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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, 1996
[ ] 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
___________________
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 20, 1997: $216,678,000
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 20, 1997
------------------- --------------
Common Stock, $.01 par value 19,260,267
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's definitive proxy material for the
1997 annual meeting of shareholders are incorporated by reference into Part III
of the Form 10-K.
PRIME MEDICAL SERVICES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
PART I
ITEM 1. BUSINESS.
------- ---------
Prime Medical Services, Inc., a Delaware corporation ("Prime" or the
"Company"), through its direct and indirect wholly-owned subsidiaries, provides
lithotripsy services to hospitals and provides non-medical management services
to cardiac rehabilitation centers.
The Company's predecessor corporation was organized in April 1972. The
Company maintains its principal executive office at 1301 Capital of Texas
Highway, Austin, Texas 78746, and its telephone number is (512) 328-2892.
Unless the context indicates otherwise, "Prime" or the "Company" includes
Prime and all of the other direct and indirect wholly-owned subsidiaries of
Prime on a consolidated basis.
Lithotripsy Operations
- ----------------------
The Company provides lithotripsy services through seven wholly-owned
subsidiaries: Prime Lithotripsy Services, Inc. ("Prime Lithotripsy"), Prime
Lithotripter Operations, Inc. ("Prime Lithotripter"), Ohio Litho, Inc. ("Ohio"),
R. R. Litho, Inc. ("R. R. Litho"), Texas Litho, Inc. ("Texas"), Sun Medical
Technologies, Inc. ("Sun") and Lithotripters, Inc. 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. Lithotripsy is the only
approved alternative to surgery for kidney stones. For these reasons,
lithotripsy is now the preferred treatment for kidney stones and is suitable for
the treatment of the overwhelming majority of the patients with kidney stones.
As of March 15, 1997, the Company had an economic interest in 49 mobile
lithotripters and 6 fixed site lithotripters, all but two of which are operated
by the Company. The Company's lithotripters serve hospitals and health care
facilities in 32 states. The Company provides non-medical 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, while medical care is rendered by
urologists utilizing the lithotripters.
The Company contracts for its lithotripsy services with hospitals and
surgery centers for utilization by urologists practicing at these facilities.
The Company markets to such facilities by providing well-maintained and
conveniently scheduled equipment for the use of the facility's doctors and
patients and by providing a full range of administrative and support services
that enable the facility to provide higher quality and more efficient care.
1
The Company's service agreements, which generally have terms of one to five
years, provide for the three basic types of billing arrangements described
below. In all instances, urologists who perform lithotripsy procedures bill
separately for their professional fees.
Hospital Billing Contracts - Under a hospital billing contract, the Company
bills and collects from the hospital or surgery center for lithotripsy services
provided by the Company to patients. The rates charged under these arrangements
may vary depending upon the number of procedures performed in a specific period
or category of patient. The hospital or surgery center is responsible for
billing and collecting from the patient or third-party payor directly.
True-up Contracts - Under a true-up contract, the Company bills and
collects a negotiated fee from the hospital or surgery center, which is then
retrospectively reviewed and adjusted based on the payments received by the
hospital or surgery center for the corresponding treatments. The hospital or
surgery center is responsible for billing and collecting from the patient or
third-party payor directly, which forms the basis for any true-up.
Direct Billing Contracts - Under a direct billing contract, the Company
bills the patient or the patient's third-party payor a combined fee, which
includes all aspects of the procedure, excluding the treating urologist's fee.
The Company then pays the hospital or surgery center a percentage of the
collected amount for its services.
Diagnostic Imaging Services
- ---------------------------
As of December 31, 1994, the Company had terminated its involvement in its
diagnostic operations. Prior to that, Prime Diagnostic Services, Inc. and Prime
Diagnostic Corp. of Florida, two wholly-owned subsidiaries of the Company,
provided non-medical management services to diagnostic imaging centers.
Prime Cardiac Rehabilitation Services, Inc.
- -------------------------------------------
Prime Cardiac Rehabilitation Services, Inc. ("Prime Cardiac"), a
wholly-owned subsidiary of the Company, provides non-medical management services
for six cardiac rehabilitation centers, pursuant to agreements with physicians,
clinics and hospitals ("Medical Providers") for initial terms of up to ten
years. The Medical Providers have absolute authority over the medical services
provided at the centers, fees charged to patients and the collection practices
of the facility. Prime Cardiac's fees are generally based on collected revenues
of the centers. The Company has substantially reduced its cardiac rehabilitation
business over the last three years, which accounted for less than 2% of the
Company's total revenues for the year ended December 31, 1996.
Acquisitions/Divestitures
- -------------------------
Effective May 1, 1996, the Company acquired Lithotripters, Inc. which
operates 31 lithotripters in 19 states through a network of 21 affiliated
limited partnerships. Lithotripters, Inc. has an economic interest of 20% to 58%
in each of these partnerships. Due to the significant control maintained by
Lithotripters, Inc. as provided in the partnership agreements, revenues and
expenses for the partnerships are consolidated and a minority interest
equivalent to the limited partners' aggregate ownership interest is recorded.
The purchase price was $86,500,000 consisting of $71,600,000 cash and 1,636,000
shares of the Company's common stock valued at $14,900,000.
2
Effective October 1, 1995, the Company acquired all of the outstanding
stock of Sun Medical Technologies, Inc. which operates 8 lithotripters in
California, Arizona, Montana, New Mexico, Washington and Wyoming. The purchase
price of $16,150,000 consisted of cash paid at closing equal to $9,438,000,
seven notes payable in three years with original principal amounts totaling
$4,025,000, and $2,687,000 cash paid in January, 1996. Additionally, the Company
issued warrants to purchase 200,000 shares of the Company's common stock at an
exercise price of $5.99. The notes included provisions that permit the
noteholders to convert a portion or all of the unpaid principal balance into the
common stock of the Company at $5.99 per share at each payment date. In 1996,
all of the warrants were exercised and the noteholders converted the outstanding
balances of their notes into the Company's stock.
Effective July 1, 1995, the Company acquired a 70% interest in Kidney Stone
of South Florida, L.L.C. which operates a fixed site lithotripter in the Fort
Lauderdale, Florida area. The purchase price for this interest was $3,885,000 in
cash and a promissory note with a principal amount of $1,665,000. The promissory
note included a provision that permits the noteholder to convert all of the
unpaid principal balance into common stock of the Company at the quarterly
payment dates. The noteholder converted the outstanding balance of the note into
the Company's stock in 1996.
Effective June 1, 1995, the Company acquired a 32.5% interest in Southern
California Stone Center, L.L.C., which operates a fixed-site lithotripter and a
mobile lithotripter in the Los Angeles, California area. The Company paid
$1,569,000 in cash for this interest.
Effective December 31, 1994, the Company sold substantially all of its
assets located at an imaging center in Rancho Cucamonga, California for two
promissory notes with principal amounts totaling $1,155,000 and the assumption
of certain contractual obligations.
Effective December 30, 1994, the Company sold all of its assets located at
an imaging center in Hemet, California for $260,000 in cash.
Effective December 1, 1994, the Company purchased all of the common stock
of Texas Litho, Inc., Ohio Litho, Inc. and R. R. Litho, Inc. from Maxum Health
Corp. Texas Litho, Inc. is the sole managing general partner and owns an
approximate 20% interest in Texas ESWL/Laser Lithotripter, Ltd. which operates a
mobile lithotripter in Texas, Arkansas and Oklahoma. Ohio Litho, Inc. is the
sole managing general partner and owns an approximate 21% interest in Ohio
Mobile Lithotripter, Ltd. which operates a mobile lithotripter in Ohio. R. R.
Litho, Inc. is the sole managing general partner of and owns an approximate 20%
interest in Arklatx Mobile Lithotripter Limited Partnership which operates a
mobile lithotripter in Louisiana. The purchase price paid for the common stock
was $5,007,000 in cash.
On August 31, 1994, Shasta Diagnostic Center J.V., in which the Company
owned a 50% interest, sold substantially all of the assets of Shasta Diagnostic
Center located in Redding, California. The sales price for the assets was
$450,000 in cash, a promissory note in the principal amount of $450,000, and the
assumption of certain specified liabilities.
3
Effective August 15, 1994, the Company sold substantially all of the assets
of Tower Diagnostic Center located in Tampa, Florida. The sales price for the
assets was $2,350,000 in cash, a promissory note in the principal amount of
$500,000 and the assumption of certain specified liabilities.
Effective August 1, 1994, the Company acquired substantially all of the
assets of Alabama Lithotripsy Joint Venture, an Alabama general partnership. The
partnership operated a mobile lithotripter in Alabama which it leased from
Baptist Medical Center-Montclair. In a related transaction, the Company
purchased the lithotripter for a promissory note in the principal amount of
$316,000. The purchase price for the assets of the joint venture was $2,863,000
in cash, a promissory note in the principal amount of $2,304,000, a stock
purchase warrant covering 725,000 shares of common stock of the Company
exercisable at $3.18 per share and the assumption of certain liabilities of the
joint venture. In 1996, the warrants were exercised and the note was paid off.
In July 1994, the Company purchased all of the outstanding capital stock
of Alabama Renal Stone Institute, Inc., an Alabama corporation, which operates a
fixed site lithotripter located in Birmingham, Alabama. The Company previously
operated this lithotripter through a license agreement which was canceled
concurrent with the acquisition. The purchase price for this acquisition was
$3,000,000 cash paid in 1994, along with an option issued in 1992 for 210,000
shares of the Company's common stock, and an additional payment of $895,000 in
August, 1995.
