Document:

Exhibit
10.85

 

PLACEMENT AGENCY
AGREEMENT

 

November 1, 2003

 

Spencer Trask Ventures, Inc.

535 Madison Avenue

18th Floor

New York, New York 10022

 

Ladies and Gentlemen:

 

Prospect Medical Holdings, Inc., a Delaware corporation (the “Company”), hereby confirms its agreement (the
“Agreement”) with Spencer Trask Ventures, a Delaware
corporation (the “Placement Agent”),
as follows (unless the context otherwise requires, as used herein, the
“Company” refers to Prospect Medical Holdings, Inc., and its subsidiaries, and
Prospect Medical Group and its subsidiaries, and as finally constituted giving
effect to the merger and acquisition transactions contemplated by the Offering
(as hereinafter defined)):

 

1.  Offering. (a) Subject to the provisions of Section
1(e) below, the Company will offer (the “Offering”)
for sale through the Placement Agent and its selected dealers, as exclusive
agent for the Company, a minimum of 69 units (the “Minimum Amount”) and a maximum of 104 units (the “Units”), plus up to an additional 31 Units
to cover over subscriptions, if any, in the sole discretion of the Placement
Agent.  Each Unit will consist of 20,000
shares (the “Shares”) at $5.50 per
share of the Company’s Series A Convertible Preferred Stock, $0.01 par value
per share (the “Series A Preferred Stock”),
which Shares shall have the rights and privileges described in the Memorandum
(as defined below) under the heading, “Description of The Series A Preferred
Stock.”

 

(b) Subject to the provisions of Section 1(e) below, placement of the
Units by the Placement Agent will be made on a “reasonable best efforts—all or
none” basis with respect to the Minimum Amount and on a “reasonable best
efforts” basis as to the remaining Units. 
The minimum subscription for Units shall be one Unit; however, the
Placement Agent may, in its sole discretion, offer fractional Units.  The Units will be offered commencing on the
date of the Memorandum for a period of 90 days, unless extended by mutual
agreement of the Placement Agent and the Company for an additional 30 days or
terminated earlier as provided herein (the “Offering
Period”).  The date on which
the Offering Period shall terminate shall be referred to as the “Termination Date.”

 

(c) Subscriptions for the Units will be accepted by the Company at a price
of $110,000 per Unit (the “Offering Price”);
provided, however, that the Placement Agent shall
not tender to the Company and the Company shall not accept subscriptions for,
or sell Units to, any persons or entities who do not qualify as “accredited investors,”
as such term is defined in Rule 501 of Regulation D promulgated under Section
4(2) of the Securities Act of 1933, as amended (the “Act”).

 

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(d) The offering
of the Units will be made by the Company solely pursuant to the Memorandum,
which at all times will be in form and substance acceptable to the Placement
Agent and its counsel and contain such legends and other information as the
Placement Agent and its counsel may, from time to time, deem necessary and
desirable to be set forth therein. “Memorandum”
as used in this Agreement means the Company’s Confidential Private Placement
Memorandum dated November 1, 2003, inclusive of all exhibits, and all
amendments, supplements and appendices thereto.  Unless otherwise defined, each term used in this Agreement will
have the same meaning as set forth in the Memorandum.

 

(e) Anything contained in this Section 1 or elsewhere in this Agreement
to the contrary notwithstanding, the Company agrees with the Placement Agent
that (i) the funds held in the Escrow Account (as hereinafter defined) shall
not be released to the Company even if the Minimum Amount is reached unless the
Company obtains additional financing, on commercially reasonable terms, in an
amount sufficient to acquire, and actually does acquire, Acquisition Target One
and (ii) even if the Minimum Amount is reached and the Company is able to
obtain such additional financing, should the closing of Acquisition Target One
not actually occur, for any reason, the gross proceeds held in the Escrow
Account shall remain in escrow until at least $8.58 million (78 Units) in gross
proceeds are received into the Escrow Account (the foregoing, the “Section 1(e)
Requirments”).

 

2.  Representations and Warranties.  The Company hereby represents and warrants
to the Placement Agent that:

 

(a) The Memorandum has been diligently prepared by the Company, in
conformity with all applicable laws, and is in compliance with Regulation D as
promulgated under Section 4(2) of the Act (“Regulation
D”), the Act and the requirements of all other rules and regulations
(the “Regulations”) of the
Securities and Exchange Commission (the “SEC”)
relating to offerings of the type contemplated by the Offering, and the
applicable securities laws and the rules and regulations of those jurisdictions
wherein the Units are to be offered and sold. 
The Units will be offered and sold pursuant to the registration
exemption provided by Regulation D and Section 4(2) and/or Section 4(6) of the
Act as a transaction not involving a public offering and the requirements of
any other applicable state securities laws and the respective rules and
regulations thereunder in those jurisdictions in which the Placement Agent
notifies the Company that the Units are being offered for sale.  The Memorandum describes all material
aspects, including attendant risks, of an investment in the Company.  The Company has not taken nor will it take
any action which conflicts with the conditions and requirements of, or which
would make unavailable with respect to the Offering, the exemption(s) from
registration available pursuant to Regulation D or Section 4(2) and/or Section
4(6) of the Act and knows of no reason why any such exemption would be
otherwise unavailable to it. The Company has not been subject to any order,
judgment or decree of any court of competent jurisdiction temporarily,
preliminarily or permanently enjoining it for failing to comply with Section
503 of Regulation D.

 

(b) The Memorandum does not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the

 

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circumstances under which they were made, not misleading.  None of the statements, documents,
certificates or other items prepared or supplied by the Company with respect to
the transactions contemplated hereby contains an untrue statement of a material
fact or omits a material fact necessary to make the statements contained
therein not misleading.  There is no
fact which the Company has not disclosed to the Placement Agent and its counsel
in writing and of which the Company is aware which materially and adversely affects
or could materially and adversely affect the business prospects, financial
condition, operations, property or affairs of the Company or any of its
subsidiaries.

 

(c) The Company is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation.  Except as set forth in the Memorandum, the
Company has no subsidiaries and does not have an equity interest in any other
firm, partnership, association or other entity.  The Company is duly qualified to transact business as a foreign
corporation and is in good standing under the laws of each jurisdiction where
the location of its properties or the conduct of its business makes such
qualification necessary, except where the failure to be so qualified would not
have a material adverse effect on the Company or its business.

 

(d) The Company has all requisite power and authority (corporate and
other) to conduct its business as presently conducted and as proposed to be
conducted (as described in the Memorandum), to enter into and perform its
obligations under this Agreement and the other agreements contemplated hereby
and by the Memorandum (collectively, the “Transaction
Documents”) and to issue, sell and deliver the Shares and the shares
of common stock of the Company, $0.01 par value per share (the “Common Stock”), issuable upon conversion of
the Shares (the “Conversion Shares”).  Each of the Transaction Documents has been
duly authorized.  This Agreement has
been duly executed and delivered and constitutes, and each of the other
Transaction Documents, upon due execution and delivery, will constitute, valid
and binding obligations of the Company, enforceable against the Company in
accordance with their respective terms, subject to any applicable bankruptcy,
insolvency or other laws affecting the rights of creditors generally and to
general equitable principles and the availability of specific performance.

 

(e) None of the execution and delivery of, or performance by the
Company under any of the Transaction Documents or the consummation of the
transactions herein or therein contemplated conflicts with or violates, or will
result in the creation or imposition of, any lien, charge or other encumbrance
upon any of the assets of the Company under any agreement or other instrument
to which the Company is a party or by which the Company or its assets may be
bound, or any term of the charter or by-laws of the Company, or any license,
permit, judgment, decree, order, statute, rule or regulation applicable to the
Company or any of its assets.

