Exhibit
10.2


 


WARRANT
AGREEMENT


 


WARRANT AGREEMENT (this “Agreement”) dated as of January 15, 2004, by and between
Prospect Medical Holdings, Inc., a Delaware corporation (the “Company”), and Spencer Trask Ventures, Inc.
(the “Agent”).


 


W
I  T  N  E  S  S  E  T  H


 


WHEREAS, the Agent has
agreed pursuant to the Placement Agency Agreement, dated November 1, 2003, as
amended, by and between the Agent and the Company (the “Placement Agency Agreement”) to act as the
placement agent in connection with the Company’s proposed private placement
(the “Offering”) of up to 104
Units (plus up to an additional 31 Units solely to cover over-subscriptions, if
any), each Unit consists of 20,000 shares (the “Shares”) of the Company’s Series A Convertible Preferred
Stock, $.01 per value per share (the “Series
A Preferred Stock”); and


 


WHEREAS, the Company has
agreed to issue to the Agent and/or its designees warrants (the “Warrants”) to purchase that number of
shares of Series A Preferred Stock (the “Warrant
Shares”) equal to twenty percent (20%) (the “Agent Warrant Percentage”) of the Shares
contained in the Units sold in the Offering (as hereinafter defined);


 


WHEREAS, the Warrants to
be issued pursuant to this Agreement will be issued in connection with one or
more Closings (as such term is defined in the Placement Agency Agreement) in
consideration for, and as part of the Agent’s compensation in connection with,
the Agent acting as the placement agent pursuant to the Placement Agency
Agreement.


 


NOW, THEREFORE, in consideration of the promises, the
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:


 


1.             Grant.  Subject to the terms and conditions
hereinafter set forth, the Holders (as defined in Section 3.1 below) are hereby
granted the right to purchase Warrant Shares at the initial exercise price of  $5.50 per share of Series A Preferred
Stock (subject to adjustment as provided in Section 8 hereof), subject to the
terms and conditions of this Agreement.


 


2.             Warrant
Certificates.  The Warrant
certificates (the “Warrant Certificates”)
delivered and to be delivered pursuant to this Agreement shall be in the form
set forth in Exhibit A, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.


 


3.             Exercise  of
Warrant.


 


3.1           Method  of
Exercise.  The Warrants are
initially exercisable at the initial exercise price per share set forth in
Section 5 hereof payable by certified or official bank check in New York
Clearing House funds, subject to adjustment as provided in Section 8
hereof.  Upon surrender of a Warrant
Certificate with the annexed Form of Election to Purchase duly executed,


 

















 


together with payment of
the Exercise Price (as defined in Section 5.2 below) for the Warrant Shares at
the Company’s principal offices, currently at 6083 Bristol Parkway, Suite 100,
Culver City, California 90230, the registered holder of a Warrant Certificate
(“Holder” or “Holders”) shall be entitled to receive a
certificate or certificates for the shares of Series A Preferred Stock so
purchased.  The purchase rights
represented by each Warrant Certificate are exercisable at the option of the
Holder(s) thereof, in whole or in part (but not as to fractional shares of the
Series A Preferred Stock underlying the Warrants).  Warrants may be exercised to purchase all or part of the shares
of Series A Preferred Stock represented thereby.  In the case of purchase of less than all the shares of Series A
Preferred Stock purchasable under any Warrant Certificate, the Company shall
cancel such Warrant Certificate upon the surrender thereof and shall execute
and deliver a new Warrant Certificate of like tenor for the balance of the
shares of Series A Preferred Stock.


 


3.2           Exercise  by
Surrender  of  Warrant. 
In addition to the method of payment set forth in Section 3.1 and in
lieu of any cash payment required thereunder, the Holder(s) of the Warrants
shall have the right at any time and from time to time, to exercise the
Warrants in full or in part by surrendering the Warrant Certificate in the
manner specified in Section 3.1 in exchange for the number of shares of Series
A Preferred Stock computed by using the following formula:


 


X = Y
(A - B)


A


 


	
  Where

  	
   

  	
  X

  	
   

  	
  =

  	
   

  	
  the number of shares of
  Series B Preferred Stock to be issued to the Holder(s) pursuant to the net
  exercise.

  
	
   

  	
   

  	
  Y

  	
   

  	
  =

  	
   

  	
  the number of shares
  Series B Preferred Stock subject to the Warrant being exercised or, if only a
  portion of such Warrant is being exercised, the portion of such Warrant being
  canceled (at the time of such calculation).

