UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
For the transition period from
______ to ______
Commission File Number: 0-22392
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, TX 78746
(Address of principal executive office) (Zip code)
(512) 328-2892
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (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 ___
-----
Indicate by check mark whether the registrant is an accelerated filer
(as described in Rule 12b-2 of the Exchange Act).
YES X NO ___
-----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Number of Shares Outstanding at
Title of Each Class October 31, 2002
------------------- ----------------
Common Stock, $.01 par value 16,931,017
1
PART I
ITEM 1 - FINANCIAL INFORMATION
2
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
($ in thousands, except per share data) 2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenue:
Lithotripsy:
Fee revenues $17,698 $ 20,158 $52,258 $ 56,853
Management fees 298 944 609 2,721
Equity income 210 421 571 1,541
----------- ----------- ----------- -----------
18,206 21,523 53,438 61,115
Manufacturing 24,991 16,547 62,316 34,566
Refractive 1,897 4,349 9,955 18,411
Other 204 - 596 -
----------- ----------- ----------- -----------
Total revenue 45,298 42,419 126,305 114,092
----------- ----------- ----------- -----------
Cost of services and general and
administrative expenses:
Lithotripsy 6,306 6,192 20,039 19,585
Manufacturing 21,188 14,033 52,330 29,311
Refractive 2,268 3,477 8,490 12,376
Corporate 936 977 2,554 2,698
Nonrecurring impairment and other costs 17,740 - 17,740 -
----------- ----------- ----------- -----------
48,438 24,679 101,153 63,970
Depreciation and amortization 1,691 3,672 5,300 10,657
----------- ----------- ----------- -----------
50,129 28,351 106,453 74,627
----------- ----------- ----------- -----------
Operating income (loss) (4,831) 14,068 19,852 39,465
Other income (expenses):
Interest and dividends 39 94 167 373
Interest expense (2,486) (2,724) (7,563) (8,504)
Loan fees (556) - (1,069) (163)
Other, net 764 140 790 251
----------- ----------- ----------- -----------
(2,239) (2,490) (7,675) (8,043)
----------- ----------- ----------- -----------
Income (loss) before (benefit) provision for income
taxes and minority interest (7,070) 11,578 12,177 31,422
Minority interest in consolidated income 6,067 7,788 16,978 21,051
(Benefit) provision for income taxes (5,030) 1,492 (1,831) 4,058
----------- ----------- ----------- -----------
Net (loss) income $ (8,107) $ 2,298 $ (2,970) $ 6,313
=========== =========== =========== ===========
Basic (loss) earnings per share:
Net (loss) income $ (0.48) $ 0.15 $ (0.18) $ 0.40
=========== =========== =========== ===========
Weighted average shares outstanding 16,911 15,704 16,163 15,704
=========== =========== =========== ===========
Diluted (loss) earnings per share:
Net (loss) income $ (0.48) $ 0.15 $ (0.18) $ 0.40
=========== =========== =========== ===========
Weighted average shares outstanding 16,911 15,706 16,163 15,715
=========== =========== =========== ===========
3
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
($ in thousands) 2002 2001
-------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,691 $ 16,503
Investments - 612
Accounts receivable, less allowance for doubtful
accounts of $853 in 2002 and $2,172 in 2001 24,804 21,781
Other receivables 381 3,167
Deferred income taxes 4,722 1,658
Prepaid expenses and other current assets 2,812 4,349
Inventory 15,863 11,143
-------------- ------------
Total current assets 56,273 59,213
-------------- ------------
Property and equipment:
Equipment, furniture and fixtures 40,450 52,735
Building and leasehold improvements 10,111 11,282
-------------- ------------
50,561 64,017
Less accumulated depreciation and amortization (26,740) (32,823)
-------------- ------------
Property and equipment, net 23,821 31,194
-------------- ------------
Assets held for sale 4,239 -
Other investments 4,208 4,737
Goodwill, net of accumulated amortization 161,154 151,687
Other noncurrent assets 3,754 5,210
-------------- ------------
$253,449 $ 252,041
============== ============
See accompanying notes to consolidated financial statements.
4
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
September 30, December 31,
($ in thousands, except share data) 2002 2001
------------- ------------
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 1,489 $ 3,002
Accounts payable 6,301 5,481
Liabilities held for sale 747 -
Accrued distributions to minority interests - 6,739
Accrued expenses 12,875 13,128
Customer deposits 4,804 -
------------- ------------
Total current liabilities 26,216 28,350
Long-term debt, net of current portion 115,970 117,364
Deferred compensation liability - 1,168
Deferred income taxes 3,513 1,065
------------- ------------
Total liabilities 145,699 147,947
Minority interest 12,948 18,618
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; 16,931,017 shares
issued in 2002 and 19,524,533 shares issued in 2001 169 195
Capital in excess of par value 67,757 89,128
Accumulated earnings 26,876 29,846
Treasury stock, at cost; 3,961,799 shares in 2001 - (33,693)
------------- ------------
Total stockholders' equity 94,802 85,476
------------- ------------
$253,449 $ 252,041
============= ============
See accompanying notes to consolidated financial statements.
5
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
($ in thousands) 2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Fee and other revenue collected $123,983 $ 108,484
Cash paid to employees, suppliers of goods and others (86,569) (70,507)
Purchases of investments (199) (1,644)
Proceeds from sales and maturities of investments 811 2,636
Interest received 167 334
Interest paid (5,562) (10,725)
Taxes refunded 2,536 236
------------ ------------
Net cash provided by operating activities 35,167 28,814
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of entities (17,026) (10,084)
Purchases of equipment and leasehold improvements (3,644) (4,115)
Distributions from investments 2,105 2,187
Other 409 249
------------ ------------
Net cash used in investing activities (18,156) (11,763)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable 5,749 12,460
Payments on notes payable, exclusive of interest (9,291) (12,624)
Distributions to minority interest (25,066) (23,434)
Contributions by minority interest, net of buyouts 1,248 2,273
Exercise of stock options 1,537 -
------------ ------------
Net cash used in financing activities (25,823) (21,325)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,812) (4,274)
Cash and cash equivalents, beginning of period 16,503 15,530
------------ ------------
Cash and cash equivalents, end of period $ 7,691 $ 11,256
============ ============
See accompanying notes to consolidated financial statements.
6
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Nine Months Ended September 30,
($ in thousands) 2002 2001
------------ ------------
Reconciliation of net (loss) income to net cash provided by operating activities:
Net (loss) income $ (2,970) $ 6,313
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Minority interest in consolidated income 16,978 21,051
Depreciation and amortization 5,300 10,657
Provision for deferred income taxes (617) 2,422
Equity in earnings of affiliates (578) (1,499)
Impairment of goodwill and other assets 15,773 -
Other 647 40
Changes in operating assets and liabilities, net of effect of purchase transactions:
Investments 611 953
Accounts receivable (1,151) (3,253)
Other receivables 2,127 813
Other assets 2,075 118
Accounts payable (1,169) (5,759)
Accrued expenses (1,859) (3,042)
------------ ------------
Net cash provided by operating activities $ 35,167 $ 28,814
============ ============
See accompanying notes to consolidated financial statements.
