UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934

 

 

 

NOTICE OF ANNUAL MEETING
AND
PROXY STATEMENT

January 27, 2006

Dear Fellow Stockholder:

On behalf of the Board of Directors and management of our Company, I cordially invite you to attend the 2006 Annual Meeting of Stockholders of Prospect Medical Holdings, Inc. to be held at 10:00 a.m. local time on March 22, 2006, at our corporate headquarters, 400 Corporate Pointe, Suite 525, Culver City, CA 90230.

The attached Notice of Annual Meeting and Proxy Statement describe the formal business to be transacted at the Annual Meeting. Once that business has been concluded, there will be a report on the state of the Company and a brief question and answer session.

We sincerely hope you will be able to attend our 2006 Annual Meeting of Stockholders. However, whether or not you personally attend, and regardless of the number of shares you own, it is important that your shares be represented at the Annual Meeting. Therefore, please take the time to vote by completing and mailing the enclosed proxy card to us.

Thank you for your continued support of Prospect Medical Holdings, Inc.

 

NOTICE OF 2006 ANNUAL MEETING OF STOCKHOLDERS

The 2006 Annual Meeting of Stockholders of Prospect Medical Holdings, Inc. will be held at our corporate headquarters, 400 Corporate Pointe, Suite 525, Culver City, CA 90230, on March 22, 2006 at 10:00 a.m. (local time), for the following purposes:

(1)         To elect  directors to hold office until our next annual stockholders meeting,

(2)         To ratify the selection by the Audit Committee of our Board of Directors of Ernst & Young LLP as our independent auditors for 2006, and

(3)         To transact such other business as may properly come before the meeting.

Our Board of Directors has set January 25, 2006 as the record date for the meeting. This means that holders of record of shares of our common stock at the close of business on that date are entitled to receive notice of, and to vote at, the meeting or any adjournment or postponement of the meeting. A complete list of stockholders as of the close of business on January 25, 2006 will be available for inspection by stockholders during normal business hours from February 21, 2006 through March 21, 2006, at our principal executive offices located at 400 Corporate Point Suite 525, Culver City, CA 90230. The list will also be available for inspection by stockholders at the meeting.

 

YOUR VOTE IS IMPORTANT

All stockholders are cordially invited to attend the 2006 Annual Meeting of Stockholders of Prospect Medical Holdings, Inc. To avoid delay and additional expense, and to ensure your representation at the meeting, please vote as promptly as possible, regardless of whether you plan to attend the meeting. To vote, please mark, sign, date and mail the proxy card included with this proxy statement using the enclosed envelope, which requires no postage. If you attend the annual meeting in person, you may vote at the meeting even if you have previously returned a proxy or voted by telephone. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the meeting, you must obtain a proxy issued in your name from that record holder.

TABLE OF CONTENTS

 

PROXY STATEMENT

The Board of Directors is furnishing you this proxy statement to solicit proxies on its behalf for use at the 2006 Annual Meeting of Stockholders of Prospect Medical Holdings, Inc., and at any adjournments or postponements of the meeting. The meeting will be held at our corporate headquarters, 400 Corporate Pointe, Suite 525, Culver City, CA 90230 on March 22, 2006, at 10:00 a.m. (local time). We expect to mail this proxy statement and the accompanying proxy card beginning on or about February 14, 2006 to stockholders of record as of January 25, 2006. In this proxy statement, we refer to Prospect Medical Holdings, Inc. as “Prospect,” the “Company,” “we,” “us” or “our.” We also refer to this proxy statement, the proxy card and our 2005 annual report to stockholders as the “proxy materials.”

The Board is asking you to vote your shares by completing, signing and returning the proxy card. If you attend the annual meeting in person, you may vote at the meeting even if you have previously returned a proxy. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the meeting, you must obtain a proxy issued in your name from that record holder.

QUESTIONS AND ANSWERS

What is a proxy?

A proxy is the legal designation of another person to vote the stock you own. That other person is called a proxy. If you designate someone as your proxy in a written document, that document is also called a proxy or a proxy card. We have designated Jacob Y. Terner, M.D., our Chairman and Chief Executive Officer, and Kenneth Schwartz, one of our independent directors, as proxies for the meeting. By completing, signing and returning the accompanying proxy card, you are authorizing Messrs. Terner and Schwartz to vote your shares at the meeting as you have instructed them on the proxy card. This way, your shares will be voted whether or not you attend the meeting. Even if you plan to attend the meeting, it is a good idea to complete, sign and return your proxy card before the meeting date just in case your plans change. You may vote at the meeting even if you have previously returned a proxy.

