PZZ Prospect Medical Holdings,

Prospect Medical Holdings, Inc. (NYSE Alternext US: PZZ) (�Prospect�), which owns and operates four community-based hospitals and manages the medical care of approximately 194,000 HMO enrollees in southern California, today announced financial results for its fiscal 2008 fourth quarter and year ended September 30, 2008. These results include the operations of the ProMed Entities (�ProMed�), acquired on June 1, 2007, and Alta Hospitals System (�Alta�), acquired on August 8, 2007, since their acquisition dates. Results for all periods exclude the Antelope Valley entities, since their sale on August 1, 2008 and pre-sale results have been classified as discontinued operations in the consolidated financial statements. The Company continues to focus on improving operating efficiencies, rationalizing costs and strengthening its financial position and credit profile. Cash and equivalents at fiscal year end were $33.6 million, an increase of approximately $11.5 million over the prior year. The Company continues to meet all of its debt obligations, including making additional principal payments, as it works down its acquisition-related debt. CONSOLIDATED RESULTS OVERVIEW Consolidated revenues for the fourth quarter of fiscal 2008 rose 31.0% to $87.7 million, from $67.0 million in the same period last year, due primarily to an increased contribution of approximately $20.1 million from Alta. Consolidated revenues for all of fiscal 2008 rose 102.7% to $329.5 million, from $162.6 million last year, due primarily to an increased contribution of approximately $111.1 million from Alta and an increased contribution of approximately $60.8 million from ProMed. Operating income for the fiscal 2008 fourth quarter was $8.7 million, compared to an operating loss of $27.2 million in the same period last year. Operating income for fiscal 2008 was $23.7 million, compared to an operating loss of $27.5 million for fiscal 2007. Net income attributable to common stockholders for the fourth quarter of fiscal 2008 was $6.5 million, or $0.32 per diluted share, on approximately 20.6 million diluted shares outstanding, as compared to a net loss attributable to common stockholders of $34.4 million, or $3.25 per diluted share, in the fourth quarter of fiscal 2007, on approximately 10.6 million diluted shares outstanding. Net income for the 2008 fourth quarter included a loss on interest rate swap arrangements of approximately $976,000 as compared to a loss of approximately $868,000 in the prior year period. The fiscal 2008 quarter included preferred stock dividends of approximately $962,000, as compared to preferred stock dividends of approximately $1.1 million in the fiscal 2007 quarter. For fiscal 2008, the net loss attributable to common stockholders was approximately $2.6 million, or $0.20 per basic and diluted share, on approximately 12.9 million weighted average shares outstanding, as compared to a net loss attributable to common stockholders for fiscal 2007 of $34.6 million, or $4.08 per basic and diluted share, on approximately 8.5 million weighted average shares outstanding. The net loss for fiscal 2008 included a one-time $8.3 million non-cash loss on debt extinguishment and a gain on interest rate swap arrangements of approximately $3.1 million, as compared to a loss of approximately $868,000 in the prior year period. For fiscal 2008, the impact of recording preferred stock dividends amounted to approximately $6.8 million, as compared to approximately $1.1 million in fiscal 2007. All accrued preferred stock dividends were forgiven during August 2008, in connection with the conversion of preferred stock to common stock. Adjusted EBITDA for the fourth quarter and full fiscal year 2008 was $11.6 million and $40.1 million, respectively (see reconciliation tables in this release). SEGMENT RESULTS IPA Management ($ in 000s) Three Months Ended September 30, � Twelve Months Ended September 30, 2008 � 2007 2008 � 2007 (unaudited) � Total managed care revenues $52,147 $ 51,390 $202,844 $146,976 Total managed care cost of revenues 38,459 43,924 � 158,908 119,657 � Gross margin 13,688 7,466 43,936 27,319 � General and administrative 7,583 6,658 29,848 24,307 Depreciation and amortization 870 1,120 3,479 2,298 Impairment of goodwill and identifiable intangibles 0 27,512 � 0 27,513 � Total non-medical expenses 8,453 35,290 33,327 54,118 � Income from unconsolidated joint venture 439 349 � 2,563 2,664 � � Operating income (loss) $5,674 $(27,475 ) $13,172 $(24,135 ) Managed care revenues for the fourth quarter of fiscal 2008 increased by approximately $757,000, or 1.5%, compared with the fourth quarter of fiscal 2007. This 2008 increase reflects the net impact of lower HMO enrollment and rate increases. Managed care revenues for the full year rose 38.0%, to $202.8 million, reflecting a $60.8 million increased contribution from ProMed, given its inclusion for a full year in fiscal 2008, combined with the net effect of decreased enrollment and rate increases at Prospect�s legacy IPAs. Managed care cost of revenues decreased to 73.8% and 78.3% of total managed care revenues for the fiscal 2008 fourth quarter and full year, from 85.5% and 81.4%, respectively, in the fiscal 2007 fourth quarter and full year. These decreases resulted from several factors, including improved per enrollee reimbursements, improved contracting, and the inclusion of ProMed for all of fiscal 2008. Higher general and administrative (�G&A�) expenses for the fiscal 2008 fourth quarter and year were primarily due to the inclusion of the acquired entities for the entire periods in fiscal 2008. Income from unconsolidated joint ventures amounted to approximately $439,000 and $2.6 million in the 2008 fiscal fourth quarter and full year, respectively. This compares to approximately $349,000 and $2.7 million in the 2007 fiscal fourth quarter and full year, respectively. Operating income for the fiscal 2008 fourth quarter was $5.7 million, as compared to an operating loss of $27.5 million in the fourth quarter of fiscal 2007, including consideration of each of the items discussed above. The operating income for all of fiscal 2008 amounted to $13.2 million, as compared to an operating loss of approximately $24.1 million for all of fiscal 2007, including consideration of each of the items discussed above. Hospital Services (Since August 8, 2007) Prospect�s Hospital Services segment consists of Alta�s four community-based hospitals in southern California, acquired in August 2007. ($ in 000s) Fifty-Four Days Ended September 30, 2007 � Three Months Ended September 30, 2008 � Twelve Months Ended September 30, 2008 (unaudited) � Net patient revenues $15,583 $35,598 $126,692 Operating expenses: Hospital operating expenses 10,699 24,621 84,353 General and administrative 1,382 3,726 12,481 Depreciation and amortization 671 2,151 4,286 Total operating expenses 12,752 30,498 101,120 � Operating income $2,831 $5,100 $25,572 The information above reflects the segment results for the periods since Alta�s acquisition, which, during fiscal 2007, represented fifty-four days. Given Alta�s acquisition date, comparison with fiscal 2007 periods is not meaningful. However, for the periods detailed above, key performance indicators, including utilization rates, net inpatient revenue per admission and net inpatient revenue per patient day have each increased. There has been no change in the number of hospitals, average licensed beds, or average available beds. Discontinued Operations The Company sold its Antelope Valley (�AV�) entities effective August 1, 2008. Pre-sale results are classified as discontinued operations in the financial statements, for all periods presented. Revenues for the AV entities totaled approximately $14.7 million and $18.1 million during the fiscal years ended September 30, 2008 (AV included for 10 months) and 2007. During fiscal 2008, the AV entities� ten month net loss from