Effective April 1, 1994, the Company acquired a 60% interest in Metro
Atlanta Stonebusters, G.P., a Texas general partnership, which operates a mobile
lithotripter operating in the Atlanta, Georgia area. The purchase price for this
acquisition was $2,040,000 in cash and a promissory note issued by the Company
in an original principal amount of $3,700,000 bearing interest at 6% per year.
In January 1994, the Company acquired all of the outstanding capital stock
of Fazio Consulting, Inc. ("FCI"), a New Jersey corporation, which owns 2 mobile
lithotripters operating in Delaware, Illinois, Indiana, Maryland, Pennsylvania,
West Virginia, and Wisconsin. The purchase price for this acquisition was
$950,000 in cash, the repayment of two promissory notes of FCI in the aggregate
amount of $1,100,000 and an earnout for the next five years based on 50% of the
annual net income of FCI. In March, 1995, the Company paid an additional
$560,000 for the 1994 earnout. In January, 1996, the Company terminated the
earnout agreement for $500,000 in cash.
The Company had a 1% ownership interest in American Physicians Service
Group, Inc. ("APS") at December 31, 1995 and 1996 and a 22% interest at December
31, 1994. The Company intends to divest the remaining 1% ownership interest.
Potential Liabilities-Insurance
- -------------------------------
All medical procedures performed in connection with the Company's business
activities are conducted directly by, or under the supervision of, urologists,
cardiologists and other 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.
4
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
$25,000 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.
Governmental Regulation and Associated Risks
- --------------------------------------------
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
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 the corresponding arrangements
between such partnerships and other entities and the treating physicians who own
interests therein and who use the lithotripsy 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.
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 and
Medicaid 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 Medicare and
Medicaid programs, and (ii) the entity may not bill Medicare, Medicaid, any
individual or any third-party payor for designated health services furnished
pursuant to a prohibited referral. Entities and physicians committing an act in
violation of Stark II are subject to civil money penalties and exclusion from
the Medicare and Medicaid programs. Although lithotripsy services are not
specifically identified as a designated health service in Stark II, the
restrictions do apply to inpatient and outpatient hospital services. Lithotripsy
services provided by the Company to Medicare and Medicaid patients are billed by
the contracting hospital in its name and under its Medicare and Medicaid program
provider numbers. Therefore, while the lithotripsy services could be considered
5
inpatient/outpatient hospital services subject to the self-referral
restrictions contained in Stark II, the Company believes that the language and
legislative history of Stark II indicate that Congress did not intend for the
restrictions contained therein to apply to ownership of interests in the
partnerships and other entities through which the Company's lithotripsy services
are provided.
It is unclear whether one of the enumerated exceptions to Stark II would
apply if lithotripsy services are considered inpatient/outpatient hospital
services when billed by a hospital. A complete regulatory interpretation of
Stark II will only be available upon publication of the final Stark II
regulations. Additionally, it is unclear to what extent these regulations may
address issues regarding the Company's relationships with physician investors.
Publication of these regulations could affect the Company's relationships with
physician investors and have a materially adverse effect upon the Company.
In addition, many states have enacted similar legislation.
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 lithotripsy 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
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 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 equipment are subject to safety regulation by the U.S.
Department of Transportation and the states in which the Company conducts its
mobile lithotripsy business. The Company believes that it is in material
compliance with these regulations.
6
While the Company believes it complies in all material respects with the
foregoing laws and regulations, and all other applicable regulatory
requirements, 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 holding minority interests in partnerships and other entities through
which the Company provides most of its lithotripsy services), 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 health care reform have been made in recent
years, some of which have included radical changes in the health care system.
Health care reform could result in material changes in the financing and
regulation of the health care business, and the Company is unable to predict the
effect of such changes on its future operations. It is uncertain what
legislation on health care reform, if any, will ultimately be implemented or
whether other changes in the administration or interpretation of governmental
health care programs will occur. There can be no assurance that future health
care legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on the
results of operations of the Company.
Equipment
- ---------
The Company purchases its lithotripter equipment and maintenance is
generally provided pursuant to service contracts with the manufacturer or local
service companies. The cost of a new lithotripter is approximately $1,200,000.
For mobile lithotripsy, 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.
Employees
- ---------
As of March 15, 1997, the Company employed approximately 250 full-time
employees and approximately 20 part-time employees.
Competition
- -----------
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.
There are numerous physicians, hospitals, clinics, and other groups that
own, operate and manage cardiac rehabilitation centers. The primary competitive
factors in this industry are price, professional services offered, and the
equipment located at the facility.
7
ITEM 2. PROPERTIES.
- ------- -----------
The Company's principal executive office is located in Austin, Texas in an
office building owned by APS. The Company pays APS approximately $4,000 per
month, which includes rental payment for approximately 2,800 square feet of
office space, reception and telephone services, and certain other services and
facilities. The office space lease expires in December, 1997.
The Company leases approximately 11,000 square feet of office space in
Fayetteville, NC under two leases expiring in 2001. The current monthly lease
amount is approximately $10,000.
The Company leases approximately 5,700 square feet of office space in
Campbell, California under a five year lease which expires in 1997. The current
monthly lease amount is approximately $10,000.
ITEM 3. LEGAL PROCEEDINGS.
- ------- ------------------
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ----------------------------------------------------
NONE.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK 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, 1996 and 1995 (NASDAQ Symbol "PMSI").
Year Ended December 31, 1996 High Low
---------------------------- ---- ----
First Quarter $ 13.31 $ 6.75
Second Quarter 20.38 13.06
Third Quarter 17.25 11.00
Fourth Quarter 13.75 10.00
Year Ended December 31, 1995 High Low
---------------------------- ---- ----
First Quarter $ 4.00 $ 3.25
Second Quarter 4.94 3.38
Third Quarter 4.88 4.06
Fourth Quarter 9.13 4.63
8
On March 20, 1997, the Company had approximately 890 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 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.
9
ITEM 6. SELECTED FINANCIAL DATA.
- ------- ------------------------
($ in thousands, except per share data)
Years Ended December 31,
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
Revenues:
Lithotripsy $ 71,602 $ 22,153 $ 14,843 $ 7,309 $ 4,291
Imaging and cardiac 802 1,042 9,925 13,259 15,026
---------- ---------- ---------- ---------- ----------
Continuing operations $ 72,404 $ 23,195 $ 24,768 $ 20,568 $ 19,317
========== ========== ========== ========== ==========
Income:
Net income $ 8,961 $ 7,204 $ 4,504 $ 2,539 $ 1,592
========== ========== ========== ========== ==========
Fully diluted earnings per share:
Net income $ 0.48 $ 0.46 $ 0.31 $ 0.21 $ 0.17
========== ========== ========== ========== ==========
Dividends per share None None None None None
Total assets $ 197,753 $ 77,627 $ 53,861 $ 38,678 $ 22,349
========== ========== ========== ========== ==========
Long-term obligations $ 70,910 $ 22,323 $ 12,734 $ 2,675 $ 3,921
========== ========== ========== ========== ==========
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
- ------- --------------------------------------------------
Year ended December 31, 1996 compared to the year ended December 31, 1995
- --------------------------------------------------------------------------
Revenues
- ---------
Total revenues increased $49,209,000 (212%) as compared to the same period
in 1995. Revenues from lithotripter operations increased by $49,449,000
primarily due to the acquisition of (1) an entity that owned or managed 31
lithotripters effective May 1, 1996 (2) an entity that owned or managed 8
lithotripters effective October 1, 1995, and (3) a 70% interest in an entity
that operated one lithotripter, as of July 1, 1995. In addition, the Company
acquired a 32.5% interest in an entity that operated one lithotripter in June
1995. Revenues from cardiac centers decreased $240,000 primarily due to four
discontinued/sold cardiac centers.
Expenses
- --------
Costs and expenses decreased from 43% to 34% of revenues, but increased
$14,742,000 (147%) in absolute terms, compared to the same period in 1995. Costs
of services associated with lithotripter operations increased $13,943,000 (233%)
in absolute terms and from 27% to 28% of lithotripter revenues primarily due to
the acquisitions discussed above. Cost of services associated with cardiac
centers decreased $873,000 (58%) primarily due to four discontinued/sold cardiac
centers. Corporate expenses decreased from 11% to 6% of revenues as the Company
was able to successfully grow without proportionately adding overhead. Corporate
expenses increased $1,672,000 (65%) primarily due to the additional corporate
expenses associated with the acquisition discussed above and the management
incentive plans tied to the performance of the Company.
Other Income (Deductions)
- -------------------------
Other deductions increased $8,251,000 primarily due to (1) the write-off of
$2,735,000 in fees paid to lenders to obtain financing, and $800,000 in fees
associated with a proposed stock offering that was canceled in August, 1996, and
(2) interest expense increased $4,746,000 due to $74,000,000 in new borrowings
in 1996 primarily for the acquisition of Lithotripters, Inc. effective May 1,
1996.
Minority Interest In Consolidated Income
- ----------------------------------------
Minority interest in consolidated income increased $19,089,000 primarily
due to the minority interest associated with the 21 partnerships in which
Lithotripters, Inc. holds a controlling interest. The Company acquired all of
the stock of Lithotripters, Inc. effective May 1, 1996.