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  A

  	
   

  	
  =

  	
   

  	
  the Fair Market Value
  of one share of Series B Preferred Stock (at the date of such calculation).

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  B

  	
   

  	
  =

  	
   

  	
  the Exercise Price (as
  adjusted to the date of such calculation).

  



 


For purposes of this Section 3.2, the “Fair Market Value” of one share of Series A Preferred Stock
shall equal: (i) the average of the closing sale price of the Series A Preferred
Stock (or any other security for which the Warrants are then exercisable) as
quoted on the Nasdaq Stock Market or in the Over-The-Counter Market or the
closing price quoted on any national securities exchange on which such
securities are listed, whichever is applicable for the ten trading days
immediately prior to the date of determination of Fair Market Value or, (ii) if
no sales take place on any such trading day, the average of the closing bid and
asked prices on such trading day; or (iii) if the Series A Preferred Stock (or
any other security for which the Warrants are then exercisable) is not quoted
on the Nasdaq Stock Market or Over-The-Counter or on a national securities
exchange, the Fair Market Value of the Series A Preferred Stock shall be established
in good faith by the disinterested members of the Company’s Board of Directors.


 


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3.3.          Exercise Period.
The Warrants shall be exercisable, in whole or in part, during the term
commencing on the date of issuance thereof by the Company (the “Warrant Issue Date”) and ending on the
tenth (10th) anniversary of the Warrant Issue Date.


 


4.             Issuance  of
Certificates.  In the event of any
exercise of the rights represented by the Warrants, as promptly as practicable
on or after the date of exercise and in any event within ten (10) business days
thereafter, the Company at its expense shall issue and deliver to the Person or
Persons (as hereinafter defined) entitled to receive the same a certificate or
certificates representing the number of Warrant Shares issued upon such
exercise; provided, however, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Holder, and the Company shall not be required to issue or
deliver such certificates unless or until the person(s) requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have established
to the reasonable satisfaction of the Company that such tax has been paid.  In the event that the Warrants are exercised
in part, as promptly as practicable on or after the date of exercise and in any
event within ten (10) business days thereafter, the Company at its sole expense
will execute and deliver new Warrants of like tenor exercisable for the number
of Warrant Shares for which the Warrants may then be exercised.  As used herein, the term “Person” or “Persons”  means
any individual or any corporation, partnership, trust, limited liability
company or other entity or organization of any kind.


 


5.             Exercise  Price.


 


5.1           Initial  and
Adjusted  Exercise  Price. 
Except as otherwise provided in Section 8 hereof, the Warrants shall be
exercisable to purchase the Shares at a price of $5.50 per share of Series A
Preferred Stock.  The adjusted exercise
price shall be the price which shall result from time to time from any and all
adjustments of the initial exercise price in accordance with the provisions of
Section 8 hereof.


 


5.2           Exercise  Price.  The term “Exercise
Price” herein shall mean the initial exercise price or the adjusted
exercise price, depending upon the context.


 


6.             Registration  Rights.  The Holders of the Warrants are entitled to
the benefits of registration under that certain Registration Rights Agreement,
dated the date hereof, by and among the Company and the investors in the
Offering (the “Registration Rights Agreement”). The terms of the Registration
Rights Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights,
limitations of rights, obligations and duties thereunder of the Company and the
Holders of the Warrants.


 


7.             Transfer of Securities; Legends.  Each Holder, by acceptance of a Warrant
Certificate, covenants and agrees that it is acquiring the Warrants evidenced
thereby and the Warrant Shares for its own account as an investment and not
with a view to distribution thereof. 
The Warrant Shares have not been registered under the Securities Act of
1933, as amended (the “Act”), or
any state securities laws and no transfer of any Warrant Shares shall be
permitted unless the Company has received notice of such transfer, at the
address of its principal office set forth in Section 3.1 hereof, in the form of
assignment attached hereto, accompanied by an


 


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opinion of counsel
reasonably satisfactory to the Company that an exemption from registration of
such Warrant Shares under the Act is available for such transfer.


 


THE SECURITIES
REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE.  THE SECURITIES MAY NOT BE TRANSFERRED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE
STATE SECURITIES LAWS OR PURSUANT TO AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE ISSUER THAT APPLICABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF SUCH ACT AND SUCH LAWS IS AVAILABLE.


 


THE TRANSFER, EXCHANGE
AND EXERCISE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN
ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.


