Document:

Exhibit 10.6

 

AMENDED AND RESTATED MANAGEMENT SERVICES
AGREEMENT

 

THIS AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT (“Agreement”)
is made and entered into as of September 15, 1998, and deemed to have been
effective as of June 4, 1996, by and between PROSPECT MEDICAL SYSTEMS,
INC., a Delaware corporation (“Manager”), and PROSPECT MEDICAL GROUP, INC., a
California professional corporation (“GROUP”).

 

RECITALS

 

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

 

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

 

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

 

D.                                    Manager
has provided GROUP with the necessary support to manage the business aspects of
the Practice, including but not limited to clerical and billing services,
claims pursuit and collection, cash flow management, marketing and general
administrative services (collectively, “Management Services”), to enable GROUP
to concentrate on the development of the professional aspects of the Practice
pursuant to a Management Services Agreement made and entered into as of
June 4, 1996, by and between Manager and GROUP (the “Original Management
Services Agreement”); and

 

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

 

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

 

 

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

 

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AGREEMENT

 

1.                                       Premises.

 

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

 

In consideration of the sums to be paid to
Manager under the terms of this Agreement, Manager hereby leases to GROUP
during the term of this Agreement the facilities and leasehold improvements at
the Premises and the furniture, fixtures and equipment (the “FF&E”) listed
on Exhibit “B” attached hereto and incorporated herein by this reference, under
the following terms and conditions:

 

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

 

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

 

1.1.2.                     All
of the terms and conditions contained in the Master Lease are incorporated
herein as terms and conditions of the sublease (with each reference therein to
“Lessor” and “Lessee,” to be deemed to refer to Manager and GROUP,
respectively) and, along with the provisions of this Section 1.1 and
Exhibit “A,” shall be the complete terms and conditions of the sublease created
hereby.

 

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

 

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

 

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

 

2.                                       Provision
of Furniture, Furnishings and Equipment (“FF&E”).

 

Manager hereby provides to GROUP, and GROUP
hereby leases from Manager, all the FF&E, which FF&E GROUP agrees are
suitable and sufficient for GROUP’s use in the operation of GROUP’s
administrative office at the Premises and are generally in good repair.  The use by GROUP of said FF&E shall be
subject to the following conditions:

 

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

 

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

 

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

 

2.4.                              Manager
shall provide and maintain, at its expense, such additional or replacement
FF&E as the Practice reasonably requires from time to time, as determined
by Manager in its sole discretion, in consultation with GROUP.  Such additional or replacement FF&E
shall be subject to all of the terms of Section 2.1 above.

 

2.5.                              GROUP
may provide additional equipment at the Practice (“GROUP Equipment”) at its
sole cost and expense.  GROUP shall be
responsible for all repairs, maintenance and replacement of, as well as all
property taxes and other assessments relating to or arising out of ownership or
use of, such 

 

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additional equipment, unless GROUP requests that Manager provide such
repairs, maintenance and replacement upon such terms and conditions as the
parties may agree including, without limitation, an increase in the Management
Fee (as defined in Section 9 below). 
Title to said GROUP Equipment shall remain in GROUP’s name at all times.

 

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

 

3.                                       Manager
Responsibilities

 

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

 

3.1.1.                     General Administrative Services

 

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

 

3.1.2.                     Accounting and Financial Management Services.

 

Manager shall provide the following
accounting and financial management services:

 

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

 

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

 

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

 

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

 

3.1.2.5.            Manager
agrees to prepare balance sheets and income statements on a monthly basis
during the term of this Agreement.  Such
financial statements shall not be audited statements.  Manager agrees to cooperate with any annual audit GROUP obtains
at its sole cost and expense by an independent public accountant selected by
GROUP;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

3.1.3.                     Office Service; Billing.

 

Manager shall provide bookkeeping and
accounting services, including, without limitation, maintenance, custody and
supervision of GROUP’s business records, papers and documents, ledgers,
journals and reports, and the preparation, distribution and recording of all
bills and statements for professional services rendered by GROUP, as well as
all reports and forms required by 

 

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applicable third party payors. 
GROUP shall at all times have the ultimate responsibility for setting
all fees for professional services provided on a fee for service basis to
patients of the Practice, as well as negotiating with each managed care
contract Payor.  All billings for
services rendered to patients by the Practice shall be made under GROUP’s name
and provider number(s), and Manager shall act as GROUP’s agent in the
preparation, rendering and collection of such billings.  GROUP hereby appoints Manager for the term
hereof as its true and lawful agent for the following purposes:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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3.1.6.2.            Review
and make recommendations regarding the business terms of agreements between
GROUP and Participating Providers;

