Document:

Exhibit 10.85

 

Prospect Medical Holdings, Inc.

2008 Omnibus Equity Incentive Plan

 

1.             Purpose of the Plan

 

The purpose of the Plan
is to aid the Company and its Affiliates in recruiting and retaining employees,
directors, advisors and consultants and to motivate such employees, directors,
advisors and consultants to exert their best efforts on behalf of the Company
and its Affiliates by providing incentives through the granting of Awards.  The Company expects that it will benefit from
the added interest, which such employees, directors, advisors and consultants
will have in the welfare of the Company as a result of their proprietary
interest in the Company’s success.

 

2.             Definitions

 

The following capitalized
terms used in the Plan have the respective meanings set forth in this Section:

 

(a)           “Act” means the Securities Exchange Act of 1934, as
amended, or any successor thereto.

 

(b)           “Affiliate” means any Subsidiary or any entity that is
consolidated with the Company for financial reporting purposes.

 

(c)           “Award” means an Option, Stock Appreciation Right,
Restricted Stock or Other Stock-Based Award granted pursuant to the Plan.

 

(d)           “Board” means the Board of Directors of the Company.

 

(c)           “Change in Control” means when the Company acquires
actual knowledge that any person (as such term is used in Sections 13(d) and
14(d) of the Act) (other than any person who on the Effective Date is a
director or officer, or holder of more than 10% of the Shares, of the Company
or an Affiliate of the Company) is or becomes the beneficial owner (as defined
in Rule 13d-3 of the Act) directly or indirectly, of securities of the
Company representing more than 50% of the combined voting power of the Company’s
then-outstanding securities entitled to vote in the election of directors.

 

(f)            “Code” means the Internal Revenue Code of 1986, as
amended, or any successor thereto.

 

(g)           “Committee” means the Compensation Committee of the
Board.

 

(h)           “Company” means Prospect Medical Holdings, Inc.,
a Delaware corporation.

 

(i)            “Disability” means a disability within the meaning of Section 22(e)(3) of
the Code, as determined by the Committee.

 

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(j)            “Effective Date” means the date the Company files a Form S-8
Registration Statement under the Securities Act of 1933, as amended, covering
the Shares issuable pursuant to the Plan.

 

(k)           “Employment” means (i) a Participant’s employment
if the Participant is an employee of the Company or its Affiliates, (ii) a
Participant’s services as a consultant, if the Participant is a consultant to
the Company or its Affiliates, (iii) a Participant’s services as an
independent contractor under any agreement for such services between the
Participant and the Company or its Affiliates or (iv) a Participant’s
services as a non-employee director, if the Participant is a non-employee
member of the Board.

 

(l)            “Fair Market Value” means, as of any date, the value
of the Shares determined as follows:

 

(i)            if the Shares are publicly traded and are listed on a
national securities exchange, the last reported sale price or, if no such
reported sale takes place on such date, the average of the closing bid and
asked prices on the principal national securities exchange on which the Shares
are listed or admitted to trading;

 

(ii)           if the Shares are quoted on the Nasdaq National Market
System, the last reported sale price on the Nasdaq National Market or, if no
such reported sale takes place on such date, the average of the closing bid and
asked prices;

 

(iii)          if the Shares are publicly traded but are not quoted
on the Nasdaq National Market nor listed or admitted to trading on a national
securities exchange, the average of the closing bid and asked prices on such
date, as reported by the Wall Street Journal, for the over-the-counter market; or

 

(iv)          if none of the foregoing is applicable, by the
Committee in good faith.

 

(m)          “ISO” means an incentive stock option granted pursuant
to Section 6(d).

 

(n)           “Option” means a stock option granted pursuant to Section 6.

 

(o)           “Option Price” means the price for which a Share can
be purchased upon exercise of an Option, as determined pursuant to Section 6(a).

 

(p)           “Other Stock-Based Awards” means awards granted
pursuant to Section 9.

