Document:

Exhibit
10.33

 

MANAGEMENT
SERVICES AGREEMENT

 

THIS
MANAGEMENT SERVICES AGREEMENT (“Agreement”) is made and entered into as of
October 1, 2003, by and between PROSPECT MEDICAL SYSTEMS, INC., a Delaware
corporation (“Manager”), and PROSPECT PROFESSIONAL CARE 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 an independent 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 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 desires to provide 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.

 

E.                                      GROUP and Manager desire to enter into this
Agreement to set forth the terms of Manager’s Management Services.

 

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
GROUP with adequate administrative office space at the addresses described
therein (the “Premises”) and Group shall retain all of its remaining facilities
for the operation of the Practice with leasehold improvements, auxiliary
services and utilities in order that GROUP may effectively perform its
functions and duties.

 

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 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  and Exhibit “A,” shall be the complete terms and conditions
of the sublease created hereby.

 

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

 

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

 

1.1.5.                     If the Master Lease contains an option to
renew the term thereof, Manager shall notify GROUP, at least thirty (30) days
prior to the expiration of the time for exercising such option, of Manager’s
intention to renew or not to renew such term. 
If

 

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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 medical practice at the Premises and are generally in good repair.  The use by GROUP of said FF&E shall be
subject to the following conditions:

 

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

 

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

 

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

 

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

 

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

 

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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 will prepare, in consultation with
GROUP, annual budgets for the Practice, reflecting in reasonable detail
anticipated revenues and expenses.

 

3.1.2.2.                                                            Manager shall, pursuant to GROUP’s
instructions, 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 deposit checks and funds received by GROUP in Accounts.  Manager shall further have the authority to
make transfers of funds to Accounts and further, Manager shall have the
authority to sign checks and stop payment on any checks drawn on Accounts.

 

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

 

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

 

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

 

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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; and

 

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

 

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

 

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

 

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

 

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

 

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

 

3.1.6.3.                                                            Make recommendations regarding compensation
to Participating Providers;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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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 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
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

 

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Manager
Personnel any or all of those individuals who were employees of GROUP
immediately prior to the 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.                              Notwithstanding the delegation of management
and administrative functions to Manager pursuant to this Agreement, GROUP and
its board or directors or other governing body shall retain and exercise
ultimate control and authority over the direction, policies, management and
operation of GROUP at all times. 
Therefore, management and administrative functions delegated to Manager
pursuant to this Agreement shall be performed in a manner consistent with the
general policies and directives of GROUP. 
All professional medical and health care services provided to
subscribers or enrollees shall be the ultimate responsibility of the GROUP’s
Participating Providers.  GROUP shall
use its best efforts to cause Participating Providers to cooperate with Manager
in the implementation of the protocols, programs, policies, and procedures
developed for GROUP by Manager.

 

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

 

3.6.                              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.

 

3.7.                              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

 

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Directors,
election of Officers, appointment of committee members including but not
limited to the Quality and Utilization Management Committee.  In addition, GROUP agrees to appoint a
Medical Director.  GROUP shall be solely
responsible for payment of any and all compensation, payroll taxes, fringe
benefits, disability insurance, workers’ compensation insurance and any other
benefits of all such individuals.

 

4.2.                              GROUP shall not enter into any agreements
with Participating Providers unless such Participating Providers have: (i)
current unrestricted licenses to practice their respective professions in the
State of California and (ii) current unrestricted Federal Drug Enforcement
Agency (“DEA”) numbers.  In addition,
where GROUP contracts with individual physicians, such physicians shall have
medical staff membership at the hospitals required by 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 ; provided however, that GROUP acknowledges and agrees that it
shall retain ultimate responsibility for meeting such obligations.

