager has provided GROUP with the necessary
support to manage the business aspects of the Practice, including but not
limited to clerical and billing services, claims pursuit and collection, cash
flow management, marketing and general administrative services (collectively,
“Management Services”), to enable GROUP to concentrate on the development of
the professional aspects of the Practice pursuant to a Management Services
Agreement made and entered into as of October 31, 1997, by and between Manager
and GROUP (the “Original Management Services Agreement”); and

 

E.                                      Manager and GROUP desire to enter into this
Agreement to incorporate within the terms of one agreement all of the
amendments previously made and to be made as of the date of execution hereof to
the Original Management Services Agreement; and

 

F.                                      Pursuant to this Agreement Manager will
continue to provide Management Services to GROUP.

 

 

NOW, THEREFORE, in
consideration of the mutual covenants and conditions hereinafter set forth and
in exchange for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:

 

 

AGREEMENT

 

1.                                      PREMISES. 
Pursuant to the Master Lease specified below, Manager intends to provide
GROUP with adequate administrative office space at the addresses described
therein (the “Premises”) and Group shall retain all of its remaining facilities
for the operation of the Practice with leasehold improvements, auxiliary
services and utilities in order that GROUP may effectively perform its
functions and duties.

 

1.1.                              Manager intends to become the lessee under
certain leases for the Premises (hereinafter collectively referred to as the
“Master Lease”) copies of which are attached hereto as Exhibit “A” and
incorporated herein by this reference. 
GROUP hereby acknowledges that the Premises described in the Master
Lease are suitable for the administrative office of the Practice.  Based and contingent upon GROUP’s promise to
timely pay all amounts due under this Agreement, Manager hereby intends to
sublease the leased Premises to GROUP upon the following terms and conditions:

 

1.1.1.                     This sublease between Manager and GROUP of
the Premises shall be subject to all of the terms and conditions of the Master
Lease.  In the event of the termination
of Manager’s interest as lessee under the Master Lease for any reason, then the
sublease created hereby shall simultaneously terminate unless GROUP is willing
to assume the obligations under the Master Lease and the Lessor consents
thereto.

 

1.1.2.                     All of the terms and conditions contained in
the Master Lease are incorporated herein as terms and conditions of the
sublease (with each reference therein to “Lessor” and “Lessee,” to be deemed to
refer to Manager and GROUP, respectively) and, along with the provisions of
this Section  and Exhibit “A,” shall be
the complete terms and conditions of the sublease created hereby.

 

1.1.3.                     Notwithstanding the foregoing, as between
Manager and GROUP, Manager shall remain responsible for meeting the financial
obligations of “Lessee” under the Master Lease, and GROUP shall have no
monetary obligation in that regard.  In
addition, as between Manager and GROUP, Manager shall retain all rights to
exercise any options to purchase the Premises, or other similar rights of
ownership or possession, which may be granted under the Master Lease, and GROUP
shall have no rights in that regard.

 

1.1.4.                     In the event this Agreement is terminated
according to its terms, this sublease shall also terminate automatically.

 

1.1.5.                     If the Master Lease contains an option to
renew the term thereof, Manager shall notify GROUP, at least thirty (30) days
prior to the expiration of the time for exercising such option, of Manager’s
intention to renew or not to renew such term. 
If Manager determines not to renew such term, Manager shall, at GROUP’s
option and upon the consent of the Landlord in accordance with the terms of the
Master Lease, assign the Master Lease to GROUP, including Manager’s right to
renew the term thereof.

 

 

2.                                      PROVISION OF FURNITURE,
FURNISHINGS AND EQUIPMENT.  Manager hereby intends to provide to GROUP,
and GROUP hereby intends to lease from Manager, all the furniture, fixtures and
equipment (the “FF&E”) listed on Exhibit “B” attached hereto and
incorporated herein by this reference, which FF&E GROUP agrees are suitable
and sufficient for GROUP’s use in the operation of GROUP’s medical practice at
the Premises and are generally in good repair. 
The use by GROUP of said FF&E shall be subject to the following
conditions:

 

2.1.                              Title to all of the FF&E shall remain in
Manager at all times, and upon the termination of this Management Services
Agreement, GROUP shall immediately surrender the FF&E to Manager in as good
condition as of the date hereof, normal wear and tear excepted.  Alternatively, GROUP, in its sole
discretion, shall have the option to purchase any or all of the FF&E upon
termination hereof.  GROUP shall
exercise such option, if at all, by giving Manager written notice of same (the
“Notice”) within twenty (20) days of the effective date of termination
hereof.  Upon exercise of such option,
Manager shall convey to GROUP within thirty (30) days of the effective date of
termination hereof, all of the FF&E identified in the Notice, together with
(i) any manufacturer’s warranties that Manager has received in connection with
such FF&E and (ii) a bill of sale or such other instrument of conveyance as
is reasonably necessary to accomplish said purchase; and GROUP shall
simultaneously convey to Manager the purchase price for said FF&E.  The purchase price shall be paid all in
cash, and shall equal the fair market value of the FF&E.

 

2.2.                              Manager shall be responsible for all repairs
and maintenance of the FF&E other than damage caused by negligence or
willful misuse by GROUP; provided, however, GROUP shall employ reasonable
efforts to prevent damage to and excessive wear of the FF&E, and shall
promptly notify Manager of any needed repairs thereto.

 

2.3.                              Manager shall be responsible for all property
taxes and other assessments relating to or arising out of ownership or use of
the FF&E that accrue on and after the date hereof.

 

2.4.                              Manager shall provide and maintain, at its
expense, such additional or replacement FF&E as the Practice reasonably
requires from time to time, as determined by Manager in its sole discretion, in
consultation with GROUP.  Such
additional or replacement FF&E shall be subject to all of the terms of
Section  above.

 

2.5.                              GROUP may provide additional equipment at the
Practice (“GROUP Equipment”) at its sole cost and expense.  GROUP shall be responsible for all repairs,
maintenance and replacement of, as well as all property taxes and other
assessments relating to or arising out of ownership or use of, such additional
equipment, unless GROUP requests that Manager provide such repairs, maintenance
and replacement upon such terms and conditions as the parties may agree
including, without limitation, an increase in the Management Fee (as defined in
Section 9 below).  Title to said GROUP
Equipment shall remain in GROUP’s name at all times.

 

 

2.6.                              All revenues of the GROUP derived directly or
indirectly from any and all FF&E or GROUP Equipment located at or used in
connection with the Practice, shall be included in “Gross Revenues” as defined
in Exhibit “D.”

 

3.                                      MANAGER RESPONSIBILITIES.

 

3.1.                              During the term of this Agreement, GROUP
appoints and engages Manager to serve as its exclusive manager and
administrator of all non-physician functions and services relating to the
operation of the Practice, and Manager agrees to furnish to GROUP those
Management Services set forth below. 
Notwithstanding such appointment and engagement, GROUP will have
exclusive authority and control over the professional aspects of the Practice
to the extent the same constitute or directly affect the practice of medicine,
including all diagnosis, treatment and ethical determinations with respect to
patients which are required by applicable law to be decided by a physician.

