News Articles

Prospect Medical Holdings Reports Fiscal 2006 Second Quarter Results
May 14, 2006

CULVER CITY, Calif.--(BUSINESS WIRE)--May 15, 2006--Prospect Medical Holdings, Inc. (AMEX: PZZ - News):

Q2 FY 2006 Highlights:

• Revenues increase 6.9% to $34.6 million
• Gross margin increases to 30.7% from 26.8%
• Net income up 33.3% to $1.2 million, or $0.15 per diluted share

Prospect Medical Holdings, Inc. (AMEX: PZZ - News; "Prospect"), which manages the medical care of approximately 178,000 HMO enrollees in Southern California, today announced financial results for its fiscal 2006 second quarter ended March 31, 2006 (see attached tables).

Dr. Jack Terner, Chairman and Chief Executive Officer of Prospect, commented, "We are very pleased with our performance in the fiscal 2006 second quarter, which saw yet another quarter of consecutive earnings per share increases. As evidenced by these strong financial results, Prospect continues to execute on its dual-pronged growth strategy. Operationally, the fiscal 2006 second quarter results include a full three-months of operations for Genesis Healthcare ("Genesis"), acquired in November 2005. These results demonstrate our continuing successful execution of the business model. Regarding acquisitions, we are in discussion with several potential acquisition targets, and hope to consummate at least one additional, accretive transaction during calendar year 2006."

"We continue to benefit from organic growth initiatives focused on Senior enrollees. The fiscal 2006 second quarter included the first-ever revenues generated by our participation in Orange County's OneCare program, a managed care program for the approximately 50,000 individuals who qualify for both Medicare and Medi-Cal benefits ("Medi-Medis"). As of March 31, 2006, approximately 2,200 Medi-Medi beneficiaries had joined Prospect's affiliated IPAs. We are also very encouraged by the progress being made at Brotman Medical Center, both operationally and strategically. During the second quarter, one of the largest Senior HMOs in California began a marketing campaign, promoting the Prospect/Brotman full-risk Medicare hospital product. Prospect is virtually alone in offering this product in the large West Los Angeles market. In addition, our efforts in capturing CMS "Risk Adjustment" dollars, reflecting Prospect's care of those Seniors requiring higher levels of care, had a positive impact on second quarter revenues, which we expect to continue going forward."

Revenues for the second quarter of fiscal 2006 increased 6.9% to $34.6 million from $32.3 million in the same period last year, reflecting the acquisition of Genesis, as well as higher capitation rates on Prospect's core business as a result of the higher number, and proportion, of more profitable Senior members.

Gross margin for the second quarter of fiscal 2006 improved to 30.7% of total operating revenue from 26.8% in the same period one year ago. This increase was due primarily to the same factors referenced above regarding revenue increases.

General and administrative expenses increased to 24.5% of total operating revenues from 20.3% in the second quarter of fiscal 2005. Higher expenses in the fiscal 2006 second quarter included outside management fees for Genesis, which costs will be eliminated once Genesis has been fully integrated into Prospect's operation, Information Technology development projects related to new revenue initiatives (including the OneCare Program) and Sarbanes-Oxley implementation costs.

Operating income increased 24.8% to $2.1 million from $1.7 million in the same period last year. Net income for the second quarter of fiscal 2006 rose 33.3% to $1.2 million, or $0.15 per diluted share, on approximately 8.2 million diluted shares outstanding ("shares outstanding"), from net income of $922,000, or $0.11 per diluted share, in the second quarter of fiscal 2005, on approximately 8.8 million shares outstanding.

FINANCIAL POSITION

Prospect's balance sheet at March 31, 2006 included cash and equivalents of $16.0 million and shareholders' equity of $30.2 million, or $3.68 per diluted share. Prospect had $10.9 million outstanding on its term loan facilities, and had utilized $2 million of its $5 million revolving credit facility. The $2 million was repaid in April, 2006.

ABOUT THE COMPANY

Prospect Medical Holdings manages the medical care of individuals enrolled in HMO plans in Southern California. The Company, through its Independent Physician Associations ("IPAs"), contracts with health care professionals to provide a full range of services to HMO enrollees. Prospect does not acquire bricks and mortar, but rather the medical management of the lives serviced by the acquired IPAs. Services provided by Prospect include contract negotiations, physician recruiting and credentialing, HR, claims administration, financial services, provider relations, case management, quality assurance, data collection and MIS. Prospect owned 11 IPAs at March 31, 2006, comprised of approximately 9,000 primary care and specialist physicians serving approximately 178,000 HMO members.