 

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

 

4.4.                              GROUP shall, at its sole cost and expense,
procure and maintain at all times during the term of this Agreement
comprehensive general and professional liability insurance covering all
activities of GROUP directly or indirectly relating to GROUP, each policy in a
minimum amount of $1,000,000.00 per occurrence and $3,000,000.00 in the
aggregate.  The aforedescribed
comprehensive general and professional liability insurance shall be issued by a
company or companies authorized to do business in California with a financial
rating of at least A or AA 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.                              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

 

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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.

 

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

 

5.                                                                                       TERM; TERMINATION.

 

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

 

5.2.                              Termination for Cause. 
Either party 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  “cause” shall include, without limitation, the following:

 

5.2.1.                     If either party fails to materially perform
any obligation required hereunder, and such default shall continue for sixty
(60) calendar days after written notice from the other party 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 the defaulting party 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 terminated as provided hereinabove if
such party commences performance within said sixty day period and diligently
pursues said obligation to completion.

 

5.2.2.                     If either party shall apply for or consent to
the appointment of a petition 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 insolvency, 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 or 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,

 

12

 

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.

 

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.

 

13

 

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;

 

7.7.3.                     in compliance with the insurance requirements
set forth in Section 4.5 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.                     (i) 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
consummation of the merger between Professional Care Medical Group, Inc. and
Prospect LA Medical Group, Inc., which resulted in GROUP (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

 

14

 

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.

 

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 Certificate of Incorporation, Bylaws or
any license, lease, franchise, mortgage, instrument, or other agreement to
which Manager may be bound.

 

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

 

9.                                                                                       MANAGER COMPENSATION.

 

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

 

9.2.                              After deduction of amounts which are
reimbursed to Manager and which are retained by Manager as Management Fee
compensation, all remaining Gross Revenues

 

15

 

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.

 

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 (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

 

16

 

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.                        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 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

 

17

 

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.

 

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 Comerica
Bank, a Michigan banking corporation successor to Imperial Bank, a California
banking corporation.  Notwithstanding
any other provision of this Agreement, neither this Agreement nor the rights
and duties of this Agreement may be assigned or delegated by GROUP.  This Agreement binds the successors, heirs,
and authorized assignees of the parties.

 

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

 

15.5.                        Headings.  The
section headings contained in this Agreement are inserted for convenience
only and shall not 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
  Professional Care Medical Group, Inc.

  
	
   

  	
   

  	
  1920
  East 17th Street, Suite 200

  
	
   

  	
   

  	
  Santa Ana, CA
  92705-8626

  
	
   

  	
   

  	
  Attn:  Jacob Y. Terner, M.D.

  
	
   

  	
   

  	
   

  
	
  If
  to Manager:

  	
   

  	
  Prospect
  Medical Systems, Inc.

  
	
   

  	
   

  	
  6083 Bristol Parkway,
  Suite 100

  
	
   

  	
   

  	
  Culver City, CA 90230

  
	
   

  	
   

  	
  Attn:  Jacob Y. Terner, M.D.

  

 

18

 

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

 

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

 

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

 

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

 

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

 

15.12.                  Dispute Resolution.

 

15.12.1.         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.         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.

 

15.12.3.         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.

 

15.12.4.         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.

 

15.12.5.         Arbitration shall take place in Los Angeles, California unless the
parties otherwise agree.  As soon as
reasonably practicable, a hearing with respect to the

 

19

 

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.

 

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

 

15.12.7.         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.

 

15.12.8.         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

 

20

 

the
Comptroller General of the United States General Accounting Office, or any of
their duly authorized representatives, a copy of this Agreement and such books,
documents and records as are necessary to certify the nature and extent of the
costs of the services provided by Manager under this Agreement.

 

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

 

21

 

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
  PROFESSIONAL

  CARE MEDICAL GROUP, INC.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Jacob
  Y. Terner, M.D.

  	
  Jacob
  Y. Terner, M.D.

