Document:

Exhibit
10.2

 

WARRANT
AGREEMENT

 

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

 

W
I  T  N  E  S  S  E  T  H

 

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

 

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

 

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

 

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

 

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

 

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

 

3.             Exercise  of
Warrant.

 

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

 

 

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

 

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

 

X = Y
(A - B)

A

 

	
  Where

  	
   

  	
  X

  	
   

  	
  =

  	
   

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

  
	
   

  	
   

  	
  Y

  	
   

  	
  =

  	
   

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

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  A

  	
   

  	
  =

  	
   

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

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  B

  	
   

  	
  =

  	
   

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

  

 

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

 

2

 

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

 

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

 

5.             Exercise  Price.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

8.             Adjustment.

 

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

 

4

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

5

 

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

 

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

 

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

 

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

 

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

 

6

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

7

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

8

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

9

 

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

 

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

 

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

 

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

 

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

 

10

 

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

 

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

 

 

[Remainder
of Page Intentionally Left Blank]

 

11

 

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

 

	
   

  	
  PROSPECT MEDICAL
  HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

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

  	
   

  
	
   

  	
   

  	
  Name:
  Jacob Y. Terner, M.D.

  	
   

  
	
   

  	
   

  	
  Title:
  Chief Executive Officer

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Attest:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  /s/ R. Stewart Kahn

  	
   

  	
   

  
	
  R. Stewart Kahn,
  Secretary

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SPENCER TRASK VENTURES,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William P.
  Dioguardi

  	
   

  
	
   

  	
   

  	
  Print
  Name: William P. Dioguardi

  	
   

  
	
   

  	
   

  	
  Title: President

  	
   

  
					

 

12

 

EXHIBIT A

 

[FORM OF WARRANT
CERTIFICATE]

 

 

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

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

 

	
  No. ST-1

  	
   

  	
                         Warrants

  
	
   

  	
   

  	
  January
      , 2004

  

 

WARRANT
CERTIFICATE

 

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

 

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

 

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

 

13

 

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

 

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

 

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

 

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

 

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

 

14

 

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

 

	
   

  	
  PROSPECT MEDICAL
  HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:
  Jacob Y. Terner, M.D

  	
   

  
	
   

  	
   

  	
  Title:
  Chief Executive Officer

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Attest:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  R. Stewart Kahn,
  Secretary

  	
   

  
					

 

15

 

[FORM OF ELECTION
TO PURCHASE]

 

	
  TO:

  	
   

  	
  Prospect Medical
  Holdings, Inc.

  
	
   

  	
   

  	
  Attention:  President

  

 

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

 

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

 

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

 

 

	
   

  	
   

  	
   

  
	
   

  	
  (Name)

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (Address)

  	
   

  

 

	
   

  	
   

  	
   

  
	
   

  	
  (Signature and Date)

  
	
   

  	
   

  
	
   

  	
  (Signature must conform
  in all respects to

  
	
   

  	
  name of holder as
  specified on the face of

  
	
   

  	
  the Warrant
  Certificate)

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (Insert Social Security
  or Other Identifying

  
	
   

  	
  Number of Holder)

  

 

16

 

[FORM OF
ASSIGNMENT]

 

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

 

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

 

(Please print name
and address of transferee)

 

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

 

 

	
  Dated:

  	
  Signature

  	
   

  	
   

  
	
   

  	
  (Signature must conform
  in all respects to name of

  
	
   

  	
  holder as specified on
  the face of the Warrant

  
	
   

  	
  Certificate)

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (Insert Social Security
  or other Identifying

  
	
   

  	
  Number of Holder)

  

 

17Exhibit 10.3

 

PROSPECT MEDICAL HOLDINGS, INC.

 

REGISTRATION RIGHTS AGREEMENT

 

 

THIS
REGISTRATION RIGHTS AGREEMENT (the “Agreement”) is made by and among PROSPECT
MEDICAL HOLDINGS, INC., a Delaware corporation (the “Company”) and each
INVESTOR (collectively, the “Investors” and each individually, an “Investor”)
executing a copy hereof.