What is a proxy statement?

A proxy statement is a document that regulations of the Securities and Exchange Commission, or SEC, require us to give you when we ask you to sign a proxy card designating Messrs. Terner and Schwartz as proxies to vote on your behalf.

What is in this proxy statement?

This proxy statement describes the proposals on which we would like you, as a stockholder, to vote at the annual meeting. It also gives you information on the proposals, as well as other information about us, so that you can make an informed decision.

What am I voting on?

We are asking you to vote on the following proposals:

·       To elect six directors to hold office until our next annual stockholders meeting,

·       To ratify the selection by the Audit Committee of our Board of Directors of Ernst & Young LLP as our independent auditors for 2006.

The section appearing later in this proxy statement entitled “Proposals to Be Voted On” will give you more information on these proposals.

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Who can vote at the annual meeting?

Only stockholders of record at the close of business on January 25, 2006, which is the Record Date, are entitled to receive notice of, and to vote at, the annual meeting or any adjournment or postponement of the annual meeting. Each share is entitled to one vote on each of the proposals to be voted on at the annual meeting. There were approximately 6,876,328 shares of Prospect common stock outstanding on the Record Date.

What is the difference between a stockholder of record and a stockholder who holds stock in street name?

·       If your shares are registered in your name, you are a stockholder of record.

·       If your shares are in the name of your broker or bank, your shares are held in street name.

What different methods can I use to vote?

You may vote by mail.   You do this by completing and signing your proxy card and mailing it to our transfer agent, American Stock Transfer & Trust Company, using the prepaid and addressed envelope included with this proxy statement. If you mark your voting instructions on the proxy card, your shares will be voted:

·       as you instruct, and

·       at the discretion of Messrs. Terner and Schwartz, if a proposal properly comes up for a vote at the meeting that is not on the proxy card.

For your voting instructions to be effective, your proxy card must be received by Prospect’s transfer agent no later than the close of business on March 21, 2006.

You may vote in person at the meeting.   We will pass out written ballots to stockholders of record who want to vote in person at the meeting. However, if you hold your shares in street name, you must request a proxy from the person in whose name your shares are held, usually your stockbroker, to vote at the meeting.

If you hold your shares through a bank, broker or other holder of record, check the information provided by that entity to determine which voting options are available to you.

What does it mean if I receive more than one proxy card?

It means that you have multiple accounts at the transfer agent or with stockbrokers. Please complete, sign and return all proxy cards to ensure that all your shares are voted. Unless you need multiple accounts for specific purposes, it may be less confusing if you consolidate as many of your transfer agent or brokerage accounts as possible under the same name and address.

What if I change my mind after I return my proxy card?

You may revoke your proxy card and change your vote by:

·       signing another proxy card with a later date and returning it before the polls close at the meeting, or

·       voting in person at the meeting.

However, if you hold your shares in street name, you must request a proxy from the person in whose name your shares are held, usually your stockbroker, to vote at the meeting.

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Will my shares be voted if I do not return my proxy card?

If your shares are held in street name, your brokerage firm, under certain circumstances, may vote your shares.

Brokerage firms have authority under American Stock Exchange, or AMEX, rules to vote customers’ unvoted shares on some “routine” matters. If you do not give instructions to your broker, your broker can vote your shares with respect to routine matters. Under these rules, all of the proposals described later under “Proposals to Be Voted On” are considered routine matters. On non-routine matters for which you do not give your broker instruction, the shares will be treated as broker non-votes.

If you do not return a proxy card to vote your shares, your brokerage firm may either:

·       vote your shares on routine matters, or

·       leave your shares unvoted.

We encourage you to provide instructions to your brokerage firm by returning your proxy card. This ensures that your shares will be voted at the meeting.

How many shares must be present to hold the meeting?

To hold the annual meeting and conduct business, a majority of Prospect’s outstanding shares as of the Record Date must be present at the meeting. This is called a quorum.

Shares are counted as present at the meeting if the stockholder either:

·       is present and votes in person at the meeting, or

·       has properly submitted a proxy.

Abstentions and broker non-votes will be counted for purposes of determining the presence or absence of a quorum at the meeting.

What are my voting choices when voting for director nominees, and what vote is needed to elect directors?

In the vote to elect the six director nominees to hold office until our next annual stockholders meeting, you may:

·       vote in favor of all nominees,

·       vote to withhold votes as to all nominees, or

·       vote to withhold votes as to specific nominees.