 

(q)           “Participant” means an employee, prospective employee,
independent contractor, director, advisor, or consultant of the Company or an
Affiliate of the Company who is selected by the Committee to participate in the
Plan.

 

(r)            “Performance-Based Awards” means Restricted Stock
awards granted pursuant to Section 8(c) and certain Other Stock-Based
Awards granted pursuant to Section 9(b).

 

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(s)           “Plan” means the 2008 Omnibus Equity Incentive Plan,
as amended from time to time.

 

(t)            “Restricted Stock” means any Share granted under Section 8.

 

(u)           “Restricted Stock Units” means the right to receive
Shares in the future or their cash equivalent (or both) granted under Section 9.

 

(v)           “SEC” means the Securities and Exchange Commission.

 

(w)          “Shares” means shares of common stock of the Company,
$0.01 par value per share.

 

(x)            “Stock Appreciation Right” means a stock appreciation
right granted pursuant to Section 7.

 

(y)           “Subsidiary” means a subsidiary corporation, as
defined in Section 424(f) of the Code (or any successor section
thereto), of the Company.

 

3.             Shares Subject to the Plan

 

The number of Shares
allocated to the Plan and reserved to satisfy Awards under the Plan is
4,000,000.  The maximum number of Shares
that may be subject to Awards which constitute ISOs shall be 4,000,000.  The maximum number of Shares that may be
included in Awards to any Participant within a 12 month period is 500,000.  The issuance of Shares or the payment of cash
upon the exercise of an Award or in consideration of the cancellation or
termination of an Award shall reduce the total number of Shares available under
the Plan, as applicable.  Shares that are
subject to Awards (or portions thereof) that terminate or lapse without the
payment of consideration may be granted again under the Plan.

 

4.             Administration

 

(a)           The Plan shall be administered by the Committee, which
may delegate its duties and powers in whole or in part to any subcommittee
thereof in which all of its members qualify as “Non-Employee Directors” within
the meaning of Rule 16b-3 under the Act (or any successor rule thereto)
and, to the extent required by Section 162(m) of the Code (or any
successor section thereto), “outside directors” within the meaning
thereof.  Any subcommittee shall consist
of at least two members.

 

(b)           The Committee shall have the full power and authority
to make, and establish the terms and conditions of, any Award to any person
eligible to be a Participant, consistent with the provisions of the Plan and to
waive any such terms and conditions at any time (including, without limitation,
accelerating or waiving any vesting conditions).  Awards may, in the discretion of the
Committee, be made under the Plan in assumption of, or in substitution for,
outstanding awards previously granted by the Company or its Affiliates or a company
acquired by the Company or with which the Company combines.  The number of 

 

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Shares underlying such
substitute awards shall be counted against the aggregate number of Shares
available for Awards under the Plan.  The
Committee, in its sole discretion but subject to applicable SEC rules and
regulations, may authorize the Company to make a full recourse loan to a
Participant to provide cash for the purpose of exercising an Option, said loan
to be secured by the Shares purchased upon exercise of the Option or other
property of the Participant.

 

(c)           The Committee is authorized to interpret the Plan and
to make any other determinations that it deems necessary or desirable for the
administration of the Plan, and may delegate such authority, as it deems
appropriate.  The Committee may correct
any defect or supply any omission or reconcile any inconsistency in the Plan in
the manner and to the extent the Committee deems necessary or desirable.  Any decision of the Committee in the
interpretation and administration of the Plan, as described herein, shall lie
within its sole and absolute discretion and shall be final, conclusive and
binding on all parties concerned (including, but not limited to, Participants
and their beneficiaries or successors).

 

(d)           The Committee shall require payment of any amount it
may determine to be necessary under the Code and comparable state and local
statutes to withhold for federal, state, local or other taxes as a result of
the exercise, grant or vesting of an Award. 
Unless the Committee specifies otherwise, the Participant may elect to
pay a portion or all of such withholding taxes by (a) delivery of Shares
or (b) having Shares withheld by the Company with a Fair Market Value
equal to the minimum statutory withholding rate from any Shares that would have
otherwise been received by the Participant.