 


7.1           Removal  of  Legend.  Upon request of a Holder of a certificate with the legends
required by Section 7 hereof, the Company shall issue to such Holder a new
certificate therefor free of any transfer legend, if, with such request, the
Company shall have received an opinion of counsel satisfactory to the Company
in form and substance to the effect that any transfer by such Holder of the
shares evidenced by such certificate will not violate the Act and any
applicable state securities laws. Any purported transfer of any Warrants or
Warrant Shares not in compliance with the provisions of this Section 7 shall be
null and void.


 


8.             Adjustment.


 


(a)           Computation of Adjusted Exercise Price. 
Except as hereinafter provided, in case the Company shall at any time
after the date hereof issue or sell any shares of its Stock (as defined in
Section 8(e)) hereof other than
the issuances or sales referred to in Section 8(f) hereof for a consideration
per share less than the Exercise Price in effect immediately prior to the
issuance or sale of such shares, or without consideration, then forthwith upon
such issuance or sale, the Exercise Price shall (until another such issuance or
sale) be reduced concurrently with such issue, to a price (calculated to the
nearest full cent) equal to the quotient derived by dividing (A) an amount
equal to the sum of (X) the product of (a) the Exercise Price in effect
immediately prior to such issuance or sale, multiplied by (b) the total number
of shares of Stock outstanding immediately prior to such issuance or sale, plus
(Y) the aggregate of the amount of all consideration, if any, received by the
Company upon such issuance or sale, by (B) the total number of shares of Stock
outstanding immediately after such issuance or sale; provided, however,
that in no event shall the Exercise Price be adjusted pursuant to this
computation to an amount in excess of the Exercise Price in effect immediately
prior to such computation, except in the case of a subdivision or combination
of outstanding shares of Stock, as provided by Section 8(c) hereof.


 


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For the purposes of this Section 8, the term Exercise
Price shall mean the Exercise Price per share for the Series A Preferred Stock
set forth in Section 1 hereof, as adjusted from time to time pursuant to the
provisions of this Section 8.


 


For purposes of any computation to be made in
accordance with this Section 8(a), the following provisions shall be
applicable:


 


(i)            In case of the
issuance or sale of shares of Stock for a consideration part or all of which
shall be cash, the amount of the cash consideration, shall be deemed to be the
amount of cash received by the Company for such shares (or, if shares of Stock
are offered by the Company for subscription, the subscription price, or, if
either of such securities shall be sold to underwriters or dealers for public
offering without a subscription price, the public offering price, before
deducting therefrom any compensation paid or discount allowed in the sale,
underwriting or purchase thereof by underwriters or dealers or other persons or
entities performing similar services, or any expenses incurred in connection
therewith) less any amounts payable to security holders or any affiliate
thereof in connection with such issuance, including, without limitation, any
employment agreement, royalty, consulting agreement, covenant not to compete,
earnout or contingent payment right or similar arrangement, agreement or
understanding, whether oral or written; all such amounts shall be valued at the
aggregate amount payable thereunder whether such payments are absolute or
contingent and irrespective of the period or uncertainty of payment, the rate
of interest, if any, or the contingent nature thereof.


 


(ii)           In case of the issuance
or sale (otherwise than as a dividend or other distribution on any stock of the
Company) of shares of Stock for a consideration part or all of which shall be
other than cash, the amount of the consideration therefor other than cash shall
be deemed to be the value of such consideration as determined in good faith by the
Board of Directors of the Company.


 


(iii)          Shares of Stock issuable
by way of dividend or other distribution on any capital stock of the Company
shall be deemed to have been issued immediately after the opening of business
on the day following the record date for the determination of stockholders
entitled to receive such dividend or other distribution and shall be deemed to
have been issued without consideration.


 


(iv)          The reclassification of
securities of the Company other than shares of Stock into securities including
shares of Stock shall be deemed to involve the issuance of such shares of Stock
for consideration other than cash immediately prior to the close of business on
the date fixed for the determination of security holders entitled to receive such
shares, and the value of the consideration allocable to such shares of Stock
shall be determined as provided in Section 8(a)(ii).


 


(v)           The number of shares of
Stock at any one time outstanding shall include the aggregate number of shares
issued or issuable (subject to readjustment upon the actual issuance thereof)
upon the exercise of then outstanding options, rights, warrants, and
convertible and exchangeable securities.


 


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(vi)          No adjustment shall be
made to the Exercise Price then in effect upon the exercise of the Warrants.