 

3.1.6.3.            Make
recommendations regarding compensation to Participating Providers;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

3.1.8.1.            Manager
shall develop a proposal outlining the structure and functions of a GROUP
utilization and quality management plan after reviewing the requirements of
each Plan.  GROUP agrees, following
review of Manager’s recommendations, to adopt a GROUP utilization and quality
management plan which includes a list of services for which Manager has
received authority 

 

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from GROUP to authorize services provided.  In authorizing said services, Manager shall be the agent of
GROUP;

 

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

 

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

 

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

 

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

 

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

 

3.1.8.7               Manager shall provide secretarial
support, logs, and minutes to the Medical Director and the UR/QA Committee of
GROUP;

 

3.1.8.8               Manager shall assist Medical Director
and the UR/QA Committee in responding to Plan Member grievances based on the
instructions of the Medical Director;

 

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

 

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

 

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

 

3.1.11.               Marketing and Public Relations Services.   Manager will assist GROUP in GROUP’s
marketing, public relations and advertising of the health care services
provided by 

 

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

 

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

 

3.1.13.               Certain Incentives.  Upon the completion of the proposed merger
by and between Manager and Med-Search Acquisition Corporation, a wholly owned
subsidiary of Med-Search, Inc. (“Med-Search”), Manager agrees to make available
MedSearch stock or exchange-listed stock options or warrants of Med-Search for
use as incentive compensation for physicians employed by or contracted with
GROUP which have been jointly determined by GROUP and Manager to be appropriate
additions to the Practice.

 

3.2.                              Managed Care Contracting

 

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

 

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

 

3.2.3.                     Manager
shall notify and provide copies to GROUP of each Contract (together with all
related materials received from the applicable Payor) that Manager executes as
GROUP’s agent.  GROUP shall comply with
all terms of each Contract including, without limitation, the terms of all 

 

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documents or instruments incorporated therein by reference and all
documents or instruments related thereto that Manager executes or agrees to on
GROUP’s behalf, as well as all applicable law. 
GROUP further agrees that an essential term of this Agreement is GROUP’s
undertaking to provide cost-effective medical care consistent with accepted
medical practices prevailing in the GROUP’s service area.

 

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

 

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

 

3.3.                              Personnel.

 

Manager shall employ or contract with and
provide all necessary non-physician personnel, including quality assurance,
utilization review, claims processing, secretarial and clerical personnel as
are reasonably necessary for the conduct of the Practice (collectively,
“Manager Personnel”).  Manager shall, in
its sole and absolute discretion, determine the types and numbers of personnel
and the number of hours and schedules of said personnel it determines are
necessary or appropriate to provide the administrative and management services
to be provided pursuant to this Agreement. 
Manager shall provide such personnel at its sole cost and expense and
such personnel may, at the sole and absolute discretion of Manager, be
employees or independent contractors of Manager.  Manager shall, in its sole and absolute discretion, have the
right, but shall not be required, to engage as Manager Personnel any or all of
those individuals who were employees of GROUP immediately prior to the
effective date hereof (“GROUP’s Former Employees”).  Manager shall have sole control over promotion and employee
disciplinary and termination matters with respect to Manager Personnel
(including, without limitation, GROUP’s Former Employees), and shall not be
responsible for any accrued vacation, paid time off or other benefits to such
individuals that have accrued prior to the date that Manager engages them as
its employees.

 

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

 

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

 

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

 

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

 

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

 

4.                                       Responsibilities
of GROUP.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

13

 

5.                                       Term;
Termination.

 

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

 

5.2.                              Termination
for Cause.

 

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

 

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

 

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

 

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

 

5.2.2.1.            If
Manager fails to materially perform any obligation required hereunder which
failure amounts to gross negligence, fraud or an illegal act on the part of
Manager, and such default shall continue for sixty (60) calendar days after
written notice from GROUP specifying the nature and extent of failure to
materially perform such obligation, this Agreement shall terminate
automatically and immediately upon the expiration of said sixty (60) calendar
day period; provided, however, that if the obligation which Manager fails to
perform is other than the failure to make payment of money, and greater than
sixty (60) calendar days are required to perform said obligation, then such
party 

 

14

 

shall not be in default of this Agreement and the Agreement shall not
terminate as provided hereinabove if such party commences performance within
said sixty day period and diligently pursues said obligation to completion.

