Document:

Exhibit 10.50

 

FIRST
AMENDMENT TO

STOCK
PURCHASE AGREEMENT

 

This First Amendment to
Stock Purchase Agreement (the “First Amendment”),
dated as of July 2, 2008, by and among Prospect Medical Group, Inc.,
a California professional corporation (“Group”) and Prospect
Medical Holdings, Inc., a Delaware corporation, and an affiliate of Group
(“Holdings”) (Group and Holdings are
collectively referred to herein as the “Prospect Parties”),
Greater Midwest, a Nevada corporation (“Greater Midwest”),
Sierra Medical Group Holding Company, Inc., a California professional
corporation (“Heritage PC”), and Richard
Merkin, M.D. (“Shareholder”) (Greater Midwest,
Heritage PC and the Shareholder are collectively referred to herein as the “Heritage Parties”)  amends that
certain Stock Purchase Agreement dated as of April 23, 2008, by and among
the Prospect Parties and the Heritage Parties (the “Agreement”).  Capitalized terms used herein without
definition shall have the meanings defined for such terms in the Agreement.

 

AGREEMENT

 

The parties hereto hereby
agree as follows:

 

1.             Current Status.  The Prospect
Parties and the Heritage Parties hereby mutually agree that the Agreement is
modified as provided herein and reinstated as of the date hereof.

 

2.             Closing Date.  Section 1.1
is hereby amended and restated as follows

 

1.1           Closing; Closing Date.  The
consummation (the “Closing”) of the SMM Stock
Purchase, the Sierra Stock Purchase, the Antelope Valley Stock Purchase, the
Pegasus Stock Purchase and the other transactions contemplated by this
Agreement (collectively, the “Transaction”),
shall take place at 10:00 am at the offices of Theodora Oringher Miller &
Richman PC, 2029 Century Park East, 6th Floor, Los Angeles, California, (i) August 1,
2008, or, (ii) in the event that the conditions precedent to the
performance of the Prospect Parties and the Heritage Parties as set forth in
Sections 5.2 and 5.4 hereof are not satisfied or waived on or before that date,
on the first business day of the month following the satisfaction or waiver of
all such conditions precedent (the “Closing Date”).”

 

3.             Amendment and Restatement of Section 1.6.  Section 1.6
is hereby amended and restated as follows:

 

(i)            The introductory paragraph of Section 1.6
is amended and restated as follows:

 

“1.6         Purchase Price and Payment. 
In consideration of (i) the sale by Holdings to Greater Midwest of
the SMM Shares, and (ii) the sale by Group to Heritage PC of the Sierra
Shares, the Antelope Valley Shares and the Pegasus Shares, the Heritage Parties
shall pay the Prospect Parties the aggregate purchase price for the Transaction
of Eight Million Dollars ($8,000,000), as adjusted in accordance with Section 1.6(b) below
(the 

 

1

 

“Purchase
Price”), payable
in cash at Closing.  Of such amount, (i) One
Million Dollars ($1,000,000) has been deposited as the Hard Money Amount, as
defined below, to be released to the Prospect Parties as described in Section 1.6(a) below,
and  (ii) at the Closing, Two Million
Dollars ($2,000,000) (the “Balance Sheet Adjustment
Amount”) shall be paid into the Escrow Fund, as defined below, to be
held as a reserve for (A) the Closing Date Balance Sheet Reconciliation
described in Section 1.6(b)(i) hereof, and (B) the Enrollment
Reconciliation described in Section 1.6(b)(ii) hereof.  Upon completion of the Closing Date Balance
Sheet Reconciliation and the Enrollment Reconciliation, the funds held in the
Escrow Fund shall be paid to the Prospect Parties and/or the Heritage Parties,
as appropriate, pursuant to Sections 1.6(b) and 1.6(c), below.

 

(ii)           Section 1.6(a)(i) through
1.6(a)(iv) are hereby amended and restated as follows:

 

“(a)         Hard Money Amount.  Concurrently
with the execution of this Agreement, the Heritage Parties and the Prospect
Parties have executed and delivered: (i) that certain Letter dated as of
the date hereof from Greater Midwest to the Prospect Parties (the “Letter Agreement”), and (ii) an Escrow Agreement dated
as of the date hereof in the form of Exhibit “A” (the “Escrow Agreement”) by and among the Heritage Parties, the
Prospect Parties and a third party escrow (the “Escrow Agent”).

 

(i)            The Prospect Parties delivered the various schedules
described in Article 2 hereof, other than Schedule 2.28 which is attached
hereto, which qualify the representations and warranties given by the Prospect
Parties in such Article 2 (with Schedule 2.28, the “Final
Prospect Schedules”), to the Heritage Parties on May 21,
2008.  The Prospect Parties and the
Heritage Parties hereby agree that the third paragraph of Schedule 2.4 is
modified to read as follows:

 

“The
real property leases for (i) 1037 E. Palmdale Blvd and (ii) 44469
thru 44471 10th Street West, Lancaster, CA 93534 require
consent for a change in ownership of Tenant.”

 

The schedules described
in Article 3 hereof, which qualify the representations and warranties
given by the Heritage Parties in such Article 3 (the “Final
Heritage Schedules”) will be prepared and delivered to the Prospect
Parties and to the Escrow Agent not later than July 15, 2008.  The Final Prospect Schedules and the Final
Heritage Schedules shall constitute the Schedules called for under Article 2
and Article 3, shall qualify the representations and warranties made in
such Articles for all purposes of this Agreement and may not, notwithstanding Section 4.8
of this Agreement, thereafter be changed without the consent of the other
parties.

 

(ii)           Pursuant to the Escrow Agreement, the Heritage Parties
have deposited the sum of One Million Dollars ($1,000,000) as earnest money (the “Hard Money Amount”) to be held by the Escrow Agent
pursuant to the terms and conditions of the Escrow Agreement.

 

2

 

(iii)          The Heritage Parties have released $500,000 of the
Hard Money Amount to the Prospect Parties. 
Subject to Section 5.4(d) hereof, such amount shall be
non-refundable and shall for all purposes be the property of the Prospect
Parties, and shall be credited at Closing to the Purchase Price described in Section 1.6.

 

(iv) 
The Heritage Parties and the Prospect Parties have further agreed that not more
than one business day following full execution hereof by the parties hereto,
the Heritage Parties shall, by written notice to the Escrow Agent and the
Prospect Parties direct that another $500,000 of the Hard Money Amount be
released to the Prospect Parties forthwith. 
Any amount released to the Prospect Parties under this Section 1.6(a)(iv) shall
be credited at Closing to the Purchase Price described in Section 1.6.”

 

(iii)          Section 1.6(b) is hereby
amended and restated as follows:

 

“(b)         Post Closing Purchase Price Adjustments.