 

(f) Immediately prior to the First Closing (as hereafter defined), the
Company will have authorized and outstanding capital stock as set forth under
the heading “Capitalization” in the Memorandum.  All outstanding shares of capital stock of the Company are duly
authorized, validly issued and outstanding, fully paid and nonassessable.  Except as set forth in the Memorandum: (i)
there are no outstanding options, stock subscription agreements, warrants or
other rights permitting or requiring

 

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the Company or others to purchase or acquire any shares of capital
stock or other equity securities of the Company or to pay any dividend or make
any other distribution in respect thereof; (ii) there are no securities issued
or outstanding which are convertible into or exchangeable for any of the
foregoing and there are no contracts, commitments or understandings, whether or
not in writing, to issue or grant any such option, warrant, right or
convertible or exchangeable security; (iii) no shares of stock or other
securities of the Company are reserved for issuance for any purpose; (iv) there
are no voting trusts or other contracts, commitments, understandings,
arrangements or restrictions of any kind with respect to the ownership, voting
or transfer of shares of stock or other securities of the Company, including
without limitation, any preemptive rights, rights of first refusal, proxies or
similar rights; and (v) no person holds a right to require the Company to
register any securities of the Company under the Act or to participate in any
such registration.  The issued and
outstanding shares of capital stock of the Company conform to all statements in
relation thereto contained in the Memorandum and the Memorandum describes all
material terms and conditions thereof. 
All issuances by the Company of its securities were exempt from
registration under the Act and any applicable state securities laws.

 

(g) Immediately prior to the First Closing, the Shares, the Conversion
Shares and the Agent’s Shares (as defined below) have been duly authorized and,
when issued and delivered against payment therefor as provided in the
Transaction Documents, will be validly issued, fully paid and
nonassessable.  No holder of any of the
Shares, the Conversion Shares or the Agent’s Securities (as defined below) will
be subject to personal liability solely by reason of being such a holder, and
except as described in the Memorandum, none of the Shares, the Conversion
Shares or the Agent’s Securities are subject to preemptive or similar rights of
any stockholder or security holder of the Company or an adjustment under the
antidilution or exercise rights of any holders of any outstanding shares of
capital stock, options, warrants or other rights to acquire any securities of the
Company. Immediately prior to the First Closing, a sufficient number of
authorized but unissued shares of Common Stock will have been reserved for
issuance upon the conversion of the Shares and the exercise of the Agent’s
Warrants (as defined below).

 

(h) No consent, authorization or filing of or with any court or
governmental authority is required in connection with the issuance or the
consummation of the transactions contemplated herein or in the other
Transaction Documents, except for required filings with the SEC and applicable
“Blue Sky” or state securities commissions relating specifically to the
Offering (all of which filings have been made by, or on behalf of, the Company,
other than those which are required to be made after the First Closing (all of
which will be duly made on a timely basis).

 

(i) The Company financial statements, together with the related notes,
included in the Memorandum present fairly the financial position of the Company
as of the respective dates specified and the results of its operations and
changes in financial position for the respective periods covered thereby.  Such financial statements and related notes
were prepared in accordance with generally accepted accounting principles applied
on a consistent basis throughout the periods indicated. Except as set forth in
such financial statements or in the Memorandum, the Company has no material
liabilities of any kind, whether accrued, absolute, contingent or otherwise or
entered into any material

 

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transactions.  The other
financial and statistical information with respect to the Company and any
pro-forma information and related notes included in the Memorandum present
fairly the information shown therein on a basis consistent with the financial
statements of the Company included in the Memorandum.  The Company does not know of any facts, circumstances or
conditions materially adversely affecting its operations, earnings or prospects
which have not been fully disclosed in the Memorandum.

 

(j) The conduct of business by the Company as presently and proposed to
be conducted is not subject to continuing oversight, supervision, regulation or
examination by any governmental official or body of the United States or any
other jurisdiction wherein the Company conducts or proposes to conduct such
business, except as described in the Memorandum and except such regulation as
is applicable to commercial enterprises generally.  The Company has obtained all material licenses, permits and other
governmental authorization to conduct its business as presently conducted.

 

(k) No default by the Company or, to the best knowledge of the Company,
any other party exists in the due performance under any material agreement to
which the Company is a party or to which any of its assets is subject
(collectively, the “Company Agreements”).  The Company Agreements disclosed in the
Memorandum are the only material agreements to which the Company is bound or by
which its assets are subject, are accurately and fairly described in the
Memorandum and are in full force and effect in accordance with their respective
terms, subject to any applicable bankruptcy, insolvency or other laws affecting
the rights of creditors generally and to general equitable principles and the
availability of specific performance.

 

(l) Except as set forth in the Memorandum, there are no actions,
proceedings, claims or investigations, before or by any court or governmental
authority (or any state of facts which management of the Company has concluded
could give rise thereto) pending or, to the knowledge of the Company,
threatened, against the Company, or involving its assets or, to the knowledge
of the Company, involving any of its officers or directors which, if determined
adversely to the Company or such officer or director, could result in any
material adverse change in the condition (financial or otherwise) or prospects
of the Company or adversely affect the transactions contemplated by this
Agreement or the other Transaction Documents or the enforceability thereof.

 

(m) The Company is not in violation of: (i) its charter or by-laws;
(ii) any indenture, mortgage, deed of trust, note or other agreement or
instrument to which the Company is a party or by which it is or may be bound or
to which any of its assets may be subject; (iii) any statute, rule or
regulation currently applicable to the Company; or (iv) any judgment, decree or
order applicable to the Company, which violation or violations individually, or
in the aggregate, would result in any material adverse change in the condition
(financial or otherwise) or prospects of the Company.

 

(n) The Company does not own any real property in fee simple, and the
Company has good and marketable title to all property (personal, tangible and
intangible) owned by it, free and clear of all security interests, liens and
encumbrances, except such as are described in the Memorandum.

 

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(o) Except as disclosed in the Memorandum, the Company owns all right,
title and interest in, or possesses adequate and enforceable rights to use, all
patents, patent applications, trademarks, service marks, copyrights, rights,
licenses, franchises, trade secrets, confidential information, processes and
formulations necessary for the conduct of its business, except as otherwise
described in the Memorandum (collectively, the “Intangibles”).  Except
as set forth in the Memorandum, to the knowledge of the Company it has not
infringed upon the rights of others with respect to the Intangibles and the
Company has not received notice that it has or may have infringed or is
infringing upon the rights of others with respect to the Intangibles, or any
notice of conflict with the asserted rights of others with respect to the
Intangibles which could, individually or in the aggregate, materially and
adversely affect the condition (financial or otherwise) or prospects of the
Company. Except as set forth in the Memorandum, to the best knowledge of the
Company, no others have infringed upon the Intangibles.

 

(p) Subsequent to the respective dates as of which information is given
in the Memorandum, the Company has operated its business diligently and only in
the ordinary course as theretofore conducted and, except as may otherwise be
set forth in or contemplated by the Memorandum, there has been no: (i) material
adverse change in the condition (financial or otherwise) of the Company;
(ii) transaction otherwise than in the ordinary course of business;
(iii) issuance of any securities (debt or equity) or any rights to acquire
any such securities, other than issuances pursuant to the Company’s stock
option plans; (iv) damage, loss or destruction, whether or not covered by
insurance, with respect to any asset or property of the Company; or (v)
agreement to permit any of the foregoing.

 

(q) The Company has filed, on a timely basis, each Federal, state,
local and foreign tax return which is required to be filed, or has requested an
extension therefor and has paid all taxes and all related assessments, penalties
and interest to the extent that the same have become due.

 

(r) Except as set forth in the Memorandum, the Company is not obligated
to pay, and has not obligated the Placement Agent to pay, a finder’s or
origination fee in connection with the Offering and agrees to indemnify the
Placement Agent from any such claim made by any other person.  The Company has not offered for sale or
solicited offers to purchase the Units except for negotiations with the
Placement Agent.  Except as set forth in
the Memorandum, no other person has any right to participate in any offer, sale
or distribution of the Company’s securities to which the Placement Agent’s
rights, described herein, shall apply.

 

(s) The Company has and will maintain appropriate casualty and
liability insurance coverage, in scope and amounts reasonable and customary for
similar businesses.

 

(t) Neither the sale of the Units by the Company hereunder nor its use of the
proceeds thereof will violate the Trading with the Enemy Act, as amended, or
any of the foreign assets control regulations of the United States Treasury
Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling
legislation or executive order relating thereto. Without limiting the
foregoing, neither the Company nor any of its subsidiaries (a) is a person
whose property or interests in property are

 

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blocked pursuant to Section 1 of Executive Order 13224 of September 23,
2001 Blocking Property and Prohibiting Transactions With Persons Who Commit,
Threaten to Commit, or Support Terrorism (66 Fed. Reg. 49079 (2001)) or (b)
engages in any dealings or transactions, or be otherwise associated, with any
such person.  The Company and its
subsidiaries are in compliance with the USA Patriot Act of 2001 (signed into
law October 26, 2001).