 

3.1.1.                     General Administrative
Services.  Manager shall provide general business
management, administration and supervision for the business operations of
GROUP, which shall include secretarial and other office personnel support services,
staff support for GROUP’S board of directors and committee meetings,
administrative record keeping, and other similar administrative services
required in the day-to-day operation of GROUP.

 

3.1.2.                     Accounting and Financial
Management Services.  Manager shall provide the following
accounting and financial management services:

 

3.1.2.1.            Manager shall have exclusive decision-making
authority with respect to the establishment and preparation of annual budgets
for the Practice, which budgets shall reflect in reasonable detail anticipated
revenues and expenses;

 

3.1.2.2.            Manager shall, in consultation with GROUP,
establish bank accounts in the name of GROUP (“Accounts”) for the deposit of
all sums received by GROUP for services provided to Members.  GROUP agrees that Manager shall have the
authority to endorse all checks made payable to GROUP and deposit checks and
funds received by GROUP in Accounts. 
Manager shall further have the authority to make transfers of funds to
Accounts and further, Manager shall have the authority to sign checks and stop
payment on any checks drawn on Accounts;

 

3.1.2.3.            Manager agrees to reconcile checks written
with bank statements on a monthly basis;

 

3.1.2.4.            Manager agrees to make recommendations
regarding check signature approvals and banking procedures of GROUP;

 

3.1.2.5.            Manager agrees to prepare balance sheets and
income statements on a monthly basis during the term of this Agreement.  Such financial statements shall not be

 

 

audited statements.  Manager agrees to cooperate with any annual
audit GROUP obtains at its sole cost and expense by an independent public
accountant selected by GROUP;

 

3.1.2.6.            Manager shall receive and deposit on a timely
basis capitation and other payments received by GROUP;

 

3.1.2.7.            Manager shall calculate primary care
capitation and specialty, ancillary and other payable claims based on the
records provided by the Plans and shall prepare checks to pay such amounts due
and shall mail said payments to the respective providers;

 

3.1.2.8.            Manager shall monitor Plan subscribers or
enrollees exceeding stop loss deductibles and communicate with Plans orally or
in writing to seek reimbursement on behalf of GROUP;

 

3.1.2.9.            Manager shall bill other payors for
coordination of benefits and other third party liability payments according to
the terms of the Plan/GROUP Agreements;

 

3.1.2.10.      Manager shall administer capitation and other distributions from Plans
including auditing and monitoring of risk pools, negotiating settlement of
GROUP’s share of such pools and establishment and maintenance of incurred but
not reported (“IBNR”) reserves for GROUP;

 

3.1.2.11.      Manager shall monitor any other revenue receipt programs Plans may
have, including but not limited to pre-existing pregnancy recovery, and seek
reimbursement from said Plans; and

 

3.1.2.12.      Manager shall assist GROUP in establishing and administering a
physician incentive system and a system to establish and adjust reserves for
medical expenses.

 

3.1.3.                     Office Service; Billing. 
Manager shall provide bookkeeping and accounting services, including,
without limitation, maintenance, custody and supervision of GROUP’s business
records, papers and documents, ledgers, journals and reports, and the
preparation, distribution and recording of all bills and statements for
professional services rendered by GROUP, as well as all reports and forms
required by applicable third party payors. 
GROUP shall at all times have the ultimate responsibility for setting
all fees for professional services provided on a fee for service basis to
patients of the Practice, as well as negotiating with each managed care
contract Payor.  All billings for
services rendered to patients by the Practice shall be made under GROUP’s name
and provider number(s), and Manager shall act as GROUP’s agent in the
preparation, rendering and collection of such billings.  GROUP hereby appoints Manager for the term
hereof as its true and lawful agent for the following purposes:

 

3.1.3.1.            to bill patients in GROUP’s name and on its
behalf;

 

 

3.1.3.2.            to collect accounts receivable generated by
such billings in GROUP’s name and on GROUP’s behalf;

 

3.1.3.3.            to submit, process and collect all claims for
payment to, and receive on behalf of GROUP payments from, the patients, Plans,
Medicare, Medicaid, and all other third-party payors;

 

3.1.3.4.            to take possession of, endorse and deposit in
the name and on behalf of GROUP to one or more Accounts designated by GROUP any
notes, checks, money orders, insurance payments, and any other instruments
received as payment of accounts receivable; and

 

3.1.3.5.            to collect in GROUP’s name and on its behalf
all collections of Gross Revenues (as defined in Exhibit “D” hereto).

 

3.1.4.                     Claim Settlement;
Exculpation.  GROUP acknowledges and agrees that Manager
shall have discretion to compromise, settle, write off or determine not to
appeal a denial of any claim for payment for any particular professional
service rendered at the Practice. 
Further, GROUP agrees to hold harmless Manager and its officers,
directors, agents, contractors, representatives and employees, from and against
any and all liability, loss, damages, claims, causes of action, and expenses
associated therewith (including, without limitation, attorneys’ fees) caused or
asserted to have been caused, directly or indirectly, by or as a result of any
acts, errors or omissions hereunder of Manager or any of its officers,
directors, agents, contractors, representatives and employees, in performing
Manager’s billing or collection duties hereunder.

 

3.1.5.                     Financial Reports. 
Manager shall furnish to GROUP monthly and annual financial reports
reflecting the GROUP’s financial status, provided that Manager shall have no
obligations with respect to any shareholder’s of GROUP personal finances or any
tax returns of the GROUP or any shareholder of GROUP.

 

3.1.6.                     Provider Contract
Administration.  During the term of this Agreement, Manager
shall provide the following provider contract administration services to GROUP:

 

3.1.6.1.            Identify and solicit participation of health
care providers identified by the GROUP as necessary for GROUP operations;

 

3.1.6.2.            Review and make recommendations regarding the
business terms of agreements between GROUP and health care providers who will
provide or are providing services to GROUP (“Participating Providers”);

 

3.1.6.3.            Make recommendations regarding compensation
to Participating Providers;

 

 

3.1.6.4.            Make recommendations for the development, in
conjunction with GROUP, of guidelines for the selection, hiring or firing of
Participating Providers;

 

3.1.6.5.            Make recommendations regarding the definition
of primary, specialty and ancillary services;

 

3.1.6.6.            Establish and exercise exclusive
decision-making authority over the establishment of GROUP policies and
procedures, including without limitation, patient acceptance policies and
procedures, except with respect to the professional aspects of the Practice to
the extent the same constitute or directly affect the practice of medicine
which are required by applicable law to be decided by a physician;

 

3.1.6.7.            Instruct all Participating Providers and
their office staff regarding established GROUP policies and procedures at least
annually during the term of this Agreement; and

 

3.1.6.8.            Coordinate the preparation, negotiation and
renewal of GROUP Participating Provider Agreements.

 

3.1.7.                     Administer Member
Eligibility Process.  Manager shall provide the following services
regarding administration of the member eligibility process:

 

3.1.7.1               Maintain and update a current eligibility
list to Plan subscribers and enrollees under all Plan agreements;

 

3.1.7.2               Verify eligibility on claims and referrals
based on the most current information provided by Plans; and

 

3.1.7.3               Administer system for retroactive eligibility
determination and assist GROUP in identifying outstanding accounts receivable
from ineligible patients.