 

5.             Limitations

 

(a)           No Award may be granted under the Plan after the tenth
anniversary of the meeting of shareholders of the Company at which the Plan is
approved, but Awards granted prior to such tenth anniversary may extend beyond
that date.

 

(b)           No Option or Stock Appreciation Right, once granted
hereunder, may be repriced.

 

(c)           With respect to any Awards granted to a Participant
who is a non-employee member of the Board at the time of grant, such Awards
shall be made pursuant to formulas established by the Board in advance of such
grant.

 

6.             Terms and Conditions of Options

 

The Committee, in its
discretion, may grant Options under the Plan. 
Options granted under the Plan shall be nonqualified stock options or
incentive stock options under Section 422 of the Code for federal income
tax purposes, as evidenced by the related Award agreements.  Incentive stock options (ISO’s) may be
granted to any Participant which is an employee of the Company or a
Subsidiary.  A nonqualified stock option
may be granted to any Participant selected by the Committee.

 

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(a)           Option Price.  The Option Price per Share shall not be less than 100%
of the Fair Market Value of a Share on the date an Option is granted.

 

(b)           Exercisability.  Options granted under the Plan shall be exercisable at
such time and upon such terms and conditions as maybe determined by the Committee,
but in no event shall an Option
be exercisable more than ten years after the date it is granted, except as may
be provided pursuant to Section 15.

 

(c)           Exercise of Options.  Except as otherwise provided in the Plan or in the
related Award agreements, an Option may be exercised for all, or from time to
time for any part, of the Shares for which it is then exercisable.  For purposes of this Section 6, the
exercise date of an Option shall be the date a notice of exercise is received
by the Company, together with provision for payment of the full purchase price
in accordance with this Section 6(c). 
The purchase price for the Shares as to which an Option is exercised
shall be paid to the Company, as designated by the Committee, pursuant to one
or more of the following methods: (i) in cash or its equivalent (e.g., by
check); (ii) in Shares having a Fair Market Value equal to the aggregate
Option Price for the Shares being purchased 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 months (or such other
period as established from time to time by the Committee in order to avoid
adverse accounting treatment applying generally accepted accounting principles);
(iii) partly in cash and partly in such Shares; or (iv) if there is a
public market for the Shares at such time, through the delivery of irrevocable
instructions to a broker to sell Shares obtained upon the exercise of the
Option and to deliver promptly to the Company an amount out of the proceeds of
such Sale equal to the aggregate Option Price for the Shares being
purchased.  No Participant shall have any
rights to dividends or other rights of a stockholder with respect to Shares
subject to an Option until the Participant has given written notice of exercise
of the Option, paid in full for such Shares and, if applicable, has satisfied
any other conditions imposed by the Committee pursuant to the Plan.

 

(d)           ISOs.  The Committee may grant Options under the Plan that
are intended to be ISOs.  Such ISOs shall
comply with the requirements of Section 422 of the Code (or any successor
section, thereto).  No ISO may be granted
to any Participant who at the time of such grant, owns more than ten percent of
the total combined voting power of all classes of stock of the Company or of
any Subsidiary, unless (i) the Option Price for such ISO is at least 110%
of the Fair Market Value of a Share on the date the ISO is granted and (ii) the
date on which such ISO terminates is a date not later than the day preceding
the fifth anniversary of the date on which the ISO is granted.  Any Participant who disposes of Shares
acquired upon the exercise of an ISO either (i) within two years after the
date of grant of such ISO or (ii) within one year after the transfer of
such Shares to the Participant, shall notify the Company of such disposition
and of the amount realized upon such disposition.  The applicable Award agreements for all
Options granted under the Plan will provide whether they are intended to be an
ISO or a nonqualified stock option.  If
an Option is intended to be an ISO, and if for any reason such Option (or
portion thereof) shall not qualify as an ISO, then, to the extent of such nonqualification,
such Option (or portion thereof) shall be regarded as a nonqualified stock
option granted under the Plan.  In no
event shall any member of the Committee, the Company or any Subsidiary (or
their respective employees, 

 

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officers or directors)
have any liability to any Participant (or any other person) due to the failure
of an Option to qualify for any reason as an ISO.

