Exhibit 10.86

 

Prospect Medical Holdings, Inc.

2008 Omnibus Equity Incentive Plan

 

Incentive Stock Option Agreement

 

WHEREAS, the Company has adopted the Plan (as defined below), the terms of which
are hereby incorporated by reference and made a part of this Incentive Stock
Option Agreement (the “Agreement”); and

 

WHEREAS, the Committee has determined that it would be in the best interests of
the Company and its stockholders to grant the Option provided for herein to the
Participant pursuant to the Plan and the terms set forth herein.

 

NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth,
the parties agree as follows:

 

1.                    Definitions. Whenever the following terms are used in this
Agreement, they shall have the meanings set forth below.  Capitalized terms not
otherwise defined herein shall have the same meanings as in the Plan.

 

(a)                 “Cause” includes (and is not limited to) dishonesty with
respect to the Company or any Affiliate, insubordination, substantial
malfeasance or non-feasance of duty, unauthorized disclosure of confidential
information, and conduct substantially prejudicial to the business of the
Company or any Affiliate.  The determination of the Committee as to the
existence of “Cause” will be conclusive on the Participant and the Company.

 

(b)                 “Disability” means, “Disability” as defined in an employment
agreement between the Company or any of its Subsidiaries and the Participant or,
if not defined therein or if there shall be no such agreement, “disability” of
the Participant shall have the meaning ascribed to such term in the Plan.

 

(c)                 “Expiration Date” means the date set forth on the Notice (as
defined below).

 

(d)                 “Good Reason” means (i) a breach by the Company or any
Affiliate of any employment or consulting agreement to which the Participant is
a party and (ii) following a Change in Control, (x) the failure of the Company
to pay or cause to be paid the Participant’s base salary or annual bonus when
due or (y) any substantial and sustained diminution in the Participant’s
authority or responsibilities materially inconsistent with the Participant’s
position; provided that either of the events described in clauses (x) and
(y) will constitute Good Reason only if the Company fails to cure such event
within 30 days after receipt from the Participant of written notice of the event
which constitutes Good Reason; provided, further, that “Good Reason” will cease
to exist for an event on the sixtieth (60th) day following the later of its
occurrence or the Participant’s  knowledge thereof, unless the Participant has
given the Company written notice of his or her termination of employment for
Good Reason prior to such date.

 

(e)           “Plan” means the Prospect Medical Holdings, Inc. 2008 Omnibus
Equity Incentive Plan, as the same may be amended, supplemented or modified from
time to time.

 

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(f)                  “Retirement” means a termination of employment by the
Participant at Participant’s election (i) following the attainment of age
sixty-five (65) with ten (10) or more years of combined service with the Company
or any Affiliate or (ii) pursuant to a retirement plan or early retirement
program of the Company or any Affiliate in which the Participant elects to
participate.

 

(g)                 “Vested Portion” means, at any time, the portion of an
Option which has become vested, as described in Section 3 of this Agreement.

 

2.                    Grant of Option. The Company hereby grants to the
Participant the right and option (the “Option”) to purchase, on the terms and
conditions hereinafter set forth, the number of Shares set forth on the Notice
of Grant of Stock Option (the “Notice”), subject to adjustment as set forth in
the Plan.  The purchase price of the Shares subject to the Option (the “Option
Price”) shall be as set forth on the Notice.  The Option is intended to be an
Incentive Stock Option, and as such is intended to be treated as an option that
complies with Section 422 of the Internal Revenue Code of 1986, as amended.

 

3.                    Vesting of the Option.

 

(a)                 In General.  Subject to Sections 3(b) and 3(c), the Option
shall vest and become exercisable at such times as are set forth in the Notice.

 

(b)                 Change in Control. Notwithstanding the foregoing, in the
event of a Change in Control, the Committee, in its discretion, may elect to
accelerate the vesting of any or all unvested Options as of the date of such
Change in Control, to the extent not previously cancelled or forfeited, so that
such unvested Options will become vested and exercisable either (i) upon the
earlier of (x) the first anniversary of the Change in Control or (y) the
termination of the Participant’s Employment (A) by the Company other than for
Cause (unless such termination is due to death or Disability) or (B) by the
Participant for Good Reason, or (ii) on such other terms established by the
Committee.