 

(u) The Company does not engage in the corporate practice of medicine.

 

3. Placement Agent Appointment and Compensation. (a) The Company
hereby appoints the Placement Agent and its selected dealers as its exclusive
agent in connection with the Offering. 
The Company has not and will not make, or permit to be made, any offers
or sales of the Units other than through the Placement Agent without its prior
written consent.  The Placement Agent
has no obligation to purchase any of the Units.  The agency of the Placement Agent hereunder shall continue until
the earlier of the Termination Date or the Final Closing.

 

(b) The Company has caused to be delivered to the Placement Agent
copies of the Memorandum and has consented, and hereby consents, to the use of
such copies for the purposes permitted by the Act and applicable securities
laws, and hereby authorizes the Placement Agent and its agents, employees and
selected dealers to use the Memorandum in connection with the sale of the Units
until the Termination Date, and no other person or entity is or will be
authorized to give any information or make any representations other than those
contained in the Memorandum or to use any offering materials other than those
contained in the Memorandum in connection with the sale of the Units.

 

(c) The Company will cooperate with the Placement Agent by making
available to its representatives such information as may be requested in making
a reasonable investigation of the Company and its affairs and shall provide
access to such employees as shall be reasonably requested.

 

(d) The Company
shall pay to the Placement Agent a placement fee equal to ten percent (10%) of
the Offering Price of all the Units sold in the Offering (the “Placement Agent’s Fee”).  The Placement Agent shall also receive an
accountable expense allowance (the “Expense
Allowance”), covering the legal fees of the Placement Agent, due
diligence fees, marketing, printing and mailing expenses, as well as well as
“Blue Sky”  legal fees and “Blue
Sky” filing fees and expenses. Payment of the proportional
amounts of the Placement Agent’s Fee will be made out of the proceeds of
subscriptions for the Units sold at each Closing.  Payment of the Expense Allowance will be made at each Closing.

 

(e) As additional compensation hereunder, at each Closing (as defined
below), the Company shall grant to the Placement Agent or its designees for
nominal consideration warrants (the “Agent’s
Warrants”) to purchase, at an exercise price of $5.50 per share, a
number of shares of Series A Preferred Stock equal to twenty percent (20%) of
the Shares contained in the Units sold in the Offering (the “Agent’s Shares;” and, collectively with the
Agent’s Warrants, the “Agent’s Securities”).  The Agent’s Warrants shall also provide the
Placement Agent with a cashless exercise

 

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right.  The Agent’s Warrants
shall be exercisable until the date 10 years after the date of issuance (the “Warrant Exercise Term”).  In addition, the holders of the Agent’s
Common Stock underlying the Shares (the “Registrable
Shares”) will have automatic and “piggy-back” registration rights
substantially equivalent to those to be granted to the holders of Shares, with
respect to the Registrable Shares during the period ending 10 years from the
Final Closing.  Prior to the First
Closing, the Company and Placement Agent shall enter into a warrant agreement
(the “Warrant Agreement”), which
shall contain such terms and other customary provisions including corporate
anti-dilution provisions (including weighted average value dilution) in form
and substance satisfactory to the Placement Agent and the Company.

 

(f) The Company
shall also pay to the Placement Agent the Placement Agent’s Fee and sell to the
Placement Agent the Agent’s Warrants (collectively, the “Investor Fee”), calculated according to the
percentages set forth in the sections 3(d) and (e) of this Agreement, if by
reason of an introduction initiated by the Placement Agent during the Offering,
a third party who is not affiliated with the Placement Agent or the Company
invests in any equity securities of the Company at any time within twelve (12)
months from the Final Closing of the Offering (the “Post-Closing Investors”). 
For purposes of verification, the Placement Agent shall, within thirty
(30) days following the date of the Final Closing, deliver to the Company a
list of the names of all third parties whose introduction to the Company was
initiated by the Placement Agent.  The Company
shall promptly notify the Placement Agent and demonstrate to the Placement
Agent’s reasonable satisfaction any prior introduction to the Company of any
such party listed by the Placement Agent. 
If an event or transaction shall occur which would entitle the Placement
Agent to receive both the Investor Fee and the Finder’s Fee (defined below),
then the Company shall have the right to elect which fee it shall pay to the
Placement Agent in full satisfaction of its obligations pursuant to this
section 3(f) and the Finder’s Agreement, as described in 3(g) below.

 

(g) On or prior to
the First Closing, the Company shall enter into a Finder’s Fee Agreement (the “Finder’s Agreement”), which will provide
that, in the event that at any time prior to twelve (12) months from the Final
Closing, with a one year fee tail, the Company or any of its affiliates shall
enter into any transaction (including, without limitation, any sale or exchange
of stock or assets, merger, consolidation, acquisition, financing, joint venture,
a material investment in the securities of or loan to the Company, a purchase
of a material portion of the stock of the Company) with any party introduced to
the Company by the Placement Agent, directly or indirectly, during such period,
the Placement Agent will be paid a cash finder’s fee, payable at the closing
thereof, equal to a percentage of the consideration or value received by the
Company and/or its stockholders as follows: (i) five percent (5%) of the first
$1,000,000 or a portion thereof; plus (ii) four percent (4%) of any transaction
value in excess of $1,000,000 but less than $2,000,000; plus (iii) three
percent (3%) of any transaction value in excess of $2,000,000 but less than
$3,000,000; plus (iv) two percent (2%) of any transaction value in excess of
$3,000,000 but less than $4,000,000; plus (v) one percent (1%) of any
transaction value in excess of $4,000,000 (collectively, the “Finder’s Fee”).  Any such finder’s fee due shall be paid at the closing of the
particular consummated transaction for which the Finder’s Fee is payable.

 

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4. Subscription and Closing Procedures. (a) Each prospective
purchaser will be required to complete and execute one original omnibus
signature page which shall serve as the signature page for each of the
Subscription Agreement, Registration Rights Agreement and Stockholders
Agreement in the forms annexed to the Memorandum (“Subscription  Documents”),
which will be forwarded or delivered to the Placement Agent at the Placement
Agent’s offices at the address set forth in Section 11 hereof, together with
the subscriber’s check or good funds in the full amount of the Offering Price
for the number of Units desired to be purchased.

 

(b) All funds for subscriptions received from the offering of the Units
will be promptly forwarded by the Placement Agent or the Company, if received
by it, to and deposited into the escrow account (the “Escrow Account”) established for such
purpose with American Stock Transfer & Trust Company or such other
financial institution selected by the Placement Agent (the “Escrow Agent”).  All such funds for subscriptions will be held in the Escrow
Account pursuant to the terms of the Escrow Agreement among the Company, the
Placement Agent and the Escrow Agent. 
The Company will pay all fees related to the establishment and
maintenance of the Escrow Account.  Any
interest accruing on funds in the Escrow Account shall be utilized first to
reimburse the Company for such fees and the balance, if any, shall be
distributed to the Placement Agent. 
Subject to the receipt of such subscriptions for the Minimum Amount, the
Company will either accept or reject the Subscription Documents in a timely
fashion, after receiving them from the Placement Agent or subscribers, and at
each Closing will countersign the Subscription Documents and provide duplicate
copies of such Agreements to the Placement Agent for distribution to the
subscribers.  The Company will give
notice to the Placement Agent of its acceptance of each subscription.  The Company will promptly return to
subscribers incomplete, improperly completed, improperly executed and rejected
subscriptions and give written notice thereof to the Placement Agent upon such
return.

 

(c) If
subscriptions for at least the Minimum Amount have been accepted prior to the
Termination Date (subject to the fulfillment of the Section 1(e) Requirements),
the funds therefor have been collected by the Escrow Agent and all of the
conditions set forth elsewhere in this Agreement are fulfilled, a closing shall
be held promptly with respect to the Units sold (the “First Closing”).  Thereafter, the remaining Units will continue to be offered and
sold until the Termination Date. Additional closings (“Closings”) may from time to time be conducted
at times mutually agreeable with respect to additional Units sold with the
final closing (“Final Closing”) to
occur within 10 days from the earlier of the Termination Date or the sale of
all Units offered. Delivery of payment for the accepted subscriptions for Units
from the funds held in the Escrow Account will be made, pursuant to written
instructions signed by the Company and by STVI, at each Closing at the
Placement Agent’s offices against delivery of the Units by the Company at the
address set forth in Section 11 hereof (or at such other place as may be
mutually agreed upon between the Company and the Placement Agent).  Executed certificates for the Shares
constituting the Units and the Agent’s Warrants will be in such authorized
denominations and registered in such names as the Placement Agent may request
on or before the second full business day prior to the date of each Closing (“Closing Date”), and will be made available
to the Placement Agent for checking and packaging at the Placement Agent’s
office at least one full business day prior thereto.

