Prospect Medical Holdings Reports Fiscal 2007 Third Quarter Results

Prospect Medical Holdings, Inc. (AMEX: PZZ) ("Prospect”), which manages the medical care of approximately 247,000 HMO enrollees in Southern California, today announced financial results for its fiscal 2007 third quarter and nine month period ended June 30, 2007 (see attached tables). These results included approximately one month of operations from ProMed Health Care ("ProMed”), which Prospect acquired on June 1, 2007. Revenues for the third quarter of fiscal 2007 were $40.8 million, an increase of 17.0% from $34.8 million in the same period last year. Operating income for the third quarter of fiscal 2007 was $1.2 million as compared to $2.1 million in the third quarter of fiscal 2006. Net income for the third quarter of fiscal 2007 was $0.53 million, or $0.06 per diluted share, as compared to net income of $1.3 million, or $0.16 per diluted share, in the fiscal 2006 third quarter. Dr. Jack Terner, Chairman and Chief Executive Officer of Prospect, commented, "Prospect’s results for the third quarter of 2007 contained a one month contribution from the operations of ProMed and no impact from the acquisition of Alta Healthcare System ("Alta”), which we consummated on August 8, 2007. These recent acquisitions have transformed Prospect into a vertically integrated healthcare provider comprised of 13 Independent Physician Associations ("IPAs”), more than 9,000 specialist and primary care physicians, and a network of community-based hospitals. We have expanded our geographic reach, increased the number of commercial HMO enrollees we serve, nearly doubled our senior HMO enrollment, significantly strengthened our management team, and enhanced our ability to provide high quality patient care. We look forward to our future with confidence operating under this exciting new paradigm.” Dr. Terner continued, "Although active on the acquisition front, we also continued to advance our internal organic growth initiatives in areas such as upgrading our physician networks, improving medical management programs, optimizing hospital lengths of stay via contracted and employed hospitalists, and accumulating and submitting member health data to Medicare in order to secure future appropriate incremental Risk Adjustment revenues. Although the investments associated with these actions resulted in higher healthcare and operating expenses during the third quarter of fiscal 2007, we remain optimistic about our likely returns on these investments.” Fiscal 2007 Third Quarter Revenues for the third quarter of fiscal 2007 rose to $40.8 million from $34.8 million in the same period last year. This increase was primarily attributable to an approximately $7.5 million contribution from ProMed, offset by decreased hospital risk pool revenue at the core Prospect operation. Gross margin for the third quarter of fiscal 2007 was $8.9 million, or 21.7% of revenues, compared to $9.4 million, or 27% of revenues, in the same period last year. This decrease in gross margin was primarily due to lower hospital risk pool revenue and increased healthcare spending described above. Joint venture income for the third quarter of fiscal 2007 rose 383% to $1.6 million due to improved profitability on the enrollees serviced by this joint venture, following the January 1, 2007 removal of certain required spending levels previously mandated for this program. This joint venture income largely represents Prospect’s participation in Orange County’s OneCare program, a managed care program for individuals who qualify for both Medicare and Medi-Cal benefits ("Medi-Medis”). Prospect commenced its participation in the OneCare program in 2006 and, as of June 30, 2007, had approximately 1,600 Medi-Medi seniors assigned to its affiliated IPAs under this program. Operating income for the fiscal 2007 third quarter was $1.2 million as compared to operating income of $2.1 million in the third quarter of fiscal 2006. This decrease was due to lower hospital risk pool revenue and higher healthcare and operating expenses described above, offset by an approximate $1.0 million contribution from ProMed, excluding any amortization of acquired intangibles. Interest