operations (exclusive of any gain on sale) was approximately $0.4 million. During fiscal 2007, the AV entities� net loss from operations was approximately $10.0 million (primarily comprised of an $8.9 million, after tax, write down of associated goodwill and other intangibles). Use of Adjusted EBITDA Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) is not a measure of financial performance under generally accepted accounting principles (�GAAP�). Management believes Adjusted EBITDA, in addition to operating income, net income and other GAAP measures, is a useful indicator of Prospect�s financial and operating performance and its ability to generate cash flows from operations that are available for taxes and capital expenditures. Investors should recognize that Adjusted EBITDA might not be comparable to similarly-titled measures of other companies. This measure should be considered in addition to, and not as a substitute for, or superior to, any measure of performance prepared in accordance with GAAP. Reconciliations of Adjusted EBITDA amounts to the most directly comparable GAAP measures for each of the quarterly periods in fiscal 2008 are included in the financial information provided as part of this release. CONFERENCE CALL Management will host a conference call on Thursday, January 8, 2009 at 2:00 pm ET / 11:00 am PT, to discuss these results, current operating initiatives, progress on addressing legacy business issues, and initiatives for 2009. 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. The conference call will be broadcast live over the Internet at the following link: http://investor.shareholder.com/media/eventdetail.cfm?eventid=63447&CompanyID=PROSPECT&e=1&mediaKey=FD1088B6F9BDB79FFAEA6E426404E661. 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 PROSPECT MEDICAL HOLDINGS 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 December 29, 2008, as well as risks and uncertainties arising from Prospect's acquisition of Alta and ProMed, and the debt incurred by Prospect in connection with those acquisitions. 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) � Three months endedSeptember 30,(Unaudited) Twelve months endedSeptember 30, 2008 � 2007 2008 � 2007 Revenues: Managed care revenues $52,147 $51,390 $202,844 $146,976 Net patient revenues 35,597 � � 15,583 � � 126,692 � � 15,583 � Total revenues 87,744 66,973 329,536 162,559 � Operating expenses: Managed care cost of revenues 38,459 43,924 158,907 119,657 Hospital operating expenses 24,621 10,699 84,353 10,699 General and administrative 14,342 10,546 57,399 31,897 Depreciation and amortization 2,077 1,798 7,789 2,997 Impairment of goodwill and intangibles 0 � � 27,512 � � 0 � � 27,512 � Total operating expenses 79,499 94,479 308,448 192,762 � Operating income from unconsolidated joint venture 439 � � 349 � � 2,563 � � 2,664 � Operating income (loss) 8,684 (27,157 ) 23,651 (27,539 ) Other (income) expense: Investment income (92 ) (303 ) (616 ) (1,097 ) Interest expense and amortization of deferred financing costs 6,285 3,902 22,341 5,049 Gain in value of interest rate swap arrangements 976 868 (3,096 ) 869 Loss on debt extinguishment 0 � � 0 � � 8,309 � � 0 � Total other expense, net 7,169 4,467 26,938 4,821 � � Income (loss) before income taxes 1,515 (31,624 ) (3,287 ) (32,360 ) Provision (benefit) for income taxes 383 � � (6,967 ) � (1,327 ) � (8,913 ) Income (loss) before minority interest 1,132 (24,657 ) (1,960 ) (23,447 ) Minority interest (10 ) � 3 � � 1 � � 10 � Income (loss) from continuing operations 1,142 (24,660 ) (1,961 ) (23,457 ) Income (loss) from discontinued operations, net of tax 6,354 � � (8,593 ) � 6,169 � � (10,020 ) Net income (loss) before preferred dividend 7,496 (33,253 ) 4,208 (33,477 ) Dividend to preferred stockholders (962 ) � (1,122 ) � (6,760 ) � (1,122 ) � Net income (loss) attributable to common stockholders 6,534 � � (34,375 ) � (2,552 ) � (34,599 ) � Per share data: Basic: Continuing operations $0.01 $(2.44 ) $(0.68 ) $(2.90 ) Discontinued operations $0.39 � � $(0.81 ) � $0.48 � � $(1.18 ) Net Income (loss) attributable to common stockholders $0.40 � � $(3.25 ) � $(0.20 ) � $(4.08 ) Diluted: Continuing operations $0.01 � � $(2.44 ) � $(0.68 ) � $(2.90 ) Discontinued operations $0.31 � � $(0.81 ) � $0.48 � � $(1.18 ) Net Income (loss) attributable to common stockholders $0.32 � � $(3.25 ) � $(0.20 ) � $(4.08 ) � Weighted average shares outstanding: Basic 16,239 � � 10,575 � � 12,885 � � 8,489 � Diluted 20,610 � � 10,575 � � 12,885 � � 8,489 � Prospect Medical Holdings, Inc. Condensed Consolidated Balance Sheets ($ in 000s) � September 30, September 30, 2008 2007 ASSETS Current assets: Cash and cash equivalents $33,583 $22,095 Investments, primarily restricted certificates of deposit 637 637 Patient accounts receivable, net of allowance for doubtful accounts of $3,891 and $4,447 at September 30, 2008 and 2007 18,314 15,840 Government program receivables 4,365 4,274 Risk pool receivables 338 179 Other receivables 2,598 2,111 Third party settlement 216 0 Notes receivable current portion 224 59 Refundable income taxes 2,654 5,041 Deferred income taxes, net 5,788 3,395 Prepaid expenses and other current assets 4,237 3,764 Current assets � discontinued operations 0 � 789 � Total current assets 72,954 58,184 � Property, improvements and equipment: Land and land improvements 18,452 18,452 Buildings 22,233 22,233 Leasehold improvements 1,505 1,418 Equipment 10,628 9,494 Furniture and fixtures 912 � 958 � 53,730 52,555 Less accumulated depreciation and amortization (7,911 ) (4,412 ) Property, improvements and equipment, net 45,819 48,143 Notes receivables, long term portion 238 490 Deposits and other assets 778 776 Deferred financing costs 662 7,431 Goodwill 128,877 129,122 Other intangible assets, net 47,740 � 51,989 � Total assets $297,068 � $296,135 � � LIABILITIES AND SHAREHOLDERS� EQUITY Current liabilities: Accrued medical claims and other health care costs payable $20,480 $21,406 Accounts payable and other accrued liabilities 16,296 14,424 Third-party settlements 0 1,034 Accrued salaries, wages and benefits 11,257 6,579 Current portion of capital leases 341 356 Current portion of long-term debt 12,100 8,000 Other current liabilities 107 1,250 Current liabilities � discontinued operations 0 � 2,728 � Total current liabilities 60,581 55,777 Long-term debt, less current portion 131,921 138,750 Deferred income taxes 24,433 28,670 Malpractice reserve 786 645 Capital leases, net of current portion 442 644 Interest rate swap liability 6,013 1,934 Other long-term liabilities 0 � 100 � Total liabilities 224,176 � 226,520 � Minority interest 81 79 Total shareholders� equity 72,811 � 69,536 � Total liabilities and shareholders� equity $297,068 � $296,135 � Adjusted EBITDA Reconciliation (Unaudited) A reconciliation of Adjusted EBITDA (also referred to as �Normalized EBITDA� in Management discussions) to the most directly comparable GAAP measure in accordance with SEC Regulation S-K follows, for each of the four quarters of fiscal 2008. Q1 08 � Q2 08 � Q3 08 � Q4 08 � Fiscal 2008 ($ in millions) � Operating income � per earnings release (1) $4.1 $6.4 $4.1 $8.7 Depreciation and amortization 1.9 1.9 1.9 2.1 Prior CEO severance 1.3 Other adjustments (2) 2.4 1.6 2.9 0.8 � Adjusted EBITDA $8.4 $ 9.9 $10.2 $11.6 $40.1 � � Net Debt: Adjusted EBITDA Ratio: Ending long-term debt $144,021 Less: Ending cash and cash equivalents (33,583 ) Ending Net Debt $110,438 � Net Debt: Adjusted EBITDA Ratio 2.75 � (1) Operating income for all of fiscal 2008 is not intended to correspond to the sum of the quarterly operating income per prior earnings releases due primarily to classification of the results of discontinued operations. (2) Comprised of amounts considered by management to be non-recurring, including certain legacy IPA costs, special investigation costs, restatement costs, lender charges, and a portion of the Q4 08 charge for equity grants.