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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
_____ to _____
Commission File Number: 0-22392
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PRIME MEDICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2652727
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1301 Capital of Texas Highway, Austin, Texas 78746
(Address of principal executive offices) (Zip Code)
(512) 328-2892
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. YES X NO
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K or
any amendment to this Form 10-K. _____
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within 60 days prior
to the date of filing.
Aggregate Market Value at March 15, 2000: $140,420,073
Indicate the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Number of Shares Outstanding at
Title of Each Class March 15, 2000
------------------- --------------
Common Stock, $.01 par value 16,398,467
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's definitive proxy material for the
2000 annual meeting of shareholders are incorporated by reference into Part III
of the Form 10-K.
1
PRIME MEDICAL SERVICES, INC.,
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
PART I
ITEM 1. BUSINESS
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Prime Medical Services, Inc., a Delaware corporation ("Prime" or the
"Company"), is the largest provider of lithotripsy services in the United
States. Lithotripsy is a non-invasive procedure for the treatment of kidney
stones, typically performed on an outpatient basis, that eliminates the need for
lengthy hospital stays and extensive recovery periods associated with surgery.
The Company has 65 lithotripters of which 59 are mobile and six are fixed site.
The Company's lithotripters performed approximately 38,000 procedures in the
United States in 1999 through a network of approximately 450 hospitals and
surgery centers in 34 states.
Lithotripters fragment kidney stones by use of extracorporeal shock
wave lithotripsy. The Company provides services related to the operation of the
lithotripters, including scheduling, staffing, training, quality assurance,
maintenance, regulatory compliance and contracting with payors, hospitals and
surgery centers. Medical care is rendered by the urologists utilizing the
lithotripters. Management believes that the Company has collected the industry's
largest and most comprehensive lithotripsy database, containing detailed
treatment and outcomes data on over 160,000 lithotripsy procedures. The Company
and its associated urologists utilize this database in seeking to provide the
highest quality of lithotripsy services as efficiently as possible.
From 1992 through 1999, the Company completed 13 acquisitions involving
58 lithotripters. Since 1992, the Company has substantially divested its
original non-lithotripsy businesses.
During 1997 the Company acquired a 75% interest in a manufacturing
company which provides manufacturing services, and installation, refurbishment
and repair of major medical equipment for mobile medical services providers. The
primary intention of this acquisition was to provide vertical integration with
the lithotripsy business. However, the non-lithotripsy business of the
manufacturing segment has continued to increase. In addition to manufacturing
services for lithotripsy trailers, the manufacturing segment also provides
manufacturing services for magnetic resonance imaging ("MRI") trailers and
cardiac catheterization lab trailers.
During 1999 the Company completed two acquisitions in the rapidly
growing field of refractive vision correction (RVC). These two acquisitions
included six laser vision correction facilities which performed approximately
19,000 procedures during 1999. These facilities provide laser vision correction
of common refractive vision disorders such as myopia (nearsightedness),
hyperopia (farsightedness) and astigmatism.
There are currently two procedures that use the excimer laser ("laser")
to correct vision disorders: Laser in-situ Keratomileusis ("LASIK") and
Photorefractive Keratectomy ("PRK"). LASIK is an outpatient procedure that
accounts for nearly 90% of laser procedures done today. In LASIK, an ophthalmic
surgeon uses a special knife called a microkeratome to peal back the top layers
of the cornea and ablates the underlying corneal tissue with the laser before
replacing the corneal layer. LASIK has three key advantages over PRK
(photorefractive keratectomy) where the laser is used without creating the
corneal flap: less pain, shorter recovery time, and fewer visual side effects.
Patients' enthusiasm and word-of-mouth referrals for the procedure have been an
important part of LASIK's rapid adoption.
2
The Company has three reportable segments: lithotripsy, manufacturing
and RVC. Other operating segments, which do not meet the qualitative thresholds
for reportable segments, include prostatherapy services. See Note N to the
consolidated financial statements for segment disclosures.
Lithotripsy Segment Overview
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Kidney stones develop from crystals made up primarily of calcium which
separate from urine and build up on the inner surfaces of the kidney. The exact
cause of kidney stone formation is unclear, and there is no known preventative
cure in the vast majority of cases. Approximately 25% of all kidney stones do
not pass spontaneously and therefore require medical or surgical treatment.
Kidney stone treatments used by urologists include lithotripsy, drug therapy,
endoscopic extraction or open surgery. While the nature and location of a kidney
stone impacts the choice of treatment, the Company believes the majority of all
kidney stones that require treatment are treated with lithotripsy because it is
non-invasive, typically requires no general anesthesia, and rarely requires
hospital stays. After fragmentation by lithotripsy, the resulting kidney stone
fragments pass out of the body naturally. Recovery from the procedure is usually
a matter of hours.
Kidney stone disease is most prevalent in the southern United States.
Men are afflicted with kidney stones more than twice as frequently as women,
with the highest incidence occurring in men 45 to 64 years of age. During 1999
the Company received approximately 79% of its revenues from the lithotripsy
segment.
Kidney Stone Treatment Methods
A number of kidney stone treatments are used by urologists ranging from
non-invasive procedures, such as drug therapy or lithotripsy, to invasive
procedures, such as endoscopic extraction or open surgery. The type of treatment
a urologist chooses depends on a number of factors, such as the size and
chemical make-up of the stone, the stone's location in the urinary system and
whether the stone is contributing to other urinary complications such as
blockage or infection.
Certain types of less common kidney stones may be dissolved by drugs
which allow normal passage from the urinary system. Stones located in certain
areas of the urinary tract may be extracted endoscopically. These procedures
commonly require general or local anesthesia and can injure the involved areas
of the urinary tract. Frequently, kidney stones are located where they are not
accessible by an endoscopic procedure. Prior to the development of lithotripsy,
stones lodged in the upper urinary tract were often treated by open surgery or
percutaneous stone removal, both major operations requiring an incision to gain
access to the stone. After such procedures, the patient typically spends several
days in the hospital followed by a convalescence period of three to six weeks.
As the technology for treating kidney stones has improved, there has been a
shift from more expensive and complicated invasive procedures to safer, more
cost efficient and less painful non-invasive procedures, such as lithotripsy.
Extracorporeal Shock Wave Lithotripsy
General. The lithotripter has dramatically changed the course of kidney
stone disease treatment since lithotripsy is normally performed on an outpatient
basis, often without general anesthesia. Recovery times are generally only a few
hours, and most patients can return to work the next day. There are two basic
types of lithotripsy treatment currently available: electromagnetic and
spark-gap. A decision regarding which type is used in any instance may depend on
several factors, among which are the treating physician's preferences, treatment
times, stone location, and anesthesia considerations. The Company has 51
electromagnetic machines and 14 spark-gap machines.
3
Electromagnetic Technology. Most new lithotripters utilize an
electromagnetic shock wave component that eliminates the need for disposable
electrodes. The use of lithotripters employing electromagnetic technology allows
for more precise focusing of shock wave energy and more predictable energy
delivery than other lithotripsy technologies, which eliminates the need for
anesthesia in most cases. Utilization of systems employing electromagnetic
technology usually results in fragmentation of the kidney stone in between 60
and 90 minutes.
Spark Gap Technology. With these lithotripsy systems, shock waves
generated by a disposable high-voltage spark electrode are focused on a kidney
stone. Utilization of systems employing spark gap technology usually results in
fragmentation of the kidney stone in less than 60 minutes. The use of spark-gap
technology often requires the administration of sedatives or intravenous
anesthesia care and in some cases requires general anesthesia.
Manufacturing Segment Overview
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In September 1997, the Company, through its acquisition of a 75%
interest in AK Associates, L.L.C. ("AK"), began providing manufacturing services
and installation, upgrade, refurbishment and repair of major medical equipment
for mobile medical services providers. The Company paid $4.8 million for this
interest, plus an earn-out of $1.1 million, which was paid in February 1999.
Certain members of AK management own the remaining 25% of AK. During 1998 AK
became certified by General Electric Company ("GE") to provide trailers for MRI
equipment, and during 1999 AK became certified by two additional companies to
provide trailers for their equipment. These certifications have resulted in
increased revenues in the manufacturing segment. The Company received
approximately 16 % of its revenues from the manufacturing segment in 1999.
RVC Segment Overview
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During 1999, the Company entered into the RVC field through two
acquisitions. Effective September 1, 1999, the Company acquired a 60% interest
in two refractive surgery centers, owned and operated by Barnet Dulaney Eye
Center, for approximately $8.8 million in cash, a warrant to purchase 29,000
shares of Company common stock and a contingent earn-out obligation to be paid
at the end of the first year of operations after acquisition. Also effective
September 1, 1999, the Company acquired, through a majority owned subsidiary,
60% of the outstanding stock of Horizon Vision Centers, Inc. ("Horizon") for
approximately $10.9 million in cash. Horizon operates four refractive surgery
centers. The Company received approximately 3% of its revenue from the RVC
segment in 1999.
Refractive Disorders
The primary function of the human eye is to focus light. The eye works
much like a camera; light rays enter the eye through the cornea, which provides
most of the focusing power. Light then travels through the lens where it is
fine-tuned to focus properly on the retina. The retina, located at the back of
the eye, acts like the film in the camera, changing light into electric impulses
that are carried by the optic nerve to the brain. To see clearly, light must be
focused precisely on the retina. The amount of refraction required to properly
focus images depends on the curvature of the cornea and the size of the eye. If
the curvature is not correct, the cornea cannot properly focus the light passing
through it onto the retina, and the viewer will see a blurred image. Refractive
disorders, such as myopia, hyperopia and astigmatism, result from an inability
of the cornea and the lens to focus images on the retina properly.
4
Laser Vision Correction Procedures
In both PRK and LASIK the physician assesses the corneal correction
required and programs the laser. Using a specially developed algorithm, the
laser's software calculates the optimal number of pulses needed to achieve the
corneal correction. Both PRK and LASIK are performed on an outpatient basis
without general anesthesia, using only topical anesthetic eye drops. The eye
drops eliminate the reflex to blink, while an eyelid holder is inserted to
prevent blinking. The patient reclines in a chair, with his or her eye focused
on a target, and the surgeon positions the patient's cornea for the procedure.
The surgeon uses a foot pedal to apply the laser beam, which emits a rapid
succession of laser pulses. The actual laser treatment takes 15 to 90 seconds to
perform and the entire procedure, from set-up to completion, takes 10 to 15
minutes.
Prostatherapy Segment Overview
- ------------------------------
In October 1997, the Company began providing thermotherapy services for
the treatment of benign prostatic hyperplasia ("BPH"). BPH is the non-cancerous
enlargement of the prostate, a condition common in men over age 60.
Thermotherapy uses microwaves to apply heat to the prostate, resulting in relief
of the symptoms of BPH without damaging surrounding tissues. Thermotherapy
relieves the symptoms of BPH without incurring the risks of complications often
associated with surgery and more invasive procedures. The Company operates three
mobile thermotherapy devices servicing hospitals and surgery centers in eastern
North Carolina and southern California. The Company is monitoring the success of
its thermotherapy operations and may expand such operations in the future. The
Company received approximately 2% of its revenues from the prostatherapy segment
in 1999.
Potential Liabilities-Insurance
- -------------------------------
All medical procedures performed in connection with the Company's
business activities are conducted directly by, or under the supervision of
physicians, who are not employees of the Company. The Company does not provide
medical services to any patients. However, patients being treated at health care
facilities at which the Company provides its non-medical services could suffer a
medical emergency resulting in serious injury or death, which could subject the
Company to the risk of lawsuits seeking substantial damages.
The Company currently maintains general and professional liability
insurance with a total limit of $1,000,000 per loss event and $3,000,000 policy
aggregate and an umbrella excess limit of $10,000,000, with a deductible of
$50,000 per occurrence. In addition, the Company requires medical professionals
who utilize its services to maintain professional liability insurance. All of
these insurance policies are subject to annual renewal by the insurer. If these
policies were to be canceled or not renewed, or failed to provide sufficient
coverage for the Company's liabilities, the Company might be forced to
self-insure against the potential liabilities referred to above. In that event,
a single incident might result in an award of damages which might have a
material adverse effect on the operations of the Company.
Government Regulation and Supervision
- -------------------------------------
The Company is subject to extensive regulation by both the federal
government and the states in which the Company conducts its business. The
Company is subject to Section 1128B of the Social Security Act (known as "the
Illegal Remuneration Statute"), which imposes civil and criminal sanctions on
persons who solicit, offer, receive or pay any remuneration, directly or
indirectly, for referring, or arranging for the referral of, a patient for
treatment that is paid for in whole or in part by Medicare, Medicaid or similar
government programs. The federal government has published regulations that
provide exceptions or a "safe harbor" for certain business transactions.
Transactions that are structured within the safe harbors are deemed not to
5
violate the Illegal Remuneration Statute. Transactions that do not satisfy all
elements of a relevant safe harbor do not necessarily violate the Illegal
Remuneration Statute, but may be subject to greater scrutiny by enforcement
agencies. The arrangements between the Company and the partnerships and other
entities in which it owns an indirect interest and through which the Company
provides most of its lithotripsy services and all of its prostatherapy services
(and the corresponding arrangements between such partnerships and other entities
and the treating physicians who own interests therein and who use the
lithotripsy and prostatherapy facilities owned by such partnerships and other
entities) could potentially be questioned under the illegal remuneration
prohibition and may not fall within the protection afforded by these safe
harbors. Many states also have laws similar to the Federal Illegal Remuneration
Statute. While failure to fall within the safe harbors may subject the Company
to scrutiny under the Illegal Remuneration Statute, such failure does not
constitute a violation of the Illegal Remuneration Statute. Nevertheless, these
illegal remuneration laws, as applied to activities and relationships similar to
those of the Company, have been subjected to limited judicial and regulatory
interpretation, and the Company has not obtained or applied for any opinion of
any regulatory or judicial authority that its business operations and
affiliations are in compliance with these laws. Therefore, no assurances can be
given that the Company's activities will be found to be in compliance with these
laws if scrutinized by such authorities.
