Document:

Exhibit 10.6

 

 

BORROWERS:

Prospect
Medical Holdings, Inc. and

Prospect Medical Group

GUARANTORS:

See Signature Pages

CONTINUING AND
UNCONDITIONAL GUARANTY

To:          Bank of America, N.A., as
administrative agent

1.             The Guaranty. 
For valuable consideration, each of the undersigned (each a “Guarantor”)
hereby unconditionally guarantees and promises to pay promptly to Bank of
America, N.A., as administrative agent for the benefit of the hereinafter
defined Lenders, its subsidiaries and affiliates (collectively, “Administrative
Agent”), or order, in lawful money of the United States, any and all
Indebtedness of Prospect Medical Holdings, Inc. and/or Prospect Medical Group
(each a “Borrower”) to Administrative Agent or any Lender when due,
whether at stated maturity, upon acceleration or otherwise, and at all times
thereafter.  The liability of Guarantor
under this Guaranty is not limited as to the principal amount of the
Indebtedness guaranteed and includes, without limitation, liability for all
interest, fees, indemnities (including, without limitation, hazardous waste
indemnities), and other costs and expenses relating to or arising out of the
Indebtedness and for all swap, option, or forward obligations now or hereafter
owing from Borrower to Administrative Agent or any Lender.  The liability of Guarantor is continuing and
relates to any Indebtedness, including that arising under successive
transactions which shall either continue the Indebtedness or from time to time
renew it after it has been satisfied. 
This Guaranty is cumulative and does not supersede any other outstanding
guaranties, and the liability of Guarantor under this Guaranty is exclusive of
Guarantor’s liability under any other guaranties signed by Guarantor.  If multiple individuals or entities sign this
Guaranty, their obligations under this Guaranty shall be joint and
several.  If Guarantor is a subsidiary or
affiliate of Borrower, Guarantor’s
liability hereunder shall not exceed at any one time the largest amount during
the period commencing with Guarantor’s execution of this Guaranty and
thereafter that would not render Guarantor’s obligations hereunder subject to
avoidance under Section 548 of the Bankruptcy Code (Title 11, United States
Code) or any comparable provisions of any applicable state law.

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2.             Definitions.

(a)           “Borrower” shall mean the
individual or the entity named in Paragraph 1 of this Guaranty and, if
more than one, then any one or more of them.

(b)           “Credit Agreement” means the
Credit Agreement dated of even date herewith among the Borrowers, the
Administrative Agent and the other lending institutions from time to time party
thereto, as the same may be amended, extended, increased, supplemented,
restated, or otherwise modified.

(c)           “Guarantor” shall mean the
individual or the entity signing this Guaranty and, if more than one, then any
one or more of them.

(d)           “Indebtedness” shall mean any
and all debts, liabilities, and obligations of Borrower to the Administrative
Agent or any Lender, now or hereafter existing, whether voluntary or involuntary
and however arising, whether direct or indirect or acquired by the
Administrative Agent or such Lender by assignment, succession, or otherwise,
whether due or not due, absolute or contingent, liquidated or unliquidated,
determined or undetermined, held or to be held by the Administrative Agent or
such Lender for its own account or as agent for another or others, whether
Borrower may be liable individually or jointly with others, whether recovery
upon such debts, liabilities, and obligations may be or hereafter become barred
by any statute of limitations, and whether such debts, liabilities, and
obligations may be or hereafter become otherwise unenforceable.  Indebtedness includes, without limitation,
any and all obligations of Borrower to the Administrative Agent and the Lenders
for reasonable attorneys’ fees and all other costs and expenses incurred by the
Administrative Agent or any Lender in the collection or enforcement of any
debts, liabilities, and obligations of Borrower to the Administrative Agent or
any Lender.  Indebtedness also includes,
without limitation, all obligations of Borrower arising under any interest
rate, credit, commodity or equity swap, cap, floor, collar, forward foreign
exchange transaction, currency swap, cross currency rate swap, currency option,
securities puts, calls, collars, options or forwards or any combination of, or
option with respect to, these or similar transactions now or hereafter entered
into between Borrower and the Administrative Agent or any Lender.

(e)           “Lender” shall have the
meaning set forth in the Credit Agreement.

(f)            “Loan Documents” shall mean
the Credit Agreement, promissory notes from Borrower in favor of the Lenders,
and all other agreements, documents, and instruments evidencing any of the
Indebtedness, and deeds of trust, mortgages, security agreements, and other
agreements, documents, and instruments executed by Borrower in connection with
such loan agreements, promissory notes, and other agreements, documents, and
instruments evidencing any of the Indebtedness, all as now in effect and as
hereafter amended, restated, renewed, or superseded.

3.             Obligations Independent.  The obligations hereunder are independent of
the obligations of Borrower or any other guarantor, and a separate action or
actions may be brought and prosecuted against Guarantor whether action is
brought against Borrower or any other 

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guarantor or whether Borrower or any other guarantor
be joined in any such action or actions. 
Anyone executing this Guaranty shall be bound by its terms without
regard to execution by anyone else.

4.             Rights of the Administrative Agent.  Guarantor authorizes the Administrative
Agent, without notice or demand and without affecting its liability hereunder,
from time to time to:

(a)           renew, compromise, extend,
accelerate, or otherwise change the time for payment, or otherwise change the
terms, of the Indebtedness or any part thereof, including increase or decrease
of the rate of interest thereon, or otherwise change the terms of any Loan
Documents;

(b)           receive and hold security for the
payment of this Guaranty or any Indebtedness and exchange, enforce, waive,
release, fail to perfect, sell, or otherwise dispose of any such security;

(c)           apply such security and direct the
order or manner of sale thereof as the Administrative Agent in its discretion
may determine;

(d)           release or substitute any Guarantor
or any one or more of any endorsers or other guarantors of any of the
Indebtedness; and

(e)           permit the Indebtedness to exceed
Guarantor’s liability under this Guaranty, and Guarantor agrees that any
amounts received by the Administrative Agent from any source other than
Guarantor shall be deemed to be applied first to any portion of the
Indebtedness not guaranteed by Guarantor.

5.             Guaranty to be Absolute.  Guarantor agrees that until the Indebtedness
has been paid in full and any commitments of the Administrative Agent and the
Lenders or facilities provided by the Administrative Agent or any Lender with
respect to the Indebtedness have been terminated, Guarantor shall not be
released by or because of the taking, or failure to take, any action that might
in any manner or to any extent vary the risks of Guarantor under this Guaranty
or that, but for this paragraph, might discharge or otherwise reduce, limit, or
modify Guarantor’s obligations under this Guaranty.  Guarantor waives and surrenders any defense
to any liability under this Guaranty based upon any such action, including but
not limited to any action of the Administrative Agent or any Lender described
in the immediately preceding paragraph of this Guaranty.  It is the express intent of Guarantor that
Guarantor’s obligations under this Guaranty are and shall be absolute and
unconditional.

