Document:

Exhibit 10.31

 

MANAGEMENT SERVICES AGREEMENT

 

THIS MANAGEMENT SERVICES
AGREEMENT (“Agreement”) is made and entered into as of January 1, 2001 (the
“Effective Date”), by and between PROSPECT MEDICAL SYSTEMS, INC., a Delaware
corporation (“Manager”), and PROSPECT HEALTH SOURCE MEDICAL GROUP, INC., a
California professional medical corporation (“GROUP”).

 

RECITALS

 

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

 

B.                                     GROUP also operates a physician practice
located at 150 North Robertson Boulevard, Beverly Hills, California (the
“Robertson Practice”).  The IPA and the
Robertson Practice shall be collectively referred to herein as the “Practice.”

 

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

 

D.                                    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

 

E.                                      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, and general administrative services (collectively,
“Management Services”), to enable GROUP to concentrate on the development of
the professional aspects of the Practice.

 

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

 

AGREEMENT

 

1.                                       PREMISES.  Pursuant to the Master Lease specified below, Manager shall provide
adequate GROUP administrative office space at the addresses described therein
(the 

 

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“Premises”) and facilities for the operation of the
IPA with leasehold improvements, auxiliary services and utilities in order that
GROUP may effectively perform its functions and duties.

 

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

 

1.1                                 Manager is the lessee, or will become
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
IPA.  Based and contingent upon GROUP’s
promise to timely pay all amounts due under this Agreement, Manager hereby
agrees to sublease the leased Premises to GROUP upon the following terms and conditions:

 

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

 

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

 

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

 

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

 

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

 

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2.                                       PROVISION OF FURNITURE, FURNISHINGS AND
EQUIPMENT (“FF&E”).  Manager hereby
provides to GROUP, and GROUP hereby leases from Manager, all the FF&E,
which FF&E GROUP agrees are suitable and sufficient for GROUP’s use in the
operation of GROUP’s administrative office at the Premises and are generally in
good repair.  The use by GROUP of said
FF&E shall be subject to the following conditions:

 

2.1                                 Title to all of the FF&E shall remain
in Manager at all times, and upon the termination of this 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 IPA reasonably
requires from time to time, as determined by Manager in its sole discretion, in
consultation with GROUP.  Such additional
or replacement FF&E shall be subject to all of the terms of Section 2.1
above.

 

2.5                                 GROUP may provide additional equipment at
the IPA and Robertson 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 “C.”

 

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; provided, however, that if the Robertson
Practice is sold, conveyed, assigned or otherwise transferred by GROUP to a
third party, Manager’s obligation to serve as Manager and administrator of all
non-physician functions and services related to operation of the Robertson
Practice shall terminate. 
Notwithstanding such appointment and engagement, GROUP will have
exclusive authority and control over the professional aspects of the Practice,
including all diagnosis, treatment and ethical determinations with respect to
patients, which are required by applicable law to be decided by a physician.

 

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

 

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

 

3.1.2.1               Manager shall, 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 Plan subscribers or
enrollees.  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.

 

3.1.2.2               Manager agrees to provide GROUP with copies of the bank
statements and to reconcile checks written with these bank statements on a
monthly basis;

 

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

 

3.1.2.4               Manager agrees to prepare balance sheets and income
statements and provide GROUP with copies of such financial statements on a
monthly basis during the term of this Agreement. Such financial statements
shall not be audited statements. Manager agrees to provide GROUP with any
additional financial, business and accounting documents upon the reasonable
request of any member of GROUP’s board of directors.  Manger also agrees to prepare any financial, business and
accounting document GROUP reasonably requests. 
Manager agrees to cooperate with any annual audit GROUP obtains at its
sole cost and expense by an independent public accountant selected by GROUP;

 

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

 

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

 

3.1.2.7               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;

 

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

 

3.1.2.9               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;

 

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

 

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

 

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

 

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

 

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

 

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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 “C” hereto).

 

3.1.4                        Claim Settlement. 
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.

 

3.1.5                        Financial Reports. 
Manager shall furnish to GROUP monthly 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
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 physicians with whom GROUP contracts or
employs to provide professional medical services to Plan enrollees
(“Participating Providers”);

 

3.1.6.3               Make recommendations regarding compensation to
Participating Providers;

 

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:

 

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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, at its sole option, may develop a proposal
outlining the structure and functions of a GROUP utilization and quality
management plan after reviewing the requirements of each Plan.  GROUP agrees, following review of Manager’s
recommendations, to adopt a GROUP utilization and quality management plan that
includes a list of services for which Manager has received authority from GROUP
to authorize services provided.  In
authorizing said services, Manager shall be the agent of GROUP;

 

3.1.8.2               Manager, at its sole option, may implement systems,
programs and procedures necessary for GROUP and Participating Providers to perform
utilization and quality management.

 

3.1.8.3               Manager, at its sole option, may recommend procedures
for prior authorization of elective, urgent and emergent outpatient ambulatory
surgery and hospital procedures;

 

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

 

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

 

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

 

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

 

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

 

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

 

3.1.9                        Supplies.  Manager
shall order and purchase all supplies required by GROUP in connection with the
operation of the administrative component 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 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                  Other Services.  Manager
shall be responsible for arranging and paying for payroll services related to
GROUP operations in the ordinary course of business.