11
Year ended December 31, 1995 compared to the year ended December 31, 1994
- --------------------------------------------------------------------------
Revenues
- --------
Total revenues decreased in 1995 by $1,573,000 (6%) compared to 1994, as an
increase in revenues from lithotripsy operations was more than offset by the
Company's exit from the diagnostic imaging business. Revenues from lithotripsy
operations increased by $7,310,000 (49%) primarily due to the acquisition of 10
additional lithotripter operations in 1995 ($3,499,000) and the recognition of
revenues for a full year of operations from five lithotripter operations
acquired during 1994 ($3,942,000). Revenues from cardiac and imaging centers
declined by $8,883,000 due primarily to the Company's exit from the diagnostic
imaging business at the end of 1994.
Costs and Expenses
- ------------------
Costs and expenses in 1995 declined by $5,220,000 (34%) compared to 1994,
from 62% to 43% of revenues. Costs of services associated with lithotripsy
operations decreased from 29% to 27% of lithotripsy revenues, as the Company
recognized operating efficiencies resulting from the acquisition and
consolidation of additional lithotripsy operations. In absolute terms, these
costs increased by $1,696,000 (40%) primarily due to the acquisition of 10
additional lithotripter operations in 1995 ($1,271,000) and the full year effect
of the five lithotripsy operations acquired during 1994 ($542,000), partially
offset by a decline in costs associated with lithotripsy operations open during
both years ($117,000). Costs of services from cardiac and imaging centers
decreased by $7,075,000 (82%) primarily due to the Company's exit from the
diagnostic imaging business at the end of 1994. Corporate expenses increased by
$159,000 (7%) from 10% to 11% of total revenues primarily due to management
incentive plans tied to the performance of the Company.
Other Income/Deductions
- -----------------------
Other deductions decreased by $342,000. Interest and dividend income
decreased by $67,000 (31%) primarily due to less cash available for investment
due to cash being utilized to acquire lithotripsy operations. Interest expense
increased by $329,000 (36%) as a result of increased debt related to
acquisitions. Other income increased by $738,000 primarily due to the gain
recognized on the sale in the open market of stock of APS ($559,000), which was
being held for investment purposes.
Minority Interest In Consolidated Income
- ----------------------------------------
Minority interest in consolidated income increased $730,000 primarily due
the minority interest in a fixed site lithotripter that operated in the Fort
Lauderdale, Florida area. The Company acquired a 70% interest in this operation
effective July 1, 1995.
12
Liquidity and Capital Resources
- --------------------------------
The Company's cash was $20,096,000 and $4,692,000 at December 31, 1996 and
1995, respectively. Cash provided by operations for the years ended December 31,
1996 and 1995 was $40,034,000 and $10,898,000, respectively. Cash used in
investing activities for the year ended December 31, 1996 was $70,202,000. This
was primarily due to expenditures of $68,561,000 associated with acquisitions
and $2,526,000 for the purchase of equipment and leasehold improvements to be
used in the Company's operations which expenditures were partially offset by
$1,257,000 in distributions from investments. Cash provided by financing
activities for the year ended December 31, 1996 was $45,572,000 which was
primarily due to $74,000,000 of borrowings under credit facilities, partially
offset by payments in the amount of $15,351,000 on notes payable and payments to
minority interests of $13,440,000. The Company's line of credit has a borrowing
limit of $40,000,000. At December 31, 1996, $29,750,000 was drawn on the line of
credit.
The Company believes that its present cash position, together with funds
generated from operations, will provide sufficient resources to meet its cash
requirements for current operations and repay existing debt. The Company intends
to continue its growth strategy in the future and expects to facilitate
additional acquisitions through the issuance of common stock and debt financing.
The Company anticipates that capital expenditures for new and replacement
equipment in 1997 will be approximately $3,000,000, the majority of which will
be financed through operating cash flow.
Impact of Inflation
- --------------------
The assets of the Company are not significantly affected by inflation
because, having no manufacturing operations, 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 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.
13
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 1997 annual meeting
of shareholders, except for the information regarding executive officers of the
Company which is provided below. The information required by this item contained
in such definitive proxy material is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------------------------------------
As of March 15, 1997, the executive officers of the Company are as follows:
Name Age Position
---- --- --------
Kenneth S. Shifrin 47 Chairman of the Board
Joseph Jenkins, M.D., J.D. 49 President, Chief Executive Officer
and Director
Dan Myers, M.D. 42 Senior Vice President - Development
Michael Madler 38 Senior Vice President of Operations
Stan Johnson 43 Vice President
Cheryl L. Williams 45 Chief Financial Officer,
Vice President-Finance, and Secretary
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
- -----------
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.
14
Dr. Jenkins
- -----------
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, the immediate past-president and currently a director
of the American Lithotripsy Society.
Dr. Myers
- ---------
Dr. Myers has been Senior Vice President - Development of the Company since
August 1996. Dr. Myers is a board certified urologist and was a Vice President
of Lithotripters, Inc. from January 1990 until it was acquired by the Company in
April 1996.
Mr. Madler
- ----------
Mr. Madler has been Senior Vice President - Operations of the Company since
August 1996. From July 1993 to August 1996, Mr. Madler was Vice President -
Operations of the Company. Previously Mr. Madler was Vice President of
Operations of American Health Services Corp., a diagnostic imaging company, from
July 1991 to June 1993. He was employed by the Company from 1985 to 1991, most
recently as its Vice President - Operations.
Mr. Johnson
- -----------
Mr. Johnson has been a Vice President of the Company and President of Sun,
a subsidiary of the Company, since November 1995. Mr. Johnson was the Chief
Financial Officer of Sun from 1990 to 1995.
Mrs. Williams
- -------------
Mrs. Williams has been Chief Financial Officer, Vice President and
Secretary of the Company since October 1989. Mrs. Williams was Controller of
Fairchild Aircraft Corporation from August 1988 to October 1989. From 1985 to
1988, Mrs. Williams served as the Chief Financial Officer of APS Systems, Inc.,
a wholly-owned subsidiary of APS.
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 1997 annual meeting
of shareholders, which information is incorporated herein by reference.
15
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 1997 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 1997 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.
------------------------------
II - Valuation and Qualifying Accounts as of December 31, 1996, 1995 and
1994.
All other schedules are omitted as the required information is presented in
the Consolidated Financial Statements and related notes.
(b) Reports on Form 8-K.
--------------------
None.
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)
16
10.2 Rights Agreement dated October 18, 1993 between the Company
and American Transfer and Trust Company. (3)
10.3 Form of Indemnification Agreement dated October 11, 1993
between the Company and certain of its officers and
directors. (3)
10.4 Contribution Agreement among Metro Atlanta Stonebusters,
Inc., Prime Lithotripsy Services, Inc. and Metro Atlanta
Stonebusters, G.P. dated April 26, 1994. (6)
10.5 Partnership Agreement of Metro Atlanta Stonebusters, G.P. (6)
10.6 Promissory Note of Prime Lithotripsy Services, Inc. dated
April 26, 1994. (6)
10.7 Stock Purchase and Amendment Agreement dated July 28, 1994
by and among A. Derrill Crowe, Paul R. Butrus, the Company,
the Alabama Renal Stone Institute, Inc., Alabama Kidney
Stone Foundation, Inc., American Physicians Service Group,
Inc. and A. Derrill Crowe and Paul R. Butrus as Trustees of
the A. Derrill Crowe Revocable Trust and the Paul R. Butrus
Trust. (7)
10.8 Management Agreement dated July 28, 1994 between the Alabama
Renal Stone Institute, Inc. and Alabama Kidney Stone
Foundation, Inc. (7)
10.9 Asset Purchase Agreement, dated August 30, 1994, between
Prime Lithotripter Operations, Inc. and Alabama Lithotripsy
Joint Venture. (8)
10.10 Asset Purchase Agreement, dated August 30, 1994, between
Prime Lithotripter Operations, Inc. and Baptist Medical
Center - Montclair. (8)
10.11 Promissory Note, dated August 30, 1994, issued by Prime
Lithotripter Operations, Inc. to Baptist Medical Center -
Montclair. (8)
10.12 Management Agreement, dated August 30, 1994, between Prime
Lithotripter Operations, Inc. and Alabama Lithotripsy
Associates, Inc. (8)
10.13 Security Agreement dated August 30, 1994, between Prime
Lithotripter Operations, Inc. and Baptist Medical Center -
Montclair. (8)
10.14 Asset Purchase Agreement dated August 15, 1994 between
Radiology Associates of Tampa, P.A. and Prime Diagnostic
Corp. of Florida. (9)
10.15 Stock Purchase Agreement dated December 19, 1994 between the
Company, Maxum Health Corp. And Maxum Health Services Corp.