6.             Guarantor’s
Waivers of Certain Rights and Certain Defenses.  Guarantor waives:

(a)           any right to require the
Administrative Agent and the Lenders to proceed against Borrower, proceed
against or exhaust any security for the Indebtedness, or pursue any other
remedy in the Administrative Agent’s or any Lender’s power whatsoever;

(b)           any defense arising by reason of any
disability or other defense of Borrower, or the cessation from any cause
whatsoever of the liability of Borrower;

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(c)           any defense based on any claim that
Guarantor’s obligations exceed or are more burdensome than those of Borrower;
and

(d)           the benefit of any statute of
limitations affecting Guarantor’s liability hereunder.

No provision or waiver in this Guaranty shall be
construed as limiting the generality of any other waiver contained in this
Guaranty.

7.             Waiver of Subrogation.  Until the Indebtedness has been paid in full
and any commitments of the Administrative Agent and the Lenders or facilities
provided by the Administrative Agent or any Lender with respect to the
Indebtedness have been terminated, even though the Indebtedness may be in
excess of Guarantor’s liability hereunder, Guarantor waives to the extent
permitted by applicable law any right of subrogation, reimbursement,
indemnification, and contribution (contractual, statutory, or otherwise)
including, without limitation, any claim or right of subrogation under the
Bankruptcy Code (Title 11, United States Code) or any successor statute,
arising from the existence or performance of this Guaranty, and Guarantor
waives to the extent permitted by applicable law any right to enforce any
remedy that the Administrative Agent or any Lender now has or may hereafter
have against Borrower, and waives any benefit of, and any right to participate
in, any security now or hereafter held by the Administrative Agent or any
Lender.

8.             Waiver of Notices.  Guarantor waives all presentments, demands
for performance, notices of nonperformance, protests, notices of protest,
notices of dishonor, notices of intent to accelerate, notices of acceleration,
notices of any suit or any other action against Borrower or any other person,
any other notices to any party liable on any Loan Document (including
Guarantor), notices of acceptance of this Guaranty, notices of the existence,
creation, or incurring of new or additional Indebtedness to which this Guaranty
applies or any other Indebtedness of Borrower to the Administrative Agent or
any Lender, and notices of any fact that might increase Guarantor’s risk.

9.             General Partner
Liability and Waivers of Other Rights and Defenses.

(a)           If Borrower is a partnership and
Guarantor is a general partner of that partnership, then Guarantor shall not be
liable under this Guaranty for any portion of the Indebtedness that is secured
by real property; provided, however, that Guarantor shall remain
liable under partnership law for all the Indebtedness.

(b)           Guarantor waives any rights and
defenses that are or may become available to Guarantor by reason of Sections
2787 to 2855, inclusive, of the California Civil Code.

(c)           Guarantor waives all rights and defenses
that Guarantor may have because any of the Indebtedness is secured by real
property.  This means, among other
things:  (i) the Administrative Agent may
collect from Guarantor without first foreclosing on any real or personal
property collateral pledged by Borrower; and (ii) if the Administrative Agent
forecloses on any real property collateral pledged by Borrower:  (1) the amount of the Indebtedness may be
reduced only by the price for which that collateral is sold at the 

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foreclosure sale, even if
the collateral is worth more than the sale price, and (2) the Administrative
Agent may collect from Guarantor even if the Administrative Agent, by
foreclosing on the real property collateral, has destroyed any right Guarantor
may have to collect from Borrower.  This
is an unconditional and irrevocable waiver of any rights and defenses Guarantor
may have because any of the Indebtedness is secured by real property.  These rights and defenses include, but are
not limited to, any rights or defenses based upon Section 580a, 580b, 580d, or
726 of the California Code of Civil Procedure.

(d)           Guarantor waives any right or defense
it may have at law or equity, including California Code of Civil Procedure
Section 580a, to a fair market value hearing or action to determine a
deficiency judgment after a foreclosure.

10.           Security.  To secure all of Guarantor’s obligations
hereunder, Guarantor assigns and grants to the Administrative Agent a security
interest in all moneys, securities, and other property of Guarantor now or
hereafter in the possession of the Administrative Agent or any Lender, all
deposit accounts of Guarantor maintained with the Administrative Agent or any
Lender, and all proceeds thereof.  Upon
default or breach of any of Guarantor’s obligations to the Administrative Agent
or any Lender, the Administrative Agent may apply any deposit account to reduce
the Indebtedness, and may foreclose any collateral as provided in the Uniform
Commercial Code and in any security agreements between the Administrative Agent
and Guarantor.

11.           Subordination.  Any obligations of Borrower to Guarantor, now
or hereafter existing, including but not limited to any obligations to
Guarantor as subrogee of the Administrative Agent or any Lender or resulting
from Guarantor’s performance under this Guaranty, are hereby subordinated to
the Indebtedness.  In addition to
Guarantor’s waiver of any right of subrogation as set forth in this Guaranty
with respect to any obligations of Borrower to Guarantor as subrogee of the
Administrative Agent or any Lender, Guarantor agrees that, if the
Administrative Agent so requests, Guarantor shall not demand, take, or receive
from Borrower, by setoff or in any other manner, payment of any other
obligations of Borrower to Guarantor until the Indebtedness has been paid in
full and any commitments of the Administrative Agent and the Lenders or
facilities provided by the Administrative Agent or any Lender with respect to
the Indebtedness have been terminated. 
If any payments are received by Guarantor in violation of such waiver or
agreement, such payments shall be received by Guarantor as trustee for the
Administrative Agent and the Lenders and shall be paid over to the
Administrative Agent on account of the Indebtedness, but without reducing or
affecting in any manner the liability of Guarantor under the other provisions
of this Guaranty.  Any security interest,
lien, or other encumbrance that Guarantor may now or hereafter have on any
property of Borrower is hereby subordinated to any security interest, lien, or
other encumbrance that the Administrative Agent or any Lender may have on any
such property.

12.           Revocation of
Guaranty.

(a)           This Guaranty may be revoked at any
time by Guarantor in respect to future transactions, unless there is a
continuing consideration as to such transactions that Guarantor does not
renounce.  Such revocation shall be
effective upon actual receipt by the Administrative Agent, at the address shown
below or at such other address as may 

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have been provided to
Guarantor by the Administrative Agent, of written notice of revocation.  Revocation shall not affect any of Guarantor’s
obligations or the Administrative Agent’s rights with respect to transactions
committed or entered into prior to the Administrative Agent’s receipt of such
notice, regardless of whether or not the Indebtedness related to such
transactions, before or after revocation, has been incurred, renewed,
compromised, extended, accelerated, or otherwise changed as to any of its
terms, including time for payment or increase or decrease of the rate of
interest thereon, and regardless of any other act or omission of the
Administrative Agent authorized hereunder.  Revocation by a Guarantor
shall not affect any obligations of any other guarantor.

(b)           Guarantor acknowledges and agrees
that this Guaranty may be revoked only in accordance with the foregoing
provisions of this paragraph and shall not be revoked simply as a result of any
change in name, location, or composition or structure of Borrower, the
dissolution of Borrower, or the termination, increase, decrease, or other
change of any personnel or owners of Borrower.