 

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 shall execute and renew Contracts, as instructed by
Manager, after Manager determines that such Contracts are in GROUP’s best
interests.

 

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

 

3.2.3                        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 GROUP executes or agrees to, 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 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 a
practice administrator, non-licensed allied health professionals, quality
assurance, utilization review, claims processing, secretarial and clerical
personnel as are reasonably necessary for the conduct of the Practice
(collectively, “Manager Personnel”). 
Manager shall, in its sole and absolute discretion, determine the types
and numbers of personnel and the number of hours and schedules of said
personnel it determines are necessary or appropriate to provide the
administrative and management services to be provided pursuant to this
Agreement.  Manager shall provide such
personnel at its sole cost and expense and such personnel may, at the sole and
absolute discretion of Manager, be employees or independent contractors of
Manager.  Manager shall, in its sole and
absolute discretion, have the right, but shall not be required, to engage as
Manager Personnel any or all of those individuals who were employees of GROUP
immediately prior to the 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).

 

3.4                                 Manager acknowledges that GROUP owns the
Robertson Practice and that, during the Term of the Agreement, GROUP will
employ those physicians and members of the support staff  who are employed at the Robertson Practice
on the Effective Date (“Robertson Employees”). Manager shall provide the
Robertson Practice with the following managerial services: accounting and
financial management services (excluding billing and collections), payroll and
human resource management services.

 

3.5                                 Notwithstanding the delegation of
management and administrative functions to Manager pursuant to this Agreement,
GROUP and its board of directors or other governing body shall retain and
exercise ultimate control and authority over the direction, 

 

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policies, management and operation of GROUP at all
times.  Therefore, management and
administrative functions delegated to GROUP 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.

 

3.6                                 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.

 

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

 

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

 

4.                                       RESPONSIBILITIES OF GROUP.

 

4.1                                 GROUP covenants and agrees that, at all
times during the term of this Agreement and any extension thereof, it shall
conduct all corporate activities required by its Articles of Incorporation and
Bylaws, including but not limited to election of a board of directors, election
of Officers, appointment of committee members including but not limited to the
Utilization Review and Quality Assurance Committees.  In addition, GROUP agrees to appoint a Medical Director, after
consultation with Manager.  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 provide professional services
through physician employees and independent contractors, and 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 

 

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physicians, such physicians shall have medical staff
membership at the hospitals required by the Plans and where GROUP contracts
with licensed clinics and medical groups, at least one primary care physician
practicing at each clinic or medical group shall have medical staff membership
at the hospitals required by the Plans. 
GROUP further agrees to establish procedures to ensure that
Participating Providers meet these requirements on an ongoing basis.  Manager shall reasonably cooperate with and
assist GROUP to meet its obligations under this Section 4.2; provided however,
that GROUP acknowledges and agrees that it shall retain ultimate responsibility
for meeting such obligations.

 

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

 

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

 

4.5                                 GROUP shall establish and pay
Participating Provider compensation.

 

4.6                                 GROUP shall, in consultation with
Manager, establish the number and specialties of full-time employed and
contracted Participating Providers.

 

4.7                                 GROUP shall employ, train and supervise
all licensed allied health professionals working at the Robertson Practice.

 

4.8                                 GROUP shall establish procedures to
ensure Participating Providers meet credentialing, utilization review and
quality assurance requirements.

 

4.9                                 GROUP shall pay all taxes, fees, costs
and expenses of GROUP that Manager is not required to pay under this Agreement.

 

4.10                           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 

 

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“occurrences” form will obtain either extended
reporting insurance coverage (“tail coverage”) with liability limits equal to
those most recently in effect prior to the day of termination of such
Participating Provider’s contract with GROUP, or will enter into such other
arrangements as shall reasonably assure the maintenance of coverage for such
Provider, GROUP, and Manager against the risk of loss in respect of
professional services rendered by such provider while this Agreement was in
effect and for a period of not less than seven (7) years after the date of
termination of this Agreement.

 

4.11                           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 Effective Date hereof and
shall expire on the thirtieth (30th) annual anniversary hereof
unless otherwise terminated as provided below. 
The term of this Agreement shall be automatically extended for two (2)
additional terms of ten (10) years each, unless either party delivers to the
other party, not less than 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 or Modification of Agreement. 
Except as set forth in Section 5.3 hereto, this Agreement may not be
terminated or modified by GROUP without the consent of at least 75% of GROUP’s
Class A directors, GROUP’s Class B director, and at least 50% of GROUP’s
shareholders.  Notwithstanding the
above, this Agreement may be modified as necessary to maintain compliance with
applicable State and Federal laws and regulations, and any directives from the
California Department of Managed Health Care. 
Any material modification to the scope or quantity of services set forth
in this Agreement that is required by law during the term of this Agreement
shall result in a corresponding modification to the management fee set forth in
Exhibit “C,” herein.

 

5.3                                 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
3.2 “cause” shall be limited to the following:

 

5.3.1.                     If either party fails to materially perform any
obligation required hereunder, and such default shall continue for thirty (30)
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
thirty (30) 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 thirty (30) 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 

 

12

 

commences performance within said sixty day period and
diligently pursues said obligation to completion.

 

5.3.2.                      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, termination
shall be effective automatically and immediately upon the occurrence of the
foregoing.