 


(b)           Options, Rights,
Warrants and Convertible and Exchangeable Securities.


 


(i)            In case the Company
shall at any time after the date hereof grant or issue options, rights or
warrants to subscribe for shares of Stock, or issue any securities convertible
into or exchangeable for shares of Stock where the aggregate consideration per
share of Stock is less than the Exercise Price in effect immediately prior to
the issuance of such options, rights or warrants or such convertible or
exchangeable securities, the Exercise Price in effect immediately prior to the
issuance of such options, rights or warrants or such convertible or
exchangeable securities, as the case may be, shall be reduced to a price
determined by making a computation in accordance with the provisions of Section
8(a) hereof, provided that:


 


(ii)           The aggregate maximum
number of shares of Stock issuable under such options, rights or warrants shall
be deemed to be issued and outstanding at the time such options, rights or
warrants were issued for an aggregate consideration equal to the minimum
purchase price per share provided for in such options, rights or warrants at
the time of issuance, plus the consideration, if any, received by the Company
for such options, rights or warrants. 
The aggregate maximum number of shares of Stock issuable upon conversion
or exchange of any convertible or exchangeable securities shall be deemed to be
issued and outstanding at the time of issuance of such securities and for an
aggregate consideration equal to the consideration received by the Company for
such securities, plus the minimum consideration, if any, receivable by the
Company upon the conversion or exchange thereof.  If any change shall occur in the price per share provided for in
any such options, rights or warrants referred to in this subsection, or in the
price per share at which the securities referred to in this subsection are
convertible or exchangeable, such options, rights or warrants or exchange or
conversion rights, as the case may be, shall be deemed to have expired or
terminated on the date when such price change became effective in respect to
shares not theretofore issued pursuant to the exercise or exchange thereof, and
the Company shall be deemed to have issued upon such date new options, rights
or warrants or convertible or exchangeable securities at the new price in
respect of the number of shares issuable upon the exercise of such options,
rights or warrants or the conversion or exchange of such convertible or
exchangeable securities.


 


(c)           Subdivision and
Combination.  If the Company shall
at any time subdivide (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the shares of Series A Preferred
Stock subject to acquisition hereunder, then, after the date of record for
effecting such subdivision, the Exercise Price in effect immediately prior to
such subdivision will be proportionately reduced and the number of shares of
Series A Preferred Stock subject to acquisition upon exercise of the Warrants
will be proportionately increased.  If
the Company at any time combines (by reverse stock split, recapitalization,
reorganization, reclassification or otherwise) the shares of Series A Preferred
Stock subject to acquisition hereunder, then, after the date of record for
effecting such combination, the Exercise Price in effect immediately prior to
such combination will be proportionately increased and the number of shares of
Series B Preferred Stock subject to acquisition upon exercise of the Warrants
will be proportionately decreased.


 


6

















 


(d)           Notice of Adjustment. Upon any adjustment of any Exercise
Price, then and in each such case the Company shall give notice thereof to the
Holder, which notice shall state the Exercise Price resulting from such
adjustment and the increase or decrease, if any, in the number of Warrant
Shares purchasable at such price upon the exercise of the Warrants, setting
forth in reasonable detail the method of calculation and the facts upon which
such calculation is based.


 


(e)           Definition of
Stock.  For the purpose of this
Agreement, the term “Stock” shall mean (i) the class of stock designated as any
series of preferred stock in the Certificate of Incorporation of the Company or
(ii) any other class of stock resulting from successive changes or
reclassifications of such Stock consisting solely of changes in par value, or
from par value to no par value, or from no par value to par value.


 


(f)            No Adjustment of
Exercise Price in Certain Cases.  No
adjustment of the Exercise Price shall be made:


 


(i) Upon issuance or sale
of the Warrants or Warrant Shares, or the other warrants issued pursuant to
this Agreement or securities into which such warrants are exercisable, upon the
conversion or exercise of preferred stock or other options, warrants and
convertible securities outstanding as of the date hereof into or for shares of
the Company’s common stock, %0.01 par value per share (the “Common Stock”) or upon the issuance or
exercise of warrants in connection with the Company’s issue and sale of shares
of its preferred stock.