 

(e)           Limitations on ISOs.  The aggregate Fair Market Value (determined as of the
date of grant) of Shares with respect to which ISOs are exercisable for the
first time by a Participant during any calendar year (under the Plan or under
any other stock option plan of the Company or any Subsidiary) shall not exceed
$100,000.  If the Fair Market Value of
Shares on the date of grant with respect to which ISOs are exercisable for the
first time by a Participant during any calendar year exceeds $100,000, the
Options for the first $100,000 worth of Shares to become exercisable in such
calendar year shall be ISOs and the Options for the amount in excess of
$100,000 that become exercisable in that calendar year shall be nonqualified
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 ISOs, such different limit shall be automatically
incorporated herein and shall apply to any ISOs granted after the effective
date of such amendment.

 

7.             Terms and Conditions of Stock Appreciation
Rights

 

(a)           Grants.  The Committee may grant a Stock Appreciation Right
independent of an Option or in conjunction with an Option.  A Stock Appreciation Right granted in
conjunction with an Option shall cover the same Shares covered by the Option,
or a lesser number as the Committee may determine.  A Stock Appreciation Right shall be subject
to the same terms and conditions as an Option, and any additional limitations,
terms or conditions set forth in this Section 7 or the related Award
agreements.

 

(b)           Terms.  The exercise price per Share of a Stock Appreciation
Right shall be an amount determined by the Committee, but in no event shall
such exercise price be less than the Fair Market Value of a Share on the date
of grant.  A Stock Appreciation Right
granted independent of an Option shall entitle the Participant upon exercise to
a payment from the Company in an amount equal to the excess of the Fair Market
Value on the exercise date of one Share over the exercise price per Share,
times the number of Stock Appreciation Rights exercised.  A Stock Appreciation Right granted in
conjunction with an Option shall entitle the Participant to surrender an
unexercised Option (or portion thereof) and to receive in exchange an amount
equal to the excess of the Fair Market Value on the exercise date of one Share
over the exercise price per Share for the Option, times the number of Shares
covered by the Option (or portion thereof) which is surrendered.  No fractional Shares will be issued in
payment for Stock Appreciation Rights, but instead cash will be paid for a
fraction or, if the Committee should so determine, the number of Shares will be
rounded downward to the next whole share.

 

(c)           Limitations.  The Committee may impose, in its discretion, such
conditions upon the exercisability or transferability of Stock Appreciation
Rights as it may deem fit.

 

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8.             Restricted Stock

 

(a)           Grant.  The Committee, in its discretion, may grant shares of
Restricted Stock which are subject to the risk of forfeiture and any other
conditions described in the related Award agreements.  Restricted Stock awards will be subject to
graded vesting as determined by the Committee. 
Such vesting requirements may be based on the continued service of the
Participant with the Company or its Affiliates for a specified time period (or
periods) or on the attainment of specified performance goals established by the
Committee in its discretion.  If the
Participant terminates Employment prior to the time a restriction lapses, the
Participant shall forfeit any shares of Restricted Stock which are still
subject to the restrictions at the time of termination of such Employment.