The nominees receiving the highest number of votes for election will be elected as directors. This number is called a plurality.

What are my voting choices when voting on the proposal to ratify the selection by the Audit Committee of Ernst & Young LLP as Prospect’s independent auditors for 2006, and what vote is needed to approve this proposal?

In the vote on the ratification of the selection by the Audit Committee of our Board of Directors of Ernst & Young LLP as our independent auditors for 2006, you may:

·       vote in favor of the ratification,

·       vote against the ratification, or

·       abstain from voting on the ratification.

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The proposal to ratify the selection of Ernst & Young LLP as our independent auditors for 2006 will be approved if holders of a majority of the shares present at the meeting, in person or by proxy and entitled to vote on the matter, vote for approval. The Audit Committee of the Board of Directors in its discretion may appoint different independent auditors for 2006 at any time if it determines that doing so would be in the best interest of Prospect Medical Holdings and its stockholders.

What happens if a nominee is unable to stand for election?

The Board may reduce the number of nominees or select a substitute nominee. In the latter case, if you have completed, signed and returned your proxy card, Messrs. Terner and Schwartz can vote your shares for a substitute nominee. They cannot vote for more than six nominees.

How are withheld votes, abstentions and broker non-votes counted?

If you withhold your vote from any one or more of the director nominees, your shares will not be counted as casting votes for such nominees.

If you abstain from voting on the proposal to ratify the selection of Ernst & Young LLP as our independent auditors for 2006, it will have the same effect as a vote “against” the proposal.

Broker non-votes have no effect and will not be counted toward the vote total for any proposal.

What if I return my proxy without providing any voting instructions?

If you give your proxy without voting instructions, your shares will be counted as a vote for each director nominee and for each of the proposals described above.

Is my vote kept confidential?

Proxies, ballots and voting tabulations identifying stockholders are kept confidential and will not be disclosed to third parties except as may be necessary to meet legal requirements.

Where do I find the voting results of the meeting?

We will announce preliminary voting results at the meeting. We will publish the final results in our quarterly report on Form 10-Q for the quarter ended March 31, 2006 or earlier on a Form 8-K. We will file the report no later than May 15, 2006 with the Securities and Exchange Commission, or SEC. You may obtain a copy of this report by contacting our Investor Relations, c/o Linda Hodges, at (310) 337-4170 or at an SEC public reference room. For the location of an SEC public reference room near you, please contact the SEC at (800) SEC-0330.

You can also get a copy of the Form 10-Q that will contain the voting results on the Internet at www.prospectmedicalholdings.com or through the SEC’s electronic data system called EDGAR at www.sec.gov.

How do I receive an annual report?

The Company hereby undertakes to provide without charge, upon written request, a copy of our Annual Report on Form 10-K for the fiscal year ended September 30, 2005, to each person to whom a copy of this proxy statement has been delivered. Any such request should be made in writing and addressed to Investor Relations, c/o Linda Hodges, Prospect Medical Holdings, Inc., 400 Corporate Pointe, Suite 525, Culver City, CA 90230. A copy of the Annual Report is also available on our web site at www.prospectmedicalholdings.com and on the SEC’s web site at www.sec.gov.

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Do we have a policy about directors’ attendance at the annual meeting?

We do not have a policy about directors’ attendance at the annual stockholders meeting. We did not hold an annual stockholders meeting last year.

How are proxies solicited and what is the cost?

We pay all expenses incurred in connection with distributing and soliciting proxies. As part of this process, we reimburse brokers, nominees, fiduciaries and other custodians’ reasonable fees and expenses in forwarding proxy materials to stockholders. Our directors and employees may solicit proxies by mail, telephone or other means. Our directors and employees do not receive any additional compensation for these activities.

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PROPOSALS TO BE VOTED ON

Proposal 1—Election of Directors

The Board of Directors consists of seven directors. Currently, there are six directors serving on the Board and one vacancy. The six current directors, who have all been nominated for reelection, are Jacob Y. Terner, MD, Catherine S. Dickson, David Levinsohn, Kenneth Schwartz, CPA, Joel S. Kanter and Gene Burleson. A seventh director is not being nominated for election at this time in order to leave a vacancy that the Board can elect to fill in connection with a future acquisition or financing transaction. Each elected director will hold office for a one-year term until the next annual stockholders meeting and until a successor is elected and has qualified, subject to earlier resignation, removal or death. The nominees’ biographies are on pages 7 and 8.

