8-K

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 8-K

Current Report

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):

October 1, 2006

Prospect Medical Holdings, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation)

1-32203	33-0564370
(Commission File Number)	(IRS Employer Identification No.)
400 Corporate Pointe, Suite 525
Culver City, California	90230
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (310) 338-8677

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 5.02.Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers

Effective October 1, 2006, the Company increased the annual base salary of our Vice President of Finance, Donna Vigil, from $150,000 to $160,000; and increased the annual base salary of our Executive Vice President and Secretary, R. Stewart Kahn, from $139,000 to $180,000.

On January 17, 2007, the Compensation Committee of our Board of Directors approved an increase in the base salary of our Chief Executive Officer, Jacob Y. Terner, increasing his annual base salary from $250,000 to $300,000; an increase in the base salary of our Chief Operating Officer, Catherine Dickson, increasing her annual base salary from $200,000 to $250,000; and an increase in the base salary of our Chief Financial Officer, Mike Heather, increasing his annual base salary from $180,000 to $225,000, effective immediately.

On July 17, 2007, the Compensation Committee of our Board of Directors approved an amendment to the employment agreement of our Chief Financial Officer, Mike Heather, increasing his annual base salary from $225,000 to $350,000, effective immediately.

Also, effective July 26, 2007, the Board has appointed Michael A. Terner as Executive Vice President and Secretary to replace R. Stewart Kahn, whose departure on July 25, 2007 was previously reported.

Item 5.03.               Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year

On July 31, 2007, the Registrant filed a Certificate of Elimination of Series A Convertible Preferred Stock with the Delaware Secretary of State pursuant to which the Registrant certified that no shares of its Series A Convertible Preferred Stock are outstanding and no shares of Series A Convertible Preferred Stock will be issued subject to the certificate of designation previously filed with respect to the Series A Convertible Preferred Stock. The effect of the Certificate of Elimination was to eliminate from the Registrant’s certificate of incorporation all matters set forth in the certificate of designation with respect to the Series A Convertible Preferred Stock.

A copy of the Certificate of Elimination has been filed with this report as Exhibit 3.1

Item 8.01.Other Events

On July 23, 2007, Standard & Poor’s Ratings Services (“S&P”) and Moody’s Investors Service (“Moody’s”) each announced ratings actions regarding the Registrant and its proposed $115 million  first lien senior secured credit facility and $45 million second lien term loan, as described in Exhibits 99.1 and 99.2 to this report.

Item 9.01.Financial Statements and Exhibits

(d)           Exhibits

The following exhibits are filed with this report:

Exhibit No.	Description
3.1	Certificate of Elimination of Series A Convertible Preferred Stock
99.1	S&P ratings announcement dated July 23, 2007
99.2	Moody’s ratings announcement dated July 23, 2007

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	PROSPECT MEDICAL HOLDINGS, INC.
	By:	/s/	Mike Heather
			Mike Heather, Chief Financial Officer
Dated: August 6, 2007

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EX-3.1

Exhibit 3.1

CERTIFICATE OF ELIMINATION
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
PROSPECT MEDICAL HOLDINGS, INC.

(Pursuant to Section 151(g) of the
Delaware General Corporation Law)

Prospect Medical Holdings, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the “Corporation”) does hereby certify that the following resolutions respecting the Corporation’s Series A Convertible Preferred Stock were duly adopted by the Corporation’s Board of Directors:

WHEREAS, no shares of the Corporation’s Series A Convertible Preferred Stock are outstanding and no shares of Series A Convertible Preferred Stock will be issued subject to the certificate of designation previously filed with respect to the Series A Convertible Preferred Stock;

NOW, THEREFORE, IT IS HEREBY RESOLVED, that the officers of the Corporation be, and each of them hereby is, authorized, empowered and directed to cause a certificate of elimination with respect to the Corporation’s Series A Convertible Preferred Stock to be executed and filed with the Secretary of the State of Delaware pursuant to Section 151(g) of the Delaware General Corporation Law in order to eliminate from the Corporation’s certificate of incorporation all matters set forth in the certificate of designation with respect to the Series A Convertible Preferred Stock.

IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by its duly authorized officer this 30th day of July, 2007.