 

(i)            Balance Sheet Purchase Price Adjustment. 
No later than sixty (60) days following the Closing Date, the Heritage
Parties shall prepare and deliver to the Prospect Parties at the sole expense
of the Heritage Parties the audited consolidated balance sheet of Sierra,
Antelope Valley, Pegasus and SMM (collectively referred to
herein as the “AV Entities”) as of July 31, 2008 (the “Closing Date Balance Sheet”), prepared in accordance with
generally accepted accounting principles (“GAAP”).  The Prospect Parties will cooperate with such
audit, to the extent they have or control the financial records of any of the
AV Entities.  Within ten (10) business
days of the delivery of the Closing Date Balance Sheet, the Prospect Parties
and the Heritage Parties shall effect a reconciliation of the current assets
(as defined under GAAP) shown on such Closing Date Balance Sheet (“Balance Sheet Current Assets Amount”), on the one hand, and
the current liabilities (as defined under GAAP, but including (if not otherwise
included under GAAP) accrued payroll and paid time off for employees and
Termination Pay for Contracted Employees pursuant to Section 4.7 hereof)
and long term debt (if any) on such Closing Date Balance Sheet (“Balance Sheet Liabilities”), on the other hand, after
elimination of all inter-company accounts between and among the AV Entities and
any other entities controlled or affiliated with the Prospect Parties (the “Closing Date Balance Sheet Reconciliation”).  If the Balance Sheet Liabilities are greater
than the Balance Sheet Current Assets  Amount, then
the Purchase Price shall be reduced by the full amount of the difference
between the Balance Sheet Liabilities and the Balance Sheet Current Assets  Amount (“Downward Balance Sheet
Adjustment”).  On the other
hand, if the Balance Sheet Current Assets  Amount is
greater than the Balance Sheet Liabilities, then the Purchase Price shall be
increased by the full amount of the difference between the Balance Sheet
Current Assets  Amount and the Balance Sheet
Liabilities (“Upward Balance Sheet Adjustment”).  The audit hereunder may include a review and
validation of the IBNR reserve amount on the Closing Date Balance Sheet, but
shall exclude the reconciliation of such IBNR reserve

 

3

 

against the actual IBNR,
which shall be handled in accordance with Section 4.6 hereof.

 

Notwithstanding
the foregoing if, at the Closing, the Prospect Parties fail to deliver
certificates evidencing polices of insurance insuring the AV Entities, the
Heritage Parties and their affiliates and the Prospect Parties and their
affiliates from and against the tail liability under any of the policies of
insurance listed on Schedule 2.18 hereof and written on an occurrence basis (“Tail Coverage”), until such tail liability shall have
expired, the Heritage Parties may treat the cost of such Tail Coverage as a
Balance Sheet Liability for all purposes of this Section 1.6(b)(i).

 

(ii)           Any adjustments under this Section 1.6(b) and
under Section 4.6 shall be excluded from the calculation of the
Indemnification Floor and the Indemnification Cap, as such terms are defined in
Section 6.2 hereof.”

 

(iii)          Enrollment Purchase Price Adjustment. 
No later than sixty (60) days following the Closing Date, the Heritage
Parties and the Prospect Parties shall jointly prepare a reconciliation of the
actual Qualified Commercial Enrollee
enrollment and the Qualified Senior Enrollee
enrollment of the AV Entities as of July 31, 2008, based on the enrollment
reports and retroactive additions and deletions for such enrollment received
from the health plan insurers for whom the AV Entities provide medical services
to enrollees (the “Enrollment Reconciliation”).   For purposes of such Enrollment
Reconciliation, any Qualified Commercial
Enrollees or Qualified Senior Enrollees
who were with the AV Entities as shown on Schedule 2.28 under the column “May-08,”
and who are, as of July 31, 2008, assigned either to physicians who
contract for managed care enrollees exclusively with High Desert Medical Group
or to California Desert Medical Group, shall be counted as Qualified
Commercial Enrollees and/or Qualified
Senior Enrollees who are with the AV Entities as of July 31, 2008.

 

(A)          If such Enrollment Reconciliation shows that there
were fewer than 14,865 Qualified Commercial Enrollees (as defined in Section 2.28
below) assigned to the AV Entities, the Prospect Parties shall pay the Heritage
Parties $385.48 for each Qualified Commercial
Enrollee below 14,122 Qualified Commercial
Enrollees.  If such Enrollment
Reconciliation shows that there were more than 14,865 Qualified Commercial
Enrollees assigned to the AV Entities, the Heritage Parties shall pay the
Prospect Parties $385.48 for each Qualified Commercial
Enrollee above 15,608 Qualified Commercial
Enrollees.

 

(B)           If such Enrollment Reconciliation shows that there
were fewer than 1,048 Qualified Senior Enrollees (as defined in Section 2.28
below) assigned to the AV Entities, the Prospect Parties shall pay the Heritage
Parties $1,927.40 for each Qualified Senior
Enrollee below 996 Senior Enrollees.  If
such Enrollment Reconciliation shows that there were more than 1,048 Qualified Senior Enrollees assigned to the AV
Entities,

 

4

 

the Heritage Parties
shall pay the Prospect Parties $1,927.40 for each Qualified Senior Enrollee above 1,100 Qualified Senior Enrollees.

 

(C)           The payments due under Sections 1.6(b)(ii)(A) and
(B) shall be netted, if applicable, and any net amount due shall be paid
as provided in Section 1.6(c) below.

 

(iv)          Section 1.6(c) is
hereby amended and restated as follows:

 

“(c)         Payment of Adjustment Amounts.

 

(i)            Not more than two (2) business
days following completion of each of the Closing Date Balance Sheet
Reconciliation and the Enrollment Reconciliation, the Prospect Parties and the
Heritage Parties shall give the Escrow Agent notice of the amount of the
payment (if any) due from the Heritage Parties to the Prospect Parties or from
the Prospect Parties to the Heritage Parties.

 

(ii)           If the Closing Date
Balance Sheet Reconciliation results in a Downward Balance Sheet Adjustment,
the Escrow Agent shall promptly pay such Downward Balance Sheet Adjustment to
the Heritage Parties as soon as practicable following receipt of notice of the
results of the Closing Date Balance Sheet Reconciliation and without regard to
whether the Enrollment Reconciliation has been determined.  If the Closing Date Balance Sheet Reconciliation
results in an Upward Balance Sheet Adjustment, the Escrow Agent shall continue
to hold such amount until resolution of the Enrollment Reconciliation.  Upon resolution of the Enrollment
Reconciliation, the Escrow Agent shall pay the net amount due the Heritage
Parties as soon as practicable following receipt of notice of the results of
the Enrollment Reconciliation and shall pay any balance remaining in the Escrow
after payment of all amounts due the Heritage Parties to the Prospect Parties.

 

(iii)          Notwithstanding
anything set forth herein to the contrary, the payments due following the
Closing Date Balance Sheet Reconciliation and the Enrollment Reconciliation
shall not be limited to the Balance Sheet Adjustment Amount held by the Escrow
Agent.  If the aggregate net payment due
either the Heritage Parties or the Prospect Parties exceeds the Balance Sheet
Adjustment Amount held by the Escrow Agent, the parties owing such excess
amount shall pay the other parties any excess amount not more than ten (10) business
days after completion of the last to occur of the Closing Date Balance Sheet
Reconciliation and the Enrollment Reconciliation.”