 

WHEREAS,
desire to purchase from the Company, and the Company desires to issue and sell
to the Investors, up to an aggregate of 104 Units (the “Units”) (plus an
additional 31 Units solely to cover over-subscriptions, if any), each Unit
consisting of 20,000 shares of the Company’s Series A Convertible Preferred
Stock (the “Series A Preferred Stock”), all upon the terms set forth in the
Company’s Confidential Private Placement Memorandum dated November 1, 2003 (the “Memorandum”);

 

WHEREAS, to
induce the Investors to purchase the Units, the Company has undertaken to
register the Common Stock issuable upon conversion of the Series A Preferred
Stock pursuant to the terms and on the conditions set forth herein.

 

NOW,
THEREFORE, the Company and the Investors hereby covenant and agree as follows:

 

1.             Certain
Definitions.  As used in this
Agreement, the following terms shall have the following respective meanings:

 

“Commission”
shall mean the United States Securities and Exchange Commission, or any other
federal agency at the time administering the Securities Act.

 

“Common Stock”
shall mean the Common Stock, par value $0.01 per share, of the Company, as
constituted as of the date of this Agreement.

 

“Eligible
Securities” shall mean all Registrable Securities other than Excluded
Securities.

 

“Exchange Act”
shall mean the Securities Exchange Act of 1934, as amended, and the rules and
regulations of the Commission thereunder, all as the same shall be in effect at
the time.

 

“Excluded
Securities” shall mean Registrable Securities that are free of restriction on
resale under the Securities Act (by removal of all restrictive legends,
instructions to transfer agent or otherwise) pursuant to Rule 144(k).

 

“Final Closing
Date” shall mean the closing date of the sale of the last Unit to Investors
pursuant to the Memorandum.

 

“Reporting
Company Period” shall mean the period commencing on the Final Closing Date and
ending on the date ninety (90) days thereafter.

 

C-1

 

“Register,”
“registered” and “registration” each shall refer to a registration effected by
preparing and filing a registration statement or statements or similar
documents in compliance with the Securities Act and the declaration or ordering
of effectiveness of such registration statement or document by the Commission.

 

“Registrable
Securities” shall mean (i) the Common Stock issuable upon conversion of the
Series A Preferred Stock held by the Investors, (ii) any Common Stock of the
Company issued as a dividend or other distribution with respect to, in exchange
for or in replacement of such Series A Preferred Stock, or Common Stock issued
upon conversion thereof, and (iii) any other shares of Common Stock otherwise
acquired by an Investor, but excluding any shares of Common Stock satisfying
clause (i), (ii) or (iii) above but which shares (x) are eligible for resale
under Rule 144A, or (y) are sold by an Investor in a transaction in which such
Investor’s registration rights under this Agreement have not been assigned.

 

“Requisite
Period” shall mean the period commencing on the effective date of the
registration statement and ending on the earlier of (i) the date on which the
sale of all Registrable Securities covered thereby is completed and (ii) 180
days after such effective date.

 

“Securities
Act” shall mean the Securities Act of 1933, as amended, and the rules and
regulations of the Commission thereunder, all as the same shall be in effect at
the applicable time.

 

2.             Automatic
Registration Statement.

 

(a)           Not
later than thirty (30) days after the later to occur of (i) the date on which
the Company’s Exchange Act registration statement has become effective, and
(ii) the date on which the Commission staff has advised the Company that it has
no further comments on the Company’s Exchange Act registration statement, the
Company shall prepare and file a registration statement with the Commission on
Form S-1 or such other appropriate form in accordance with the Securities Act,
covering the Registrable Securities.

 

(b)           The Company shall use its
commercially reasonable efforts to have such registration statement declared
effective within twelve (12) months after the Final Closing Date, and to
maintain the effectiveness and use of such registration statement for a period
of no less than the earlier of (i) the date on which all of the Registrable
Securities may be resold without restriction pursuant to Rule 144(k) under the
Securities Act, or (ii) the date on which all of the Registrable Securities
have been sold.

 

(c)           If a registration
statement covering the Registrable Securities is not filed within the period
specified in Section 2(a) herein, (the “Registration Date”), for each thirty
(30) day period (or pro-rata for any portion thereof) following the
Registration Date during which no registration statement is filed with respect
to the Registrable Securities, the conversion price of the Series A Preferred
Stock shall be adjusted so that holders of Series A Preferred Stock shall
receive, upon conversion thereof, an additional 1% of the amount of shares of
Common Stock such holder would have otherwise received upon conversion.  Additionally, if the Company fails to use
reasonable commercial efforts to cause the registration statement covering the
Registrable Shares to be declared effective within the period specified in
Section 2(b) herein (the “Effective Date”), for each thirty (30) day period (or
pro-rata for any portion thereof) following the

 

C-2

 

Effective Date during which the
registration statement is not declared effective pursuant to Section 2(b) with
respect to the Registrable Shares, the conversion price of the Series A
Preferred Stock shall be adjusted so that holders of Series A Preferred Stock
shall receive, upon conversion thereof, an additional 1% of the amount of
shares of Common Stock such holder would have otherwise received upon
conversion.