In addition to the Illegal Remuneration Statute, Section 1877 of the
Social Security Act ("Stark II") imposes certain restrictions upon referring
physicians and providers of certain designated health services under the
Medicare, Medicaid and Champus Programs ("Government Programs"). Subject to
certain exceptions, Stark II provides that if a physician (or a family member of
a physician) has a financial relationship with an entity: (i) the physician may
not make a referral to the entity for the furnishing of designated health
services reimbursable under the Government Programs; and (ii) the entity may not
bill Government Programs, any individual or any third-party payor for designated
health services furnished pursuant to a prohibited referral under the Government
Programs. The prohibitions of Stark II only apply to the treatment of Government
Program patients, and have no application to services performed for
non-government program patients. Entities and physicians committing an act in
violation of Stark II will be required to refund amounts collected in violation
of the statute and also are subject to civil money penalties and exclusion from
the Government Programs. Physicians are investors in 51 of the Company's 65
lithotripsy operations, all of the three Company affiliates engaged in
thermotherapy services and each of the Company's six refractive vision
correction facilities. The Company lithotripsy and thermotherapy affiliates with
physician-investors are referred to herein as the "Company Physician Entities".
Many key terms in Stark II are not adequately defined and the statute
is silent regarding its application to vendors, such as the Company Physician
Entities, contracting "'under arrangements" with hospitals for the provision of
outpatient services. Prior to the publication of the Proposed Stark Regulations
described below, the Company interpreted Stark II consistently with the informal
view of the General Counsel for Health and Human Services, and concluded that
the statute did not apply to its method of conducting business. Based upon a
reasonable interpretation of Stark II, by referring a patient to a hospital
furnishing the outpatient lithotripsy or thermotherapy services "under
arrangements" with the Company Physician Entities, a physician investor in a
Company Physician Entity is not making a referral to an entity (the hospital) in
which they have an ownership interest.
On January 9, 1998, the federal government published proposed
regulations under Stark II (the "Proposed Stark Regulations"). By clarifying
certain ambiguities and defining certain statutory terms, the Proposed Stark
Regulations and accompanying commentary apply the physician referral
prohibitions of Stark II to the Company Physician Entities' practice of
contracting "under arrangements" with hospitals for treatment and billing of
Government Program patients. Only hospitals can bill the Government Programs for
lithotripsy and thermotherapy services; thus contracting under arrangements with
hospitals was the way the Company Physician Entities economically participated
in the treatment of Government Program patients. Absent a restructuring of
6
traditional operations to comply with the government's interpretation of Stark
II, the physician-investors will be prohibited from referring Government Program
patients to the hospitals contracting with the Company Physician Entities. The
Company cannot predict when final Stark II regulations will be issued or the
substance of the final regulations, but the interpretive provisions of the
Proposed Stark Regulations may be viewed as the federal government's interim
enforcement position until final regulations are issued. Restructuring
traditional operations may reduce Company revenues and limit future growth by
(i) reducing or eliminating revenues attributable to the treatment of Government
Program patients by the Company Physician Entities, (ii) reducing revenues from
the treatment of non-government patients by Company Physician Entities due to
physician, hospital and third-party payor anxiety and concern created by Stark
II, (iii) requiring the Company Physician Entities to restructure their
operations to comply with Stark II, (iv) restricting the acquisition or
development of additional lithotripsy or thermotherapy operations that will both
treat Government Program patients and have referring physician-investors, (v)
impairing the Company's relationship with urologists and (vi) otherwise
materially adversely impacting the Company.
Many states currently have laws similar to Stark II that restrict a
physician with a financial relationship with an entity from referring patients
to that entity. Often these laws contain statutory exceptions for circumstances
where the referring physician, or a member of his practice group, treats their
own patients. States also commonly require physicians to disclose to patients
their financial relationship with an entity. The Company believes that it is in
material compliance with these state laws. Nevertheless, these state
self-referral laws, as applied to activities and relationships similar to those
of the Company, have been subjected to limited judicial and regulatory
interpretation, and the Company has not obtained or applied for any opinion of
any regulatory or judicial authority that its business operations and
affiliations are in compliance with these laws. Therefore, no assurances can be
given that the Company's activities will be found to be in compliance with these
laws if scrutinized by such authorities.
In addition, upon the occurrence of changes in the law that may
adversely affect operations, the Company is required to purchase the interests
of physician-investors for certain of the Company Physician Entities. These
mandatory purchase obligations require the payment by the Company of a multiple
of earnings similar to multiples used by the Company in pricing the original
acquisition of such interests. To the extent the Company is required to purchase
such interests, such purchases might cause a default under the terms of the
Company's senior credit facility and senior subordinated notes, impair the
Company's relationship with physicians and otherwise have a material adverse
impact on the Company. Regulatory developments, such as Stark II, might also
dictate that the Company purchase all the interests of its physician-investors,
regardless of any contractual requirements to do so, or substantially alter its
business and operations to remain in compliance with applicable laws.
Accordingly, there can be no assurance that the Company will not be required to
change its business practices or its investment relationships with physicians or
that the Company will not experience a material adverse effect as a result of
any challenge made by a federal or state regulatory agency. In addition, there
can be no assurance that physician-investors who, voluntarily or otherwise,
divest of their interests in Company Physician Entities will continue to refer
patients at the same rate or at all.
Some states require approval, usually in the form of a certificate of
need ("CON"), prior to the purchase of major medical equipment exceeding a
predesignated capital expenditure threshold or for the commencement of certain
clinical health services. Such approval is generally based upon the anticipated
utilization of the service and the projected need for the service in the
relevant geographical area of the state where the service is to be provided. CON
laws differ in many respects, and not every state's CON law applies to the
Company. Most of the Company's operations originated in states which did not
require a CON for the Company's services, and the Company has obtained a CON in
states where one is required. Some states also require registration of
lithotripters with the state agency which administers its CON program. Such
7
registration is not subject to any required approval, but rather is an
administrative matter imposed so that the state will be aware of all existing
clinical health services. The Company registers in those states which require
these filings.
All states in which the Company operates require registration of the
fluoroscopic x-ray tubes which are utilized to locate the kidney stones treated
with the Company's lithotripters. The registration requirements are imposed in
order to facilitate periodic inspection of the fluoroscopic tubes.
Some states have regulations that require facilities such as mobile
lithotripters and thermotherapy facilities to be licensed and to have
appropriate emergency care resources and qualified staff meeting the stated
educational and experience criteria. The Company's lithotripsy equipment is
subject to regulation by the U.S. Food & Drug Administration, and the motor
vehicles utilized to transport the Company's mobile lithotripsy and
thermotherapy equipment are subject to safety regulation by the U.S. Department
of Transportation and the states in which the Company conducts its mobile
lithotripsy and thermotherapy business. The Company believes that it is in
material compliance with these regulations.
Except as provided herein, the Company believes it complies in all
material respects with the foregoing laws and regulations, and all other
applicable regulatory requirements; however, these laws are complex and have
been broadly construed by courts and enforcement agencies. Thus, there can be no
assurance that the Company will not be required to change its practices or its
relationships with treating physicians who are investors in the Company
Physician Entities, or that the Company will not experience material adverse
effects as a result of any investigations or enforcement actions by a federal or
state regulatory agency.
A number of proposals for healthcare reform have been made in recent
years, some of which have included radical changes in the healthcare system.
Healthcare reform could result in material changes in the financing and
regulation of the healthcare business, and the Company is unable to predict the
effect of such changes on its future operations. It is uncertain what
legislation on healthcare reform, if any, will ultimately be implemented or
whether other changes in the administration or interpretation of governmental
healthcare programs will occur. There can be no assurance that future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs will not have a material adverse effect on the
results of operations of the Company.
Equipment
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The Company purchases its equipment, and maintenance is generally
provided pursuant to service contracts with the manufacturer or other service
companies. The cost of a new lithotripter ranges from $400,000 to $600,000. For
mobile lithotripsy and thermotherapy, the Company either purchases or leases the
tractor, usually for a term up to five years, and purchases the trailer or a
self contained coach. The cost of the laser equipment utilized in RVC ranges
from $300,000 to $500,000. The cost of new prostatherapy equipment ranges from
$200,000 to $400,000.
Employees
- ---------
As of March 15, 2000, the Company employed approximately 301 full-time
employees and approximately 72 part-time employees.
8
Competition
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The market to provide lithotripsy services is highly fragmented and
competitive. The Company competes with other private facilities and medical
centers that offer lithotripsy services and with hospitals, clinics and
individual medical practitioners that offer conventional medical treatment for
kidney stones. Certain of the Company's current and potential competitors have
substantially greater financial resources than the Company and may compete with
the Company for acquisitions and development of operations in markets targeted
by the Company. A decrease in the purchase price of lithotripters as a result of
the development of less expensive lithotripsy equipment could decrease the
Company's competitive advantage. Most of the Company's lithotripsy services
agreements have matured past their initial terms and are now in annual renewal
terms or are on a month-to-month basis. The Company also competes with three
public companies, all of which are also manufacturers of lithotripsy equipment,
which may create different incentives for such providers in pricing lithotripsy
services. Moreover, while the Company believes that lithotripsy has emerged as
the superior treatment for kidney stone disease, the Company competes with
alternative kidney stone disease treatments.
The Company's manufacturing segment competes with at least three
privately held, national companies. The primary competitive factors are price
and quality, including product manufacturing differences. Additionally, two of
the three largest competitors are certified to provide GE trailers. The Company
believes it manufactures a high quality product at a competitive price.
The RVC market is fragmented and competitive. The Company competes with
several national, public companies as well as individual ophthalmologists,
hospitals and smaller service companies. The principal methods for competition
are pricing and quality issues. The larger competitors are primarily focused on
pricing, while the smaller competitors compete using both pricing and quality
issues. While there are lower cost competitors in the geographic areas where the
Company currently has operations, the Company believes it provides a higher
quality service for a competitive price.
ITEM 2. PROPERTIES
- ------- ----------
The Company's principal executive office is located in Austin, Texas in
an office building owned by American Physicians Service Group, Inc. ("APS"). The
Company pays APS approximately $10,000 per month, which includes rental payment
for approximately 6,700 square feet of office space, reception and telephone
services, and certain other services and facilities. The office space lease
expires in December 2002.
The Company leases approximately 11,000 square feet of office space in
Fayetteville, North Carolina under two leases expiring in 2001. The current
monthly lease amount is approximately $10,000.
The Company's manufacturing subsidiary owns a building containing
approximately 78,000 square feet of manufacturing and office space in Harvey,
Illinois.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
The Company is involved in various claims and legal actions that have
arisen in the ordinary course of business. Management believes that any
liabilities arising from these actions will not have a material adverse effect
on the financial condition, results of operations or cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
NONE.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------------------
The following table sets forth the high and low closing prices for the
Company's common stock in the over-the-counter market as reported by the
National Association of Securities Dealers, Inc., Automated Quotations System,
for the years ended December 31, 1999 and 1998 (NASDAQ Symbol "PMSI").
1999 1998
------------------- ------------------
High Low High Low
First Quarter $ 8.44 $ 7.13 $13.38 $9.88
Second Quarter $ 7.56 $ 6.75 $12.06 $8.62
Third Quarter $ 9.75 $ 7.44 $ 9.06 $7.00
Fourth Quarter $10.63 $ 8.13 $ 8.00 $6.88
On March 15, 2000, the Company had approximately 627 holders of record
of its common stock.
The Company has not declared any cash dividends on its common stock
during the last two years and has no present intention of declaring any cash
dividends in the foreseeable future. In addition, the Company is not permitted
by its current credit facility and terms of senior subordinated notes to declare
or make any payments for dividends. It is the present policy of the Board of
Directors to retain all earnings to provide funds for the growth of the Company.
The declaration and payment of dividends in the future will be determined by the
Board of Directors based upon the Company's earnings, financial condition,
capital requirements, loan covenants and such other factors as the Board of
Directors may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
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(In thousands, except
per share data) Years Ended December 31
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenues:
Lithotripsy $89,180 $92,053 $93,113 $71,602 $22,153
Other 22,994 12,583 2,866 802 1,042
-------- -------- -------- -------- --------
Total $112,174 $104,636 $95,979 $72,404 $23,195
======== ======== ======== ======== ========
Income:
Net income $15,039 $10,794 $14,856 $8,961 $7,204
======= ======= ======= ====== ======
Diluted earnings per share $0.88 $0.57 $0.76 $0.49 $0.48
===== ===== ===== ===== =====
Dividends per share None None None None None
Total assets $246,826 $240,198 $224,905 $201,175 $77,627
======== ======== ======== ======== =======
Long-term obligations $103,797 $100,987 $71,198 $70,910 $22,323
======== ======== ======= ======= =======
10
Quarterly Data March 31 June 30 Sept 30 Dec 31
-------- -------- -------- --------
1999
Revenues $25,382 $28,608 $30,632 $27,552
Net income $3,162 $4,302 $4,339 $3,236
Per share amounts (basic):
Net income $0.18 $0.25 $0.26 $0.20
Weighted average shares
outstanding 17,387 17,098 16,818 16,553
Per share amounts (diluted):
Net income $0.18 $0.25 $0.26 $0.19
Weighted average shares
outstanding 17,495 17,196 17,000 16,788
1998
Revenues $22,795 $25,029 $28,936 $27,876
Net income (loss) $(1,168) $3,517 $3,941 $4,505
Per share amounts (basic):
Net income $(0.06) $0.18 $0.21 $0.25
Weighted average shares
outstanding 19,313 19,088 18,437 17,781
Per share amounts (diluted):
Net income ($0.06) $0.18 $0.21 $0.25
Weighted average shares
outstanding 19,313 19,223 18,561 17,890
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS OF THE COMPANY
------------------------------------
Forward-Looking Statements
- --------------------------
The statements contained in this Report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Readers should not place undue
reliance on forward-looking statements. All forward-looking statements included
in this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements. It is important to note that the Company's actual results could
differ materially from those in such forward-looking statements. In addition to
any risks and uncertainties specifically identified in the text surrounding such
forward-looking statements, the reader should consult the Company's reports on
Form 10-Q and other filings under the Securities Act of 1933 and the Securities
Exchange Act of 1934, for factors that could cause actual results to differ
materially from those presented.
11
The forward-looking statements included herein are necessarily based on
various assumptions and estimates and are inherently subject to various risks
and uncertainties, including risks and uncertainties relating to the possible
invalidity of the underlying assumptions and estimates and possible changes or
developments in social, economic, business, industry, market, legal and
regulatory circumstances and conditions and actions taken or omitted to be taken
by third parties, including customers, suppliers, business partners and
competitors and legislative, judicial and other governmental authorities and
officials. Assumptions related to the foregoing involve judgements with respect
to, among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Any of such
assumptions could be inaccurate and therefore, there can be no assurance that
the forward-looking statements included in this Report on Form 10-K will prove
to be accurate.