 

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

 

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

 

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

 

6.                                       Rights
of Manager Upon Termination.

 

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

 

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

 

15

 

7.                                       Representations
and Warranties of GROUP.

 

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

 

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

 

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

 

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

 

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

 

7.5.                              GROUP
and any and all Participating Providers providing services for the GROUP have
each obtained and currently maintain all necessary licenses, permits,
contracts, and approvals required by federal, state or local statutes and
regulations for the proper conduct of the business of the GROUP as it is now
being conducted and have been approved by the Board of Directors or its
properly designated committee, as documented by written committee minutes.

 

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

 

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

 

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

 

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

 

16

 

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

 

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

 

7.9.                              GROUP
represents and warrants that, as of the date hereof:

 

7.9.1.                     All
of GROUP’s Former Employees and any current non-professional employees of GROUP
related to the Practice (“Practice Employees”) (i) if terminated, have been
properly terminated as of the closing under the Agreement of Purchase and Sale
of Stock, by and between GROUP and Prospect Medical Group, Inc. (the “Closing”)
without creating any cause of action or otherwise giving rise to any liability
for wrongful discharge, breach of contract, tort or other cause of action at
law or in equity, and there are no such actions pending or, to GROUP’s
knowledge, threatened, and GROUP has satisfied all obligations to such
employees for all accrued salaries and benefits, or (ii) are subject to such
other disposition as is satisfactory to Manager.

 

7.9.2.                     There
is no liability to any employee or third party, including any governmental
agency, for any employee benefits, compensation, taxes or withholdings of any
kind with respect to any of the Practice Employees other than those items
arising in the normal course of business immediately prior to the Closing, all
of which items shall be set forth in Schedule 7.9.2.  There are no accrued vacations or sick leave
for any of the Practice Employees for which Manager may become liable by reason
of any of the transactions contemplated under this Agreement.  GROUP shall be solely responsible to comply
with the requirements, if any, of the federal Worker Adjustment and Retraining
Notification Act.

 

7.9.3.                     There
are no threats of strikes or work stoppages by any of the Practice
Employees.  The GROUP is not a party to
any contract or agreement with a labor union or any local or subdivision
thereof, and has not been charged with any unresolved unfair labor practices,
and there are no labor grievances or any present union organizing activity
among any of the Practice Employees.

 

8.                                       Representations
and Warranties of Manager.

 

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

 

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

 

17

 

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

 

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

 

9.                                       Manager
Compensation.

 

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

 

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

 

10.                                 Records.

 

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

 

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

 

18

 

11.                                 Indemnification.

 

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

 

12.                                 Proprietary
Information.

 

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

 

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

 

12.3.                        GROUP
shall inform all of GROUP’s Former Employees specified by Manager in writing,
within ten (10) days following the date hereof, that they are now employees of
Manager.  Notwithstanding the provisions
of Section 12.2 above, upon termination of this Agreement, Manager may, at
its option, require GROUP upon written notice to hire any or all of GROUP’s
Former Employees at salary and benefit levels equal to or greater than the
salary and benefits that Manager was paying those individuals as of their last
day of employment with Manager.

 

19

 

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

 

13.                                 Independent
Contractors.

 

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

 

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

 

15.                                 Miscellaneous

 

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

 

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

 

15.3.                        Successors
and Assigns.  All of Manager’s
rights and duties under this Agreement may be assigned or delegated by Manager,
including but not limited to, an assignment to Imperial Bank, a California
banking corporation.  Notwithstanding
any other provision of this Agreement, neither this 

 

20

 

Agreement nor the rights and duties of this Agreement may be assigned
or delegated by GROUP.  This Agreement
binds the successors, heirs, and authorized assignees of the parties.

 

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

 

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

 

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

 

If to GROUP:                           Prospect
Medical Group, Inc.

18200 Yorba Linda Blvd., Suite 409

Yorba Linda, CA 92886

Attention: 
President

 

If to Manager:                    Prospect
Medical Systems, Inc.

18200 Yorba Linda Blvd., Suite 409

Yorba Linda, CA 92886

Attention: 
President

 

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

 

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

 

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

 

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

 

21

 

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

 

15.12.                  Dispute
Resolution.

 

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

 

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

 

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

 

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

 

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

 

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

 

15.12.7.         All
decisions of the arbitrator shall be final, binding and conclusive on the
parties and shall constitute the only method of resolving disputes or matters
subject to arbitration pursuant to this Agreement.  The arbitrator or a court of appropriate jurisdiction may issue a
writ of execution to 

 

22

 

enforce the arbitrator’s judgment. 
Judgment may be entered upon such a decision in accordance with
applicable law in any court having jurisdiction thereof.