 

(b)           Restricted Stock Certificates.  The Company may, but is not obligated to, subject to
any applicable provisions of Delaware law, issue certificates representing the
Shares of Restricted Stock that have been granted to the Participant and are
reflected on the books and records of the Company as being owned by the
Participant subject to the risk of forfeiture as provided in the applicable
Award agreements If issued, such certificates shall be deposited by the
Participant with the Company, together with a stock power endorsed in blank,
with the Company.  After the lapse of the
restrictions, the Company shall deliver a certificate representing the Shares
of Restricted Stock, or other evidence of ownership, to the Participant or the
Participant’s legal representative.

 

(c)           Performance-Based Grants.  The Committee, in its sole discretion, may determine
that certain grants of Shares of Restricted Stock should be subject to such
requirements so that they are deductible by the Company under Section 162(m) of
the Code (or any successor section thereto) (Performance-Based Grant).  If the Committee so determines, such Awards
shall be considered Performance-Based Grants subject to the terms of this Section 8(c),
as provided in the related Award agreements. 
A Performance-Based Grant shall be granted by the Committee in a manner
to satisfy the requirements of Code Section 162(m) and the
regulations thereunder.  The performance
goals shall be based upon one or more of the criteria set forth in Section 9(b) below.  The Committee shall determine in its
discretion whether, with respect to a performance period, the applicable
performance goals have been met with respect to a given Participant and, if
they have, shall so certify prior to the release of the restrictions on the
Shares.

 

9.             Other Stock-Based Awards

 

(a)           Generally.  The Committee, in its sole discretion, may grant
Awards of Stock and other Awards that are valued in whole or in part by
reference to, or are otherwise based on, the Fair Market Value of Shares, such
as, for example Restricted Stock Units (“Other Stock-Based Awards”).  Such Other Stock-Based Awards shall be in
such form, and dependent on such conditions, as the Committee shall determine,
including, without limitation, the right to receive, or vest with respect to,
one or more Shares or the equivalent cash value of such Shares (or both) upon
the completion of a specified period of service, the occurrence of an event
and/or the attainment of performance objectives.  Other Stock-Based Awards may be granted alone
or in addition to any other Awards granted under the Plan.  Subject to the provisions of the Plan, the
Committee shall determine the number of Shares to 

 

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be awarded to a
Participant under (or otherwise related to) such Other Stock-Based Awards;
whether such Other Stock-Based Awards shall be settled in cash, Shares or a
combination of cash and Shares; and all other terms and conditions of such
Awards (including, without limitation, the vesting provisions thereof and
provisions ensuring that all Shares so awarded and issued shall be fully paid
and non-assessable).

 

(b)           Performance-Based Awards.  The Committee, in its sole discretion, may determine
that certain grants of Other Stock-Based Awards should be subject to such
requirements so that they are deductible by the Company under Section 162(m) of
the Code (or any successor section thereto) (“Performance-Based Awards”).  If the Committee so determines, such Awards
shall be considered Performance-Based Awards subject to the terms of this Section 9(b),
as provided in the related Award agreements. 
A Performance-Based Award shall be granted by the Committee in a manner
to satisfy the requirements of Code Section 162(m) and the
regulations thereunder.  A Participant’s
Performance-Based Award shall be determined based on the attainment of written
performance goals approved by the Committee for a performance period
established by the Committee .  The
performance goals shall be based upon one or more of the following criteria: (i) consolidated
earnings before or after taxes (including earnings before interest, taxes,
depreciation and amortization); (ii) net income; (iii) operating
income; (iv) earnings per Share; (v) book value per Share; (vi) return
on shareholders’ equity; (vii) expense management; (viii) return on
investment; (ix) improvements in capital structure; (x) profitability
of an identifiable business unit or product; (xi) maintenance or improvement of
profit margins; (xii) stock price; (xiii) market share; (xiv) revenues or
sales; (xv) costs; (xvi) cash flow; (xvii) working capital and (xviii) return
on assets.  The foregoing criteria may
relate to the Company, one or more of its Affiliates or one or more of its or
their divisions or units, Company-wide or based on geographic area or location,
or any combination of the foregoing, and may be applied on an absolute basis
and/or be relative to one or more peer group companies or indices, or any
combination thereof, all as the Committee shall determine.  In addition, to the degree consistent with Section 162(m) of
the Code (or any successor section thereto), the performance goals may be
calculated without regard to extraordinary items.  The Committee shall determine whether, with
respect to a performance period, the applicable performance goals have been met
with respect to a given Participant and, if they have, shall so certify and
ascertain the amount of the applicable Performance-Based Award.  No Performance-Based Awards will be paid for
such performance period until such certification is made by the Committee.  The amount of the Performance-Based Award
actually paid to a given Participant may be less than the amount determined by
the applicable performance goal formula, at the discretion of the
Committee.  The amount of the
Performance-Based Award determined by the Committee for a performance period
shall be paid to the Participant at such time as determined by the Committee in
its sole discretion after the end of such performance period.