 

3.             Intentionally
Deleted.

 

4.             Piggyback
Registration.

 

(a)           If the Company at any
time from the date of this Agreement through the fifth anniversary of the Final
Closing Date, proposes to register any of its securities under the Securities
Act for sale to the public, whether for its own account or for the account of
other security holders or both (except with respect to registration statements
on Forms S-4, S-8 and any successor forms thereto as well as registrations that
do not permit resales), each such time it will give written notice to such
effect to all holders of outstanding Registrable Securities at least thirty
(30) days prior to such filing.  Upon
the written request of any such holder received by the Company within twenty
(20) days after the provision of any such notice by the Company to register any
of its Eligible Securities, the Company will cause the Eligible Securities as
to which registration shall have been so requested to be included in the
securities to be covered by the registration statement proposed to be filed by
the Company, or to the extent required to permit the sale or other disposition
by the holder of such Eligible Securities so registered.

 

(b)           If the registration of
which the Company gives notice is for a registered public offering involving an
underwriting, the Company shall so advise the holders of Registrable Securities
as a part of the written notice given pursuant to Section 4(a).  In such event, the right of any such holder
to registration pursuant to Section 4 shall be conditioned upon such
holder’s participation in such underwriting and the inclusion of Eligible
Securities in the underwriting shall be limited to the extent provided
herein.  All holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company.

 

5.             Intentionally
Deleted. 

 

6.             Holdback
Agreements. In connection with any registration of Registrable Securities,
each holder of Registrable Securities agrees, if so requested by the
underwriter or underwriters, not to effect any public sale or distribution
(including any sale pursuant to Rule 144 under the Securities Act) of any
Registrable Securities, and not to effect any such public sale or distribution
of any other equity security of the Company or of any security convertible into
or exchangeable or exercisable for any equity security of the Company (in each
case other than as part of such underwritten public offering), during the
180-day period, or such other period as the managing underwriter of such
offering shall reasonably require, or such other period agreed to by the
Attorney-in-fact or Power of Attorney on behalf of the holders, beginning on
the effective date of such registration statement, provided that (i)
such holder has received written notice of such registration at least fifteen
(15) days prior to such effective date and (ii), with respect to any offering
other than pursuant to a firm commitment underwriting, the underwriters
continue to actively market the Registrable Securities

 

C-3

 

until the earlier of the end of such lock-up period and the closing with
respect to the sale of all, or the final portion of, the Registrable Securities
offered by such holders; provided, however, that the immediately
foregoing restrictions imposed on such holder or holders by this Section 6
shall terminate on the earlier of the end of such lock-up period and thirty
(30) days after such closing.

 

7.             Registration
Procedures.  If and whenever the
Company is required by the provisions hereof to use its best efforts to effect
the registration of any Registrable Securities under the Securities Act, the
Company will, as expeditiously as possible:

 

(a)           other than for such
registration in Section 2 herein, prepare and file with the Commission a
registration statement with respect to such securities and use its best efforts
to cause such registration statement to become effective not later than ninety
(90) days from the date of its filing and to remain effective for the Requisite
Period;

 

(b)           prepare and file with
the Commission such amendments and supplements to such registration statement
and the prospectus used in connection therewith as may be necessary to keep
such registration statement effective for the Requisite Period and comply with
the provisions of the Securities Act with respect to the disposition of all
Registrable Securities covered by such registration statement in accordance
with the intended method of disposition set forth in such registration
statement for such period;

 

(c)           furnish to each seller
of Registrable Securities and to each underwriter such number of copies of the
registration statement and the prospectus included therein (including each
preliminary prospectus) as such persons reasonably may request in order to
facilitate the intended disposition of the Registrable Securities covered by
such registration statement;

 