(10)
17
10.16 Asset Purchase Agreement dated December 23, 1994 by and among
MedQuest Associates, Inc., Grove Diagnostic Imaging Center,
Inc. and Prime Diagnostic Services, Inc. (10)
10.17 Amended and Restated Joint Venture Agreement dated April,
1989, between Prime Diagnostic Imaging Services, Inc. and
The Shasta Diagnostic Imaging Medical Group. (5)
10.18 Contract of Sale of Business between Shasta Diagnostic
Center, J.V., Shasta Diagnostic Imaging Services, Inc. and
Michael G. Davis dated September 1, 1994. (11)
10.19 Promissory Note of Shasta Diagnostic Imaging Services, Inc.
and Michael G. Davis dated September 1, 1994. (11)
10.20 Loan Agreement dated November 28, 1994 between Prime Medical
Services, Inc., The First National Bank of Boston,
NationsBank of Texas, N.A. and The First National Bank of
Boston, as agent. (11)
10.21 First Amendment to Loan Agreement dated August 17, 1995
between Prime Medical Services, Inc. And The First National
of Boston, as agent. (13)
10.22 Amended and Restated Loan Agreement dated April 26, 1996
between Prime Medical Services, Inc., The First National Bank
of Boston, NationsBank of Texas, N.A. and The First National
Bank of Boston, as agent. (15)
10.23 Promissory Note, dated April 26, 1996 issued by the Company
to the First National Bank of Boston. (15)
10.24 Promissory Note, dated April 26, 1996 issued by the Company
to NationsBank of Texas, N.A. (15)
10.25 Promissory Note, dated April 26, 1996 issued by the Company
to the First National Bank of Boston. (15)
10.26 Promissory Note, dated April 26, 1996 issued by the Company
to NationsBank of Texas, N.A. (15)
10.27 Contribution Agreement among Southern California Stone
Center, A Medical Group, Prime Lithotripsy Services, Inc.,
and Southern California Stone Center, L.L.C. dated June 1,
1995. (13)
18
10.28 Operating Agreement for Southern California Stone Center,
L.L.C. (13)
10.29 Contribution Agreement among Kidney Stone Center of South
Florida, Ltd., South Florida Lithotripters, Ltd., Prime
Lithotripsy Services, Inc. and Kidney Stone Center of South
Florida, L.C. dated August 24, 1995. (13)
10.30 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. (13)
10.31 Stock Purchase Agreement with respect to all Outstanding
Capital Stock of Sun Medical Technologies, Inc. dated
November 10, 1995. (12)
10.32* Employment Agreement dated October 27, 1995 between Prime
Medical Services, Inc. And Stan D. Johnson. (13)
10.33* Employment Agreement dated May 1, 1996 between Prime Medical
Services, Inc. and Joseph Jenkins, M.D., J.D. (15)
10.34 Stock Purchase Agreement dated April 26, 1996 between Prime
Medical Services, Inc.; Lithotripters, Inc.; William R.
Jordan, M.D.; Franklin S. Clark, M.D.; Dan A. Myers, M.D.;
Thomas B. Mobley, M.D.; Thomas R. Jordan; Anthony E. Rand;
Estate of H. Edward Rietze, III; Phillip J. Gallina; Joseph
Jenkins, M.D.; William B. Grine, M.D.; and W. Alan Terry.
(14)
10.35 Registration Rights Agreement dated April 26, 1996 between
Prime Medical Services, Inc.; Lithotripters, Inc.; William R.
Jordan, M.D.; Franklin S. Clark, M.D.; Dan A. Myers, M.D.;
Thomas B. Mobley, M.D.; Thomas R. Jordan; Anthony E. Rand;
Estate of H. Edward Rietze, III; Phillip J. Gallina; Joseph
Jenkins, M.D.; William B. Grine, M.D.; and W. Alan Terry.
(14)
10.36 Stock Purchase Agreement dated April 26, 1996 between Prime
Medical Services, Inc. and FastStart, Inc.; Lithotripters,
Inc.; William R. Jordan, M.D.; Franklin S. Clark, M.D.; Dan
A. Myers, M.D.; Thomas B. Mobley, M.D.; Thomas R. Jordan;
Anthony E. Rand; Estate of H. Edward Rietze, III; Phillip J.
Gallina; Joseph Jenkins, M.D.; William B. Grine, M.D.; and
W. Alan Terry. (14)
19
11.1 Computation of per share earnings (included in Appendix A
hereto).
21.1 List of subsidiaries of the Company. (15)
23.1 Independent Auditors' Consent of KPMG Peat Marwick LLP. (15)
--------------
* Executive compensation plans and arrangements.
(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, Austin, Texas 78746.
(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, 1990 and
incorporated herein by reference.
(5) 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.
(6) Filed as an Exhibit to the Current Report on Form 8-K dated May 5, 1994
of the Company and incorporated herein by reference.
(7) Filed as an Exhibit to the Current Report on Form 8-K dated July 28,
1994 of the Company and incorporated herein by reference.
(8) Filed as an Exhibit to the Current Report on Form 8-K dated September
13, 1994 of the Company and incorporated herein by reference.
(9) Filed as an Exhibit to the Current Report on Form 8-K dated August 26,
1994 of the Company and incorporated herein by reference.
(10) Filed as an Exhibit to the Current Report on Form 8-K dated December
30, 1994 of the Company and incorporated herein by reference.
(11) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1994.
(12) Filed as an Exhibit to the Current Report on Form 8-K dated November
10, 1995 of the Company and incorporated herein by reference.
20
(13) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1995.
(14) Filed as an Exhibit to the Current Report on Form 8-K dated April 26,
1996 of the Company and incorporated herein by reference.
(15) Filed herewith.
21
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 27, 1997
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 27, 1997
By: /s/ Cheryl L. Williams
----------------------
Cheryl L. Williams
Vice President of Finance, Secretary
and Chief Financial Officer (Principal
Financial and Accounting Officer)
Date: March 27, 1997
By: /s/ Joseph Jenkins
------------------
Joseph Jenkins, M.D., President,
Chief Executive Officer and Director
Date: March 27, 1997
22
By: /s/ Paul R. Butrus
------------------
Paul R. Butrus, Director
Date: March 27, 1997
By: /s/ William E. Foree
--------------------
William E. Foree, M.D., Director
Date: March 27, 1997
By: /s/ Irwin Katz
--------------
Irwin Katz, Director
Date: March 27, 1997
By: /s/ John McEntire
-----------------
John McEntire, Director
Date: March 27, 1997
By: /s/ William A. Searles
----------------------
William A. Searles, Director
Date: March 27, 1997
By: /s/ Michael Spalding
--------------------
Michael Spalding, M.D., Director
Date: March 27, 1997
23
APPENDIX A
INDEX
-----
Page
------
Independent Auditors' Report A-2
Consolidated Financial Statements:
Consolidated Statements of Income for the A-3
years ended December 31, 1996, 1995 and 1994.
Consolidated Balance Sheets at December 31, 1996 and 1995. A-4
Consolidated Statements of Stockholders' Equity A-6
for the years ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended A-7
December 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements. A-12
Schedules:
II - Valuation and Qualifying Accounts as of S-1
December 31, 1996, 1995 and 1994.
--------------------
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. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG Peat Marwick LLP
Austin, Texas
February 21, 1997
A-2
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
Years Ended December 31,
--------------------------------------------
1996 1995 1994
---- ---- ----
Fee Revenue:
Lithotripsy:
Fee revenues $ 65,138 $ 19,306 $ 14,721
Management fees 4,698 1,617 31
Equity income 1,766 1,230 91
----------- ----------- -----------
71,602 22,153 14,843
Imaging and Cardiac 802 1,042 9,925
------------ ----------- ----------
72,404 23,195 24,768
----------- ---------- ---------
Costs and expenses:
Cost of services and general and
administrative expenses
Lithotripsy 19,922 5,979 4,283
Imaging and Cardiac 632 1,505 8,580
Corporate 4,245 2,573 2,414
---------- ---------- ----------
24,799 10,057 15,277
Depreciation and amortization 7,455 3,195 2,975
---------- ---------- ----------
32,254 13,252 18,252
--------- --------- ---------
Operating income 40,150 9,943 6,516
Other income (deductions):
Interest and dividends 459 152 219
Interest expense (5,977) ( 1,231) ( 902)
Loan fees and stock offering costs (3,535) -- --
Other, net 370 647 ( 91)
----------- ------------ ----------
(8,683) ( 432) ( 774)
----------- ----------- ---------
Income before provision for income taxes
and minority interest 31,467 9,511 5,742
Minority interest in consolidated income 20,510 1,421 691
Provision for income taxes 1,996 886 547
----------- ----------- ----------
Net income $ 8,961 $ 7,204 $ 4,504
=========== ========== =========
Primary earnings per share:
Net income $ 0.48 $ 0.47 $ 0.31
=========== =========== ==========
Weighted average shares outstanding 18,606 15,298 14,509
========== ========== =========
Fully diluted earnings per share:
Net income $ 0.48 $ 0.46 $ 0.31
=========== =========== ==========
Weighted average shares outstanding 18,898 16,010 14,650
========== ========== =========
See accompanying notes to consolidated financial statements.
A-3
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
December 31,
-----------------------
1996 1995
---------- ----------
ASSETS
Current assets:
Cash $ 20,096 $ 4,692
Accounts receivable, less allowance
for doubtful accounts of $335 in
1996 and $232 in 1995 16,346 4,109
Other receivables 1,842 364
Deferred income taxes 948 770
Prepaid expenses and other
current assets 841 1,003
---------- ----------
Total current assets 40,073 10,938
---------- ----------
Property and equipment:
Equipment, furniture and fixtures 22,339 7,867
Leasehold improvements 113 113
---------- ----------
22,452 7,980
Less accumulated depreciation and
amortization (7,122) (3,272)
---------- ----------
Property and equipment, net 15,330 4,708
---------- ----------
Investment in American Physicians
Service Group, Inc. 173 173
Other investments 7,927 7,623
Goodwill, at cost, net of amortization 132,302 52,679
Other noncurrent assets 1,948 1,506
---------- ----------
$ 197,753 $ 77,627
========== ==========
See accompanying notes to consolidated financial statements.
A-4
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
($ in thousands)
December 31,
-----------------------
1996 1995
---------- ----------
LIABILITIES:
Current Liabilities:
Current portion of long-term debt $ 10,522 $ 3,043
Accounts payable 4,451 4,814
Accrued expenses 16,582 2,862
---------- ----------
Total current liabilities 31,555 10,719
Long-term debt, net of current portion 70,910 22,323
Deferred income taxes 5,423 1,212
---------- ----------
Total liabilities 107,888 34,254
Minority interest 13,438 623
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
1,000,000 shares authorized;
none outstanding -- --
Common stock, $.01 par value,
40,000,000 shares authorized;
19,078,933 issued in 1996 and
14,729,663 issued in 1995 191 147
Capital in excess of par value 83,271 58,700
Accumulated deficit (7,035) (15,996)
Treasury stock, at cost, 30,000 shares -- (101)
---------- ----------
Total stockholders' equity 76,427 42,750
---------- ----------
$ 197,753 $ 77,627
========== ==========
See accompanying notes to consolidated financial statements.
