Prospect Medical Holdings Reports Fiscal 2008 Second Quarter and Six Month Financial Results

Prospect Medical Holdings, Inc. (AMEX: PZZ): Q2 FY 2008 Highlights Compared to Q2 FY 2007 Revenues rose 162% to $87.3 million from $33.3 million Operating income rose to $6.4 million from an operating loss of $1.8 million Net income, prior to $2.0 million non-cash dividend to preferred stockholders, was $728,000, compared to a net loss of $1.1 million After $2.0 million non-cash dividend to preferred stockholders, net loss attributable to common stockholders was $1.3 million, or $0.11 per share, compared to a net loss attributable to common stockholders of $1.1 million, or $0.14 per share Prospect Medical Holdings, Inc. (AMEX: PZZ) ("Prospect”), which manages the medical care of approximately 228,000 HMO enrollees and operates four community hospitals in southern California, today announced financial results for its fiscal 2008 second quarter ended March 31, 2008. These results include the operations of the two acquired entities since their respective dates of acquisition; specifically the ProMed Entities ("ProMed”), which Prospect acquired on June 1, 2007, and Alta Hospitals System, LLC (f/k/a Alta Healthcare System, Inc.) ("Alta”), which Prospect acquired on August 8, 2007. SECOND QUARTER CONSOLIDATED RESULTS OVERVIEW Consolidated revenues for the second quarter of fiscal 2008 rose 162% to $87.3 million from $33.3 million in the same period last year. Higher revenues primarily reflected a $32.4 million contribution from Alta and a $23.2 million contribution from ProMed. Operating income for the second quarter of fiscal 2008 rose to $6.4 million from an operating loss of $1.8 million in the second quarter of fiscal 2007, due primarily to inclusion of the operations of Alta and ProMed. Included in operating expenses for the 2008 quarterly period is approximately $1.5 million related to the Alta restatement, special investigation and lender forbearance activities. Interest expense and amortization of deferred financing costs rose to $5.4 million in the fiscal 2008 second quarter from $234,000 in the second quarter of fiscal 2007, due to debt associated with the acquisitions of ProMed and Alta. Included in interest expense for the 2008 quarterly period is approximately $0.8 million in forbearance fees paid to lenders. Net income for the fiscal 2008 second quarter, prior to the $2.0 million non-cash dividend to preferred stockholders, was $728,000 compared to a net loss of $1.1 million in the same period last year. Following the $2.0 million non-cash dividend to preferred stockholders, as compared to no such dividend in the same period last year, the net loss attributable to common stockholders for the fiscal 2008 second quarter was $1.3 million, or $0.11 per share, compared to a net loss attributable to common stockholders of $1.1 million, or $0.14 per share, in the second quarter of fiscal 2007. SEGMENT RESULTS IPA Management ($ in 000s) (unaudited)   Three Months Ended March 31,   Six Months Ended March 31, 2008   2007 2008   2007   Total managed care revenues $ 54,947 $ 33,327 $ 109,921 $ 68,155 Total managed care cost of revenues 42,830 26,170 87,220 52,206 Gross margin 12,117 7,157 22,701 15,949   General and administrative 13,026 9,082 24,714 17,158 Depreciation and amortization 1,212 391 2,414 783 Total non-medical expenses 14,238 9,473 27,128 17,941   Income from unconsolidated joint venture 694 500 1,169 763   Operating loss $ (1,427) $ (1,816) $ (3,258) $ (1,229) Higher revenues for the second quarter of fiscal 2008 were due primarily to a $23.2 million revenue contribution from ProMed as compared to no such contribution in the second quarter of fiscal 2007, offset by a $1.5 million decrease in capitation revenues from Prospect’s legacy IPA business. Higher managed care cost of revenue for the fiscal 2008 second quarter was primarily the result of the ProMed acquisition, as well as higher physician salaries, offset by lower enrollment in Prospect’s legacy IPA business. Higher general and administrative ("G&A”) expenses for the fiscal 2008 second quarter was primarily due to the inclusion of ProMed in the current period, which added approximately $2.1 million, as well as increases in staffing, and higher costs related to audit, legal and Sarbanes-Oxley Act compliance associated with the larger enterprise in 2008. All costs of Prospect, the Holding Company, are included in the IPA Management Segment. Depreciation and amortization increased primarily as a result of increased amortization of intangible assets related to the