13.           Reinstatement of Guaranty.  If this Guaranty is revoked, returned, or
canceled, and subsequently any payment or transfer of any interest in property
by Borrower to the Administrative Agent or any Lender is rescinded or must be
returned by the Administrative Agent or such Lender to Borrower, this Guaranty
shall be reinstated with respect to any such payment or transfer, regardless of
any such prior revocation, return, or cancellation.

14.           Stay of Acceleration.  In the event that acceleration of the time
for payment of any of the Indebtedness is stayed upon the insolvency,
bankruptcy, or reorganization of Borrower or otherwise, all such Indebtedness
guaranteed by Guarantor shall nonetheless be payable by Guarantor immediately
if requested by the Administrative Agent.

15.           No Setoff or
Deductions; Taxes.

(a)           Guarantor represents and warrants
that it is organized and resident in the United States of America.  All payments by Guarantor hereunder shall be
paid in full, without setoff or counterclaim or any deduction or withholding
whatsoever, including, without limitation, for any and all present and future
taxes.  If Guarantor must make a payment
under this Guaranty, Guarantor represents and warrants that it will make the
payment from one of its U.S. resident offices to the Administrative Agent so
that no withholding tax is imposed on the payment.  Notwithstanding the foregoing, if Guarantor
makes a payment under this Guaranty to which withholding tax applies or if any
taxes (other than taxes on net income (i) imposed by the country or any
subdivision of the country in which the Administrative Agent’s principal office
or actual lending office is located and (ii) measured by the United States
taxable income the Administrative Agent and the Lenders would have received if
all payments under or in respect of this Guaranty were exempt from taxes levied
by Guarantor’s country) are at any time imposed on any payments under or in respect
of this Guaranty including, but not limited to, payments made pursuant to this
paragraph, Guarantor shall pay all such taxes to the relevant authority in
accordance with applicable law such that the Administrative Agent receives the
sum it would have received had no such deduction or withholding been made (or,
if 

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Guarantor cannot legally
comply with the foregoing, Guarantor shall pay to the Administrative Agent such
additional amounts as
will result in the Administrative Agent receiving the sum it would have
received had no such deduction or withholding been made).  Further, Guarantor shall also pay to the
Administrative Agent, on demand, all additional amounts that the Administrative
Agent specifies as necessary to preserve the after-tax yield the Administrative
Agent and the Lenders  would have
received if such taxes had not been imposed.

(b)           Guarantor shall promptly provide the
Administrative Agent with an original receipt or certified copy issued by the
relevant authority evidencing the payment of any such amount required to be
deducted or withheld.

16.           Information Relating to Borrower.  Guarantor acknowledges and agrees that it has
made such independent examination, review, and investigation of the Loan
Documents as Guarantor deems necessary and appropriate, including, without
limitation, any covenants pertaining to Guarantor contained therein, and shall
have sole responsibility to obtain from Borrower any information required by
Guarantor about any modifications thereto. 
Guarantor further acknowledges and agrees that it shall have the sole
responsibility for, and has adequate means of, obtaining from Borrower such
information concerning Borrower’s financial condition or business operations as
Guarantor may require, and that the Administrative Agent has no duty, and
Guarantor is not relying on the Administrative Agent, at any time to disclose
to Guarantor any information relating to the business operations or financial
condition of Borrower.

17.           Borrower’s Authorization.  Where Borrower is a corporation, partnership,
or limited liability company, it is not necessary for the Administrative Agent
to inquire into the powers of Borrower or of the officers, directors, partners,
members, managers, or agents acting or purporting to act on its behalf, and any
Indebtedness made or created in reliance upon the professed exercise of such
powers shall be guaranteed hereunder, subject to any limitations on Guarantor’s
liability set forth herein.

18.           Information Relating to Guarantor.  Guarantor authorizes the Administrative Agent
to verify or check any information given by Guarantor to the Administrative
Agent, check Guarantor’s credit references, verify employment, and obtain
credit reports. Guarantor acknowledges and agrees that the authorizations
provided in this paragraph apply to any individual general partner of Guarantor
and to Guarantor’s spouse and any such general partner’s spouse if Guarantor or
such general partner is married and lives in a community property state.

19.           Change of Status.  Any Guarantor that is a business entity shall
not enter into any consolidation, merger, or other combination unless Guarantor
is the surviving business entity. 
Further, Guarantor shall not change its legal structure unless (a) Guarantor
obtains the prior written consent of the Administrative Agent and (b) all
Guarantor’s obligations under this Guaranty are assumed by the new business
entity.

20.           Remedies.  If Guarantor fails to fulfill its duty to pay
all Indebtedness guaranteed hereunder, the Administrative Agent shall have all
of the remedies of a creditor and, to the extent applicable, of a secured
party, under all applicable law.  Without
limiting the foregoing, the Administrative Agent may, at its option and without
notice or demand:

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(a)           declare any Indebtedness due and
payable at once;

(b)           take possession of any collateral
pledged by Borrower or Guarantor, wherever located, and sell, resell, assign,
transfer, and deliver all or any part of the collateral at any public or
private sale or otherwise dispose of any or all of the collateral in its then
condition, for cash or on credit or for future delivery, and in connection
therewith the Administrative Agent may impose reasonable conditions upon any
such sale.  Further, the Administrative
Agent, unless prohibited by law the provisions of which cannot be waived, may
purchase all or any part of the collateral to be sold, free from and discharged
of all trusts, claims, rights of redemption and equities of Borrower or
Guarantor whatsoever.  Guarantor
acknowledges and agrees that the sale of any collateral through any nationally
recognized broker-dealer, investment banker, or any other method common in the
securities industry shall be deemed a commercially reasonable sale under the
Uniform Commercial Code or any other equivalent statute or federal law, and
expressly waives notice thereof except as provided herein; and

(c)           set off against any or all
liabilities of Guarantor all money owed by the Administrative Agent, any Lender
or any of their respective agents or affiliates in any capacity to Guarantor,
whether or not due, and also set off against all other liabilities of Guarantor
to the Administrative Agent and the Lenders all money owed by the
Administrative Agent or any Lender in any capacity to Guarantor.  If exercised by the Administrative Agent, the
Administrative Agent shall be deemed to have exercised such right of setoff and
to have made a charge against any such money immediately upon the occurrence of
such default although made or entered on the books subsequent thereto.

21.           Notices.  All notices required under this Guaranty
shall be personally delivered or sent by first class mail, postage prepaid, or
by overnight courier, to the addresses on the signature page of this Guaranty,
or sent by facsimile to the fax numbers listed on the signature page, or to
such other addresses as the Administrative Agent and Guarantor may specify from
time to time in writing.  Notices sent by
(a) first class mail shall be deemed delivered on the earlier of actual receipt
or on the fourth business day after deposit in the U.S. mail, postage prepaid,
(b) overnight courier shall be deemed delivered on the next business day,
and (c) telecopy shall be deemed delivered when transmitted.

