Prospect Medical Holdings Reports Fiscal 2007 Fourth Quarter and Full Year Results

Prospect Medical Holdings, Inc. (AMEX: PZZ) ("Prospect”), which manages the medical care of approximately 241,000 HMO enrollees and operates four community hospitals in southern California, today announced financial results for its fiscal 2007 fourth quarter and fiscal year ended September 30, 2007 (see attached tables). 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. CONSOLIDATED RESULTS OVERVIEW Consolidated revenues for the fourth quarter of fiscal 2007 rose 117.8% to $71.7 million from $32.9 million in the same period last year. This was due primarily to a $15.6 million contribution from Alta and a $22.9 million contribution from ProMed, as compared to no such contributions in the same period last year. The operating loss for the fiscal 2007 fourth quarter was $38.2 million as compared to operating income of $2.2 million in the fourth quarter of fiscal 2006. The net loss for the fourth quarter of fiscal 2007 was $33.3 million, or $3.14 per diluted share, as compared to net income of $1.3 million, or $0.15 per diluted share, in the fourth quarter of 2006. The 2007 net loss amounts are after the non-cash, non-recurring $38.8 million goodwill and identifiable intangibles write-down described below. Consolidated revenues for the full year of fiscal 2007 rose 33.0% to $180.7 million from $135.8 million last year, due primarily to a $15.6 million contribution from Alta and a $30.5 million contribution from ProMed, as compared to no such contributions last year. This increase was offset by a $1.2 million decrease in Prospect’s legacy IPA operation. The operating loss for fiscal 2007 was $38.1 million as compared to operating income of $8.3 million in fiscal 2006. The net loss for fiscal 2007 was $33.5 million, or $3.94 per diluted share, as compared to net income of $4.9 million, or $0.60 per diluted share, in fiscal 2006. The 2007 net loss amounts are after the non-cash, non-recurring $38.8 million goodwill and identifiable intangibles write-down described below. The operating and net losses for the fiscal 2007 fourth quarter and full year included non-cash charges totaling $38.8 million, amounting to $3.67 per diluted share in Q4 and $4.57 per diluted share for fiscal 2007, comprised of write-downs of $38.0 million in goodwill and $0.8 million in identifiable intangibles related to the legacy Prospect portion of the IPA Management segment. Exclusive of the $38.8 million in charges, operating and net income for the fiscal 2007 fourth quarter would have been $573,000 and $5,500,000, respectively, while operating and net income for all of fiscal 2007 would have been $689,000 and $5,300,000, respectively. During fiscal 2007, Alta and ProMed performed as expected, generating higher revenues and income as compared to the prior year. Prospect continued to make significant investments in its core IPA operation, consistent with its reputation for service, accessibility and efficiency. These investments, while considered essential to the Company’s strategy, did lower current year margins as compared to the prior year. Key fiscal 2008 IPA initiatives include revenue management; claims management; membership retention and growth; and increasing the number of capitated specialist providers. Finally, the Company has taken a variety of steps to strengthen Alta’s internal controls, including in those areas that gave rise to the restatement of Alta’s 2006 financial statements, and is addressing and correcting any existing weaknesses as part of ongoing efforts to improve its control environment. SEGMENT RESULTS Following the acquisitions of ProMed and Alta, Prospect is now organized into the following primary reportable segments: "IPA Management,” consisting of 11 legacy Prospect IPAs and two legacy Management Services Organizations ("MSOs”), two ProMed IPAs and one ProMed MSO; and "Hospital Services,” consisting of Alta’s four community based hospitals in southern California. IPA Management     ($ in 000s) Three Months Ended September 30 Year Ended September 30 2007   2006 2007   2006   Total Revenues $ 56,163 $ 32,941 $ 165,070 $ 135,796 Operating Expenses: Managed care cost of revenue 46,947 23,326 131,045 97,184 General and administrative 10,483 7,327 36,208 30,205 Depreciation and amortization 1,340 517 2,622 1,513 Goodwill and intangibles impairment   38,776     --   38,776     -- Total Operating Expenses 97,546 31,170 208,651 128,902 Operating Income from Unconsolidated Joint Venture 349 402 2,663 1,400 Operating (Loss) Income $ (41,034 ) $ 2,173 $ (40,918 ) $ 8,294 Higher revenues for the fourth quarter and fiscal year ended September 30, 2007 were due primarily to the June 1, 2007 acquisition of ProMed. For the 2007 fourth quarter and fiscal year, ProMed contributed $22.9 million and $30.5 million in revenues, respectively. There were no such contributions during fiscal 2006. Revenues for the 2007 fourth quarter and fiscal year were also positively impacted by $1.1 million and $3.3 million, respectively, due to the reassignment of revenues under the CalOptima contract from the AMVI/Prospect Joint Venture directly to Prospect Medical Group, and higher pay-for-performance revenues for the delivery of quality medical care. These increases were slightly offset by lower hospital risk pool revenue, decreased enrollment, and lower capitation rates for senior members under Medicare’s risk adjusted payment methodology. Total IPA operating expenses increased by 212.9% in the fourth quarter of fiscal 2007 and by 61.8% for the full year compared to the respective prior year periods, and were comprised of the following: Higher managed care cost of revenue for the fiscal 2007 fourth quarter and fiscal year, the result of the ProMed acquisition, which Prospect owned during the last four months of fiscal 2007, as well as higher per member per month medical costs, offset by enrollment declines in Prospect’s legacy IPA business. Higher general and administrative expenses ("G&A”) for the fiscal 2007 fourth quarter and fiscal year due primarily to increases in staffing, and increased audit, legal, Sarbanes-Oxley Act compliance and information technology consulting costs. Higher G&A was also due, in part, to the acquisition of ProMed, which increased these expenses by approximately $1.4 million in the fiscal 2007 fourth quarter and by approximately $1.9 million for all of fiscal 2007. Exclusive of the ProMed acquisition, as a percentage of revenue, G&A increased to approximately 27.2% for the fiscal 2007 fourth quarter from 22.2% for the fourth quarter of 2006, and to 25.5% for the full year 2007 from 22.2% for fiscal 2006. Depreciation and amortization increased primarily as a result of increased amortization of intangible assets acquired in connection with the ProMed acquisition, as well as depreciation expense associated with increased capital expenditures. During the fourth quarter of fiscal 2007, Prospect, together with its outside valuation experts, determined that the current and future operating cash flows of its legacy IPA operation, inclusive of the costs of managing that operation, indicated the need to write down goodwill and identifiable intangibles in that legacy Prospect unit. As a result of these analyses, goodwill and identifiable intangibles in the legacy Prospect reporting unit were determined to be impaired and written down by a total of $38.8 million. Income from unconsolidated joint venture increased as a result of increased profitability from the participation in the CalOptima OneCare program for Medicare/MediCal eligible beneficiaries during fiscal 2007. The operating losses in the IPA segment for the fiscal 2007 fourth quarter and full year were due primarily to the $38.8 million in pre-tax, non-cash impairment charges described above and, to a lesser extent, a decline in members, higher claims per member rates, and higher general and administrative costs. Hospital Services Following the acquisition of Alta, and for the period August 8, 2007 through September 30, 2007, Prospect’s Hospital Services segment reported revenue of $15.6 million, operating expenses of $12.8 million, and operating income of $2.8 million. Prospect did not have a Hospital Services segment during the fiscal 2006 period. UPCOMING EVENTS Prospect expects to file its Form 10-Q for the three months ended December 31, 2007 and Form 10-Q for the three months ended March 31, 2008 by June 16, 2008. As previously announced, Prospect has been notified that the AMEX has conditionally accepted the Company’s plan for regaining compliance with the exchange’s continued listing requirements and has extended the compliance period to July 28, 2008. As detailed in previous announcements, following the filings, as outlined above, and the meeting of certain other terms and conditions, Prospect believes it will be compliant with the continued listing requirements of the AMEX and will qualify for its common stock to resume trading. Prospect management will host an investor conference call following the filing of its second quarter Form 10-Q at a date and time that will be announced prior to the call. With the Form 10-K to be filed on June 2, 2008, Prospect will begin preparing its 2007 Proxy Statement, together with other related materials, in preparation for its (previously postponed) Annual Meeting, which Prospect expects to be held within the next few months. 