 

5.4                                 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, Manager shall be entitled to recover from GROUP all
Management Fees (as defined below), and any and all advances and other charges
owed to Manager that had accrued but were unpaid as of the date of termination,
which shall be payable, without limitation, out of net revenues attributable to
medical services provided by GROUP during the Term of this Agreement, whether
received before, on or after the effective 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.

 

13

 

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

 

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

 

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

 

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

 

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 4.4 hereof.

 

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

 

8.                                       REPRESENTATIONS AND WARRANTIES OF
MANAGER.

 

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

 

14

 

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

 

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

 

9.                                       MANAGER COMPENSATION.

 

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

 

9.2.                              After deduction of amounts which are
retained by Manager as Management Fee compensation, all remaining Gross
Revenues shall be remitted to GROUP. 
From such sums, Manager shall pay, on GROUP’s behalf, the Cost of
Medical Services (as defined in Exhibit “C” 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 may, at Manager’s sole discretion, loan to GROUP funds in
an amount sufficient to allow GROUP to meet some or all of its financial
obligations.

 

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 Participating Providers.  GROUP agrees to require GROUP’s
Participating 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.

 

15

 

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 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.

 

16

 

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.                                 OTHER AGREEMENTS.

 

To secure any and all
amounts loaned to GROUP by Manager pursuant to Section 9.2 above, the parties
shall enter into a Security Agreement in the form attached hereto as Exhibit D.

 

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 otherwise stated
under the terms of the Agreement. 
Notwithstanding anything contained herein, or any conduct or course of
conduct by any party hereto, before or after signing this Agreement, this
Agreement shall not be construed as creating any right, claim or cause of
action against either Manager or GROUP by any other person or entity.

 

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

 

15.3.                        Successors and Assigns. 
All of Manager’s rights and duties under this Agreement may be assigned
or delegated by Manager. 
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.

 

17

 

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
Health Source Medical Group, Inc.

6083 Bristol Parkway, Suite 100

Culver City, CA 90230

Attention: Jacob Y. Terner, M.D.

 

If to Manager:                    Prospect
Medical Systems, Inc.

6083 Bristol Parkway, Suite 100

Culver City, CA 90230

Attn:  R. Stewart Kahn, Executive Vice
President

 

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

 

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.  All exhibits
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.

 

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.

 

18

 

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 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.

 

19

 

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

 

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

 

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

 

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

 

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 HEALTH SOURCE

  MEDICAL GROUP, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Jacob Y. Terner, M.D.

  	
   

  	
  Jacob Y. Terner, M.D.

  
	
  Its: President

  	
  Its: President

  
						

 

20

 

LIST OF EXHIBITS AND
SCHEDULES

 

Schedule

 

7.6                                 -                                            Pending Litigation

 

 

Exhibits

 

A                                      -                                            Master Lease

 

B                                        -                                            Furniture, Fixtures & Equipment

 

C                                        -                                            Management Fee

 

D                                       -                                            Security Agreement

 

21

 

SCHEDULE 5.6

 

PENDING LITIGATION

 

 

None

 

 

EXHIBIT A

 

MASTER LEASE

 

1

 

EXHIBIT B

 

FURNITURE, FIXTURES &
EQUIPMENT

 

Furniture and Equipment

 

Bookcases

1 – Bookcase
(3 shelves)

1 – Bookcase
(2 shelves)

 

Chairs

4 – Executive Chairs

3 – Exam Room Stools

3 – Secretarial Chairs

6 – Office Chairs

 

Desks

1 – Clerical Desk

5 – Desks

 

Files

4 – File Cabinets (Charts)

2 – Short Hanging File Cabinets

3 – Filing Cabinets

 

Miscellaneous

1 – Spirometry Machine

1 – Treadmill/Quinton 2000

1 – Crash Cart

1 – Pitney Bows Stamp Machine (30-Years-Old)

3 – Calculators

1 – Dictaphone Memoscriber

1 – ER G Machine

1 – X-Ray Machine

1 – X-Ray Processor

1 – Bone Density Machine (Leased)

1 – Hyfrecaton 2000

4 – Standing Lamps (Examining Rooms)

5 – Mayo Stands

5 – Scales

1 – Wheel Chair

1 – Supply Cabinet

1 – Refrigerator (Small)

1 – Time Clock

 

1

 

Tables

8 – Examination Tables

 

Kitchen
Appliances

1 – Microwave

1 – Coffeemaker

 

Printers

2 – Hewlet Packard Laser Jet 4

1 – Desk Jet 540

1 – Hewlet Packard Laser Jet 2100

 

Fax Machines

3 – Fax Machines

 

Xerox Machines

1 – Xerox Machine

 

Phone System

6 – Telephones

 

Computers 

2 – Syncmaster 550B Computer

5 – Avanta Computers

1 – Hewlet Packard Personal Computer

 

Typewriters

2 – Typewriters

 

Office Supplies

3 Month Supply (approx. value of $2,000 - $3,000)

 

Injectables

 

Xylocaine 1% x 2 vials

Xylocaine 1% Rid x 1 vial

Celeston Solution x 11⁄2 vials

Kenalog 40mg x 1 vial

Depo Medral 40 Mg x 2 vials

Rocephin 1 gram x 2 vials

Rocephin 500mg x 2 vials

Rocephin 250mg x 5 vials

Vistaril 50mg x 1 vial

Depo Provera 150mg x 3 vials

 