acquisition of ProMed. Income from unconsolidated joint venture increased as a result of higher profitability from participation in the CalOptima OneCare program for Medicare/MediCal eligible beneficiaries. Hospital Services Prospect‘s Hospital Services segment consists of Alta’s four community based hospitals in southern California. Prospect acquired Alta in August 2007. Prospect did not have a Hospital Services segment during the second quarter of fiscal 2007. ($ in 000s) (unaudited) Three Months Ended March 31, 2008   Six Months Ended March 31, 2008 Net patient revenues $ 32,396 $ 59,682 Operating expenses: Hospital operating expenses 20,967 38,968 General and administrative 2,911 5,535 Depreciation and amortization   707   1,432 Total operating expenses   24,585   45,935   Operating income $ 7,811 $ 13,747 Sam Lee, Chairman and Chief Executive Officer of Prospect, commented, "The filing of Prospect’s 10-Q for fiscal 2008 second quarter marks the end of a challenging period and signals the beginning of what we believe will be an important new era of growth. We are very pleased with our return to profitability prior to the non-cash preferred stock dividend, positive operating cash flow, and cash and equivalents of $23.7 million at March 31, 2008. With the acquisitions of ProMed and Alta, Prospect is now a company of significantly greater size, scale and, we believe, potential than at any time in its history. We are making, and expect to continue to make, notable progress in our legacy (excluding ProMed) IPA operations, rationalizing expenses and further strengthening our management team with the addition of seasoned, functional executives. In addition, we believe that the various one-time and unusual costs and expenses we have incurred during the first three quarters of fiscal 2008 will decline substantially in the fiscal 2008 fourth quarter, ending September 30, 2008.” RESUMPTION OF TRADING As previously announced, Prospect has submitted to the AMEX the Company’s plan for regaining compliance with the AMEX’s continued listing requirements no later than July 28, 2008. With the filing of its Form 10-K for the 2007 fiscal year, Form 10-Q for the fiscal 2008 first quarter, and Form 10-Q for the fiscal 2008 second quarter, Prospect believes that the Company is now in compliance with all applicable SEC filing requirements and corresponding AMEX continued listing requirements. The Company believes it qualifies for trading in its stock to be resumed, subject, however, to AMEX review of the Company's recent SEC filings and any further issues that the AMEX may raise. CONFERENCE CALL Management will host a conference call on Friday, June 20, 2008 at 1:00 pm ET / 10:00 am PT to discuss this news release and other recent corporate developments. Interested parties may participate in the call by dialing (866) 267-2584 (Domestic) or (706) 634-4739 (International) approximately 10 minutes before the call is scheduled to begin and ask to be connected to the Prospect Medical conference call. In addition, the conference call will be broadcast live over the Internet at http://investor.shareholder.com/media/eventdetail.cfm?eventid=561 76&CompanyID=PROSPECT&e=1&mediaKey=FD1088B6F9BDB79FFAEA6E426404E661. (Due to its length, this URL may need to be copied/pasted into your Internet browser's address field. Remove the extra space if one exists.) To listen to the live call on the Internet, go to the web site at least 15 minutes early to register, download and install any necessary audio software. If you are unable to participate in the live call, the conference call will be archived and can be accessed for approximately 30 days. ABOUT THE COMPANY Prospect Medical Holdings operates four community-based hospitals in the greater Los Angeles area and manages the medical care of individuals enrolled in HMO plans in Southern California, through a network of approximately 14,000 specialist and primary care physicians. This press release contains forward-looking statements. Additional written or oral forward-looking statements may be made by Prospect from time to time, in filings with the Securities and Exchange Commission, or otherwise. Statements contained herein that are not historical facts are forward-looking statements. Investors are cautioned that forward-looking statements, including the statements regarding anticipated or expected results, involve risks and uncertainties which may affect the Company's business and prospects, including those outlined in Prospect's Form 10-K filed on June 2, 2008 and its Form 10-Q filed on June 16, 2008, as well as risks and