PROSPECT MEDICAL HOLDINGS, INC.
By:	/s/ Mike Heather
	Mike Heather
	Chief Financial Officer

EX-99.1

Exhibit 99.1

Research Update:

Prospect Medical Holdings Inc. Bank Loan And Recovery Ratings Revised

Rationale

On July 20, 2007, Standard & Poor’s Ratings Services raised its ratings on Prospect Medical Holdings Inc.’s (Amex:PZZ; Prospect) first-lien term loan and senior secured revolving credit facility to ‘BB’ (two notches higher than the counterparty credit rating) from ‘B+’. At the same time, Standard & Poor’s revised the recovery ratings on this loan and credit facility to ‘1’ from ‘3’, indicating an expectation of a very high (90%-100%) recovery in the event of a payment default.

In addition, Standard & Poor’s assigned its ‘B-’ rating (two notches lower than the corporate credit rating) to the company’s second-lien term loan. Standard & Poor’s also assigned a recovery rating of ‘6’ to this loan, indicating an expectation of a negligible recovery in the event of default.

These rating actions reflect the company’s decrease of its first-lien term loan by $45 million and a proposed new second-lien term loan of $45 million. The revised proposed $160 million senior secured bank facilities consist of a $15 million revolving credit facility due 2012, a $100 million seven-year first-lien term loan due 2014, and a $45 million 7.5-year second-lien term loan due 2015.

The ratings are based on the counterparty credit rating on Prospect and reflect the company’s geographic and client concentrations, acquisition-oriented growth strategy, and increased financial leverage. Offsetting factors include the company’s integrated operational relationship with Prospect Medical Group, its established competitive position in core markets, good earnings/cash-flow profile, and mostly unregulated business.

Prospect will use the proceeds of the loans to refinance its current outstanding term loan; to partially finance its planned acquisition of Alta Healthcare System, which is a privately owned for-profit hospital management company that owns and operates four community-based hospitals in the greater Los Angeles area; and to refinance Alta’s indebtedness.

Prospect operates as a medical services organization to HMO enrollees in California (Los Angeles, Orange, and San Bernardino Counties), where it provides care for about 250,000 HMO enrollees, including 199,000 commercial, 27,000 Medi-Cal, and 24,000 seniors through 12 individual practice associations and three medical clinics. Its largest customers are PacifiCare, Health Net, Blue Cross Calif., and Blue Shield Calif.

Outlook

Standard & Poor’s expects that Prospect Medical will remain focused on managing the medical risk of its affiliated physician organizations and maintaining efficient operations. Prospect Medical’s established market presence in its core market will facilitate its sustained competitiveness and

Standard & Poor’s RatingsDirect  |  July 20, 2007

© Standard & Poor’s. All rights reserved. No reprint or dissemination without Standard & Poor’s permission. See Terms of Use/Disclaimer on the last page.

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Research Update: Prospect Medical Holdings Inc. Bank Loan And Recovery Ratings Revised

enable the company to grow and diversify its business profile. The outlook also reflects our expectation for Prospect Medical to sustain its earnings profile and prudently manage its overall growth objectives, which includes the integration of Alta.

By year-end 2007, we expect combined pro forma revenue to be $300 million-$325 million and for the company to serve 240,000-250,000 members. Pretax ROR will likely be 5%-7%, resulting in financial leverage and coverage metrics considered moderately conservative for the rating category. By year-end 2007, debt to EBITDA and pro forma interest coverage should be
2.75x-3.25x and 4x-5x, respectively.

Ratings List

Prospect Medical Holdings Inc.

	To	From
Ratings raised
First-lien term loan	BB	B+
Revolving credit facility	BB	B+
Recovery rating	1	3
New ratings
Second-lien term loan	B-
Recovery rating	6

Complete ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor’s credit ratings, research, and risk analysis, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor’s public Web site at www.standardandpoors.com; select Ratings in the left navigation bar, then Credit Ratings Search.

www.standardandpoors.com/ratingsdirect

© Standard & Poor’s. All rights reserved. No reprint or dissemination without Standard & Poor’s permission. See Terms of Use/Disclaimer on the last page.

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Standard & Poor’s RatingsDirect  |  July 20, 2007

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EX-99.2

Exhibit 99.2

Global Credit Research
Rating Action
23 JUL 2007

Rating Action: Prospect Medical Holdings, Inc.