Year ended December 31, 1999 compared to the year ended December 31, 1998
- -------------------------------------------------------------------------
Total revenues increased $7,538,000 (7%) as compared to the same period
in 1998. Revenues from lithotripter operations decreased by $2,873,000 (3%)
primarily due to renegotiation of contracts which resulted in a larger number of
contracts providing for per diem pricing, and contracts lost due to non-renewal
and competition. Despite the lithotripsy revenue declines, lithotripsy procedure
volume was constant from 1998 to 1999, which the Company believes is indicative
of its market share preservation. Manufacturing revenue increased by $6,461,000
(58%) due to increased sales of MRI trailers as well as the Company's expansion
into manufacturing and sales of cardiac catheterization lab trailers. During
1998 the manufacturing facility became certified by GE to provide trailers for
MRI equipment. RVC revenues were $3,414,000 in 1999 and included fee revenue of
$3,004,000 and equity income of $410,000. The refractive operations were
acquired during the third quarter of 1999. Prostatherapy revenues increased
$627,000 (52%) as1999 revenues included a full year of operations for three
entities, while 1998 revenues included a full year of operations for one entity
and a partial year of operations for two entities.
Costs of services and general and administrative expenses (excluding
depreciation and amortization) increased from 38% to 40% of revenues and
increased $5,466,000 (14%) in absolute terms, compared to the same period in
1998. Cost of services associated with lithotripter operations increased
$327,000 (1%) in absolute terms and from 25% to 26% of lithotripter revenues.
Cost of services associated with manufacturing increased $3,676,000 (40%) due to
the increase in sales. Cost of services associated with RVC was $1,954,000,
which represents approximately 4 months of operations. Cost of services
associated with prostatherapy increased $482,000 due to increased operations.
Corporate expenses decreased from 5% to 4% of revenues and increased $101,000
(2%) in absolute terms, as the Company was able to successfully grow without
proportionately adding overhead.
Other deductions decreased $4,318,000 from 1998 to 1999. This decrease
is attributable to a decrease in loan fees and stock offering costs of
$4,412,000 due to costs recognized in 1998 of $4,978,000 associated with the
$100 million senior subordinated notes offering and the $50 million increase in
the senior revolving credit facility, partially offset by 1999 expenses of
$566,000 related to a restructuring of the Company's $100 million senior
revolving credit facility. Also contributing to the decrease in other deductions
was income recognition in 1999 of $1,140,000 due to the release of a contractual
obligation related to a management incentive compensation program accrued at
December 31, 1998. These decreases were partially offset by an increase in
interest expense of $939,000, primarily due to the $100 million debt offering
which closed in March 1998.
12
Minority interest in consolidated income decreased $282,000 in 1999 as
compared to 1998 primarily due to the decline in lithotripsy revenue discussed
above in certain of the Company's subsidiaries. Earnings before interest, taxes,
depreciation, and amortization (EBITDA) attributable to minority interests was
$28,554,000 for the year ended December 31, 1999 compared to $28,077,000 for the
same period in 1998. EBITDA is not intended to represent net income or cash
flows from operating activities in accordance with generally accepted accounting
principles and should not be considered a measure of the Company's profitability
or liquidity.
Income tax expense for 1999 increased $2,055,000 over 1998 primarily
due to the increase in pretax income.
Year ended December 31, 1998 compared to the year ended December 31, 1997
- -------------------------------------------------------------------------
Total revenues increased $8,657,000 (9%) as compared to the same period
in 1997. Revenues from lithotripter operations decreased by $1,060,000 (1%)
primarily due to a decline in average reimbursement per procedure. Manufacturing
revenue increased by $8,708,000 (369%) due to the fact that the 1998 revenues
were for the full year while 1997 revenues were for four months of operations.
The Company acquired the trailer manufacturer in September 1997. Prostatherapy
revenues rose $1,207,000 due to the fact that 1998 revenues were for the full
year for one entity and a partial year for another entity, while 1997 revenues
included one entity which began operations in the fourth quarter. Other revenues
decreased $198,000 primarily due to four discontinued/sold cardiac centers.
Costs of services and general and administrative expenses (excluding
depreciation and amortization) increased from 35% to 38% of revenues and
increased $6,188,000 (19%) in absolute terms, compared to the same period in
1997. Cost of services associated with lithotripter operations decreased
$2,707,000 (11%) in absolute terms and from 27% to 25% of lithotripter revenues.
Cost of services associated with manufacturing increased $7,461,000 (428%) due
to full year of operations in 1998 while 1997 costs represent four months of
operations. Cost of services associated with prostatherapy increased $803,000
due to a full year of operations for the first time in 1998. Other cost of
services decreased $229,000 (48%) primarily due to four discontinued/sold
cardiac centers. Corporate expenses decreased from 6% to 5% of revenues, as the
Company was able to successfully grow without proportionately adding overhead.
Corporate expenses decreased $757,000 (13%) primarily due to a consolidation of
corporate functions.
Other deductions increased $4,635,000 primarily due to (i) the increase
of $4,618,000 for the write-off of fees paid to lenders to obtain financing, and
(ii) an increase in interest expense of $992,000 due to an increase in new
borrowings in March 1998 related to the $100 million senior subordinated notes
offering. The increased deductions were offset partially by an increase in
interest income of $677,000.
Minority interest in consolidated income decreased $251,000 primarily
due to the decline in revenue discussed above in certain of the Company's
subsidiaries. EBITDA attributable to minority interests was $28,077,000 for the
year ended December 31, 1998 compared to $28,591,000 for the same period in
1997.
Income tax expense for 1998 increased $1,582,000 over 1997, despite the
12% reduction in pretax earnings over the same period as the 1997 provision
included the effect of a reduction in the Company's valuation allowance related
to net operating loss carryforwards.
Liquidity and Capital Resources
Cash and cash equivalents were $20,064,000 and $40,146,000 at December
31, 1999 and 1998, respectively. The Company's subsidiaries generally distribute
all of their available cash quarterly, after establishing reserves for estimated
capital expenditures and working capital. For the years ended December 31, 1999
and 1998, the Company's subsidiaries distributed cash of approximately
$27,180,000 and $25,799,000, respectively, to minority interest holders.
13
Cash provided by operations was $35,744,000 for the year ended December
31, 1999 and $45,551,000 for the year ended December 31, 1998. From 1998 to 1999
fee and other revenue collected increased by $9,602,000 and was offset by the
increase in cash paid to employees, suppliers of goods and others of
$12,396,000. These fluctuations are attributable to increased operations as well
as the timing of accounts receivable collections and accounts payable and
accrued expense payments. An increase in interest payments of $2,092,000 was due
to the $100 million of senior subordinated notes issued in March 1998, resulting
in a partial year of interest payments on this debt in 1998 versus a full year
of interest payments on this debt in 1999. Taxes paid increased $790,000 from
1998 to 1999 due to higher income tax expense during 1999. Additionally, the
Company purchased investments in a trading portfolio of $9,222,000 during 1999,
partially offset by proceeds from sales and maturities of $5,003,000.
Cash used by investing activities for the year ended December 31, 1999,
was $26,241,000 primarily due to $23,580,000 used in two refractive acquisitions
and one lithotripter acquisition as well as payments of earnouts related to
prior year acquisitions. Purchases of equipment and leasehold improvements of
$5,790,000 were partially offset by $2,352,000 in distributions from
investments. Cash used by investing activities for the year ended December 31,
1998, was $2,142,000 primarily due to $5,213,000 for the purchase of equipment
and leasehold improvements, partially offset by $2,532,000 in distributions from
investments.
Cash used in financing activities for the year ended December 31, 1999,
was $29,585,000, which was primarily due to distributions to minority interests
of $27,180,000 and purchases of treasury stock of $8,382,000 partially offset by
net borrowings of $3,181,000 and contributions of $2,636,000 received from
holders of minority interests related to expansion of existing partnerships and
new partnership formations. Cash used in financing activities for the year ended
December 31, 1998, was $27,033,000, primarily due to distributions to minority
interests of $25,799,000, purchases of treasury stock of $16,439,000 and debt
issuance costs of $4,417,000, partially offset by net borrowings of $19,541,000.
The Company's credit facility as of December 31, 1999 is comprised of a
revolving line of credit. The revolving line of credit has a borrowing limit of
$100 million, none of which was drawn at December 31, 1999 and March 15, 2000.
Subsequent to December 31, 1999 the Company completed a restructuring of its
revolving line of credit to enable the Company to draw on the revolver for RVC
acquisitions. The restructuring splits the revolver into two facilities of
$14,000,000 for refractive acquisitions by certain subsidiaries and the
remaining $86,000,000 for lithotripsy, manufacturing, refractive and
prostatherapy acquisitions as well as for working capital. On March 27, 1998,
the Company completed an offering of $100 million of senior subordinated notes
due 2008 (the "Notes") to qualified institutional buyers. The net proceeds from
the offering of approximately $96 million was used to repay all outstanding
indebtedness under the Company's bank facility, with the remainder used for
general corporate purposes, including acquisitions. In connection therewith, the
Company recorded a charge to earnings in 1998 of approximately $4.4 million for
debt issuance costs associated with the Notes. The Notes bear interest at 8.75%
and interest is payable semi-annually on April 1st and October 1st. Principal is
due April 2008.
The Company intends to increase the number of its lithotripsy
operations primarily through acquisitions and the number of its RVC operations
through both acquisitions and development. The Company intends to fund the
purchase price for future acquisitions and developments using borrowings under
its senior credit facility and cash flow from operations. In addition, the
Company may use shares of its common stock in such acquisitions where
appropriate.
14
During 1998, the Company announced a stock repurchase program of up to
$25.0 million of common stock. In February 2000 the Company announced an
increase in the authorized repurchase amount from $25.0 million to $35.0
million. From time to time, the Company may purchase additional shares of its
common stock where, in the judgment of management, market valuations of its
stock do not accurately reflect the Company's past and projected results of
operations. The Company intends to fund any such purchases using available cash,
cash flow from operations and borrowings under its senior credit facility. The
Company has purchased 2,968,800 shares of stock for a total of $25,572,000 as of
March 15, 2000.
The Company's ability to make scheduled payments of principal of, or to
pay the interest on, or to refinance, its indebtedness, or to fund planned
capital expenditures will depend on its future performance, which, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond its control. Based upon the current
level of operations and anticipated cost savings and revenue growth, management
believes that cash flow from operations and available cash, together with
available borrowings under its senior credit facility, will be adequate to meet
the Company's future liquidity needs for at least the next several years.
However, there can be no assurance that the Company's business will generate
sufficient cash flow from operations, that anticipated revenue growth and
operating improvements will be realized or that future borrowings will be
available under the senior credit facility in an amount sufficient to enable the
Company to service its indebtedness or to fund its other liquidity needs.
Inflation
- ---------
The operations of the Company are not significantly affected by
inflation because the Company is not required to make large investments in fixed
assets. However, the rate of inflation will affect certain of the Company's
expenses, such as employee compensation and benefits.
ITEM 7.A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------- ----------------------------------------------------------
Interest Rate Risk:
The Company has long-term debt (including current portion) totaling
$105,560,000, of which $100.8 million has a fixed rate of interest of 8.75%,
$126,000 has fixed rates of 6% to 9% and $162,000 does not bear any interest.
The remaining $4,464,000 bears interest at the prime rate. The Company is
exposed to some market risk due to the floating interest rate on the $4,464,000.
The Company makes monthly or quarterly payments of principal and interest on the
$4,464,000. An increase in interest rates of 1.5% would result in a $67,000
annual increase in interest expense on this existing principal balance.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
The information required by this item is contained in Appendix A attached
hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The information required by this item is contained in the definitive proxy
material of the Company to be filed in connection with its 2000 annual meeting
of shareholders, except for the information regarding executive officers of the
Company, which is presented below. The information required by this item
contained in such definitive proxy material is incorporated herein by reference.
As of March 15, 2000, the executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
Kenneth S. Shifrin 50 Chairman of the Board
Joseph Jenkins, M.D., J.D. 52 President, Chief Executive Officer and
Director
Brad A. Hummel 43 Executive Vice President and Chief
Operating Officer
Cheryl L. Williams 48 Chief Financial Officer, Senior Vice
President-Finance and Secretary
Teena E. Belcik 37 Vice President and Treasurer
John R. Hedrick 47 Senior Vice President of Development
Stan Johnson 46 Vice President
The foregoing does not include positions held in the Company's subsidiaries.
Officers are elected for annual periods. There are no family relationships
between any of the executive officers and/or directors of the Company.
Mr. Shifrin has been Chairman of the Board and a director of the Company since
October 1989. In addition, Mr. Shifrin has served in various capacities with APS
since February 1985, and is currently Chairman of the Board and Chief Executive
Officer of APS. Mr. Shifrin is a member of the World Presidents' Organization.
Dr. Jenkins has been President and Chief Executive Officer and a director of the
Company since April 1996. From May 1990 until December 1991, Dr. Jenkins was a
Vice President of Lithotripters, Inc. Since January 1992, Dr. Jenkins has been
President of Lithotripters, Inc. Dr. Jenkins is a board certified urologist and
is a founding member, a past president and currently a director of the American
Lithotripsy Society.
Mr. Hummel has been the Executive Vice President and Chief Operating Officer of
the Company since October 1999. Prior to joining the Company, Mr. Hummel was
with Diagnostic Health Services, Inc. ("DHS") since 1984, most recently serving
as the President and Chief Executive Officer, and as a member of the Board of
Directors. The Company believes that DHS filed for Chapter 11 reorganization on
or about March 20, 2000. From 1981 to 1984, Mr. Hummel was an associate with
Covert, Crispin and Murray, a Washington, D.C. and London-based management
consulting firm. Mr. Hummel also serves as a member of APS's Board of Directors.
Ms. Williams has been Chief Financial Officer, Senior Vice President - Finance
and Secretary of the Company since October 1989. Ms. Williams was Controller of
Fairchild Aircraft Corporation from August 1988 to October 1989. From 1985 to
1988, Ms. Williams served as the Chief Financial Officer of APS Systems, Inc., a
wholly-owned subsidiary of APS.
16
Ms. Belcik has been Vice President and Treasurer since October 1999. Ms. Belcik
served various positions with Bank of America, N.A. since 1994 and was most
recently a Senior Vice President in the Health Care Banking Group. Previously,
Ms. Belcik taught at Valdosta State University, was a financial consultant, and
held several positions with Chase Bank's Corporate Banking Group.
Mr. Hedrick has been the Senior Vice President of Development since September
1999. Mr. Hedrick was with a subsidiary of American Physicians Service Group,
Inc. ("APS") since 1997 serving as Senior Vice President. From 1988 to 1997 Mr.