7
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(Unaudited)
1. General
-------
The accompanying unaudited consolidated financial statements have been prepared
in conformity with the accounting principles for interim financial statements
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These
consolidated financial statements reflect all adjustments which are, in our
opinion, necessary for a fair presentation of the statement of the financial
position as of September 30, 2002 and the results of operations and cash flows
for the periods presented. These statements have not been audited by our
independent certified public accountants. The operating results for the interim
periods are not necessarily indicative of results for the full fiscal year.
The notes to consolidated financial statements appearing in our Annual Report on
Form 10-K for the year ended December 31, 2001 filed with the Securities
Exchange Commission should be read in conjunction with this Quarterly Report on
Form 10-Q. There have been no significant changes in the information reported in
those notes other than from normal business activities.
2. Earnings per share
------------------
Basic EPS is based on weighted average shares outstanding without any dilutive
effects considered. Diluted EPS reflects dilution from all contingently issuable
shares, including options and warrants. A reconciliation of such EPS data is as
follows:
Basic Diluted
earnings earnings
($ in thousands, except per share data) per share per share
--------- ---------
Nine Months Ended September 30, 2002
- ------------------------------------
Net loss $(2,970) $(2,970)
======= =======
Weighted average shares outstanding 16,163 16,163
Effect of dilutive securities -- --
------- -------
Shares for EPS calculation 16,163 16,163
======= =======
Net loss per share $(0.18) $(0.18)
======= =======
Nine Months Ended September 30, 2001
- ------------------------------------
Net income $6,313 $6,313
======= =======
Weighted average shares outstanding 15,704 15,704
Effect of dilutive securities -- 11
------- -------
Shares for EPS calculation 15,704 15,715
======= =======
Net income per share $0.40 $0.40
======= =======
8
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (continued)
(Unaudited)
2. Earnings per share (continued)
------------------
Basic Diluted
earnings earnings
($ in thousands, except per share data) per share per share
--------- ---------
Three Months Ended September 30, 2002
- -------------------------------------
Net loss $(8,107) $(8,107)
======= =======
Weighted average shares outstanding 16,911 16,911
Effect of dilutive securities -- --
------- -------
Shares for EPS calculation 16,911 16,911
======= =======
Net loss per share $(0.48) $(0.48)
======= =======
Three Months Ended September 30, 2001
- -------------------------------------
Net income $2,298 $2,298
======= =======
Weighted average shares outstanding 15,704 15,704
Effect of dilutive securities -- 2
------- -------
Shares for EPS calculation 15,704 15,706
======= =======
Net income per share $0.15 $0.15
======= =======
We did not include in the computations of diluted EPS unexercised employee
stock options and warrants to purchase 2,674,000, and 2,537,000 shares of our
common stock as of September 30, 2002, and 2001, respectively, because the
exercise prices were greater than the average market price of our common stock
during the respective periods or because the effect of including the
contingently issuable shares would decrease the net loss per share for the three
and nine months ended September 2002.
3. Segment Reporting
-----------------
We had three reportable segments as of September 30, 2002: lithotripsy,
manufacturing and refractive. The lithotripsy segment provides services related
to the operation of the lithotripters, including scheduling, staffing, training,
quality assurance, maintenance, regulatory compliance and contracting with
payors, hospitals and surgery centers. The manufacturing segment provides
manufacturing services and installation, upgrade, refurbishment and repair of
major medical equipment for mobile medical service providers and the mobile
broadcast and communication industry. The refractive segment, whose operations
were disposed in the three months ended September 30, 2002, provided services
related to the operations of refractive vision correction centers.
We measure performance based on the pretax income or loss from our operating
segments, which do not include unallocated corporate general and administrative
expenses and corporate interest revenue and expense.
9
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (continued)
(Unaudited)
3. Segment Reporting (continued)
-----------------
($ in thousands) Lithotripsy Manufacturing Refractive
----------- ------------- ----------
Nine Months Ended
- -----------------
September 30, 2002
------------------
Revenue from
external customers $53,438 $62,316 $9,955
Intersegment revenues -- 531 --
Segment profit 14,263 8,990 175
Nine Months Ended
- -----------------
September 30, 2001
------------------
Revenue from
external customers $61,115 $34,566 $18,411
Intersegment revenues -- 46 --
Segment profit 16,276 3,661 818
The following is a reconciliation of the measure of segment profit per above to
consolidated income (loss) before provision for income taxes per the
consolidated statements of operations:
Nine Months ended September 30,
($ in thousands) 2002 2001
---- ----
Total segment profit $23,428 $20,755
Corporate revenues 596 --
Unallocated corporate expenses:
General and administrative (2,554) (2,698)
Net interest expense (7,017) (7,406)
Loan fees (1,069) (163)
Nonrecurring impairment and other costs (17,740) --
Other, net (445) (117)
------- -------
Total unallocated corporate expenses (28,825) (10,384)
------- -------
Income (loss) before income taxes $(4,801) $10,371
======= =======
10
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (continued)
(Unaudited)
3. Segment Reporting (continued)
-----------------
($ in thousands) Lithotripsy Manufacturing Refractive
----------- ------------- ----------
Three Months Ended
- ------------------
September 30, 2002
------------------
Revenue from
external customers $18,206 $24,991 $1,897
Intersegment revenues -- 531 --
Segment profit (loss) 4,789 3,553 (82)
Three Months Ended
- ------------------
September 30, 2001
------------------
Revenue from
external customers $21,523 $16,547 $4,349
Intersegment revenues -- -- --
Segment profit (loss) 5,835 1,706 (412)
The following is a reconciliation of the measure of segment profit per above to
consolidated income (loss) before provision for income taxes per the
consolidated statements of operations:
Three Months ended September 30,
($ in thousands) 2002 2001
---- ----
Total segment profit $8,260 $7,129
Corporate revenues 204 --
Unallocated corporate expenses:
General and administrative (936) (977)
Net interest expense (2,254) (2,374)
Loan fees (556) --
Nonrecurring impairment and other costs (17,740) --
Other, net (115) 12
--------- ------
Total unallocated corporate expenses (21,601) (3,339)
--------- ------
Income (loss) before income taxes $ (13,137) $3,790
========= ======
11
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (continued)
(Unaudited)
4. Goodwill and Other Intangible Assets
------------------------------------
We adopted Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangible Assets" effective January 1, 2002. Under the new
standard, we no longer amortize goodwill and indefinite life intangible assets,
but those assets are subject to annual impairment tests. Other intangible assets
with finite lives consisted primarily of non-compete agreements at September 30,
2002 and December 31, 2001, and we have included them as other noncurrent assets
in the accompanying consolidated balance sheets. The non-compete agreements will
continue to be amortized over their useful lives.