  
	
  President
  & Chief Executive Officer

  	
  President
  & Chief Executive Officer

  
				

 

22

 

LIST OF EXHIBITS AND
SCHEDULES

 

	
  Exhibits

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  A

  	
   

  	
  -

  	
   

  	
  Master
  Lease

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  B

  	
   

  	
  -

  	
   

  	
  Furniture,
  Fixtures & Equipment

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  C

  	
   

  	
  -

  	
   

  	
  Power
  of Agency

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  D

  	
   

  	
  -

  	
   

  	
  Management
  Fee

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  E

  	
   

  	
  -

  	
   

  	
  Assignable
  Option Agreement

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Schedule

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  7.9.2

  	
   

  	
  Practice
  Employee Liabilities

  

 

23

 

EXHIBIT “A”

 

MASTER
LEASE

 

 

EXHIBIT “B”

 

FURNITURE,
FIXTURES & EQUIPMENT

 

 

EXHIBIT “C”

 

POWER OF
AGENCY

 

 

POWER OF
AGENCY

 

This Power of Agency is made and entered into in connection with that
certain Management Services Agreement dated as of the
           day of
October 1, 2003, between Prospect Medical Systems, Inc., a Delaware
corporation (“Manager”), and Prospect Professional Care Medical Group, Inc., a
professional corporation (“GROUP”).

 

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 President of Manager or his 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; and (c) administering
executed Contracts, as set forth below.

 

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
  PROFESSIONAL

  
	
   

  	
  CARE
  MEDICAL GROUP, INC.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Jacob
  Y. Terner, M.D.

  	
  Jacob
  Y. Terner, M.D.

  
	
  President
  & Chief Executive Officer

  	
  President
  & Chief Executive Officer

  
				

 

 

EXHIBIT “D”

 

MANAGEMENT
FEE

 

 

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) per 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.

 

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.

 

 

SCHEDULE 7.9.2

 

PRACTICE
EMPLOYEE LIABILITIES

 

None

 

1

 

EXHIBIT E

 

ASSIGNABLE
OPTION AGREEMENT

 

2Exhibit
10.34

 

MANAGEMENT
SERVICES AGREEMENT

 

THIS
MANAGEMENT SERVICES AGREEMENT (“Agreement”) is made and entered into as of
March 1, 2004, by and between PROSPECT MEDICAL SYSTEMS, INC., a Delaware
corporation (“Manager”), and PROSPECT NWOC 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 an independent 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 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 desires to provide 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.

 

E.                                      GROUP and Manager desire to enter into this
Agreement to set forth the terms of Manager’s Management Services.

 

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:

 

1

 

AGREEMENT

 

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

 

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 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  and Exhibit
“A,” shall be the complete terms and conditions of the sublease created hereby.

 

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

 

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

 

1.1.5.   If
the Master Lease contains an option to renew the term thereof, Manager shall
notify GROUP, at least thirty (30) days prior to the expiration of the time for
exercising such option, of Manager’s intention to renew or not to renew such
term.  If

 

2

 

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 medical practice at the Premises and are generally in good repair.  The use by GROUP of said FF&E shall be
subject to the following conditions:

 

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

 

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

 

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

 

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

 

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

 

3

 

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 will prepare, in consultation with
GROUP, annual budgets for the Practice, reflecting in reasonable detail
anticipated revenues and expenses.

 

3.1.2.2.                                                            Manager shall, pursuant to GROUP’s
instructions, 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 deposit checks and funds received by GROUP in Accounts.  Manager shall further have the authority to
make transfers of funds to Accounts and further, Manager shall have the
authority to sign checks and stop payment on any checks drawn on Accounts.