 

9

 

(d) If Subscription Documents for the Minimum Amount have not been
received and accepted by the Company on or before the Termination Date for any
reason, the Offering will be terminated, no Units will be sold, and the Escrow
Agent will, pursuant to written instructions signed by the Company and the
Placement Agent, cause all monies received from subscribers for the Units to be
promptly returned to such subscribers without interest, penalty, expense or
deduction.

 

5. Further Covenants. The Company hereby covenants and agrees
that:

 

(a) Except with the prior written consent of the Placement Agent, the
Company shall not, at any time prior to the Final Closing, take any action
which would cause any of the representations and warranties made by it in this
Agreement not to be complete and correct on and as of each Closing Date with
the same force and effect as if such representations and warranties had been made
on and as of each such date.

 

(b) If, at any time prior to the Final Closing, any event shall occur
which does or may materially affect the Company or as a result of which it
might become necessary to amend or supplement the Memorandum so that the representations
and warranties herein remain true, or in case it shall, in the opinion of
counsel to the Placement Agent, be necessary to amend or supplement the
Memorandum to comply with Regulation D or any other applicable securities laws
or regulations, the Company will promptly notify the Placement Agent and shall,
at its sole cost, prepare and furnish to the Placement Agent copies of
appropriate amendments and/or supplements in such quantities as the Placement
Agent may request.  The Company will not
at any time, whether before or after the Final Closing, prepare or use any
amendment or supplement to the Memorandum of which the Placement Agent will not
previously have been advised and furnished with a copy, or to which the
Placement Agent or its counsel will have objected in writing or orally
(confirmed in writing within 24 hours), or which is not in compliance with the
Act, the Regulations and other applicable securities laws. As soon as the
Company is advised thereof, the Company will advise the Placement Agent and its
counsel, and confirm the advice in writing, of any order preventing or
suspending the use of the Memorandum, or the suspension of the qualification or
registration of the Shares for offering or the suspension of any exemption for
such qualification or registration of the Shares for offering in any
jurisdiction, or of the institution or threatened institution of any
proceedings for any of such purposes, and the Company will use its best efforts
to prevent the issuance of any such order and, if issued, to obtain as soon as
reasonably possible the lifting thereof.

 

(c) The Company shall comply with the Act, the Regulations, the
Securities Exchange Act of 1934, as amended (the “1934 Act”) and the rules and
regulations thereunder, all applicable state securities laws and the rules and
regulations thereunder in the states in which Blue Sky counsel has advised the
Placement Agent that the Units are qualified or registered for sale or exempt
from such qualification or registration, so as to permit the continuance of the
sales of the Units, and will file with the SEC, and shall promptly thereafter
forward to the Placement Agent, any and all reports on Form D as are required.

 

10

 

(d) The Company shall use commercially reasonable best efforts to
qualify the Units for sale under the securities laws of such jurisdictions in
the United States as may be mutually agreed to by the Company and the Placement
Agent, and the Company will make such applications and furnish information as
may be required for such purposes, provided that the Company will not be
required to qualify as a foreign corporation in any jurisdiction.  The Company will, from time to time, prepare
and file such statements and reports as are or may be required to continue such
qualifications in effect for so long a period as the Placement Agent may
reasonably request.

 

(e) The Company shall place a legend on the certificates representing
the Shares and the Conversion Shares issued to subscribers stating that the
securities evidenced thereby have not been registered under the Act or
applicable state securities laws, setting forth or referring to the applicable
restrictions on transferability and sale of such securities under the Act and
applicable state laws.

 

(f) The Company shall apply the net proceeds from the sale of the Units
to fund the acquisition of Acquisition Target One (as defined in the
Memorandum) or, alternatively, other potential acquisitions, repayment of
acquisition indebtedness, and/or other working capital requirements and
purposes as specifically described under “Use of Proceeds” in the
Memorandum.  Except as specifically set
forth in the Memorandum, the net proceeds of the Offering shall not be used to
repay indebtedness to officers, directors or stockholders of the Company
without the prior written consent of the Placement Agent.

 

(g) During the Offering Period, the Company shall make available for
review by prospective purchasers of the Units during normal business hours at
the Company’s offices, upon their request, copies of the Company Agreements to
the extent that such shall not violate any obligation on the part of the
Company to maintain the confidentiality thereof and shall afford each
prospective purchaser of Units the opportunity to ask questions of and receive
answers from an officer of the Company concerning the terms and conditions of
the Offering and the opportunity to obtain such other additional information
necessary to verify the accuracy of the Memorandum to the extent it possesses
such information or can acquire it without unreasonable expense.

 

(h) Except with the prior written consent of the Placement Agent, the
Company shall not, at any time prior to the Final Closing, engage in or commit
to engage in any transaction outside the ordinary course of business or issue,
agree to issue or set aside for issuance any securities (debt or equity) or any
rights to acquire any such securities except as contemplated by the Memorandum.

 

(i) Until the
earlier of (i) the second anniversary of the Final Closing and (ii) the
effective date of the Company’s Form 10 registration statement under the 1934
Act (so long as the Company thereafter files on a current basis all subsequent
reports required to be filed by the Company under the 1934 Act), the Company
shall deliver to the Placement Agent and the Company’s stockholders:
(i) annual audited financial statements setting forth fairly the financial
position of the Company; (ii) quarterly unaudited financial statements
including both a balance sheet and statement of income (with year over year
quarterly comparisons); and (iii) a quarterly report of the progress and status
of the Company and an annual report setting forth clearly the financial
position and outlook of the

 

11

 

Company; provided that such report need not contain
information reasonably deemed confidential by the Company’s Board of
Directors.  In addition, the Company
shall deliver to the Placement Agent a copy of a list of its stockholders as
and when so requested, and shall establish and maintain a Company website for
the dissemination of general Company information and potentially the
information to be provided in items (i) and (iii) above.

 

(j) The Company shall pay all reasonable expenses incurred in
connection with the preparation and printing of all necessary offering
documents and instruments related to the Offering and the issuance of the
Shares, the Conversion Shares, the Agent’s Shares and the Agent’s Warrants and
will also pay the Company’s own expenses for accounting fees, legal fees and
other costs involved with the Offering. The Company will provide at its own
expense such quantities of the Memorandum and other documents and instruments
relating to the Offering as the Placement Agent may reasonably request. In
addition, the Company shall pay all reasonable filing fees, costs and legal
fees for Blue Sky services and related filings and expenses of counsel with
respect to Blue Sky qualifications.  The
Blue Sky filings shall be prepared by the Placement Agent’s counsel on behalf
of the Company and all Blue Sky filing fees shall be paid by the Company prior
to any filing.  At each Closing, upon
receiving written instructions to do so from the Company and the Placement
Agent, the Escrow Agent may deduct from the proceeds of subscriptions for Units
sold at such Closing, all other fees and expenses of Blue Sky counsel
outstanding as of such date, and pay such amount directly to such counsel.

 

(k) Until the completion of the Offering or the Termination Date,
neither the Company nor any person or entity acting on its behalf will
negotiate with any other placement agent or underwriter with respect to a
private or public offering of the Company’s or any subsidiary’s debt or equity
securities. Neither the Company nor anyone acting on its behalf will, until the
Termination Date, offer for sale to, or solicit offers to subscribe for Units
or other securities of the Company from, or otherwise approach or negotiate in
respect thereof with, any other person.

 

(l) Executive
officers of the Company will continue to retain their current positions
following the Offering, and prior to the First Closing, the Placement Agent
shall either approve any existing employment or other similar agreements or the
Company will enter into a written agreement with Jacob Y. Terner, M.D., in form and substance reasonably
satisfactory to the Placement Agent.