 


(ii) Upon the issuance or
sale of any shares of capital stock, or the grant or issuance of options
exercisable therefor, issued or issuable after the date of Warrants, to
directors, officers, employees, advisers and consultants of the Company or any
subsidiary pursuant to any incentive or non-qualified stock option plan or
agreement, stock purchase plan or agreement, stock restriction agreement or
restricted stock plan, employee stock ownership plan (ESOP), consulting
agreement, stock appreciation right (SAR), stock depreciation right (SDR),
bonus stock arrangement, or such other similar compensatory options, issuances,
arrangements, agreements or plans approved by the Board of Directors.


 


(iii) If the amount of
said adjustment shall be less than two cents ($0.02) per security issuable upon
exercise of the Warrants, provided, however, that in such case
any adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment so carried forward,
shall amount to at least two cents ($0.02) per security issuable upon exercise
of the Warrants.


 


9.             Exchange  and
Replacement  of  Warrant  Certificates.  Each Warrant Certificate is exchangeable
without expense, upon the surrender thereof by the registered Holder(s) at the
principal office of the Company, for a new Warrant Certificate of like form,
tenor and date representing in the aggregate the right to purchase the same
number of securities in such denominations as shall be designated by the
Holder(s) thereof at the time of such surrender.


 


7

















 


Upon receipt by the
Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of any Warrant Certificate, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and reimbursement to the Company of all reasonable expenses incidental thereto,
and upon surrender and cancellation of the Warrants, if mutilated, the Company
will make and deliver a new Warrant Certificate of like form and tenor in lieu
thereof.


 


10.           No Fractional Shares
or Scrip.  No fractional shares or
scrip representing fractional shares shall be issued upon the exercise of this
Warrant, but in lieu of such fractional shares the Company shall make a cash
payment therefor on the basis of the Exercise Price then in effect.


 


11.           Stock  Fully
Paid; Reservation  of  Shares.  The Company shall at all times reserve and
keep available out of its authorized Series A Preferred Stock, solely for the
purpose of issuance upon the exercise of the Warrants, such number of shares of
Series A Preferred Stock or other securities, properties or rights as shall be
issuable upon the exercise thereof and such number of shares of Common Stock
into which such shares of Series A Preferred Stock are exercisable.  The Company covenants and agrees that, upon
exercise of the Warrants and payment of the Exercise Price therefore, all
shares of Series A Preferred Stock and other securities issuable upon such exercise
shall be duly and validly issued, fully paid, non-assessable and not subject to
the preemptive rights of any stockholder, except as set forth in the Memorandum
(as defined in the Placement Agency Agreement).


 


12.           Notices  to
Warrant  Holders.  Nothing
contained in this Agreement shall be constructed as conferring upon the Holders
the right to vote or to consent or to receive notice to stockholders in respect
of any meetings of stockholders for the election of directors or any other
matter, or as having any rights whatsoever as a stockholder of the
Company.  If, however, at any time prior
to the expiration of the Warrants and their exercise, any of the following
events shall occur:


 


(a)           the Company shall take
a record of the holders of its shares of Series A Preferred Stock for the
purpose of entitling them to receive a dividend or distribution payable
otherwise than in cash, or a cash dividend or distribution payable otherwise
than out of current or retained earnings, as indicated by the accounting
treatment of such dividend or distribution on the books of the Company; or


 


(b)           the Company shall offer
to all the holders of its Series A Preferred Stock any additional shares of
capital stock of the Company or securities convertible into or exchangeable for
shares of capital stock of the Company, or any option right or warrant to
subscribe therefor; or


 


(c)           a dissolution,
liquidation or winding up of the Company (other than in connection with a
consolidation or merger) or a sale of all or substantially all of its property,
assets and business as an entirety shall be proposed;


 


then, in any one or more
of such events, the Company shall give written notice of such event at least
fifteen (15) days prior to the date fixed as a record date for the dividend or
the date of


 


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closing the transfer
books for the determination of the issuance of any convertible or exchangeable
securities or subscription rights, options or warrants or for the determination
of the persons or entitled to vote on such proposed dissolution, liquidation,
winding up or sale.  Such notice shall
specify such record date or the date of closing the transfer books, as the case
may be.  Failure to give such notice or
any defect therein shall not affect the validity of any action taken in connection
with the declaration or payment of any such dividend, or the issuance of any
convertible or exchangeable securities  or subscription rights, options or
warrants, or any proposed  dissolution, liquidation winding up or
sale.