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 to be filed on June 2, 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. Consolidated Statements of Operations ($ in 000s)     Three months ended September 30, Fiscal Year Ended September 30, 2007   2006 2007   2006 Revenues: Managed care revenues $ 56,164 $ 32,941 $ 165,070 $ 135,796 Hospital operating revenues   15,583     -     15,583     -   Total revenues 71,747 32,941 180,653 135,796   Operating expenses: Managed care cost of revenues 46,947 23,326 131,045 97,184 Hospital operating expenses 10,699 - 10,699 - General and administrative 12,052 7,327 37,777 30,205 Depreciation and amortization 1,824 517 3,107 1,513 Impairment of goodwill and identifiable intangibles   38,776     -     38,776     --   Total operating expenses 110,298 31,170 221,404 128,902   Operating income from unconsolidated joint venture   349     402     2,664     1,400   Operating income (loss) (38,202 ) 2,173 (38,087 ) 8,294 Other income (expense): Investment income 288 254 1,097 913 Interest expense and amortization of debt discounts and fees (3,988 ) (291 ) (5,257 ) (1,107 ) Loss on interest rate swap   (868 )   --     (868 )   -   Total other (expense)   (4,568 )   (37 )   (5,029 )   (194 )   Income (loss) before income taxes (42,770 ) 2,136 (43,116 ) 8,100 Provision (benefit) for income taxes   (9,520 )   880     (9,649 )   3,194   Net income (loss) before minority interest (33,250 ) 1,255 (33,467 ) 4,907 Minority interest   (4 )   (1 )   (10 )   ( 17 ) Net income (loss) $ (33,254 ) $ 1,254   $ (33,477 ) $ 4,890     Net earnings (loss) per common share: Basic $ (3.14 ) $ 0.18   $ (3.94 ) $ 0.71   Diluted $ (3.14 ) $ 0.15   $ (3.94 ) $ 0.60     Weighted average shares outstanding: Basic   10,575     7,096     8,489     6,913   Diluted   10,575     8,295     8,489     8,107   Prospect Medical Holdings, Inc. Consolidated Balance Sheet ($ in 000s)   September 30, 2007   2006 ASSETS Current assets: Cash and cash equivalents $ 21,599 $ 16,623 Investments, primarily restricted certificates of deposit 637 836 Patient accounts receivable, net of allowance for doubtful accounts of $4,447 at September 30, 2007 15,840 -- Government program receivables 4,274 - Risk pool receivables 179 1,419 Other receivables, net of allowances of $509 and $632 at September 30, 2006 and 2007 2,559 1,917 Notes receivable, current portion 59 176 Refundable income taxes 5,041 2,493 Deferred income taxes, net 3,395 658 Prepaid expenses and other current assets   3,816   646 Total current assets   57,399   24,768   Property, improvements and equipment, net of accumulated depreciation and amortization of $5,094 at September 30, 2007 and $4,000 at September 30, 2006 48,294 1,286 Notes receivables, less current portion 490 414 Deposits and other assets 914 613 Deferred financing costs 7,431 101 Goodwill 129,122 37,838 Other intangible assets, net   51,989   1,637 Total assets $ 295,639 $ 66,657   LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accrued medical claims and other health care costs payable $ 22,639 $ 11,400 Accounts payable and other accrued liabilities 14,972 6,861 Third-party settlements 1,034 - Accrued salaries, wages and benefits 6,898 1,331 Current portion of capital leases 356 - Current portion of long-term debt 8,000 5,300 Other current liabilities   1,252   - Total current liabilities   55,151   24,892 Deferred income taxes 28,669 1,146 Malpractice reserve 645 - Long-term debt, less current portion 138,750 6,700 Capital leases, net of current portion 644 - Interest rate swap liability 1,934 - Other long-term liabilities   231   34 Total liabilities   226,024   32,772 Minority interest 79 82 Total shareholders’ equity   69,536   33,803 Total liabilities and shareholders’ equity $ 295,639 $ 66,657