A-5
PRIME MEDICAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
($ in thousands, except share data)
Issued Capital in Accumulated
Common Stock Excess of Earnings Treasury Stock Reciprocal
Shares Amount Par Value (Deficit) Shares Amount Stockholdings Total
---------- ---------- ---------- ----------- -------- -------- ------------- ---------
Balance, January 1, 1994 14,458,663 $ 145 $ 58,590 ($27,704) -- -- ($1,055) $29,976
Net income for the year -- -- -- 4,504 -- -- -- 4,504
Exercise of stock options 136,000 1 41 -- -- -- -- 42
Purchase of treasury stock -- -- -- -- 30,000 ( 101) -- (101)
---------- --------- ---------- ---------- -------- --------- ------------- ----------
Balance, December 31, 1994 14,594,663 146 58,631 (23,200) 30,000 ( 101) ( 1,055) 34,421
Net income for the year -- -- -- 7,204 -- -- -- 7,204
Exercise of stock options 135,000 1 69 -- -- -- -- 70
Reclassification of
reciprocal stockholdings -- -- -- -- -- -- 1,055 1,055
---------- --------- ---------- ----------- ------- --------- ------------- ----------
Balance, December 31, 1995 14,729,663 147 58,700 ( 15,996) 30,000 ( 101) -- 42,750
Net income for the year -- -- -- 8,961 -- -- -- 8,961
Issuance of stock 1,636,364 17 14,903 -- -- -- -- 14,920
Exercise of stock options 477,666 5 488 -- -- -- -- 493
Debt converted to stock 921,415 9 5,241 -- -- -- -- 5,250
Exercise of warrants 1,343,825 13 4,040 -- -- -- -- 4,053
Retirement of treasury
stock ( 30,000) -- ( 101) -- (30,000) 101 -- --
---------- --------- ----------- ----------- -------- -------- ------------- ---------
Balance, December 31, 1996 19,078,933 $ 191 $ 83,271 ($ 7,035) $ -- $ -- $ -- $76,427
========== ========= =========== =========== ======== ======== ============= =========
See accompanying notes to consolidated financial statements.
A-6
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Years Ended December 31,
--------------------------------------------
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Fee and other revenue collected $ 72,452 $ 21,640 $ 25,017
Cash paid to employees, suppliers
of goods and others (25,190) ( 9,094) (14,268)
Interest received 459 157 216
Interest paid ( 5,104) ( 1,275) ( 785)
Taxes paid ( 1,015) ( 530) ( 662)
---------- ------------ ----------
Net cash provided by operating activities 41,602 10,898 9,518
---------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of lithotripter entities (66,742) (15,033) (14,837)
Proceeds from sale of investment in American
Physicians Service Group, Inc. stock -- 2,753 --
Purchases of equipment and leasehold
improvements ( 2,526) ( 473) ( 602)
Deferred payments on lithotripter entities ( 3,387) -- --
Sale of net assets of diagnostic centers -- -- 2,350
Proceeds from sales of equipment 6 21 120
Investments 1,257 864 282
Refund of deposit -- -- 176
Other ( 378) ( 6) 153
--------- ---------- ----------
Net cash (used by) investing activities (71,770) (11,874) ( 12,358)
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable & capital leases,
exclusive of interest ( 15,351) ( 9,588) ( 8,780)
Borrowings on notes payable 74,000 14,284 11,525
Distributions to minority interest ( 13,440) ( 1,644) ( 440)
Line of credit fees -- (367) ( 866)
Other 363 71 ( 59)
--------- ---------- ----------
Net cash provided by financing activities 45,572 2,756 1,380
---------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 15,404 1,780 ( 1,460)
Cash and cash equivalents, beginning of period 4,692 2,912 4,372
--------- ---------- ---------
Cash and cash equivalents, end of period $ 20,096 $ 4,692 $ 2,912
========== ========== =========
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,
-------------------------------------------
1996 1995 1994
---- ---- ----
Reconciliation of net income to net
cash provided by operating activities
Net income $ 8,961 $ 7,204 $ 4,504
Adjustments to reconcile net
income to cash provided by
operating activities:
Depreciation and amortization 7,455 3,195 2,975
Provision for uncollectible accounts 319 771 2,078
Minority interest in consolidated income 20,510 1,421 691
Equity in earnings of affiliates (1,773) ( 1,234) ( 86)
Gain on sale of investment in American
Physicians Service Group, Inc. stock -- ( 559) --
Provision for deferred income taxes 974 -- --
Writeoff of loan fees 696 -- --
Other -- ( 33) 80
Changes in operating assets and liabilities, net of effect of purchase
transactions:
Accounts receivable 1,284 ( 541) ( 1,035)
Notes receivable 180 1,416 ( 206)
Other receivables 292 781 294
Other current assets 529 ( 447) 62
Accounts payable 452 (1,224) ( 177)
Accrued expenses 1,723 148 338
-------- --------- -----------
Total adjustments 32,641 3,694 5,014
-------- -------- ----------
Net cash provided by operating activities $ 41,602 $10,898 $ 9,518
======== ======= =========
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,
-------------------------------------------
1996 1995 1994
---- ---- ----
SUPPLEMENTAL INFORMATION OF
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
In 1996, the Company acquired (1) 100% of the outstanding stock of a
corporation which operated 31 lithotripters and (2) increased ownership in two
partnerships, in which the Company is the managing general partner. These
transactions are discussed further in Note D. The acquired assets and
liabilities were as follows:
Current assets increased by $ 19,032
Noncurrent assets increased by 12,630
Goodwill increased by 82,297
Current liabilities increased by 13,110
Noncurrent liabilities increased by 69,712
Minority interest increased by 16,218
Stockholders' equity 14,919
In 1996, several holders of notes issued by the Company elected to convert
the outstanding balances of the notes into 921,000 shares of the Company stock.
In addition, certain holders of warrants exercised their warrants and the
Company issued 1,344,000 shares of the Company's stock to the warrant holders.
The effect of these transactions were as follows:
Current assets increased by 1,749
Current liabilities decreased by 4,062
Noncurrent liabilities decreased by 3,493
Stockholders' equity increased by 9,304
At December 31, 1996, the Company had accrued distributions payable to
minority interests. The effect of this transaction was as follows:
Current liabilities increased by 10,705
Minority interest decreased by 10,705
See accompanying notes to consolidated financial statements.
A-9
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
($ in thousands)
Years Ended December 31,
--------------------------------------------
1996 1995 1994
---- ---- ----
In 1995, the Company acquired (1) 100% of the outstanding stock of a
corporation which owned or managed eight lithotripter operations and (2) 70%
interest in a lithotripter operation. These transactions are discussed further
in Note D. The acquired assets and liabilities were as follows:
Current assets decreased by $ 9,905
Noncurrent assets increased by 2,491
Goodwill increased by 19,553
Current liabilities increased by 7,249
Noncurrent liabilities increased by 4,890
In 1995, the Company retired a note payable to American Physicians Service
Group, Inc. ("APS"). This note was retired by the Company transferring to APS
shares of stock of APS that the Company owned. The effect of this transaction is
as follows:
Current assets decreased by 3
Investment in APS decreased by 301
Notes payable decreased by 297
Loss 7
In 1994, the Company acquired (1) 100% of the outstanding stock of five
corporations, which own or manage lithotripter operations and (2) assets, net of
liabilities assumed of two lithotripter operations. These transaction are
discussed in further detail in Note D. The acquired assets and liabilities were
as follows:
Current assets decreased by 11,505
Noncurrent assets increased by 923
Goodwill increased by 20,257
Current liabilities increased by 2,904
Noncurrent liabilities increased by 6,771
See accompanying notes to consolidated financial statements.
A-10
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
($ in thousands)
Years Ended December 31,
--------------------------------------------
1996 1995 1994
---- ---- ----
In 1994, the Company sold its interests and terminated its management of
four imaging centers. These transactions are discussed in further detail in Note
E. The effect of these transactions is as follows:
Current assets increased by 3,302
Noncurrent assets decreased by 3,368
Goodwill decreased by 2,193
Current liabilities decreased by 851
Noncurrent liabilities decreased by 1,408
See accompanying notes to consolidated financial statements.
A-11
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 to
lithotripsy and cardiac rehabilitation centers. The Company operates
lithotripters in 32 states. In December 1994, the Company sold its remaining
interest in the diagnostic imaging centers that the Company owned or managed.
(See Note E).
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Consolidation
-------------
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries, entities more than 50% owned and partnerships
where the Company 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 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%. 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.
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 five 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.
Investments
-----------
Effective January 1, 1996, the Company acquired a 27% general partner
interest in a partnership that provides lithotripsy service in Ohio. This
investment is accounted for using the equity method of accounting.
A-12
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
-----------------------------------------------------
Investments, continued
----------------------
In November 1996, the Company acquired a 4% interest in a partnership that
operates two mobile lithotripters in North Carolina. This investment is
accounted for using the cost method of accounting.
Effective June 1, 1995, the Company acquired a 32.5% interest in a limited
liability company that operates a lithotripter facility in California. (See Note
D). This investment is accounted for using the equity method of accounting.