 


13.           Notices.  All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly made when delivered, or mailed by registered or certified mail, return
receipt requested:


 


(a)           If to a registered
Holder(s) of the Warrants, to the address of such Holder(s) as shown on the
books of the Company; or


 


(b)           Prospect Medical
Holdings, Inc., 6083 Bristol Parkway, Suite 100, Culver City, California 90230,
Attn: Jacob Y. Terner, M.D., Chief Executive Officer, Telefax number (310)
338-1109, with a copy to J. Brad Wiggins, Esq., Miller & Holguin, 1801
Century Park East, 7th Floor, Los Angeles, California 90067, Telefax number
(310) 557-2205.


 


(c)           if to the Agent, at 535
Madison Avenue, New York, New York 10022, Attention: DiAnn Ellis, or at such
other address as may have been furnished in writing by the Agent, with a copy
to Littman Krooks LLP, 655 Third Avenue, New York, New York 10017, Attention:
Mitchell C. Littman, Esq.


 


14.           Supplements  and
Amendments.  The Company and the
Agent may from time to time supplement or amend this Agreement without the
approval of any Holder(s) of Warrant Certificates in order to cure any
ambiguity, to correct or supplement any provision contained herein which may be
defective or inconsistent with any provision herein, or to make any other
provisions in regard to matters or questions arising hereunder which the
Company and the Agent may deem necessary or desirable and which the Company and
the Agent deem shall not adversely affect the interests of the Company and/or
the Holder(s) of Warrant Certificates. 
Other amendments to this Agreement may be made only with the written
consent of the Company and the Holder(s) of the majority of the outstanding
Warrant Shares and Warrant Shares issuable upon exercise of the Warrants.


 


15.           Successors.  All the covenants and provisions of this
Agreement shall be binding upon and inure to the benefit of the Company, the
Holder(s) and their respective successors and assigns hereunder.


 


16.           Termination.  This Agreement shall terminate at the close
of business on the Expiration Time.


 


17.           ARBITRATION, CHOICE OF LAW; COSTS. THE
PARTIES HERETO AGREE TO SUBMIT ALL CONTROVERSIES TO ARBITRATION IN ACCORDANCE


 


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WITH THE PROVISIONS SET FORTH BELOW
AND UNDERSTAND THAT (A) ARBITRATION IS FINAL AND BINDING ON THE PARTIES, (B)
THE PARTIES ARE WAIVING THEIR RIGHTS TO SEEK REMEDIES IN COURT, INCLUDING THE
RIGHT TO A JURY TRIAL, (C) PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED
AND DIFFERENT FROM COURT PROCEEDINGS, (D) THE ARBITRATOR’S AWARD IS NOT
REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL REASONING AND ANY PARTY’S RIGHT
TO APPEAL OR TO SEEK MODIFICATION OF RULES BY ARBITRATORS IS STRICTLY LIMITED,
(E) THE PANEL OF NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. (THE “NASD”)
ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF ARBITRATORS WHO WERE OR ARE
AFFILIATED WITH THE SECURITIES INDUSTRY, AND (F) ALL CONTROVERSIES WHICH MAY
ARISE BETWEEN THE PARTIES CONCERNING THIS AGREEMENT SHALL BE DETERMINED BY
ARBITRATION PURSUANT TO THE RULES THEN PERTAINING TO THE NASD.  JUDGMENT ON ANY AWARD OF ANY SUCH
ARBITRATION MAY BE ENTERED IN THE SUPREME COURT OF THE STATE OF NEW YORK OR IN
ANY OTHER COURT HAVING JURISDICTION OVER THE PERSON OR PERSONS AGAINST WHOM
SUCH AWARD IS RENDERED.  THE PARTIES
AGREE THAT THE DETERMINATION OF THE ARBITRATORS SHALL BE BINDING AND CONCLUSIVE
UPON THEM.  THE PREVAILING PARTY, AS
DETERMINED BY SUCH ARBITRATORS, IN A LEGAL PROCEEDING SHALL BE ENTITLED TO
COLLECT ANY COSTS, DISBURSEMENTS AND REASONABLE ATTORNEY’S FEES FROM THE OTHER
PARTY.


 


18.           Entire  Agreement;
Modification.  This Agreement
(including the Placement Agency Agreement to the extent portions thereof are
referred to herein) contains the entire understanding between the parties
hereto with respect to the subject matter hereof and may not be modified or
amended except by a writing duly signed by the party against whom enforcement
of the modification or amendment is sought.


 


19.           Severability.  If any provision of this Agreement shall be
held to be invalid and unenforceable, such invalidity or unenforceability shall
not affect any other provision of this Agreement.