In accordance with SFAS 142, we have not restated prior period amounts. A
reconciliation of the previously reported net income and earnings per share for
the nine and three months ended September 30, 2001 to the amounts adjusted for
the reduction of amortization expense, net of the related income tax effect, is
as follows:
Nine Months Ended
- -----------------
September 30, 2001
- ------------------
($ in thousands, except per share data) Net Income Basic EPS Diluted EPS
---------- --------- -----------
Reported net income $ 6,313 $ 0.40 $ 0.40
Add: amortization adjustment 3,059 0.19 0.19
------- ---------- ---------
Adjusted net income $ 9,372 $ 0.59 $ 0.59
======= ========== =========
Three Months Ended
- ------------------
September 30, 2001
- ------------------
($ in thousands, except per share data)
Reported net income $2,298 $ 0.15 $ 0.15
Add: amortization adjustment 1,039 0.07 0.07
------ --------- ---------
Adjusted net income $3,337 $ 0.22 $ 0.22
====== ========= =========
The net carrying value of goodwill and other intangible assets as of September
30, 2002 is comprised of the following:
Total Lithotripsy Manufacturing
Goodwill $ 161,154 $ 129,876 $ 31,278
Other intangible assets 983 266 717
--------- --------- --------
$ 162,137 $ 130,142 $ 31,995
========= ========= ========
Other intangible assets as of September 30, 2002, subject to amortization
expense, are comprised of the following:
Gross Carrying Accumulated
Amount Amortization Net
Other intangible assets $ 1,376 $ 393 $ 983
======= ======= ======
12
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (continued)
(Unaudited)
4. Goodwill and Other Intangible Assets (continued)
------------------------------------
Amortization expense for other intangible assets with finite lives was $427,000
and $159,000 for the nine and three months ended September 30, 2002,
respectively. We estimate annual amortization expense for each of the five
succeeding fiscal years as follows:
2002 $ 466,000
2003 212,000
2004 184,000
2005 140,000
2006 142,000
5. Aquisitions
-----------
Effective May 31, 2002, we acquired the assets and certain liabilities of
Frontline Communications Corporation ("Frontline"). Frontline is a leading
manufacturer and integrator of custom vehicles exclusively for the broadcast and
communications industry with 2001 sales in excess of $20 million. This
acquisition expands our market share in the broadcast and communications
industry and provides opportunities for combination synergy with our existing
manufacturing operations. The aggregate purchase price was approximately $12.8
million, comprised of approximately $10.1 million in cash and $2.7 million of
our common stock. We determined the number of shares of our common stock to be
issued by using an average closing price of our common stock over the ten
trading days ending 5 days prior to May 31, 2002. Approximately 300,000 shares
were issued. We recognized approximately $12 million of goodwill related to this
transaction.
Also effective May 31, 2002, we acquired the remaining 20% ownership interest in
our manufacturing subsidiary, AK Specialty Vehicles. The aggregate purchase
price was approximately $8.2 million comprised of $1.8 million in cash and $6.4
million of our common stock. We determined the number of shares of our common
stock to be issued by using an average closing price for the twenty trading days
ending five days prior to the date of the Purchase Agreement. Approximately
730,000 shares were issued. Upon first anniversary of closing, each of the two
sellers has a one-time right to require us to purchase its shares of our common
stock at a 20% discount to the original value of the common stock. We recognized
$4.5 million of goodwill related to this transaction.
Effective July 1, 2002, we acquired Holland-based Smit Mobile Equipment Company,
a leading European manufacturer of mobile medical imaging vehicles, with 2001
sales of approximately $9 million. This acquisition expands our presence in the
global marketplace as a manufacturer of specialty vehicles, strengthens our
strategic position to participate in the growing European market for high
technology mobile medical imaging and broadcast and communication vehicles,
allows us to eliminate the transportation costs associated with the production
of vehicles in our US manufacturing plants as we shift production to the Smit
plant in Holland, and provides access to patented vehicle body technology, the
"Snap-Lock System". The Snap Lock System offers a unique construction technique,
which is expected to improve the manufacturing efficiency of the specialty
vehicles manufactured by AK Specialty Vehicles and Frontline, while at the same
time
13
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (continued)
(Unaudited)
5. Aquisitions (continued)
-----------
yielding a very high quality, corrosion resistant product. Under the terms of
the acquisition, we paid $3.5 million in cash and issued 20,900 shares of our
common stock valued at $210,000. Additionally, we could pay an additional $1.7
million in common stock in the event that certain profitability objectives are
met over the following two years. We recognized approximately $4 million of
goodwill related to this transaction.
6. Disposal of RVC Operations
--------------------------
During the third quarter of 2002, we substantially completed our exit from the
RVC business by selling our interests in the centers back to our physician
partners. In connection with these transactions, which were either completed in
the third quarter or shortly thereafter, we recognized an impairment on the
related assets totaling approximately $17 million in the accompanying
consolidated statements of operations. This impairment included approximately
$11 million of goodwill and $3 million of non-compete agreements. The total
consideration to be received is approximately $4.1 million, which includes $3
million of notes receivable to be repaid over the next three years.
7. Condensed Financial Information Regarding Guarantor Subsidiaries
----------------------------------------------------------------
We have presented below our condensed consolidating financial information
regarding Guarantor Subsidiaries and Non-guarantor Subsidiaries for September
30, 2002 and 2001 for purposes of complying with the reporting requirements of
the Guarantor Subsidiaries. We have not presented separate financial statements
and other disclosures concerning each Guarantor Subsidiary because we have
determined that such information is not material to investors. The Guarantor
Subsidiaries are wholly owned subsidiaries of ours who have fully and
unconditionally guaranteed the 8.75% unsecured senior subordinated Notes.