2

 

Benadryl 50 mg. x 1 vial

Depo Testosterone 200 mg. x 31⁄2 vials

Delestrogen x 21⁄2 vials

B12  x 21⁄2 vials

B Complex x 2 vials

Compazine 5mg X 1 vial

Bacteriostat Water x 1 vial

Sodium Chloride 0.9%

Nitrostat

Hepatitis B Vaccine x 3 injectables

Hepatitis A Vaccine x 2 injectables

Yellowfever x 2 vials

Meningococcal Vaccine x 2 vials

Thyphoid x 3 injectables

Poliovirus Vaccine x 1 vial

Tetanus Tyoid x 1 vial

Tetanus Dip. x 5 vials

MMR x 2 injectables

Rubella Vaccine x 1 vial

 

Lab
Equipment And Supplies

 

Lab Equipment

1 – Ames Aliquot Mixer

1 – Microscope

2 – Refrigerators

1 – Water Bath

1 – Hematology Analyzer (AB x 2000)

1 – Shaker

1 – Vortex Mixer

 

Lab Supplies

Mid-Valley Surgical Supply (3 Months) – $3,484.14

Sigma (2 Months) – $3,428.76

DPC (2 Months) – $599.99

Laboratory Specialists (3 Months) – $2,823.82

Kelent X-Ray Film (3 Months) – $1,000

Mercedes Medical (3 Months) – $1,000

Polynideo – $400.00

 

3

 

EXHIBIT C

 

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).

 

“Gross Revenues” means
the sum of (i) all capitated income attributed to GROUP (determined on an
accrual basis) as compensation for the provision of medical services during the
Term by GROUP employed and independent contractor physicians and physician
extenders; (ii) all other sums attributed to GROUP (determined on a cash basis)
as compensation for the provision of medical services during the Term by GROUP
employed and independent contractor physicians and physician extenders,
including but not limited to, 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 (iii) sums derived  by GROUP or its employees from consulting services provided
during the Term or as interest income accrued during the Term.

 

B.                                     Management Fee

 

For its services
hereunder, which shall include the provision of all facilities at the Premises
and all non-physician employees of Manager who perform services at or for the
Practice and all management services provided hereunder, but shall exclude
marketing and public relations services, Manager shall retain that portion of
the Gross Revenues which is equal to ten percent (10%) of Gross Revenues, less
eight thousand dollars ($8,000) per month. 
Manager shall also receive a fee for marketing and public relations
services of eight thousand dollars ($8,000) per month.

 

Furthermore, Manager shall receive a year-end bonus fee for meeting the
following performance objectives: each year Manager provides services to GROUP
and GROUP achieves profitability (i.e., GROUP’s gross revenues exceed GROUP’s
expenses), Manager shall receive a bonus fee that is five percent (5%) of Gross
Revenues.  This bonus fee shall be
reduced (or, if applicable, not paid) to the extent it shall cause GROUP to (i)
receive less than sixty percent 

 

1

 

(60%) of
GROUP’s net profits for the year (after the fees in the preceding paragraph of
this Section B are paid), or (ii) no longer meet provider solvency requirements
specified by the California Department of Managed Health Care.  The manner in which GROUP’s 60% share of its
net profits, if any, shall be distributed shall be based solely on the
discretion of the Class A directors.

 

2

 

EXHIBIT D

 

SECURITY AGREEMENT

 

 

SECURITY AGREEMENT

 

 

This SECURITY AGREEMENT,
dated as of January 1, 2001, is entered into between PROSPECT HEALTH SOURCE
MEDICAL GROUP, a California professional medical corporation (“Physician
Group”) and PROSPECT MEDICAL SYSTEMS, INC., a Delaware corporation (“Manager”),
with reference to the following facts:

 

R E C I T A L S

 

A.                                   Manager and Physician Group have entered
into that certain Management Services Agreement, effective January 1, 2001 (the
“Management Agreement”), pursuant to which Manager is providing certain
management services to Physician Group;

 

B.                                     Physician Group has agreed to enter into
this Security Agreement in order to grant Manager a first priority security
interest in the Collateral (as hereinafter defined) to secure prompt payment
and performance of its obligations under the Management Agreement.

 

A G R E E M EN T

 

NOW, THEREFORE, in
consideration of the mutual promises, covenants, conditions, representations,
and warranties hereinafter set forth, and for other good and valuable
consideration, the parties hereto agree as follows:

 

1.                                       Definitions. 
All initially capitalized terms used but not defined herein shall have
the meanings ascribed thereto in the Management Agreement.  In addition, as used herein, the following
terms shall have the following meanings:

 

“Account Debtor” means
any person or entity who is or who may become obligated with respect to, or on
account of, an Account.

 

“Accounts” means any and
all of Physician Group’s presently existing and hereafter arising accounts and
rights to payment arising out of the sale or lease of goods or  from
the rendition of professional medical services by Physician Group, excluding
accounts related to and rights to payments from the Medicare or Medi-Cal
programs, and all Instruments evidencing the same or arising in connection
therewith.