 

(v)           A new Section 1.6(d) is hereby added to the Agreement as follows:

 

“(d)         Disputes. 
If the Heritage Parties and the Prospect Parties are unable to agree on
either the final Closing Date Balance Sheet Reconciliation or the Enrollment
Reconciliation on or before October 13, 2008, then (A) they shall
determine the aggregate amount of the Balance Sheet Adjustment Amount payable
to either or both of the Heritage Parties and/or the Prospect Parties that is
not in dispute and shall issue 

 

5

 

written instructions to the Escrow Agent to pay such
undisputed amount to the Heritage Parties and/or the Prospect Parties, as
applicable, on or before October 15, 2008, and (B) by written notice
either Party may submit any dispute related to the disputed portion of the
Balance Sheet Adjustment Amount for determination by arbitration in Los
Angeles, California, including the determination of the scope or applicability
of this agreement to arbitrate.  Such
arbitration shall be conducted by a single arbitrator, and shall be
administered by JAMS pursuant to its Comprehensive Arbitration Rules and
Procedures, as those Rules and Procedures are modified by the agreement of
the parties in this Section 1.6(d) (as specifically permitted by JAMS
Comprehensive Arbitration Rules and Procedures, Rule 2).  The Heritage Parties and the Prospect Parties
shall each pay one-half JAMS fees. 
Judgment on the Award issued by the arbitrator may be entered in any
court having jurisdiction.  If the
Parties are unable to agree upon an arbitrator, an arbitrator with experience
in accounting matters will be selected pursuant to JAMS Rule 15 (the “Designated Arbitrator”). 
Within five (5) business days of the selection of the Designated
Arbitrator the Designated Arbitrator shall have a scheduling conference, at
which time the Designated Arbitrator shall set out a schedule for the conduct
of the arbitration, with the hearing to be held within thirty (30) days of the
scheduling conference.  The exchange of
information required by Rule 17(a) and pre-hearing submissions
required by Rule 20(a) shall be completed no less than ten (10) days
before the hearing.  Written statements
of position may be submitted pursuant to Rule 20(b).  The Designated Arbitrator shall have ten (10) calendar
days from the date of the close of the hearing to issue a ruling, in which the
Designated Arbitrator shall select either the position of the Heritage Parties
or the position of the Prospect Parties as the final determination of each
disputed matter.  The Designated
Arbitrator shall have no power to alter or compromise the determinations of the
Heritage Parties and the Prospect Parties, but must select one or the other as
the prevailing position for each disputed matter.  No discovery whatsoever shall be permitted in
connection with the arbitration, including document discovery, deposition
discovery or interrogatories.”

 

4.             Due
Diligence.  The Prospect
Parties shall deliver the materials described on Exhibit A, attached
hereto and incorporated herein by this reference (the “Due Diligence Materials”),
to the Heritage Parties on or before July 8, 2008.  If the Due Diligence Materials are not
delivered to the Heritage Parties in materially complete form on or before July 8,
2008, then not later than July 11, 2008, the Heritage Parties shall
provide to the Prospect Parties written notice specifying which Due Diligence
Materials have not been so provided by the Prospect Parties, in which case the
Prospect Parties shall supply any such omitted Due Diligence Materials to the
Heritage Parties not later than July 21, 2008.  If such omitted Due Diligence Materials are
not provided to the Heritage Parties by July 21, 2008, the Heritage
Parties shall have the right to delay the Closing to the first day of the month
at least 10 days after delivery of such omitted Due Diligence Materials, and
all specific dates set forth herein (other than the July 31, 2008 date set
forth in Section 1.6(b)(iii)) shall be appropriately adjusted.  If the Heritage Parties fail to disapprove
any delivery of omitted Due Diligence Materials within five (5) business
days of receipt, they shall be deemed to have approved such delivery for all
purposes of this Agreement.

 

5.             Non-Competition
Agreement.  The parties hereby
agree to allocate $250,000 to the Covenant Not to Compete set forth in the
Non-Competition Agreement.  The Prospect
Parties 

 

6

 

and the
Heritage Parties have agreed that the Non-Competition Agreement
attached hereto as Exhibit “B” shall be the Non-Competition Agreement to
be executed and delivered by the Prospect Parties at the Closing.

 

6.             Representations
and Warranties.  The representations
and warranties made by the Prospect Parties will be expanded to include the
following:

 

“2.28       Enrollment.  The senior and commercial enrollment assigned
to each of the AV Entities as of May 2008, is set forth on Schedule 2.28
under the column “May-08.”  For purposes
of this Agreement, the term “Qualified Commercial
Enrollees” shall mean  enrollees
shown on such Schedule 2.28 as “Commercial,” excluding enrollees assigned to
Great West Life and LA Care (the “Excluded Plans”),
and the term “Qualified Senior Enrollees” shall
mean  enrollees shown on such Schedule 2.28
as “Medicare,” excluding enrollees assigned to the Excluded Plans.

 

2.29         Elective Procedures.  As of the Closing date, there will be no
Deferred Elective Procedures (as defined below) pending for enrollees assigned
to the AV Entities.  The term “Deferred Elective Procedure” shall mean a non-emergency
diagnostic, medical, surgical, therapeutic or other procedure and/or medical
equipment or other medical service which has been documented in the clinical
notes as being medically necessary and that has not been scheduled as of ninety
(90) days following such documentation. 
For elective procedures that require ongoing courses of therapy or services
(such as chemotherapy, radiation therapy, infusion therapy in a non
institutional setting, and dialysis) this term will apply to the first
treatment episode in the series.

 

2.30         Health Plan Audits.  The AV Entities have passed all applicable
oversight audits by any health plan through which they have any enrollees for
UM, QM and credentialing conducted at any time during calendar years 2007 and
2008.”

 

7.             Modification
of Section 4.9.  The second
sentence of Section 4.9 is hereby amended and restated as follows:

 

“Whenever a representation, warranty, covenant or agreement is qualified by
the statement “to the knowledge of” any or all of Prospect Parties, knowledge
shall be deemed to be the actual knowledge of Stewart Kahn, Dan Frank, Jay
Jayakumar and/or Catherine Dickson, who the Prospect Entities hereby represent
and warrant are familiar with the business and operations of the AV Entities
and would have knowledge of the matters described in representations and
warranties made herein to the knowledge of the Prospect Entities.”

 

8.             New Section 4.13.  New Section 4.13 is hereby added to the
Agreement as follows:

 

“4.13.      Non-Solicitation of Employees.  If the transaction described in this
Agreement does not close by reason of the default of the Heritage Parties, the
Heritage Parties agree not to solicit any of employees of the AV Entities to
terminate his or her employment with the AV Entities, for a period of six (6) months
following termination of this Agreement; provided,

 

7

 

however,
the foregoing shall not prohibit the Heritage Parties from engaging in
recruitment activity through newspapers, magazines, trade journals, internet
and other general means of solicitation or from  discussing
employment with any person who independently seeks employment with the Heritage
Parties or from hiring an employee of the AV Entities in the absence of any such prohibited solicitation. This provision shall not
waive or affect any obligations of the Heritage Parties with respect to the
treatment of confidential information provided to the Heritage Parties by the
Prospect Parties, including obligations arising under the Confidentiality
Agreement referenced in Section 8.18 of this Agreement

 

9.             New
Sections 5.1(h) through 5.1(j). 
New Sections 5.1(h) through 5.1(j) are hereby added to the
Agreement as follows:

 

“(h)         documents releasing all
liens on the Sierra Shares, the Antelope Valley Shares, the Pegasus Shares, the
SMM Shares, and any and all of their respective assets arising under the $155
million senior secured credit facilities arranged by Bank of America, N.A. to
the Prospect Parties and their affiliates (the “BofA Debt”)
and releases of all guarantees or other obligations of any kind by the AV
Entities in connection with such BofA Debt (collectively, “Lien
Releases”).  Such Lien
Releases shall be in form and substance reasonably satisfactory to the Heritage
Parties.