Moody’s rates Prospect Medical B2 first lien credit facilities

$160 million of debt rated

New York, July 23, 2007 — Moody’s Investors Service has affirmed the B3 corporate family rating of Prospect Medical Holdings, Inc. (Prospect, AMEX:PZZ) and assigned a B2 rating to the proposed $115 million first lien senior secured credit facility ($100 million term loan and $15 million revolving credit facility) and a Caa2 rating to the proposed $45 million second lien senior secured credit facility. Prospect and Prospect Medical Group, Inc. (PMG), an affiliated physician organization controlled by Prospect, will be co-borrowers under the credit facility. The proceeds will be used to finance the acquisition of Alta Healthcare System Inc., and retire existing debt at Prospect. The outlook on the ratings is stable.

The rating agency said that the ratings are driven by Prospect’s limited geographic area, small membership base and focus on HMO membership. The proposed acquisition of Alta Healthcare System, Inc. (Alta) and its four hospitals is perceived as increasing Prospect’s risk profile due to the company’s lack of experience in operating a hospital system, although Alta’s senior management will join the pro forma company’s management team, and Alta’s concentration in the Medicare and Medi-Cal (California’s Medicaid program) business segments. The rating also reflects Prospect’s weak financial profile, in particular, its consistent although somewhat low earnings margins, which are offset by the increased debt and high financial leverage resulting from the financing of the proposed acquisition (initial debt to EBIT of approximately 5 times, where debt includes operating leases) and low interest coverage ratio (initial EBIT coverage below 3 times). The rating agency also noted that over the last few years Prospect has been very acquisitive, with fifteen affiliated physician organizations currently under its control, having completed another IPA acquisition, ProMed, on June 1, 2007. Moody’s anticipates that the company will continue to seek additional IPAs and possibly hospital acquisitions.

Prospect is a health care management services organization that provides management services to affiliated physician organizations that operate as independent physician associations or medical clinics. Prospect’s operations are concentrated in Orange County, Los Angeles County and San Bernardino County in California. The affiliated physician organizations have entered into agreements with managed care companies to provide HMO enrollees with a full range of non- hospital medical services in exchange for fixed capitation payments. Prospect currently provides management services to fifteen affiliated physician organizations, including PMG, of which thirteen of the affiliated physician organizations are controlled by PMG, one is 55% owned by PMG and the other is a joint venture in which PMG owns 50% interest.

Through three management subsidiaries—Prospect Medical Systems, Sierra Medical Management and ProMed Health Care Administrators— Prospect has entered into long-term agreements to provide management services to the affiliated physician organizations in exchange for a management fee. The management services provided include negotiation of contracts with physicians and HMOs, physician recruiting and credentialing, human resources services, claims administration, financial services, provider relations, member services, case management including utilization management and quality assurance, data collection, and management information systems.

Moody’s commented that the ratings are based on the expectation that there will be no losses or impairments to PMG’s contracts with the managed care companies as a result of the transaction and that the terms of the credit facility will require that at least 50% of excess cash flow be used for debt repayment.

The rating agency added that the ratings could move up if debt to EBIT falls below 3x, EBIT to interest expense exceeds 4x, and the company produces consistent net income margins of at least 5%. However, if the enrolled membership at PMG declines by 5% or more, if the medical ratio exceeds 82%, if cash flow from operations is less than one times net income or if there is an acquisition of another hospital system, then Moody’s said the ratings could be lowered.

The following ratings were assigned with a stable outlook:

Prospect Medical Holdings, Inc. — first lien senior secured debt rating of B2; second lien senior secured debt rating of Caa2.

The following rating was affirmed with stable outlook:

Prospect Medical Holdings, Inc. - corporate family rating of B3.

Moody’s last rating action on Prospect Medical was on July 20, 2007 when the rating agency withdrew the B3 senior secured credit facility rating on its previously planned financing deal, which was restructured into the current funding plan.

Prospect Medical Holdings, Inc. is headquartered in Culver City, California. For the fiscal year ending September 30, 2006 total revenue was $136 million with ending HMO enrollees of approximately 171,400. As of September 30, 2006 the company reported shareholders’ equity of $33.8 million.

Moody’s corporate family rating is an opinion of a corporate family’s ability to honor all of its financial obligations and is assigned to a corporate family as if it had a single class of debt and a single consolidated legal entity structure.

For more information, visit our website at www.moodys.com/insurance.

New York

Stephen Zaharuk

VP - Senior Credit Officer

Financial Institutions Group

Moody’s Investors Service

JOURNALISTS: 212-553-0376

SUBSCRIBERS: 212-553-1653

New York

Robert Riegel

Managing Director

Financial Institutions Group

Moody’s Investors Service

JOURNALISTS: 212-553-0376

SUBSCRIBERS: 212-553-1653

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