(d)           use its best efforts
(i) to register or qualify the Registrable Securities covered by such
registration statement under the securities or “blue sky” laws of such
jurisdictions as the sellers of Registrable Securities or, in the case of an
underwritten public offering, the managing underwriter, reasonably shall
request, (ii) to prepare and file in those jurisdictions such amendments
(including post-effective amendments) and supplements, and take such other
actions, as may be necessary to maintain such registration and qualification in
effect at all times for the period of distribution contemplated thereby and
(iii) to take such further action as may be necessary or advisable to enable
the disposition of the Registrable Securities in such jurisdictions, provided,
that the Company shall not for any such purpose be required to qualify
generally to transact business as a foreign corporation in any jurisdiction
where it is not so qualified or to consent to general service of process in any
such jurisdiction;

 

(e)           use its best efforts to
list the Registrable Securities covered by such registration statement with any
securities exchange on which the Common Stock of the Company is then listed,
or, if the Common Stock is not then listed on a national securities exchange,
use its best efforts to facilitate the reporting of the Common Stock on the
American Stock Exchange or the Nasdaq SmallCap Market;

 

(f)            immediately notify
each seller of Registrable Securities and each underwriter under such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any
event of which the Company has

 

C-4

 

knowledge as a result of which
the prospectus contained in such registration statement, as then in effect,
includes any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing and promptly amend
or supplement such registration statement to correct any such untrue statement
or omission;

 

(g)           notify each seller of
Registrable Securities of the issuance by the Commission of any stop order
suspending the effectiveness of the registration statement or the initiation of
any proceedings for that purpose and make every reasonable effort to prevent
the issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible time;

 

(h)           permit a single firm of
counsel designated as selling stockholders’ counsel by the holders of a
majority in interest of the Registrable Securities being registered to review
the registration statement and all amendments and supplements thereto for a
reasonable period of time prior to their filing (provided,  however,
that in no event shall the Company be required to reimburse legal fees in
excess of $5,000 per registration statement pursuant to this Section 6(h)) and
the Company shall not file any document in a form to which such counsel
reasonably objects;

 

(i)            if the offering is an
underwritten offering, enter into a written agreement with the managing
underwriter selected in the manner herein provided in such form and containing
such provisions as are usual and customary in the securities business for such
an arrangement between such underwriter and companies of the Company’s size and
investment stature, including, without limitation, customary indemnification
and contribution provisions;

 

(j)            if the offering is an
underwritten offering, at the request of any seller of Registrable Securities,
use its best efforts to furnish to such seller on the date that Registrable
Securities are delivered to the underwriters for sale pursuant to such registration:
(i) a copy of an opinion dated such date of counsel representing the Company
for the purposes of such registration, addressed to the underwriters, stating
that such registration statement has become effective under the Securities Act
and that (A) to the best knowledge of such counsel, no stop order suspending
the effectiveness thereof has been issued and no proceedings for that purpose
have been instituted or are pending or contemplated under the Securities Act,
(B) the registration statement, the related prospectus and each amendment or
supplement thereof comply as to form in all material respects with the
requirements of the Securities Act (except that such counsel need not express
any opinion as to financial statements or other financial or statistical
information contained therein) and (C) to such other effects as reasonably may
be requested by counsel for the underwriters; and (ii) a copy of a letter dated
such date from the independent public accountants retained by the Company,
addressed to the underwriters, stating that they are independent public
accountants within the meaning of the Securities Act and that, in the opinion
of such accountants, the financial statements of the Company included in the
registration statement or the prospectus, or any amendment or supplement
thereof, comply as to form in all material respects with the applicable
accounting requirements of the Securities Act, and such letter shall
additionally cover such other financial matters (including information as to
the period

 

C-5

 

ending no more than five
business days prior to the date of such letter) with respect to such
registration as such underwriters reasonably may request;

 

(k)           take all actions
reasonably necessary to facilitate the timely preparation and delivery of
certificates (not bearing any legend restricting the sale or transfer of such
securities) representing the Registrable Securities to be sold pursuant to the
registration statement and to enable such certificates to be in such
denominations and registered in such names as the Investors or any underwriters
may reasonably request; and

 

(l)            take all other
reasonable actions necessary to expedite and facilitate the registration of the
Registrable Securities pursuant to the registration statement.

 

In connection with each registration hereunder, the sellers of
Registrable Securities will furnish to the Company in writing such information
with respect to themselves and the proposed distribution by them as reasonably shall
be necessary in order to assure compliance with federal and applicable state
securities laws.