 

(i)            If requested by the
Heritage Parties:

 

(i) mutually acceptable agreements among Group and the
AV Entities pursuant to which (a) Group will pay the full amount of
capitation paid to Group or any affiliate of Group with respect to enrollees
assigned to the AV Entities to the AV Entities for periods commencing on and
after the Closing Date, not more than three (3) business days after
receipt by Group or any such affiliate, and (b) the AV Entities will agree
to provide medical services to such enrollees for such periods, and

 

(ii) mutually acceptable agreements among Group and the
AV Entities pursuant to which Group and it affiliates, as applicable, will
provide such IT services as the Heritage Parties shall request, at no cost to
the Heritage Parties or the AV Entities, for a period of not more than six (6) months
following the Closing, exercising the same standard of care as Group uses for
its own similar activities.  Group shall
not be liable under such agreements for negligent errors or omissions, provided
Group fully cooperates with the Heritage Parties and/or the AV Entities in
correcting any such negligent errors or omissions.  The Heritage Parties agree to use reasonable
efforts to transition such services to other providers as soon as reasonably
possible following the Closing.

 

10.           Modification
of Section 6.2(D)(i). 
Section 6.2(D)(i) is hereby amended and restated as follows:

 

8

 

“(i) any breach of the representations, warranties, covenants or
agreements of the Prospect Parties set forth herein (other than Section 2.28
which is excluded from the scope of this Section 6.2 and is separately
addressed in Section 1.6 hereof),”

 

11.           Modification
of Prospect Notice Address.

 

(i)            All notices to be delivered to Holdings shall be directed as
follows:

 

Samuel
Lee

Chief
Executive Officer

Prospect
Medical Holdings, Inc.

10780
Santa Monica Blvd., Suite 400

Los
Angeles, CA 90025

 

(ii)           All notices to be delivered to Group
shall be directed as follows:

 

Jacob
Y. Terner., M.D.

c/o
Stewart Kahn

Prospect
Medical Group, Inc.

1920
E. 17th St., Suite 200

Santa
Ana, CA 92705

 

12.           Preservation
of Rights.  Notwithstanding the
provisions of Section 1 hereof:

 

(i)            the Prospect Parties contend that the Agreement did not
terminate by its terms on May 31, 2008, and

 

(ii)           the Heritage Parties contend that
the Agreement did terminate by its terms on May 31, 2008

 

This
Amendment shall not be asserted in any arbitration, litigation or other legal
proceeding between or among the parties hereto in support of their respective
positions concerning the termination or non-termination of the Agreement on May 31,
2008.

 

13.           Conforming
Amendments.  As between the
Prospect Parties and the Heritage Parties, the Escrow Agreement and the Early
Execution Letter are hereby amended to conform to the terms of this First
Amendment.  The Prospect Parties and the
Heritage Parties shall prepare an amendment to the Escrow Agreement conforming
such agreement to the terms hereof.

 

14.           Miscellaneous.

 

(a)           This First Amendment is
the entire agreement between the parties with respect to the subject matter
hereof and supersedes all prior and contemporaneous oral and written agreements
and discussions.  This First Amendment
may be amended only by an agreement in writing, signed by the parties hereto.

 

9

 

(b)                                 This First Amendment is
binding upon and shall inure to the benefit of the parties hereto, their
respective agents, employees, representatives, officers, directors, divisions,
subsidiaries, affiliates, assigns, heirs, successors in interest and shareholders.

 

(c)                                  This First Amendment
may be executed in any number of counterparts, each of which shall be deemed an
original, but all of which when taken together shall constitute one and the
same instrument.  The signature page of
any counterpart may be detached therefrom without impairing the legal effect of
the signature(s) thereon provided such signature page is attached to any other
counterpart identical thereto except having additional signature pages executed
by other parties to this First Amendment attached thereto.

 

(d)                                 Except as amended
and/or modified by this First Amendment, the Agreement is hereby ratified and
confirmed and all other terms of the Agreement shall remain in full force and
effect, unaltered and unchanged by this First Amendment.  Upon any conflict between the provisions of
this First Amendment and the provisions of the Agreement, the provisions of
this First Amendment shall prevail. 
Whether or not specifically amended by this First Amendment, all of the
terms and provisions of the Agreement are hereby amended to the extent
necessary to give effect to the purpose and intent of this First Amendment.

 

IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first written above.

 

 

	
   

  	
  “Group”

  
	
   

  	
   

  
	
   

  	
  PROSPECT
  MEDICAL GROUP, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

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

  
	
   

  	
   

  	
  Jacob
  Y. Terner, M.D.,

  
	
   

  	
   

  	
  Chief
  Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  “Holdings”

  
	
   

  	
   

  
	
   

  	
  PROSPECT
  MEDICAL HOLDINGS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Samuel Lee

  
	
   

  	
   

  	
  Samuel
  Lee,

  
	
   

  	
   

  	
  Chief
  Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

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

  
	
   

  	
   

  	
  Jacob
  Y. Terner, M.D.

  
	
   

  	
   

  	
   

  
	
  [signatures continue on next page]

  

 

10

 

	
   

  	
  “Greater Midwest”

  
	
   

  	
   

  
	
   

  	
  GREATER
  MIDWEST

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Richard Merkin, M.D.

  
	
   

  	
   

  	
  Richard
  Merkin, M.D.,

  
	
   

  	
   

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  “Heritage PC”

  
	
   

  	
   

  	
   

  
	
   

  	
  Sierra
  Medical Group Holding Company, Inc.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Richard Merkin, M.D.

  
	
   

  	
   

  	
  Richard
  Merkin, M.D.,

  
	
   

  	
   

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  “Shareholder”

  
	
   

  	
   

  
	
   

  	
  /s/ Richard Merkin, M.D.

  
	
   

  	
  Richard Merkin, M.D.

  

 

11

 

Exhibit A

Due Diligence Items

 

Due Diligence
Items

 

Payroll
Liability

·                  Executed employment contracts for
the non-physician & physician employees

·                  A current list of employed doctors
and other staff

·                  Vacation and payroll accrual hours
have been provided, but corresponding rates of pay to calculate outstanding
liability have not been provided

 

IBNR, Income
and Enrollment

·                  Paid claims history with all fields
to reconcile paid amount to financial statements for DOS 2007-2008, paid
through May 31st, 2008

·                  Eligibility history for 2007-2008
(to calculate IBNR)

·                  Financial Statements as of May 31st, 2008

·                  FFS A/R aging by financial class
(insurance type) as of May 31, 2008

·                  Eligibility from health plans for May
2008 (to verify enrollment)

 

Other Medical
Practice Data

·                  Claims and authorization data for
the last 18 months

·                  Open authorizations from January 2008
until present

·                  Any case management list of high
risk patients including, ESRD, transplants, OB, dialysis etc.

·                  Patient satisfaction and patient
access studies for 2007 and 2008, to the extent available

·                  Annual oversight audits for UM, QM
and credentialing from the health plans for 2007 and 2008.

 

12

 

Exhibit B

 

NON-COMPETITION AGREEMENT

 

THIS
NON-COMPETITION AGREEMENT (the “Agreement”) is
made as of the Effective Date (as defined below) by and between Greater
Midwest, a Nevada corporation (“Greater Midwest”), Sierra Medical Group Holding AV
Entities , Inc., a California professional corporation (“Heritage PC”), and Richard
Merkin, M.D. (collectively, with Greater Midwest and Heritage PC, “Buyer”) and Prospect Medical Group, Inc., a California
professional corporation (“Group”), Prospect Medical Holdings, Inc., a Delaware
corporation (“Holdings”), and Jacob Y. Terner,
M.D., the sole shareholder of Group (“Shareholder”
and collectively with Group and Holdings, 
“Seller”).