 

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

 

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

 

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

 

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

 

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

 

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

 

Manager further agrees that in the event
Manager carries out any of its duties under this Agreement through a
subcontract, with a value or cost of Ten Thousand Dollars ($10,000) or more
over a twelve (12) month period, such subcontract shall contain a clause to the
effect that until the expiration of four (4) years after the furnishing of such
services pursuant to such subcontract, the subcontractor shall make available,
upon written request to the Secretary of the United States Department of Health
and 

 

23

 

Human Services, or upon request to the Comptroller General of the
United States General Accounting Office, or any of their duly authorized
representatives, the subcontract and such books, documents and records of such
organization as are necessary to verify the nature and extent of such costs.

 

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

 

	
  MANAGER:

  	
   

  	
  GROUP:

  
	
   

  	
   

  	
   

  
	
  PROSPECT MEDICAL SYSTEMS, INC.

  	
   

  	
  PROSPECT MEDICAL GROUP, INC.

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ R. Steward Kahn

  	
   

  	
  By:

  	
  /s/ Jacob Y. Terner, M.D.

  	
   

  
	
   

  	
  R. Steward Kahn

  	
   

  	
   

  	
  Jacob Y. Terner, M.D.

  	
   

  
	
  Its:

  	
  ExecutiveVice President

  	
   

  	
  Its:

  	
  Vice President

  	
   

  
							

 

 

24

 

LIST OF
EXHIBITS AND SCHEDULES

 

Exhibits

 

A                                      -                                            Master
Lease

 

B                                        -                                            Furniture,
Fixtures & Equipment

 

C                                        -                                            Power of
Agency

 

D                                       -                                            Management
Fee

 

Schedule

 

7.9.2                        Practice Employee Liabilities

 

 

EXHIBIT “A”

 

MASTER
LEASE

 

 

EXHIBIT “B”

 

FURNITURE,
FIXTURES & EQUIPMENT

 

 

EXHIBIT “C”

 

POWER
OF AGENCY

 

 

EXHIBIT “C”

 

POWER
OF AGENCY

 

This Power of Agency is made and entered into
in connection with that certain Management Services Agreement (the “Agreement”)
dated as of the
              
day of
              ,
1996, between Prospect Medical Systems, Inc., a Delaware corporation (“Manager”),
and Prospect Medical Group, Inc., a professional corporation (“GROUP”), as
amended.

 

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

 

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

 

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

 

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

 

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

 

 

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

 

	
  MANAGER:

  	
   

  	
  GROUP:

  
	
   

  	
   

  	
   

  
	
  PROSPECT MEDICAL SYSTEMS, INC.

  	
   

  	
  PROSPECT MEDICAL GROUP, INC.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Its:

  	
   

  	
   

  	
  Its:

  	
   

  	
   

  
							

 

 

EXHIBIT “D”

 

MANAGEMENT
FEE

 

 

EXHIBIT “D”

 

MANAGEMENT
FEE

 

A.                                   Definitions

 

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

 

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

 

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

 

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

 

 

B.                                     Management Fee

 

For its services hereunder, which shall
include the providing of all facilities and furniture, fixtures and equipment
at the Premises and all non-physician employees of Manager who perform services
at or for the Practice and all management services provided hereunder, Manager
shall (i) retain that portion of the Gross Revenues which is equal to
Manager’s Costs plus (ii) eight percent (8%) of Gross Revenues plus (iii) a
fee for marketing and public relations services of $8,000 per month plus
(iv) fifty percent (50%) of Net Pre-tax Income in excess of eight percent
(8%) of Gross Revenues; provided however, that if after the payment of
Manager’s Costs as set forth in item (i) herein GROUP’s working capital is
insufficient to meet GROUP’s liabilities or other obligations, the amount of
Gross Revenues paid to Manager shall be deferred until GROUP is able to meet
such obligations.  Additionally, subject to the terms of the Subordination and
Note Cancellation Agreement, dated as of September 25, 1997, by and among
Manager, Group, Imperial Bank, a California banking corporation, Prospect
Medical Holdings, Inc., a Delaware corporation, Karunyan Arulanantham, M.D. and
Sinnadurai E. Moorthy, M.D. the Management Fee shall be deferred to the
extent necessary to provide for the payment of any amounts owed when due under
those promissory notes issued by GROUP to Karunyan Arulanantham, M.D. and
Sinnadurai E. Moorthy, M.D. in the aggregate principal amount of $2,250,000.