22.           Successors and Assigns.  This Guaranty (a) binds Guarantor and
Guarantor’s executors, administrators, successors, and assigns, provided that
Guarantor may not assign its rights or obligations under this Guaranty without
the prior written consent of the Administrative Agent, and (b) inures to the
benefit of the Administrative Agent and the Lenders and their respective
indorsees, successors, and assigns.  The
Administrative Agent and the Lenders may, without notice to Guarantor and
without affecting Guarantor’s obligations hereunder, sell, assign, grant
participations in, or otherwise transfer to any other person, firm, or
corporation the Indebtedness and this Guaranty, in whole or in part.  Guarantor agrees that the Administrative
Agent and each Lender may disclose to any assignee or purchaser, or any
prospective assignee or purchaser, of all or part of the Indebtedness any and
all information in the Administrative Agent’s or such Lender’s possession
concerning Guarantor, this Guaranty, and any security for this Guaranty.

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23.           Amendments, Waivers, and
Severability.  No provision of this
Guaranty may be amended or waived except in writing.  No failure by the Administrative Agent to
exercise, and no delay in exercising, any of its rights, remedies, or powers
shall operate as a waiver thereof, and no single or partial exercise of any
such right, remedy, or power shall preclude any other or further exercise
thereof or the exercise of any other right, remedy, or power.  The unenforceability or invalidity of any
provision of this Guaranty shall not affect the enforceability or validity of
any other provision of this Guaranty.

24.           Costs and Expenses.  Guarantor agrees to pay all reasonable
attorneys’ fees, including allocated costs of the Administrative Agent’s
in-house counsel to the extent permitted by applicable law, and all other costs
and expenses that may be incurred by the Administrative Agent and the Lenders
(a) in the enforcement of this Guaranty or (b) in the preservation, protection,
or enforcement of any rights of the Administrative Agent and the Lenders in any
case commenced by or against Guarantor or Borrower under the Bankruptcy Code
(Title 11, United States Code) or any similar or successor statute.

25.           Governing Law and Jurisdiction.  This Guaranty shall be governed by and
construed and enforced in accordance with federal law and the law of the State
of California.  Jurisdiction and venue
for any action or proceeding to enforce this Guaranty shall be the forum
appropriate for such action or proceeding against Borrower, to which
jurisdiction Guarantor irrevocably submits and to which venue Guarantor waives
to the fullest extent permitted by law any defense asserting an inconvenient
forum in connection therewith.  It is
provided, however, that if Guarantor owns property in another state,
notwithstanding that the forum for enforcement action is elsewhere, the
Administrative Agent may commence a collection proceeding in any state in which
Guarantor owns property for the purpose of enforcing provisional remedies
against such property.  Service of
process by the Administrative Agent in connection with such action or
proceeding shall be binding on Guarantor if sent to Guarantor by registered or
certified mail at its address specified below.

26.           Dispute Resolution Provision.  This paragraph, including the subparagraphs below,
is referred to as the “Dispute Resolution Provision.”  This Dispute Resolution Provision is a
material inducement for the parties entering into this agreement.

(a)           This Dispute Resolution Provision
concerns the resolution of any controversies or claims between the parties,
whether arising in contract, tort or by statute, including but not limited to
controversies or claims that arise out of or relate to: (i) this agreement
(including any renewals, extensions or modifications); or (ii) any document related
to this agreement (collectively a “Claim”).  For the purposes of this Dispute Resolution
Provision only, the term “parties” shall include any parent corporation,
subsidiary or affiliate of the Administrative Agent involved in the servicing,
management or administration of any obligation described or evidenced by this
agreement.

(b)           At the request of any party to this
agreement, any Claim shall be resolved by binding arbitration in accordance
with the Federal Arbitration Act (Title 9, U.S. Code) (the “Act”).  The Act will apply even though this agreement
provides that it is governed by the law of a specified state.

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(c)           Arbitration proceedings will be
determined in accordance with the Act, the then-current rules and procedures
for the arbitration of financial services disputes of the American Arbitration
Association or any successor thereof (“AAA”), and the terms of this
Dispute Resolution Provision.  In the
event of any inconsistency, the terms of this Dispute Resolution Provision
shall control.  If AAA is unwilling or
unable to (i) serve as the provider of arbitration or (ii) enforce any
provision of this arbitration clause, the Administrative Agent may designate
another arbitration organization with similar procedures to serve as the
provider of arbitration.

(d)           The arbitration shall be administered
by AAA and conducted, unless otherwise required by law, in any U.S. state where
real or tangible personal property collateral for this credit is located or if
there is no such collateral, in the state specified in the governing law
section of this agreement.  All Claims
shall be determined by one arbitrator; however, if Claims exceed Five Million
Dollars ($5,000,000), upon the request of any party, the Claims shall be decided
by three arbitrators.  All arbitration
hearings shall commence within ninety (90) days of the demand for arbitration
and close within ninety (90) days of commencement and the award of the
arbitrator(s) shall be issued within thirty (30) days of the close of the
hearing.  However, the arbitrator(s),
upon a showing of good cause, may extend the commencement of the hearing for up
to an additional sixty (60) days.  The
arbitrator(s) shall provide a concise written statement of reasons for the
award.  The arbitration award may be
submitted to any court having jurisdiction to be confirmed and have judgment
entered and enforced.

(e)           The arbitrator(s) will give effect to
statutes of limitation in determining any Claim and may dismiss the arbitration
on the basis that the Claim is barred. For purposes of the application of any
statutes of limitation, the service on AAA under applicable AAA rules of a
notice of Claim is the equivalent of the filing of a lawsuit.  Any dispute concerning this arbitration
provision or whether a Claim is arbitrable shall be determined by the
arbitrator(s), except as set forth at subparagraph (j) of this Dispute
Resolution Provision.  The arbitrator(s)
shall have the power to award legal fees pursuant to the terms of this
agreement.

(f)            The procedure described above will
not apply if the Claim, at the time of the proposed submission to arbitration,
arises from or relates to an obligation to the Administrative Agent secured by
real property.  In this case, all of the
parties to this agreement must consent to submission of the Claim to
arbitration.

(g)           To the extent any Claims are not
arbitrated, to the extent permitted by law the Claims shall be resolved in
court by a judge without a jury, except any Claims which are brought in
California state court shall be determined by judicial reference as described
below.

(h)           Any Claim which is not arbitrated and
which is brought in California state court will be resolved by a general
reference to a referee (or a panel of referees) as provided in California Code
of Civil Procedure Section 638.  The
referee (or presiding referee of the panel) shall be a retired Judge or
Justice.  The referee (or panel of
referees) shall be selected by mutual written agreement of the parties.  If the parties do not agree, 

 10
 

the referee shall be
selected by the Presiding Judge of the Court (or his or her representative) as
provided in California Code of Civil Procedure Section 638 and the following
related sections.  The referee shall
determine all issues in accordance with existing California law and the California
rules of evidence and civil procedure. The referee shall be empowered to enter
equitable as well as legal relief, provide all temporary or provisional
remedies, enter equitable orders that will be binding on the parties and rule
on any motion which would be authorized in a trial, including without
limitation motions for summary judgment or summary adjudication . The award
that results from the decision of the referee(s) will be entered as a judgment
in the court that appointed the referee, in accordance with the provisions of
California Code of Civil Procedure Sections 644(a) and 645.  The parties reserve the right to seek
appellate review of any judgment or order, including but not limited to, orders
pertaining to class certification, to the same extent permitted in a court of
law.