Hedrick's experience included providing merger and acquisition advisory services
to privately held healthcare entities, including ophthalmology, and the practice
of law.
Mr. Johnson has been a Vice President of the Company and President of Sun
Medical Technologies, Inc. ( "Sun "), a wholly-owned subsidiary of the Company,
since November 1995. Mr. Johnson was the Chief Financial Officer of Sun from
1990 to 1995.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information required by this item is contained in the definitive
proxy statement of the Company to be filed in connection with its 2000 annual
meeting of shareholders, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
The information required by this item is contained in the definitive
proxy statement of the Company to be filed in connection with its 2000 annual
meeting of shareholders, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information required by this item is contained in the definitive
proxy statement of the Company to be filed in connection with its 2000 annual
meeting of shareholders, which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ------- ----------------------------------------------------------------
(a) 1. Financial Statements.
--------------------
The information required by this item is contained in Appendix A
attached hereto.
2. Financial Statement Schedules.
-----------------------------
None.
(b) Reports on Form 8-K.
-------------------
None.
17
(c) Exhibits. (1)
--------
3.1 Certificate of Incorporation of the Company. (2)
3.2 Bylaws of the Company. (2)
4.1 Specimen of Common Stock Certificate. (2)
10.1* Prime Medical Services, Inc. 1993 Stock Option Plan. (3)
10.2* First Amendment to the Prime Medical Services, Inc. 1993 Stock
Option Plan. (12)
10.3* Second Amendment to the Prime Medical Services, Inc. 1993 Stock
Option Plan. (12)
10.4* Third Amendment to the Prime Medical Services, Inc. 1993 Stock
Option Plan. (13)
10.5 Rights Agreement dated October 18, 1993 between the Company and
American Stock Transfer and Trust Company. (3)
10.6 Form of Indemnification Agreement dated October 11, 1993
between the Company and certain of its officers and directors. (3)
10.7 Partnership Agreement of Metro Atlanta Stonebusters, G.P. (5)
10.8 Management Agreement dated July 28, 1994 between the Alabama Renal
Stone Institute, Inc. and Alabama Kidney Stone Foundation, Inc. (6)
10.9 Asset Purchase Agreement dated July 21, 1999 among Prime Lithotripsy
Services, Inc., Reston Hospital Lithotripter Joint Venture, Reston
Lithotripsy Associates, Inc., Columbia Arlington Healthcare System,
L.L.C. and Robert Ball, M.D. (15)
10.10 Not used
10.11 Not used
10.12 Not used
10.13 Not used
10.14 Amended and Restated Joint Venture Agreement dated April 1989,
between Prime Diagnostic Imaging Services, Inc. and The Shasta
Diagnostic Imaging Medical Group. (4)
10.15 Agreement of Limited Partnership of Mobile Kidney Stone Centers of
California III, L.P. (15)
10.16 Amendments to First Amended and Restated Agreement of Limited
Partnership of Ohio Mobile Lithotripter, Ltd. (15)
10.17 Second Amendment to Agreement of Limited Partnership of Pacific
Medical Limited Partnership (15)
18
10.18 Amendments to Agreement of Limited Partnership of Texas Lithotripsy
Limited Partnership VII, L.P. (15)
10.19 Fourth Amendment to Agreement of Limited Partnership of San Diego
Lithotripters Limited Partnership (15)
10.20 Amendment to Agreement of Limited Partnership of Fayetteville
Lithotripters Limited Partnership - Virginia I (15)
10.21 Amendments to Agreement of Limited Partnership of Fayetteville
Lithotripters Limited Partnership - South Carolina II (15)
10.22 Amendment to Agreement of Limited Partnership of Fayetteville
Lithotripters Limited Partnership - Utah I (15)
10.23 Third Amendment to Agreement of Limited Partnership of Florida
Lithotripters Limited Partnership I (15)
10.24 Fourth Amendment to Agreement of Limited Partnership of Indiana
Lithotripters Limited Partnership I (15)
10.25 Sixth Amendment to Agreement of Limited Partnership of Texas
Lithotripsy Limited Partnership III, L.P. (15)
10.26 Agreement of Limited Partnership of Mobile Kidney Stone Centers of
California II, L.P. (15)
10.27 Fourth Amendment to Agreement of Limited Partnership of Louisiana
Lithotripsy Investment Limited Partnership (15)
10.28 Operating Agreement for Southern California Stone Center, L.L.C. (9)
10.29 Lease Agreement dated July 1, 1995 between Kidney Stone Center of
South Florida, L.C. and Madorsky and Pinon Kidney Stone Center of
South Florida, P.A. (9)
10.30 Agreement of Limited Partnership of Texas I Prostatherapy Limited
Partnership (15)
10.31 Not used
10.32 Partnership Interest Purchase Agreement dated May 1, 1997 among
Prime Lithotripter Operations, Inc., Tenn-Ga Stone Group Two, L.P.,
NGST, Inc. and all the Shareholders of NGST, Inc. (12)
10.33 Stock Purchase Agreement dated June 1, 1997 between Sun Medical
Technologies, Inc. and Executive Medical Enterprises, Inc. (12)
10.34 Contribution Agreement dated October 8, 1997 between Prime Medical
Services, Inc. and AK Associates. (12)
10.35 Confidential Assignment Summary for Pacific Medical Limited
Partnership. (14)
10.36 Limited Partnership Agreement for Texas Lithotripsy VII, L.P. (14)
19
10.37 Agreement and Plan of Merger of Texas Lithotripsy Limited
Partnership II, L.P., Texas Lithotripsy Limited Partnership IV, L.P.
and Texas ESWL/Laser Lithotripter, Ltd. (14)
10.38 Limited Partnership Agreement for Big Sky Urological Limited
Partnership. (14)
10.39 Operating Agreement for Kentucky I Lithotripsy, LLC. (14)
10.40 Confidential Private Placement Memorandum for Tennessee Valley
Lithotripter Limited Partnership. (14)
10.41 Confidential Private Placement Memorandum for Fayetteville
Lithotripters Limited Partnership - Arkansas I. (14)
10.42 Confidential Private Placement Memorandum for Texas Lithotripsy
Limited Partnership I, L.P. (14)
10.43 Operating Agreement for Washington Urological Services, LLC. (14)
10.44* Amended and Restated 1993 Stock Option Plan, as amended June 10,
1998. (10)
10.45 Agreement of Limited Partnership of Wyoming Urological Services,
L.P. (14)
10.46 Indenture Agreement dated March 27, 1998 between Prime Medical
Services, Inc. and State Street Bank and Trust Company of Missouri,
N.A. (8)
10.47 Loan Agreement dated January 31, 2000 for $14,000,000 Advancing Term
Loan between Prime Refractive Management, L.L.C., Bank of America,
N.A. as Administrative Agent, Bank Boston, N.A. as Documentation
Agent and the Lenders Named Therein (15)
10.48 Fourth Amended and Restated Loan Agreement dated January 31, 2000
for $86,000,000 Revolving Credit Loan between Prime Medical Services
Inc., Bank of America, N.A. as Administrative Agent, BankBoston,
N.A. as Documentation Agent and the Lenders Named Therein (15)
10.49 Pledge and Security Agreements dated January 31, 2000 relating to
$14,000,000 Advancing Term Loan and $86,000,000 Revolving Credit
Loan (15)
10.50 Borrower Security Agreements dated January 31, 2000 relating to
$14,000,000 Advancing Term Loan and $86,000,000 Revolving Credit
Loan (15)
10.51 Guarantor Security Agreements dated January 31, 2000 relating to
$14,000,000 Advancing Term Loan and $86,000,000 Revolving Credit
Loan (15)
10.52 Guarantor Copyright Security Agreements dated January 31, 2000
relating to $14,000,000 Advancing Term Loan and $86,000,000
Revolving Credit Loan (15)
10.53 Guaranty Agreements dated January 31, 2000 relating to $14,000,000
Advancing Term Loan and $86,000,000 Revolving Credit Loan (15)
10.54 Note dated January 31, 2000 in the amount of $1,050,000 between
Prime Refractive Management and Guaranty Federal Bank, F.S.B. (15)
20
10.55 Note dated January 31, 2000 in the amount of $1,575,000 between
Prime Refractive Management and Fleet National Bank (15)
10.56 Note dated January 31, 2000 in the amount of $3,150,000 between
Prime Refractive Management and BankBoston, N.A. (15)
10.57 Note dated January 31, 2000 in the amount of $4,725,000 between
Prime Refractive Management and Bank of America, N.A. (15)
10.58 Note dated January 31, 2000 in the amount of $2,100,000 between
Prime Refractive Management and Bank One, Texas, N.A. (15)
10.59 Note dated January 31, 2000 in the amount of $12,900,000 between
Prime Medical Services, Inc. and Bank One, Texas, N.A. (15)
10.60 Note dated January 31, 2000 in the amount of $8,600,000 between
Prime Medical Services, Inc. and LaSalle Bank, National
Association (15)
10.61 Note dated January 31, 2000 in the amount of $8,600,000 between
Prime Medical Services, Inc. and Cooperative Centrale
Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland", New York
Branch (15)
10.62 Note dated January 31, 2000 in the amount of $8,600,000 between
Prime Medical Services, Inc. and Credit Lyonnais New York
Branch (15)
10.63 Note dated January 31, 2000 in the amount of $5,375,000 between
Prime Medical Services, Inc. and Fleet National Bank (15)
10.64 Note dated January 31, 2000 in the amount of $8,600,000 between
Prime Medical Services, Inc. and Imperial Bank(15)
10.65 Note dated January 31, 2000 in the amount of $6,450,000 between
Prime Medical Services, Inc. and Guaranty Federal Bank, F.S.B. (15)
10.66 Note dated January 31, 2000 in the amount of $16,125,000 between
Prime Medical Services, Inc. and Bank of America, N.A. (15)
10.67 Note dated January 31, 2000 in the amount of $10,750,000 between
Prime Medical Services, Inc. and BankBoston, N.A. (15)
10.68 Note dated January 31, 2000 in the amount of $1,400,000 between
Prime Refractive Management and LaSalle Bank, National
Association (15)
10.69 Not used
10.70 Contribution Agreement dated September 1, 1999 and First Amendment
dated January 31, 2000 among Barnet Dulaney Eye Center, P.L.L.C.,
David Dulaney, M.D., Ronald W. Barnet, M.D., Mark Rosenberg,
Prime Medical Services Inc., Prime Medical Operating Inc., LASIK
Investors, L.L.C., Prime/BDR Acquisition, L.L.C. and Prime/BDEC
Acquisition, L.L.C. (15)
21
10.71 Loan Agreement dated September 1, 1999 between Prime Medical
Operating, Inc. and Prime/BDR Acquisition, L.L.C. (15)
10.72 Limited Liability Company Agreement of Prime/BDR Acquisition,
L.L.C. (15)
10.73 Limited Liability Company Agreement of Prime/BDEC Acquisition,
L.L.C. (15)
10.74 Non-Competition Agreements dated September 1, 1999 between Robert
B. Pinkert, O.D. and Scott A. Perkins, M.D. for the benefit of Prime
Medical Services Inc., Prime Medical Operating, Inc., Prime/BDR
Acquisition, L.L.C., Prime/BDEC Acquisition, L.L.C., Barnet Dulaney
Eye Center, P.L.L.C., LASIK Investors, L.L.C., Ronald W. Barnet,
M.D., David D. Dulaney, M.D., and Mark Rosenberg (15)
10.75 Promissory Note dated September 1, 1999 from Prime/BDR Acquisition,
L.L.C., to Prime Medical Operating, Inc. (15)
10.76 Collocation Agreement dated September 1, 1999 by and between Barnet
Dulaney Eye Center, P.L.L.C. and Prime/BDR Acquisition, L.L.C. (15)
10.77 Membership Interest Transfer Restriction Agreement dated
September 1, 1999 (15)
10.78 Assignment and Security Agreement dated September 1, 1999 between
Prime Medical Operating, Inc. and LASIK Investors, L.L.C. (15)
10.79 Promissory Note dated September 1, 1999 from Prime/BDR Acquisition,
L.L.C., to Prime Medical Operating, Inc. (15)
10.80 Loan Agreement dated January 31, 2000 between Prime Refractive,
L.L.C. and Prime Refractive Management, L.L.C. (15)
10.81 Promissory Note dated January 31, 2000 between Prime Refractive,
L.L.C. and Prime Refractive Management, L.L.C. (15)
10.82 Assignment and Security Agreement dated January 31, 2000 between
Prime Refractive Management, L.L.C. and LASIK Investors, L.L.C. (15)
10.83 Limited Liability Company Agreement dated September 1, 1999 of Prime
Refractive, L.L.C. (15)
10.84 Stock Purchase Agreements dated September 1, 1999 relating to the
acquisition of Horizon Vison Center, Inc. (15)
10.85 Assignment and Security Agreements relating to the acquisition of
Horizon Vison Center, Inc. (15)
10.86 Exclusive Use Agreements relating to the acquisition of Horizon
Vison Center, Inc. (15)
10.87 Amended and Restated Bylaws for the regulation of Horizon Vison
Centers, Inc. (15)
10.88 Assignment and Security Agreement by and between Prime Medical
Operating, Inc. and Prime/BDR Acquisition, L.L.C. (15)
12 Computation of ratio of earnings to fixed charges. (15)
21.1 List of subsidiaries of the Company. (15)
23.1 Independent Auditors' Consent of KPMG LLP. (15)
27 Financial Data Schedule (15)
--------------
* Executive compensation plans and arrangements.
22
(1) The exhibits listed above will be furnished to any security holder upon
written request for such exhibit to Cheryl L. Williams, Prime Medical
Services, Inc., 1301 Capital of Texas Highway, Suite C-300, Austin, Texas
78746. The Securities and Exchange Commission (the "SEC") maintains a
website that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC at
"http://www.sec.gov".
(2) Filed as an Exhibit to the Registration Statement on Form S-4 (Registration
No. 33-56900) of the Company and incorporated herein by reference.
(3) Filed as an Exhibit to the Current Report on Form 8-K of the Company dated
October 18, 1993 and incorporated herein by reference.
(4) Filed as an Exhibit to the Annual Report on Form 10-K of Old Prime,
Commission File Number 0- 9963, for the year ended December 31, 1992 and
incorporated herein by reference.
(5) Filed as an Exhibit to the Current Report on Form 8-K dated May 5, 1994 of
the Company and incorporated herein by reference.
(6) Filed as an Exhibit to the Current Report on Form 8-K dated July 28, 1994
of the Company and incorporated herein by reference.