 

8.             Expenses.

 

All expenses
incurred by the Company in complying with Sections 2, 4 and 6, including,
without limitation, all registration and filing fees, printing expenses, fees
and disbursements of counsel and independent public accountants for the
Company, fees and expenses (including counsel fees) incurred in connection with
complying with state securities or “blue sky” laws, fees of the National Association
of Securities Dealers, Inc. (the “NASD”), fees of transfer agents and
registrars and fees and disbursements of one counsel for the sellers of
Registrable Securities (subject to the limitation in Section 7(h)), but
excluding any Selling Expenses, are called “Registration Expenses.”  All underwriting discounts and selling
commissions applicable to the sale of Registrable Securities are called
“Selling Expenses.”

 

The Company
will pay all Registration Expenses in connection with any registration
statement filed hereunder, and the Selling Expenses in connection with each
such registration statement shall be borne by the participating sellers in
proportion to the number of Registrable Securities sold by each or as they may
otherwise agree.

 

9.             Indemnification
and Contribution.

 

(a)           In the event of a
registration of any of the Registrable Securities under the Securities Act
pursuant to the terms of this Agreement, the Company will indemnify and hold
harmless and pay and reimburse, each seller of such Registrable Securities
thereunder, each underwriter of such Registrable Securities thereunder and each
other person, if any, who controls such seller or underwriter within the
meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which such seller, underwriter or controlling
person may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any registration statement under which such
Registrable Securities were registered under the Securities Act pursuant hereto
or any preliminary prospectus or final prospectus contained therein, or any
amendment or

 

C-6

 

supplement thereof, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation or alleged violation of the Securities
Act or any state securities or blue sky laws and will reimburse each such
seller, each such underwriter and each such controlling person for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided,
that the Company will not be liable in any such case if and to the extent that
any such loss, claim, damage or liability arises out of or is based upon the
Company’s reliance on an untrue statement or alleged untrue statement or
omission or alleged omission so made in conformity with information furnished
by any such seller, any such underwriter or any such controlling person in
writing specifically for use in such registration statement or prospectus.

 

(b)           In the event of a
registration of any of the Registrable Securities under the Securities Act
pursuant hereto each seller of such Registrable Securities thereunder, severally
and not jointly, will indemnify and hold harmless the Company, each person, if
any, who controls the Company within the meaning of the Securities Act, each
officer of the Company who signs the registration statement, each director of
the Company, each underwriter and each person who controls any underwriter
within the meaning of the Securities Act, against all losses, claims, damages
or liabilities, joint or several, to which the Company or such officer,
director, underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
reliance on any untrue statement or alleged untrue statement of any material fact
contained in the registration statement under which such Registrable Securities
were registered under the Securities Act pursuant hereto or any preliminary
prospectus or final prospectus contained therein, or any amendment or
supplement thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company and each such officer, director, underwriter and controlling person for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action,
provided, that such seller will be liable hereunder in any such case if and
only to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with information
pertaining to such seller, as such, furnished in writing to the Company by such
seller specifically for use in such registration statement or prospectus, and
provided, that the liability of each seller hereunder shall be limited to the
proceeds received by such seller from the sale of Registrable Securities
covered by such registration statement. Notwithstanding the foregoing, the
indemnity provided in this Section 9(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or expense if such settlement
is effected without the consent of such indemnified party and provided further,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage or liability (or action in respect thereof) arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission in such registration statement, which untrue statement or
alleged untrue statement or omission or alleged omission is completely
corrected in an amendment or supplement to the registration statement and the
undersigned indemnitees thereafter fail to deliver or cause to be delivered
such registration statement as so amended or supplemented prior to or currently
with the sale of the Registrable Shares to the

 

C-7

 

person asserting such loss,
claim, damage or liability (or actions in respect thereof) or expense after the
Company has furnished the undersigned with the same.