Directors are elected by a plurality of the votes properly cast in person or by proxy. The six nominees receiving the highest number of affirmative votes will be elected. Shares represented by executed proxies will be voted, if authority to do so is not withheld, for the election of the six nominees named in this proxy statement. Proxies cannot be voted for a greater number of persons than the six nominees named. If any nominee becomes unavailable for election as a result of an unexpected occurrence, your shares will be voted by the proxy holders for the election of a substitute nominee proposed by the Corporate Governance and Nominating Committee. Each person nominated for election has agreed to serve if elected. Our management has no reason to believe that any nominee will be unable to serve.

Proposal 2—Ratification of Selection of Independent Auditors

The Audit Committee of the Company’s Board has selected Ernst & Young LLP as the Company’s independent auditors for the fiscal year ending September 30, 2006 and has further directed that management submit the selection of the Company’s independent auditors for ratification by its stockholders at the meeting. Ernst & Young LLP has audited the Company’s financial statements since 1998. Representatives of Ernst & Young LLP are expected to be present at the meeting, will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

Stockholder ratification of the selection by the Audit Committee of Ernst & Young LLP as the Company’s independent auditors is not required by the Company’s bylaws or otherwise. However, the Audit Committee and the Board are submitting the selection of Ernst & Young LLP to the stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection, the Audit Committee will reconsider whether or not to retain that firm. Even if the selection is ratified, the Audit Committee in its discretion may direct the appointment of different independent auditors at any time during the year if they determine that such a change would be in the best interests of the Company and its stockholders.

The Board recommends a vote for ratification of the selection of Ernst & Young LLP as Prospect’s
independent auditors for the fiscal year ending September 30, 2006.

Other Business

The Board knows of no other business to be considered at the meeting. However, if:

·       other matters are properly presented at the meeting, including at a reconvened meeting after any adjournment or postponement of the meeting, and

·       you have appropriately returned your proxy card as described above,

then Messrs. Terner and Schwartz will, with your proxy, vote your shares on those matters at their discretion.

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ELECTION OF DIRECTORS

Biographies

Our certificate of incorporation provides for directors to be elected on an annual basis. Our bylaws provide that the Board will consist of no greater than seven nor less than three members, with the exact number of directors within this range to be fixed from time to time by the Board. Currently, the number of members constituting the Board has been fixed by the Board at seven.

The following sets forth information regarding the six nominees for director at the annual meeting.

Nominees

Jacob Y. Terner, M.D.   Jacob Y. Terner, M.D., 71, has served as our Chairman, Chief Executive Officer and a member of our Board of Directors since July 31, 1996. Dr. Terner is also the Chief Executive Officer and a Director of each of our management subsidiaries and is the Chief Executive Officer, President, Treasurer and a Director of each of our affiliated physician organizations except for AMVI/Prospect Health Network, which is a joint venture partner where Dr. Terner is Chief Executive Officer, President, Treasurer and a Director of one of the two general partners; Sierra Primary Care Medical Group, where Dr. Terner serves as Chief Executive Officer, Treasurer and a Director; and Nuestra Familia Medical Group, where Dr. Terner serves as Secretary and a Director. Dr. Terner held the position of Clinical Professor of Obstetrics and Gynecology at the University of Southern California, School of Medicine from 1972 to 2001. Dr. Terner is currently Emeritus Clinical Professor of Obstetrics and Gynecology. Dr. Terner also served as Chairman and Chief Executive Officer of Century MediCorp, Inc., a publicly-traded, integrated health-management organization from June 24, 1988 until its October 1992 merger with Foundation Health Corporation. Following this merger, Dr. Terner was named to Foundation’s Board of Directors and served as its Executive Vice President and as a Director until his resignation in December 1992. Dr. Terner is also a Director of Brotman Medical Center, Inc.

Catherine S. Dickson.   Catherine S. Dickson, 36, serves as our President and Chief Operating Officer, positions she has held since July 2003. In February 2004, Ms. Dickson was elected as a member of our Board of Directors. Ms. Dickson is also the President and Chief Executive Officer of Prospect Medical Systems. Prior to Ms. Dickson’s appointment as our President and Chief Operating Officer, Ms. Dickson served as Vice President of Contracting and Credentialing for Prospect Medical Systems since February 2000. Ms. Dickson has been with Prospect Medical Systems since January 1998. Ms. Dickson has significant experience across a broad range of managed care divisions, including contract negotiation and implementation, claims adjudication, eligibility, utilization management and credentialing. Before joining Prospect Medical Systems, Ms. Dickson served as an Associate Contract Administrator for Orange Coast Managed Care Services, Inc., the health care management company for the Sisters of St. Joseph Health Organization Independent Physician Association.