(i)            This Dispute Resolution Provision
does not limit the right of any party to: (i) exercise self-help remedies, such
as but not limited to, setoff; (ii) initiate judicial or non-judicial
foreclosure against any real or personal property collateral; (iii) exercise
any judicial or power of sale rights, or (iv) act in a court of law to obtain
an interim remedy, such as but not limited to, injunctive relief, writ of
possession or appointment of a receiver, or additional or supplementary
remedies.  The filing of a court action
is not intended to constitute a waiver of the right of any party, including the
suing party, thereafter to require submittal of the Claim to arbitration or
judicial reference.

(j)            Any arbitration, judicial reference
or trial by a judge of any Claim will take place on an individual basis without
resort to any form of class or representative action (the “Class Action
Waiver”).  Regardless of anything
else in this Dispute Resolution Provision, the validity and effect of the Class
Action Waiver may be determined only by a court or referee and not by an
arbitrator.  The parties to this
Agreement acknowledge that the Class Action Waiver is material and essential to
the arbitration of any disputes between the parties and is nonseverable from
the agreement to arbitrate Claims. If the Class Action Waiver is limited,
voided or found unenforceable, then the parties’ agreement to arbitrate shall
be null and void with respect to such proceeding, subject to the right to appeal
the limitation or invalidation of the Class Action Waiver.  The Parties
acknowledge and agree that under no circumstances will a class action be
arbitrated.

(k)           By agreeing to binding
arbitration or judicial reference, the parties irrevocably and voluntarily
waive any right they may have to a trial by jury as permitted by law in respect
of any Claim.  Furthermore, without
intending in any way to limit this Dispute Resolution Provision, to the extent
any Claim is not arbitrated or submitted to judicial reference, the parties
irrevocably and voluntarily waive any right they may have to a trial by jury to
the extent permitted by law in respect of such Claim.  This waiver of jury trial shall remain in
effect even if the Class Action Waiver is limited, voided or found
unenforceable.  WHETHER THE CLAIM IS DECIDED BY ARBITRATION,
BY JUDICIAL REFERENCE, OR BY TRIAL BY A JUDGE, THE PARTIES AGREE AND UNDERSTAND
THAT THE EFFECT OF THIS AGREEMENT IS 

 11
 

THAT THEY ARE GIVING
UP THE RIGHT TO TRIAL BY JURY TO THE EXTENT PERMITTED BY LAW.

27.           FINAL AGREEMENT.  BY SIGNING THIS DOCUMENT EACH PARTY
REPRESENTS AND AGREES THAT:  (A) THIS
DOCUMENT REPRESENTS THE FINAL AGREEMENT BETWEEN PARTIES WITH RESPECT TO THE
SUBJECT MATTER HEREOF, (B) THIS DOCUMENT SUPERSEDES ANY COMMITMENT LETTER, TERM
SHEET, OR OTHER WRITTEN OUTLINE OF TERMS AND CONDITIONS RELATING TO THE SUBJECT
MATTER HEREOF, UNLESS SUCH COMMITMENT LETTER, TERM SHEET, OR OTHER WRITTEN
OUTLINE OF TERMS AND CONDITIONS EXPRESSLY PROVIDES TO THE CONTRARY, (C) THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES, AND (D) THIS DOCUMENT MAY
NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OR UNDERSTANDINGS OF THE PARTIES.

[Remainder of page
intentionally left blank.]

 12
 

Executed as of
this 1st day of June, 2007.

	
  

  	
  GUARANTORS:

  
	
   

  	
   

  
	
   

  	
  ANTELOPE VALLEY
  MEDICAL ASSOCIATES, INC., a California professional corporation

  
	
   

  	
  APAC MEDICAL
  GROUP, INC., a California professional corporation

  
	
   

  	
  PEGASUS MEDICAL
  GROUP, INC., a California professional corporation

  
	
   

  	
  PROSPECT
  ADVANTAGE NETWORK, INC., a California corporation

  
	
   

  	
  PROSPECT HEALTH
  SOURCE MEDICAL GROUP, INC., a California professional corporation

  
	
   

  	
  PROSPECT
  HOSPITAL ADVISORY SERVICES, INC., a California corporation

  
	
   

  	
  PROSPECT NWOC
  MEDICAL GROUP, INC., a California professional corporation

  
	
   

  	
  PROSPECT
  PHYSICIAN ASSOCIATES, INC., a California professional corporation

  
	
   

  	
  PROSPECT
  PROFESSIONAL CARE MEDICAL GROUP, INC., a California professional corporation

  
	
   

  	
  SANTA ANA/TUSTIN
  PHYSICIANS GROUP, INC., a California professional corporation

  
	
   

  	
  SIERRA MEDICAL
  MANAGEMENT, INC., a Delaware corporation

  
	
   

  	
  SIERRA PRIMARY
  CARE MEDICAL GROUP, A MEDICAL CORPORATION, a California professional
  corporation

  
	
   

  	
  STARCARE MEDICAL
  GROUP, INC., a California professional corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
  Jacob Y. Terner, M.D.

  
	
   

  	
  Title:

  	
  Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  PROSPECT MEDICAL
  SYSTEMS, INC., a Delaware corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
  R. Stewart Kahn

  
	
   

  	
  Title:

  	
  Executive Vice President

  
				

 

 13
 

 

 

	
  

  	
  NUESTRA FAMILIA
  MEDICAL GROUP, INC., a California
  professional corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
  R. Stewart Kahn

  
	
   

  	
  Title:

  	
  Vice President

  
	
   

  	
   

  
	
   

  	
  POMONA VALLEY
  MEDICAL GROUP, INC., a California professional corporation

  
	
   

  	
  PROMED HEALTH CARE
  ADMINISTRATORS, a California corporation

  
	
   

  	
  PROMED HEALTH
  SERVICES COMPANY, a California corporation

  
	
   

  	
  UPLAND MEDICAL
  GROUP, A PROFESSIONAL MEDICAL CORPORATION, a California professional
  corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
  Jacob Y. Terner, M.D.

  
	
   

  	
  Title:

  	
  Chief Executive Officer

  
				

 

Address for notices to
Guarantors:

400 Corporate Pointe, Suite
425

Culver City, California  90230

Attn:       Chief Executive Officer

Address for notices to
Administrative Agent:

Bank of America, N.A.