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 27, 2005 and in the Form 10-Q filed on May 15, 2006. 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 Income

                              (Unaudited)

                         Three months ended       Six months ended

                              March 31                March 31

                      ------------------------------------------------

                          2006        2005        2006        2005

                       ----------- ----------- ----------- -----------

Revenues              $34,572,146 $32,330,622 $68,036,905 $65,611,458

Cost of revenues       23,963,663  23,656,214  48,449,879  48,456,826

                       ----------- ----------- ----------- -----------

Gross margin           10,608,483   8,674,408  19,587,026  17,154,632

Operating expenses:

  General and

   administrative       8,461,134   6,550,266  15,592,208  13,123,077

  Depreciation and

   amortization           335,573     263,680     657,589     496,910

                       ----------- ----------- ----------- -----------

Total operating

 expenses               8,796,707   6,813,946  16,249,797  13,619,987

Operating income

 (loss) from

 unconsolidated joint

 venture                  330,732    (143,396)    676,893      97,682

                       ----------- ----------- ----------- -----------

Operating income        2,142,508   1,717,066   4,014,122   3,632,327

Other (income)

 expense:

  Investment income      (204,722)    (99,407)   (439,189)   (177,388)

  Interest expense        288,229     271,414     545,740     449,416

                       ----------- ----------- ----------- -----------

Total other (income)

 expense, net              83,507     172,007     106,551     272,028

                      ------------ ----------- ----------- -----------

Income before income

 taxes                  2,059,001   1,545,059   3,907,571   3,360,299

Provision for income

 taxes                    825,392     618,650   1,569,575   1,346,809

                      ------------ ----------- ----------- -----------

Net income before

 minority interest      1,233,609     926,409   2,337,996   2,013,490

Minority interest           4,386       4,561       5,984       4,945

                       ----------- ----------- ----------- -----------

Net income            $ 1,229,223 $   921,848 $ 2,332,012 $ 2,008,545

                       =========== =========== =========== ===========

Net income per common

 share:

  Basic               $      0.18 $      0.20 $      0.34 $      0.45

                       =========== =========== =========== ===========

  Diluted             $      0.15 $      0.11 $      0.29 $      0.23

                       =========== =========== =========== ===========

Weighted average

 shares outstanding:

  Basic                 6,887,286   4,549,828   6,792,907   4,446,048

                       =========== =========== =========== ===========

  Diluted               8,233,916   8,757,795   7,994,380   8,716,551

                       =========== =========== =========== ===========

                    Prospect Medical Holdings, Inc.

                 Condensed Consolidated Balance Sheets

                                              March 31,  September 30,

                                                 2006         2005

                                             ------------ ------------

                                             (Unaudited)

ASSETS

Current assets

Cash and cash equivalents                    $16,033,876  $16,949,304

Investments, primarily restricted

 certificates of deposit                         835,153    1,100,000

Risk pool receivables                            450,000       57,267

Other receivables, net of allowances of

 $667,000 and $802,000 at  March 31, 2006 

 and September 30, 2005                          866,159    1,940,536

Notes receivable, current portion                 49,676       52,160

Prepaid expenses and other                       735,115      646,932

Refundable income taxes                        1,393,252

Deferred income taxes, net                     1,537,970    1,904,137

                                              -----------  -----------

                Total current assets          21,901,201  $22,650,336

Property, improvements and equipment:

     Land                                         40,620       40,620

     Leasehold improvements                      986,827      726,973

     Equipment                                 3,311,815    3,342,385

     Furniture and fixtures                      561,134      546,523

                                              -----------  -----------

                                               4,900,396    4,656,501

Less accumulated depreciation and

 amortization                                 (3,713,051)  (3,454,282)

                                              -----------  -----------

Property, improvements and equipment, net      1,187,345    1,202,219

Notes receivable, long term portion              558,034      572,979

Deposits                                         546,438      583,226

Goodwill                                      38,623,322   31,404,328

Other intangible assets, net                   1,726,164    1,317,614

                                              -----------  -----------

Total assets                                 $64,542,504  $57,730,702

                                              ===========  ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accrued medical claims and other health care

 costs payable                               $11,695,000  $11,532,328

Accounts payable and other accrued

 liabilities                                   8,389,769    9,799,968

Current maturities of long-term debt and

 capital leases                                4,800,000    2,000,000

                                              -----------  -----------

Total current liabilities                     24,884,769   23,332,296

Long-term debt, less current maturities        8,100,000    6,166,667

Deferred income taxes                          1,066,930    1,045,696

Other long-term liabilities                      185,000      185,000

                                              -----------  -----------

                    Total liabilities         34,236,699   30,729,659

Minority interest                                 71,389       65,405

Shareholders' equity:

Common stock, $0.01 par value; 40,000,000

 shares authorized; 6,922,828 and 6,640,362

 shares issued and outstanding at March 31,

 2006 and September 30, 2005                      69,228       66,403

Additional paid-in capital                    19,337,428   18,373,487

Retained earnings                             10,827,760    8,495,748

                                              -----------  -----------

         Total shareholders' equity           30,234,416   26,935,638

                                              -----------  -----------

         Total liabilities and shareholders'

          equity                             $64,542,504  $57,730,702

                                              ===========  ===========