 

Buyer
and Seller are parties to a Stock Purchase Agreement dated as of April     , 2008 (the “Purchase
Agreement”) pursuant to which Buyer has agreed to purchase (the “Purchase”) all of the equity interests of Seller in Sierra
Primary Care Medical Group, A Medical Corporation (“Sierra”), Antelope Valley
Medical Associates, Inc. (“Antelope
Valley”) and Pegasus Medical Group, Inc. (“Pegasus”), three California
professional corporations that operate as an independent practice associations
in the Antelope Valley area of Los Angeles County, and all of the equity
interests of Seller in Sierra Medical Management, Inc. (“SMM”), a
Delaware corporation which provides management and administrative services to
independent practice associations and medical clinics in the Antelope Valley
area of Los Angeles County.  Sierra, Antelope
Valley, Pegasus and SMM
are herein referred to collectively as the “AV Entities.”

 

As a condition to the Purchase, and to preserve the value of the AV Entities
following acquisition by Buyer after the Purchase, the Purchase Agreement
contemplates, among other things, that Seller shall enter into this Agreement
and that this Agreement shall become effective on the Closing of the Purchase.

 

NOW,
THEREFORE, in consideration of the mutual promises made herein, Seller hereby
agrees as follows:

 

1.                                       Covenant
Not to Compete or Solicit.

 

(a)                                  Non-Competition. Beginning on
the Effective Date and continuing for five (5) years from the Effective Date
(the “Non-Competition Period”), Seller shall
not engage in a Competitive Business Activity (as defined below) anywhere in
the Restricted Territory (as defined below).

 

(i)                                     For all
purposes hereof, the term “Competitive Business
Activity” shall mean: (A) Seller or any of them engaging in, or
managing or directing persons engaged in, or causing any officer, employee or
shareholder holding (directly or indirectly) 10% or more of the shares of any
Group or Holdings (an “Affiliate”) to
engage in, manage or direct persons engaged in, any business in competition
with the AV Entities’ Business; (B) Seller or any of them acquiring or having
an ownership interest in any entity that derives revenues from any business in
competition with the AV Entities’ Business (except for passive 

 

13

 

ownership of five percent (5%) or less of any entity whose securities
are publicly traded on a national securities exchange or market); or (C) Seller
or any of them participating in, or causing any Affiliate to participate in,
the operation, management or control of any firm, partnership, corporation,
entity or business (each, an “Entity”)
described in clause (B) of this sentence.

 

(ii)                                  For all
purposes hereof, the term “Restricted Territory”
shall mean that portion of Los Angeles County, California lying north of the
Angeles National Forest, east of Interstate 5, south of Kern County and west of
San Bernardino County, including all of the areas located in the postal zip
codes listed on Exhibit A, attached hereto and incorporated herein by this
reference.

 

(iii)                               For all
purposes hereof, the term “AV Entities’ Business” shall mean
the operation and management of independent practice associations and medical
clinics.

 

(b)                                 Non-Solicitation. During the
Non-Competition Period, Seller shall not, without the written consent of Buyer,
solicit, encourage or take any other action which is intended to induce or
encourage, or could reasonably be expected to have the effect of inducing or
encouraging, any employee of the AV Entities to terminate his or her employment
with the AV Entities.  Notwithstanding
the foregoing, nothing in this Agreement shall preclude Seller from accepting
an affirmative response of an employee of the AV Entities to a general
recruitment or advertising effort carried out through public or general
solicitation or hiring an employee of the AV Entities in the absence of any
such inducement or encouragement.

 

(c)                                  Separate Covenants.  The covenants contained in Section 1(a) hereof
shall be construed as a series of separate covenants, one for each city or
other political subdivision of the Restricted Territory. Except for geographic
coverage, each such separate covenant shall be deemed identical in terms to the
covenant contained in Section 1(a) hereof. 
If, in any judicial proceeding, a court refuses to enforce any of such
separate covenants (or any part thereof), then such unenforceable covenant (or
such part) shall be eliminated from this Agreement to the extent necessary to
permit the remaining separate covenants (or portions thereof) to be enforced.
If the provisions of this Section 1 are deemed to exceed the time, geographic
or scope limitations permitted by applicable law, then such provisions shall be
reformed to the maximum time, geographic or scope limitations, as the case may
be, permitted by applicable laws.

 

(d)                                 Protection of Goodwill.  Seller acknowledges (without in any way
representing to Buyer any of the following) that (i) the goodwill associated
with the AV Entities prior to the Purchase is an integral component of the
value of the AV Entities to Buyer and is reflected in the consideration to be
received by Seller, and (ii) Seller’s agreement as set forth herein is
necessary to preserve the value of the AV Entities for Buyer following the
Purchase. Seller also acknowledges that the limitations of time, geography and
scope of activity agreed to in this Agreement are reasonable because, among
other things, (A) the AV Entities are engaged in a highly competitive industry,
(B) Seller has unique access to, and will continue to have access to, the trade
secrets and 

 

14

 

know-how relating to the AV Entities and its business, including,
without limitation, the plans and strategy (and, in particular, the competitive
strategy) relating to the AV Entities, their customers, suppliers and
enrollees, and (C) this Agreement provides no more protection than is necessary
to protect Buyer’s interests in the goodwill, trade secrets and confidential
information of the AV Entities.

 

2.                                       Compensation.  In consideration of Seller’s covenants
hereunder, Buyer shall pay Group and Holdings the amount allocated to this
Agreement under the Purchase Agreement.

 

3.                                       Miscellaneous.

 

(a)                                  Governing Law; Consent to
Personal Jurisdiction. This Agreement will be governed and
construed in accordance with the laws of the State of California as applied to
transactions taking place wholly within California between California
residents. Seller and Buyer each hereby expressly consent to the personal
jurisdiction of the state and federal courts located in Los Angeles County,
California for any lawsuit filed there arising from or related to this
Agreement.

 

(b)                                 Attorneys’ Fees.  In the event of any action at law or in
equity between the parties to enforce or interpret this Agreement, the
unsuccessful party to such litigation shall pay to the successful party all
costs and expenses, including reasonable attorneys’ fees and disbursements,
incurred therein by such successful party and, if such successful party shall
recover judgment in any such action or proceedings, such costs, expenses and
attorneys’ fees and disbursements may be included in and as a part of such
judgment.  The successful party shall be
the party who is entitled to recover his costs of suit, whether or not the suit
proceeds to final judgment.  If no costs
of suit are awarded, then the successful party shall be determined by the
court.  For the purpose of this Section,
the term “attorneys’ fees and disbursements” shall include, but not be limited
to, fees and disbursements incurred in connection with the following: (i) contempt
proceedings; (ii) discovery; (iii) any motion, proceeding or other activity of
any kind or nature in connection with a bankruptcy proceeding or case arising
out, concerning or related in any way to any petition under Title 11 of the
United States Code, as the same shall be in effect from time to time, or any
similar law; (iv) garnishment, levy, and debtor and third party examinations;
and, (iv) post-judgment motions, proceedings or activity of any kind or nature,
including, but not limited to, any activity taken to collect or enforce any
judgment.