14
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2002
(Unaudited)
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
--------------- --------------- --------------- -------------- --------------
Revenue:
Lithotripsy:
Fee revenues $ - $ 9,195 $ 43,063 $ - $ 52,258
Management fees - 710 (101) - 609
Equity income 10,332 6,061 467 (16,289) 571
--------------- --------------- --------------- -------------- --------------
10,332 15,966 43,429 (16,289) 53,438
Manufacturing 8,931 39,733 25,005 (11,353) 62,316
Refractive (9,838) 517 9,955 9,321 9,955
Other - 596 - - 596
--------------- --------------- --------------- -------------- --------------
Total revenue 9,425 56,812 78,389 (18,321) 126,305
--------------- --------------- --------------- -------------- --------------
Cost of services and general and
administrative expenses:
Lithotripsy - 2,041 17,998 - 20,039
Manufacturing - 30,540 21,790 - 52,330
Refractive - - 8,490 - 8,490
Corporate 60 2,494 - - 2,554
Nonrecurring impariment and other costs - 16,912 828 - 17,740
--------------- --------------- --------------- -------------- --------------
60 51,987 49,106 - 101,153
Depreciation and amortization - 1,416 3,884 - 5,300
--------------- --------------- --------------- -------------- --------------
60 53,403 52,990 - 106,453
--------------- --------------- --------------- -------------- --------------
Operating income 9,365 3,409 25,399 (18,321) 19,852
--------------- --------------- --------------- -------------- --------------
Other income (deductions):
Interest and dividends 31 68 68 - 167
Interest expense (6,901) (374) (288) - (7,563)
Loan fees (1,015) (54) - - (1,069)
Other, net (118) 92 816 - 790
--------------- --------------- --------------- -------------- --------------
Total other income (deductions) (8,003) (268) 596 - (7,675)
--------------- --------------- --------------- -------------- --------------
Income before provision for income
taxes and minority interest 1,362 3,141 25,995 (18,321) 12,177
Minority interest in consolidated income - - - 16,978 16,978
(Benefit) provision for income taxes 4,332 (6,284) 121 - (1,831)
--------------- --------------- --------------- -------------- --------------
Net (loss) income $ (2,970) $ 9,425 $ 25,874 $ (35,299) $ (2,970)
=============== =============== =============== ============== ==============
15
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2001
(Unaudited)
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
-------------- -------------- --------------- --------------- ---------------
Revenue:
Lithotripsy:
Fee revenues $ - $ 9,768 $ 47,085 $ - $ 56,853
Management fees - 1,467 1,254 - 2,721
Equity income 13,422 10,144 545 (22,570) 1,541
-------------- -------------- --------------- --------------- ---------------
13,422 21,379 48,884 (22,570) 61,115
Manufacturing 3,712 4,155 34,566 (7,867) 34,566
Refractive 1,032 2,561 18,411 (3,593) 18,411
-------------- -------------- --------------- --------------- ---------------
Total revenue 18,166 28,095 101,861 (34,030) 114,092
-------------- -------------- --------------- --------------- ---------------
Cost of services and general and
administrative expenses:
Lithotripsy - 1,693 17,892 - 19,585
Manufacturing - - 29,311 - 29,311
Refractive - - 12,376 - 12,376
Corporate 35 2,663 - - 2,698
-------------- -------------- --------------- --------------- ---------------
35 4,356 59,579 - 63,970
Depreciation and amortization - 5,806 4,851 - 10,657
-------------- -------------- --------------- --------------- ---------------
35 10,162 64,430 - 74,627
-------------- -------------- --------------- --------------- ---------------
Operating income 18,131 17,933 37,431 (34,030) 39,465
-------------- -------------- --------------- --------------- ---------------
Other income (deductions):
Interest and dividends 33 176 164 - 373
Interest expense (7,613) (22) (869) - (8,504)
Loan fees (163) - - - (163)
Other, net 72 65 114 - 251
-------------- -------------- --------------- --------------- ---------------
Total other income (deductions) (7,671) 219 (591) - (8,043)
-------------- -------------- --------------- --------------- ---------------
Income before provision for income
taxes and minority interest 10,460 18,152 36,840 (34,030) 31,422
Minority interest in consolidated income - - - 21,051 21,051
Provision for income taxes 4,147 (14) (75) - 4,058
-------------- -------------- --------------- --------------- ---------------
Net income $ 6,313 $ 18,166 $ 36,915 $ (55,081) $ 6,313
============== ============== =============== =============== ===============
16
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2002
(Unaudited)
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
-------------- --------------- -------------- -------------- ---------------
Revenue:
Lithotripsy:
Fee revenues $ - $ 2,958 $ 14,740 $ - $ 17,698
Management fees - 222 76 - 298
Equity income 2,521 1,766 130 (4,207) 210
-------------- -------------- -------------- -------------- ---------------
2,521 4,946 14,946 (4,207) 18,206
Manufacturing 3,553 24,992 - (3,554) 24,991
Refractive (10,237) (20) 1,897 10,257 1,897
Other - 204 - - 204
-------------- -------------- -------------- -------------- ---------------
Total revenue (4,163) 30,122 16,843 2,496 45,298
-------------- -------------- -------------- -------------- ---------------
Cost of services and general and
administrative expenses:
Lithotripsy - 802 5,504 - 6,306
Manufacturing - 21,188 - - 21,188
Refractive - - 2,268 - 2,268
Corporate 21 915 - - 936
Nonrecurring impariment and other costs - 16,912 828 - 17,740
-------------- -------------- -------------- -------------- ---------------
21 39,817 8,600 - 48,438
Depreciation and amortization - 534 1,157 - 1,691
-------------- -------------- -------------- -------------- ---------------
21 40,351 9,757 - 50,129
-------------- -------------- -------------- -------------- ---------------
Operating income (4,184) (10,229) 7,086 2,496 (4,831)
-------------- -------------- -------------- -------------- ---------------
Other income (deductions):
Interest and dividends 1 17 21 - 39
Interest expense (2,195) (227) (64) - (2,486)
Loan fees (556) - - (556)
Other, net - (93) 857 764
-------------- -------------- -------------- -------------- ---------------
Total other income (deductions) (2,750) (303) 814 - (2,239)
-------------- -------------- -------------- -------------- ---------------
Income before provision for income
taxes and minority interest (6,934) (10,532) 7,900 2,496 (7,070)
Minority interest in consolidated income - - - 6,067 6,067
(Benefit) provision for income taxes 1,173 (6,369) 166 - (5,030)
-------------- -------------- -------------- -------------- ---------------
Net (loss) income $ (8,107) $ (4,163) $ 7,734 $ (3,571) $ (8,107)
============== ============== ============== ============== ===============
17
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2001
(Unaudited)
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
--------------- --------------- --------------- --------------- ---------------
Revenue:
Lithotripsy:
Fee revenues $ - $ 3,353 $ 16,805 $ - $ 20,158
Management fees - 487 457 - 944
Equity income 4,702 3,248 204 (7,733) 421
--------------- --------------- --------------- --------------- ---------------
4,702 7,088 17,466 (7,733) 21,523
Manufacturing 1,789 2,145 16,547 (3,934) 16,547
Refractive (232) 277 4,349 (45) 4,349
--------------- --------------- --------------- --------------- ---------------
Total revenue 6,259 9,510 38,362 (11,712) 42,419
--------------- --------------- --------------- --------------- ---------------
Cost of services and general and
administrative expenses:
Lithotripsy - 515 5,677 - 6,192
Manufacturing - - 14,033 - 14,033
Refractive - - 3,477 - 3,477
Corporate 16 961 - - 977
--------------- --------------- --------------- --------------- ---------------
16 1,476 23,187 - 24,679
Depreciation and amortization - 1,917 1,755 - 3,672
--------------- --------------- --------------- --------------- ---------------
16 3,393 24,942 - 28,351