The Company has approximately a 1% ownership interest in the company that
is its largest stockholder. Two of the Company's eight board members are also on
the board of its largest stockholder. (See Note C). The Company's investment is
accounted for using the cost method of accounting in 1995 and 1996. In 1994, the
Company accounted for its investment using the equity method when the Company's
ownership exceeded 20%.
In December 1994, the Company acquired 100% of the stock of three
corporations, which are the managing general partners and owned an approximate
20% interest in each of three partnerships (See Note C). These investments are
accounted for using the equity method of accounting.
The Company also has an ownership interest of 50% in a joint venture that
had owned a diagnostic imaging center, which was sold in August 1994 (See Note
E). This investment is accounted for using the equity method of accounting.
Through December 31, 1996, the Company had recognized $190,000 in earnings
using the equity method. This amount represents undistributed earnings from
entities, in which the Company owns 50 percent or less, and does not exhibit
substantial control.
Intangible Assets
-----------------
The Company records as goodwill the excess of the purchase price over the
fair value of the net assets of acquired businesses. Goodwill is amortized over
a period not to exceed forty years using the straight-line basis. Accumulated
amortization at December 31, 1996 and 1995 is $5,798,000 and $2,873,000,
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 fair
value and carrying value of the goodwill.
A-13
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
-----------------------------------------------------
Revenue Recognition
-------------------
Revenues generated from services are recognized as they are earned and
include, under certain contracts, the reimbursement of contractually defined
operating expenses. For the years ended December 31, 1996, 1995 and 1994, the
amounts included in revenues that were reimbursement of contractually defined
operating expenses were $58,000, $82,000 and $3,483,000, respectively.
The Company's revenues are based upon collectibility of fees for services
charged to hospitals, commercial insurance carriers and state and federal health
care agencies.
At December 31, 1996, approximately 17% of accounts receivable relate to
units operating in Texas, 11% relate to units located in California, 9% relate
to units located in Florida and 9% relate to units located in South Carolina.
Reciprocal Stockholdings
------------------------
The Company had accounted for its investment in its largest shareholder's
common stock on the equity basis prior to 1995 (see Note C). The Company's
investment was reduced for the Company's pro rata interest in the common stock
of the Company owned by such shareholder. This reduction was reflected in an
offsetting charge to reciprocal stockholdings. When the Company's investment
dropped below 5%, reciprocal stockholdings were eliminated.
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-14
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
------------------------------------------------------
Income Per Share
----------------
Income per share is based on the weighted average number of shares of
common stock and common stock equivalent shares outstanding during each period.
In 1995, the Company issued convertible debt, in conjunction with certain
lithotripsy acquisitions, which resulted in the computation of fully diluted
earnings per share exceeding primary earnings per share by more than 3%.
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, if there is a difference between the
fair value and carrying value of the asset.
Post Retirement/Post Employment Benefits
----------------------------------------
The Company's employee benefits do not extend beyond an employee's active
employment. Consequently, no accrual for future benefits as prescribed in
Statement of Financial Accounting Standards No. 106 and No. 112 has been
recorded.
Derivative Financial Instruments
--------------------------------
The Company has not made use of derivative financial instruments as defined
in the Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 119, Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments.
Notes Receivable
----------------
Notes receivable are recorded at cost, less allowances for doubtful
accounts when deemed necessary. The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan (Statement 114), in May 1993 and the related Statement of
Financial Accounting Standards No. 118 Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures, in October 1994 for implementation
in fiscal years beginning after December 15, 1994. Management, considering
current information and events regarding the borrowers ability to repay their
obligations, considers a note to be impaired when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the note agreement. When a loan is considered to be impaired, the
amount of the impairment is measured based on the present value of expected
future cash flows discounted at the note's effective interest rate.
A-15
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
-----------------------------------------------------
Notes Receivable, continued
---------------------------
Impairment losses are included in the allowance for doubtful accounts
through a charge to bad debt expense. Cash receipts on impaired notes receivable
are applied to reduce the principal amount of such notes until the principal has
been recovered and are recognized as interest income, thereafter. The adoption
of Statements 114 and 118 by the Company on January 1, 1995 did not have a
material affect on the financial statements.
Stock-Based Compensation
------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123"), in October 1995 for implementation in fiscal years beginning
after December 15, 1995. Statement 123 became effective beginning with the
Company's first quarter of fiscal year 1996 and did not have a material effect
on the Company's financial position or results of operations. Upon adoption of
Statement 123, 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 K).
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.
Reclassification
----------------
Certain reclassifications have been made to amounts presented in previous
years to be consistent with the 1996 presentation.
A-16
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. INVESTMENTS
-----------
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. The purchase price was cash of $1,569,000. This transaction was
accounted for using the purchase method of accounting.
Texas, Ohio & Louisiana Partnerships
------------------------------------
In December 1994, the Company acquired all of the common stock of three
corporations. Each corporation is the general partner and holds an approximate
20% interest in a limited partnership which operates a mobile lithotripter.
Texas ESWL/Laser Lithotripter, Ltd. operates a mobile lithotripter in Texas,
Oklahoma and Arkansas. Ohio Mobile Lithotripter, Ltd. operates a mobile
lithotripter in Ohio. Arklatx Mobile Lithotripter, L.P. operates a mobile
lithotripter in Louisiana.
The purchase price paid by Prime for the common stock was $5,007,000 in
cash. This transaction was accounted for using the purchase method of accounting
effective December 1, 1994.
Condensed unaudited balance sheet for the three partnerships at December
31:
1996 1995
---------- ----------
Current assets $3,996,000 $4,327,000
Non-current assets 451,000 729,000
---------- ----------
Total assets $4,447,000 $5,056,000
========== ==========
Current liabilities $3,173,000 $3,770,000
Long-term liabilities -- 311,000
Partners' capital 1,274,000 975,000
---------- ----------
Total liabilities
and equity $4,447,000 $5,056,000
========== ==========
A-17
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. INVESTMENTS, continued
----------------------
Texas, Ohio & Louisiana Partnerships, continued
-----------------------------------------------
Condensed unaudited statement of earnings for the three partnerships for
the year ended December 31:
1996 1995
---------- ----------
Total revenues $9,985,000 $8,469,000
Total expenses 2,926,000 3,519,000
---------- ----------
Net income $7,059,000 $4,950,000
========== ==========
American Physicians Service Group, Inc.
---------------------------------------
At December 31, 1996 and 1995, the Company owned 50,000 shares of common
stock, representing approximately 1%, of the outstanding common stock of
American Physicians Service Group, Inc. (APS). APS owned approximately 16% and
21%, respectively of the outstanding common stock of the Company at December 31,
1996 and 1995. The Company's pro rata interest in its own shares of common stock
had been included in stockholders' equity as reciprocal stockholdings prior to
1995. (See Note B).
The Company occupies approximately 2,800 square feet of office space owned
by APS. The Company also shares certain personnel with APS. The monthly rent and
personnel cost is approximately $4,000.
Shasta Diagnostic Center Joint Venture
--------------------------------------
In 1989, the Company acquired a 50% interest in Shasta Diagnostic Center
Joint Venture ("Shasta"), a California general partnership. Shasta was formed
for the purpose of operating and managing a diagnostic imaging center. In
September 1994, the joint venture sold the operating assets of the imaging
center. The sales price was comprised of $450,000 cash, a promissory note for
$450,000, bearing interest at 8% and the assumption of approximately $2,145,000
in debt and lease obligations.
D. ACQUISITIONS
------------
Effective May 1, 1996, the Company acquired 100% of the common stock of
Lithotripters, Inc. ("Litho"). Litho operated 31 lithotripters serving
approximately 200 locations in 19 states. The purchase price was $86,500,000
consisting of $71,600,000 cash and 1,636,000 shares of the Company's common
stock valued at $14,900,000. This transaction was accounted for using the
purchase method of accounting.
A-18
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D. ACQUISITIONS, continued
-----------------------
Effective November 1, 1996, the Company increased its ownership interest in
two partnerships that operate lithotripters in Arkansas and South Carolina. The
Company acquired an additional 12.0% interest in Fayetteville Lithotripters
Limited Partnership - Arkansas I and 2.7% interest in Fayetteville Lithotripters
Limited Partnership - South Carolina II, which the Company manages as General
Partner. The purchase price was $1,291,000 in cash. This transaction was
accounted for using the purchase method of accounting.
Also effective November 1, 1996, the Company acquired a 4% ownership in a
partnership that operates two lithotripters in North Carolina. The purchase
price was $550,000 in cash. This acquisition was accounted for using the cost
method of accounting.
Unaudited proforma combined statement of earnings for the year ended
December 31, 1996 of the Company and the acquisitions discussed previously
assuming all were effective January 1, 1995 is as follows:
1996 1995
----------- -----------
Total revenues $92,499,000 $82,934,000
Total expenses 82,355,000 74,409,000
----------- -----------
Net earnings $10,144,000 $ 8,525,000
=========== ===========
Earnings per share $ 0.53 $ 0.49
=========== ===========
Effective October 1, 1995, the Company acquired 100% of the outstanding
stock of Sun Medical Technologies, Inc. ("Sun"). Sun operates eight
lithotripters servicing clients in California, Arizona, Montana, New Mexico,
Washington and Wyoming. The purchase price was $16,150,000 consisting of cash of
$9,438,000, deferred payments payable in January, 1996 of $2,687,000, notes
payable of $4,025,000, and warrants to purchase 200,000 shares of the Company's
common stock. The exercise price of the warrants represented the market price of
the Company's common stock at the date the warrants were issued. The notes
payable of $4,025,000 may be converted into 672,000 shares of the Company's
common stock. Each noteholder may convert all or part of the outstanding note
balance on the quarterly payment dates. (Note: These noteholders elected to
convert the outstanding balances of their notes into the Company's stock in
1996.) This acquisition was accounted for using the purchase method of
accounting.
