Fourth-quarter and full-year fiscal 2009 results announced by Prospect Medical Holdings

Prospect Medical Holdings, Inc. (NASDAQ: PZZ) (“Prospect”), which owns and operates five community-based hospitals and manages the medical care of approximately 177,000 HMO enrollees in southern California, today announced financial results for its fiscal 2009 fourth quarter and year ended September 30, 2009.

Prospect continued to demonstrate success at growing and diversifying revenues, reducing operating and administrative costs, strengthening its capital structure, and efficiently delivering quality, coordinated acute and preventative patient care through its Medical Group and Hospital segments, generating continued strong results for the fourth quarter and full year of fiscal 2009. On a consolidated basis, Prospect generated double-digit increases in revenues, operating income and Adjusted EBITDA, and, excluding non-recurring charges, operated profitably. The Company’s Hospital Services segment grew both organically and as a result of increasing its stake in Brotman Medical Center, Inc. (“Brotman”) to 72% effective April 14, 2009. Profitability at the Medical Group segment rose for both the fourth quarter and full year of fiscal 2009. Cash and investments rose by more than $5 million in the fourth quarter, and Prospect’s $15 million revolving credit facility remains undrawn.

The Company’s ability to efficiently deliver quality, cost effective healthcare through its Hospital and Medical Group segments has enabled it to succeed despite the difficult California marketplace. The Company believes that the California marketplace may improve due to a number of factors, including:

• The number of beds and hospitals in California continues to decrease and significant cost, seismic and other regulatory barriers exist to adding new beds, even as the population ages;
• The Governor’s budget contemplates $2.4 billion in additional funds for healthcare and social services, including a $1.1 billion increase to the Department of Health Care Services due to caseload and rate adjustments in Medi-Cal;
• $1.6 billion additional Federal Funds pursuant to Assembly Bill 1383 are expected to become available to California in 2010, including additional reimbursements expected to benefit Prospect;
• Expected favorable provisions in federal health care legislation, including greater access for the uninsured population, protection for hospital reimbursement rates and favorable treatment for cost-effective providers of healthcare;
• Medicaid per diems and Disproportionate Share Hospital (DSH) payments in California are considerably below national averages; and
• Californians are currently utilizing less acute care than the national averages (admissions, in-patient days and ER visits).

Prospect’s operating model, which has proven successful in this difficult southern California market, provides the Company with a high degree of confidence that it can continue to successfully operate within California and elsewhere under prospective healthcare reforms being legislated in Washington, DC.

Finally, the Company intends to continue its focus on further improving its existing operations, exploring opportunities to expand organically, and pursuing strategic acquisitions within California and in other parts of the country.

CONSOLIDATED RESULTS OVERVIEW

Consolidated revenues for the fiscal 2009 fourth quarter rose 35% to $118.4 million from $87.7 million in the same period last year, due primarily to a $30.1 million contribution from Brotman. Consolidated revenues for all of fiscal 2009 rose 22% to $402.2 million from $329.5 million last year, due to a $60.2 million contribution from Brotman and an $18.6 million increase in revenues generated by the core Alta hospitals, offset by a $6.1 million decline in managed care revenues.

Operating income for the fiscal 2009 fourth quarter rose 38% to $12.0 million from $8.7 million in the same period last year, with the 2009 increase comprised of additional contributions of $3.1 million from the Hospital Segment and $0.7 million from the Medical Group Segment. Operating income for all of fiscal 2009 rose 70% to $40.3 million from $23.7 million last year, with the 2009 increase comprised of additional contributions of $11.1 million from the Hospital Segment and an additional $2.6 million contribution from the Medical Group Segment.

Net loss attributable to common stockholders for the fiscal 2009 fourth quarter was $2.3 million, or $0.11 per diluted share, on approximately 20.6 million diluted shares outstanding, as compared to a net income attributable to common stockholders of $6.5 million, or $0.32 per diluted share, in the fiscal 2008 fourth quarter, on approximately 20.6 million diluted shares outstanding. The net loss for the 2009 fourth quarter included non-recurring charges of $2.6 million in prepayment penalties incurred when refinancing the prior debt and related interest rate swap termination costs of $6.9 million. Net income for the 2008 fourth quarter included a gain of $6.4 million, or $0.31 per share, from the sale of discontinued operations and preferred stock dividends of $1.0 million.

For all of fiscal 2009, the net loss attributable to common stockholders was $2.4 million, or $0.12 per diluted share, on approximately 20.5 million weighted average shares outstanding, as compared to a net loss attributable to common stockholders for fiscal 2008 of $2.6 million, or $0.20 per diluted share, on approximately 12.9 million weighted average shares outstanding. The fiscal 2009 net loss included $14.7 million of non-recurring charges from prior debt financing matters. The fiscal 2008 net loss included a gain in the value of interest rate swap arrangements of approximately $3.1 million, a loss on debt extinguishment of $8.3 million, a gain of $6.2 million from the sale of discontinued operations and preferred stock dividends of $6.8 million.

All accrued preferred stock dividends were eliminated during August 2008, in connection with the conversion of preferred stock to common stock.

Adjusted EBITDA for the fourth quarter and full fiscal year 2009 was $14.6 million and $53.4 million, respectively, as compared to $11.6 million and $40.1 million, respectively in fiscal 2008 (see reconciliation tables at the back of this release).

SEGMENT RESULTS

Hospital Services

Prospect’s Hospital Services segment consists of the Company’s five community-based hospitals in southern California.

The 2009 information above includes results for Brotman since April 14, 2009.

Fiscal 2009 fourth-quarter Hospital revenues increased by approximately 85% to $65.8 million, primarily as a result of Brotman’s $30 million contribution. Full-year Hospital revenues increased approximately 62% to $205.5 million, primarily as a result of Brotman’s $60 million contribution, plus an approximately $19 million increase in “same-store” revenues at the Company’s core Alta hospitals, due to increases in Medicare and Medi-Cal admissions and higher Medicare reimbursement rates.

Hospital operating income for the fourth quarter of fiscal 2009 rose 52% to $9.2 million from $6.0 million in the fourth quarter of fiscal 2008. Full-year hospital operating income rose 44% to $36.7 million, primarily coming from the core Alta hospitals.

Medical Groups

Prospect’s Medical Groups manage the medical care of individuals enrolled in HMO plans in southern California, through a network of primary care and specialist physicians.

Medical Group revenues for the fourth quarter of fiscal 2009 increased by approximately $0.5 million, or 1%, compared with the fourth quarter of fiscal 2008, primarily resulting from increased performance incentive revenues received in the current year, as well as rate increases, which was offset by lower HMO enrollment, due in part to increased unemployment. For the full year, Medical Group revenues decreased approximately $6.1 million, or 3%, as a result of lower HMO enrollment and cancellation of certain unprofitable Medi-Cal contracts, positively offset by rate increases and increased performance incentive revenues.

Medical Group cost of revenues represented 75.1% and 76.8% of total Medical Group revenues for the fiscal 2009 fourth quarter and full year, compared to 73.8% and 78.3%, respectively, in the fiscal 2008 fourth quarter and full year. These improvements resulted from higher per-enrollee reimbursement levels, capitating certain additional specialties, increased performance incentive revenues, offset by rate increases to key physicians at certain Medical Groups.

Medical Group operating income for the fiscal 2009 fourth quarter improved to $6.3 million from $5.7 million in the fourth quarter of fiscal 2008, including consideration of the items discussed above. Medical Group operating income for all of fiscal 2009 increased to $15.8 million from $13.2 million for all of fiscal 2008, including consideration of the items discussed above.