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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, 1997
[ ] 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, 1998: $228,150,000
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, 1998
------------------- --------------
Common Stock, $.01 par value 19,314,267
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's definitive proxy material for the
1998 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, 1997
PART I
ITEM 1. BUSINESS.
Prime Medical Services, Inc., a Delaware corporation ("Prime" or the
"Company"), is the largest provider of lithotripsy services in the United
States. Lithotripsy is a non-invasive procedure for the treatment of kidney
stones, typically performed on an outpatient basis, that eliminates the need for
lengthy hospital stays and extensive recovery periods associated with surgery.
The Company has 61 lithotripters of which 54 are mobile and seven are fixed
site. The Company's lithotripters performed approximately 36,000 procedures in
the United States in 1997 through its network of approximately 450 hospitals and
surgery centers in 34 states. In addition, the Company has over 270 contracts
with managed care organizations.
Lithotripters fragment kidney stones by use of extracorporeal shock
wave lithotripsy. The Company provides services related to the operation of the
lithotripters, including scheduling, staffing, training, quality assurance,
maintenance, regulatory compliance and contracting with payors, hospitals and
surgery centers. Medical care is rendered by the urologists utilizing the
lithotripters. Management believes that the Company has collected the industry's
largest and most comprehensive lithotripsy database, containing detailed
treatment and outcomes data on over 120,000 lithotripsy procedures. The Company
and its associated urologists utilize this database in seeking to provide the
highest quality of lithotripsy services as efficiently as possible.
From 1992 through 1997, the Company completed 12 acquisitions involving
57 lithotripter operations and internally developed four new operations. Since
1992, the Company has substantially divested its original non-lithotripsy
businesses.
Lithotripsy Industry Overview
Kidney stones develop from crystals made up primarily of calcium which
separate from urine and build up on the inner surfaces of the kidney. The exact
cause of kidney stone formation is unclear, and there is no known preventative
cure in the vast majority of cases. Approximately 25% of all kidney stones do
not pass spontaneously and therefore require medical or surgical treatment.
Kidney stone treatments used by urologists include lithotripsy, drug therapy,
endoscopic extraction or open surgery. While the nature and location of a kidney
stone impacts the choice of treatment, the Company believes the majority of all
kidney stones that require treatment are treated with lithotripsy because it is
non-invasive, typically requires no general anesthesia, and rarely requires
hospital stays. After fragmentation by lithotripsy, the resulting kidney stone
fragments pass out of the body naturally. Recovery from the procedure is usually
a matter of hours.
Kidney stone disease is most prevalent in the southern United States.
Men are afflicted with kidney stones more than twice as frequently as women,
with the highest incidence occurring in men
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45 to 64 years of age.
Kidney Stone Treatment Methods
A number of kidney stone treatments are used by urologists ranging from
non-invasive procedures, such as drug therapy or lithotripsy, to invasive
procedures, such as endoscopic extraction or open surgery. The type of treatment
a urologist chooses depends on a number of factors, such as the size and
chemical make-up of the stone, the stone's location in the urinary system and
whether the stone is contributing to other urinary complications such as
blockage or infection.
Certain types of less common kidney stones may be dissolved by drugs which
allow normal passage from the urinary system. Stones located in certain areas of
the urinary tract may be extracted endoscopically. These procedures commonly
require general or local anesthesia and can injure the involved areas of the
urinary tract. Frequently, kidney stones are located where they are not
accessible by an endoscopic procedure. Prior to the development of lithotripsy,
stones lodged in the upper urinary tract were often treated by open surgery or
percutaneous stone removal, both major operations requiring an incision to gain
access to the stone. After such procedures, the patient typically spends several
days in the hospital followed by a convalescence period of three to six weeks.
As the technology for treating kidney stones has improved, there has been a
shift from more expensive and complicated invasive procedures to safer, more
cost efficient and less painful non-invasive procedures, such as lithotripsy.
Extracorporeal Shock Wave Lithotripsy
General. The lithotripter has dramatically changed the course of kidney
stone disease treatment since lithotripsy is normally performed on an outpatient
basis, often without general anesthesia. Recovery times are generally only a few
hours, and most patients can return to work the next day. There are three basic
types of lithotripsy treatment currently available: electromagnetic, spark-gap
and piezoelectric. A decision regarding which type is used in any instance may
depend on several factors, among which are the treating physician's preferences,
treatment times, stone location, and anesthesia considerations. The Company has
40 electromagnetic machines, 20 spark-gap machines and one piezoelectric
machine.