(7) Not used.
(8) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the period
ended June 30, 1998
(9) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for
the year ended December 31, 1995.
(10) Filed as an Exhibit to the Registration Statement on Form S-8 (Registration
No. 333-62245) of the Company and incorporated herein by reference.
(11) Not used.
(12) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for
the year ended December 31, 1997.
(13) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the period
ended September 30, 1998.
(14) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for
the year ended December 31, 1998.
(15) Filed herewith.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRIME MEDICAL SERVICES, INC.
By: /s/ Joseph Jenkins, M.D., J.D.
-------------------------------
Joseph Jenkins, M.D., J.D., President,
Chief Executive Officer and Director
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Kenneth S. Shifrin
----------------------
Kenneth S. Shifrin
Chairman of the Board
Date: March 30, 2000
By: /s/ Cheryl L. Williams
----------------------
Cheryl L. Williams
Senior Vice President of Finance, Secretary
and Chief Financial Officer (Principal
Financial and Accounting Officer)
Date: March 30, 2000
24
By: /s/ Joseph Jenkins
----------------------
Joseph Jenkins, M.D., President,
Chief Executive Officer and Director
Date: March 30, 2000
By: /s/ John McEntire
----------------------
John McEntire, Director
Date: March 30, 2000
By: /s/ William A. Searles
----------------------
William A. Searles, Director
Date: March 30, 2000
By: /s/ Michael Spalding
----------------------
Michael Spalding, M.D., Director
Date: March 30, 2000
By: /s/ James M. Usdan
----------------------
James M. Usdan, Director
Date: March 30, 2000
25
APPENDIX A
INDEX
Page
Independent Auditors' Report A-2
Consolidated Financial Statements:
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997. A-3
Consolidated Balance Sheets at December 31, 1999 and 1998. A-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997. A-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997. A-7
Notes to Consolidated Financial Statements. A-10
A-1
Independent Auditors' Report
The Board of Directors and Shareholders
Prime Medical Services, Inc.:
We have audited the accompanying consolidated financial statements of Prime
Medical Services, Inc. and subsidiaries ("Company") as listed in the
accompanying index. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Prime Medical
Services, Inc. and subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/:KPMG LLP
Austin, Texas
March 6, 2000
A-2
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
Years Ended December 31,
1999 1998 1997
Revenue:
Lithotripsy:
Fee revenues $ 80,880 $ 83,879 $ 84,537
Management fees 5,719 5,284 6,237
Equity income 2,581 2,890 2,339
-------- -------- --------
89,180 92,053 93,113
Manufacturing 17,527 11,066 2,358
Refractive 3,414 - -
Prostatherapy 1,834 1,207 -
Other 219 310 508
-------- -------- --------
Total revenue 112,174 104,636 95,979
-------- -------- --------
Cost of services and general and administrative expenses:
Lithotripsy 23,001 22,674 25,381
Manufacturing 12,880 9,204 1,743
Refractive 1,954 - -
Prostatherapy 1,285 803 -
Other 165 249 478
Corporate 5,027 4,926 5,683
Nonrecurring development, impairment
and other costs, net 627 1,617 -
-------- -------- --------
44,939 39,473 33,285
Depreciation and amortization 10,848 10,476 9,911
-------- -------- --------
Total operating expenses 55,787 49,949 43,196
-------- -------- --------
Operating income 56,387 54,687 52,783
Other income (deductions):
Interest and dividends 1,505 1,417 740
Interest expense (9,408) (8,469) (7,477)
Loan fees and stock offering costs (566) (4,978) (360)
Release of contractual obligation 1,140 - -
Other, net (79) 304 6
-------- -------- --------
(7,408) (11,726) (7,091)
-------- -------- --------
Income before provision for income taxes
and minority interest 48,979 42,961 45,692
Minority interest in consolidated income 24,508 24,790 25,041
Provision for income taxes 9,432 7,377 5,795
-------- -------- --------
Net income $ 15,039 $ 10,794 $ 14,856
======== ======== ========
Basic earnings per share:
Net income $ 0.89 $ 0.58 $ 0.77
======== ======== ========
Weighted average shares outstanding 16,958 18,650 19,275
======== ======== ========
Diluted earnings per share:
Net income $ 0.88 $ 0.57 $ 0.76
======== ======== ========
Weighted average shares outstanding 17,114 18,783 19,461
======== ======== ========
See accompanying notes to consolidated financial statements.
A-3
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
December 31,
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $20,064 $40,146
Investments 4,120 -
Accounts receivable, less allowance for doubtful
accounts of $224 in 1999 and $966 in 1998 23,273 21,400
Other receivables 3,491 2,693
Deferred income taxes 1,066 2,330
Prepaid expenses and other current assets 2,322 949
Inventory 3,676 1,825
-------- --------
Total current assets 58,012 69,343
-------- --------
Property and equipment:
Equipment, furniture and fixtures 42,128 34,485
Building and leasehold improvements 2,092 2,073
-------- --------
44,220 36,558
Less accumulated depreciation and
amortization (25,567) (18,471)
-------- --------
Property and equipment, net 18,653 18,087
-------- --------
Other investments 18,963 11,026
Goodwill, at cost, net of amortization 149,088 140,863
Other noncurrent assets 2,110 879
-------- --------
$246,826 $240,198
======== ========
See accompanying notes to consolidated financial statements.
A-4
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
($ in thousands, except share data)
December 31,
1999 1998
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 1,763 $ 890
Accounts payable 3,290 5,287
Accrued distributions to minority interests 8,332 8,951
Accrued expenses 7,108 12,051
-------- --------
Total current liabilities 20,493 27,179
Long-term debt, net of current portion 103,797 100,987
Deferred income taxes 6,400 4,789
-------- --------
Total liabilities 130,690 132,955
Minority interest 19,454 17,493
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none outstanding - -
Common stock, $0.01 par value, 40,000,000 shares
authorized; 19,367,267 issued in 1999 and
19,350,267 isssued in 1998 194 194
Capital in excess of par value 87,655 87,380
Accumulated earnings 33,654 18,615
Treasury stock, at cost, 2,875,300 shares in 1999
and 1,845,200 shares in 1998 (24,821) (16,439)
-------- --------
Total stockholders' equity 96,682 89,750
-------- --------
$246,826 $240,198
======== ========
See accompanying notes to consolidated financial statements.
A-5
PRIME MEDICAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
($ in thousands, except share data)
Capital in Accumulated
Issued Common Stock Excess of Earnings Treasury Stock
Shares Amount Par Value (Deficit) Shares Amount Total
---------- ------ ---------- -------- ---------- --------- --------
Balance, January 1, 1997 19,078,933 $ 191 $ 83,271 $ (7,035) - $ - $ 76,427
Net income for the year - - - 14,856 - - 14,856
Exercise of stock options
including tax benefit of
$438 on non-qualifying
exercises 227,334 2 779 - - - 781
---------- ------ ---------- -------- ---------- --------- --------
Balance, December 31, 1997 19,306,267 193 84,050 7,821 - - 92,064
Net income for the year - - - 10,794 - - 10,794
Tax benefits on exercised warrants - - 3,096 - - - 3,096
Exercise of stock options
including tax benefit of
$140 on non-qualifying
exercises 44,000 1 234 - - - 235
Purchase of treasury stock - - - - (1,845,200) (16,439) (16,439)
---------- ------ ---------- -------- ---------- --------- --------
Balance, December 31, 1998 19,350,267 194 87,380 18,615 (1,845,200) (16,439) 89,750
Net income of the year - - - 15,039 - - 15,039
Issuance of put options - - 73 - - - 73
Issuance of warrants - - 97 - - - 97
Exercise of stock options
including tax benefit of
$18 on non-qualifying
exercises 17,000 - 105 - - - 105
Purchase of treasury stock - - - - (1,030,100) (8,382) (8,382)
---------- ------ ---------- -------- ---------- --------- --------
Balance, December 31, 1999 19,367,267 $ 194 $ 87,655 $ 33,654 (2,875,300) $ (24,821) $ 96,682
========== ====== ========== ======== ========== ========= ========
See accompanying notes to consolidated financial statements.
A-6
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Years Ended December 31,
1999 1998 1997
------------ ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Fee and other revenue collected $ 108,251 $ 98,649 $ 90,924
Cash paid to employees, suppliers
of goods and others (52,144) (39,748) (31,685)
Purchases of investments (9,222) - -
Proceeds from sales and maturities of investments 5,003 - -
Interest received 1,505 1,417 739
Interest paid (9,353) (7,261) (7,521)
Taxes paid (8,296) (7,506) (764)
------------ ----------- ------------
Net cash provided by operating activities 35,744 45,551 51,693
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equity investments and entities (23,580) - (20,217)
Purchases of equipment and leasehold
improvements (5,790) (5,213) (4,546)
Proceeds from sales of equipment 207 224 30
Distributions from investments 2,352 2,532 1,690
Other 570 315 94
------------ ----------- ------------
Net cash used in investing activities (26,241) (2,142) (22,949)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable, exclusive of interest (1,403) (80,484) (50,328)
Borrowings on notes payable 4,584 100,025 51,201
Distributions to minority interest (27,180) (25,799) (28,667)
Debt issuance costs - (4,417) -
Contributions by minority interest 2,636 72 2,381
Exercise and issuance of stock options 160 9 343
Purchase of treasury stock (8,382) (16,439) -
------------ ----------- ------------
Net cash used in financing activities (29,585) (27,033) (25,070)
------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (20,082) 16,376 3,674
Cash and cash equivalents, beginning of period 40,146 23,770 20,096
------------ ----------- ------------
Cash and cash equivalents, end of period $ 20,064 $ 40,146 $ 23,770
============ =========== ============
See accompanying notes to consolidated financial statements.
A-7
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
($ in thousands)
Years Ended December 31,
1999 1998 1997
------------ ------------ ------------
Reconciliation of net income to net cash provided by
operating activities:
Net income $ 15,039 $ 10,794 $ 14,856
Adjustments to reconcile net income to cash provided
by operating activities:
Minority interest in consolidated income 24,508 24,790 25,041
Depreciation and amortization 10,848 10,476 9,911
Provision for uncollectible accounts 702 252 427
Equity in earnings of affiliates (2,802) (2,890) (2,339)
Debt issuance costs - 4,417 -
Provision for deferred income taxes 2,875 (442) 68
Write down of equipment 1,149 - -
Settlement of contingent liability (500) - -
Release of contractual liability (1,140) - -
Other (66) (100) 1,159
Changes in operating assets and liabilities,
net of effect of purchase transactions:
Investments (4,120) - -
Accounts receivable (1,851) (3,186) (3,156)
Other receivables (1,424) (910) 754
Other assets (2,585) (1,244) (602)
Accounts payable (2,665) 822 934
Accrued expenses (2,224) 2,772 4,640
------------ ------------ ------------
Total adjustments 20,705 34,757 36,837
------------ ------------ ------------
Net cash provided by operating activities $ 35,744 $ 45,551 $ 51,693
============ ============ ============
See accompanying notes to consolidated financial statements.
A-8
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
($ in thousands)
Years Ended December 31,
1999 1998 1997
----------- ------------ ------------
SUPPEMENTAL INFORMATION OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
At December 31, 1999, the Company had accrued distributions payable to
minority interests. The effect of this transaction was as follows:
Current liabilities increased by $ 8,332
Minority interest decreased by 8,332
In 1999, the Company acquired, through a majority owned subsidiary 60% of the
outstanding stock of Horizon Vision Centers. This transaction is discussed
further in Note D. The acquired assets and liabilities were as follows:
Current assets increased by 710
Noncurrent assets increased by 3,057
Goodwill increased by 9,174
Current liabilities increased by 1,489
Noncurrent liabilities increased by 413
Minority interest increased by 910
At December 31, 1998, the Company had accrued distributions payable to
minority interests. The effect of this transaction was as follows:
Current liabilities increased by $ 8,951
Minority interest decreased by 8,951
In 1998, the Company recognized tax benefits associated with warrants
previously exercised. The effect of this was as follows:
Current liabilities decreased by 1,512
Noncurrent liabilities decreased by 1,584
Stockholders' equity increased by 3,096
In 1997, the Company acquired (1) additional ownership interests in 10
partnerships, (2) a 38.25% general partnership interest in a lithotripter
operation, (3) 100% of the stock of a lithotripter operator, and (4) 75%
equity interest in a trailer manufacturer. These transactions are discussed
further in Notes C and D. The acquired assets and liabilities were as
follows:
Noncurrent assets increased by 4,041
Goodwill increased by 15,836
Current liabilities increased by 1,343
Minority interest decreased by 998
At December 31, 1997, the Company had accrued distributions payable to
minority interests. The effect of this transaction was as follows:
Current liabilities increased by 8,655
Minority interest decreased by 8,655
See accompanying notes to consolidated financial statements.
A-9
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND OPERATION OF THE COMPANY
Prime Medical Services, Inc. ("Prime"), through its direct and indirect
wholly-owned subsidiaries, provides non-medical management services for
lithotripsy, refractive and prostatherapy operations. The Company
provides its services in 34 states. The Company also manufactures
trailers for major medical equipment manufacturers and mobile medical
service providers. References to the Company are to Prime and its
controlled and affiliated entities.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Prime, its
wholly-owned subsidiaries, entities more than 50% owned and partnerships where
Prime has control, even though its ownership is less than 50%. Investments in
entities in which the Company's investment is less than 50% ownership, and the
Company does not have control, are accounted for by the equity method if
ownership is between 20% - 50%, or by the cost method if ownership is less than
20%. Through December 31, 1999, the Company had recognized approximately
$675,000 in undistributed earnings using the equity method. This amount
represents undistributed earnings from entities, in which the Company owns 50%
or less, and does not exhibit control. All significant intercompany accounts and
transactions have been eliminated.
Cash Equivalents
The Company considers as cash equivalents demand deposits and all short-term
investments with an original maturity of three months or less.
Investments
The Company classifies its investments in debt securities as trading securities
in accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Trading
securities are reported at fair value, with unrealized gains and losses included
in earnings. The change in net unrealized holding gain or loss on trading
securities for the year ended December 31, 1999 was not material.
Property and Equipment
Property and equipment are stated at cost. Major betterments are capitalized
while normal maintenance and repairs are charged to operations. Depreciation is
computed by the straight-line method using estimated useful lives of three to
ten years. Leasehold improvements are generally amortized over ten years or the
term of the lease, whichever is shorter. When assets are sold or retired, the
corresponding cost and accumulated depreciation or amortization are removed from
the related accounts and any gain or loss is credited or charged to operations.