 

(c)                                  Specific Performance; Injunctive
Relief. The parties acknowledge that Buyer will be irreparably harmed and that
there will be no adequate remedy at law for a violation of any of the covenants
or agreements of Seller set forth herein. Therefore, it is agreed that, in
addition to any other remedies that may be available to Buyer upon any such
violation, Buyer shall have the right to seek enforcement of such covenants and
agreements by specific performance, injunctive relief or by any other means
available to Buyer at law or in equity.

 

(d)                                 Liquidated
Damages.  IF SELLER OR
ANY OF THEM BREACHES THE PROVISIONS OF SECTION 1(a) OF THIS AGREEMENT, GROUP
AND 

 

15

 

HOLDINGS, JOINTLY AND SEVERALLY, AGREE TO PAY TO BUYER $2,000,000 FOR
SUCH BREACH.   BUYER AND SELLER AGREE
THAT THIS PROVISION CONSTITUTES A VALID AND ENFORCEABLE PROVISION FOR
LIQUIDATED DAMAGES TO BUYER FOR SELLER’S FAILURE TO PERFORM THIS AGREEMENT,
REPRESENTS A REASONABLE ESTIMATE OF THE TOTAL NET DETRIMENT WHICH BUYER WOULD
INCUR AS A RESULT OF SUCH FAILURE AND DOES NOT CONSTITUTE A PENALTY OR
FORFEITURE.  BUYER AND SELLER ALSO
ACKNOWLEDGE AND AGREE THAT BUYER IS RELYING ON SELLER’S PROMISE TO COMPLY WITH
THE PROVISIONS OF THIS AGREEMENT AND THAT BUYER IS TAKING ACTIONS BASED ON THIS
RELIANCE. BUYER AND SELLER FURTHER ACKNOWLEDGE AND AGREE THAT, AS A RESULT OF
BUYER’S RELIANCE, THE DETRIMENT TO BUYER AS A RESULT OF SELLER’S BREACH WILL BE
SUBSTANTIAL AND LIKELY IN EXCESS OF THE COMPENSATION DESCRIBED IN PARAGRAPH 2
OF THIS AGREEMENT. THIS PROVISION SHALL NOT (1) WAIVE OR AFFECT BUYER’S OTHER
OBLIGATIONS PURSUANT TO ANY OTHER PROVISIONS OF THE PURCHASE AGREEMENT OR (2) WAIVE
OR AFFECT BUYER’S RIGHT TO SPECIFIC PERFORMANCE OF THIS AGREEMENT.

 

(e)                                  Severability. If any
portion of this Agreement is held by an arbitrator or a court of competent
jurisdiction to conflict with any federal, state or local law, or to be
otherwise invalid or unenforceable, such portion of this Agreement shall be of
no force or effect and this Agreement shall otherwise remain in full force and
effect and be construed as if such portion had not been included in this
Agreement.

 

(f)                                    No
Assignment. Because the nature of the Agreement is specific to
the actions of Seller, Seller may not assign its obligations under this
Agreement; provided, however that this Agreement will be binding on any successor
of Group, Holdings or Shareholder or purchasers of all or substantially all of
the assets of Group, Holdings or Shareholder. This Agreement shall inure to the
benefit of Buyer and its successors and assigns.

 

(g)                                 Notices. All notices,
demands, or other communications that either party desires or is required or
permitted to give or make to the other party under or pursuant to this Note
(collectively referred to as “notices”) shall be made or given in writing and
shall either be: (i) personally served; (ii) sent by registered or certified
mail, postage prepaid, return receipt requested; or, (iii) sent by a nationally
recognized overnight delivery service or courier (such as Federal Express or
DHL), signature required.  All notices
shall be addressed to or personally served on the other party’s current
business address.  Notices given by a
party pursuant to the alternative methods described in this section shall be
deemed to have been delivered to and received by the other party at the
following times: (a) for notices personally served, on the date of hand
delivery to the other party or its duly authorized employee, representative, or
agent; (b) for notices given by registered or certified mail, on the date shown
on the return receipt as having been delivered to and received by the other
party or parties; or (c) for notices delivered by overnight courier, on the
date shown on the courier receipt as having been delivered to and received by
the other party or parties.  Each party
shall make an ordinary, good faith effort to ensure that 

 

16

 

it will accept or receive notices that are given in accordance with
this section, and that any person to be given notice actually receives such
notice.  A party may change or supplement
its designated agent, address, or fax number given above, or designate
additional agents, addresses or fax numbers for notice purposes, by giving
notice to the other party in the manner set forth in this section, provided
that any such address change shall not be effective until five (5) days after
the notice is delivered or received by the other party.

 

(h)                                 Entire Agreement. This
Agreement contains the entire agreement and understanding of the parties and
supersedes all prior discussions, agreements and understandings relating to the
subject matter hereof. This Agreement may not be changed or modified, except by
an agreement in writing executed by Buyer and Seller.

 

(i)                                     Waiver
of Breach. The waiver of a breach of any term or provision of
this Agreement, which must be in writing, shall not operate as or be construed
to be a waiver of any other previous or subsequent breach of this Agreement.

 

(j)                                     Headings. All captions
and section headings used in this Agreement are for convenience only and do not
form a part of this Agreement.

 

(k)                                  Counterparts. This
Agreement may be executed in counterparts, and each counterpart shall have the
same force and effect as an original and shall constitute an effective, binding
agreement on the part of each of the undersigned.

 

[Signatures begin on next page]

 

17

 

IN
WITNESS WHEREOF, the parties have executed this Agreement as of the Effective
Date.

 

	
   

  	
  “Group”

  
	
   

  	
  PROSPECT
  MEDICAL GROUP, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Jacob
  Y. Terner, M.D.,

  
	
   

  	
   

  	
  Chief
  Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  “Holdings”

  
	
   

  	
  PROSPECT
  MEDICAL HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Samuel
  Lee,

  
	
   

  	
   

  	
  Chief
  Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Jacob
  Y. Terner, M.D.,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  “Greater Midwest”

  
	
   

  	
  GREATER
  MIDWEST

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Chief
  Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  “Heritage PC”

  
	
   

  	
  Sierra
  Medical Group Holding Company, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Chief
  Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Richard
  Merkin, M.D.

  

 

18

 

EXHIBIT A

 

Restricted Area Zip Codes

 

	
  93554

  
	
  93527

  
	
  93555

  
	
  93528

  
	
  93519

  
	
  93581

  
	
  93501

  
	
  93523

  
	
  93524

  
	
  93560

  
	
  93516

  
	
  93561

  
	
  93536

  
	
  93535

  
	
  93552

  
	
  93591

  
	
  93551

  
	
  93532

  
	
  93534

  
	
  93550

  
	
  93510

  
	
  93544

  
	
  93543

  
	
  93553

  
	
  93555

  
	
  93556

  
	
  93563

  

 

19Exhibit 10.51

 

SECOND
AMENDMENT TO

STOCK
PURCHASE AGREEMENT

 

This Second Amendment to Stock Purchase
Agreement (the “Second Amendment”), dated as of August
1, 2008, by and among Prospect Medical Group, Inc., a California professional
corporation (“Group”) and
Prospect Medical Holdings, Inc., a Delaware corporation, and an affiliate of
Group (“Holdings”) (Group and Holdings are collectively
referred to herein as the “Prospect Parties”),
Greater Midwest, a Nevada corporation (“Greater
Midwest”), Sierra Medical Group Holding Company, Inc., a California
professional corporation (“Heritage PC”),
and Richard Merkin, M.D. (“Shareholder”)
(Greater Midwest, Heritage PC and the
Shareholder are collectively referred to herein as the “Heritage Parties”)  amends that certain Stock Purchase
Agreement dated as of April 23, 2008, as amended by that First Amendment to
Stock Purchase Agreement dated as of July 2, 2008 by and among the Prospect
Parties and the Heritage Parties (as amended by the First Amendment, the “Agreement”). 
Capitalized terms used herein without definition shall have the meanings
defined for such terms in the Agreement.