 

3.1.8.                     Utilization
Management/Quality Assurance.  Manager agrees to provide the following
services regarding utilization management and quality assurance.

 

3.1.8.1.            Manager shall implement systems, programs and
procedures necessary for GROUP and Participating Providers to perform
utilization and quality management;

 

3.1.8.2               Manager shall recommend procedures for prior
authorization of elective, urgent and emergent out-patient ambulatory surgery
and hospital procedures;

 

3.1.8.3               Manager shall assist GROUP with prospective,
concurrent and retrospective review of medical procedures in accordance with
GROUP policies and Plan requirements;

 

 

3.1.8.4               Manager shall provide data regarding the use
of outpatient and inpatient services by provider to GROUP;

 

3.1.8.5               Manager shall provide data regarding the use
of noncontracting providers;

 

3.1.8.6               Manager shall provide secretarial support,
logs, and minutes to the Medical Director and the Quality and Utilization
Management Committee of GROUP;

 

3.1.8.7               Manager shall assist Medical Director and the
Quality and Utilization Management Committee in responding to Plan Member
grievances based on the instructions of the Medical Director;

 

3.1.8.8               Manager shall provide staff assistance to
GROUP in the credentialing process GROUP is required to conduct to assure that
providers have current licenses and medical staff privileges.

 

3.1.9.                     Supplies. 
Manager shall order and purchase all supplies required by GROUP in connection
with the operation of the administrative office of the Practice, including
furnishing to GROUP all necessary forms, supplies, postage and duplication
services, provided that all supplies acquired and services provided shall be
reasonably necessary in connection with the day-to-day operations of the
Practice.

 

3.1.10.               Filing of Reports. 
Manager shall prepare and file all forms, reports, and returns required
by law in connection with unemployment insurance, workers’ compensation
insurance, disability benefits, social security, and other similar laws
(excluding income or franchise tax forms of GROUP or any of GROUP’s
shareholders, employees or contractors or providing any other tax-related
services on their behalf) now in effect or hereafter imposed.

 

3.1.11.               Marketing and Public
Relations Services.   Manager will assist GROUP in GROUP’s
marketing, public relations and advertising of the health care services
provided by GROUP.  Manager shall
provide and be principally responsible for marketing and advertising services
for GROUP and prepare signs, brochures, letterhead, advertisements, and other
marketing materials for GROUP.  Manager
may, at its discretion, contract with third parties to assist it in the provision
of GROUP marketing and public relations services, should Manager deem such
action advisable.  Manager shall produce
and distribute such written descriptive materials concerning GROUP’s
professional services, subject to the prior approval of GROUP, as may be
necessary or appropriate to the conduct of the Practice.  In providing such marketing services,
Manager is acting solely in its capacity as administrator for the GROUP.  At no time shall Manager hold itself out as
providing, or actually provide, medical services on behalf of GROUP.  All such marketing services shall be
conducted in accordance with the laws, rules, regulations and guidelines of all
applicable governmental and quasi-governmental agencies, including but not
limited to the Medical Board of California. 
Manager shall be the owner and holder of all right, title and interest
in and to any such marketing and advertising materials.

 

 

3.1.12.               Professional and Other
Services .  Manager shall be responsible for arranging
and paying for payroll, legal and accounting services related to GROUP
operations in the ordinary course of business, including the cost of enforcing
any managed care plan, physician or subcontractor contracts, but excluding the
cost of malpractice suits.

 

3.2.                              Managed Care Contracting.

 

3.2.1.                     Manager shall act as GROUP’s exclusive agent
in seeking and negotiating managed care contracts (“Contracts”).  Manager is hereby authorized to negotiate,
in its sole discretion, all terms of the Contracts.  GROUP hereby appoints Manager for the term hereof as its true and
lawful agent to perform all actions contemplated by this Section including,
without limitation, the evaluation, negotiation, administration, renewal and
execution of Contracts on GROUP’s behalf and binding GROUP to performance
thereunder, provided that the Plan with whom each Contract is entered agrees to
pay an amount for GROUP’s professional services thereunder equal to or greater
than the minimum rate that GROUP shall specify to Manager.  GROUP shall complete and execute the Power
of Agency attached hereto as Exhibit “C.”

 

3.2.2.                     Manager shall also be responsible for general
monitoring of GROUP compliance with the requirements, terms and conditions of
Contracts.

 

3.2.3.                     Manager shall notify and provide copies to
GROUP of each Contract (together with all related materials received from the
applicable Payor) that Manager executes as GROUP’s agent.  GROUP shall comply with all terms of each
Contract including, without limitation, the terms of all documents or
instruments incorporated therein by reference and all documents or instruments
related thereto that Manager executes or agrees to on GROUP’s behalf, as well
as all applicable law.  GROUP further
agrees that an essential term of this Agreement is GROUP’s undertaking to provide
cost-effective medical care consistent with accepted medical practices
prevailing in the GROUP’s service area.

 

3.2.4.                     Nothing in this Agreement shall prevent
Manager from entering into similar agreements with Plans on behalf of other
independent practice associations, medical groups, physicians, health care
professionals or entities comprised of physician or health care professionals.

 

3.2.5.                     GROUP acknowledges and agrees that (i)
Manager shall in no way be responsible for payment of any sums payable to GROUP
under any such Contract (whether by any Payor or otherwise), and (ii) Manager
in no way guarantees or insures the payment to GROUP of any such amounts.

 

3.3.                              Personnel. 
Manager shall employ or contract with and provide all necessary
non-physician personnel, including quality assurance, utilization review,
claims processing, secretarial and clerical personnel as are reasonably
necessary for the conduct of the Practice (collectively, “Manager
Personnel”).  Manager shall, in its sole
and absolute discretion, determine the types and numbers of personnel and the
number of hours and schedules of said personnel it determines are necessary or
appropriate to provide the administrative and management services to be
provided pursuant to this Agreement. 
Manager shall provide

 

 

such personnel at its sole
cost and expense and such personnel may, at the sole and absolute discretion of
Manager, be employees or independent contractors of Manager.  Manager shall, in its sole and absolute
discretion, have the right, but shall not be required, to engage as Manager
Personnel any or all of those individuals who were employees of GROUP
immediately prior to the effective date hereof (“GROUP’s Former
Employees”).  Manager shall have sole
control over promotion and employee disciplinary and termination matters with
respect to Manager Personnel (including, without limitation, GROUP’s Former
Employees), and shall not be responsible for any accrued vacation, paid time
off or other benefits to such individuals that have accrued prior to the date
that Manager engages them as its employees.

 

3.4.                              All professional medical and health care
services provided to subscribers or enrollees shall be the ultimate
responsibility of the GROUP’s Participating Providers.  GROUP shall use its best efforts to cause
Participating Providers to cooperate with Manager in the implementation of the
protocols, programs, policies, and procedures developed for GROUP by Manager.