 

10.                               Adjustments Upon Certain Events

 

Notwithstanding any other
provisions in the Plan to the contrary, the following provisions shall apply to
all Awards granted under the Plan:

 

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(a)           Generally.  In the event of any change in the outstanding Shares
after the Effective Date by reason of any Share dividend or split,
reorganization, recapitalization, merger, consolidation, spin-off, combination,
combination or transaction or exchange of Shares or other corporate exchange,
or any distribution to shareholders of Shares other than regular cash dividends
or any transaction similar to the foregoing, the Committee, in its sole
discretion and without liability to any person, may make such substitution or
adjustment, if any, as it deems to be equitable, as to (i) the number or
kind of Shares or other securities issued or reserved for issuance pursuant to
the Plan or pursuant to outstanding Awards, (ii) the maximum number of
Shares for which Awards (including limits established for Restricted Stock or
Other Stock-Based Awards) may be granted during a calendar year to any
Participant, (iii) the Option Price or exercise price of any Stock
Appreciation Right and/or (iv) any other affected terms of such Awards.

 

(b)           Change in Control.  In the event of a Change in Control after the
Effective Date, the Committee may, but shall not be obligated to, (A) accelerate,
vest or cause the restrictions to lapse with respect to, all or any portion of
an Award or (B) cancel Awards for fair value (as determined in the sole
discretion of the Committee) which, in the case of Options and Stock
Appreciation Rights, may equal the excess, if any, of value of the
consideration to be paid in the Change in Control transaction to holders of the
same number of Shares subject to such Options or Stock Appreciation Rights (or,
if no consideration is paid in any such transaction, the Fair Market Value of
the Shares subject to such Options or Stock Appreciation Rights) over the
aggregate exercise price of such Options or Stock Appreciation Rights or (C) provide
for the issuance of substitute Awards that will substantially preserve the
otherwise applicable terms of any affected Awards previously granted hereunder
as determined by the Committee in its sole discretion or (D) provide that
for a period of at least 30 days prior to the Change in Control, such Options
shall be exercisable as to all shares subject thereto and that upon the
occurrence of the Change in Control, such Options shall terminate and be of no
further force and effect.

 

11.                               No Right to Employment or Awards

 

The granting of an Award
under the Plan shall impose no obligation on the Company or an Affiliate to
continue the Employment of a Participant and shall not lessen or affect the
Company’s or Affiliate’s right to terminate the Employment of such
Participant.  No Participant or other
person shall have any claim to be granted any Award, and there is no obligation
for uniformity of treatment of Participants, or holders of Awards.  The terms and conditions of Awards and the
Committee’s determinations and interpretations with respect thereto need not be
the same with respect to each Participant (whether or not such Participants are
similarly situated).

 

12.                               Successors and Assigns

 

The Plan shall be binding
on all successors and assigns of the Company and a Participant, including
without limitation, the estate of such Participant and the executor,
administrator or trustee of such estate, or any receiver or trustee in
bankruptcy or representative of the Participant’s creditors.