 

(c)           Promptly after receipt
by an indemnified party hereunder of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party hereunder, notify the indemnifying party in
writing thereof, but the omission so to notify the indemnifying party shall not
relieve it from any liability which it may have to such indemnified party other
than under this Section 9 and shall only relieve it from any liability which it
may have to such indemnified party under this Section 9 if and to the extent
the indemnifying party is materially prejudiced by such omission. In case any
such action shall be brought against any indemnified party and it shall notify
the indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate in and, to the extent it shall wish, to assume
and undertake the defense thereof with counsel reasonably satisfactory to such
indemnified party, and, after notice from the indemnifying party to such
indemnified party of its election so to assume and undertake the defense
thereof, the indemnifying party shall not be liable to such indemnified party
under this Section 9 for any legal expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation and of liaison with counsel so selected, provided,
that if the defendants in any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have reasonably
concluded based upon written advise of its counsel that there may be reasonable
defenses available to it which are different from or additional to those
available to the indemnifying party or if the interests of the indemnified
party reasonably may be deemed to conflict with the interests of the
indemnifying party, the indemnified party shall have the right to select a
separate counsel and to assume such legal defenses and otherwise to participate
in the defense of such action, with the expenses and fees of such separate counsel
and other expenses related to such participation to be reimbursed by the
indemnifying party as incurred.

 

(d)           In order to provide for
just and equitable contribution to joint liability under the Securities Act in
any case in which either (i) any holder of Registrable Securities exercising
rights under this Agreement, or any controlling person of any such holder,
makes a claim for indemnification pursuant to this Section 9 but it is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of
the last right of appeal) that such indemnification may not be enforced in such
case notwithstanding the fact that this Section 9 provides for indemnification
in such case, or (ii) contribution under the Securities Act may be required on
the part of any such selling holder or any such controlling person in
circumstances for which indemnification is provided under this Section 9; then,
and in each such case, the Company and such holder will contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that such holder is
responsible for the portion represented by the percentage that the public
offering price of its Registrable Securities offered by the registration
statement bears to the public offering price of all securities offered by such
registration statement, and the Company is responsible for the remaining
portion; provided, that, in any such case, (A) no such holder will be
required to contribute any amount in excess of the public offering price of all
such Registrable Securities offered by it pursuant to such registration
statement and (B) no person or entity guilty of fraudulent misrepresentation
(within the meaning

 

C-8

 

of Section 11(f) of the
Securities Act) will be entitled to contribution from any person or entity who
was not guilty of such fraudulent misrepresentation.

 

10.           Changes in Capital
Stock.  If, and as often as, there
is any change in the capital stock of the Company by way of a stock split,
stock dividend, combination or reclassification, or through a merger,
consolidation, reorganization or recapitalization, or by any other means,
appropriate adjustment shall be made in the provisions hereof so that the
rights and privileges granted hereby shall continue as so changed.

 

11.           Rule
144 Reporting.  With a view to
making available the benefits of certain rules and regulations of the
Commission which may at any time permit the sale of the Registrable Securities
to the public without registration, at all times after ninety (90) days after
any registration statement covering a public offering or resale of securities
of the Company under the Securities Act shall have become effective, the
Company agrees to:

 

(a)           make and keep public
information available, as those terms are understood and defined in Rule 144
under the Securities Act;

 

(b)           file with the
Commission in a timely manner all reports and other documents required of the
Company under the Exchange Act; and

 

(c)           furnish to each holder
of Registrable Securities forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of such Rule 144
and of the Exchange Act, a copy of the most recent annual or quarterly report
of the Company, and such other reports and documents so filed by the Company as
such holder may reasonably request in availing itself of any rule or regulation
of the Commission allowing such holder to sell any Registrable Securities
without registration.

 

12.           Representations
and Warranties of the Company.  The
Company represents and warrants to the Investors as follows:

 

(a)           The execution, delivery
and performance of this Agreement by the Company have been duly authorized by
all requisite corporate action and will not violate any provision of law, any
order of any court or other agency of government, the Charter or By-laws of the
Company or any provision of any indenture, agreement or other instrument to
which it or any of its properties or assets is bound, conflict with, result in
a breach of or constitute (with due notice or lapse of time or both) a default
under any such indenture, agreement or other instrument or result in the
creation or imposition of any lien, charge or encumbrance of any nature
whatsoever upon any of the properties or assets of the Company or its
subsidiaries.

 

(b)           This Agreement has been
duly executed and delivered by the Company and constitutes the legal, valid and
binding obligation of the Company, enforceable in accordance with its 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.