--------------- --------------- --------------- --------------- ---------------
Operating income 6,243 6,117 13,420 (11,712) 14,068
--------------- --------------- --------------- --------------- ---------------
Other income (deductions):
Interest and dividends 3 60 31 - 94
Interest expense (2,436) (7) (281) - (2,724)
Loan fees - - -
Other, net 10 84 46 - 140
--------------- --------------- --------------- --------------- ---------------
Total other income (deductions) (2,423) 137 (204) - (2,490)
--------------- --------------- --------------- --------------- ---------------
Income before provision for income
taxes and minority interest 3,820 6,254 13,216 (11,712) 11,578
Minority interest in consolidated income - - - 7,788 7,788
Provision for income taxes 1,522 (5) (25) - 1,492
--------------- --------------- --------------- --------------- ---------------
Net income $ 2,298 $ 6,259 $ 13,241 $ (19,500) $ 2,298
=============== =============== =============== =============== ===============
18
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet
September 30, 2002
(Unaudited)
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
-------------- --------------- -------------- -------------- --------------
ASSETS
Current assets:
Cash $ 14 $ 4,550 $ 3,127 $ - $ 7,691
Accounts receivable, net - 16,502 8,302 - 24,804
Other receivables 291 (287) 377 - 381
Deferred income taxes (1,635) 6,357 - - 4,722
Prepaid expenses and other current assets 3,290 (350) (128) - 2,812
Inventory - 15,863 - - 15,863
-------------- --------------- -------------- -------------- --------------
Total current assets 1,960 42,635 11,678 - 56,273
-------------- --------------- -------------- -------------- --------------
Property and equipment:
Equipment, furniture and fixtures - 11,325 29,125 - 40,450
Building and leasehold improvements - 10,061 50 - 10,111
-------------- --------------- -------------- -------------- --------------
- 21,386 29,175 - 50,561
Less accumulated depreciation
and amortization - (7,704) (19,036) - (26,740)
-------------- --------------- -------------- -------------- --------------
Property and equipment, net - 13,682 10,139 - 23,821
-------------- --------------- -------------- -------------- --------------
Assets held for sale - 4,239 - - 4,239
Investment in subsidiaries
and other investments 209,532 8,788 - (214,112) 4,208
Goodwill, at cost, net of amortization - 161,154 - - 161,154
Other noncurrent assets 1,451 2,059 244 - 3,754
-------------- --------------- -------------- -------------- --------------
$ 212,943 $ 232,557 $ 22,061 $ (214,112) $ 253,449
============== =============== ============== ============== ==============
LIABILITIES
Current liabilities:
Current portion of long-term debt $ - $ 323 $ 1,166 $ - $ 1,489
Accounts payable - 4,837 1,464 - 6,301
Liabilities held for sale - 747 - - 747
Accrued expenses 5,128 7,290 457 - 12,875
Customer deposits - 4,804 - - 4,804
-------------- --------------- -------------- -------------- --------------
Total current liabilities 5,128 18,001 3,087 - 26,216
Long-term debt, net of current portion 109,500 5,024 1,446 - 115,970
Deferred income taxes 3,513 - - - 3,513
-------------- --------------- -------------- -------------- --------------
Total liabilities 118,141 23,025 4,533 - 145,699
-------------- --------------- -------------- -------------- --------------
Minority interest - - - 12,948 12,948
STOCKHOLDERS' EQUITY
Common stock 169 - - - 169
Capital in excess of par value 67,757 - - - 67,757
Accumulated earnings 26,876 - - - 26,876
Subsidiary net equity - 209,532 17,528 (227,060) -
-------------- --------------- -------------- -------------- --------------
Total stockholders' equity 94,802 209,532 17,528 (227,060) 94,802
-------------- --------------- -------------- -------------- --------------
$ 212,943 $ 232,557 $ 22,061 $ (214,112) $ 253,449
============== =============== ============== ============== ==============
19
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2002
(Unaudited)
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 $ (4,150) $ 10,292 $ 29,025 $ - $ 35,167
-------------- -------------- --------------- --------------- ---------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of operating entities - (17,026) - - (17,026)
Purchases of equipment and leasehold
improvements - (117) (3,527) - (3,644)
Distributions from subsidiaries 8,868 10,076 - (18,944) -
Investments in subsidiaries (5,000) - - 5,000 -
Distributions from investments - 2,105 - - 2,105
Other - - 409 - 409
-------------- -------------- --------------- --------------- ---------------
Net cash provided by (used in)
investing activities 3,868 (4,962) (3,118) (13,944) (18,156)
-------------- -------------- --------------- --------------- ---------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings on notes payable 5,000 - 749 - 5,749
Payments on notes payable exclusive of
interest (6,500) - (2,791) - (9,291)
Exercise of stock options 1,537 - - - 1,537
Contributions by minority interest,
net of buyouts - - 1,248 - 1,248
Distributions to minority interest - - - (25,066) (25,066)
Contributions by parent - 5,000 - (5,000) -
Distributions to equity owners - (8,868) (35,142) 44,010 -
-------------- -------------- --------------- --------------- ---------------
Net cash provided by (used in)
financing activities 37 (3,868) (35,936) 13,944 (25,823)
-------------- -------------- --------------- --------------- ---------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (245) 1,462 (10,029) - (8,812)
Cash and cash equivalents, beginning of period 259 3,088 13,156 - 16,503
-------------- -------------- --------------- --------------- ---------------
Cash and cash equivalents, end of period $ 14 $ 4,550 $ 3,127 $ - $ 7,691
============== ============== =============== =============== ===============
20
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2001
(Unaudited)
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 $ (12,270) $ 6,691 $ 34,393 $ - $ 28,814
-------------- -------------- --------------- --------------- ---------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of operating entities - (3,207) (6,877) - (10,084)
Purchases of equipment and leasehold
improvements - (960) (3,155) - (4,115)
Distributions from subsidiaries 21,457 11,805 - (33,262) -
Investments in subsidiaries (11,000) (8,000) - 19,000 -
Distributions from investments - 2,187 - - 2,187
Other - - 249 - 249
-------------- -------------- --------------- --------------- ---------------
Net cash provided by (used in)
investing activities 10,457 1,825 (9,783) (14,262) (11,763)
-------------- -------------- --------------- --------------- ---------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings on notes payable 11,000 - 1,460 - 12,460
Payments on notes payable exclusive of
interest (9,000) - (3,624) - (12,624)
Contributions by minority interest,
net of buyouts - - 2,273 - 2,273
Distributions to minority interest - - - (23,434) (23,434)
Contributions by parent - 11,000 8,000 (19,000) -
Distributions to equity owners - (21,457) (35,239) 56,696 -
-------------- -------------- --------------- --------------- ---------------
Net cash provided by (used in)
financing activities 2,000 (10,457) (27,130) 14,262 (21,325)
-------------- -------------- --------------- --------------- ---------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS 187 (1,941) (2,520) - (4,274)
Cash and cash equivalents, beginning of period 427 7,393 7,710 - 15,530
-------------- -------------- --------------- --------------- ---------------
Cash and cash equivalents, end of period $ 614 $ 5,452 $ 5,190 $ - $ 11,256
============== ============== =============== =============== ===============
21
Item 2 - Management's Discussion and Analysis
of Financial Condition and
Results of Operations
Forward-Looking Statements
- --------------------------
The statements contained in this report 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 our expectations, hopes, intentions or strategies regarding
the future. You should not place undue reliance on forward-looking statements.