David Levinsohn.   David Levinsohn, 70, has served as a member of our Board of Directors since July 1996 and as a member of the Audit Committee of our Board of Directors since 1996. Mr. Levinsohn has been the President and Chief Executive Officer of Sherman Oaks Health Systems, Inc. d/b/a Sherman Oaks Hospital and Medical Center since March 1995. Prior to being named to those positions, Mr. Levinsohn served as the Chief Operating Officer of Sherman Oaks Health Systems since May 1994. From November 1993 to May 1994, Mr. Levinsohn was the Vice President of Encino Tarzana Medical Center. From 1989 until November 1993, Mr. Levinsohn was Executive Director of Sherman Oaks Hospital.

Kenneth Schwartz, CPA.   Kenneth Schwartz, 69, has served as a member of our Board of Directors since June 1998. Mr. Schwartz served as a Director of Deloitte & Touche LLP from December 1990 to

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June 1998. Mr. Schwartz previously served as a member of the National Management Committee and Managing Partner of the Los Angeles office of Spicer & Oppenheimer.

Joel S. Kanter.   Mr. Kanter, 49, was elected as a member of our Board of Directors in February 2004. Mr. Kanter has been the President of Windy City, Inc., since 1986, a privately held investment. From 1995 to 1999, Mr. Kanter was the Chief Executive Officer and President of Walnut Financial Services, Inc., a publicly traded company (NMS:WNUT). Mr. Kanter’s past experience includes serving as a Legislative Assistant for former Congressman Abner J. Mikva (D-Illinois), Special Assistant to the National Association of Attorneys General, Staff Director of the House Rules Committee’s Subcommittee on Legislative Process and Managing Director of The Investors’ Washington Service. Mr. Kanter serves on the Board of Directors of Encore Medical Corporation (NMS: ENMC), I-Flow Corporation (NASDAQ: IFLO), Logic Devices Incorporated (NMS: LOGC), and Magna-Lab, Inc. (OTC Bulletin Board: MAGLA.OB). Mr. Kanter is also a Trustee at the Georgetown Day School (Washington, D.C.) and a past President of the Board of Trustees of The Langley School (McLean, Virginia).

Gene E. Burleson.   Mr. Burleson, 64, was selected by Spencer Trask, the placement agent for our 2004 preferred stock offering, as its designee to our Board of Directors, effective July 2004. Mr. Burleson served as Chairman of the Board of Directors of Mariner Post-Acute Network Inc., an operator of long-term care facilities from January 2000 to June 2002. Mr. Burleson also served as Chairman of the Board of Directors of Alterra Healthcare Inc., a developer and operator of assisted living facilities and is on the Board of Deckers Outdoor Corporation, Inc. In addition he is involved with several private health care companies as an investor and director. Mr. Burleson served as Chairman of the Board of GranCare Inc. from October 1989 to November 1997. Additionally, Mr. Burleson served as President and Chief Executive Officer of GranCare Inc. from December 1990 to February 1997. Upon completion of the merger of GranCare’s pharmacy operations with Vitalink Pharmacy Services Inc. in February 1997, he became Chief Executive Officer and a Director of Vitalink Pharmacy Services Inc. Mr. Burleson resigned as Chief Executive Officer and a director of Vitalink Pharmacy Services in August 1997. From June 1986 to March 1989 Mr. Burleson served as President, Chief Operating Officer and a director of American Medical International Inc. (“AMI”), an owner and operator of acute care hospitals. Based in London from May 1981 to June 1986, Mr. Burleson served as Managing Director of AMI’s international operations.

Terms of Office

Directors are elected annually by our stockholders and hold office until their successors are elected and qualified, or until their earlier resignation or removal. Our Board of Directors currently consists of six members.

In connection with a recent private offering, the placement agent was granted the right, until the second anniversary of the effective date of our Securities Act registration statement (July 27, 2005) to designate one person (the “Designee”) reasonably acceptable to us to serve, at the placement agent’s sole discretion, on our Board of Directors. Mr. Gene Burleson was selected as the Designee and now sits on our Board of Directors. He also serves as a member of the Compensation Committee to authorize stock option grants by our company; provided, however, that any proposed stock option grants by our company to senior management will also be subject to the specific approval of the Designee, which approval will not be unreasonably withheld or delayed.