 

(c)                 Termination of Employment.  If the Participant’s Employment
with the Company and its Subsidiaries terminates for any reason (including,
unless otherwise determined by the Committee, a Participant’s change in status
from an employee to a non-employee (other than director of the Company or any
Affiliate)), the Option, to the extent not then vested, shall be immediately
canceled by the Company without consideration; provided, however, that if the
Participant’s Employment terminates due to death, Disability or Retirement, the
unvested portion of the Option, to the extent not previously cancelled or
forfeited, shall immediately become vested and exercisable.  The Vested Portion
of the Option shall remain exercisable for the period set forth in
Section 4(a) of this Agreement.  If the Participant is absent from work with the
Company or with an Affiliate because of a temporary disability (any disability
other than a Disability), or on an approved leave of absence for any purpose,
the Participant shall not, during the period of any such absence, be deemed, by
virtue of such absence alone, to have terminated Employment, except to the
extent that the Committee so determines.

 

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4.                    Exercise of Option.

 

(a)                 Period of Exercise. Subject to the provisions of the Plan
and this Agreement, and the terms of any employment agreement entered into by
the Participant and the Company or an Affiliate that provides for treatment of
Options that is more favorable to the Participant than clauses (i) - (vii) of
this Section 4(a), the Participant may exercise all or any part of the Vested
Portion of the Option at any time prior to the Expiration Date.  Notwithstanding
the foregoing, if the Participant’s Employment terminates prior to the
Expiration Date, the Vested Portion of the Option shall remain exercisable for
the period set forth below.  If the last day on which the Option may be
exercised, whether the Expiration Date or due to a termination of the Optionee’s
Employment prior to the Expiration Date, is a Saturday, Sunday or other day that
is not a trading day on the American Stock Exchange (the “AMEX”) or, if the
Company’s Shares are not then listed on AMEX, such other stock exchange or
trading system that is the primary exchange on which the Company’s Shares are
then traded, then the last day on which the Option may be exercised shall be the
preceding trading day on AMEX or such other stock exchange or trading system. 
If the Shares are not publicly traded, the next business day (when U.S.
government offices and federal courts are open for business) following a
Saturday, Sunday or national holiday shall be the last day on which the Option
may be exercised.

 

(i)                   Death or Disability. If the Participant’s Employment with
the Company or any Affiliate terminates due to the Participant’s death or
Disability, the Participant (or his or her representative) may exercise the
Vested Portion of the Option for a period ending on the earlier of (A) one
hundred eighty (180) days following the date of such termination and (B) the
Expiration Date;

 

(ii)                 Retirement. If the Participant’s Employment with the
Company or any Affiliate terminates due to the Participant’s Retirement, the
Participant may exercise the Vested Portion of the Option for a period ending on
the earlier of (A) ninety (90) days following the date of such termination and
(B) the Expiration Date; provided, that if the Company or any Affiliate has
given the Participant notice that the Participant’s Employment is being
terminated for Cause prior to the Participant’s election to terminate due to the
Participant’s Retirement, then the provisions of Section 4(a)(v) shall control;

 

(iii)                Unsatisfactory Performance; Voluntary Termination without
Good Reason. If the Participant’s Employment with the Company or any Affiliate
is terminated by the Company or the Affiliate (other than after a Change in
Control as set forth in Section 4(a)(vi)) for unsatisfactory performance, but
not for Cause (as determined in its sole discretion by the Company or the
Affiliate), or the Participant voluntarily terminates Employment at any time
without Good Reason, the Participant may exercise the Vested Portion of the
Option for a period ending on the earlier of (A) ninety (90) days following the
date of such termination and (B) the Expiration Date; provided, that if the
Company or any Affiliate has given the Participant notice that the Participant’s
Employment is being terminated for Cause prior to the Participant’s election to
voluntarily terminate Employment without Good Reason, then the provisions of
Section 4(a)(v) shall control;

 

(iv)               Termination other than for Cause. Subject to the provision of
Section 4(a)(vi), if the Participant’s Employment with the Company or any
Affiliate is terminated by the

 

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Company or the Affiliate for any reason other than by the Company or the
Affiliate for Cause, unsatisfactory performance or due to the Participant’s
death or Disability, the Participant may exercise the Vested  Portion of the
Option for a period ending on the earlier of (A) ninety (90) days following the
date of such termination and (B) the Expiration Date;

 

(v)                 Termination by the Company for Cause. If the Participant’s
Employment with the Company or any Affiliate is terminated by the Company or the
Affiliate for Cause, the Vested Portion of the Option shall immediately
terminate in full and cease to be exercisable; and

 

(vi)               After a Change in Control. If the Participant’s Employment
with the Company or any Affiliate terminates after a Change in Control due to a
termination by the Company other than for Cause or due to the Participant’s
resignation for Good Reason, the Participant may exercise the Vested Portion of
the Option for a period ending on the earlier of (A) ninety (90) days following
the date of such termination and (B) the Expiration Date.