Electromagnetic Technology. Most new lithotripters utilize an
electromagnetic shock wave component that eliminates the need for disposable
electrodes. The use of lithotripters employing electromagnetic technology allows
for more precise focusing of shock wave energy and more predictable energy
delivery than other lithotripsy technologies, which eliminates the need for
anesthesia in most cases. Utilization of systems employing electromagnetic
technology usually results in fragmentation of the kidney stone in between 60
and 90 minutes.
Spark Gap Technology. With these lithotripsy systems, shock waves generated
by a disposable high-voltage spark electrode are focused on a kidney stone.
Utilization of systems employing spark gap technology usually results in
fragmentation of the kidney stone in less than 60 minutes. The use of spark-gap
technology often requires the administration of sedatives or intravenous
anesthesia care and in some cases requires general anesthesia.
Piezoelectric Technology. Lithotripters applying piezoelectric technology
focus shock waves on the kidney stone using a linear array of ceramic elements.
This technology has not been widely adopted, and there are only a few
lithotripters utilizing piezoelectric technology operating in the United States.
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Other Lines of Business
In September 1997, the Company, through its acquisition of a 75% interest
in AK Associates, L.L.C. ("AK"), began providing manufacturing services and
installation, upgrade, refurbishment and repair of major medical equipment for
mobile medical services providers. The Company paid $4.8 million for this
interest, plus an earn-out of up to $1.1 million. The remaining 25% of AK is
owned by certain members of AK management. The Company did not receive
significant revenues from AK during 1997.
In October 1997, the Company began providing thermotherapy services for the
treatment of benign prostatic hyperplasia ("BPH"). BPH is the non-cancerous
enlargement of the prostate, a condition common in men over age 60.
Thermotherapy uses microwaves to apply heat to the prostate, resulting in relief
of the symptoms of BPH without damaging surrounding tissues. Thermotherapy
relieves the symptoms of BPH without incurring the risks of complications often
associated with surgery and more invasive procedures. The Company operates one
mobile thermotherapy device servicing hospitals and surgery centers in eastern
North Carolina, and has been granted an unrestricted license to provide
thermotherapy services with a second mobile system in southern California. The
Company intends to evaluate the success of its thermotherapy operations and may
expand such operations in the future. The Company did not receive significant
revenues from this activity during 1997.
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"). 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 1% of the Company's total revenues for the
year ended December 31, 1997.
Potential Liabilities-Insurance
All medical procedures performed in connection with the Company's
business activities are conducted directly by, or under the supervision of
physicians, who are not employees of the Company. The Company does not provide
medical services to any patients. However, patients being treated at health care
facilities at which the Company provides its non-medical services could suffer a
medical emergency resulting in serious injury or death, which could subject the
Company to the risk of lawsuits seeking substantial damages.
The Company currently maintains general and professional liability
insurance with a total limit of $1,000,000 per loss event and $3,000,000 policy
aggregate and an umbrella excess limit of $10,000,000, with a deductible of
$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.
3
Government Regulation and Supervision
The Company is subject to extensive regulation by both the federal
government and the states in which the Company conducts its business. The
Company is subject to Section 1128B of the Social Security Act (known as "the
Illegal Remuneration Statute"), which imposes civil and criminal sanctions on
persons who solicit, offer, receive or pay any remuneration, directly or
indirectly, for referring, or arranging for the referral of, a patient for
treatment that is paid for in whole or in part by Medicare, Medicaid or similar
government programs. The federal government has published regulations that
provide exceptions or a "safe harbor" for certain business transactions.
Transactions that are structured within the safe harbors are deemed not to
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.
Nevertheless, these illegal remuneration laws, as applied to activities and
relationships similar to those of the Company, have been subjected to limited
judicial and regulatory interpretation, and the Company has not obtained or
applied for any opinion of any regulatory or judicial authority that its
business operations and affiliations are in compliance with these laws.
Therefore, no assurances can be given that the Company's activities will be
found to be in compliance with these laws if scrutinized by such authorities.