Officers are elected by and serve at the discretion of our Board of Directors. They hold office until their successors are chosen and qualified, or until they resign or have been removed from office. The Board of Directors may appoint, or empower the Chief Executive Officer to appoint or terminate, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, and have such authority, and perform such duties as are provided in the Bylaws, or as the Board of Directors may from time to time determine.

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THE BOARD OF DIRECTORS AND ITS COMMITTEES

Audit Committee.   The Audit Committee of our Board of Directors makes recommendations to management concerning the engagement of independent public accountants, reviews with the independent public accountants the plans and results of the audit engagement, approves professional services provided by the independent public accountants, reviews independence of the independent public accountants, considers the range of audit and non-audit fees and reviews the adequacy of our internal accounting controls. Mr. Schwartz is the Chairman of the Audit Committee, and Mr. Levinsohn, Mr. Kanter and Mr. Burleson serve as members of the Audit Committee.

Compensation Committee.   The Compensation Committee of our Board of Directors determines salaries and incentive compensation for our executive officers and administers our employee benefits plans. Mr. Burleson is Chairman of the Compensation Committee, and Mr. Levinsohn, Mr. Schwartz and Mr. Kanter serve as members of the Compensation Committee.

Corporate Governance and Nominating Committee.   The Corporate Governance and Nominating Committee identifies and recommends to the Board the nominees for election as directors at each annual meeting of stockholders, fills vacancies on the Board, develops and recommends to the Board corporate governance principles, and establishes evaluation procedures for the Board and its committees that conduct self-evaluation. Mr. Levinsohn serves as Chairman of the Corporate Governance and Nominating Committee. Mr. Kanter, Mr. Schwartz and Mr. Burleson serve as members of the Corporate Governance and Nominating Committee.

Steering Committee.   The Steering Committee has responsibility for overseeing and coordinating all internal control activities. Dr. Terner and Mike Heather, our Chief Financial Officer, serve as members of the Steering Committee.

Disclosure Committee.   The Disclosure Committee establishes disclosure controls and procedures in order to ensure that all public filings, announcements and other disclosures are made on an accurate, timely and complete basis. Dr. Terner, Ms. Dickson, Mr. Heather and Donna Vigil, our Vice President, Finance, serve as members of the Disclosure Committee.

Corporate Governance Guidelines

The American Stock Exchange recently adopted rules that require listed companies to adopt governance guidelines covering certain matters, including director qualifications and responsibilities, director independence, access to management personnel, management succession, director compensation, continuing education and annual performance evaluations of the Board and directors. On January 17, 2006, the Corporate Governance and Nominating Committee of the Board recommended that the Board approve Corporate Governance Guidelines that are consistent with the AMEX rules, which the Board approved on January 18, 2006. The management of Prospect, including its Chief Executive Officer, is not aware of any violation by Prospect of any AMEX corporate governance standard. A copy of the Corporate Governance Guidelines will be provided to any stockholder that requests it in writing. Requests should be addressed to Investor Relations, c/o Linda Hodges, Prospect Medical Holdings, Inc., at 400 Corporate Pointe, Suite 525, Culver City, CA 90230.

Lead Independent Director

The independent members of our Board of Directors have named Joel Kanter as Lead Independent Director in accordance with Corporate Governance Guidelines approved by the Corporate Governance and Nominating Committee of the Board. The Lead Independent Director’s duties include presiding at executive sessions of the Board’s independent directors and facilitating communication by stockholders

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and employees with the independent directors and facilitating communication between the independent directors and other members of the Board.

Independence Determinations

No director will be deemed to be independent unless the Board affirmatively determines that the director has no material relationship with Prospect, directly or as an officer, stockholder or partner of an organization that has a material relationship with Prospect. The Board consults with the Company’s legal counsel to ensure that the Board’s determinations are consistent with all relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in SEC rules and regulations and pertinent listing standards of the American Stock Exchange, as in effect from time to time.

In its annual review of director independence, the Board considers all commercial, banking, consulting, legal, accounting, charitable or other business relationships that any director may have with Prospect. As a result of its annual review, the Board has determined that all directors, with the exception of Dr. Terner and Ms. Dickson, are independent for AMEX purposes. Dr. Terner is not independent because he is the Chief Executive Officer of Prospect. Ms. Dickson is not independent because she is the President and Chief Operating Officer of Prospect.