All forward-looking statements included in this report are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. It is important to note that our actual results
could differ materially from those in the forward-looking statements. In
addition to any risks and uncertainties specifically identified in the text
surrounding such forward-looking statements, you should consult our reports on
Form 10-K and other filings under the Securities Act of 1933 and the Securities
Exchange Act of 1934, for factors that could cause our actual results to differ
materially from those presented.
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 judgments 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 our control. Any of such assumptions
could be inaccurate and therefore, there can be no assurance that the
forward-looking statements included in this report will prove to be accurate.
General
- -------
We provide lithotripsy services and design and manufacture trailers and coaches
that transport high technology medical devices as well as broadcast and
communication equipment.
Lithotripsy Services. Lithotripsy is a non-invasive procedure for treating
kidney stones, typically performed on an outpatient basis, that eliminates the
need for lengthy hospital stays and extensive recovery periods associated with
surgery. We own 65 lithotripters, 60 of which are mobile and five of which are
fixed site. We do not render any medical services. Rather, the physicians do.
We also provide services relating to operating our lithotripters, including
scheduling, staffing, training, quality assurance, maintenance, regulatory
compliance, and contracting with payors, hospitals and surgery centers.
Manufacturing. We design, construct and engineer mobile trailers, coaches, and
special purpose mobile units that transport high technology medical devices and
equipment designed for broadcasting and communications applications, such as
magnetic resonance imaging, cardiac catheterization labs, CT scanware,
lithotripters, postitron emission tomography, mobile command and control centers
and satellite news gathering vehicles.
22
Recent Developments
- -------------------
Effective July 1, 2002, we acquired Holland-based Smit Mobile Equipment Company,
a leading European manufacturer of mobile medical imaging vehicles, with 2001
sales of approximately $9 million. Under the terms of the acquisition, we paid
$3.5 million in cash and issued 20,900 shares of our common stock valued at
$210,000. Additionally, we could pay an additional $1.7 million in common stock
in the event that certain profitability objectives are met over the following
two years.
Effective May 31, 2002, we acquired the assets and certain liabilities of
Frontline. Frontline is a leading manufacturer and integrator of custom vehicles
exclusively for the broadcast and communications industry with 2001 sales in
excess of $20 million. This acquisition expands our market share in the
broadcast and communications industry and provides opportunities for combination
synergy with our existing operations. The aggregate purchase price was
approximately $12.8 million, comprised of approximately $10.1 million in cash
and shares of our common stock valued at $2.7 million.
Also effective May 31, 2002, we acquired the remaining 20% ownership interest in
our manufacturing subsidiary, AK Specialty Vehicles. The aggregate purchase
price of approximately $8.2 million comprised of $1.8 million in cash and shares
of our common stock valued at $6.4 million.
In February 2002, we announced our intention to divest our Refractive Vision
Correction (RVC) operations to focus more on opportunities in our manufacturing
and lithotripsy businesses. During the third quarter of 2002, we substantially
completed our exit from this business by selling our interests in the centers
back to our physician partners. In connection with these transactions, which
were completed in the third quarter or shortly thereafter, we recognized an
impairment on the related assets totaling approximately $17 million. The total
consideration to be received is approximately $4.1 million.
Critical Accounting Policies.
- -----------------------------
Management has identified the following critical accounting policies:
Consolidation of our investment in certain limited partnerships where we, as the
general partner, exercise effective control, even though our ownership is less
than 50%. We have reviewed each of the underlying agreements and determined we
have effective control. If effective control did not exist, we would reflect
these investments using the equity method of accounting. Although equity method
presentation would change individual line items within our consolidated
financial statements, it would have no effect on our net income and/or total
stockholders' equity.
Impairments of intangible assets is another critical accounting policy that
requires judgment and is based on assumptions of future operations. Effective
January 1, 2002, we adopted Statement of Financial Accounting Standards ("SFAS")
No. 142. Under SFAS No. 142, goodwill is no longer amortized, but must be tested
for impairment at least annually. We provide impairment testing at a reporting
unit level. We currently have identified three reporting units under the
criteria set forth by SFAS No. 142. Pursuant to the transitional rules of SFAS
No. 142, we have completed the first step of our goodwill impairment test during
the second quarter of 2002. Our first step testing indicated a potential
impairment related to our RVC reporting unit. As previously discussed, all of
our RVC operations were either sold prior to September 30, 2002 or shortly
thereafter and those assets were held for sale and recorded at the actual value
received for the assets subsequent to September 30, 2002.
23
A third critical accounting policy which requires judgment of management is the
estimated allowance for doubtful accounts and contractual adjustments. We have
based our estimates on historical collection amounts, current contracts with
payors, current changes of the facts and circumstances relating to these matters
and certain negotiations with related payors. Actual results could vary from
these estimates.
Nine months ended September 30, 2002 compared to the nine months ended
- ----------------------------------------------------------------------
September 30, 2001
- ------------------
Our total revenues for the nine months ended September 30, 2002 increased
$12,213,000 (11%) as compared to the same period in 2001. Revenues from our
lithotripter operations decreased by $7,677,000 (13%). Conversion of contracts
from a retail style contract to a wholesale style contract, payor mix changes
and renegotiation of contracts during the past year resulted in decreases in
average revenue per procedure. The actual number of procedures performed in the
period decreased by 6% compared to the same period in 2001. Our manufacturing
revenues increased $27,750,000 (80%) due to the acquisitions of Calumet Coach
Company during May 2001, Frontline in May 2002 and Smit in July 2002. Our
refractive revenues decreased $8,456,000 (46%). We disposed of our refractive
operations in the third quarter of 2002 or shortly thereafter as previously
discussed.