Agency Management

Mail Code: 
WA1-501-32-37

800 Fifth Avenue, Floor 32

Seattle, WA 98104

Attention: 
            Tiffany Shin

Telephone: 
(206)358-0078

Telecopier:  (206)358-0971

 14Exhibit 10.7

SECOND AMENDED AND RESTATED ASSIGNABLE OPTION
AGREEMENT

THIS SECOND
AMENDED AND RESTATED ASSIGNABLE OPTION AGREEMENT (this “Agreement”) is effective as of the 1st of June, 2007, by and among Prospect
Medical Systems, Inc., a Delaware corporation (“PMS”), Prospect Medical Group, Inc., a California
professional corporation (“PMG”), and Jacob Y.
Terner, M.D. (“Shareholder”),
with reference to the following facts:

RECITALS

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

B.            All of the issued and outstanding
shares of PMG are owned by Shareholder.

C.            Pursuant to the Assignable Option
Agreement dated as of January 13, 2000, 
among the parties hereto (as amended or otherwise modified prior to the
date hereof, the Prior Assignable Option
Agreement”), PMG and Shareholder granted to PMS and PMS acquired
from PMG and Shareholder an assignable option to purchase all of the assets of
PMG and the right to designate the purchaser (“Successor Physician”) of all or part of the issued and
outstanding stock in PMG.  When used in
this Agreement, the term “Assets”
shall mean all of PMG’s and Shareholder’s right, title, interest and estate in
and to all the assets of every kind and description used in or pertaining to
the Practice, including but not limited to the assets set forth on Exhibit A.  When used in this Agreement, the term “Stock” shall mean all of Shareholder’s
right, title, interest and estate in and to all of the issued and outstanding
stock in PMG, including any rights to any additional stock, preemptive rights,
warrants, and the like, as set forth on Exhibit B.

D.            PMS, PMG and Shareholder desire to
enter into this Agreement to incorporate within the terms, conditions and
provisions of one agreement all of the terms, conditions and provisions
governing assignable options to purchase all of the Assets and the right to
designate the Successor Physician of all or part of the issued and outstanding
Stock and to amend and restate the terms, conditions and provisions set forth
in the Prior Assignable Option Agreement.

NOW, THEREFORE, in
consideration of the foregoing promises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
the parties, PMS, PMG and Shareholder agree to amend and restate the Prior
Assignable Option Agreement in its entirety to read as follows:

1.             Grant of
Option.

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

1.2           PMG and Shareholder hereby grant to PMS, the assignable
right to designate a Successor Physician or Successor Physicians, which person
or persons must be duly licensed physicians in the State of California or
otherwise permitted by law to be a shareholder in a 

professional corporation,
to purchase all or part of the Stock (the “Stock Option”), on the terms and subject to the
conditions set forth herein.  In its sole
discretion, PMS may designate the amount of Stock which is to be
purchased.  The Assets Option and the
Stock Option are collectively referred to herein as the “Option.”

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

1.4           Except as set forth in the Credit Succession Agreement,
effective June 1, 2007, by and among PMS, Sierra Medical
Management, Inc., a Delaware corporation (“SMM”),
ProMed Health Care Administrators, a California corporation (“PHCA”; and together with PMS and
SMM, each a “Management Company” and collectively, the “Management Companies”), Prospect Hospital
Advisory Services, Inc., a Delaware corporation (“PHA”), Prospect Advantage Network, Inc., a
California corporation (“PAN”) and
ProMed Health Services Company, a California corporation (“PHS”), and together with PHA and PAN, each
a “Non-Management Subsidiary”
and collectively, the “Non-Management
Subsidiaries”, PMG, Sierra Primary Care Medical Group, A Medical
Corporation, a California professional corporation (“Sierra
Primary”), Santa Ana/Tustin Physicians Group, Inc., a California
professional corporation (“Santa Ana/Tustin”),
Pegasus Medical Group, Inc., a California professional corporation (“Pegasus”), Antelope Valley Medical
Associates, Inc., a California professional corporation (“Antelope”),
Nuestra Familia Medical Group, Inc., a California professional corporation (“Nuestra”), Prospect Health Source
Medical Group, Inc., a California professional corporation (“Prospect Health”), Prospect
Professional Care Medical Group, Inc., a California professional corporation (“Prospect Professional”), Prospect
NWOC Medical Group, Inc., a California professional corporation (“Prospect NWOC”), APAC Medical
Group, Inc., a California professional corporation (“APAC”),
StarCare Medical Group, Inc., a California professional corporation (“StarCare”), Genesis Healthcare of
Southern California, Inc., a Medical Group, a California professional
corporation (“Genesis”),
Prospect Physician Associates, Inc., a California professional corporation (“Prospect Physician”), Pomona Valley
Medical Group, Inc., a California professional corporation (“Pomona Valley”), Upland Medical
Group, A Professional Medical Corporation, a California professional
corporation (“Upland”; and
together with PMG, Sierra Primary, Santa Ana/Tustin, Pegasus, Antelope,
Nuestra, Prospect Health, Prospect Professional, Prospect NWOC, APAC, Genesis, Prospect Physician, and
Pomona Valley, each a “Professional
Corporation” and
collectively, the “Professional Corporations”), PC
Shareholders (as defined therein, the “PC Shareholders”) and Banc of America Capital Solutions LLC and Bank of America,
N.A. (each, a “Lender”)
(as the same may be amended, supplemented, restated or otherwise modified from
time to time, the “Credit Succession Agreement”), PMG shall not recognize any share transfer or other action not
in compliance with the terms of this Agreement. 
When used in this Agreement, the term “Applicable Management Company” shall mean (i) with respect
Sierra Primary, Pegasus or Antelope, SMM (ii) with respect to  PMG,
Prospect Health, Prospect Professional, Nuestra, Prospect NWOC, Santa
Ana/Tustin, APAC or StarCare or Genesis, PMS (iii) with respect to Pomona
Valley and Upland, PHCA.

 2
 

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

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

4.             Exercise of
Option.

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

4.2           Notwithstanding the provisions of Section 4.1
above, if the Management Services Agreement is terminated by either PMG or PMS,
for any reason, PMS’s right to exercise the Option is automatically and
immediately exercised as of the termination date of the Management Services
Agreement such that PMS may exercise either the Assets Option or the Stock
Option, or both, at such time.

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

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

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

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

4.7           PMG and Shareholder shall cooperate with PMS in any due
diligence, and PMG and Shareholder shall cause each other Professional
Corporation and PC Shareholder to cooperate with PMS or any Applicable
Management Company in any due diligence.

4.8           PMG and Shareholder shall execute and deliver such
agreements, documents and instruments at Closing (as defined below) as PMS may
request evidencing or relating to the purchase of Assets or Stock, as the case
may be, each in form and substance satisfactory to PMS, 

 3
 

including without
limitation, the Non-Competition Agreement in the form of Exhibit C
attached hereto.