 

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13.                               Nontransferability of Awards

 

Unless otherwise
determined by the Committee, an Award shall not be transferable or assignable
by the Participant otherwise than by will or by the laws of descent and
distribution.  During the lifetime of a
Participant, an Award may be exercised only by the Participant.  Any Award that is exercisable after the death
of a Participant may be exercised by the legatees, personal representatives or
distributees of the Participant.

 

14.                               Amendments or Termination

 

The Board or the
Committee may amend, alter or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made, (a) without the approval of
the shareholders of the Company, if such action would (except as is provided in
Section 10 of the Plan), increase the total number of Shares reserved for
the purposes of the Plan or increase the maximum number of Shares of Restricted
Stock or Other Stock-Based Awards that may be awarded hereunder, or the maximum
number of Shares for which Awards may be granted to any Participant, (b) without
the approval of the shareholders if such amendment, alteration or modification
of the Plan is required to be approved by the shareholders by applicable law or
governmental regulations (c) without the consent of a Participant, if such
action would diminish any of the rights of the Participant under any Award
theretofore granted to such Participant under the Plan or (d) to Section 5(b),
relating to repricing of Options or Stock Appreciation Rights, to permit such
repricing; provided, however, that the Committee may amend the Plan in such
manner as it deems necessary to permit the granting of Awards meeting the
requirements of the Code or other applicable laws.

 

15.                               Compliance with 409A.

 

To the extent that the
Board or the Committee determines that any Award granted under the Plan is
subject to Section 409A of the Code, the Award agreements evidencing such
Award shall incorporate the terms and conditions required by Section 409A
of the Code.  To the extent applicable,
the Plan and Award agreements shall be interpreted in accordance with Section 409A
of the Code.  Notwithstanding any
provision of the Plan to the contrary, in the event that, following the
Effective Date, the Board or the Committee determines that any Award may be
subject to Section 409A of the Code, the Board or the Committee may adopt
such amendments to the Plan and the applicable Award agreements or adopt other
policies and procedures (including amendments, policies and procedures with
retroactive effect), or take any other actions, that the Board or the Committee
determines are necessary or appropriate to (1) exempt the Award from Section 409A
of the Code and/or preserve the intended tax treatment of the benefits provided
with respect to the Award, or (2) comply with the requirements of Section 409A
of the Code.

 

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16.                               International Participants

 

With respect to
Participants who may reside or work outside the United States of America and
who are not (and who are not expected to be) “covered employees” within the
meaning of Section 162(m) of the Code, the Committee may, in its sole
discretion, amend the terms of the Plan or Awards with respect to such
Participants in order to conform such terms with the requirements of local law
or to obtain more favorable tax or other treatment for a Participant, the
Company or its Affiliates.

 

17.                               Other Benefit Plans

 

All Awards shall
constitute a special incentive payment to the Participant and shall not be
taken into account in computing the amount of salary or compensation of the
Participant for the purpose of determining any benefits under any pension,
retirement, profit-sharing, bonus, life insurance or other benefit plan of the
Company or under any agreement between the Company and the Participant, unless such
plan or agreement specifically provides otherwise.

 

18.                               Choice of Law

 

The Plan shall be
governed by and construed in accordance with the laws of the State of Delaware
without regard to conflicts of laws, and except as otherwise provided in the
pertinent Award agreements, any and all disputes between a Participant and the
Company or any of its Affiliates relating to an Award shall be brought only in
a state or federal court of competent jurisdiction sitting in Wilmington,
Delaware.

 

19.                               Effectiveness of the Plan

 

The Plan shall be
effective as of the Effective Date, subject to the approval of the shareholders
of the Company at or prior to the Effective Date.

 

11Exhibit 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.

 

 

(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.

 

2

 

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 

 

3

 

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 

 

4

 

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 

 

5

 

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 

 

6

 

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)

 

7

 

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:

  

 

8

 

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.

  

 

 

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:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
				

 

2

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