Our costs of services and general and administrative expenses (excluding
depreciation and amortization and certain nonrecurring charges discussed below)
for nine months ended September 30, 2002 increased from 56% to 66% of revenues,
primarily due to increases in our manufacturing operations, which has lower
operating margins than our lithotripsy operations. Our costs of services
associated with our lithotripsy operations increased $454,000 (2%) in absolute
terms and increased from 32% to 37% of our lithotripsy revenues primarily due to
decrease in revenues noted above. Our cost of services associated with our
manufacturing operations increased $23,019,000 (79%) in absolute terms due to
increased sales and costs related to our acquisitions but decreased from 85% to
84% of our manufacturing revenues as we were able to improve our margins due to
successful integration cost savings at Calumet. Cost of services associated with
our refractive operations decreased $3,886,000 (31%) in absolute terms, but
increased from 67% to 85% of our refractive revenues due to decreased procedures
from the same period a year ago. Our corporate expenses remained constant at 2%
of revenues, decreasing $144,000 (5%) in absolute terms, as we continue to grow
without adding a disproportionately higher amount of corporate expenses.
Depreciation and amortization expense decreased $5,357,000 for the nine months
ended September 30, 2002 compared to the same period in 2001, primarily due to
the adoption of SFAS No. 142 on January 1, 2002, which eliminated amortization
expense related to goodwill and due to certain lithotripsy units becoming fully
depreciated in the fourth quarter of 2001.
In the third quarter of 2002, we recognized an impairment of approximately $17
million related to the disposal of our RVC operations. Additionally, we
recognized an impairment related to certain lithotripsy assets located in south
Florida due to a loss of the related revenue contracts.
Other expenses, net for the nine months ended September 30, 2002 decreased
$368,000 (5%) compared to the same period in 2001, primarily due to a $941,000
decrease in interest expense related to our senior credit facility.
Minority interest in consolidated income for the nine months ended September 30,
2002 decreased $4,073,000 compared to the same period in 2001, primarily as a
result of a decrease in income from our lithotripsy segment which has
significantly higher minority interest percentages than our other segments and
due to our acquiring the remaining minority interest in our manufacturing
segment. Earnings before interest, taxes, depreciation and amortization (EBITDA)
attributable to minority interest was $19,690,000 for the nine months ended
September 30, 2002 compared to $24,081,000 for the same period in 2001. 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 our profitability or liquidity.
24
Provision for income taxes for the nine months ended September 30, 2002
decreased $5,889,000 compared to the same period in 2001 due to a decrease in
taxable income.
Three months ended September 30, 2002 compared to the three months ended
- ------------------------------------------------------------------------
September 30, 2001
- ------------------
Our total revenues for the three months ended September 30, 2002 increased
$2,879,000 (7%) as compared to the same period in 2001. Revenues from our
lithotripter operations decreased by $3,317,000 (15%). Conversion of contracts
from a retail style contract to a wholesale style contract, payor mix changes
and renegotiation of contracts during the past year resulted in decreases in
average revenue per procedure. The actual number of procedures performed in the
three months ended September 30, 2002 decreased by 6% compared to the same
period in 2001. Our manufacturing revenues increased $8,444,000 (51%) due to the
acquisition of Frontline in May 2002 and Smit in July 2002. Our refractive
revenues decreased $2,452,000 (56%). We disposed of our refractive operations in
the third quarter of 2002 or shortly thereafter as previously discussed.
Our costs of services and general and administrative expenses (excluding
depreciation and amortization and certain nonrecurring charges discussed below)
for three months ended September 30, 2002 increased from 58% to 68% of revenues,
primarily due to increases in our manufacturing operations, which has lower
operating margins than our lithotripsy operations. Our costs of services
associated with our lithotripsy operations increased $114,000 (2%) in absolute
terms and increased from 29% to 35% of our lithotripsy revenues primarily due to
decrease in revenues noted above. Our cost of services associated with our
manufacturing operations increased $7,155,000 (51%) in absolute terms due to
increased sales and costs related to our acquisitions and remained constant at
85% of our manufacturing revenues. Cost of services associated with our
refractive operations decreased $1,209,000 (35%) in absolute terms, and
increased from 80% to 120% of our refractive revenues due to decreased
procedures from the same period a year ago. Our corporate expenses remained
constant at 2% of revenues, decreasing $41,000 (4%) in absolute terms, as we
continue to grow without adding a disproportionately higher amount of corporate
expenses.
Depreciation and amortization expense decreased $1,981,000 for the three months
ended September 30, 2002 compared to the same period in 2001, primarily due to
the adoption of SFAS No. 142 on January 1, 2002, which eliminated amortization
expense related to goodwill and due to certain lithotripsy units becoming fully
depreciated in the fourth quarter of 2001.
In the third quarter of 2002, we recognized an impairment of approximately $17
million related to the disposal of our RVC operations. Additionally, we
recognized an impairment related to certain lithotripsy assets located in south
Florida due to a loss of the related revenue contracts.
Other expenses, net for the three months ended September 30, 2002 decreased
$251,000 (10%) compared to the same period in 2001, primarily due to a $238,000
decrease in interest expense to our senior credit facility.
Minority interest in consolidated income for the three months ended September
30, 2002 decreased $1,721,000 compared to the same period in 2001, primarily as
a result of a decrease in income from our lithotripsy segment which has
significantly higher minority interest percentages than our other segments and
due to our acquiring the remaining minority interest in our manufacturing
segment. Earnings before interest, taxes, depreciation and amortization (EBITDA)
attributable to minority interest was $7,074,000 for the three months ended
September 30, 2002 compared to $8,866,000 for the same period in 2001.
25
Provision for income taxes for the three months ended September 30, 2002
decreased $6,522,000 compared to the same period in 2001 due to a decrease in
taxable income.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents were $7,691,000 and $16,503,000 at September 30, 2002
and December 31, 2001, respectively. Cash provided by operations for the nine
months ended September 30, 2002 was $35,167,000 compared to cash provided by
operations for the nine months ended September 30, 2001 of $28,814,000. Fee and
other revenue collected increased by $15,499,000 and was offset by the increase
in cash paid to employees, suppliers of goods and others of $16,062,000. We
attribute these fluctuations to increased operations primarily in our
manufacturing segment as well as the timing of accounts receivable collections
and accounts payable and accrued expense payments. A decrease in interest
payments of $5,163,000 was due to timing of interest payments made on the 8.75%
notes. Taxes refunded increased $2,300,000 from 2001 to 2002 due to the receipt
of a 2001 tax refund in 2002.
Cash used in investing activities for the nine months ended September 30, 2002
was $18,156,000 compared to cash used in investing activities for the nine
months ended September 30, 2001 of $11,763,000. The increase in cash used was
attributable to an increase in the cash paid for acquisitions partially offset
by decrease in cash paid for equipment purchases. Cash used in financing
activities for the nine months ended September 30, 2002 was $25,823,000 compared
to cash used for financing activities for the nine months ended September 30,
2001 of $21,325,000. The increase in cash used was primarily due to a net
increase in payments on notes payable and distributions paid to minority
interests.