 

 

EXHIBIT “E”

 

ASSIGNABLE
OPTION AGREEMENT

 

 

SCHEDULE 7.9.2

 

PRACTICE
EMPLOYEE LIABILITIESExhibit
10.7

 

AMENDMENT
TO MANAGEMENT SERVICES AGREEMENT

 

THIS AMENDMENT TO MANAGEMENT SERVICES AGREEMENT (“Agreement”) is made
and entered into as of October 1, 1998, by and between PROSPECT MEDICAL
SYSTEMS, INC., a Delaware corporation (“Manager”), and PROSPECT MEDICAL GROUP,
INC., a California professional corporation (“GROUP”).

 

RECITALS

 

A.                                   GROUP and Manager entered into that certain
Management Services Agreement dated as of June 4, 1996 (“Management
Agreement”).

 

B.                                     The parties desire to amend and restate
Exhibit D to the Management Agreement as follows:

 

EXHIBIT D -
MANAGEMENT FEE

 

A.                                   Definitions

 

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

 

Manager’s
Costs means all operating and non-operating third party
vendor and consultant expenses and costs, as well as expenses and costs
directly related to Manager’s employees working at GROUP’s facility, incurred
by Manager on behalf of GROUP in conjunction with the operation of the
Practice.  These expenses and costs
include, but are not limited to, direct labor costs (for all employees of
Manager or its affiliates working at GROUP’s facility, and for any independent
contractors or consultants to Manager or other third parties whose services are
specifically retained primarily for the benefit of GROUP), indirect labor costs
for services primarily for the benefit of GROUP, supplies, all amounts paid by Manager
or GROUP to satisfy any obligations of GROUP to non-professional employees and
third parties (other than for the Cost of Medical Services), obligations under
any lease or purchase agreement or arrangement for which Manager has direct or
indirect financial liability, and direct and indirect corporate overhead of
GROUP.

 

 

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

 

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

 

Net Pre-Tax Loss means any loss resulting after the deduction
from Gross Revenues of Manager’s Costs and the Cost of Medical Services after
provision of any physician incentive payments but before provision for income
taxes.

 

Net Pre-Tax Profit means any profit resulting after the
deduction from Gross Revenues of Manager’s Costs and the Cost of Medical
Services after provision of any physician incentive payments but before
provision for income taxes.

 

B.                                     Management Fee

 

Base Management Fee: for its services hereunder, which shall
include the provision of all facilities and furniture, fixtures and equipment
at the Premises and all non-physician employees of Manager who perform services
at or for the Practice and all management services provided hereunder, Manager
shall (i) retain that portion of the Gross Revenues which is equal to Manager’s
Costs plus (ii) fifteen percent (15%) of Gross Revenues the (“Management Fee”)
plus (iii) a fee for marketing and public relations services in the amount of four
thousand dollars ($4,000) pet month. 
Notwithstanding the foregoing, if, after the payment of Manager’s Costs
as set forth in item (i) above, GROUP’s working capital is insufficient to meet
GROUP’s liabilities or other obligations to the extent necessary to meet such
obligations, the Management Fee provided for in item (ii) above shall be
deferred until GROUP is able to meet all such obligations.  The Management Fee shall be reviewed on an
annual basis by Manager’s Board of Directors to ensure that it remains
consistent with the fair market value for the services rendered to GROUP by
Manager.

 

Performance Incentive Bonus Payment: if, at the end of GROUP’s fiscal year, it is
determined that GROUP has a Net Pre-Tax Profit for the year, Manager shall be
entitled to a performance incentive bonus payment consistent with the fair
market value of the services provided by Manager to Group (as determined on an
annual basis by the Board of Directors of Manager), but no more than fifty
percent (50%) of Net Pre-Tax Income in excess of eight percent (8%) of Net
Pre-Tax Profits.

 

2

 

Performance Incentive Penalty Payment: if, at the end of GROUP’s fiscal year, it is
determined that GROUP has a Net Pre-Tax Loss for the year, Manager shall be
obligated to pay to GROUP (in the form a reduction in future management fees) a
penalty payment in the amount of fifty percent (50%) of one hundred percent
(100%) of such Net Pre-Tax Loss.

 

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

 

	
  MANAGER

  	
   

  	
  GROUP

  
	
   

  	
   

  	
   

  
	
  PROSPECT
  MEDICAL SYSTEMS, INC.

  	
   

  	
  PROSPECT
  MEDICAL GROUP, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
  R.
  Stewart Kahn,

  	
   

  	
   

  	
  Jacob
  Y. Terner, M.D.

  
	
   

  	
  Executive
  Vice President

  	
   

  	
   

  	
  Vice
  President

  
							

 

3

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