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

6.             Purchase
Price of the Assets or Stock.

6.1           Purchase Price.

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

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

6.2           Payment. For the Assets, PMS shall pay to PMG the
Assets Purchase Price at Closing (as defined below) in the form of immediately
available funds transferred by wire to an account at a financial institution
designated by PMG.  For the Stock, PMS
shall cause the Successor Physician to pay the Shareholder the Stock Purchase
Price.

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

7.             Additional
Obligations of PMG and Shareholder.

7.1           Affirmative Covenants.  To the extent that PMG or Shareholder
participate in the Practice and own, control, or use the Assets, PMG and
Shareholder shall, and shall cause each other Professional Corporation and PC
Shareholder to::

(a)           Conduct of Practice.  Conduct PMG’s and each such other
Professional Corporation’s business efficiently and without voluntary interruption
and preserve all rights, privileges, and franchises held by PMG and each such
other Professional Corporation and by 

 4
 

PMG’s Practice and the
practice of each such other Professional Corporation, including the maintenance
of all contracts, copyrights, trademarks, licenses, registrations, etc.;

(b)           Use.  Make
use of the Assets and the assets of each such other Professional Corporation
with reasonable care to prevent diminution in value of the Practice and the
practice of each such other Professional Corporation and the Assets and the
assets of each such other Professional Corporation, and keep the Assets and the
assets of each such other Professional Corporation in good repair;

(c)           Value. 
Perform all acts necessary to maintain, preserve, and protect the Assets
and the assets of each such other Professional Corporation, and maintain fire
and extended coverage insurance on the Assets in the amounts and under policies
acceptable to PMS and the Applicable Management Companies, and provide PMS and
the Applicable Management Companies with the original policies and certificates
at PMS’s or the Applicable Management Company’s request;

(d)           Financing Statements.  Execute and deliver to PMS and the Applicable
Management Companies, all financing statements and other documents that PMS or
any Applicable Management Company requests, in order to put third parties on
notice of this Agreement;

(e)           Access. 
Permit PMS and each Applicable Management Company, its representatives,
and its agents to inspect the Assets and the assets of the each other
Professional Corporations at any time, and to make copies of records pertaining
to the Assets and the assets of each other Professional Corporation, at
reasonable times at the applicable Management Company’s request;

(f)            Reports. Furnish PMS and the Applicable Management
Companies any reports relating to the Assets and the assets of each other
Professional Corporation at PMS’s or at the Applicable Management Company’s
request;

(g)           Defaults. Notify PMS and the Applicable Management
Companies promptly in writing of any default, potential default, or any
development that might have a material adverse effect on the Assets, the assets
of each other Professional Corporation, the Stock or the equity interest in any
other Professional Corporation, or the Practice or any practice of any other
Professional Corporation, or of any litigation that may have a material adverse
effect on the Practice or any practice of any other Professional Corporation;

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

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

 5
 

(j)            Taxes.  Pay
promptly when due all taxes and assessments owed in connection with the Assets
and the assets of each other Professional Corporation and the Stock and the
equity interest in each other Professional Corporation; and

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

7.2           Negative Covenants. 
Except as required under the Credit Succession Agreement or under the
Loan and Security Agreement, dated as of the date hereof, among Holdings, the
Management Companies, the Non-Management Companies, the Professional
Corporations and the Lender, without the prior written consent of the PMS or
the Applicable Management Companies, PMG and Shareholder shall not (and shall
not permit any other Professional Corporation or PC Shareholder to):

(a)           Transfer. 
Sell, lease, transfer, or otherwise dispose of the Assets or the assets
of any other Professional Corporation or Stock or the equity interest in any
other Professional Corporation;

(b)           Debt.  Incur,
guarantee, assume or otherwise become liable for any borrowing or increase any
existing indebtedness; or discharge or cancel any debt owed to PMG or any other
Professional Corporation;

(c)           No Further Hypothecation.  Pledge, hypothecate, encumber, redeem or
dispose of the Assets or any of the assets of any other Professional
Corporation, the Stock or any interest therein, or any equity interest in any
other Professional Corporation or an interest therein until all of PMG’s
obligations under this Agreement have been fully satisfied or the Assets or the
Stock has been released;

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

(e)           Use.  Use the
Assets, or the assets of other Professional Corporations, or the Stock, or any
equity interest in any other Professional Corporations, for any unlawful
purpose or in any way that would void any effective insurance;

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

(g)           Issuance of Stock; Change in Ownership; Mergers and
Consolidation.  Permit any issuance
of Stock, any equity interest in any other Professional Corporation, other
equity, or debt; permit any change in the composition or respective percentage
ownership of PMG or any other Professional Corporation; permit PMG or any other
Professional Corporation to be merged, consolidated or otherwise reorganized
with or into any other corporation, 

 6
 

partnership, trade,
business, or the like; amend or otherwise modify its articles of incorporation
and bylaws; dissolve; or enter into any agreement with any person to do any of
the foregoing.

8.             Confidentiality.  The parties shall use all good faith efforts
to keep the contents of this Agreement and all other aspects of the
negotiations preceding execution of this Agreement confidential.  Unless required by law, PMS, PMG and Shareholder
shall not disclose the contents of this Agreement or the negotiations leading
to this Agreement to third parties without the prior written consent of the
other party.  PMS shall ensure that all
of the assignees likewise comply with the obligations of confidentiality
imposed by this Section, except that PMS and the assignees may disclose
the contents of such to their respective agents, representatives, contractors,
and employees to the extent necessary to exercise their respective rights or
perform their respective obligations hereunder.

9.             General.

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

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

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

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

 7
 

in its entirety.  The parties
hereto acknowledge and agree that this Agreement that the rights and
obligations under the Prior Agreement are in all respects continuing under this
Agreement with only the terms being modified from and after the date hereof as
provided in this Agreement.

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

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

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

If to a PMG

Or Shareholder:                                                                                                              c/o Prospect Medical Group, Inc.

1920 East 17th Street, Suite 200

Santa Ana, California

Attention: Jacob Y. Terner, M.D.

If to PMS:

c/o Prospect Medical Holdings, Inc.

400 Corporate Pointe, Suite 525

Culver City, California  90230

Attention: Stewart Kahn, Executive Vice President

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

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

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

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

 8
 

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

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

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

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

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

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

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

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

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

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

 9
 

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

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

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

9.18         Spousal Consent.   Shareholder shall cause his spouse to
execute a Spousal Joinder and Consent, substantially in the form of Exhibit
A attached hereto, signifying such spouse’s consent to this Agreement and
such spouse’s agreement that any rights that such spouse may have, as a result
of a community property or other interest in the Stock, shall be subject to the
provisions of this Agreement.  It is
intended by this Agreement that Shareholder shall subject his entire interest
in the Stock to the terms of this Agreement, irrespective of any community property
or other interest of his spouse.

<The remainder of the page
is intentionally blank.>

 10

 

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

	
  “PMS”

  	
  “PMG”

  
	
   

  	
   

  
	
  PROSPECT MEDICAL SYSTEMS, INC., a Delaware
  corporation

   

   

   

  By:                                                                          

  Name:     R.
  Stewart Kahn   

  Title:       Executive
  Vice President     

   

  	
  PROSPECT MEDICAL GROUP, INC.,
  a California professional corporation

   

   

   

  By:                                                                          

  Name:     Jacob
  Y. Terner, M.D.         