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. The purchase price was cash of $1,569,000. This transaction was
accounted for using the purchase method of accounting.
A-19
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D. ACQUISITIONS, continued
-----------------------
Effective July 1, 1995 the Company acquired an undivided 70% interest in a
fixed site lithotripter located in Fort Lauderdale, Florida. The purchase price
was $5,550,000 consisting of cash of $3,885,000 and notes payable of $1,665,000,
which can be converted into 326,000 shares of the Company's common stock. The
noteholder may convert all of the balance outstanding on the note on the
quarterly payment dates. (Note: The noteholder elected to convert the
outstanding balance of their note into the Company's stock in 1996.) The
acquisition was accounted for using the purchase method of accounting.
Unaudited proforma combined statement of earnings for the year ended
December 31, 1995 of the Company and the acquisitions discussed previously
assuming all were effective January 1, 1994 is as follows:
1995 1994
----------- -----------
Total revenues $31,771,000 $37,859,000
Total expenses 23,851,000 31,665,000
----------- -----------
Net earnings $ 7,920,000 $ 6,194,000
=========== ===========
Earnings per share $ 0.47 $ 0.40
=========== ===========
Effective August 1, 1994, the Company acquired a mobile lithotripter
operating in Birmingham, Alabama. The purchase price was cash of $2,863,000,
notes payable of $2,620,000, and a warrant to purchase approximately 725,000
shares of the Company's common stock. The exercise price of the warrant
represented the market price of the Company's common stock at the date the
warrant was issued. (Note: The noteholder exercised its warrants and in
exchange, considered the Company's $2,304,000 note paid in full, in 1996.) This
acquisition was accounted for using the purchase method of accounting.
In July 1994, the Company acquired all of the outstanding stock of Alabama
Renal Stone Institute, Inc. ("ARSI"), which owns a fixed-site lithotripter
located in Birmingham, Alabama and had previously licensed the use of the
lithotripter to a wholly-owned subsidiary of the Company. As a result, ARSI
operates the lithotripter as a wholly-owned subsidiary of the Company, free of
certain options that ARSI and its former owners had to terminate the license.
The purchase price was $3,895,000, and has been accounted for using the purchase
method of accounting.
A-20
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D. ACQUISITIONS, continued
-----------------------
In April 1994, the Company acquired an undivided 60% interest in certain
assets, subject to 60% of certain liabilities of Metro Atlanta Stonebusters,
Inc. ("MASI"), which operated a mobile lithotripter in the Atlanta, GA area.
Prime paid to MASI $2,040,000 in cash and a promissory note issued in the amount
of $3,700,000, bearing interest at 6%. Prime contributed its interest in the net
assets acquired to Metro Atlanta Stonebusters, G.P. ("MASBGP") in exchange for a
60% general partnership interest in MASBGP, and MASI contributed its 40%
interest to MASBGP for a 40% interest in MASBGP. This transaction was accounted
for using the purchase method of accounting.
In January 1994, the Company acquired all of the outstanding capital stock
of Fazio Consulting, Inc. ("FCI"), which operated two mobile lithotripters in
seven states. The purchase price was cash of $950,000, the repayment of two
promissory notes of FCI in the aggregate amount of $1,100,000 and an earnout for
the next five years based on 50% of the net income of FCI. At December 31, 1994,
the Company calculated the earnout for the first year to be $559,000, and that
amount has been recorded as goodwill and was accounted for using the purchase
method of accounting. At December 31, 1995, the Company reached an agreement to
settle the remaining four years of the earnout, along with a buyout of the
remaining term of two tractor leases. The Company has recorded the $700,000
settlement as follows: $685,000 recorded to goodwill and $15,000 to acquire
title to one tractor.
Unaudited proforma combined statement of earnings for the year ended
December 31, 1994 of the Company and the acquisitions discussed previously
assuming all were effective January 1, 1993 is as follows:
1994 1993
----------- -----------
Total revenues $27,721,000 $27,904,000
Total expenses 22,044,000 23,714,000
----------- -----------
Net earnings $ 5,677,000 $ 4,190,000
=========== ===========
Earnings per share $ 0.39 $ 0.34
=========== ===========
E. DISPOSITIONS
------------
In December 1994, the Company sold its interest in the Grove Diagnostic
Imaging Center. The Company received two promissory notes totaling $1,155,000
and the buyer assumed approximately $1,200,000 in contractual obligations.
In December 1994, the Company received $260,000 in cash for its equipment
and termination of its management contract, related to an imaging center managed
by the Company.
A-21
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
E. DISPOSITIONS, continued
-----------------------
In August 1994, Shasta Diagnostic Center J.V., in which the Company owns a
50% interest, sold the operating assets of Shasta Diagnostic Imaging Center, a
multi-modality imaging center. The sales price was comprised of $450,000 cash, a
promissory note for $450,000, bearing interest at 8%, and the assumption of
approximately $2,145,000 in debt and lease obligations.
In August 1994, the Company sold the operating assets of the Tower
Diagnostic Center, a multi-modality imaging center located in Tampa, Florida.
The sales price was comprised of $2,350,000 cash, a promissory note for
$500,000, bearing interest at 7.25% and the assumption of approximately
$4,100,000 in capital and operating lease obligations.
Summarized results of operations for the centers disposed of in 1994 were
as follows:
Fee revenues $ 8,292,000
Cost of services and
general and administrative expenses 6,705,000
Depreciation and amortization 941,000
---------------
646,000
Interest income 21,000
Interest expense (188,000)
Other, net 3,000
---------------
Net income $ 482,000
===============
F. 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,
1996 and 1995:
($ Amounts in Thousands)
1996 1995
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial assets:
Cash $ 20,096 $ 20,096 $ 4,692 $ 4,692
Notes receivable -- -- 203 200
Accounts receivable 16,346 16,346 4,109 4,109
Other receivables 1,842 1,842 183 183
Investment in American
Physicians Service Group, Inc. 173 325 173 481
A-22
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F. FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
----------------------------------------------
($ Amounts in Thousands) 1996 1995
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial liabilities:
Debt 81,432 81,432 25,366 25,281
Accounts payable 4,451 4,451 4,814 4,814
Fair value estimates, methods, and assumptions are set forth below for the
Company's 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.
Notes Receivable
----------------
The fair value of notes has been determined using discounted cash flows
based on management's estimate of current interest rates for notes of similar
credit quality.
Accounts Receivable and Other Receivables
-----------------------------------------
The carrying value of these receivables approximates the fair value due to
their short-term nature and historical collectibility.
Investment in American Physicians Service Group, Inc.
-----------------------------------------------------
The fair value of the stock is based on the last trade value at the end of
the year.
Debt
----
The carrying value of debt approximates fair value since the majority is
primarily floating rate debt based on current market rates.
Accounts Payable
----------------
The carrying value of the payables approximates fair value due to the
short-term nature of the obligation.
A-23
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F. 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-and-off 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 the 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.
G. ACCRUED EXPENSES
----------------
Accrued expenses consist of the following:
December 31, December 31,
1996 1995
------------ ------------
Legal fees $ 452,000 $ 228,000
Accrued group insurance costs 164,000 114,000
Compensation and payroll
related expense 1,502,000 1,114,000
Taxes, other than income taxes 334,000 92,000
Accrued interest 1,028,000 155,000
Provision for closed centers 163,000 221,000
Income taxes payable 761,000 384,000
Dividends payable to minority interest 10,705,000 183,000
Other 1,473,000 371,000
---------- ----------
$16,582,000 $ 2,862,000
=========== ===========
A-24
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. INDEBTEDNESS
------------
Outstanding long-term debts, other than bank debts, are as follows:
Interest December 31,
Rates Maturities 1996 1995
- -------------------- --------------- ------------ ------------
None 1997 - 2006 $ 241,000 $ 320,000
6% Note 1997 984,000 1,967,000
10% Note -- -- 1,561,000
11.25% -11.6% 1997 - 1998 12,000 190,000
60 Day Libor +
2 1/2% -- -- 3,690,000
Prime -- -- 2,304,000
------------ ------------
1,237,000 10,032,000
Less current portion of
long-term debt 1,100,000 2,759,000
------------ ------------
$ 137,000 $ 7,273,000
============ ============
$171,000 of the non-interest bearing notes are unsecured. A non-interest
bearing note in the amount of $70,000 is secured by a mobile lithotripter. The
6% note, in the principal amount of $984,000 and $1,967,000 at December 31, 1996
and 1995, respectively, is secured by a Security Agreement which conveys first
security title to the assets the lender sold to the Company as part of the
acquisition by the Company of 60% of certain assets, subject to 60% of certain
liabilities of Metro Atlanta Stonebusters, Inc. The 11.25% to 11.6% notes are
secured by medical and computer equipment.