 

“Applicable Law” means
all applicable provisions of constitutions, statutes, rules, regulations and
orders of all government bodies and all orders and decrees of all courts,
tribunals and arbitrators.

 

“Bankruptcy Code” means
The Bankruptcy Reform Act of 1978 (Pub. L. No. 95-598; 11 U.S.C.), as amended
or supplemented from time to time, or any successor statute, and any and all
rules and regulations issued or promulgated in connection therewith.

 

1

 

“Code” means the
California Uniform Commercial Code.  Any
and all terms used in this Security Agreement which are defined in the Code
shall be construed and defined in accordance with the meaning and definition
ascribed to such terms under the Code, unless otherwise defined herein.

 

“Collateral” means any
and all of the furniture, fixtures and equipment, Accounts and Physician
Group’s Books, in each case whether now existing or hereafter acquired or
created, and any Proceeds or products of any of the foregoing, or any portion
thereof, and any and all Accounts, money, or other tangible or intangible
property, resulting from the sale or other disposition of the Accounts, or any
portion thereof or interest therein, and the substitutions, replacements,
additions, accessions, products and Proceeds thereof.

 

“Expenses” means any and
all costs or expenses required to be paid by Physician Group under this
Security Agreement which are paid or advanced by Manager; all costs and expenses
of Manager, including its attorneys’ fees and expenses (including attorneys’
fees incurred pursuant to proceedings arising under the Bankruptcy Code),
incurred or expended to correct any default or enforce any provision of this
Security Agreement, or in gaining possession of, maintaining, handling,
preserving, storing, shipping, selling, preparing for sale, or advertising to
sell the Collateral, irrespective of whether a sale is consummated; and all
costs and expenses of suit incurred or expended by Manager, including its
attorneys’ fees and expenses (including attorneys’ fees incurred pursuant to
proceedings arising under the Bankruptcy Code) in enforcing or defending this
Security Agreement, irrespective of whether suit is brought.

 

“Governmental Authority”
means any federal, state, local or other governmental department, commission,
board, bureau, agency, central bank, court, tribunal or other instrumentality
or authority or subdivision thereof, domestic or foreign, exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.

 

“Health Care Law” means
any Applicable Law regulating the acquisition, construction, operation,
maintenance or management of a healthcare practice, facility, provider or payor.

 

“Instruments” means any
and all negotiable instruments, certificated securities and every other writing
which evidences a right to the payment of money, in each case whether now
existing or hereafter acquired.

 

“Lien” means any
mortgage, deed of trust, pledge, security interest, hypothecation, assignment,
deposit arrangement or other preferential arrangement, charge or encumbrance
(including, any conditional sale or other title retention agreement, or finance
lease) of any kind.

 

“Physician Group’s Books”
means any and all presently existing and hereafter acquired or created books
and records of Physician Group, including all records (including maintenance
and warranty records), ledgers, computer programs, disc or tape files, 

 

2

 

printouts, runs, and other computer prepared
information indicating, summarizing, or evidencing the Accounts.

 

“Proceeds” means whatever
is receivable or received from or upon the sale, lease, license, collection,
use, exchange or other disposition, whether voluntary or involuntary, of any
Collateral or other assets of Physician Group, including “proceeds” as defined
in Section 9306 of the Code, any and all proceeds of any insurance, indemnity,
warranty or guaranty payable to or for the account of Physician Group from time
to time with respect to any of the Collateral, any and all payments (in any
form whatsoever) made or due and payable to Physician Group from time to time
in connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral by any Governmental Authority
(or any person or entity acting under color of Governmental Authority), any and
all other amounts from time to time paid or payable under or in connection with
any of the Collateral or for or on account of any damage or injury to or
conversion of any Collateral by any person or entity, any and all other
tangible or intangible property received upon the sale or disposition of
Collateral, and all proceeds of proceeds.

 

“Secured Obligations”
shall mean any and all debts, liabilities, obligations, or undertakings owing
by Physician Group to Manager arising under, advanced pursuant to, or evidenced
by the Management Agreement and this Security Agreement, whether direct or
indirect, absolute or contingent, matured or unmatured, due or to become due,
voluntary or involuntary, whether now existing or hereafter arising.

 

“Security Agreement”
shall mean this Security Agreement, any concurrent or subsequent riders,
exhibits or schedules to this Security Agreement, and any extensions,
supplements, amendments, or modifications to or in connection with this
Security Agreement, or to any such riders, exhibits or schedules.

 

2.                                       Construction. 
Unless the context of this Security Agreement clearly requires
otherwise, references to the plural include the singular, references to the
singular include the plural, the part includes the whole, “including” is not
limiting, and “or” has the inclusive meaning represented by the phrase “and/or.”
 References in this Security Agreement
to “determination” by Manager include reasonable estimates (absent manifest
error) by Manager, as applicable (in the case of quantitative determinations)
and reasonable beliefs (absent manifest error) by Manager, as applicable (in
the case of qualitative determinations). The 
words “hereof,” “herein,” “hereby,” “hereunder,” and similar terms in
this Security Agreement refer to this Security Agreement as a whole and not to
any particular provision of this Security Agreement. Article, section,
subsection, exhibit, and schedule references are to this Security Agreement
unless otherwise specified.