 

3.5.                              Manager is hereby expressly authorized by
GROUP to perform all services required of Manager pursuant to the terms of this
Agreement in the manner Manager deems reasonable and appropriate to meet the
day-to-day requirements of GROUP.  To
the extent required or desirable to enable Manager to perform such services,
GROUP hereby appoints Manager for the term hereof as its true and lawful
agent.  GROUP acknowledges and agrees
that Manager may subcontract with other persons or entities, including entities
related to Manager by ownership or control, to perform any part or all of the
services required of Manager hereunder.

 

3.6.                              Subject to applicable securities, health care
and other laws or regulations, Manager agrees to use its best efforts to cause
the holding company of Manager to issue, or otherwise make available, stock or
exchange-listed stock options or warrants of such holding company for use as
consideration for the acquisition by GROUP of medical groups, IPAs or other
forms of physician practices or, as consideration for any other appropriate
use.

 

3.7.                              Upon the request of GROUP, Manager shall
provide or arrange for the provision of additional services, beyond those
described herein.  Any additional
services provided by Manager are subject to Manager’s capacity and availability
to provide the services so requested. 
Should Manager provide such additional services, GROUP agrees to pay
Manager for such services at its then current rates as a supplemental payment
to the Management Fee described herein.

 

3.8.                              Notwithstanding any other provision contained
herein, Manager shall not be liable to GROUP and shall not be deemed to be in
default hereunder for the failure to perform or provide any of the services,
personnel or other obligations to be performed or provided by Manager pursuant
to this Agreement if such failure is a result of collective bargaining, a labor
dispute, act(s) of God, or any other event which is beyond the reasonable
control of Manager or which was not reasonably foreseeable by Manager.

 

 

4.                                      RESPONSIBILITIES OF GROUP.

 

4.1.                              GROUP covenants and agrees that, at all times
during the term of this Agreement and any extension thereof, it shall conduct
all corporate activities required by its Articles of Incorporation and Bylaws,
including but not limited to election of a Board of Directors, election of
Officers, and appointment of committee members including but not limited to the
Quality and Utilization Management Committee. 
In addition, GROUP agrees to appoint a Medical Director.  GROUP shall be solely responsible for
payment of any and all compensation, payroll taxes, fringe benefits, disability
insurance, workers’ compensation insurance and any other benefits of all such
individuals.

 

4.2.                              GROUP shall not enter into any agreements
with Participating Providers unless such Participating Providers have: (i)
current unrestricted licenses to practice their respective professions in the
State of California and (ii) current unrestricted Federal Drug Enforcement
Agency (“DEA”) numbers.  In addition,
where GROUP contracts with individual physicians, such physicians shall have medical
staff membership at the hospitals required by the Plans and where GROUP
contracts with licensed clinics and medical groups, at least one primary care
physician practicing at each clinic or medical group shall have medical staff
membership at the hospitals required by the Plans.  GROUP further agrees to establish procedures to ensure that
Participating Providers meet these requirements on an ongoing basis.  Manager shall reasonably cooperate with and
assist GROUP to meet its obligations under this Section ; provided however,
that GROUP acknowledges and agrees that it shall retain ultimate responsibility
for meeting such obligations.

 

4.3.                              GROUP acknowledges and agrees that it is
solely responsible for making all required reports to the Medical Board of
California under Section 805 of the California Business and Professions Code
and the National Practitioner Data Bank.

 

4.4.                              GROUP shall, at its sole cost and expense,
procure and maintain at all times during the term of this Agreement
comprehensive general and professional liability insurance covering all
activities of GROUP directly or indirectly relating to GROUP, each policy in a
minimum amount of $1,000,000.00 per occurrence and $3,000,000.00 in the
aggregate.  The aforedescribed
comprehensive general and professional liability insurance shall be issued by a
company or companies authorized to do business in California with a financial
rating of at least A:12 or better in “Best’s Key Rating Guide” or its
equivalent.  In the event GROUP procures
a “claims made” policy as distinguished from an “occurrence” policy, GROUP
shall procure and maintain at its sole cost and expense, prior to termination
of such insurance, “tail” coverage to continue and extend coverage complying
with this Agreement after the end of the “claims made” policy.  Upon reasonable request from Manager, GROUP
shall cause to be issued to Manager proper certificates of insurance,
evidencing that the foregoing provisions of this Agreement have been complied
with, and said certificates shall provide that prior to any cancellation or change
in the underlying insurance during the policy period, the insurance carrier
shall first give thirty (30) calendar days written notice to Manager.

 

4.5.                              Subject to the terms and conditions of
Sections 3.1.6.3 and 3.1.6.4 herein, GROUP shall, at its sole cost and expense,
including, but not limited to, the payment of all salaries, benefits, medical
malpractice insurance, employ or contract with such physicians as shall be
reasonably necessary for the conduct of the Practice.

 

 

4.6.                              GROUP shall ensure that Participating
Providers procure and maintain professional liability insurance with minimum
coverage amounts of $1,000,000.00 per occurrence and $3,000,000.00 in the
aggregate.  GROUP shall ensure that any
Participating Provider who procures insurance required hereunder on a “claims
made” rather than an “occurrences” form will obtain either extended reporting
insurance coverage (“tail coverage”) with liability limits equal to those most
recently in effect prior to the day of termination of such Participating
Provider’s contract with GROUP, or will enter into such other arrangements as
shall reasonably assure the maintenance of coverage for such Provider, GROUP,
and Manager against the risk of loss in respect of professional services
rendered by such provider while this Agreement was in effect and for a period
of not less than seven (7) years after the date of termination of this
Agreement.

 

4.7.                              GROUP acknowledges and agrees that it shall
reasonably assist and cooperate with Manager to meet all of Manager’s
obligations under this Agreement, including approval of agreements and
provision of information.  GROUP
acknowledges and agrees that Manager shall have no liability for GROUP’s
failure to pay any and all of GROUP’s debts and expenses.

 

5.                                      TERM; TERMINATION.

 

5.1.                              Term.  The
term of this Agreement (the “Term”) shall commence on the date hereof and shall
expire on the thirtieth (30th) annual anniversary hereof unless earlier
terminated as provided below.  The term
of this Agreement shall be automatically extended for additional terms of ten
(10) years each, unless either party delivers to the other party, not less then
twelve (12) months nor earlier than fifteen (15) months prior to the expiration
of the preceding term, written notice of such party’s intention not to extend
the term of this Agreement.

 

5.2.                              Termination for Cause.

 

5.2.1.                     Manager may terminate this Agreement for
cause at any time during the Term immediately upon written notice (except as
otherwise provided below).  For purposes
of this Section .1 “cause” shall include, without limitation, the following:

 

5.2.1.1.            If GROUP fails to materially perform any
obligation required hereunder, and such default shall continue for sixty (60)
calendar days after written notice from Manager specifying the nature and
extent of failure to materially perform such obligation, this Agreement shall
terminate automatically and immediately upon the expiration of said sixty (60)
calendar day period; provided, however, that if the obligation which GROUP
fails to perform is other than the failure to make payment of money, and
greater than sixty (60) calendar days are required to perform said obligation,
then such party shall not be in default of this Agreement and the Agreement
shall not terminate as provided hereinabove if such party commences performance
within said sixty day period and diligently pursues said obligation to
completion.