In addition to the Illegal Remuneration Statute, Section 1877 of the
Social Security Act ("Stark II") imposes certain restrictions upon referring
physicians and providers of certain designated health services under the
Medicare, Medicaid and Champus Programs ("Government Programs"). Subject to
certain exceptions, Stark II provides that if a physician (or a family member of
a physician) has a financial relationship with an entity: (i) the physician may
not make a referral to the entity for the furnishing of designated health
services reimbursable under the Government Programs; and (ii) the entity may not
bill Government Programs, any individual or any third-party payor for designated
health services furnished pursuant to a prohibited referral under the Government
Programs. The prohibitions of Stark II only apply to the treatment of Government
Program patients, and have no application to services performed for
non-government program patients. Entities and physicians committing an act in
violation of Stark II will be required to refund amounts collected in violation
of the statute and also are subject to civil money penalties and exclusion from
the Government Programs. Urologists are investors in 43 of the Company's 61
lithotripsy operations, and the two Company affiliates engaged in thermotherapy
services have referring physicians- investors (the Company lithotripsy and
thermotherapy affiliates with referring physicians-investors are referred to
herein as the "Company Physician Entities").
Many key terms in Stark II are not adequately defined and the statute
is silent regarding its application to vendors, such as the Company Physician
Entities, contracting "under arrangements" with hospitals for the provision of
outpatient services. Since the passage of Stark II, the Company, interpreted
Stark II consistently with the informal view of the General Counsel for Health
and
4
Human Services, and concluded that the statute did not apply to its method of
conducting business. Based upon a reasonable interpretation of Stark II, by
referring a patient to a hospital furnishing the outpatient lithotripsy or
thermotherapy services "under arrangements" with the Company Physician Entities,
a physician investor in a Company Physician Entity is not making a referral to
an entity (the hospital) in which they have an ownership interest.
On January 9, 1998, the federal government published proposed
regulations under Stark II (the "Proposed Stark Regulations"). By clarifying
certain ambiguities and defining certain statutory terms, the Proposed Stark
Regulations and accompanying commentary apply the physician referral
prohibitions of Stark II to the Company Physician Entities' practice of
contracting "under arrangements" with hospitals for treatment and billing of
Government Program patients. Only hospitals can bill the Government Programs for
lithotripsy and thermotherapy services; thus contracting under arrangements with
hospitals was the way the Company Physician Entities economically participated
in the treatment of Government Program patients. Absent a restructuring of
traditional operations, to comply with the government's interpretation of Stark
II, the physician- investors will be prohibited from referring Government
Program patients to the hospitals contracting with the Company Physician
Entities. The Company cannot predict when final Stark II regulations will be
issued or the substance of the final regulations, but the interpretive
provisions of the Proposed Stark Regulations may be viewed as the federal
government's interim enforcement position until final regulations are issued.
Restructuring traditional operations may reduce Company revenues and limit
future growth by (i) reducing or eliminating revenues attributable to the
treatment of Government Program patients by the Company Physician Entities, (ii)
reducing revenues from the treatment of non-government patients by Company
Physician Entities due to physician, hospital and third-party payor anxiety and
concern created by Stark II, (iii) requiring the Company Physician Entities to
restructure their operations to comply with Stark II, (iv) restricting the
acquisition or development of additional lithotripsy or thermotherapy operations
that will both treat Government Program patients and have referring
physician-investors, (v) impairing the Company's relationship with urologists
and (vi) otherwise materially adversely impacting the Company.
Many states currently have laws similar to Stark II that restrict a
physician with a financial relationship with an entity from referring patients
to that entity. Often these laws contain statutory exceptions for circumstances
where the referring physician, or a member of his practice group, treats their
own patients. States also commonly require physicians to disclose to patients
their financial relationship with an entity. The Company believes that it is in
material compliance with these state laws. Nevertheless, these state
self-referral laws, as applied to activities and relationships similar to those
of the Company, have been subjected to limited judicial and regulatory
interpretation, and the Company has not obtained or applied for any opinion of
any regulatory or judicial authority that its business operations and
affiliations are in compliance with these laws. Therefore, no assurances can be
given that the Company's activities will be found to be in compliance with these
laws if scrutinized by such authorities.