 

3.                                       Creation of Security Interest. 
Physician Group hereby grants to Manager a continuing security interest
in all presently existing and hereafter acquired or arising Collateral in order
to secure the prompt payment and performance of all of the Secured Obligations.
Physician Group acknowledges and affirms that such security interest in the
Collateral has attached to all Collateral without further act on the part of
Manager or Physician Group.

 

3

 

4.                                       Further Assurances. 
Physician Group shall execute and deliver to Manager concurrently with
Physician Group’s execution of this Security Agreement, and from time to time
at the request of Manager, all financing statements, continuation financing
statements, fixture filings, security agreements, chattel mortgages,
assignments, and all other documents that Manager may request, in form satisfactory
to Manager, to perfect and maintain perfected Manager’s security interests in
the collateral and in order to consummate fully all of the transactions
contemplated by this Security Agreement and the Management Agreement.

 

5.                                       Representations and Warranties. 
Physician Group represents and warrants to Manager that:

 

5.1                                 Trade Names and Trade Styles. 
Physician Group presently does not conduct its business operations under
any trade names or trade styles.

 

5.2                                 Ownership of Collateral. 
Physician Group is and shall continue to be the sole and complete owner
of the Collateral, free from any Lien.

 

5.3                                 Enforceability; Priority of Security
Interest.  This Agreement (i) creates a security
interest which is enforceable against the Collateral in which Physician Group
now has rights and will create a security interest which is enforceable against
the Collateral in which Physician Group hereafter acquires rights at the time
Physician Group acquires any such rights, and (ii) Manager has a perfected
security interest (to the fullest extent perfection can be obtained by filing,
notification to third parties or possession) and a first priority security
interest in the Collateral in which Physician Group now has rights, and will
have a perfected and first priority security interest in the Collateral in
which Physician Group hereafter acquires rights at the time Physician Group
acquires any such rights.

 

5.4                                 Other Financing Statements. 
Other than financing statements in favor of Manager, no effective
financing statement naming Physician Group as debtor, assignor, grantor,
mortgagor, pledgor or the like and covering all or any part of the Collateral
is on file in any filing or recording office in any jurisdiction.

 

6.                                       Covenants.  In addition
to the covenants of Physician Group set forth in the Management Agreement which
are incorporated herein by this reference, Physician Group agrees that from the
date of this Security Agreement and thereafter until the indefeasible payment,
performance and satisfaction in full of the Secured Obligations, and all of
Physician Group’s obligations under the Management Agreement to Manager have
been terminated:

 

6.1                                 Defense of Collateral. 
Physician Group shall appear in and defend any action, suit or
proceeding which may affect its title to or right or interest in, or Manager’s
right or interest in, the Collateral.

 

6.2                                 Preservation of Collateral. 
Physician Group shall do and perform all acts that may be necessary and
appropriate to maintain, preserve and protect the Collateral.

 

4

 

6.3                                 Change in Name: Adoption of Trade Name or
Trade Style.
Physician Group shall give Manager at least 30 days’ prior written notice of
any changes in its name, or of the adoption of any trade name or trade style.

 

6.4                                 Maintenance of Records. 
Physician Group shall keep separate, accurate and complete Physician
Group’s Books, disclosing Manager’s security interest hereunder.

 

6.5                                 Disposition of Collateral. 
Physician Group shall not surrender or lose possession of (other than to
Manager), sell, lease, rent, or otherwise dispose of or transfer any of the
Collateral or any right or interest therein.

 

6.6                                 Liens.  Physician
Group shall keep the Collateral free of all Liens, other than the Lien granted
to Manager hereunder.

 

7.                                       Events of Default. 
The occurrence of any of the following shall constitute an event of
default (“Event of Default”) under this Security Agreement:

 

7.1                                 Breach of Management Agreement. 
Physician Group shall breach, or be in default of, any of its agreements,
covenants and obligations under the Management Agreement;

 

7.2                                 Breach of Security Agreement. 
Physician Group shall breach, or be in default of, any of its
agreements, covenants and obligations under this Security Agreement; or

 

7.3                                 Breach of Representations or Warranties. 
Any representation or warranty made by Physician Group in this Security
Agreement shall have been untrue in any material respect when made.

 

8.                                       Rights and Remedies, Etc.

 

8.1                                 Rights and Remedies. During the continuance of an Event of
Default, Manager, without notice or demand, may do any one or more of the
following, all of which are authorized by Physician Group:

 

(a)                                  Make such payments and do such acts as it
considers necessary or reasonable to protect Manager’s security interest in the
Collateral. Physician Group agrees to assemble and make available any or all of
the Collateral if Manager so requires. Physician Group authorizes Manager to
enter the premises where the Collateral is located, take and maintain
possession of the Collateral, or any part of it, and to pay, purchase, contest,
or compromise any encumbrance, charge, or lien which, in the opinion of the
Manager, appears to be prior or superior to Manager’s security interest, and to
pay all costs and expenses incurred in connection therewith;

 

5

 

(b)                                 Sell the Collateral, at either a public
or private sale, or both, by way of one or more contracts or transactions, for
cash or on terms, in such manner and at such places (including Physician
Group’s premises) as is commercially reasonable, and apply any proceeds of any
sale or other disposition of the Collateral in the order provided in Section
9504 of the Code, including the payment of Expenses.  It is not necessary that the Collateral be present at any such
sale;