 

(m)
The Company will maintain for a period of two (2) years after the First
Closing, “key man” life insurance policies in the amount of $1,000,000 for
Jacob Y. Terner, M.D. if and to the extent that such coverage is available on a
commercially reasonable basis.

 

(n)  The Placement Agent
shall have the right to designate one (1) person reasonably acceptable to the
Company to serve, at the Placement Agent’s sole discretion, on the Board of
Directors of the Company.  In the event
such person is designated as a nominee for director, the Principal Stockholders
shall agree, as provided in the Stockholders Agreement, to vote in favor of
such nominee and the Company shall use its best efforts (which shall include,
without limitation, the solicitation of proxies on behalf of such nominee) to
elect such nominee to the Board of Directors.

 

12

 

For the purpose of this Agreement, a “Principal Stockholder” shall have
the meaning ascribed in the Stockholders’ Agreement. Additionally, the
Placement Agent designee shall serve on a committee of the Company’s Board of
Directors which has been given sole discretion to authorize stock option grants
by the Company (the “Stock Committee”). 
All stock option grants by the Company shall be subject to the prior
written consent of the Stock Committee; provided,
however, that all options grants by the Company to senior management
shall be subject to the prior written approval of the nominee of the Placement
Agent, which approval shall not be unreasonably withheld or delayed.   The Company covenants and agrees that from
the time of the First Closing until such time that the Placement Agent’s
designee actually becomes a member of the Board of Directors and the Stock
Committee, no option grants will be made to senior management that would have
otherwise required the approval of the Placement Agent’s nominee had such
nominee been in place at the time of the option grant. The Company agrees to
indemnify and hold the Placement Agent harmless against any and all claims,
actions, awards and judgments arising solely out of the attendance and
participation of the Placement Agent and its designated nominee at any such
meeting described herein.

 

(o) The Company shall take all necessary and appropriate action to
file, not later than ninety (90) days after the Final Closing, a registration
statement on Form 10 under the 1934 Act to become a fully reporting company
under the 1934 Act.

 

6. Conditions of Placement Agent’s Obligations. The obligations
of the Placement Agent hereunder are subject to the fulfillment, at or before
each Closing, of the following additional conditions:

 

(a) Each of the representations and warranties of the Company shall be
true and correct when made on the date hereof and on and as of each Closing
Date as though made on and as of each Closing Date.

 

(b) The Company shall have performed and complied with all agreements,
covenants and conditions required to be performed and complied with by it under
the Transaction Documents at or before each Closing.

 

(c) No order
suspending the use of the Memorandum or enjoining the offering or sale of the
Units shall have been issued, and no proceedings for that purpose or a similar
purpose shall have been initiated or pending, or, to the best of the Company’s
knowledge, are contemplated or threatened.

 

(d) As of the First Closing, the Company will have an authorized
capitalization of 40,000,000 shares of Common Stock, of which approximately
4,314,525 shares (plus any other shares issued upon exercise of outstanding
options or warrants) shall be issued and outstanding and 5,000,000 shares of
Preferred Stock, of which 3,240,000 shares will be designated as Series A
Convertible Preferred Stock and up to 2,700,000 shares of Series A Convertible
Preferred Stock will be issued and outstanding.

 

(e) The Placement Agent shall have received certificates of the Chief
Executive Officer and Chief Financial Officer of the Company, dated as of each
Closing Date, certifying, in such detail as

 

13

 

Placement Agent may reasonably request, as to the fulfillment of the
conditions set forth in subparagraphs (a), (b), (c) and (d) above.

 

(f) The Company shall have delivered to the Placement Agent (i) a
currently dated good standing certificate from the secretary of state of its
jurisdiction of incorporation and each jurisdiction in which the Company is
qualified to do business as a foreign corporation, and (ii) certified
resolutions of the Company’s Board of Directors approving this Agreement and
the other Transaction Documents, and the transactions and agreements
contemplated by this Agreement and the other Transaction Documents.

 

(g) On or prior to the date hereof and at each Closing, the Chief
Executive Officer of the Company shall have provided a certificate to the
Placement Agent confirming (i) that there have been no material and adverse
changes in the condition (financial or otherwise) or prospects of the Company
from the date of the financial statements included in the Memorandum, (ii) the
absence of undisclosed liabilities and (iii) such other matters relating to the
financial condition and prospects of the Company that the Placement Agent may
reasonably request.

 

(h) At each
Closing, the Company shall have (i) paid to the Placement Agent the Placement
Agent’s Fee and the Expense Allowance as set forth in Section 3(d) hereof and (ii)
executed and delivered to the Placement Agent the Agent’s Warrants in an amount
proportional to the Units sold.

 

(i) On or prior to the First Closing, the Company, the Principal
Stockholders and those management stockholders listed on Schedule A attached hereto (the
“Stockholders”) shall have entered into a Stockholders’ Agreement substantially
in the form of Annex B to the
Memorandum (the “Stockholders’ Agreement”),
pursuant to which the Principal Stockholders and the Stockholders shall agree
not to sell, transfer or otherwise dispose of any of the Company’s securities
beneficially owned by them or issuable to them pursuant to the exercise of
options, warrants or conversion of other securities without the Placement
Agent’s prior written consent, until the later of 180 days following the Final
Closing or 180 days following the date that the Company becomes a fully
reporting company under the Securities Exchange Act of 1934, as amended, except
that such persons may make transfers to (i) a parent, spouse, sibling or
descendent, or to a trust for the benefit of any of the foregoing persons and
(ii) in accordance with the provisions set forth in the Stockholders Agreement,
as of the date of the First Closing, among the Company, the Placement Agent,
the Principal Stockholders and the Stockholders, the investors in the Offering;
provided, however, that such transfers shall be
subject to this Section 6(i) and that the Placement Agent may require that any
such permitted transfer be made subject to a voting agreement pursuant to which
the transferring stockholder retains the right to vote all transferred shares
for up to two (2) years from the First Closing.

 

(j) There shall have been delivered to the Placement Agent a signed
opinion of counsel to the Company (“Company
Counsel”), dated as of each Closing Date, in form and substance
reasonably satisfactory to counsel to the Placement Agent.

 

14

 

(k) All proceedings taken at or prior to each Closing in connection
with the authorization, issuance and sale of the Units and the Agent’s Warrants
will be reasonably satisfactory in form and substance to the Placement Agent
and its counsel, and such counsel shall have been furnished with all such
documents, certificates and opinions as they may reasonably request upon
reasonable prior notice in connection with the transactions contemplated
hereby.

 

(l) If applicable, the Section 1(e) Requirements have been met.

 

7. Indemnification. (a) The Company will (i) indemnify and hold
harmless the Placement Agent, its selected dealers and their respective
officers, directors, employees and each person, if any, who controls the
Placement Agent within the meaning of the Act and such selected dealers (each
an “Indemnitee”) against, and pay
or reimburse each Indemnitee for, any and all losses, claims, damages,
liabilities or expenses whatsoever (or actions or proceedings or investigations
in respect thereof), joint or several (which will, for all purposes of this
Agreement, include, but not be limited to, all reasonable costs of defense and
investigation and all reasonable attorneys’ fees, including appeals), to which
any Indemnitee may become subject, under the Act or otherwise, in connection
with the offer and sale of the Units, whether such losses, claims, damages,
liabilities or expenses shall result from any claim of any Indemnitee or any
third party; and (ii) reimburse each Indemnitee for any legal or other expenses
reasonably incurred in connection with investigating or defending against any
such loss, claim, action, proceeding or investigation; provided, however,
that the Company will not be liable in any such case to the extent that any
such claim, damage or liability results from (A) an untrue statement or alleged
untrue statement of a material fact made in the Memorandum, or an omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in reliance upon
and in conformity with written information furnished to the Company by the
Placement Agent or any such controlling persons specifically for use in the
preparation thereof, or (B) any violations by the Placement Agent of the Act or
state securities laws which does not result from a violation thereof by the
Company or any of its affiliates. In addition to the foregoing agreement to
indemnify and reimburse, the Company will indemnify and hold harmless each
Indemnitee against any and all losses, claims, damages, liabilities or expenses
whatsoever (or actions or proceedings or investigations in respect thereof),
joint or several (which shall for all purposes of this Agreement, include, but
not be limited to, all costs of defense and investigation and all reasonable
attorneys’ fees, including appeals) to which any Indemnitee may become subject
insofar as such costs, expenses, losses, claims, damages or liabilities arise
out of or are based upon the claim of any person or entity that he or it is
entitled to broker’s or finder’s fees from any Indemnitee in connection with
the Offering. The foregoing indemnity agreements will be in addition to any
liability which the Company may otherwise have.