 

5.2.1.2.            In the event the performance by either party
hereto of any term, covenant, condition or provision of this Agreement should be
determined by a state or federal court

 

 

or governmental agency or
court of law to be in violation of any statute, ordinance, or be otherwise
deemed illegal (“Jeopardy Event”), then the parties shall use their best
efforts to meet forthwith and attempt to negotiate an amendment to this
Agreement to remove or negate the effect of the Jeopardy Event.  In the event the parties are unable to
negotiate such an amendment within thirty (30) days following written notice by
either party of the Jeopardy Event, then Manager may terminate this Agreement
immediately upon written notice.

 

5.2.2.                     GROUP may terminate this Agreement for cause
at any time during the Term immediately upon written notice (except as
otherwise provided below).  For purposes
of this Section .2 “cause” shall include, without limitation, the following:

 

5.2.2.1.            If Manager fails to materially perform any
obligation required hereunder which failure amounts to gross negligence, fraud
or an illegal act on the part of Manager, and such default shall continue for
sixty (60) calendar days after written notice from GROUP specifying the nature
and extent of failure to materially perform such obligation, this Agreement
shall terminate automatically and immediately upon the expiration of said sixty
(60) calendar day period; provided, however, that if the obligation which
Manager fails to perform is other than the failure to make payment of money,
and greater than sixty (60) calendar days are required to perform said
obligation, then such party shall not be in default of this Agreement and the
Agreement shall not terminate as provided hereinabove if such party commences
performance within said sixty day period and diligently pursues said obligation
to completion.

 

5.2.3.                     Either party may terminate this Agreement for
cause at any time during the Term immediately upon written notice.  For purposes of this Section .3 “cause”
shall include, without limitation, the following:

 

5.2.3.1.            If either party shall apply for or consent to
the appointment of a receiver, trustee or liquidator in bankruptcy, make a
general assignment for the benefit of creditors, file a petition or answer
seeking reorganization or arrangement with creditors, or take advantage of any
bankruptcy, insolvency, reorganization, moratorium or other law for the benefit
of creditors or if any order, judgment, or decree shall be entered by any court
of competent jurisdiction on the application of a creditor or otherwise
adjudicating either party bankrupt or approving a petition seeking
reorganization of either party or appointment of a receiver, trustee or
liquidator of either party of all or a substantial part of its assets, and such
order, judgment or decree shall continue stayed and in effect for sixty (60)
calendar days after its entry, termination shall be effective automatically and
immediately upon the occurrence of the foregoing.

 

5.3.                              Jeopardy.  In
the event the performance by either party hereto of any term, covenant,
condition or provision of this Agreement should be determined by a state or federal
court or governmental agency to be in violation of any statute or ordinance, or
be otherwise deemed illegal (“Jeopardy Event”), then the parties shall use
their best efforts to meet forthwith and attempt to negotiate an amendment to
this Agreement to remove or negate the effect of the Jeopardy Event.  In the event the parties are unable to
negotiate such an amendment within thirty (30) days following written notice by
either

 

 

party of the Jeopardy Event,
then either party may terminate this Agreement immediately upon written notice.

 

6.                                      RIGHTS OF MANAGER UPON
TERMINATION.

 

6.1.                              In the event of the termination of this
Agreement for any reason, including without limitation the breach of this
Agreement by either party, Manager shall be entitled to recover (out of the
Accounts (as defined in Section 3.1.2.2 hereof) or otherwise) from GROUP all
fees, and any and all advances and other charges owed to Manager that had
accrued but were unpaid as of the date of termination.

 

6.2.                              In the event of termination of this Agreement
for any reason, Manager shall remain entitled to its Management Fee with
respect to all Gross Revenues (as defined in Exhibit “D” hereto) that have
accrued on or before the effective date of termination, which shall be payable,
without limitation, out of Net Revenues attributable thereto whether received
before, on or after the effective date of termination.  Further, GROUP shall remain obligated to
reimburse Manager for any and all other unpaid Management Fees that have
accrued hereunder as of the date of termination.

 

7.                                      REPRESENTATIONS AND
WARRANTIES OF GROUP.  The following representations and warranties
of GROUP are made to Manager for the purpose of inducing Manager to enter into
this Agreement.  GROUP represents and
warrants as follows:

 

7.1.                              GROUP is a corporation duly organized,
validly existing and in good standing under the laws of the State of California
and has all necessary corporate powers to own its properties and to operate
pursuant to its corporate purposes.

 

7.2.                              GROUP’s Board of Directors has all requisite
power to execute, deliver and perform this Agreement.  Neither the execution and delivery of this Agreement, nor the
consummation and performance of the transactions contemplated in this
Agreement, shall constitute a default or an event that would constitute a
default under, or violation or breach of, GROUP’s Articles of Incorporation,
Bylaws or any license, lease, franchise, mortgage, instrument, or other
agreement to which GROUP may be bound.

 

7.3.                              GROUP has furnished Manager full and complete
copies of all contracts and agreements affecting GROUP including, but not
limited to, all contracts to which GROUP is a party.

 

7.4.                              GROUP and any and all physicians providing
services to the Plans have each complied with, and are not in violation of,
applicable federal, state or local statutes, laws and regulations including,
but not limited to, statutes, laws and regulations regarding the practice of
medicine and surgery in California, participation in the Medicaid and Medicare
programs or the operation of GROUP and all applicable standards of practice
relating to the provision of professional services hereunder.

 

7.5.                              GROUP and any and all Participating Providers
providing services for the GROUP have each obtained and currently maintain all
necessary licenses, permits, contracts, and approvals required

 

 

by federal, state or local
statutes and regulations for the proper conduct of the business of the GROUP as
it is now being conducted and have been approved by the Board of Directors or
its properly designated committee, as documented by written committee minutes.

 

7.6.                              There is no action, suit, proceeding,
investigation or litigation outstanding, pending or, to the best of GROUP’s
knowledge, threatened, affecting GROUP other than routine patient collection
matters and professional liability cases adequately covered by insurance.

 

7.7.                              GROUP represents and warrants that each GROUP
Participating Provider is as of the date hereof, and shall at all times during
the term hereof be and remain:

 

7.7.1.                     duly licensed to practice medicine within the
State of California and in possession of a federal DEA number, all without
limitation, restriction or condition whatsoever;

 

7.7.2.                     entitled to receive Medicare and Medicaid
reimbursement without limitation, restriction or condition whatsoever;

 

7.7.3.                     in compliance with the insurance requirements
set forth in Section 4.6 hereof.

 

7.8.                              GROUP represents and warrants that it and
each GROUP Participating Provider shall (i) comply with all applicable
governmental laws, regulations, ordinances, and directives and (ii) perform his
or her work and functions at all times in strict accordance with currently
approved methods and practices in his or her field.