We terminated our deferred compensation plan during the first quarter of 2002.
We satisfied the related deferred compensation liability through the issuance of
treasury stock, which we had previously held in the deferred compensation plan.
We also retired all our treasury stock during the quarter ended September 30,
2002.
Senior Credit Facility
- ----------------------
We refinanced our senior credit facility, which is a revolving line of credit,
in July 2002. The new facility has a borrowing limit of $50 million, $9.5
million of which was drawn at September 30, 2002 and $11.5 million at October
31, 2002. Our senior credit facility contains covenants that, among other
things, limit the payment of cash dividends on our common stock, limit
repurchases of our common stock, restrict the amount of our consolidated debt,
restrict our ability to make certain loans and investments and provide that we
maintain certain financial ratios.
8.75% Notes
- -----------
In addition, we have $100 million of unsecured senior subordinated 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.
26
The indenture governing our 8.75% notes contains covenants that, among other
things: (1) limit the incurrence of additional indebtedness; (2) limit certain
investments; (3) limit restricted payments; (4) limit the disposition of assets;
(5) limit the payment of dividends and other payment restrictions affecting
subsidiaries; (6) limit transactions with affiliates; (7) limit the creation of
liens; and (8) restrict mergers, consolidations and transfers of assets. In the
event of a change of control under the indenture, we will be required to make an
offer to repurchase the 8.75% notes at 101% of the principal amount thereof,
plus accrued and unpaid interest to the date of the repurchase.
The 8.75% notes are unsecured general obligations and are subordinated in right
of payment to all our existing and future senior indebtedness and are guaranteed
by our subsidiaries on a full, unconditional, joint and several basis.
In August 2002, we entered into an interest rate swap which is designated as a
fair value hedge pursuant to the provisions of FAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and FAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, An Amendment of
FASB Statement No. 133. This swap was executed to convert $50 million of the
8.75% notes from a fixed to floating rate instrument. The floating rate is based
on LIBOR plus 4.56%.
General
- -------
We seek opportunities to increase our lithotripsy operations primarily through
forming new operating subsidiaries in new markets as well as by acquisitions. We
seek opportunities to grow our manufacturing operations through both
acquisitions, expanding our product lines and by selling to a broader customer
base. We intend to fund the purchase price for future acquisitions and
developments using borrowings under our senior credit facility and cash flows
from our operations. In addition, we may use shares of our common stock in
acquisitions where appropriate.
During 1998, we announced a stock repurchase program of up to $25.0 million of
our common stock. In February 2000, we announced an increase in the authorized
repurchase amount from $25.0 million to $35.0 million and in January 2001 we
increased this amount to $45.0 million. We did not repurchase any of our common
stock during 2002 or 2001. From time to time, we may purchase additional shares
of our common stock where, in our judgment, market valuations of our stock do
not accurately reflect our past and projected results of operations. We intend
to fund any additional stock purchases using cash flows from operations and
borrowings under our senior credit facility. Under our repurchase program,
through October 31, 2002, we had purchased 3,820,200 shares of our stock at
total cost of $32,525,000. These shares were retired in August 2002.
Our ability to make scheduled payments of principal, or to pay the interest on,
or to refinance, our indebtedness, or to fund planned capital expenditures, will
depend on our future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control. Based upon the current level of our
operations and anticipated cost savings and revenue growth, we believe that cash
flows from our operations and available cash, together with available borrowings
under our senior credit facility, will be adequate to meet our future liquidity
needs for at least the next several years. However, there can be no assurance
that our business will generate sufficient cash flows from operations, that we
will realize our anticipated revenue growth and operating improvements or that
future borrowings will be available under our senior credit facility in an
amount sufficient to enable us to service our indebtedness or to fund our other
liquidity needs.
27
Inflation
- ---------
Our operations are not significantly affected by inflation because we are not
required to make large investments in fixed assets. However, the rate of
inflation will affect certain of our expenses, such as employee compensation and
benefits.
Adoption of Accounting Pronouncements
- -------------------------------------
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("Statement 144"), Accounting for the Impairment or Disposal of Long-Lived
Assets. Statement 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. Statement 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale and
broadens presentation of discontinued operations to include more disposals. Our
adoption or Statement 144 effective January 1, 2002 did not have a material
effect on our financial position or results of operations.
28
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk
Interest Rate Risk
- ------------------
As of September 30, 2002, we had long-term debt (including current portion)
totaling $117,459,000, of which $100 million has a fixed rate of interest of
8.75% (see discussion of interest rate swap below), $196,000 has fixed rates of
5% to 14%, $7,748,000 bears interest at a variable rate equal to a specified
prime rate, $9,500,000 bears interest at a variable rate equal to LIBOR + 2 to
3.5% and $15,000 does not bear any interest. We are exposed to some market risk
due to the floating interest rate debt totaling $17,248,000. We make monthly or
quarterly payments of principal and interest on $7,748,000 of the floating rate
debt. An increase in interest rates of 1.5% would result in a $259,000 annual
increase in interest expense on this existing principal balance.
Additionally, in August 2002, we entered into an interest rate swap, which is
designated as a fair value hedge pursuant to the provisions of FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and FAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities, An
Amendment of FASB Statement No. 133. This swap was executed to convert $50
million of the 8.75% notes from a fixed to floating rate instrument. The
floating rate is based on LIBOR plus 4.56%.
Item 4 - Controls and Procedures
Within 90 days before the date of this report on Form 10-Q, under the
supervision and with the participation of our management, including our Chief
Executive Officer (our principal executive officer) and our Chief Financial
Officer (our principal financial officer), we evaluated the effectiveness of our
disclosure controls and procedures (as defined under Rule 13a-14(c) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on this
evaluation, our Chief Executive Officer and our Chief Financial Officer
concluded that our disclosure controls and procedures are effective to ensure
that information we are required to disclose in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms.
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of such
evaluation.
29
PART II
OTHER INFORMATION
30
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits
12. Computation of ratio of earnings to fixed charges.
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Current Reports on Form 8-K
NONE
31
SIGNATURES
Pursuant to the requirements 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.
Date: November 13, 2002 By: /s/ John Q. Barnidge
--------------------
John Q. Barnidge, Senior Vice President
and Chief Financial Officer
32
CERTIFICATION
I, Brad A. Hummel, President and Chief Executive Officer of Prime Medical
Services, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Prime
Medical Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
33
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 By: /s/ Brad A. Hummel
-------------------------------------
Brad A. Hummel
President and Chief Executive Officer
34
CERTIFICATION
I, John Q. Barnidge, Chief Financial Officer of Prime Medical Services, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Prime
Medical Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
35
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 By:/s/ John Q. Barnidge
--------------------------------------
John Q. Barnidge
Chief Financial Officer
36