 

(b) The Placement Agent will indemnify and hold harmless the Company,
its officers, directors, employees and each person, if any, who controls the
Company within the meaning of the Act against, and pay or reimburse any such
person for, any and all losses, claims, damages or liabilities or expenses
whatsoever (or actions, proceedings or investigations in respect thereof) to
which the Company or any such person may become subject under the Act or
otherwise, whether such losses,

 

15

 

claims, damages, liabilities or expenses shall result from any claim of
the Company, any of its officers, directors, employees, any person who controls
the Company within the meaning of the Act or any third party, insofar as such
losses, claims, damages or liabilities are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Memorandum but
only with reference to information contained in the Memorandum relating to the
Placement Agent furnished in writing to the Company by the Placement Agent,
specifically for use in the preparation thereof. The Placement Agent will
reimburse the Company or any such person for any legal or other expenses
reasonably incurred in connection with investigating or defending against any
such loss, claim, damage, liability or action, proceeding or investigation to
which such indemnity obligation applies. The foregoing indemnity agreements
will be in addition to any liability which the Placement Agent may otherwise
have.

 

(c) Promptly after receipt by an indemnified party under this Section 7
of notice of the commencement of any action, claim, proceeding or investigation
(the “Action”), such indemnified
party, if a claim in respect thereof is to be made against the indemnifying
party under this Section 7, will notify the indemnifying party of the
commencement thereof, but the omission to so notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
under this Section 7 unless the indemnifying party has been substantially
prejudiced by such omission. The indemnifying party will be entitled to
participate in, and, to the extent that it may wish, jointly with any other
indemnifying party, to assume the defense thereof subject to the provisions
herein stated, with counsel reasonably satisfactory to such indemnified party.
The indemnified party will have the right to employ separate counsel in any
such Action and to participate in the defense thereof, but the fees and
expenses of such counsel will not be at the expense of the indemnifying party
if the indemnifying party has assumed the defense of the Action with counsel
reasonably satisfactory to the indemnified party, provided, however,
that if the indemnified party shall be requested by the indemnifying party to
participate in the defense thereof or shall have concluded in good faith and
specifically notified the indemnifying party either that there may be specific
defenses available to it which are different from or additional to those
available to the indemnifying party or that such Action involves or could have
a material adverse effect upon it with respect to matters beyond the scope of
the indemnity agreements contained in this Agreement, then the counsel
representing it, to the extent made necessary by such defenses, shall have the
right to direct such defenses of such Action on its behalf and in such case the
reasonable fees and expenses of such counsel in connection with any such
participation or defenses shall be paid by the indemnifying party. No
settlement of any Action against an indemnified party will be made without the
consent of the indemnifying party and the indemnified party, which consent
shall not be unreasonably withheld or delayed in light of all factors of
importance to such party and no indemnifying party shall be liable to indemnify
any person for any settlement of any such claim effected without such
indemnifying party’s consent.

 

8. Contribution. To provide for just and equitable contribution,
if (i) an indemnified party makes a claim for indemnification pursuant to
Section 7 hereof and it is finally determined, by a judgment, order or decree
not subject to further appeal that such claims for indemnification may not be
enforced, even though this Agreement expressly provides for indemnification in
such case; or (ii) any

 

16

 

indemnified or indemnifying party seeks contribution under the Act, the
1934 Act, or otherwise, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Placement Agent on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses (or actions in respect thereof), as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Placement Agent on the other
shall be deemed to be in the same proportion as the total net proceeds from the
Offering (before deducting expenses) received by the Company bear to the total
commissions and fees received by the Placement Agent. The relative fault, in
the case of an untrue statement, alleged untrue statement, omission or alleged
omission will be determined by, among other things, whether such statement,
alleged statement, omission or alleged omission relates to information supplied
by the Company or by the Placement Agent, and the parties’ relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement, alleged statement, omission or alleged omission. The Company and the
Placement Agent agree that it would be unjust and inequitable if the respective
obligations of the Company and the Placement Agent for contribution were
determined by pro rata allocation
of the aggregate losses, liabilities, claims, damages and expenses or by any
other method or allocation that does not reflect the equitable considerations
referred to in this Section 8. No person guilty of a fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) will be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this Section 8, each person, if any, who
controls the Placement Agent within the meaning of the Act will have the same
rights to contribution as the Placement Agent, and each person, if any, who
controls the Company within the meaning of the Act will have the same rights to
contribution as the Company, subject in each case to the provisions of this
Section 8. Anything in this Section 8 to the contrary notwithstanding, no party
will be liable for contribution with respect to the settlement of any claim or
action effected without its written consent. This Section 8 is intended to
supersede, to the extent permitted by law, any right to contribution under the
Act, the 1934 Act or otherwise available.

 

9. Termination. (a) The Offering may be terminated by the
Placement Agent at any time prior to the expiration of the Offering Period as
contemplated in Section 1(b) hereof (the “Expiration Date”) in the event that: (i) any of the
representations or warranties of the Company contained herein, in the
Memorandum or in any other Transaction Document shall prove to have been false
or misleading in any material respect when made or deemed made; (ii) the
Company shall have failed to perform any of its material obligations hereunder;
(iii) the Placement Agent shall determine that it is reasonably likely
that any of the conditions to Closing set forth herein will not, or cannot, be
satisfied; or (iv) there shall occur any event which could adversely
affect the Transactions contemplated hereby or the other Transaction Documents
or the ability of the parties to perform thereunder. In the event of any such
termination occasioned by or arising out of or in connection with any breach or
failure hereunder on the part of the Company, the Placement Agent shall be
entitled to receive, in addition to other rights and remedies it may have
hereunder, at law or otherwise, an amount equal to the sum of: (A) all
Placement Agent’s Fees earned through the Termination Date; (B) the full amount
of the Expense Allowance; (C) all amounts which may become payable in respect
of Post-Closing Investors

 

17

 

pursuant to Section 3(f) hereof; and (D) in the event that this
Agreement is terminated pursuant to Section 9(a)(i) – (iv), for which the
Company is primarily responsible, or by the Company for any reason other than
Section 9(b)(i) – (ii) within ninety (90) days from the date hereof and the
Company is sold, merged or otherwise combined or acquired, or the Company
enters into a letter of intent or completes a public or private offering of its
securities within 18 months from the Termination Date, an investment banking
fee equal to five percent (5%) of the total consideration received by the
Company and/or its stockholders in connection with such sale, merger,
acquisition or sale of securities  In
the event of any such termination by the Placement Agent as a result of any
event described in clause (iii) or (iv) above, or pursuant to Section 4(d)
hereof, not occasioned by or arising out of or in connection with any breach or
failure hereunder by the Company, the Placement Agent will be entitled to
receive the sum of all Placement Agent’s Fees earned through the Termination
Date, the amount of the Expense Allowance accrued through the Termination Date
and the amounts set forth in clauses (C) and (D) of this Section 9(a) and Agent’s
Warrants pursuant to Section 3(e) hereof.

 

(b) This Offering may be terminated by the Company at any time prior to
the Expiration Date in the event that (i) the Placement Agent shall have
failed to perform any of its material obligations hereunder or (ii) there
shall occur any event described in Section 9(a)(iii) or Section 9(a)(iv)
above not occasioned by or arising out of or in connection with any breach or
failure hereunder on the part of the Company. In the event of any termination
by the Company pursuant to clause (i) above, the Placement Agent shall be
entitled to retain the amount of the Expense Allowance accrued through the
Termination Date, including any non-refundable portions thereof, but shall be
entitled to no other amounts whatsoever except as may be due under any
indemnity or contribution obligation provided herein or any other Transaction
Document, at law or otherwise. In the event of any termination by the Company
pursuant to clause (ii) above, the provisions of the last sentence of Section 9(a)
hereof shall apply.