 

8.                                      REPRESENTATIONS AND
WARRANTIES OF MANAGER.  The following representations and warranties
of Manager are made to GROUP for the purpose of inducing GROUP to enter into
this Agreement.  Manager represents and
warrants as follows:

 

8.1.                              Manager is a corporation duly organized,
validly existing and in good standing under the laws of the State of California
and has all necessary corporate powers to own its properties and to operate
pursuant to its corporate purposes.

 

8.2.                              Manager has all requisite power to execute,
deliver and perform this Agreement.  Neither
the execution and delivery of this Agreement, nor the consummation and
performance of the transactions contemplated in this Agreement, shall
constitute a default, or an event that would constitute a default under, or
violation or breach of, Manager’s Certificate of Incorporation, Bylaws or any
license, lease, franchise, mortgage, instrument, or other agreement to which
Manager may be bound.

 

8.3.                              There is no action, suit, proceeding,
investigation or litigation outstanding, pending or, to the best of Manager’s
knowledge, threatened, affecting Manager.

 

 

9.                                      MANAGER COMPENSATION.

 

9.1.                              As compensation for its services hereunder,
Manager shall be reimbursed its Costs (as defined in Exhibit D attached hereto)
and paid a management fee (the “Management Fee”) in the amount set forth on
Exhibit D attached hereto and incorporated herein by reference.

 

9.2.                              After deduction of amounts which are
reimbursed to Manager and which are retained by Manager as Management Fee
compensation, all remaining Gross Revenues shall be remitted to GROUP.  From such sums, Manager shall pay, on
GROUP’s behalf, the Cost of Medical Services (as defined in Exhibit D attached
hereto), such other payments or disbursements which Manager may be authorized
or required to make pursuant to this Agreement and such payments or
disbursements which GROUP shall direct Manager to make.  Should the funds in GROUP’s accounts not be
sufficient at any time during the term of this Agreement to make such disbursements
and to meet the GROUP’s financial obligations, Manager shall have the right
(but not the obligation) to loan to GROUP funds in an amount sufficient to
allow GROUP to meet its financial obligations. 
Such loan shall bear interest at a rate that is at or above fair market
value and shall have such other terms as the parties may agree from time to
time.  Manager shall not lend any funds
to GROUP for such purposes without the prior approval of GROUP’s Board of
Directors or the officer(s) of GROUP delegated such power of approval by
GROUP’s Board of Directors.

 

10.                               RECORDS.

 

10.1.                        All medical records and documents, including
reports, x-rays, and other similar types of reports for patients of GROUP
providers shall be the property of GROUP’s providers.  GROUP agrees to require GROUP providers to allow Manager and its
duly authorized representatives to inspect, audit and duplicate any data or
records necessary for Manager to perform its duties pursuant to this
Agreement.  GROUP and Manager shall
comply with all applicable federal, state, and local laws and regulations
pertaining to the confidentiality of said medical records.

 

10.2.                        All business records, information, software
and systems of the Manager relating to the provision of its services under this
Agreement shall remain the property of the Manager and may be removed by the
Manager upon any termination of this Agreement.

 

11.                               INDEMNIFICATION.  Each
party shall indemnify, defend and hold harmless the other, its officers,
directors, agents, contractors, representatives and employees, and each of its
affiliates from and against any and all liability, loss, damages, claims,
causes of action, and expenses associated therewith (including, without
limitation, attorneys’ fees) caused or asserted to have been caused, directly
or indirectly, by or as a result of any acts, errors or omissions hereunder of
the other, its contractors, shareholders, employees or agents during the term
hereof.  The provisions of this section
shall survive the expiration or earlier termination of this Agreement.

 

 

12.                               PROPRIETARY INFORMATION.

 

12.1.                        At all times during the term hereof and
following the expiration or earlier termination of this Agreement, all trade
secrets and proprietary confidential information of Manager, including without
limitation, all forms of contracts and other business documents or information
of Manager, whether currently or in the future developed or maintained by
Manager and including any and all deletions, additions, modifications and
amendments thereto and further including the amount of compensation to be paid
to Manager for its services hereunder (collectively, “Manager’s Proprietary
Materials”), shall be the exclusive, sole and absolute property of
Manager.  Both parties acknowledge and
agree that Manager has developed Manager’s Proprietary Materials at significant
expense, and that said Proprietary Materials are not available for review or
use by members of the public.  All of
Manager’s Proprietary Materials are and shall at all times remain confidential
and proprietary and constitute valuable trade secrets of Manager.  Except in the ordinary course of performing
its obligations under this Agreement and except upon Manager’s prior written
consent, GROUP shall not disclose to anyone, use, copy, or take any of Manager’s
Proprietary Materials for GROUP’s benefit or gain either during the term of
this Agreement or at any time after the termination hereof.  Upon any expiration or earlier termination
of this Agreement for any reason, GROUP shall not, without the prior written
consent of Manager, take or use any of Manager’s Proprietary Materials, and
shall return to Manager all of Manager’s Proprietary Materials in GROUP’s
possession or control.

 

12.2.                        At all times during the term hereof and
following the termination of this Agreement, GROUP shall not, directly or
indirectly, interfere with, disrupt or attempt to disrupt the relationship,
contractual or otherwise, between Manager and any health care provider or
supplier (including, without limitation, any physician or osteopath), or any
employee, independent contractor, consultant or agent of Manager.  GROUP further agrees not to hire, engage or
contract with, either as an independent contractor, employee or in any other
capacity, any personnel of Manager, other than personnel of Manager who are
GROUP’s Former Employees, during the first twelve (12) months following the
effective expiration or termination date hereof without Manager’s prior written
consent.

 

12.3.                        The provisions of this Section 12 shall
survive the termination of this Agreement.

 

13.                               INDEPENDENT CONTRACTORS.  The
parties hereto acknowledge and agree that the relationship created between
Manager and GROUP is strictly that of independent contractors.  Nothing contained herein shall be construed
as creating a partnership or joint venture relationship between the
parties.  Each party hereto shall be
responsible for all compensation, salaries, taxes, withholdings, contributions,
benefits, and workers’ compensation insurance with respect to all personnel
employed or contracted by said party and shall indemnify, defend and hold
harmless the other party and its officers, directors, agents, contractors,
representatives and employees (and, in the case of GROUP’s indemnification of
Manager, Manager’s affiliates and subcontractors) from and against any and all
liability, loss, damages, claims, causes of action, and expenses associated
therewith (including, without limitation, attorneys’ fees) caused or asserted
to have been caused, directly or indirectly, by or as a result of same.  The provisions of this Section shall survive
the expiration or earlier termination of this Agreement.

 

 

14.                               ASSIGNABLE OPTION AGREEMENT.  The
parties shall enter into an Assignable Option 
Agreement in the form attached hereto as Exhibit E.

 

15.                               MISCELLANEOUS.

 

15.1.                        No Third Party
Beneficiaries.  The parties intend that the benefits of this
Agreement shall inure only to Manager and GROUP and not to any third person,
except as expressly so stated herein. 
Notwithstanding anything contained herein, or any conduct or course of
conduct by any party hereto, before or after signing this Agreement, this
Agreement shall not be construed as creating any right, claim or cause of
action against either Manager or GROUP by any other person or entity.