In addition, upon the occurrence of changes in the law that may
adversely affect operations, the Company is required to purchase the interests
of physician-investors for certain of the Company Physician Entities. These
mandatory purchase obligations require the payment by the Company of a multiple
of earnings similar to multiples used by the Company in pricing the original
acquisition of such interests. To the extent the Company is required to purchase
such interests, such purchases might cause a default under the terms of the
Company's senior credit facility, impair the Company's relationship with
urologists and otherwise have a material adverse impact on the Company.
Regulatory developments, such as Stark II, might also dictate that the Company
purchase all the
5
interests of its physician-investors, regardless of any contractual requirements
to do so, or substantially alter its business and operations to remain in
compliance with applicable laws. Accordingly, there can be no assurance that the
Company will not be required to change its business practices or its investment
relationships with urologists or that the Company will not experience a material
adverse effect as a result of any challenge made by a federal or state
regulatory agency. In addition, there can be no assurance that
physician-investors who, voluntarily or otherwise, divest of their interests in
Company Physician Entities will continue to refer patients at the same rate or
at all.
Some states require approval, usually in the form of a certificate of
need ("CON"), prior to the purchase of major medical equipment exceeding a
predesignated capital expenditure threshold or for the commencement of certain
clinical health services. Such approval is generally based upon the anticipated
utilization of the service and the projected need for the service in the
relevant geographical area of the state where the service is to be provided. CON
laws differ in many respects, and not every state's CON law applies to the
Company. Most of the Company's operations originated in states which did not
require a CON for 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.
Except as provided herein, the Company believes it complies in all
material respects with the foregoing laws and regulations, and all other
applicable regulatory requirements; however, these laws are complex and have
been broadly construed by courts and enforcement agencies. Thus, there can be no
assurance that the Company will not be required to change its practices or its
relationships with treating physicians who are investors in the Company
Physician Entities, or that the Company will not experience material adverse
effects as a result of any investigations or enforcement actions by a federal or
state regulatory agency. Further, the Company acknowledges that the Proposed
Stark Regulations apply the physician referral prohibitions of Stark II to the
Company Physician Entities' practice of contracting under arrangements with
hospitals for the treatment and billing of Government Program patients. As a
consequence, the Company Physician Entities will have to restructure or modify
their business practices in order to comply with the Stark II statute as
interpreted by the Proposed Stark Regulations.
A number of proposals for healthcare reform have been made in recent
years, some of which have included radical changes in the healthcare system.
Healthcare reform could result in material changes in the financing and
regulation of the healthcare business, and the Company is unable to
6
predict the effect of such changes on its future operations. It is uncertain
what legislation on healthcare reform, if any, will ultimately be implemented or
whether other changes in the administration or interpretation of governmental
healthcare programs will occur. There can be no assurance that future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs will not have a material adverse effect on the
results of operations of the Company.
Equipment
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 ranges from $600,000 to
$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, 1998, the Company employed approximately 330 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. A decrease in the purchase price of lithotripters as a result of
the development of less expensive lithotripsy equipment could decrease the
Company's competitive advantage. Most of the Company's lithotripsy services
agreements have matured past their initial terms and are now in annual renewal
terms or are on a month-to-month basis. Another significant provider of
lithotripsy services is also a manufacturer of lithotripsy equipment, which may
create different incentives for such provider in pricing lithotripsy services.
Moreover, while the Company believes that lithotripsy has emerged as the
superior treatment for kidney stone disease, the Company competes with
alternative kidney stone disease treatments.
ITEM 2. PROPERTIES.
The Company's principal executive office is located in Austin, Texas in
an office building owned by American Physicians Services Group, Inc. ("APS").
The Company pays APS approximately $8,000 per month, which includes rental
payment for approximately 5,600 square feet of office space, reception and
telephone services, and certain other services and facilities. The office space
lease expires in December, 1998.
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.
7
The Company leases approximately 24,000 square feet of manufacturing
and office space in Mokena, Illinois under a lease which expires in 2000. The
current monthly lease amount is approximately $12,000.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company may be named as a party to litigation
proceedings incidental to its business. The Company does not believe the outcome
of any such litigation is likely to have a material adverse effect on its
business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCK HOLDER 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, 1997 and 1996 (NASDAQ Symbol "PMSI").
Year Ended December 31, 1997 High Low
First Quarter $12.38 $ 9.75
Second Quarter 11.81 8.94
Third Quarter 14.75 10.25
Fourth Quarter 14.69 11.75
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
On March 20, 1998, the Company had approximately 800 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
8
relevant.