A-10
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Intangible Assets
The Company records as goodwill the excess of the purchase price over the fair
value of the net assets associated with acquired businesses. Goodwill is
amortized using the straight-line basis over a period not to exceed twenty five
years for the refractive segment and forty years for the lithotripsy segment.
Accumulated amortization at December 31, 1999 and 1998 is $18,155,000 and
$13,807,000, respectively. Goodwill is reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows is less
than the carrying amount of the goodwill, a loss is recognized for the
difference between the discounted cash flows and carrying value of the goodwill.
Revenue Recognition
Revenues generated from management services and the manufacture of trailers are
recognized as they are earned. The Company's lithotripsy fee revenues are based
upon fees charged for services to hospitals, commercial insurance carriers,
state and federal health care agencies, and individuals, net of contractual fee
reductions.
Major Customers and Credit Concentrations
A significant portion of the Company's manufacturing revenues are from four
customers. For the years ended December 31, 1999 and 1998, sales to these four
customers accounted for 71% of each year's manufacturing revenues.
Concentrations of credit risk with respect to receivables are limited due to the
wide variety of customers, as well as their dispersion across many geographic
areas. Other than as disclosed below, the Company does not consider itself to
have any significant concentrations of credit risk. At December 31, 1999,
approximately 14% of accounts receivable relate to units operating in Texas, 8%
relate to units located in Louisiana, and 12% relate to units located in
California. At December 31, 1998, approximately 17% of accounts receivable
relate to units operating in Texas, 11% relate to units located in Louisiana,
and 10% relate to units located in California.
Income Tax
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
A-11
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized, for the difference between the fair
value and carrying value of the asset.
Accounts Receivable
Accounts receivable are recorded based on revenues, less allowance for doubtful
accounts and contractual adjustments.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using the
average cost method. Certain components that meet the Company's manufacturing
requirements are only available from a limited number of suppliers. The
inability to obtain components as required or to develop alternative sources, if
and as required in the future, could result in delays or reduction in product
shipments, which in turn could have a material adverse effect on the Company's
manufacturing business, financial condition and results of operations.
Stock-Based Compensation
Upon adoption of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("Statement 123"), in 1996, the Company continued
to measure compensation expense for its stock-based employee compensation plans
using the intrinsic value method prescribed by APB Opinion No. 25, Accounting
for Stock Issued to Employees. The Company provides proforma disclosures of net
income and earnings per share as if the fair value-based method prescribed by
Statement 123 had been applied in measuring compensation expense. (See Note J).
Debt Issuance Costs
The Company expenses debt issuance costs as incurred.
Estimates Used to Prepare Financial Statements
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were assumed in
preparing the financial statements.
A-12
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Reclassification
Certain reclassifications have been made to amounts presented in previous years
to be consistent with the 1999 presentation.
Earnings Per Share
Basic earnings per share is based on the weighted average shares outstanding
without any dilutive effects considered. Diluted earnings per share reflects
dilution from all contingently issuable shares, including options and warrants.
A reconciliation of such earnings per share data is as follows:
(In thousands, except per share data)
Net Per Share
For the year ended December 31, 1999 Income Shares Amounts
- ------------------------------------ ------- ------ -------
Basic $15,039 16,958 $0.89
=======
Effect of dilutive securities:
Options - 156
------- ------
Diluted $15,039 17,114 $0.88
======= ====== =======
For the year ended December 31, 1998
- ------------------------------------
Basic $10,794 18,650 $0.58
=======
Effect of dilutive securities:
Options - 133
------- ------
Diluted $10,794 18,783 $0.57
======= ====== =======
For the year ended December 31, 1997
- ------------------------------------
Basic $14,856 19,275 $0.77
=======
Effect of dilutive securities:
Options - 186
------- ------
Diluted $14,856 19,461 $0.76
======= ====== =======
Unexercised employee stock options and warrants to purchase 1,247,000, 1,708,000
and 841,000 shares of Prime common stock as of December 31, 1999, 1998 and 1997,
respectively, were not included in the computations of diluted EPS because the
option exercise prices were greater than the average market price of Prime's
common stock during the respective periods.
A-13
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. INVESTMENTS
Barnet Dulaney Eye Center
Effective September 1, 1999 the Company purchased a 60% interest in two laser
(refractive) surgery centers operated by Barnet Dulaney Eye Center for
approximately $8,807,000 in cash and a warrant to purchase 29,000 shares of
Company common stock, plus a contingent earn-out obligation to be paid at the
end of the first year of operations after the acquisition. The contingent
earn-out obligation is based on the operating performance of one of the two
surgery centers during the first year of operations after the acquisition. This
investment is accounted for using the equity method.
Tenn-GA
In May 1997, the Company acquired a 38.25% general partner interest in a
partnership that provides mobile lithotripsy service in Tennessee and Georgia.
The purchase price was cash of $3,470,000. This investment is accounted for
using the equity method.
Southern California
Effective June 1, 1995, the Company acquired a 32.5% interest in a limited
liability company that operates a fixed site lithotripter near Los Angeles,
California. This investment is accounted for using the equity method.
Ohio and Louisiana Partnerships
In December 1994, the Company acquired all of the common stock of two
corporations. Each corporation is the general partner and holds an approximate
20% interest in a limited partnership which operates a mobile lithotripter. Ohio
Mobile Lithotripter, Ltd. operates a mobile lithotripter in Ohio. Arklatx Mobile
Lithotripter, L.P. operates a mobile lithotripter in Louisiana. These
investments are accounted for using the equity method.
American Physicians Service Group, Inc.
At December 31, 1999 and 1998, the Company owned 1,000 shares of common stock,
representing less than 1%, of the outstanding common stock of American
Physicians Service Group, Inc. (APS). APS owned approximately 14% and 18% of the
outstanding common stock of the Company at December 31, 1999 and 1998,
respectively. Two of the Company's six board members are also on the board of
APS.
The Company occupies approximately 6,700 square feet of office space owned by
APS. The Company also shares certain personnel with APS. The monthly rent and
personnel cost is approximately $10,000. The Company purchased treasury stock
shares through APS Financial Services, Inc. (a wholly owned subsidiary of APS).
For the years ended December 31, 1999 and 1998, the Company paid commissions of
approximately $25,000 and $100,000, respectively, to acquire 420,100 and
1,845,000 shares, respectively, which management believes was competitive with
commissions charges by other firms offering such services.
A-14
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D. ACQUISITIONS
Effective September 1, 1999 the Company acquired, through a majority owned
acquisition subsidiary, 60% of the outstanding stock of Horizon Vision Centers,
Inc. (Horizon). Horizon operates four laser (refractive) surgery centers in
California. The Company paid approximately $10,866,000 in cash for this
acquisition and has accounted for the transaction using the purchase method of
accounting.
Unaudited proforma combined income data for the years ended December 31, 1999
and 1998 of the Company, the Horizon acquisition discussed above and the equity
investment acquisition of the Barnet Dulaney Eye Center's refractive surgery
centers assuming they were effective January 1, 1998 is as follows:
($ in thousands, except per share data)
1999 1998
-------- --------
Total revenues $121,710 $111,545
Total expenses $105,989 $100,522
-------- --------
Net income $15,721 $11,023
======== ========
Diluted earnings per share $0.92 $0.59
======== ========
Effective September 1, 1997, the Company acquired a 75% equity interest in AK
Associates, LLC ("AK"), which provides installation, upgrade, manufacturing,
refurbishment and repair services for major medical equipment manufacturers and
mobile medical service providers. The purchase price was $4,761,000 in cash with
contingent consideration of $1,050,000 which was accrued at December 31, 1998
and paid in the first quarter of 1999. This transaction was accounted for using
the purchase method of accounting.
Effective June 1, 1997, the Company acquired 100% of the stock of Executive
Medical Enterprises, Inc. ("EME"), which operated three lithotripters in
California, Oregon and Washington. The purchase price was $1,339,000 in cash and
potential contingent consideration based upon the performance of these
operations during 1998, 1999 and 2000. Contingent consideration of $400,000 was
paid in 1998, $843,000 was accrued at December 31, 1998 and paid in the first
quarter of 1999, and $54,000 was accrued December 31, 1999. The transaction was
accounted for using the purchase method of accounting.
In January 1997, the Company purchased additional ownership interests in 10
partnerships, which the Company controls. The purchase price for the additional
ownership interests was $10,510,000 in cash. These transactions were accounted
for using the purchase method of accounting.
A-15
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
E. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments (Statement 107), requires that the Company
disclose estimated fair values for its financial instruments as of December 31,
1999 and 1998. The carrying amounts and fair values of the Company's significant
financial instruments are as follows:
1999 1998
------------------ ------------------
Carrying Fair Carrying Fair
($in thousands) Amount Value Amount Value
------- ------- ------- -------
Financial assets:
Cash $20,064 $20,064 $40,146 $40,146
Investments 4,120 4,120 - -
Accounts receivable 23,273 23,273 21,400 21,400
Other receivables 3,491 3,491 2,693 2,693
Financial liabilities:
Debt 105,560 97,560 101,877 92,603
Accounts payable 3,290 3,290 5,287 5,287
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
Cash
The carrying amounts for cash approximate fair value because they mature in less
than 90 days and do not present unanticipated credit concerns.
Investments
The carrying value of investments approximates fair value as they are reported
based on quoted market rates.
Accounts Receivable and Other Receivables
The carrying value of these receivables approximates the fair value due to their
short-term nature and historical collectibility.
Debt
The fair value at December 31, 1999 and 1998 for the $100 million fixed rate
senior subordinated notes was valued using the market rate of 10.2% and 10.456%,
respectively. The carrying value of the debt bearing interest at prime rate
approximates fair value.
Accounts Payable
The carrying value of the payables approximates fair value due to the short-term
nature of the obligation.
A-16
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
E. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. Fair value
estimates are based on existing on balance sheet financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. Other
significant assets and liabilities that are not considered financial assets or
liabilities include deferred tax assets and liabilities, property and equipment,
equity investment in partnerships, goodwill, other noncurrent assets and accrued
expenses. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the aforementioned estimates.
F. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
($ in thousands) 1999 1998
------- -------
Legal fees $291 $1,280
Accrued group insurance costs 193 206
Compensation and payroll
related expense 1,393 2,958
Taxes, other than income taxes 343 1,301
Accrued interest 2,247 2,192
Income taxes payable (receivable) (146) 1,229
Deferred payments for acquisitions 54 1,950
Other 2,733 935
------- -------
$7,108 $12,051
======= =======
A-17
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. INDEBTEDNESS
Long-term debt is as follows:
($ in thousands) December 31,
1999 1998
-------- --------
Interest Rates Maturities
8.75% 2000-2008 $100,808 $100,000
Prime 2000-2003 4,464 1,715
None 2000-2006 162 162
6%-9% 2000-2004 126 -
-------- --------
$105,560 $101,877
Less current portion of
long-term debt 1,763 890
-------- --------
$103,797 $100,987
======== ========
In March 1998, the Company completed an offering of an aggregate $100 million of
unsecured senior subordinated notes (the "Notes") due 2008. The issue price of
the notes was 99.50 with an 8.75% coupon. Interest is payable semi-annually on
April 1 and October 1, beginning October 1, 1998. The financing costs associated
with this offering totaling $4,418,000 were expensed during 1998 in the
accompanying consolidated statements of income. A portion of the proceeds from
the offering were used to pay off the Company's $77 million of term loans under
its existing credit facility.
The Note Indenture restricts, among other things, the ability of the Company and
its Restricted Subsidiaries to incur additional indebtedness and issue preferred
stock, enter into sale and leaseback transactions, incur liens, pay dividends or
make certain other restricted payments, apply net proceeds from certain asset
sales, enter into certain transactions with affiliates, merge or consolidate
with any other person, sell stock of subsidiaries and assign, transfer, lease,
convey or otherwise dispose of substantially all of the assets of the Company.
During 1998, the Company amended its syndicated bank facility from $135 million
to $100 million. The facility consists of a $100 million revolving credit
facility bearing interest of LIBOR + 1 to 2%, maturing in April 2003. At
December 31, 1999, the entire $100 million revolving credit facility was
undrawn. At December 31, 1999, interest on the Company's bank facility was
7.385%. The assets of the Company and the stock of its subsidiaries
collateralize the bank facility.
The stated principal repayments for all indebtedness as of December 31, 1999 are
payable as follows:
($ in thousands)
2000 $1,763
2001 1,845
2002 1,363
2003 280
2004 178
Thereafter 100,131
A-18
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. COSTS OF SERVICES AND GENERAL AND ADMINISTRATIVE EXPENSES
Costs of services and general and administrative expenses consist of the
following:
Years Ended December 31,
1999 1998 1997
($ in thousands) ------- ------- -------
Salaries, wages and benefits $16,230 $16,294 $15,779
Other costs of services 7,789 7,136 7,569
General and administrative 5,770 3,225 3,595
Legal and professional 2,167 2,551 2,064
Manufacturing costs 11,902 8,294 1,394
Other 1,081 1,973 2,884
------- ------- -------
$44,939 $39,473 $33,285
======= ======= =======
I. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions that have arisen in
the ordinary course of business. Management believes that any liabilities
arising from these actions will not have a material adverse effect on the
financial condition, results of operations or cash flows of the Company.
The Company sponsors a partially, self-insured group medical insurance plan. The
plan is designed to provide a specified level of coverage, with stop-loss
coverage provided by a commercial insurer. The Company's maximum claim exposure
is limited to $35,000 per person per policy year. At December 31, 1999, the
Company had 255 employees enrolled in the plan. The plan provides
non-contributory coverage for employees and contributory coverage for
dependents. The Company's contributions totaled $966,000, $623,000 and $351,000,
in 1999, 1998 and 1997 respectively.
J. COMMON STOCK OPTIONS
1993 Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options. The Company
provides proforma disclosures of net income and earnings per share as if the
fair-value based method prescribed by Statement 123 had been applied in
measuring compensation expense. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
On October 12, 1993, the Company adopted the 1993 Stock Option Plan which
authorizes the grant of up to 2,000,000 shares to certain key employees,
directors, and consultants and advisors to the Company. Options granted under
the 1993 Stock Option Plan shall terminate no later than ten years from the date
the option is granted, unless the option terminates sooner by reason of
termination of employment, disability or death.
A-19
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. COMMON STOCK OPTIONS (continued)
In June 1997, the Company adopted an amendment to the 1993 Stock Option Plan
that authorized an additional 500,000 shares. In June 1998, the Company adopted
an amendment to the 1993 Stock Option Plan that authorized an additional 750,000
shares.