uncertainties arising from Prospect's acquisition of Alta and ProMed, the debt incurred by Prospect in connection with those acquisitions, and the ability of the Company to regain compliance with the AMEX’s continued listing requirements. Any forward-looking statements contained in this press release represent our estimates only as of the date hereof, or as of such earlier dates as are indicated, and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Prospect Medical Holdings, Inc. Condensed Consolidated Statements of Operations ($ in 000s, except per share data) (unaudited)   Three months ended March 31,   Six months ended March 31,   2008       2007     2008       2007   Revenues: Managed care revenues $ 54,947 $ 33,327 $ 109,921 $ 68,155 Net patient revenues   32,396     -     59,682     -   Total revenues 87,343 33,327 169,603 68,155   Operating expenses: Managed care cost of revenues 42,830 26,171 87,220 52,206 Hospital operating expenses 20,967 - 38,968 - General and administrative 15,937 9,082 30,249 17,159 Depreciation and amortization   1,919     391     3,846     783   Total operating expenses 81,653 35,644 160,283 70,148   Operating income from unconsolidated joint venture   694     500     1,169     764   Operating income (loss) 6,384 (1,817 ) 10,489 (1,229 ) Other income (expense): Investment income 149 222 443 464 Interest expense and amortization of deferred financing costs (5,383 ) (234 ) (9,679 ) (502 ) Loss on interest rate swaps   -     -     (877 )   -   Total expense, net (5,234 ) (12 ) (10,113 ) (38 )     Income (loss) before income taxes 1,150 (1,829 ) 376 (1,267 ) Provision (benefit) for income taxes   419     (737 )   137     (511 ) Net income (loss) before minority interest 731 (1,092 ) 239 (756 ) Minority interest   3     (1 )   8     2   Net income (loss) 728 (1,091 ) 231 (758 ) Dividend to preferred stockholders   (1,983 )   -     (3,865 )   -     Net loss attributable to common stockholders $ (1,255 ) $ (1,091 ) $ (3,634 ) $ (758 )   Per share data: Net loss per share attributable to common stockholders – historical: Basic $ (0.11 ) $ (0.14 ) $ (0.31 ) $ (0.10 ) Diluted $ (0.11 ) $ (0.14 ) $ (0.31 ) $ (0.10 )   Weighted average shares outstanding Basic   11,783     7,695     11,748     7,482   Diluted   11,783     7,695     11,748     7,482   Prospect Medical Holdings, Inc. Condensed Consolidated Balance Sheets ($ in 000s)   March 31, September 30, 2008 (Unaudited)   2007 ASSETS Current assets: Cash and cash equivalents $ 23,639 $ 21,599 Investments, primarily restricted certificates of deposit 637 637 Patient accounts receivable, net of allowance for doubtful accounts of $4,510 and $4,447 at March 31, 2008 and September 30, 2007 2007 and September 30, 2007 19,431 15,840 Government program receivables 2,478 4,274 Risk pool receivables 185 179 Other receivables, net of allowances of $763 and $632 at March 31, 2008 and September 30, 2007 3,009 2,559 Notes receivable, current portion 60 59 Refundable income taxes 3,514 5,041 Deferred income taxes, net 3,395 3,395 Prepaid expenses and other current assets   4,980     3,816   Total current assets   61,328     57,399     Property, improvements and equipment: Land and land improvements 18,499 18,493 Buildings 22,353 22,233 Leasehold improvements 2,203 2,013 Equipment 10,437 9,651 Furniture and fixtures   1,004     998   54,496 53,388 Less accumulated depreciation and amortization   (6,815 )   (5,094 ) Property, improvements and equipment, net 47,681 48,294 Notes receivables, long term portion 415 490 Deposits and other assets 1,068 914 Deferred financing costs, net 6,323 7,431 Goodwill 129,117 129,122 Other intangible assets, net   49,864     51,989   Total assets $ 295,796   $ 295,639     LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accrued medical claims and other health care costs payable $ 23,226 $ 22,639 Accounts payable and other accrued liabilities 12,235 14,972 Third-party settlements 939 1,034 Accrued salaries, wages and benefits 8,081 6,898 Current portion of capital leases 334 356 Current portion of long-term debt 10,750 8,000 Other current liabilities   5,624     1,251   Total current liabilities 61,189 55,150 Long-term debt, less current portion 136,250 138,750 Deferred income taxes 24,022 28,669 Malpractice reserve 664 645 Capital leases, net of current portion 629 644 Interest rate swap liability 10,716 1,934 Other long-term liabilities   232     232   Total liabilities   233,702     226,024   Minority interest 88 79 Total shareholders’ equity   62,006     69,536   Total liabilities and shareholders’ equity $ 295,796   $ 295,639