ITEM 6. SELECTED FINANCIAL DATA.
($ in thousands, except per share data)
Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues:
Lithotripsy $ 93,113 $ 71,602 $ 22,153 $ 14,843 $ 7,309
Other 2,866 802 1,042 9,925 13,259
-------- -------- -------- --------- --------
Total $ 95,979 $ 72,404 $ 23,195 $ 24,768 $ 20,568
======== ======== ======== ======== ========
Income:
Net income $ 14,856 $ 8,961 $ 7,204 $ 4,504 $ 2,539
======== ========= ======== ======== ========
Diluted earnings per share:
Net income $ 0.76 $ 0.49 $ 0.48 $ 0.31 $ 0.21
====== ====== ====== ====== ======
Dividends per share None None None None None
Total assets $225,826 $202,534 $ 77,627 $ 53,861 $ 38,678
======== ======== ======== ======== ========
Long-term obligations $ 71,198 $ 70,910 $ 22,323 $ 12,734 $ 2,675
======== ======== ======== ======== ========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Forward Looking Statements
The statements contained in this Report on Form 10-K that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including statements regarding the Company's expectation, hopes,
intentions or strategies regarding the future. Readers should not place undue
reliance on forward-looking statements. All forward-looking statements included
in this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements. It is important to note that the Company's actual results could
differ materially from those in such forward-looking statements. In addition to
any risks and uncertainties specifically identified in the text surrounding such
forward- looking statements, the reader should consult the Company's reports on
Form 10-Q and other filings under the Securities Act of 1933 and the Securities
Exchange Act of 1934, for factors that could cause actual results to differ
materially from those presented.
The forward-looking statements included herein are necessarily based on
various assumptions and estimates and are inherently subject to various risks
and uncertainties, including risks and uncertainties relating to the possible
invalidity of the underlying assumptions and estimates and possible changes or
developments in social, economic, business, industry, market, legal and
regulatory circumstances and conditions and actions taken or omitted to be taken
by third parties,
9
including customers, suppliers, business partners and competitors and
legislative, judicial and other governmental authorities and officials.
Assumptions related to the foregoing involve judgements with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Any of such
assumptions could be inaccurate and therefore, there can be no assurance that
the forward-looking statements included in this Report on Form 10-K will be
prove to be accurate.
Year ended December 31, 1997 compared to the year ended December 31, 1996
For the year ended December 31, 1997, total revenues increased $23,575,000
(33%) as compared to the same period in 1996. Revenues from lithotripter
operations increased by $21,511,000 primarily due to the acquisitions of (i) one
lithotripter entity that owned or managed 31 lithotripters throughout the U.S.
effective May 1996, (ii) additional interests in 10 partnerships in January
1997, (iii) one company that owned two lithotripters effective June 1997 and
(iv) a 38.25% interest in a lithotripter unit effective May 1997. Revenues from
manufacturing were $2,358,000, related to the acquisition of the trailer
manufacturer in September 1, 1997. Revenues from cardiac centers decreased
$323,000 primarily due to the one sold cardiac center.
For the year ended December 31, 1997, costs and expenses (excluding
depreciation and amortization) increased from 34% to 35% of revenues, and
increased $8,486,000 (34%) in absolute terms, compared to the same period in
1996. Costs of services associated with lithotripter operations increased
$5,459,000 (27%) in absolute terms primarily due to the acquisitions discussed
above, and decreased from 28% to 27% of lithotripter revenues. Expenses from
manufacturing were $1,743,000. Cost of services associated with cardiac centers
decreased $322,000 (51%) primarily due to the sale of one cardiac center.
Corporate expenses were 6% of revenues for both years as the Company was able to
successfully grow without proportionately adding overhead. Corporate expenses
increased $1,438,000 (34%) primarily due to the additional corporate expenses
associated with the acquisitions discussed above.
For the year ended December 31, 1997, other deductions decreased $1,592,000
primarily due to $3,535,000 in debt issuance and canceled stock offering costs
in 1996, compared to only $360,000 which were recorded in 1997, partially offset
by an increase in interest expense of $1,500,000 due to borrowings in 1997
related to the acquisitions discussed above.
Minority interest in consolidated income increased $5,498,000 primarily due
to the other ownership interest associated with 21 partnerships in which
Lithotripters, Inc. holds a controlling interest. The Company concluded the
Lithotripters, Inc. acquisition effective May 1, 1996.