 

AGREEMENT

 

The
parties hereto agree as follows:

 

1.             Modification
of Section 1.6(a).  The title to Section 1.6(a) shall
be amended and restated as follows:

 

“(a)         Hard Money Amount; Release
of Funds From Escrow On or Prior to Closing Date.”

 

2.             New
Subsection 1.6(a)(v) is hereby added to the Agreement as follows:

 

“(v)  The Prospect
Parties and the Heritage Parties hereby agree that the Heritage Parties may, by
written notice to the Escrow Agent and the Prospect Parties on or after the
Closing Date, direct that One Million Five Hundred Thousand Dollars ($1,500,000)
of the Balance Sheet Adjustment Amount paid into Escrow Fund on the Closing
Date be advanced to the Heritage Parties for use solely in the operation of the
AV Entities in the ordinary course of business in accordance with past custom
and practice (the “Business Operations Escrow
Advance”).

 

3.             Modification
of Subsections 1.6(c)(ii) and (iii).  Subsections 1.6(c)(ii) and (iii) shall
be amended and restated as follows:

 

“(ii)         If
the Closing Date Balance Sheet Reconciliation results in a Downward Balance
Sheet Adjustment, the Heritage Parties and the Prospect Parties shall, without
regard to whether the Enrollment Reconciliation has been determined, give the
Escrow Agent instructions to promptly disburse to the

 

1

 

Heritage Parties an amount (which shall be
calculated by the Heritage Parties and the Prospect Parties) equal to: (i) the
amount of such Downward Balance Sheet Adjustment, less (ii) the amount of the
Business Operations Escrow Advance; which amount shall be paid to Greater
Midwest as soon as practicable following Escrow Agent’s receipt of such
notice.  (If such Downward Balance Sheet
Adjustment is less than One Million Five Hundred Thousand Dollars ($1,500,000),
the portion of the Business Operations Escrow Advance not offset by the
Downward Balance Sheet Adjustment shall be referred to herein as the “Net Remaining Business Operations Escrow Advance.”)  If the Closing Date Balance Sheet
Reconciliation results in an Upward Balance Sheet Adjustment, the Escrow Agent
shall continue to hold such amount until resolution of the Enrollment Reconciliation.  Upon the subsequent resolution of the
Enrollment Reconciliation which results in a payment to the Heritage Parties,
the Heritage Parties and the Prospect Parties shall give the Escrow Agent
instructions to promptly disburse to the Heritage Parties an amount (which
shall be calculated by the Heritage Parties and the Prospect Parties) equal to (x)
the amount of any Enrollment Reconciliation payment due the Heritage Parties,
less (y) the Net Remaining Business Operations Escrow Advance, if any, and less
(z); the amount of any Upward Balance Sheet Adjustment due the Prospect
Parties, if any, which amount shall be paid to Greater Midwest as soon as
practicable following Escrow Agent’s receipt of such notice, and shall pay any
balance remaining in the Escrow after payment of all amounts due the Heritage
Parties to the Prospect Parties.

 

“(iii)        Notwithstanding anything set forth herein to the contrary,
the payments due following the Closing Date Balance Sheet Reconciliation and
the Enrollment Reconciliation shall not be limited to the remaining Balance
Sheet Adjustment Amount then held by the Escrow Agent.  If the aggregate net payment due either the
Heritage Parties or the Prospect Parties exceeds the remaining Balance Sheet
Adjustment Amount then held by the Escrow Agent, the parties owing such excess
amount shall pay the other parties any excess amount not more than ten (10) business
days after completion of the last to occur of the Closing Date Balance Sheet
Reconciliation and the Enrollment Reconciliation.”

 

4.             Modification
of Section 4.7.  Section 4.7 shall be amended and
restated as follows:

 

“4.7         Employees.  The Prospect Parties have entered into
employment agreements (“Employment Agreements”)
dated as of April 1, 2008, with four (4) non-physician senior employees to
induce such employees to continue their employment through and after the
Closing (the “Contracted Employees”).  The Prospect Parties have further entered
into a severance agreement (“Severance Agreement”)
dated as of April 1, 2008, with Jay Jayakumar, a senior non-physician employee
to induce him to continue his employment through the Closing Date.  The Employment Agreements provide for payment
of a severance payment if the Contracted Employee’s employment is terminated
prior to the end of the initial term of the Employment Agreement.  The Severance Agreement provides for  payment of $172,492.00 to Mr. Jayakumar if
there is a change of ownership of SMM and he either resigns voluntarily or is
terminated involuntarily (“Jayakumar Severance Amount”).   The Severance Agreement also restricts the

 

2

 

employment
of Mr. Jayakumar by the Heritage Parties for one year following the date
of his resignation or termination.

 

(a)
With respect to the Employment Agreements, the Prospect Parties and the
Heritage Parties agree that: (a) the Heritage Parties shall retain at least 2
of the Contracted Employees, (b) the Heritage Parties shall have until
sixty (60) days following the Closing to elect to retain or terminate the other
2 Contracted Employees and, as to either or both of the 2 Contracted Employees
whom Heritage chooses not to retain on or prior to the end of such 60 day
period, the Prospect Parties shall be liable for any severance pay or other termination
benefits beyond those ordinarily granted by the AV Entities to terminated
employees (“Termination Pay”).  For purposes of Section 1.6(b) hereof,
any Termination Pay due any such Contracted Employee terminated during such
sixty (60) day period shall be treated as a Balance Sheet Liability.  Following such sixty (60) day period, the
Heritage Parties and/or the AV Entities shall be solely liable for any
Termination Pay due upon termination of any Contracted Employee.

 

(b) With
respect to the Severance Agreement, the Prospect Parties and the Heritage
Parties agree that, immediately prior to the Closing, (i) SMM and Mr. Jayakumar shall terminate the Severance Agreement in its
entirety, including the bonus and employment restrictions contained therein, and
(ii) SMM and Mr. Jayakumar shall enter into a new employment agreement
which shall provide for Mr. Jayakumar’s continued employment with SMM for a one
year period commencing on the Closing Date and a bonus to be paid to Mr. Jayakumar
on the Closing Date (as provided in Section 4.15 below) in the amount of
$105,000.00 (“Jayakumar Bonus Payment”).”