 

C-9

 

13.           Assignment
of Registration Rights.  The rights
to have the Company register Registrable Securities pursuant to this Agreement
may be assigned by the Investors to transferees or assignees of such
securities; provided, that the Company is, within a reasonable time
after such transfer, furnished with written notice of the name and address of
such transferee or assignee and the securities with respect to which such registration
rights are being assigned and provided further that the transferee or
assignee of such rights assumes in writing the obligations of such holder under
this Agreement. The term “Investors” as used in this Agreement shall include
such permitted assigns.

 

14.           Miscellaneous.

 

(a)           All covenants and
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of the respective successors and
assigns of the parties hereto (including without limitation transferees of any
Registrable Securities), whether so expressed or not.

 

(b)           All notices, requests,
consents and other communications hereunder shall be in writing and shall be
delivered in person, mailed by certified or registered mail, return receipt
requested, or sent by telecopier or telex, addressed (i) if to the Company, at
6083 Bristol Parkway, Suite 100, Culver City, California 90230; (ii) if to any
other party hereto, at the address of such party set forth beneath such party’s
signature to this Agreement; and (iii) if to any subsequent holder of
Registrable Securities, to it at such address as may have been furnished to the
Company in writing by such holder; or, in any case, at such other address or
addresses as shall have been furnished in writing to the Company (in the case
of a holder of Registrable Securities) or to the holders of Registrable
Securities (in the case of the Company) in accordance with the provisions of
this paragraph.

 

(c)           This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
applicable to contracts entered into and to be performed wholly within said
State.

 

(d)           Any judicial proceeding brought against any of the parties to this
Agreement on any dispute arising out of this Agreement of any matter related
hereto shall be brought in the courts of the State of New York and County of
New York or in the United States District Court for the Southern District of
New York, and, by execution and delivery of this Agreement, each of the parties
hereto accepts for itself and himself the process in any such action or
proceeding by the mailing of copies of such process to it or him, at its or his
address as set forth in paragraph 14(b) and irrevocably agrees to be bound by
any judgment rendered thereby in connection with this Agreement.  Each party hereto irrevocably waives to the
fullest extent permitted by law any objection that it or he may now or
hereafter have to the laying of the venue of any judicial proceeding brought in
such courts and any claim that any such judicial proceeding has been brought in
an inconvenient forum.  The foregoing
consent to jurisdiction shall not constitute general consent to service of
process in the State of New York for any purpose except as provided above and
shall not be deemed to confer rights on any person other than the respective
parties to this Agreement.

 

(e)           This Agreement may not
be amended or modified without the written consent of the Company and the
holders of at least a majority of the Registrable Securities.

 

C-10

 

(f)            Failure of any party
to exercise any right or remedy under this Agreement or otherwise, or delay by
a party in exercising such right or remedy, shall not operate as a waiver
thereof. No waiver shall be effective unless and until it is in writing and
signed by the party granting the waiver.

 

(g)           This Agreement may be
executed in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.

 

(h)           The Company shall not
grant to any third party other than Spencer Trask Ventures, Inc. any
registration rights more favorable than or inconsistent with any of those
contained herein, or which would in any way adversely affect the rights of
Investors hereunder, so long as any of the registration rights under this
Agreement remains in effect.

 

(i)            If any provision of
this Agreement shall be held to be illegal, invalid or unenforceable, such
illegality, invalidity or unenforceability shall attach only to such provision
and shall not in any manner affect or render illegal, invalid or unenforceable
any other provision of this Agreement, and this Agreement shall be carried out
as if any such illegal, invalid or unenforceable provision were not contained
herein.

 

(j)            Omnibus Signature
Page.  This Agreement is intended to
be read and construed in conjunction with (a) that certain Subscription
Agreement and (b) the Stockholders’ Agreement by and among the Company and the
Investors dated October 28, 2003 (the “Stockholders’ Agreement”).  Accordingly, pursuant to the terms and
conditions of this Agreement and such related agreements, it is hereby agreed
that the execution by the Investors of the Subscription Agreement, in the place
set forth therein, shall constitute their agreement to be bound by the terms
and conditions hereof and the terms and conditions of the Subscription
Agreement, the Stockholders’ Agreement and this Agreement, with the same effect
as if each of such separate but related agreements were separately signed.

 

C-11

 

IN WITNESS
WHEREOF, the undersigned has executed this Agreement as of this
      day of
          ,
200     .

 

 

See Omnibus Signature Pages for Investor
Signatures

 

C-12

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