 

(b)                 Method of Exercise.

 

(i)                   Subject to Section 4(a) of this Agreement, the Vested
Portion of an Option may be exercised by delivering to the Company at its
principal office written notice of intent to so exercise; provided that the
Option may be exercised with respect to whole Shares only.  Such notice shall
specify the number of Shares for which the Option is being exercised, shall be
signed (whether or not in electronic form) by the person exercising the Option
and shall make provision for the payment of the Option Price.  Payment of the
aggregate Option Price shall be paid to the Company, at the election of the
Committee, pursuant to one or more of the following methods: (A) in cash, or its
equivalent; (B) by transferring Shares having a Fair Market Value equal to the
aggregate Option Price for the Shares being purchased to the Company and
satisfying such other requirements as may be imposed by the Committee; provided
that such Shares have been held by the Participant for no less than six
(6) months (or such other period as established from time to time by the
Committee or generally accepted accounting principles); (C) partly in cash and
partly in Shares; or (D) if there is a public market for the Shares at such
time, subject to such rules as may be established by the Committee, through
delivery of irrevocable  instructions to a broker to sell the Shares otherwise
deliverable upon the exercise of the Option and to deliver promptly to the
Company an amount equal to the aggregate Option Price.  No Participant shall
have any rights to dividends or other rights of a stockholder with respect to
the Shares subject to the Option until the issuance of the Shares.

 

(ii)                 Notwithstanding any other provision of the Plan or this
Agreement to the contrary, absent an available exemption to registration or
qualification, the Option may not be exercised prior to the completion of any
registration or qualification of the Option or the Shares under applicable state
and federal securities or other laws, or under any ruling or regulation of any
governmental body or national securities exchange that the Committee shall in
its sole reasonable discretion determine to be necessary or advisable.

 

(iii)                Upon the Company’s determination that the Option has been
validly exercised as to any of the Shares, the Company shall issue certificates
in the Participant’s name for such Shares.  However, the Company shall not be
liable to the Participant for damages relating to any delays in issuing the
certificates to the Participant, any loss by the Participant of

 

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the certificates, or any mistakes or errors in the issuance of the certificates
or in the certificates themselves.

 

(iv)               In the event of the Participant’s death, the Vested Portion
of an Option shall remain vested and exercisable by the Participant’s executor
or administrator, or the person or persons to whom the Participant’s rights
under this Agreement shall pass by will or by the laws of descent and
distribution as the case may be, to the extent set forth in Section 4(a) of this
Agreement.  Any heir or legatee of the Participant shall take rights herein
granted subject to the terms and conditions hereof.

 

(c)                                  Limitations and Restrictions.

 

(i)                   If Participant sells or otherwise disposes of any of the
Shares acquired pursuant to the Option on or before the later of: (1) the date
two years after the Date of Grant, and (2) the date one year after transfer of
such Shares to Participant upon exercise of the Option, Participant immediately
shall notify the Company in writing of such disposition.  Participant agrees
that Participant may be subject to income tax withholding by the Company on the
compensation income recognized by Participant from the early disposition by
payment in the manner set forth in paragraph 8.

 

(ii)                 The aggregate Fair Market Value (determined as of the date
of grant) of Shares with respect to which the Option is exercisable for the
first time by Participant during any calendar year (under the Plan or under any
other stock option plan of the Company or any Affiliate) shall not exceed
$100,000.  If the Fair Market Value of Shares on the date of grant with respect
to which the Option is exercisable for the first time by Participant during any
calendar year exceeds $100,000, only the Options for the first $100,000 worth of
Shares to become exercisable in such calendar year shall comply with Section 422
of the Code and Options for the amount in excess of $100,000 that become
exercisable in that calendar year shall be non-qualified stock options.  In the
event that the Code or the regulations promulgated thereunder are amended after
the Effective Date to provide for a different limit on the Fair Market Value of
Shares permitted to be subject to incentive stock options, such different limit
shall be automatically incorporated herein and shall apply to the unexercised
portion of this Option after the effective date of such amendment, provided such
regulations are intended to apply to pre-existing options.