A summary of the Company's stock option activity, and related information for
the years ended December 31, follows:
1999 1998 1997
-------------------------- -------------------------- --------------------------
Options Weighted-Average Options Weighted-Average Options Weighted-Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
Outstanding-beginning
of year 1,892 $10.10 1,394 $11.04 1,228 $8.99
Granted 695 7.56 825 8.63 428 11.94
Exercised (17) 5.10 (44) 3.73 (227) 1.51
Forfeited (276) 12.20 (283) 12.58 (35) 12.19
------ ------ ------ ------ ------ ------
Outstanding-end of year 2,294 $9.10 1,892 $10.10 1,394 $11.04
====== ====== ====== ====== ====== ======
Exercisable at end of year 1,137 $9.89 806 $10.74 466 $8.21
Weighted-average fair
value of options
granted during the year $2.96 - $3.40 - $5.21 -
The following table summarizes the Company's outstanding options at December 31,
1999:
Outstanding Options Exercisable Options
----------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Options Contractual Exercise Options Exercise
Range of Exercise Prices (000) Life Price (000) Price
- ------------------------ ------ ----------- -------- ------ --------
$0.25 - $4.12 151 0.4 years $0.37 151 $0.37
$4.13 - $8.25 963 4.0 years 7.35 193 7.43
$8.26 - $12.37 625 4.3 years 9.80 312 10.15
$12.38 - $16.50 555 2.2 years 13.79 481 13.70
------ ------
Total 2,294 1,137
====== ======
Proforma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1999,
1998 and 1997, respectively: risk-free interest rates of 6.5%, 5.2% and 6.2%;
dividend yields of 0%, 0% and 0%; volatility factors of the expected market
price of the Company's common stock of .44, .42 and .46; and a weighted-average
expected life of the option of 4 years.
A-20
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. COMMON STOCK OPTIONS (continued)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of proforma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's proforma
information follows (in thousands except for earnings per share information):
1999 1998 1997
------- ------- -------
Pro forma net income $11,960 $7,817 $12,448
Pro forma earning per share:
Basic $0.71 $0.42 $0.65
Diluted $0.70 $0.42 $0.64
K. LONG-LIVED ASSETS TO BE DISPOSED OF
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, equipment which management has both the ability and intent to
remove from service is reported in the financial statements at the lower of
carrying amount or fair value less costs to sell. During 1999 the Company
approved the removal from service of five lithotripter units. Three of these
units were removed from service by the end of 1999 and the remaining two will be
removed from service within the first quarter of 2000. These assets are held by
the lithotripsy segment. The customers of these units are or will be serviced by
other equipment. A loss of approximately $1.1 million was recognized on the
write-down to fair value less costs to sell in the caption "nonrecurring
development, impairment and other costs, net" of the accompanying statement of
income. The minority interest portion of this loss was approximately $600,000.
L. INCOME TAXES
The Company files a consolidated tax return with its wholly owned subsidiaries.
A substantial portion of consolidated income is not taxed at the corporate level
as it represents income from partnerships. Accordingly, only the portion of
income from these partnerships attributable to the Company's ownership interests
is included in taxable income in the consolidated tax return and financial
statements. The minority interest portion of this income is the responsibility
of the individual partners.
A-21
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L. INCOME TAXES (continued)
Income tax expense consists of the following:
Years Ended December 31,
1999 1998 1997
($ in thousands) ------- ------- -------
Federal:
Current $5,490 $6,404 $4,369
Deferred 2,875 (442) 68
State 1,067 1,415 1,358
------- ------- -------
$9,432 $7,377 $5,795
======= ======= =======
A reconciliation of expected income tax (computed by applying the United States
statutory income tax rate of 35% to earnings before income taxes) to total
income tax expense in the accompanying consolidated statements of income
follows:
Years Ended December 31,
1999 1998 1997
($ in thousands) ------- ------- -------
Expected federal income tax $8,565 $6,360 $7,228
Change in beginning of year
valuation allowance - - (2,399)
State taxes 1,067 1,415 1,358
Other (200) (398) (392)
------- ------- -------
$9,432 $7,377 $5,795
======= ======= =======
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1999 and
1998 are presented below:
($ in thousands) 1999 1998
------- -------
Deferred tax assets:
Capitalized costs $1,948 $2,381
Loan origination fees amortizable
for tax purposes 949 1,267
Accounts receivable, principally due
to allowance for doubtful accounts 73 248
Accrued expenses deductible for tax
purposes when paid 994 2,082
------- -------
Total gross deferred tax assets 3,964 5,978
Less valuation allowance - -
------- -------
Net deferred tax assets 3,964 5,978
------- -------
A-22
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L. INCOME TAXES (continued)
($ in thousands) 1999 1998
------- -------
Deferred tax liabilities:
Property and equipment, principally due
to differences in depreciation $ (99) $ (166)
Investments in affiliated entities,
principally due to undistributed
income (2,329) (2,703)
Intangible assets, principally due to
differences in amortization periods
for tax purposes (6,870) (5,568)
------- -------
Total gross deferred tax liability (9,298) (8,437)
------- -------
Net deferred tax liability $(5,334) $(2,459)
======= =======
There is no valuation allowance for deferred tax assets at December 31, 1999 and
1998. A decrease of $2,399,000 in 1997, primarily due to utilization of net
operating loss carryforwards was recorded in 1997.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for future
taxable income over the periods which the deductible temporary differences
reverse, management believes it is more likely than not the Company will realize
the benefits of these deductible differences at December 31, 1999.
M. RELATED PARTY TRANSACTIONS
See Note C for related party transactions involving investments in affiliates.
N. SEGMENT REPORTING
The Company has three reportable segments: lithotripsy, manufacturing and
refractive. The lithotripsy segment provides services related to the operation
of the lithotripters, including scheduling, staffing, training, quality
assurance, maintenance, regulatory compliance and contracting with payors,
hospitals and surgery centers. The manufacturing segment provides manufacturing
services and installation, upgrade, refurbishment and repair of major medical
equipment for mobile medical service providers. The refractive segment, which is
new in 1999, provides services related to the operations of refractive vision
correction centers. Other operating segments which do not meet the quantitative
thresholds for reportable segments include prostatherapy services.
A-23
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
N. SEGMENT REPORTING (continued)
The accounting policies of the segments are the same as those described in Note
B, the summary of significant accounting policies. The Company measures
performance based on the pretax income or loss after consideration of minority
interests from its operating segments, which do not include unallocated
corporate general and administrative expenses and corporate interest income and
expense. Additionally, certain consolidated entities that are reported as
"corporate" own and operate lithotripsy equipment. The revenue and depreciation
expense related to this equipment is included in the lithotripsy segment.
However, the equipment is included in corporate assets.
The Company's segments are divisions that offer different services, and require
different technology and marketing approaches. The majority of the lithotripsy
segment is comprised of acquired entities, as are the manufacturing and
refractive segments. The prostatherapy segment was developed internally. The
presentation of segments for 1998 and 1997, which included two segments for
medical and manufacturing, have been recast to conform to the Company's
operating segments for 1999.
All of the Company's revenues are earned in the United States and long-lived
assets are located in the United States. The Company does not have any major
customers who account for more than 10% of its revenues.
A-24
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
N. SEGMENT REPORTING (continued)
($ in thousands)
Lithotripsy Manufacturing Refractive Other
----------- ------------- ---------- -----
1999
- ----
Revenue from
external customers $89,180 $17,527 $3,414 $2,053
Intersegment revenues - 243 - -
Interest income 341 - - 4
Interest expense 269 98 457 -
Depreciation and
amortization 9,754 264 363 336
Segment profit 32,115 3,430 450 337
Segment assets 195,012 13,122 23,254 3,021
Investment in
equity method
investees 8,814 - 9,375 -
Capital expenditures 4,367 161 548 298
1998
- ----
Revenue from
external customers $92,053 $11,066 - $1,517
Intersegment revenues - 255 - -
Interest income 444 - - 3
Interest expense 235 38 - -
Depreciation and
amortization 9,899 223 - 252
Segment profit 35,484 1,142 - 209
Segment assets 203,653 9,916 - 2,628
Investment in
equity method
investees 10,696 - - -
Capital expenditures 2,770 1,580 - 787
A-25
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
N. SEGMENT REPORTING (continued)
($ in thousands)
Lithotripsy Manufacturing Refractive Other
----------- ------------- ---------- -----
1997
- ----
Revenue from
external customers $93,113 $2,358 - $508
Intersegment revenues - 185 - -
Interest income 536 - - 24
Interest expense 314 - - -
Depreciation and
amortization 9,793 18 - 75
Segment profit 33,187 403 - 92
Segment assets 211,282 6,223 - 2,216
Investment in
equity method
investees 10,658 - - -
Capital expenditures 3,741 23 - 732
The following is a reconciliation of revenues per above to the consolidated
revenues per the consolidated statements of income:
1999 1998 1997
($ in thousands) -------- -------- --------
Total revenues for reportable segments $110,364 $103,374 $95,656
Other segment 2,053 1,517 508
Elimination of intersegment revenues (243) (255) (185)
-------- -------- --------
Total consolidated revenues $112,174 $104,636 $95,979
======== ======== ========
A-26
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
N. SEGMENT REPORTING (continued)
The following is a reconciliation of profit per above to income before taxes per
the consolidated statements of income:
1999 1998 1997
($ in thousands) ------- ------- -------
Total profit for reportable segments $35,995 $36,626 $33,590
Other segment 337 209 92
Unallocated corporate expenses:
General and administrative (5,027) (4,926) (5,683)
Net interest expense (7,424) (7,226) (6,983)
Loan fees and stock offering costs (566) (4,978) (360)
Nonrecurring development and other costs 475 (1,617) -
Release of contractual obligation 1,140 - -
Other, net (459) 83 (5)
------- ------- -------
Unallocated corporate expenses total (11,861) (18,664) (13,031)
------- ------- -------
Income before income taxes $24,471 $18,171 $20,651
======= ======= =======
The following is a reconciliation of segment assets per above to the
consolidated assets per the consolidated balance sheets:
1999 1998 1997
($ in thousands) -------- -------- --------
Total assets for reportable segments $231,388 $213,569 $217,505
Other segment 3,021 2,628 2,216
Unallocated corporate assets 12,417 24,001 5,184
-------- -------- --------
Consolidated total $246,826 $240,198 $224,905
======== ======== ========
A-27
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
N. SEGMENT REPORTING (continued)
The reconciliation of the other significant items to the amounts reported in the
consolidated financial statements is as follows:
Eliminating
($ in thousands) Segments Corporate Entries Consolidated
-------- --------- ------- ------------
1999
Interest income $345 $1,250 $(90) $1,505
Interest expense 824 8,674 (90) 9,408
Depreciation and
amortization 10,717 131 - 10,848
Capital expenditures 5,374 416 - 5,790
1998
Interest income $447 $1,007 $(37) $1,417
Interest expense 273 8,233 (37) 8,469
Depreciation and
amortization 10,374 102 - 10,476
Capital expenditures 5,137 76 - 5,213
1997
Interest income $560 $180 - $740
Interest expense 314 7,163 - 7,477
Depreciation and
amortization 9,886 25 - 9,911
Capital expenditures 4,496 50 - 4,546
The amounts in 1999, 1998 and 1997 for interest income and expense, depreciation
and amortization and capital expenditures represent amounts recorded by the
operations of the Company's corporate functions, which have not been allocated
to the segments.
O. CONDENSED FINANCIAL INFORMATION REGARDING GUARANTOR SUBSIDIARIES
Condensed consolidating financial information regarding the Company, Guarantor
Subsidiaries and non-guarantor subsidiaries as of December 31, 1999 and 1998 and
for each of the years in the three-year period ended December 31, 1999 is
presented below for purposes of complying with the reporting requirements of the
Guarantor Subsidiaries. Separate financial statements and other disclosures
concerning each Guarantor Subsidiary have not been presented because management
has determined that such information is not material to investors. The Guarantor
Subsidiaries are wholly-owned subsidiaries of the Company who have fully and
unconditionally guaranteed the Notes described in Note G.