expense increased by $0.37 million to $0.64 million from the third quarter of fiscal 2006, due primarily to $48.0 million of financing associated with the ProMed acquisition and expensing of prepayment penalties on prior bank debt. Net income for the third quarter of fiscal 2007 was $0.53 million, or $0.06 per diluted share, on approximately 9.0 million diluted shares outstanding, as compared to net income of $1.3 million, or $0.16 per diluted share, in the fiscal 2006 third quarter, on approximately 8.1 million diluted shares outstanding. As of June 30, 2007, Prospect’s balance sheet included cash and investments totaling $18.0 million, and shareholders’ equity of $43.4 million, or $4.80 per diluted share. CONFERENCE CALL Dr. Jack Terner, Chairman and Chief Executive Officer, Catherine Dickson, President and Chief Operating Officer and Mike Heather, Chief Financial Officer, will host a conference call on August 21, 2007 at 4:30 p.m. ET / 1:30 pm PT to discuss this news release. Interested parties may participate in the call by dialing (866) 820-1713 (Domestic) or (706) 643-3137 (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://audioevent.mshow.com/336015/. 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 90 days. ABOUT THE COMPANY Prospect Medical Holdings manages the medical care of individuals enrolled in HMO plans in Southern California. The Company’s vertically-integrated medical services platform is comprised of Independent Physician Associations ("IPAs”), which contract with HMOs and health care professionals to provide a full range of services to HMO enrollees, and community-based hospitals. This press release contains forward-looking statements. Additional written or oral forward-looking statements may be made by the Company 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, and the future introduction of new products, involve risks and uncertainties which may affect the Company's business and prospects, including those outlined in the Company's Form 10-K filed on December 28, 2006 and Form 10-Q filed on August 20, 2007. 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 (Unaudited)   Three months endedJune 30 Nine months endedJune 30   2007       2006     2007       2006     Revenues $ 40,751,862 $ 34,818,020 $ 108,906,846 $ 102,854,925 Cost of revenues   31,890,916     25,408,055     84,097,298     73,857,934     Gross margin 8,860,946 9,409,965 24,809,548 28,996,991 Non-medical expenses: General and administrative 8,566,868 7,286,083 25,725,367 22,878,291 Depreciation and amortization   616,393     338,140     1,399,419     995,729   Total non-medical expenses 9,183,261 7,624,223 27,124,786 23,874,020   Operating income from unconsolidated joint venture   1,551,088     321,125     2,314,666     998,019     Operating income (loss) 1,228,773 2,106,867 (572 ) 6,120,990   Other (income) expense: Investment income (329,712 ) (219,589 ) (793,573 ) (658,778 ) Interest expense   637,140     269,884     1,138,718     815,625   Total other expense, net   307,428     50,295     345,145     156,847     Income (loss) before income taxes 921,345 2,056,572 (345,717 ) 5,964,143 Provision (benefit) for income taxes   382,165     743,949     (129,173 )   2,313,524     Net income (loss) before minority interest 539,180 1,312,623 (216,544 ) 3,650,619   Minority interest   5,210     8,632     7,082     14,616     Net income (loss) $ 533,970   $ 1,303,991   $ (223,626 ) $ 3,636,003     Net income (loss) per common share: Basic $ 0.06   $ 0.19   $ (0.03 ) $ 0.53   Diluted $ 0.06   $ 0.16   $ (0.03 ) $ 0.45   Weighted average shares outstanding: Basic   8,394,827     6,969,440     7,786,145     6,851,751   Diluted   9,018,948     8,141,421     7,786,145     8,044,146   Prospect Medical Holdings, Inc. Condensed Consolidated Balance Sheets   June 30, September 30, 2007 2006 (unaudited)     Total Current Assets $ 30,233,257 $ 24,767,951   Total Assets $ 123,152,566 $ 66,657,472 Total Current Liabilities $ 32,490,925 $ 24,891,849   Total Liabilities $ 79,714,000 $ 32,772,134   Minority Interest $ 76,529 $ 81,881   Total Shareholders’ Equity $ 43,362,037 $ 33,803,457   Total Liabilities & Shareholders’ Equity $ 123,152,566 $ 66,657,472