 

15.2.                        Entire Agreement.  This
Agreement, together with all exhibits and schedules hereto, and all documents
referred to herein, constitutes the entire agreement between the parties with
respect to the subject matter hereof, supersedes all other and prior agreements
on the same subject, whether written or oral, and contains all of the covenants
and agreements between the parties with respect to the subject matter
hereof.  Each party to this Agreement
acknowledges that no representations, inducements, promises, or agreements,
orally or otherwise, have been made by the other party(ies), or by anyone
acting on behalf of any party, that are not embodied herein, and that no other
agreement, statement, or promise not contained in this Agreement shall be valid
or binding.  This Agreement incorporates
the Original Management Services Agreement, together with all amendments
previously made and to be made to the date of execution hereof, and is deemed
to have been effective as of the date of the Original Management Services
Agreement.

 

15.3.                        Successors and Assigns.  All
of Manager’s rights and duties under this Agreement may be assigned or
delegated by Manager, including but not limited to, an assignment to Imperial
Bank, a California banking corporation. 
Notwithstanding any other provision of this Agreement, neither this
Agreement nor the rights and duties of this Agreement may be assigned or
delegated by GROUP.  This Agreement
binds the successors, heirs, and authorized assignees of the parties.

 

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

 

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

 

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

 

 

	
  If to GROUP: Pegasus Medical Group, Inc.

  
	
   

  	
  18200 Yorba Linda Boulevard, Suite 409

  
	
   

  	
  Yorba Linda, California 92886

  
	
   

  	
  Attention: President

  
	
   

  	
   

  
	
  If to Manager: Sierra Medical Management, Inc.

  
	
   

  	
  18200 Yorba Linda Boulevard, Suite 409

  
	
   

  	
  Yorba Linda, California 92886

  
	
   

  	
  Attention:  President

  

 

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

 

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

 

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

 

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

 

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

 

15.12.                  Dispute Resolution.

 

15.12.1.         Subject to the terms of Section 15.12.2, in the event the parties
hereto are unable to resolve any and all disputes in connection with this
Agreement, either party may commence arbitration by sending a written demand
for arbitration to the other party, setting forth the nature of the matter to
be resolved by arbitration.  Except as may
be expressly provided to the contrary herein, the arbitration procedure
described in this Section shall be the sole means of resolving any disputes
hereunder.

 

15.12.2.         Notwithstanding the foregoing, it is expressly understood by the
parties that the arbitration procedure described in this Section shall not be
applicable to any disputes between the parties as to matters over which Manager
has exclusive decision-making authority pursuant to the terms hereof, including
without limitation, the Manager’s exclusive decision-making authority with
respect to the development of guidelines for the selection, hiring and firing
of health care professionals, compensation payable to health care
professionals, scope of services to be provided, patient acceptance policies
and

 

 

procedures, pricing of
services, negotiation and execution of contracts, and approval of operating and
capital budgets.

 

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

 

15.12.4.         The parties shall share all costs of arbitration.  The prevailing party shall be entitled to
reimbursement by the other party of such party’s attorneys’ fees and costs and
any arbitration fees and expenses incurred in connection with the arbitration
hereunder.

 

15.12.5.         The substantive law of the State of California shall be applied by the
arbitrator.  The parties shall have the
rights of discovery as provided for in Part 4 of the California Code of Civil
Procedure and as provided for in Section 1283.05 of said Code.  The California Code of Evidence shall apply
to testimony and documents submitted to the arbitrator.

 

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

 

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

 

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

 

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

 

15.13.                  Attorneys’ Fees. 
Should either party institute any action or procedure to enforce this
Agreement or any provision hereof, or for damages by reason of any alleged
breach of this Agreement or of any provision hereof, or for a declaration of
rights hereunder (including, without limitation, arbitration), the prevailing
party in any such action or proceeding shall be entitled to receive from the
other party all

 

 

costs and expenses,
including without limitation reasonable attorneys’ fees, incurred by the
prevailing party in connection with such action or proceeding.

 

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

 

15.15.                  Rights Cumulative.  The
various rights and remedies herein granted to Manager or GROUP shall be
cumulative and in addition to any other rights Manager or GROUP, respectively,
may be entitled to under law.  The
exercise of one or more rights or remedies shall not impair the right of
Manager or GROUP to exercise any other right or remedy, at law or equity.

 

15.16.                  Federal Social Security Requirements. 
Pursuant to Section 1395x (V)(1)(I) of Title 42 of the United States
Code, with respect to any services furnished under the terms of this Agreement
if the value or cost of which is Ten Thousand Dollars ($10,000) or more over a
twelve (12) month period, until the expiration of four (4) years after the
termination of this Agreement, Manager shall make available upon written
request to the Secretary of the United States Department of Health and Human
Services, or upon request by the Comptroller General of the United States
General Accounting Office, or any of their duly authorized representatives, a
copy of this Agreement and such books, documents and records as are necessary
to certify the nature and extent of the costs of the services provided by Manager
under this Agreement.

 

Manager further agrees that
in the event Manager carries out any of its duties under this Agreement through
a subcontract, with a value or cost of Ten Thousand Dollars ($10,000) or more
over a twelve (12) month period, such subcontract shall contain a clause to the
effect that until the expiration of four (4) years after the furnishing of such
services pursuant to such subcontract, the subcontractor shall make available,
upon written request to the Secretary of the United States Department of Health
and Human Services, or upon request to the Comptroller General of the United
States General Accounting Office, or any of their duly authorized
representatives, the subcontract and such books, documents and records of such
organization as are necessary to verify the nature and extent of such costs.

 

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

 

	
  “MANAGER”

  	
  “GROUP”

  
	
  SIERRA MEDICAL MANAGEMENT, INC.

  	
   

  	
  PEGASUS MEDICAL

  
	
   

  	
   

  	
  GROUP, INC.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Its:

  	
   

  	
   

  	
  Its:

  	
   

  	
   

  

 

 

LIST OF EXHIBITS AND
SCHEDULES

 

 

	
  Exhibits

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  A

  	
  -

  	
  Master Lease

  
	
   

  	
   

  	
   

  
	
  B

  	
  -

  	
  Furniture, Fixtures & Equipment

  
	
   

  	
   

  	
   

  
	
  C

  	
  -

  	
  Power of Agency

  
	
   

  	
   

  	
   

  
	
  D

  	
  -

  	
  Management Fee

  
					

 

 

	
  Schedule

  
	
   

  	
   

  
	
  7.9.2

  	
  Practice Employee Liabilities

  

 

 

EXHIBIT “A”

 

MASTER
LEASE

 

 

Set forth below is a list of
the leases which comprise the Master Lease and are attached as Exhibit “A” to
the Management Services Agreement, made and entered into as of October 31,
1997, by and between Sierra Medical Management, Inc. and Pegasus Medical Group,
Inc.; these leases have been intentionally omitted from this copy of said
Management Services Agreement.