A-28
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Income
Year Ended December 31, 1999
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
-------------- -------------- -------------- -------------- --------------
Revenue:
Lithotripsy:
Fee revenues $ - $ 20,303 $ 60,577 $ - $ 80,880
Management fees - 3,304 2,415 - 5,719
Equity income 32,763 18,799 - (48,981) 2,581
-------------- -------------- -------------- -------------- --------------
32,763 42,406 62,992 (48,981) 89,180
Manufacturing - - 17,527 - 17,527
Refractive 346 410 3,004 (346) 3,414
Prostatherapy - - 1,834 - 1,834
Other - 219 - - 219
-------------- -------------- -------------- -------------- --------------
Total revenue 33,109 43,035 85,357 (49,327) 112,174
-------------- -------------- -------------- -------------- --------------
Cost of services and general and
administrative expenses:
Lithotripsy - 1,995 21,006 - 23,001
Manufacturing - - 12,880 - 12,880
Refractive - - 1,954 - 1,954
Prostatherapy - (198) 1,483 - 1,285
Other - 165 - - 165
Corporate 248 4,779 - - 5,027
Nonrecurring development,
impairment and other costs, net (570) 173 1,024 - 627
-------------- -------------- -------------- -------------- --------------
(322) 6,914 38,347 - 44,939
Depreciation and amortization 5 5,216 5,627 - 10,848
-------------- -------------- -------------- -------------- --------------
Total operating expenses (317) 12,130 43,974 - 55,787
-------------- -------------- -------------- -------------- --------------
Operating income 33,426 30,905 41,383 (49,327) 56,387
-------------- -------------- -------------- -------------- --------------
Other income (deductions):
Interest income 749 510 246 - 1,505
Interest expense (9,111) 438 (735) - (9,408)
Loan fees and stock offering costs (492) (74) - - (566)
Release of contractual obligation - 1,140 - - 1,140
Other, net (662) 522 61 - (79)
-------------- -------------- -------------- -------------- --------------
Total other income (deductions) (9,516) 2,536 (428) - (7,408)
-------------- -------------- -------------- -------------- --------------
Income before provision for income
taxes and minority interest 23,910 33,441 40,955 (49,327) 48,979
Minority interest in consolidated income - - - 24,508 24,508
Provision for income taxes 8,871 332 229 - 9,432
-------------- -------------- -------------- -------------- --------------
Net income $ 15,039 $ 33,109 $ 40,726 $ (73,835) $ 15,039
============== ============== ============== ============== ==============
A-29
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Income
Year Ended December 31, 1998
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
--------------- ------------- -------------- -------------- --------------
Revenue:
Lithotripsy:
Fee revenues $ - $ 22,487 $ 61,392 $ - $ 83,879
Management fees - 3,126 2,158 - 5,284
Equity income 30,952 20,077 - (48,139) 2,890
-------------- -------------- -------------- -------------- --------------
30,952 45,690 63,550 (48,139) 92,053
Manufacturing - - 11,066 - 11,066
Prostatherapy - - 1,207 - 1,207
Other - 310 - - 310
-------------- -------------- -------------- -------------- --------------
Total revenue 30,952 46,000 75,823 (48,139) 104,636
-------------- -------------- -------------- -------------- --------------
Cost of services and general and
administrative expenses:
Lithotripsy - 3,977 18,697 - 22,674
Manufacturing - - 9,204 - 9,204
Prostatherapy - - 803 - 803
Other - 249 - - 249
Corporate 203 4,723 - - 4,926
Nonrecurring development,
impairment and other costs, net 1,617 - - - 1,617
-------------- -------------- -------------- -------------- --------------
1,820 8,949 28,704 - 39,473
Depreciation and amortization 7 5,221 5,248 - 10,476
-------------- -------------- -------------- -------------- --------------
Total operating expenses 1,827 14,170 33,952 - 49,949
-------------- -------------- -------------- -------------- --------------
Operating income 29,125 31,830 41,871 (48,139) 54,687
-------------- -------------- -------------- -------------- --------------
Other income (deductions):
Interest income 735 305 377 - 1,417
Interest expense (8,234) (44) (191) - (8,469)
Loan fees and stock offering costs (4,978) - - - (4,978)
Other, net (39) 331 12 - 304
-------------- -------------- -------------- -------------- --------------
Total other income (deductions) (12,516) 592 198 - (11,726)
-------------- -------------- -------------- -------------- --------------
Income before provision for income
taxes and minority interest 16,609 32,422 42,069 (48,139) 42,961
Minority interest in consolidated income - - - 24,790 24,790
Provision for income taxes 5,815 1,470 92 - 7,377
-------------- -------------- -------------- -------------- --------------
Net income $ 10,794 $ 30,952 $ 41,977 $ (72,929) $ 10,794
============== ============== ============== ============== ==============
A-30
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Income
Year Ended December 31, 1997
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
--------------- -------------- -------------- -------------- --------------
Revenue:
Lithotripsy:
Fee revenues $ - $ 20,863 $ 63,674 $ - $ 84,537
Management fees - 3,978 2,259 - 6,237
Equity income 27,386 18,587 - (43,634) 2,339
-------------- -------------- -------------- -------------- --------------
27,386 43,428 65,933 (43,634) 93,113
Manufacturing - - 2,358 - 2,358
Other - 508 - - 508
-------------- -------------- -------------- -------------- --------------
Total revenue 27,386 43,936 68,291 (43,634) 95,979
-------------- -------------- -------------- -------------- --------------
Cost of services and general and
administrative expenses:
Lithotripsy - 4,646 20,735 - 25,381
Manufacturing - - 1,743 - 1,743
Other - 478 - - 478
Corporate 567 5,116 - - 5,683
-------------- -------------- -------------- -------------- --------------
567 10,240 22,478 - 33,285
Depreciation and amortization 7 5,157 4,747 - 9,911
-------------- -------------- -------------- -------------- --------------
Total operating expenses 574 15,397 27,225 - 43,196
-------------- -------------- -------------- -------------- --------------
Operating income 26,812 28,539 41,066 (43,634) 52,783
-------------- -------------- -------------- -------------- --------------
Other income (deductions):
Interest income - 309 431 - 740
Interest expense (7,160) (52) (265) - (7,477)
Loan fees and stock offering costs (360) - - - (360)
Other, net - (128) 134 - 6
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Total other income (deductions) (7,520) 129 300 - (7,091)
-------------- -------------- -------------- -------------- --------------
Income before provision for income
taxes and minority interest 19,292 28,668 41,366 (43,634) 45,692
Minority interest in consolidated income - - - 25,041 25,041
Provision for income taxes 4,436 1,282 77 - 5,795
-------------- -------------- -------------- -------------- --------------
Net income $ 14,856 $ 27,386 $ 41,289 $ (68,675) $ 14,856
============== ============== ============== ============== ==============
A-31
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet
December 31, 1999
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
--------------- ------------- -------------- -------------- -------------
ASSETS
Current assets:
Cash $ 2,043 $ 2,682 $ 15,339 $ - $ 20,064
Investments 4,120 - - - 4,120
Accounts receivable, net - 3,069 20,204 - 23,273
Other receivables 291 1,689 1,511 - 3,491
Deferred income taxes 94 972 - - 1,066
Prepaid expenses and other current assets 14 1,195 1,113 - 2,322
Inventory - - 3,676 3,676
-------------- -------------- -------------- -------------- -------------
Total current assets 6,562 9,607 41,843 - 58,012
Property and equipment:
Equipment, furniture and fixtures - 5,549 36,579 - 42,128
Building and leasehold improvements - 498 1,594 - 2,092
-------------- -------------- -------------- -------------- -------------
- 6,047 38,173 - 44,220
Less accumulated depreciation
and amortization - (4,514) (21,053) - (25,567)
-------------- -------------- -------------- -------------- -------------
Property and equipment, net - 1,533 17,120 - 18,653
Investment in subsidiaries
and other investments 196,347 50,721 - (228,105) 18,963
Goodwill, at cost, net of amortization - 139,989 9,099 - 149,088
Other noncurrent assets 281 643 1,186 - 2,110
-------------- -------------- -------------- -------------- -------------
$ 203,190 $ 202,493 $ 69,248 $ (228,105) $ 246,826
============== ============== ============== ============== =============
LIABILITIES
Current liabilities:
Current portion of long-term debt $ - $ - $ 1,763 $ - $ 1,763
Accounts payable 70 1,256 1,964 - 3,290
Accrued expenses 3,524 1,242 10,674 - 15,440
-------------- -------------- -------------- -------------- -------------
Total current liabilities 3,594 2,498 14,401 - 20,493
Long-term debt, net of current portion 100,000 162 3,635 - 103,797
Deferred income taxes 2,914 3,486 - - 6,400
-------------- -------------- -------------- -------------- -------------
Total liabilities 106,508 6,146 18,036 - 130,690
Minority interest - - - 19,454 19,454
STOCKHOLDERS' EQUITY
Common stock 194 - - - 194
Capital in excess of par value 87,655 - - - 87,655
Accumulated earnings 33,654 - - - 33,654
Treasury stock (24,821) - - - (24,821)
Subsidiary net equity - 196,347 51,212 (247,559) -
-------------- -------------- -------------- -------------- -------------
Total stockholders' equity 96,682 196,347 51,212 (247,559) 96,682
-------------- -------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------- -------------
$ 203,190 $ 202,493 $ 69,248 $ (228,105) $ 246,826
============== ============== ============== ============== =============
A-32
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet
December 31, 1998
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
--------------- ------------- -------------- -------------- -------------
ASSETS
Current assets:
Cash $ 15,798 $ 7,585 $ 16,763 $ - $ 40,146
Accounts receivable, net - 3,319 18,081 - 21,400
Other receivables - 2,693 - - 2,693
Deferred income taxes 1,603 727 - - 2,330
Prepaid expenses and other current assets - 456 493 - 949
Inventory - - 1,825 1,825
-------------- -------------- -------------- -------------- -------------
Total current assets 17,401 14,780 37,162 - 69,343
Property and equipment:
Equipment, furniture and fixtures - 5,301 29,184 - 34,485
Building and leasehold improvements - 491 1,582 - 2,073
-------------- -------------- -------------- -------------- -------------
- 5,792 30,766 - 36,558
Less accumulated depreciation
and amortization - (4,485) (13,986) - (18,471)
-------------- -------------- -------------- -------------- -------------
Property and equipment, net - 1,307 16,780 - 18,087
Investment in subsidiaries
and other investments 178,611 28,038 - (195,623) 11,026
Goodwill, at cost, net of amortization - 140,863 - - 140,863
Other noncurrent assets 105 488 286 - 879
-------------- -------------- -------------- -------------- -------------
$ 196,117 $ 185,476 $ 54,228 $ (195,623) $ 240,198
============== ============== ============== ============== =============
LIABILITIES
Current liabilities:
Current portion of long-term debt $ - $ - $ 890 $ - $ 890
Accounts payable 1,501 1,254 2,532 - 5,287
Accrued expenses 3,563 1,929 15,510 - 21,002
-------------- -------------- -------------- -------------- -------------
Total current liabilities 5,064 3,183 18,932 - 27,179
Long-term debt, net of current portion 100,000 162 825 - 100,987
Deferred income taxes 1,303 3,486 - - 4,789
-------------- -------------- -------------- -------------- -------------
Total liabilities 106,367 6,831 19,757 - 132,955
Minority interest - - - 17,493 17,493
STOCKHOLDERS' EQUITY
Common stock 194 - - - 194
Capital in excess of par value 87,380 - - - 87,380
Accumulated earnings 18,615 - - - 18,615
Treasury stock (16,439) - - - (16,439)
Subsidiary net equity - 178,645 34,471 (213,116) -
-------------- -------------- -------------- -------------- -------------
Total stockholders' equity 89,750 178,645 34,471 (213,116) 89,750
-------------- -------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------- -------------
$ 196,117 $ 185,476 $ 54,228 $ (195,623) $ 240,198
============== ============== ============== ============== =============
A-33
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows
December 31, 1999
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
--------------- ------------- ------------- -------------- --------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by (used in)
operating activities $ (20,940) $ 5,205 $ 51,479 $ - $ 35,744
-------------- -------------- ------------- -------------- --------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of investments and entities - (13,451) (10,129) - (23,580)
Purchases of equipment and leasehold
improvements - (1,193) (4,597) - (5,790)
Proceeds from sales of equipment - 167 40 - 207
Distributions from subsidiaries 15,407 17,424 - (32,831) -
Investments - 2,352 - - 2,352
Other - - 570 - 570
-------------- -------------- ------------- -------------- --------------
Net cash provided by (used in)
investing activities 15,407 5,299 (14,116) (32,831) (26,241)
-------------- -------------- ------------- -------------- --------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on notes payable exclusive of
interest - - (1,403) - (1,403)
Borrowings on notes payable - - 4,584 - 4,584
Distributions to minority interest - - - (27,180) (27,180)
Contributions by minority interest - - 2,636 - 2,636
Exercise and issuance of stock options 160 - - - 160
Purchase of treasury stock (8,382) - - - (8,382)
Distributions to equity owners - (15,407) (44,604) 60,011 -
-------------- -------------- ------------- -------------- --------------
Net cash provided by (used in)
financing activities (8,222) (15,407) (38,787) 32,831 (29,585)
-------------- -------------- ------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (13,755) (4,903) (1,424) - (20,082)
Cash and cash equivalents, beginning of period 15,798 7,585 16,763 - 40,146
-------------- -------------- ------------- -------------- --------------
Cash and cash equivalents, end of period $ 2,043 $ 2,682 $ 15,339 $ - $ 20,064
============== ============== ============= ============== ==============
A-34
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows
December 31, 1998
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
--------------- ------------- ------------- -------------- --------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by (used in)
operating activities $ (10,215) $ 9,608 $ 46,158 $ - $ 45,551
-------------- -------------- ------------- -------------- --------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of equipment and leasehold
improvements - (2,000) (3,213) - (5,213)
Proceeds from sales of equipment - 179 45 - 224
Distributions from subsidiaries 26,228 16,665 - (42,893) -
Investments (408) 2,940 - - 2,532
Other 22 166 127 - 315
-------------- -------------- ------------- -------------- --------------
Net cash provided by (used in)
investing activities 25,842 17,950 (3,041) (42,893) (2,142)
-------------- -------------- ------------- -------------- --------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on notes payable exclusive of
interest (79,000) (5) (1,479) - (80,484)
Borrowings on notes payable 100,000 - 25 - 100,025
Distributions to minority interest - - - (25,799) (25,799)
Debt issuance costs (4,417) - - - (4,417)
Contributions by minority interest - - 72 - 72
Exercise and issuance of stock options 9 - - - 9
Purchase of treasury stock (16,439) - - - (16,439)
Distributions to equity owners - (26,228) (42,464) 68,692 -
-------------- -------------- ------------- -------------- --------------
Net cash provided by (used in)
financing activities 153 (26,233) (43,846) 42,893 (27,033)
-------------- -------------- ------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 15,780 1,325 (729) - 16,376
Cash and cash equivalents, beginning of period 18 6,260 17,492 - 23,770
-------------- -------------- ------------- -------------- --------------
Cash and cash equivalents, end of period $ 15,798 $ 7,585 $ 16,763 $ - $ 40,146
============== ============== ============= ============== ==============
A-35
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows
December 31, 1997
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
--------------- ------------- -------------- -------------- --------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by (used in)
operating activities $ (9,441) $ 14,879 $ 46,255 $ - $ 51,693
-------------- -------------- -------------- -------------- --------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of lithotripter entities - (20,217) - - (20,217)
Purchases of equipment and leasehold
improvements - (1,516) (3,030) - (4,546)
Proceeds from sales of equipment - 30 - - 30
Distributions from subsidiaries 6,865 16,667 - (23,532) -
Investments - 1,690 - - 1,690
Other - 94 - - 94
-------------- -------------- -------------- -------------- --------------
Net cash provided by (used in)
investing activities 6,865 (3,252) (3,030) (23,532) (22,949)
-------------- -------------- -------------- -------------- --------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on notes payable exclusive of
interest (47,750) (1,100) (1,478) - (50,328)
Borrowings on notes payable 50,000 - 1,201 - 51,201
Distributions to minority interest - - - (28,667) (28,667)
Contributions by minority interest - - 2,381 - 2,381
Exercise and issuance of stock options 343 - - - 343
Distributions to equity owners - (6,865) (45,334) 52,199 -
-------------- -------------- -------------- -------------- --------------
Net cash provided by (used in)
financing activities 2,593 (7,965) (43,230) 23,532 (25,070)
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 17 3,662 (5) - 3,674
Cash and cash equivalents, beginning of period 1 2,598 17,497 - 20,096
-------------- -------------- -------------- -------------- --------------
Cash and cash equivalents, end of period $ 18 $ 6,260 $ 17,492 $ - $ 23,770
============== ============== ============== ============== ==============
A-36