 


20.           Captions.  The caption headings of the Sections of this
Agreement are for convenience of reference only and are not intended, nor
should they be construed, as a part of this Agreement and shall be given no
substantive effect.


 


21.           Benefits  of
this  Agreement.  Nothing
in this Agreement shall be construed to give to any person, entity or
corporation other than the Company and the Agent and any other registered
Holder(s) of the Warrant Certificates, Warrant Shares any legal or equitable
right, remedy or claim under this Agreement; and this Agreement shall be for
the sole and exclusive benefit of the Company and the Agent and any other
Holder(s) of the Warrant Certificates or Warrant Shares.


 


10

















 


22.           Counterparts.  This Agreement may be executed in any number
of counterparts and each of such counterpart shall for all purposes be deemed
to be an original, and such counterparts shall together constitute but one and
the same instrument.


 


23.           Assignment.  Any Person or Persons to whom Warrants are
transferred by the Agent shall agree to be bound by all of the provisions hereof;
and the Agent shall not transfer any Warrants unless the Agent first provides a
written instrument to the Company notifying the Company of such transfer
pursuant to which the transferee agrees in writing to be bound by the terms of
this Agreement and unless the Agent complies with the provisions hereof.


 


 


[Remainder
of Page Intentionally Left Blank]


 


11

















 


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


 


	
   

  	
  PROSPECT MEDICAL
  HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

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

  	
   

  
	
   

  	
   

  	
  Name:
  Jacob Y. Terner, M.D.

  	
   

  
	
   

  	
   

  	
  Title:
  Chief Executive Officer

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Attest:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  /s/ R. Stewart Kahn

  	
   

  	
   

  
	
  R. Stewart Kahn,
  Secretary

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SPENCER TRASK VENTURES,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William P.
  Dioguardi

  	
   

  
	
   

  	
   

  	
  Print
  Name: William P. Dioguardi

  	
   

  
	
   

  	
   

  	
  Title: President

  	
   

  
					



 


12

















 


EXHIBIT A


 


[FORM OF WARRANT
CERTIFICATE]


 


 


THE SECURITIES
REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE.  THE SECURITIES MAY NOT BE TRANSFERRED EXCEPT
PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND
APPLICABLE STATE SECURITIES LAWS OR (ii) AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO THE ISSUER, THAT AN APPLICABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF SUCH ACT AND SUCH LAWS IS AVAILABLE.


THE TRANSFER, EXCHANGE
AND EXERCISE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN
ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.


 


	
  No. ST-1

  	
   

  	
                         Warrants

  
	
   

  	
   

  	
  January
      , 2004

  



 


WARRANT
CERTIFICATE


 


This Warrant Certificate
certifies that Spencer Trask Ventures, Inc., or its registered assigns, is the
registered holder of
                  
Warrants to purchase initially, at any time after the date hereof (“Warrant Issue Date”) until 5:30 p.m. New
York on the tenth anniversary of the Warrant Issue Date (the “Expiration Date”), up to
                  
fully paid and non-assessable shares of Series A Convertible Preferred Stock,
$0.01 par value per share (“Series A
Preferred Stock”) of Prospect Medical Holdings, Inc. (the “Company”), at the initial exercise price,
subject to adjustment in certain events (the “Exercise
Price”), of $5.50 upon surrender of this Warrant Certificate and
payment of the Exercise Price at an office or agency of the Company, or by
surrender of this Warrant Certificate in lieu of cash payment, but subject to
the conditions and adjustments set forth herein and in the Warrant Agreement
dated as of January      , 2004 between the Company
and Spencer Trask Ventures, Inc. (the “Warrant
Agreement”).  Payment of the
Exercise Price shall be made by certified or official bank check in New York
Clearing House funds payable to the order of the Company.


 


No Warrant may be
exercised after 5:30 p.m. (New York time) on the Expiration Date, at which time
all Warrants evidenced hereby, unless exercised prior thereto, shall thereafter
be void.


 


The Warrants evidenced by
this Warrant Certificate are part of a duly authorized issue of Warrants issued
pursuant to the Warrant Agreement, which Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and to which
reference is hereby made for a description of the rights, limitations of
rights, obligations, duties and immunities thereunder of the Company and the
registered holder(s) of the Warrants.


 


13

















 


As set forth in Section 8
of in the Warrant Agreement, certain adjustments may be made to the Exercise
Price and the type and/or number of the Company’s securities issuable upon
their exercise.  In the event of such an
adjustment, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided, however, that the failure of the Company
to issue such new Warrant Certificates shall not in any way change, alter or
otherwise impair the rights of the holder as set forth in the Warrant
Agreement.