Outstanding long-term notes payable - banks are as follows:
Interest December 31,
Rates Maturities 1996 1995
- -------------------- --------------- ------------ ------------
60-day LIBOR
plus 2 1/2% 1997-2001 $ 76,750,000 $ 15,050,000
Prime 1997-1998 3,245,000 --
Prime + 1 1/2% 1997 200,000 284,000
------------ ------------
80,195,000 15,334,000
Less current portion of
long-term bank debt 9,422,000 284,000
------------ ------------
$ 70,773,000 $ 15,050,000
============ ============
A-25
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. INDEBTEDNESS, continued
-----------------------
In conjunction with the acquisition discussion in Note D, the Company
increased its bank facility with the Bank of Boston from $25 million to $90
million. The $50 million term loan bears an interest rate of LIBOR + 2 to 3%,
payable monthly and requires quarterly principal payments beginning July, 1996,
with the final payment in April, 2001. The $40 million line of credit bears an
interest rate of LIBOR + 2 to 3%, payable monthly and matures in April, 2001.
The facility is collateralized by the assets of the Company, including the stock
of its subsidiaries.
The stated principal repayments for all indebtedness as of December 31,
1996 are payable as follows:
1997 $10,522,000
1998 10,134,000
1999 11,979,000
2000 12,696,000
2001 36,000,000
Thereafter 101,000
I. COSTS OF SERVICES AND GENERAL AND ADMINISTRATIVE EXPENSES
---------------------------------------------------------
Costs of services and general and administrative expenses consist of the
following:
Year Ended Year Ended Year Ended
Dec. 31, Dec. 31, Dec. 31,
1996 1995 1994
---------- ---------- ----------
Salaries, wages and benefits $11,953,000 $ 4,027,000 $ 5,460,000
Other costs of services 6,878,000 3,412,000 6,014,000
Provision for bad debts 150,000 573,000 805,000
General and administrative 1,941,000 718,000 1,454,000
Legal and professional 1,315,000 659,000 677,000
Other 2,562,000 668,000 867,000
----------- ----------- -----------
$24,799,000 $10,057,000 $15,277,000
=========== =========== ===========
A-26
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. COMMITMENTS AND CONTINGENCIES
-----------------------------
At December 31, 1996, minimum annual rental commitments under
non-cancelable operating leases for equipment and office space, which may
contain renewal and escalation clauses, are:
1997 $ 313,000
1998 191,000
1999 188,000
2000 157,000
2001 2,000
Thereafter --
Rent expense for equipment and office space for the years ended December
31, 1996 was $360,000, December 31, 1995 was $239,000 and December 31, 1994 was
$544,000.
The Company sponsors two partially, self-insured group medical insurance
plans. One 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, 1996,
the Company had 48 employees enrolled in the plan. The plan provides
non-contributory coverage for employees and contributory coverage for
dependents. The second plan is designed to provide a specified level of
coverage, with stop-loss coverage provided by a commercial insurer. At December
31, 1996, the Company had 150 employees enrolled in the plan. The plan provides
non-contributory coverage for employees and contributory coverage for
dependents. The Company's maximum claim exposure is limited to $20,000 per
person per policy year. The Company's contributions totaled $224,000 in 1996,
$150,000 in 1995, and $431,000 in 1994.
K. 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 because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. 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.
A-27
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K. COMMON STOCK OPTIONS, continued
--------------------------------
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 after ten years from the date the
option is granted, unless the option terminates sooner by reason of termination
of employment, disability or death.
A summary of the Company's stock option activity, and related information
for the years ended December 31, follows:
1996 1995 1994
------------------------------ ------------------------------- -------------------------------
Options Weighted-Average Options Weighted-Average Options Weighted-Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
----------- ----------------- ----------- ---------------- ------------ ----------------
Outstanding - beginning of year 975 $ 1.31 1,055 $ 0.98 1,156 $ 0.85
Granted 730 13.87 55 5.58 65 3.05
Exercised (477) 0.52 (135) 0.52 (136) 0.31
Forfeited ( --) -- ( --) -- ( 30) 3.46
----------- ----------------- ----------- ---------------- ------------ ----------------
Outstanding-end of year 1,228 $ 8.99 975 $ 1.31 1,055 $ 0.98
=========== ================ =========== ================ ============ ================
Exercisable at end of year 422 $ 2.03 816 $ 0.75 813 $ 0.55
Weighted-average fair
value of options granted
during the year $ 6.13 -- $ 2.07 -- N/A --
A-28
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K. COMMON STOCK OPTIONS, continued
-------------------------------
The following table summarizes the Company's outstanding options at
December 31, 1996:
Average Weighted
Remaining Average
Contractual Exercise
Range of Exercise Prices Shares Life Price
------------------------ --------- ----------- ---------
$ 0.25 - $ 4.12 447,000 2.2 years $ 1.39
$ 4.13 - $ 8.25 50,000 4.9 years $ 5.75
$ 8.26 - $12.37 25,000 4.0 years $ 8.94
$12.38 - $16.50 706,000 4.7 years $14.04
---------
Total 1,228,000
=========
Pro forma 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 1995 and 1996 option pricing model with the following
weighted-average assumptions for 1995 and 1996, respectively: risk-free interest
rates of 5.7% and 6.2%; dividend yields of 0% and 0%; volatility factors of the
expected market price of the Company's common stock of .38 and .53; and a
weighted-average expected life of the option of 4 years.
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.
A-29
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K. COMMON STOCK OPTIONS, continued
-------------------------------
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
1996 1995
---------- ---------
Pro forma net income $ 8,109 $ 7,197
Pro forma earnings
per share
Primary $0.44 $0.47
Fully Diluted $0.43 $0.46
L. OTHER INCOME (EXPENSE)
----------------------
Included in other, net in the consolidated statements of operations are the
following components:
Years Ended December 31,
1996 1995 1994
---------- ---------- ----------
Collections on amounts
previously written off $ 192,000 -- --
Gain on sale of investment
in American Physicians
Service Group, Inc. stock -- 559,000 --
Equipment rental 58,000 -- --
Equity in income of affiliates -- -- 9,000
Loss on sale of
marketable securities -- -- (43,000)
Other income (expense) 120,000 88,000 (57,000)
---------- ---------- ----------
Other, net $ 370,000 $ 647,000 $ (91,000)
========== ========== ==========
M. INCOME TAXES
------------
The Company recognized $97,000, $110,000 and $114,000 in current Federal
income tax expense for 1996, 1995 and 1994 respectively, consisting entirely of
alternative minimum tax.
A-30
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
M. INCOME TAXES, continued
-----------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below.
1996 1995
----------- ------------
Deferred tax assets:
Accounts receivable,
principally due to allowance
for doubtful accounts $ 114,000 $ 79,000
AMT credit carryforwards 249,000 374,000
Net operating loss carryforwards 944,000 4,088,000
Investment tax credit carryforwards 1,200,000 1,200,000
Accrued expenses deductible
for tax purposes when paid 834,000 573,000
Other 829,000 162,000
----------- ------------
Total gross deferred tax
assets 4,170,000 6,476,000
Less valuation allowance (2,399,000) (5,492,000)
----------- ------------
Net deferred tax assets 1,771,000 984,000
----------- ------------
Deferred tax liabilities:
Property and equipment,
principally due to
differences in depreciation ( 516,000) (334,000)
Investments in affiliated
entities, principally due to
undistributed income (2,860,000) ( 430,000)
Intangible assets, principally
due to differences in
amortization periods for tax
purposes (1,872,000) ( 460,000)
IRS Section 481(A) adjustment
for partnerships acquired ( 175,000) --
----------- ----------
Total gross deferred tax
liabilities (5,423,000) (1,224,000)
----------- ----------
Net deferred tax liability ($3,652,000) ($ 240,000)
=========== ==========
A-31
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
M. INCOME TAXES, continued
-----------------------
The valuation allowance for deferred tax assets as of December 31, 1996 was
$2,399,000 representing a decrease of $3,093,000, primarily due to utilization
of net operating loss carryforwards. The valuation allowance for deferred tax
assets as of January 1, 1995 was $7,583,000 with the change in the total
valuation allowance for the year ended December 31, 1995 being a decrease of
$2,091,000. The Company believes that the valuation allowance at December 31,
1996 is necessary due to uncertainties regarding the Company's use of the net
operating loss carryforwards and tax credit carryforwards which could become
limited in the event that the Company experiences a greater than 50% stock
ownership change in a three-year period (as defined in the Internal Revenue
Service regulations).
At December 31, 1996, net operating loss carryforwards available to reduce
future taxable income amounted to approximately $2,777,000 and expire through
2008. Investment tax credit carryforwards, which expire through 2000, amounted
to $1,200,000 at December 31, 1996.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowances at December 31, 1996. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
N. RELATED PARTY TRANSACTIONS
--------------------------
See Notes B and C for additional related party transactions involving
investments in affiliates.
O. SUBSEQUENT EVENT
----------------
In January 1997 the Company purchased additional ownership interests in 10
partnerships, which the Company controls. The purchase price for additional
ownership interests was $10,510,000 in cash. These transactions were accounted
for using the purchase method of accounting.
A-32
SCHEDULE II
-----------
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
($ in thousands)
Additions
----------
Charged to Balance at
Beginning of Costs and End of
Description Period Accounts Deductions Period
----------- ------------ ---------- ----------- ----------
Year ended December 31, 1996:
Accounts Receivable
Allowance for doubtful
accounts $ 232 $ 319 $ 216 (A) $ 335
============= =========== =========== ==========
Year ended December 31, 1995:
Accounts Receivable
Allowance for doubtful
accounts $ 938 $ 531 $ 1,237 (A) $ 232
============= =========== ========== ==========
Year ended December 31, 1994:
Accounts Receivable
Allowance for doubtful
accounts $ 1,625 $ 1,857 $ 2,544 (A) $ 938
============ ========== ========== ==========
- -------------------------------
(A) Accounts receivable written off against the allowance for doubtful
accounts and other minor reclassifications.
S-1