 

(c) Upon any such termination, the Escrow Agent shall, at the request
of the Placement Agent, cause all monies received with respect to the
subscriptions for Units not accepted by the Company to be promptly returned to
such subscribers without interest, penalty, expense or deduction. Any interest
earned thereon shall be applied first to the payment of amounts, if any, due to
the Escrow Agent and next to the payment of any amounts payable to the
Placement Agent hereunder which remain unpaid.

 

(d)  Before any termination by
the Placement Agent under Section 9(a) or by the Company under Section 9(b)
shall become effective, the terminating party shall give written notice to the
other party of its intention to terminate the Offering (the “Termination Notice”).  The Terminating Notice shall specify the
grounds for the proposed termination and their material adverse effect on the
Transactions contemplated hereby.  If
the specified grounds for termination, or their resulting adverse effect on the
Transactions, are curable, then the other party shall have ten (10) days from
the Termination Notice within which to remove such grounds or to eliminate all
of their material adverse effects on the Transactions contemplated hereby;
otherwise, the Offering shall terminate.

 

18

 

10. Survival. (a) The obligations of the parties to pay any
costs and expenses hereunder and to provide indemnification and contribution as
provided herein shall survive any termination hereunder.

 

(b) The respective indemnities, agreements, representations, warranties
and other statements of the Company set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any investigation
made by or on behalf of, and regardless of any access to information by, the
Company or the Placement Agent, or any of their officers or directors or any
controlling person thereof, and will survive the sale of the Units.

 

11. Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date delivered personally, or the date mailed if mailed by
registered or certified mail (postage prepaid, return receipt requested) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like changes of address which shall be effective upon
receipt) or sent by electronic transmission, with confirmation received, if
sent to the Placement Agent, will be mailed, delivered or telefaxed and
confirmed to Spencer Trask Ventures, Inc., 535 Madison Avenue, 18th Floor, New
York, New York 10022, Attention: DiAnn Ellis, Telefax number (212) 319-8457,
with a copy to: Littman Krooks LLP, 655 Third Avenue, New York, NY 10017, Attn:
Mitchell C. Littman, Esq., Telefax number (212) 490-2990, and if sent to the
Company, will be mailed, delivered or telefaxed and confirmed to Prospect
Medical Holdings, Inc., 6083 Bristol Parkway, Suite 100, Culver City, California
90230, Attn: Jacob Y. Terner, M.D., 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.

 

12. APPLICABLE
LAW, ARBITRATION, COSTS, ETC.  THIS
AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED
WHOLLY WITHIN SUCH STATE.  THE PARTIES HERETO AGREE TO SUBMIT ALL
CONTROVERSIES TO ARBITRATION IN ACCORDANCE WITH THE PROVISIONS SET FORTH BELOW
AND UNDERSTAND THAT: (A) ARBITRATION IS FINAL AND BINDING ON THE PARTIES; (B)
THE PARTIES ARE WAIVING THEIR RIGHT 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 RULINGS BY ARBITRATORS IS STRICTLY
LIMITED; (E) THE PANEL OF 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
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.  JUDGMENT ON ANY AWARD OF ANY SUCH ARBITRATION MAY BE ENTERED IN

 

19

 

THE SUPREME COURT OF THE STATE OF NEW
YORK OR IN ANY OTHER COURT HAVING JURISDICTION OF 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 AGENT OR
THE COMPANY, AS THE CASE MAY BE, SHALL BE ENTITLED TO COSTS AND REASONABLE
ATTORNEY’S FEES IN THE EVENT IT PREVAILS IN ANY CLAIMS, ACTIONS, AWARDS OR
JUDGMENT UNDER THIS AGREEMENT.

 

13. Miscellaneous. No provision of this Agreement may be changed
or terminated except by a writing signed by the party or parties to be charged
therewith. Unless expressly so provided, no party to this Agreement will be
liable for the performance of any other party’s obligations hereunder. Any
party hereto may waive compliance by the other with any of the terms,
provisions and conditions set forth herein; provided, however that any such
waiver shall be in writing specifically setting forth those provisions waived
thereby. No such waiver shall be deemed to constitute or imply waiver of any other
term, provision or condition of this Agreement. This Agreement contains the
entire agreement between the parties hereto and is intended to supersede any
and all prior agreements between the parties relating to the same subject
matter. This Agreement may be executed in counterparts, each of which shall be
deemed an original and all of which shall constitute a single agreement.

 

14. Entire Agreement. This Agreement, together with any other
agreement referred to herein, supersedes all prior agreements between the
parties with respect to the Units purchased hereunder and the subject matter
hereof.

 

20

 

If the foregoing
is in accordance with your understanding of our agreement, kindly sign and
return this Agreement, whereupon it will become a binding agreement between the
Company and the Placement Agent in accordance with its terms.

 

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  PROSPECT MEDICAL

  HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:  R.
  Stewart Kahn,

  
	
   

  	
  Title: 
  Executive Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Accepted and agreed to as of this

  
	
   

  	
  1stth day of November, 2003.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SPENCER TRASK VENTURES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

21

 

Schedule A

 

Stockholders

 

Jacob Y. Terner, M.D.

Catherine Dickson

Donna Vigil

R. Stewart Kahn

Linda Hodges

 

22Exhibit 10.86

 

AMENDMENT NO.
1 TO

PLACEMENT AGENCY AGREEMENT

 

This Amendment No 1. to the 
Placement Agency Agreement (the “Agreement”), dated December 30,
2003, entered into by and between Prospect Medical Holdings, Inc., a Delaware corporation (the “Company”),
and Spencer Trask Ventures, a
Delaware corporation (the “Placement Agent”), as follows (unless the context
otherwise requires, as used herein, the “Company” refers to Prospect Medical
Holdings, Inc., and its subsidiaries, and Prospect Medical Group and its
subsidiaries, and as finally constituted giving effect to the merger and
acquisition transactions contemplated by the Offering (as hereafter defined)):

 

W I T N E S S E T H:

 

WHEREAS, pursuant to that certain Placement Agency Agreement by and between the Company and the
Placement Agent dated November 1, 2003 (the “Placement Agency Agreement”),
the Company is offering (the “Offering”) for sale through the Placement Agent
and its selected dealers, as exclusive agent for the Company, a minimum of 69
units (the “Minimum Amount”) and a maximum of 104 units (the “Units”), plus up
to an additional 31 Units to cover over subscriptions, if any, in the sole
discretion of the Placement Agent, consisting of 20,000 shares (the “Shares”)
at $5.50 per share of the Company’s Series A Convertible Preferred Stock, $0.01
par value per share (the “Series A Preferred Stock”).

 

WHEREAS, the Company and the Placement Agent desire to amend the terms
of the Placement Agency Agreement as set forth herein;

 

NOW, THEREFORE, in consideration of the premises and agreements
hereinafter contained, it is agreed as follows:

 

1.                                       Amendments
to Placement Agency Agreement.

 

The Placement Agency Agreement is hereby amended as follows:

 

(a)                                  Section 6(i) of
the Placement Agency Agreement is hereby deleted in its entirety and replaced
with the following:

 

(i)                                     On
or prior to the First Closing, the Company, the Principal Stockholders and
those management stockholders listed on Schedule A
attached hereto (the “Stockholders”) shall have entered into a Stockholders’
Agreement substantially in the form of Annex
B to the Memorandum (the “Stockholders’ Agreement”), pursuant to
which the Principal Stockholders and the Stockholders shall agree not to sell,
transfer or otherwise dispose of any of the Company’s securities beneficially
owned by them or issuable to them pursuant to the exercise of options, warrants
or conversion of other securities without the Placement Agent’s prior written
consent, until 90 days following the effective date of the registration
statement on Form S-1 (or such other applicable registration statement)
covering the public sale of shares of common stock issued or issuable upon
conversion of the Series A Preferred Stock, except that such persons may make
transfers to (i) a

 

 

parent,
spouse, sibling or descendent, or to a trust for the benefit of any of the
foregoing persons and (ii) in accordance with the provisions set forth in the
Stockholders Agreement, as of the date of the First Closing, among the Company,
the Placement Agent, the Principal Stockholders and the Stockholders, the
investors in the Offering; provided, however, that such transfers shall be
subject to this Section 6(i) and that the Placement Agent may require that
any such permitted transfer be made subject to a voting agreement pursuant to
which the transferring stockholder retains the right to vote all transferred
shares for up to two (2) years from the First Closing.