The Company’s independent directors meet in regularly scheduled and ad hoc executive sessions at which only independent directors are present. The Lead Independent Director presides over the executive sessions. Persons interested in communicating with the independent directors with concerns or issues may address correspondence to a particular director, or to the independent directors generally, in care of Prospect Medical Holdings, Inc., 400 Corporate Pointe, Suite 525, Culver City, CA 90230. If no particular director is named, letters will be forwarded, depending on the subject matter, to the Lead Independent Director or to the Chair of the Audit, Compensation, or Corporate Governance and Nominating Committee.

Activities of the Board of Directors and its Committees

Our Board met a total of seven times in fiscal 2005. The Audit Committee met a total of eleven times, the Compensation Committee met a total of five times, and the Corporate Governance and Nominating Committee met one time during fiscal 2005. Each member of our Board attended 75% or more of all Board and applicable committee meetings held in fiscal 2005.

Prospect’s bylaws provide that committees of directors may be established by resolution adopted by the Board, with such powers and duties as may be prescribed by the Board, except for the power to amend the bylaws or adopt or recommend to stockholders any matter required to be submitted to stockholders for approval or that otherwise requires stockholder approval under Delaware law, which powers and authority are retained by the Board under the bylaws. In this connection, the Board has established the following committees: (i) Audit Committee, (ii) Compensation Committee, (iii) Corporate Governance and Nominating Committee, (iv) Steering Committee and (v) Disclosure Committee. Each of the committees has authority to engage legal counsel and other experts or consultants as it deems appropriate to carry out its responsibilities.

The Corporate Governance and Nominating Committee recommends directors for each committee and a majority of the Board selects the directors to serve on these committees.

Audit Committee

The Audit Committee assists the Board in fulfilling its legal and fiduciary obligations with respect to matters involving the accounting, auditing, financial reporting, internal control and legal compliance functions of Prospect and its subsidiaries. The Audit Committee operates under a written charter adopted

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by the Board. Under its charter, the Audit Committee, among other things, is directed and has authority to:

·       Retain and terminate the Company’s independent auditors and to propose the independent auditors for ratification by the stockholders at the annual meeting of stockholders,

·       Review the scope, cost and results of the independent audit of the Company’s books and records,

·       Discuss the results of the annual audit and results of quarterly reviews of financial statements with management and the independent auditors and the adequacy of the Company’s accounting, financial and operating controls including the effectiveness of internal controls over financial reporting,

·       Review the performance of and assess the qualifications of the independent auditors and make annual recommendations to the Board regarding the appointment or removal of the independent auditors,

·       Monitor the rotation of partners of the independent auditors on the Company’s audit engagement team as required by law,

·       Establish procedures as required by applicable law for the receipt, retention and treatment of complaints received by the Company regarding internal accounting controls or auditing matters,

·       Review the financial statements to be included in the Annual Report on Form 10-K, and other periodic and current reports,

·       Pre-approve all audit services and permitted non-audit services performed by the independent auditors and outsourced internal auditors,

·       Review Prospect’s financial plans and operating results,

·       Oversee Prospect’s internal audit programs,

·       Prepare or direct the preparation of the audit committee report to be included in the Company’s annual proxy statement,

·       Meet privately (without members of management present) and separately with each of the internal auditors and the independent auditors at least annually, and

·       Oversee the implementation of Prospect’s ethics program and adherence to our code of ethics.

Each member of the Audit Committee meets the independence requirements of the American Stock Exchange, the Securities Exchange Act of 1934, as amended, or the Exchange Act, and our Corporate Governance Guidelines. Each member of our Audit Committee is financially literate, knowledgeable and qualified to review financial statements. The “audit committee financial expert” designated by the Board is Mr. Schwartz.

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Compensation Committee

The Compensation Committee provides general oversight regarding the overall strategy, goals and objectives of our broad-based employee compensation and benefit plans and practices and provides specific oversight regarding the strategy, goals and objectives of our compensation and benefit plans applicable to senior executives and Employee Retirement Income Security Act, or ERISA, qualified employee benefit plans. The Compensation Committee operates under a written charter adopted by the Board. Under its charter, the Compensation Committee, among other things, is directed and has authority to:

·       Establish and periodically review Prospect’s senior executive compensation and benefits plans,

·       Periodically review Prospect’s senior executive incentive-compensation and equity-based plans,

·       Establish and review the compensation and benefits for the five most highly compensated executive officers, including the highest ranking employee executive of Prospect (the “principal executive officer”),

·       Evaluate annually the performance of the principal executive officer in light of the goals and objectives of Prospect’s executive compensation and benefit plans,

·       Produce an annual report on executive compensation for inclusion in the Company’s annual proxy statement,

·       Administer the stock and other equity-based incentive compensation plans (other than the director plans, except to the extent empowered by the Board), and

·       Periodically review, on a general policy-level basis, Prospect’s various broad-based compensation plans and other employee benefit plans.