 

(c)                                  Without constituting a retention of
collateral in satisfaction of indebtedness as provided for in Section 9505 of
the Code, notify account debtors and other obligors of Physician Group of
Manager’s security interests in the Collateral, and proceed to collect the same
and apply the net cash proceeds therefrom to the Secured Obligations;

 

(d)                                 Manager shall give notice of any
disposition of the Collateral as follows:

 

(i)                                     Manager shall give Physician Group and
each holder of a security interest in the Collateral who has filed with Manager
a written request for notice, a written notice stating the time and place of a
public sale, or, if the disposition is to be either a private sale or some
other disposition that is not a public sale, the time on or after which the
private sale or other disposition is to be made;

 

(ii)                                  The notice described in the immediately
preceding paragraph shall be delivered to Physician Group as provided in
section 14.6 of the Management Agreement at least five (5) calendar days before
the date fixed for a sale. Notice to persons other than Physician Group
claiming an interest in the Collateral shall be sent to such addresses as such
persons have furnished to Manager prior to the date of such notice;

 

(iii)                               If the disposition is to be a public
sale, Manager shall also give notice of the time and place of said sale by
publishing a notice at least five (5) calendar days before the date of the sale
in a newspaper of general circulation, if one exists, in the county in which
the sale is to be held;

 

(e)                                  Manager may, in its own name, or in the
name of a designee or nominee, credit bid and purchase at any public sale;

 

(f)                                    Physician Group shall pay all Expenses;
and

 

(g)                                 Any portion of the Secured Obligations
which remains unpaid after disposition of the Collateral as provided above
shall be paid immediately by Physician Group. Any excess which exists after
disposition of the Collateral and payment in full of the Secured Obligations
shall be returned promptly, without interest and subject to the rights of third
persons, to Physician Group by Manager.

 

8.2                                 Further Documentation. 
Upon the exercise by Manager of any power, right, privilege, or remedy
pursuant to this Security Agreement which requires any consent, approval,
registration, qualification, or authorization of any Governmental Authority, 

 

6

 

Physician Group agrees to execute and deliver, or will
cause the execution and delivery of, all applications, certificates,
instruments, assignments, and other documents and papers that Manager or any
purchaser of the Collateral may be required to obtain for such governmental
consent, approval, registration, qualification, or authorization.

 

8.3                                 Cumulative Remedies, Waivers. 
The rights and remedies of Manager under this Security Agreement, the
Management Agreement, and all other agreements contemplated hereby and thereby
shall be cumulative. Manager shall have all other rights and remedies not
inconsistent herewith as provided under the Code, by law, or in equity. No
exercise by Manager of any one right or remedy shall be deemed an election of
remedies, and no waiver by Manager of any default on Physician Group’s part
shall be deemed a continuing waiver of any further defaults. No delay by
Manager shall constitute a waiver, election or acquiescence with respect to any
right or remedy.

 

9.                                       Notices.  All notices
or demands by any party hereto to the other party and relating to this Security
Agreement shall be made in the manner set forth in section 16.6 of the
Management Agreement.

 

10.                                 General Provisions.

 

10.1                           Successors and Assigns. 
This Security Agreement shall bind and inure to the benefit of the
respective successors and assigns of Physician Group and Manager; provided,
however, that Physician Group may not assign this Security Agreement nor
delegate any of its duties hereunder without Manager’s prior written consent
and any prohibited assignment or delegation shall be absolutely void. No
consent by Manager to an assignment by Physician Group shall release Physician
Group from the Secured Obligations. 
Manager may assign this Security Agreement and delegate its duties
hereunder, if any, from time to time to its lender or lenders or to its
Parent’s lender or lenders, without prior notice to, or the consent of,
Physician Group, and Physician Group agrees to recognize such lender or lenders
as Manager’s assignee under this Security Agreement.

 

10.2                           No Presumption Against Any Party. 
Neither this Security Agreement nor any uncertainty or ambiguity herein
shall be construed or resolved against Manager or Physician Group, whether
under any rule of construction or otherwise. On the contrary, this Security
Agreement has been reviewed by each of the parties and their counsel and shall
be construed and interpreted according to the ordinary meaning of the words
used so as to accomplish fairly the purposes and intentions of all parties
hereto.

 

10.3                           Amendments and Waivers. Any provision of this Security
Agreement or any of the Loan Documents to which Physician Group is a party may
be amended or waived if, but only if, such amendment or waiver is in writing
and is signed by the party asserted to be bound thereby, and then such
amendment or waiver shall be effective only in the specific instance and
specific purpose for which given.

 

10.4                           Counterparts; Integration; Effectiveness. 
This Security Agreement may be signed in any number of counterparts,
each of which shall be an original, with the same 

 

7

 

effect as if the signatures thereto and hereto were
upon the same instrument. This Security Agreement constitutes the entire
agreement and understanding among the parties hereto and supersedes any and all
prior agreements and understandings, oral or written, relating to the subject
matter hereof. This Security Agreement shall become effective when executed by
each of the parties hereto and delivered to Manager.

 

11.                                 Governing Law. 
This Security Agreement shall be deemed to have been made in the State
of California and the validity, construction, interpretation, and enforcement
hereof, and the rights of the parties hereto, shall be determined under,
governed by, and construed in accordance with the internal laws of the State of
California, without reference to the conflict of laws provisions thereof.