 

1.                                       West Lancaster Plaza Lease commencing on
November 1, 1997 by and between The Prudential Insurance Company of America,
Inc., a New Jersey Corporation and Pegasus Medical Group, Inc., a California
Corporation (for 2783 West Avenue L, Lancaster, California 93536).

 

2.                                       Lease for 2151 East Palmdale Boulevard,
Palmdale, California by and between 22nd Street Plaza, a California Limited
Partnership and Pegasus Medical Group, Inc.

 

 

EXHIBIT “B”

 

FURNITURE,
FIXTURES & EQUIPMENT

 

 

EXHIBIT “C”

 

POWER OF
AGENCY

 

 

This Power of Agency is made
and entered into in connection with that certain Management Services Agreement
(the “Agreement”) dated as of the 31st day of October, 1997, between Sierra
Medical Management, Inc., a Delaware corporation (“Manager”), and Pegasus
Medical Group, Inc., a professional corporation (“GROUP”), as amended.

 

1.                                       Definitions.  Capitalized terms used herein
and not otherwise defined herein shall have the meaning assigned to them in the
Agreement.

 

2.                                       Power of Manager. 
GROUP hereby appoints the Manager or its designee or successor, as
GROUP’s agent (“Agent”) to act for GROUP and in GROUP’s name, place and stead
for the purposes of: (a) communicating the terms and conditions under which
GROUP would accept a Contract with each Plan, as set forth in the Agreement and
Exhibit “C” thereto; (b) executing on behalf of GROUP each Contract that
contains said terms and conditions or that contains any other terms and
conditions that are not rejected by GROUP; (c) administering executed
Contracts, as set forth below; (d) performing all actions on behalf of GROUP
contemplated by the Agreement relating to Contracts, including, without
limitation, the evaluation, negotiation and renewal of Contracts; (e)
negotiating and executing all business agreements and leases on GROUP’s behalf
in accordance with the Agreement; (f) endorsing all checks made payable to
GROUP for services provided to Members; (g) taking all steps required or
desirable to submit, process and collect all claims for payment to patients,
Plans, Medicare, Medicaid and all other third party payors; and (h) receiving
and depositing capitation and other payments received by GROUP.

 

3.                                       Administration. 
Agent shall maintain in his/her files a copy of each executed Contract
and shall provide to GROUP a list of Plans contracting with GROUP.  Notwithstanding anything herein to the
contrary, GROUP shall look solely to Plans and/or enrollees or beneficiaries of
Plans, as applicable, for payment for medical services and supplies and neither
Manager nor any officer, employee, agent or affiliate of Manager shall be
liable for such payment.

 

4.                                       Term.  The term of this Power of
Agency shall be coextensive with the term of the Agreement.

 

5.                                       Full Authority. Agent is hereby granted full authority to
act in any manner proper, necessary or convenient to the exercise of the
foregoing powers, including substitution and revocation.  GROUP hereby ratifies every act that Agent
may lawfully perform in exercising those powers.

 

 

IN
WITNESS WHEREOF, this Power of Agency is executed effective as of the day and
year first above written.

 

	
  “MANAGER”

  	
  “GROUP”

  
	
  SIERRA MEDICAL MANAGEMENT, INC.

  	
   

  	
  PEGASUS MEDICAL

  
	
   

  	
   

  	
  GROUP, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Its:

  	
   

  	
   

  	
  Its:

  	
   

  	
   

  

 

 

EXHIBIT “D”

 

MANAGEMENT
FEE

 

 

A.                                   Definitions

 

Cost of
Medical Services
means with respect to the GROUP, the aggregate compensation of GROUP’s employed
physicians and physician extenders (e.g. physician assistants and nurse
practitioners), charges incurred by the GROUP for independent contractor
physicians, the cost of services ordered by GROUP through its physicians for
managed care patients, the cost of GROUP’s employee benefits including, but not
limited to, vacation pay, employer and employee contributions to any 401(k)
plan or other retirement plan for the benefit of GROUP employees, sick pay,
health care expenses, GROUP’s share of employment and payroll taxes, GROUP’s
employees’ professional dues and all other expenses and payments required to be
made by GROUP to or for physicians pursuant to physician employment and
independent contractor agreements (including expense reimbursements,
discretionary bonuses, incentives based on profitability or productivity, and
payments paid and accrued or deferred).

 

Manager’s
Costs means all
operating and non-operating expenses and other costs directly or indirectly
incurred by Manager, including but not limited to direct labor costs (for all
employees of Manager or its affiliates and for any independent contractors or
consultants to Manager), indirect labor costs, supplies, all amounts paid by
Manager or GROUP to satisfy any obligations of GROUP to non-professional employees
and third parties (other than for the Cost of Medical Services), obligations
under any lease or purchase agreement or arrangement for which Manager has
direct or indirect financial liability, and direct and indirect overhead and
other expenses relating to the operation of GROUP’s administrative and
non-medical management affairs and relating to GROUP’s direct and indirect
corporate overhead (including but not limited to all interest expense and other
expenses which are attributable generally to Manager’s business operations in
accordance with Manager’s corporate allocation policies as such are in effect
from time to time).

 

Gross
Revenues means all
sums which are (i) attributed to GROUP (determined on an accrual basis) as
compensation for the provision of medical services by GROUP employed and
independent contractor physicians and physician extenders, including but not
limited to all capitated income, all rights to receive GROUP’s portion of
hospital and other shared risk pool payments, all copayments, coordination of
benefits, third party recovery, insured services, enrollment protection (or
other such revenue as is available to replenish capitated services) and all
rights to receive fee-for-service income for medical, diagnostic and
therapeutic services provided to GROUP patients; and (ii) derived by GROUP or
its employees other than from the provision of medical services, including but
not limited to consulting services, insurance and legal recoveries, royalties
and licensing payments, franchise payments, rents and lease payments, and
proceeds from the sale of assets or the merger or other business combination of
GROUP.

 

Net-Pre-Tax
Income means Gross
Revenues less the sum of Manager’s Costs and the Cost of Medical Services after
provision of related bonuses but before provision for income taxes.

 

 

B.                                     Management Fee

 

For its services hereunder,
which shall include the providing of all facilities and furniture, fixtures and
equipment at the Premises and all non-physician employees of Manager who perform
services at or for the Practice and all management services provided hereunder,
Manager shall (i) retain that portion of the Gross Revenues which is equal to
Manager’s Costs plus (ii) eight percent (8%) of Gross Revenues plus (iii) a fee
for marketing and public relations services of $8,000 per month plus (iv) fifty
percent (50%) of Net Pre-tax Income in excess of eight percent (8%) of Gross
Revenues; provided however, that if after the payment of Manager’s Costs as set
forth in item (i) herein GROUP’s working capital is insufficient to meet
GROUP’s liabilities or other obligations, including but not limited to the
payment of $700,000 to Prospect Medical Group, Inc. pursuant to the terms of a
Secured Promissory Note, of even date herewith, by and between GROUP and
Prospect Medical Group, Inc., the amount of Gross Revenues paid to Manager
shall be deferred until GROUP is able to meet such obligations.

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