Each member of the Compensation Committee is a “non-employee director” as defined under Rule 16b-3 of the Exchange Act. Each member of the Compensation Committee is also an “outside director” as defined under Section 162(m) of the Internal Revenue Code of 1986.

Corporate Governance and Nominating Committee

The Corporate Governance and Nominating Committee recommends to the Board individuals qualified to serve as directors and on committees of the Board and advises the Board with respect to Board composition, procedures and committees. The Corporate Governance and Nominating Committee also develops and recommends to the Board the corporate governance guidelines applicable to the Company and oversees the evaluation of the Board and management. The Corporate Governance and Nominating Committee operates under a written charter adopted by the Board, a copy of which may be viewed on the Company’s website at http://www.prospectmedicalholdings.com. Under its charter, the Corporate Governance and Nominating Committee, among other things, is directed and has authority to:

·       Establish criteria for selecting new directors,

·       Evaluate and recruit Board candidates, including candidates recommended by shareholders,

·       Review the performance and contributions of each committee and the Board as a whole, at least annually, and recommend areas of improvement to the Board,

·       Annually review the performance of each Board member to determine whether it is desirable for such Board members to continue to serve on the Board based upon the designated functional needs of the Board and any change in the responsibilities of a particular Board member,

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·       Make recommendations to the Board regarding the need for any change in the Board representation or committee structure,

·       Recommend the establishment or elimination of committees and nominating members and chairs of committees,

·       Establish a selection process for new Board members and recommend to the Board director nominees for election by the stockholders or appointment by the Board, as the case may be,

·       Develop and recommend to the Board a set of corporate governance guidelines for the Company,

·       Establish and implement self-evaluation procedures for the Board and its committees, and

·       Periodically review with the Chairman of the Board and the Chief Executive Officer, the succession plans relating to positions held by senior executive officers of the Company and make recommendations to the Board of Directors with respect to the selection of individuals to occupy these positions.

The Corporate Governance and Nominating Committee believes that candidates for director should have certain minimum qualifications, including being financially literate under SEC rules and regulations and American Stock Exchange listing standards, being over 21 years of age and having the highest personal integrity and ethics. The Corporate Governance and Nominating Committee will consider a candidate’s experience, knowledge, skills, expertise, integrity, diversity, ability to make independent analytical inquiries, understanding of the Company’s business environment and willingness to devote adequate time and effort to Board responsibilities, among other factors, in assessing a candidate. The Committee retains the right to modify these qualifications from time to time. Director candidates are reviewed in the context of the current composition of the Board, the operating requirements of the Company and the long-term interests of stockholders. In the case of incumbent directors, the Committee reviews each director’s overall service to the Company during his or her term, including the number of meetings attended, level of participation, quality of performance, and any other relationships and transactions that might impair the director’s independence. In the case of new director candidates, the Committee also makes the initial determination of whether the nominee must be independent for AMEX purposes, which determination is based upon applicable AMEX listing standards, applicable SEC rules and regulations and the advice of legal counsel, if necessary. The Committee then compiles a list of potential candidates based on recommendations of incumbent directors and management and if deemed appropriate, with the assistance of a professional search firm. The Committee conducts any appropriate inquiries into the backgrounds and qualifications of possible candidates. The Committee then meets to discuss and consider such candidates’ qualifications and selects a nominee for recommendation to the Board by majority vote. To date, the Committee has not received or rejected a timely director nominee from a stockholder or stockholders holding more than 5% of our voting stock.

The Corporate Governance and Nominating Committee will consider director candidates recommended by stockholders. Stockholders who wish to recommend individuals for consideration by the Committee to become nominees for election to the Board may do so by delivering a written recommendation to the Corporate Governance and Nominating Committee at the following address: 400 Corporate Pointe, Suite 525, Culver City, CA 90230, at least 120 days prior to the anniversary date of the mailing of the Company’s proxy statement for the last annual meeting of stockholders. Submissions must include the full name of the proposed nominee, a description of the proposed nominee’s business experience for at least the previous five years, complete biographical information and a description of the proposed nominee’s qualifications as a director. Any such submission must be accompanied by the written consent of the proposed nominee to be named as a nominee and to serve as a director if elected.

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