 

(iii)                Participant understands and acknowledges that for purposes
of this Agreement, Participant must be an employee of the Company or an
Affiliate.  Termination of Participant’s employment with the Company or an
Affiliate in order to provide service to the Company or an Affiliate in any
other capacity, such as a consultant or as an employee of a consultant providing
services to the Company or an Affiliate will not comply with the requirements of
Section 422 of the Code and will result in the unexercised portion of the Option
to be treated as a non-qualified stock option.

 

5.                    No Right to Continued Employment. Neither the Plan nor
this Agreement shall be construed as giving the Participant the right to be
retained in the Employment of the Company or any Affiliate.  Further, the
Company or an Affiliate may at any time dismiss the Participant or

 

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discontinue any other relationship, free from any liability or any claim under
the Plan or this Agreement, except as otherwise expressly provided herein.

 

6.                    Legend on Certificates. The certificates representing the
Shares purchased by exercise of an Option shall be subject to such stop transfer
orders and other restrictions as the Committee may deem reasonably advisable
under the Plan or the rules, regulations, and other requirements of the
Securities and Exchange Commission, AMEX or any stock exchange upon which such
Shares are listed, any applicable federal or state laws and the Company’s
Certificate of Incorporation and Bylaws, and the Committee may cause a legend or
legends to be put on any such certificates to make appropriate reference to such
restrictions.

 

7.                    Transferability. Unless otherwise determined by the
Committee, an Option may not be assigned, alienated, pledged, attached, sold or
otherwise transferred or encumbered by the Participant otherwise than by will or
by the laws of descent and distribution, and any such purported assignment,
alienation, pledge, attachment, sale, transfer or encumbrance shall be void and
unenforceable against the Company or any Affiliate.

 

8.                    Withholding. The Participant may be required to pay to the
Company or an Affiliate and the Company or the Affiliate shall have the right
and is hereby authorized to withhold from any payment due or transfer made under
the Option or under the Plan or from any compensation or other amount owing to a
Participant the amount (in cash, Shares, other securities, other Awards or other
property) of any applicable withholding taxes in respect of the Option, its
exercise, or any payment or transfer under the Option or under the Plan and to
take such action as may be necessary in the option of the Company to satisfy all
obligations for the payment of such taxes.

 

9.                    Securities Laws. Upon the acquisition of any Shares
pursuant to the exercise of an Option, the Participant will make or enter into
such written representations, warranties and agreements as the Committee may
reasonably request in order to comply with applicable securities laws or with
this Agreement.

 

10.                 Notices. Any notice under this Agreement shall be addressed
to the Company in care of its Corporate Secretary at the principal executive
office of the Company, with a copy to the Director, Human Resources, at the
principal executive office of the Company, and to the Participant at the address
appearing in the personnel records of the Company for the Participant or to
either party at such other address as either party hereto may hereafter
designate in writing to the other.  Any such notice shall be deemed effective
upon receipt thereof by the addressee.

 

11.                 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to conflicts of laws, and any and all disputes between the Participant and the
Company or any Affiliate relating to the Option shall be brought only in a state
or federal court of competent jurisdiction sitting in Wilmington, Delaware and
the Participant and the Company and any Affiliate hereby irrevocably submit to
the jurisdiction of any such court and irrevocably agree that venue for any such
action shall be only in any such court.

 

12.                 Entire Agreement. This Agreement, together with the Notice
and the Plan, embodies the entire agreement and understanding between the
parties hereto with respect to the subject matter

 

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hereof and supersedes all prior oral or written agreements and understandings
relating to the subject matter hereof.  No statement, representation, warranty,
covenant or agreement not expressly set forth in this Agreement or the Notice
shall affect or be used to interpret, change or restrict, the express terms and
provisions of this Agreement or the Notice; provided, that this Agreement and
the Notice shall be subject to and governed by the Plan, and in the event of any
inconsistency between the provisions of this Agreement or the Notice and the
provisions of the Plan, the provisions of the Plan shall govern.

 

13.                 Modifications And Amendments. The terms and provisions of
this Agreement and the Notice may be modified or amended as provided in the
Plan.

 

14.                 Waivers And Consents. Except as provided in the Plan, the
terms and provisions of this Agreement and the Notice may be waived, or consent
for the departure therefrom granted, only by a written document executed by the
party entitled to the benefits of such terms or provisions.  No such waiver or
consent shall be deemed to be or shall constitute a waiver or consent with
respect to any other terms or provisions of this Agreement or the Notice,
whether or not similar.  Each such waiver or consent shall be effective only in
the specific instance and for the purpose for which it was given, and shall not
constitute a continuing waiver or consent.