 

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

 

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

 

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

 

4

 

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; and

 

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

 

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

 

5

 

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

 

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

 

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

 

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

 

3.1.6.3.                                                            Make recommendations regarding compensation
to Participating Providers;

 

6

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

7

 

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

 

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

 

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

 

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

 

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

 

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

 

8

 

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
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 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

 

9

 

Manager
Personnel any or all of those individuals who were employees of GROUP
immediately prior to the 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.                              Notwithstanding the delegation of management
and administrative functions to Manager pursuant to this Agreement, GROUP and
its board or directors or other governing body shall retain and exercise
ultimate control and authority over the direction, policies, management and
operation of GROUP at all times. 
Therefore, management and administrative functions delegated to Manager
pursuant to this Agreement shall be performed in a manner consistent with the
general policies and directives of GROUP. 
All professional medical and health care services provided to
subscribers or enrollees shall be the ultimate responsibility of the GROUP’s
Participating Providers.  GROUP shall
use its best efforts to cause Participating Providers to cooperate with Manager
in the implementation of the protocols, programs, policies, and procedures
developed for GROUP by Manager.

 

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

 

3.6.                              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.

 

3.7.                              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

 

10

 

Directors,
election of Officers, appointment of committee members including but not
limited to the Quality and Utilization Management Committee.  In addition, GROUP agrees to appoint a
Medical Director.  GROUP shall be solely
responsible for payment of any and all compensation, payroll taxes, fringe
benefits, disability insurance, workers’ compensation insurance and any other
benefits of all such individuals.

 

4.2.                              GROUP shall not enter into any agreements
with Participating Providers unless such Participating Providers have: (i)
current unrestricted licenses to practice their respective professions in the
State of California and (ii) current unrestricted Federal Drug Enforcement
Agency (“DEA”) numbers.  In addition,
where GROUP contracts with individual physicians, such physicians shall have
medical staff membership at the hospitals required by 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 ; provided however, that GROUP acknowledges and agrees that it
shall retain ultimate responsibility for meeting such obligations.

 

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

 

4.4.                              GROUP shall, at its sole cost and expense,
procure and maintain at all times during the term of this Agreement
comprehensive general and professional liability insurance covering all
activities of GROUP directly or indirectly relating to GROUP, each policy in a
minimum amount of $1,000,000.00 per occurrence and $3,000,000.00 in the
aggregate.  The aforedescribed
comprehensive general and professional liability insurance shall be issued by a
company or companies authorized to do business in California with a financial
rating of at least A or AA 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.                              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

 

11

 

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.

 

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

 

5.                                                                                       TERM; TERMINATION.

 

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

 

5.2.                              Termination for Cause. 
Either party 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  “cause” shall include, without limitation, the following:

 

5.2.1.   If
either party fails to materially perform any obligation required hereunder, and
such default shall continue for sixty (60) calendar days after written notice
from the other party 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 the defaulting party 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
terminated as provided hereinabove if such party commences performance within
said sixty day period and diligently pursues said obligation to completion.

 

5.2.2.   If
either party shall apply for or consent to the appointment of a petition 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 insolvency, 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 or 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,

 

12

 

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.

 

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.

 

13

 

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;

 

7.7.3.   in
compliance with the insurance requirements set forth in Section 4.5
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.                     (i) 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
consummation of the merger between Professional Care Medical Group, Inc. and
Prospect LA Medical Group, Inc., which resulted in GROUP (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

 

14

 

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.

 

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 Certificate of Incorporation, Bylaws or
any license, lease, franchise, mortgage, instrument, or other agreement to
which Manager may be bound.

 

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

 

9.                                                                                       MANAGER COMPENSATION.

 

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

 

9.2.                              After deduction of amounts which are
reimbursed to Manager and which are retained by Manager as Management Fee
compensation, all remaining Gross Revenues

 

15

 

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.

 

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 (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

 

16

 

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.                        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 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

 

17

 

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.

 

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 Comerica
Bank, a Michigan banking corporation successor to Imperial Bank, a California
banking corporation.  Notwithstanding
any other provision of this Agreement, neither this Agreement nor the rights and
duties of this Agreement may be assigned or delegated by GROUP.  This Agreement binds the successors, heirs,
and authorized assignees of the parties.