 

(b)                                 The
following covenant shall be added as Section 5(p) to the Placement Agency
Agreement:

 

(p)                                 The
Company shall use its best efforts to cause those certain stockholders, option
holders and warrant holders listed in Schedule B
attached hereto to execute that certain lock-up letter between each of them and
the Placement Agent in substantially the form attached hereto as Exhibit A.

 

2.                                       Full
Force and Effect.

 

Except as specifically amended hereby, all of the terms and provisions
of the Placement Agency Agreement shall remain in full force and effect.

 

3.                                       Counterparts.

 

This Amendment may be executed in any number of counterparts, each of
which shall be deemed an original and all of which together shall be deemed to
be one and the same instrument.

 

2

 

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

 

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  PROSPECT MEDICAL

  HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
  R. Stewart Kahn

  
	
   

  	
  Title:

  	
  Executive Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Accepted and agreed to as of this

  
	
   

  	
  30th day of December, 2003.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SPENCER TRASK VENTURES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  
	
   

  	
   

  	
   

  
	
   

  	
  Name: William P. Dioguardi

  
	
   

  	
  Title: President

  
				

 

3

 

Schedule B

 

	
  Name

  	
   

  	
  Shares

  	
   

  	
  Warrant &

  Option Shares

  	
   

  	
  Totals

  
	
  Abrams, Emanuel

  	
   

  	
  56,057.0

  	
   

  	
  0.0

  	
   

  	
  56,057.0

  
	
  Amir, Paul & Michal

  	
   

  	
  561,394.0

  	
   

  	
  72,816.0

  	
   

  	
  634,210.0

  
	
  Arulanantham, Karunyan

  	
   

  	
  342,817.0

  	
   

  	
  126,285.0

  	
   

  	
  469,102.0

  
	
  Bell, Carol

  	
   

  	
  40,041.0

  	
   

  	
  0.0

  	
   

  	
  40,041.0

  
	
  Dickson, Catherine

  	
   

  	
  0.0

  	
   

  	
  65,500.0

  	
   

  	
  65,500.0

  
	
  Dutton, Theodore

  	
   

  	
  112,444.0

  	
   

  	
  29,127.0

  	
   

  	
  141,571.0

  
	
  Frisch, David

  	
   

  	
  27,380.0

  	
   

  	
  20,000.0

  	
   

  	
  47,380.0

  
	
  Goldenberg, Irwin

  	
   

  	
  96,263.0

  	
   

  	
  14,563.5

  	
   

  	
  110,826.5

  
	
  Goldstein, Robert

  	
   

  	
  220,344.0

  	
   

  	
  14,563.5

  	
   

  	
  234,907.5

  
	
  Hodges, Linda

  	
   

  	
  0.0

  	
   

  	
  100,000.0

  	
   

  	
  100,000.0

  
	
  Jayakumar, Jay

  	
   

  	
  68,092.0

  	
   

  	
  45,782.5

  	
   

  	
  113,874.5

  
	
  Kahn, Stewart

  	
   

  	
  25,000.0

  	
   

  	
  102,500.0

  	
   

  	
  127,500.0

  
	
  Levine, Howard

  	
   

  	
  5,000.0

  	
   

  	
  65,000.0

  	
   

  	
  70,000.0

  
	
  Levinsohn, David

  	
   

  	
  208,211.0

  	
   

  	
  110,000.0

  	
   

  	
  318,211.0

  
	
  Lipper, Arthur

  	
   

  	
  11,680.0

  	
   

  	
  20,000.0

  	
   

  	
  31,680.0

  
	
  Maloof, Thomas and John

  	
   

  	
  101,211.0

  	
   

  	
  7,282.5

  	
   

  	
  108,493.5

  
	
  Miller & Holguin

  	
   

  	
  277,350.0

  	
   

  	
  105,469.5

  	
   

  	
  382,819.5

  
	
  Miller, Marty

  	
   

  	
  0.0

  	
   

  	
  25,000.0

  	
   

  	
  25,000.0

  
	
  Moorthy, Sinnadurai & CSM Trust

  	
   

  	
  302,363.0

  	
   

  	
  87,377.0

  	
   

  	
  389,740.0

  
	
  Nishimoto, Jo Ann

  	
   

  	
  0.0

  	
   

  	
  20,000.0

  	
   

  	
  20,000.0

  
	
  Reich, Melvin

  	
   

  	
  0.0

  	
   

  	
  21,099.0

  	
   

  	
  21,099.0

  
	
  Schwartz, Kenneth

  	
   

  	
  20,000.0

  	
   

  	
  50,000.0

  	
   

  	
  70,000.0

  
	
  Sherman Oaks Health System

  	
   

  	
  30,360.0

  	
   

  	
  0.0

  	
   

  	
  30,360.0

  
	
  Simmons; Frederick

  	
   

  	
  192,525.0

  	
   

  	
  29,127.0

  	
   

  	
  221,652.0

  
	
  Spencer Trask Venture Investment Partners

  	
   

  	
  100,000.0

  	
   

  	
  559,409.0

  	
   

  	
  659,409.0

  
	
  Stephens, Roger

  	
   

  	
  4,855.0

  	
   

  	
  4,369.5

  	
   

  	
  9,224.5

  
	
  Tashjian, Larry & Tashjian Trust

  	
   

  	
  136,222.0

  	
   

  	
  7,282.5

  	
   

  	
  143,504.5

  
	
  Terner, Jacob Y.

  	
   

  	
  372,702.0

  	
   

  	
  1,137,816.0

  	
   

  	
  1,510,518.0

  
	
  Terner, Michael

  	
   

  	
  0.0

  	
   

  	
  30,000.0

  	
   

  	
  30,000.0

  
	
  Vigil, Donna

  	
   

  	
  0.0

  	
   

  	
  90,000.0

  	
   

  	
  90,000.0

  
	
  Vogel, Rachel Terner

  	
   

  	
  40,041.0

  	
   

  	
  0.0

  	
   

  	
  40,041.0

  
	
  TOTALS

  	
   

  	
  3,352,352.0

  	
   

  	
  2,960,369.5

  	
   

  	
  6,312,721.5

  

 

 

Exhibit A

 

SPENCER TRASK
VENTURES, INC.

535 Madison Avenue

New York, New York 10022

 

[ADDRESS OF STOCKHOLDER]

 

Dear Sir or Madam:

 

This letter is being delivered to you in connection with that certain private offering (the
“Offering”) of up to 104 units (the “Units”), plus an additional 31 Units to
cover over-subscriptions, if any, consisting of 20,000 shares of Series A
Convertible Preferred Stock (the “Series A Preferred Stock”) of Prospect
Medical Holdings, Inc. (the “Company”), pursuant to that certain Confidential
Private Placement Memorandum, dated November 1, 2003 (the “Memorandum”),
for which Spencer Trask Ventures, Inc. is acting as the placement agent (the
“Placement Agent”).

 

In connection with the Offering, you hereby agree not to Transfer (as
hereafter defined) any shares of the Company’s common stock and/or any
securities (including, without limitation, options and warrants) of the Company
convertible into or exercisable or exchangeable for any shares of the Company’s
common stock without the prior written consent of the Placement Agent, which
consent shall not be unreasonably withheld, until ninety (90) days following
the effective date of that certain registration statement on Form S-1 (or such
other applicable registration statement) covering the public sale of shares of
common stock issued or issuable upon conversion of the Series A Preferred
Stock, as contemplated in that certain Registration Rights Agreement among the
Company and investors in the Offering contemplated by the Memorandum.

 

For purposes of this letter, “Transfer” shall
mean any voluntary or involuntary, direct or indirect sale, transfer,
conveyance, assignment, gift, donation, assignment, pledge, hypothecation,
delivery or other disposition of shares of the company’s common stock and any
other securities of the Company issued in exchange for, upon conversion or in
substitution of, or otherwise in respect of such shares (“Equity Securities”),
but shall not include any redemption or repurchase of Equity Securities by the
Company.

 

	
   

  	
   

  	
  Yours very truly,

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  SPENCER TRASK VENTURES, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
  AGREED AND ACCEPTED:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  [NAME OF STOCKHOLDER]

  	
   

  	
   

  
	
  Dated: December   , 2003

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