 

15.                 Reformation; Severability. If any provision of this
Agreement or the Notice (including any provision of the Plan that is
incorporated herein by reference) shall hereafter be held to be invalid,
unenforceable or illegal, in whole or in part, in any jurisdiction under any
circumstances for any reason, (i) such provision shall be reformed to the
minimum extent necessary to cause such provision to be valid, enforceable and
legal while preserving the intent of the parties as expressed in, and the
benefits of the parties provided by, this Agreement, the Notice and the Plan or
(ii) if such provision cannot be so reformed, such provision shall be severed
from this Agreement or the Notice and an equitable adjustment shall be made to
this Agreement or the Notice (including, without limitation, addition of
necessary further provisions) so as to give effect to the intent as so expressed
and the benefits so provided.  Such holding shall not affect or impair the
validity, enforceability or legality of such provision in any other jurisdiction
or under any other circumstances.  Neither such holding nor such reformation or
severance shall affect the legality, validity or enforceability of any other
provision of this Agreement, the Notice or the Plan.

 

16.                 Receipt of Documents. By entering into this Agreement, the
Participant agrees and acknowledges that (i) the Participant has received and
read a copy of the Plan and (ii) the Option is granted pursuant to the Plan and
is therefore subject to all of the terms of the Plan.

 

17.                 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be considered an original and shall become
effective when one or more counterparts have been signed by each of the parties
hereto and delivered to the other party hereto. Execution and delivery shall be
deemed effective whether made via hard copy with manual signatures or via email
or fax transmission with facsimile signatures.

 

(Signature Page Follows)

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
20th day of August, 2008 at Los Angeles, California.

 

 

COMPANY

 

 

PROSPECT MEDICAL HOLDINGS, INC.

 

 

By:

 

 

Name: Samuel S. Lee

 

Title: Chief Executive Officer

 

 

 

 

PARTICIPANT

 

 

 

 

 

Name:

 

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Prospect Medical Holdings, Inc.

2008 Omnibus Equity Incentive Plan

 

NOTICE OF GRANT OF INCENTIVE STOCK OPTION

 

PROSPECT MEDICAL HOLDINGS, INC. (the “Company”), pursuant to action of the
Compensation Committee of the Board of Directors of the Company taken on
August 20, 2008, granted (the “Award”) to the undersigned Participant the
following Stock Option (the “Option”) to purchase Shares, subject to the terms
and conditions of this Notice of Grant of Incentive Stock Option (the “Notice”),
the Incentive Stock Option Agreement (the “ISO Agreement”) and the Company’s
2008 Omnibus Equity Incentive Plan (the “Plan”). The Plan and the ISO Agreement
are both incorporated into and made a part of this Notice.

 

1.

Participant’s Name:

 

 

2.

Grant Information for this Award:

 

Option Grant Number:

 

Date of Grant:                               , 20

 

Exercise Price per Share:

 

Total Number of Shares Subject to Option:

 

Option Expiration Date:                                 , 20

 

 

3.

The vesting dates shall be:

 

Shares

 

Vesting Date

 

Performance Vesting (Yes/No)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

subject to earlier forfeiture in certain circumstances, including termination of
Employment, and accelerated vesting, as provided in the ISO Agreement and the
Plan. If Performance Vesting terms apply, they will be set forth in Attachment A
to this Notice and the ISO Agreement.

 

 

4.

I acknowledge that I have read and will comply with the Company’s Insider
Trading Policy (accessible on the Company’s Website), which I understand may be
updated from time to time.

 

 

5.

I acknowledge and agree that I may owe withholding taxes at the time of each
exercise of a vested portion of the Option and that I must determine if I will
owe withholding taxes and, if so, elect the method of payment of such
withholding taxes in advance of each exercise in accordance with the procedures
established by the Company, and that such procedures may change and be updated
over time.

 

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IN WITNESS WHEREOF, the Company has caused this Notice to be signed by its duly
authorized officer or agent as of the          day of                         ,
          .

 

Prospect Medical Holdings, Inc.

 

 

By:

 

 

Accepted and Agreed to:

 

 

 

 

 

Participant:

 

 

 

                       (Signature)

 

 

 

 

 

Home Address:

 

Business Address:

 

 

 

 

 

 

 

 

 

 

 

 

 

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