 


Upon due presentment for
registration of transfer of this Warrant Certificate and the executed form of
assignment attached hereto at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like form and tenor and evidencing in
the aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection with such transfer.


 


Upon the exercise of less
than all of the Warrants evidenced by this Certificate, the Company shall
forthwith issue to the holder hereof a new Warrant Certificate representing
such number of unexercised Warrants.


 


The Company may deem and
treat the registered holder(s) hereof as the absolute owner(s) of this Warrant
Certificate (notwithstanding any notation of ownership or other writing hereon
made by anyone), for the purpose of any exercise hereof, and of any
distribution to the holder(s) hereof, and for all other purposes, and the
Company shall not be affected by any notice to the contrary.


 


All capitalized terms
used and not defined in this Warrant Certificate shall have the meanings
ascribed to them in the Warrant Agreement.


 


14

















 


IN WITNESS WHEREOF, the Company has caused this
Warrant Certificate to be duly executed as of January
             ,
2004.


 


	
   

  	
  PROSPECT MEDICAL
  HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:
  Jacob Y. Terner, M.D

  	
   

  
	
   

  	
   

  	
  Title:
  Chief Executive Officer

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Attest:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  R. Stewart Kahn,
  Secretary

  	
   

  
					



 


15

















 


[FORM OF ELECTION
TO PURCHASE]


 


	
  TO:

  	
   

  	
  Prospect Medical
  Holdings, Inc.

  
	
   

  	
   

  	
  Attention:  President

  



 


The undersigned hereby irrevocably elects to
exercise the right, represented by this Warrant Certificate, to purchase
                              
(leave blank if you choose Alternative No. 2 below) shares of Series A
Preferred Stock of Prospect Medical Holdings, Inc. (the “Company”) pursuant to
the terms of that certain Warrant Agreement (the “Warrant Agreement”) by and
between the Company and Spencer Trask Ventures, Inc., and tenders herewith
payment of the purchase price of such shares in full.  (Initial here if the undersigned elects this alternative). 
                              


 


In lieu of exercising the attached Warrant for cash or
check, the undersigned hereby elects to effect the net issuance provision set
forth in Section 3.2 of the Warrant Agreement and receive                               
(leave blank if you choose Alternative No. 1 above) shares of Series A
Preferred Stock of the Company. 
(Initial here if the undersigned elects this alternative).                                


 


Please issue a certificate or certificates
representing said securities in the name of the undersigned or in such other
name as is specified below:


 


 


	
   

  	
   

  	
   

  
	
   

  	
  (Name)

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (Address)

  	
   

  



 


	
   

  	
   

  	
   

  
	
   

  	
  (Signature and Date)

  
	
   

  	
   

  
	
   

  	
  (Signature must conform
  in all respects to

  
	
   

  	
  name of holder as
  specified on the face of

  
	
   

  	
  the Warrant
  Certificate)

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (Insert Social Security
  or Other Identifying

  
	
   

  	
  Number of Holder)

  



 


16

















 


[FORM OF
ASSIGNMENT]


 


(To be executed by
the registered holder if such holder
 desires to transfer the Warrant
Certificate.)


 


FOR VALUE RECEIVED
                                                            
(the “Transferor”) hereby sells, assigns and transfers unto
                                                            
(the “Transferee”)


 


(Please print name
and address of transferee)


 


this Warrant Certificate,
together with all right, title and interest therein, and does hereby
irrevocably constitute and appoint
                                                 
as its Attorney to transfer the within Warrant Certificate on the books of Prospect
Medical Holdings, Inc., with full power of substitution.  The Transferor has provided a written
instrument to the Company notifying the Company of such transfer and pursuant
to which the Transferee hereunder has agreed in writing to be bound by the
terms of the Warrant Agreement dated January 7, 2004 by and between Prospect
Medical Holdings, Inc., a Delaware corporation and Spencer Trask Ventures,
Inc., a copy of which has been provided to the Transferee by the Transferor.


 


 


	
  Dated:

  	
  Signature

  	
   

  	
   

  
	
   

  	
  (Signature must conform
  in all respects to name of

  
	
   

  	
  holder as specified on
  the face of the Warrant

  
	
   

  	
  Certificate)

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (Insert Social Security
  or other Identifying

  
	
   

  	
  Number of Holder)

  



 


17