 

5.             New Section 4.14
is hereby added to the Agreement as follows:

 

“4.14       Indemnification
for Obligations under Blue Shield/Cigna Health Plan Agreements.  The Prospect Parties and the
Heritage Parties hereby acknowledge and agree that the Heritage Parties are currently
seeking the consent of the health plans for whom the AV Entities provide
medical services to the change of ownership of the AV Entities to the Heritage
Parties.  The Prospect Parties and the
Heritage Parties acknowledge that Blue Shield and Cigna  are requiring that Group and/or Group and
certain of Group’s other subsidiaries(1) (collectively, “Assignors”), continue to be fully liable for the obligations,
duties and responsibilities of the provider (collectively, “Post-Closing Liabilities”) under the Blue Shield and Cigna
health plan agreements (collectively, the “BS&C Agreements”),
including Post-Closing Liabilities related to enrollees assigned to the AV
Entities (“AV Post-Closing Liabilities”).  The Prospect Parties and the Heritage Parties
agree that as between the Prospect Parties (including all Assignors) and the
Heritage Parties, the Heritage Parties are solely responsible for all AV
Post-Closing Liabilities notwithstanding any language to the contrary in the
consent agreement with Blue Shield and/or Cigna.  The Prospect Parties and the Heritage Parties
further agree that as between the Prospect Parties (including all Assignors)
and the Heritage Parties, the Prospect Parties (including all Assignors) are
solely responsible for all Post Closing Liabilities exclusive of the AV
Post-Closing Liabilities (the “Prospect Post-Closing
Liabilities”).

 

(1) The payor contract for Cigna includes the
following subsidiaries of Group who are also deemed “assignors” of the health
plan agreement and remain liable under the terms of the consent agreement after
the Closing Date: Prospect Health Source Medical Group, Inc., Prospect NWOC
Medical Group, Inc., Prospect Professional Care Medical Group, Inc.,
and Nuestra Famila Medical Group, Inc.

 

3

 

The Heritage Parties acknowledge and agree that any AV
Post-Closing Liabilities resulting in any damage, loss, liability or expense
(including without limitation (A) reasonable expenses
of investigation and reasonable attorneys’ fees and reasonable expenses in
connection with any action, suit or proceeding, (B) any fees and expenses
in connection with the retention of counsel to pursue insurance coverage, (C) any
amounts paid to defend, litigate, settle, satisfy a judgment, or otherwise
resolve disputes with the insurance carrier, if any, or the claimant; and (D) all
amounts not covered by insurance),
suffered or incurred by any of the Assignors or the Prospect Parties shall
constitute Prospect Indemnifiable Damages under Article Section 6 of the
Agreement.  Notwithstanding any provision
in Article 6 of the Agreement to the contrary, any Prospect Indemnifiable
Damages shall be excluded from the calculation of the Indemnification Floor and
the Indemnification Cap, as such terms are defined in Section 6.2 hereof.

 

The Prospect Parties acknowledge and agree that any
Prospect Post-Closing Liabilities resulting in any damage, loss, liability or
expense (including without limitation (A) reasonable expenses of
investigation and reasonable attorneys’ fees and reasonable expenses in
connection with any action, suit or proceeding, (B) any fees and expenses
in connection with the retention of counsel to pursue insurance coverage, (C) any
amounts paid to defend, litigate, settle, satisfy a judgment, or otherwise
resolve disputes with the insurance carrier, if any, or the claimant; and (D) all
amounts not covered by insurance),
suffered or incurred by any of the AV Entities, the Heritage Parties or the
assignee under the Blue Shield and Cigna consents, shall constitute Heritage
Indemnifiable Damages under Article Section 6 of the Agreement.  Notwithstanding any provision in Article 6
of the Agreement to the contrary, any Heritage Indemnifiable Damages shall be
excluded from the calculation of the Indemnification Floor and the
Indemnification Cap, as such terms are defined in Section 6.2 hereof.”

 

6.             New Section 4.15
is hereby added to the Agreement as follows:

 

“4.15       Bonuses.  The Prospect Parties and the
Heritage Parties hereby acknowledge and agree that on the Closing Date the
Heritage Parties shall pay, via check, from the Purchase Price on behalf of the
Prospect Parties, those physician provider bonuses aggregating $55,500.00 set
forth on Schedule 4.15(a) hereto, those staff bonuses aggregating $22,000.00
set forth on Schedule 4.15(b) hereto, and the Jayakumar Bonus Payment.  Such payments shall not be treated as Balance
Sheet Liabilities for purposes of Section 1.6(b) hereof.”

 

7.             New Section 4.16
is hereby added to the Agreement as follows:

 

“4.16       Tail
Insurance.  The Prospect Parties and the Heritage Parties
hereby acknowledge and agree that on the Closing Date the Heritage Parties
shall pay, via wire transfer, from the Purchase Price on behalf of the Prospect
Parties, the premium for the Tail Coverage, in the amount and to the insurance
company, provided by the Prospect Parties on the Closing Date.  Such payment shall not be treated as Balance
Sheet Liabilities for purposes of Section 1.6(b) hereof.”

 

8.             Miscellaneous.

 

(a)           This Second
Amendment is the entire agreement between the parties with respect to the
subject matter hereof and supersedes all prior and contemporaneous oral 

 

4

 

and
written agreements and discussions.  This
Second Amendment may be amended only by an agreement in writing, signed by the
parties hereto.  The Stock Purchase
Agreement, as amended by the First Amendment and this Second Amendment, is a
valid, binding, and enforceable agreement in accordance with its terms.

 

(b)           This Second
Amendment is binding upon and shall inure to the benefit of the parties hereto,
their respective agents, employees, representatives, officers, directors,
divisions, subsidiaries, affiliates, assigns, heirs, successors in interest and
shareholders.

 

(c)           This Second
Amendment may be executed in any number of counterparts, each of which shall be
deemed an original, but all of which when taken together shall constitute one
and the same instrument.  The signature page
of any counterpart may be detached therefrom without impairing the legal effect
of the signature(s) thereon provided such signature page is attached
to any other counterpart identical thereto except having additional signature pages executed
by other parties to this Second Amendment attached thereto.

 

(d)           Except as
amended and/or modified by this Second Amendment, the Agreement is hereby
ratified and confirmed and all other terms of the Agreement shall remain in
full force and effect, unaltered and unchanged by this Second Amendment.  Upon any conflict between the provisions of
this Second Amendment and the provisions of the Agreement, the provisions of
this Second Amendment shall prevail. 
Whether or not specifically amended by this Second Amendment, all of the
terms and provisions of the Agreement are hereby amended to the extent
necessary to give effect to the purpose and intent of this Second Amendment.

 

[SIGNATURE PAGE IMMEDIATELY FOLLOWS]

 

5

 

IN WITNESS WHEREOF, the undersigned have executed this Second
Amendment to Stock Purchase Agreement as of the date first
written above.

 

	
   

  	
  “Group”

  
	
   

  	
   

  
	
   

  	
  PROSPECT
  MEDICAL GROUP, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:  

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

  
	
   

  	
   

  	
  Jacob
  Y. Terner, M.D.,

  
	
   

  	
   

  	
  Chief
  Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  “Holdings”

  
	
   

  	
   

  
	
   

  	
  PROSPECT
  MEDICAL HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Samuel Lee

  
	
   

  	
   

  	
  Samuel
  Lee,

  
	
   

  	
   

  	
  Chief
  Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  “Greater Midwest”

  
	
   

  	
   

  
	
   

  	
  GREATER
  MIDWEST

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Richard Merkin, M.D.

  
	
   

  	
   

  	
  Richard
  Merkin, M.D.,

  
	
   

  	
   

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
  “Heritage PC”

  
	
   

  	
   

  
	
   

  	
  Sierra
  Medical Group Holding Company, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Richard Merkin, M.D.

  
	
   

  	
   

  	
  Richard
  Merkin, M.D.,

  
	
   

  	
   

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
  “Shareholder”

  
	
   

  	
   

  
	
   

  	
  /s/ Richard Merkin, M.D.

  
	
   

  	
  Richard Merkin, M.D.

  

 

6

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00163-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00163-of-00352.parquet"}]]