 

12.                                 No Violation of Applicable Law. 
To the extent that any lien or security interest on any Asset(s) granted
by Physician Group herein violates any applicable Health Care Law, the grant of
such lien or security interest on such Asset(s) shall be automatically null and
void; provided however, that to the extent such lien or security interest at
any time hereafter no longer violates any applicable Health Care Law, then such
lien or security interest shall automatically and without any further action
attach and become fully effective at that time (giving effect to any
retroactive effect to any change in applicable law or regulation); and,
provided further, that the liens or security interests on other Asset(s)
granted by Physician Group herein that do not violate any applicable Health
Care Law shall remain at all times in full force and effect.

 

IN WITNESS WHEREOF, the
parties have executed this Security Agreement as of the date first set forth
above.

 

	
   

  	
  PROSPECT HEALTH SOURCE MEDICAL GROUP

  
	
   

  	
  a California professional medical corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Jacob Y. Terner, M.D.

  
	
   

  	
  Its:

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  PROSPECT MEDICAL SYSTEMS, INC.

  
	
   

  	
  a Delaware corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Jacob Y. Terner, M.D.

  
	
   

  	
  Its:

  	
  President

  

 

8Exhibit 10.32

 

AMENDMENT TO MANAGEMENT SERVICES AGREEMENT

 

This Amendment (“Amendment”)
to Management Services Agreement, effective as of November 1, 2002 (this
“Amendment”) to that certain Management Services Agreement made and entered
into as of January 1, 2001 (the “Agreement”) is entered into by and
between Prospect Medical Systems, Inc. (“Manager”) and Prospect Health Source
Medical Group, Inc. (“Group”) (collectively as the “Parties”).

 

RECITALS

 

A.                                   Pursuant to the
Agreement, Manager commenced management of Group’s IPA and Robertson Practice.

 

B.                                     In 2001 Group
sold the Robertson Practice and management of the Robertson Practice by Manager
terminated.

 

C.                                     Manager
continues to manage the IPA pursuant to the terms of the Agreement.

 

D.                                    The Parties now
desire to amend the Agreement in order to increase the management fee to
Manager.

 

Capitalized
terms used herein but not defined shall have the meanings ascribed to such
terms in the Agreement.

 

NOW, THEREFORE, for good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties hereto agree as follows:

 

AMENDMENT

 

1.                                      Exhibit
C to Management Agreement. 
Exhibit C to the Management Agreement shall be replaced in its entirety
with the following:

 

EXHIBIT C

 

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

 

1

 

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).

 

“Gross Revenues” means
the sum of (i) all capitated income attributed to GROUP (determined on an
accrual basis) as compensation for the provision of medical services during the
Term by GROUP employed and independent contractor physicians and physician
extenders; (ii) all other sums attributed to GROUP (determined on a cash basis)
as compensation for the provision of medical services during the Term by GROUP
employed and independent contractor physicians and physician extenders, including
but not limited to, 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 (iii) sums derived  by GROUP or its employees from consulting services provided
during the Term or as interest income accrued during the Term.

 

B.                                     Management Fee

 

For its services
hereunder, which shall include the provision of all facilities at the Premises
and all non-physician employees of Manager who perform services at or for the
Practice and all management services provided hereunder, but shall exclude
marketing and public relations services, Manager shall retain that portion of
the Gross Revenues which is equal to twelve and one-half percent (12.50%) of
Gross Revenues, less eight thousand dollars ($8,000) per month.  Manager shall also receive a fee for
marketing and public relations services of eight thousand dollars ($8,000) per
month.

 

Furthermore, Manager shall receive a year-end
bonus fee for meeting the following performance objectives: each year Manager
provides services to GROUP and GROUP achieves profitability (i.e., GROUP’s
gross revenues exceed GROUP’s expenses), Manager shall receive a bonus fee that
is five percent (5%) of Gross Revenues. 
This bonus fee shall be reduced (or, if applicable, not paid) to the
extent it shall cause GROUP to (i) receive less than sixty percent (60%) of
GROUP’s net profits for the year (after the fees in the preceding paragraph of
this Section B are paid), or (ii) no longer meet provider solvency requirements
specified by the California Department of Managed Health Care.  The manner in which GROUP’s 60% share of its
net profits, if any, shall be distributed shall be based solely on the
discretion of the Class A directors.

 

2.                                      Further
Assurances.  Each Party hereto
agrees to execute such other documents and take such other actions as may be
reasonably necessary or desirable to confirm or effectuate the agreements
contemplated in this Amendment.

 

3.                                      Continuing
Agreement.  Except as modified
by this Amendment, the Agreement shall continue in full force and effect.  In the event of any conflict between any

 

2

 

provision of this Amendment and any provision of the Agreement, the
provision of this Amendment shall control.

 

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

 

 

	
  “Group”

  	
  “Manager”

  
	
   

  	
   

  
	
  PROSPECT HEALTH SOURCE MEDICAL

  GROUP, INC.

  a California professional medical corporation

  	
  PROSPECT MEDICAL SYSTEMS, INC.

  a Delaware corporation  

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
  Its:

  	
   

  	
   

  	
  Its:

  	
   

  	
   

  

 

3

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