  Title:       Chief
  Executive Officer        

   

  
	
   

  	
  “SHAREHOLDER”

  
	
   

  	
   

  
	
   

  	
  JACOB
  Y. TERNER

  
	
   

  	
   

  
	
   

  	
   

                                                                                  

  Jacob Y. Terner, individually

   

  

[Signature
Page to the Amended and Restated

Assignable Option Agreement]

SPOUSAL JOINDER AND CONSENT

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

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

Executed this 1st day of June, 2007.

Signature: 
_________________

Printed or Typed Name:
Sandra W. Terner

[Signature Page to the Spousal Joinder and Consent to the Amended and
Restated

Assignable Option Agreement]

EXHIBIT A

ASSETS

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

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

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

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

5.             All supplies and inventory relating
to the Practice.

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

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

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

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

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

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

EXHIBIT B

STOCK

Stock of PMG has
been pledged to Lender pursuant to the terms of that certain Pledge Agreement,
dated as of the June 1,
2007 executed in favor of Lender by Jacob Y. Terner, as the same may be amended,
supplemented, restated or otherwise modified from time to time, and
as  such pledge has been reaffirmed
pursuant to the term of that certain Amended and Restated Credit Succession Agreement, dated
as of June 1,  2007, by and among, Shareholder, PMS, SMM, PHR, the
Professional Corporations, the PC Shareholders and Lender, as the same may be
amended, supplemented, restated or otherwise modified from time to time.

EXHIBIT C

NON-COMPETITION AGREEMENT

THIS
NON-COMPETITION AGREEMENT (“Agreement”) is made as of this ___th day of [____________], and is effective as
of_____________, ____, by and between Prospect Medical Systems, Inc., a
Delaware. corporation (“Systems”), Prospect Medical Group, Inc., a California
professional corporation (“PC”), Jacob Y. Terner, M.D. (“Professional”), and
_________________ (“Successor Physician”).

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

RECITALS

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

B.            On___________, ___, Systems
exercised its Option to designate Successor Physician to acquire the stock or
assets of PC under the terms of that certain Assignable Option Agreement, dated
June 1, 2007 by and between Systems, PC and Professional (as the same may
be amended, supplemented, restated or otherwise modified from time to time, the
“Assignable Option Agreement”).

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

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

AGREEMENT

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

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

1.1           That Professional will not, directly
or indirectly (whether as a sole proprietor, partner, stockholder, director,
officer, employee, independent contractor or in any other capacity as principal
or agent) (i) establish, operate or provide professional medical services
within ten (10) miles of any location at which PC conducts business or any
location at which other 

professional
corporations managed by Systems as of the Effective Date conduct business; or
(ii) compete with Systems in the provision of the same services or
services substantially similar to those services provided by Systems.
Professional shall be deemed to compete with Systems if Professional provides
to any medical association(s) or group(s) of physicians within ten (10) miles
of any location at which PC conducts business during the term of this Agreement
any services that are the same or substantially similar to any services
provided by Systems pursuant to the terms of its management services
agreements.

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

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

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

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

2.             Confidentiality

2.1           PC’s Confidential and Proprietary
Information.  In the course of
Professional’s engagement by PC, Professional has had access to certain
confidential or proprietary information 

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

2.2           Systems’ Confidential and
Proprietary Information.

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

2.2.2        Professional
acknowledges and agrees that Systems is entitled to prevent the disclosure or
improper use of any of Systems’ Confidential and Proprietary Information.  Professional agrees at all times to hold in
strictest confidence and not to disclose to any person, firm or corporation and
not to use, except in the pursuit of the business of PC or Systems, Systems’
Confidential and Proprietary Information, without the prior written consent of
Systems; unless (i) such information becomes known or available to the
public generally through no wrongful act of Professional or (ii) disclosure
is required by law or the rule, regulation or order of any governmental
authority under color of law; provided, that prior to disclosing any of Systems’
Confidential and Proprietary Information pursuant to this clause (ii),
Professional shall, if possible, give prior written notice thereof to Systems
and provide Systems with the opportunity to contest such disclosure.  Professional shall take all necessary and
proper 

precautions
against disclosure of any of Systems’ Confidential and Proprietary Information
to unauthorized persons.  Upon execution
of this Agreement, Professional shall cease all use of any of Systems’
Confidential and Proprietary Information and shall execute such documents as
may be reasonably necessary to evidence abandonment of any claim thereto.

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

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

4.             Miscellaneous.

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

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

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

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

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

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

If to Professional:                                                                                                  Jacob Y. Terner, M.D.

__________________

__________________

__________________

If to Systems:                                                                                                                       Prospect
Medical Systems, Inc.

__________________

__________________

__________________

If to PC:                                                                                                                                                     Prospect
Medical Group, Inc.

__________________

__________________

__________________

If to Successor
Physician:

__________________

__________________

__________________

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

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

4.9           Severability.  If any provision or portion of this Agreement
is held by a court of competent jurisdiction to be invalid or unenforceable,
the remainder of this Agreement will nevertheless continue in full force and
effect and shall not be invalidated or rendered unenforceable or otherwise
adversely affected, unless such invalidity or unenforceability would defeat an
essential business purpose of this Agreement. 
Without limiting the generality of the foregoing, if the provisions of
this Agreement shall be deemed to create a restriction, which is unreasonable
as to either duration or geographical area or both, the parties agree that the
provisions of this Agreement shall be enforced for such duration and in such
geographic area as any court of competent jurisdiction may determine to be
reasonable.

4.10         Attorneys’ Fees.  Should any of Systems, PC or Professional
institute any action or procedure to enforce this Agreement or any provision
hereof, or for damages by reason of any alleged breach of this Agreement or of
any provision hereof, or for a declaration of rights hereunder (including
without limitation arbitration), the prevailing party(ies) in any such action 

or proceeding
shall be entitled to receive from the other party all costs and expenses,
including without limitation reasonable attorneys’ fees, incurred by the
prevailing party(ies) in connection with such action or proceeding.

4.11         Professional’s Practice of Medicine.  Notwithstanding anything to the contrary in
this Agreement, nothing herein is meant to limit or restrict Professional’s
ability to practice medicine as a physician within any radius, including within
10 miles of any PC location, in the State of California.

[The remainder of the page is intentionally blank.]

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

“Systems”

PROSPECT MEDICAL SYSTEMS, INC.

a Delaware corporation

By:                                                                                          

R. Stewart Kahn

Title:                       Executive
Vice President

“PC”

PROSPECT MEDICAL GROUP, INC.,

a California professional corporation

By:                                                                                          

Jacob Y. Terner, M.D.

Title:                       Sole
Shareholder

“PROFESSIONAL”

JACOB Y. TERNER, M.D.

                                                                                

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

“SUCCESSOR PHYSICIAN”

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