 

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

 

15.5.                        Headings.  The
section headings contained in this Agreement are inserted for convenience
only and shall not 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
  Professional Care Medical Group, Inc.

  
	
   

  	
   

  	
  1920
  East 17th Street, Suite 200

  
	
   

  	
   

  	
  Santa Ana, CA
  92705-8626

  
	
   

  	
   

  	
  Attn:  Jacob Y. Terner, M.D.

  
	
   

  	
   

  	
   

  
	
  If
  to Manager:

  	
   

  	
  Prospect
  Medical Systems, Inc.

  
	
   

  	
   

  	
  6083 Bristol Parkway, Suite 100

  
	
   

  	
   

  	
  Culver City, CA 90230

  
	
   

  	
   

  	
  Attn:  Jacob Y. Terner, M.D.

  

 

18

 

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

 

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

 

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

 

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

 

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

 

15.12.                  Dispute Resolution.

 

15.12.1.         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.         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.

 

15.12.3.         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.

 

15.12.4.         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.

 

15.12.5.         Arbitration shall take place in Los Angeles, California unless the
parties otherwise agree.  As soon as
reasonably practicable, a hearing with respect to the

 

19

 

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.

 

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

 

15.12.7.         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.

 

15.12.8.         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

 

20

 

the
Comptroller General of the United States General Accounting Office, or any of
their duly authorized representatives, a copy of this Agreement and such books,
documents and records as are necessary to certify the nature and extent of the
costs of the services provided by Manager under this Agreement.

 

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

 

21

 

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
  PROFESSIONAL

  
	
   

  	
  CARE
  MEDICAL GROUP, INC.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Jacob
  Y. Terner, M.D.

  	
  Jacob
  Y. Terner, M.D.

  
	
  President
  & Chief Executive Officer

  	
  President
  & Chief Executive Officer

  
				

 

22

 

LIST OF EXHIBITS AND
SCHEDULES

 

	
  Exhibits

  
	
   

  
	
  A

  	
   

  	
  -

  	
   

  	
  Master
  Lease

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  B

  	
   

  	
  -

  	
   

  	
  Furniture,
  Fixtures & Equipment

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  C

  	
   

  	
  -

  	
   

  	
  Power
  of Agency

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  D

  	
   

  	
  -

  	
   

  	
  Management
  Fee

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  E

  	
   

  	
  -

  	
   

  	
  Assignable
  Option Agreement

  
	
   

  
	
  Schedule

  
	
   

  
	
  7.9.2

  	
   

  	
  Practice
  Employee Liabilities

  
							

 

23

 

EXHIBIT “A”

 

MASTER
LEASE

 

 

EXHIBIT “B”

 

FURNITURE,
FIXTURES & EQUIPMENT

 

 

EXHIBIT “C”

 

POWER OF
AGENCY

 

 

POWER OF
AGENCY

 

This Power of Agency is made and entered into in connection with that
certain Management Services Agreement dated as of the
             day
of October 1, 2003, between
Prospect Medical Systems, Inc., a Delaware corporation (“Manager”), and
Prospect Professional Care Medical Group, Inc., a professional corporation
(“GROUP”).

 

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 President of Manager or his 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; and (c) administering
executed Contracts, as set forth below.

 

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
  PROFESSIONAL

  
	
   

  	
  CARE
  MEDICAL GROUP, INC.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Jacob
  Y. Terner, M.D.

  	
  Jacob
  Y. Terner, M.D.

  
	
  President
  & Chief Executive Officer

  	
  President
  & Chief Executive Officer

  
	
   

  	
   

  
				

 

 

EXHIBIT “D”

 

MANAGEMENT
FEE

 

 

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) per 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.

 

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.

 

 

SCHEDULE 7.9.2

 

PRACTICE
EMPLOYEE LIABILITIES

 

None

 

1

 

EXHIBIT E

 

ASSIGNABLE
OPTION AGREEMENT

 

2

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