Provision for income taxes increased $3,799,000 due to the increase in
income before income taxes, partially offset by the Company fully utilizing its
net operating loss and other carryforwards in 1997, which resulted in a
reduction in the beginning of year valuation allowance of $2,399,000.
Year ended December 31, 1996 compared to the year ended December 31, 1995
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 acquisitions of (i) an entity that owned or managed 31
lithotripters effective May 1, 1996 (ii) an entity that owned or managed eight
lithotripters effective October 1, 1995, and (iii) 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
10
$240,000 primarily due to four discontinued/sold cardiac centers.
Costs and expenses (excluding depreciation and amortization) 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 deductions increased $8,251,000 primarily due to (i) 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
(ii) an increase in interest expense of $4,746,000 due to $74.0 million in new
borrowings in 1996 primarily for the acquisition of Lithotripters, Inc.,
effective May 1, 1996.
Minority interest in consolidated income increased $18,122,000 primarily
due to the other ownership interest associated with 21 partnerships in which
Lithotripters, Inc. holds a controlling interest. The Company concluded the
acquisition of Lithotripters, Inc. effective May 1, 1996.
Liquidity and Capital Resources
Cash was $23,770,000 and $20,096,000 at December 31, 1997 and December 31,
1996, respectively. Cash provided by operations was $51,693,000 for the year
ended December 31, 1997 and $41,602,000 for the year ended December 31, 1996.
The Company's subsidiaries generally distribute all of their available cash
quarterly, after establishing reserves for estimated capital expenditures and
working capital. For the years ended December 31, 1997 and 1996, the Company's
subsidiaries distributed cash of approximately $28,667,000 and $13,440,000,
respectively, to minority interest holders.
Cash used by investing activities for the year ended December 31, 1997 was
$22,949,000 primarily due to $20,217,000 associated with acquisitions and
$4,546,000 for the purchase of equipment and leasehold improvements, partially
offset by $1,690,000 in distributions from investments. Cash used by investing
activities for the year ended December 31, 1996 was $71,770,000 primarily due to
expenditures of $70,129,000 associated with acquisitions including $3,387,000
for deferred payments, and $2,526,000 for the purchase of equipment and
leasehold improvements. This was partially offset by $1,257,000 in distributions
from investments.
Cash used in financing activities for the year ended December 31, 1997 was
$25,070,000, primarily due to distributions to minority interests of $28,667,000
offset by net borrowings of $873,000, and contributions received from minority
interests of $2,381,000. Cash provided by financing activities for the year
ended December 31, 1996 was $45,572,000, which was primarily due to $58,649,000
in net borrowings under credit facilities, partially offset by distributions to
minority interests of $13,440,000.
The Company's existing credit facility is comprised of two term loans and a
revolving line of credit. The term loans bear interest at the rate of LIBOR plus
two percent to three percent, payable monthly, and require quarterly or annual
principal payments. At December 31, 1997, approximately $39 million was owed
under the term loan which matures in April 2001, and approximately $40 million
was owed under the term loan which matures in April 2003. The revolving line of
credit has a borrowing limit of $50.0 million none of which was drawn at
December 31, 1997.
On March 27, 1998, the Company completed an offering of $100 million of
senior subordinated notes due 2008 (the "Notes") to qualified institutional
buyers. The net proceeds from the offering
11
of approximately $96 million will be used to repay all outstanding
indebtedness under the Company's bank facility, with the remainder to be used
for general corporate purposes, including acquisitions. In connection herewith,
the Company will take a charge to earnings of approximately $3.8 million for
debt issuance costs associated with the Notes.
The Company is currently evaluating its alternatives in light of the
Proposed Stark Regulations. While the Company believes the changing regulatory
environment may benefit the Company by creating new lithotripsy acquisition
opportunities, the Company is reevaluating its historical model for providing
lithotripsy and thermotherapy services through operations which include
physician- investors and has delayed the organization of physician partnerships
that were in various stages of development.
The Company intends to increase the number of its lithotripsy operations
primarily through acquisitions. The Company believes that the fragmented nature
of the lithotripsy industry, combined with operational challenges created by
increasing regulatory and business complexities, including Stark II, the Illegal
Remuneration Statute and similar state laws, will provide significant
lithotripsy acquisition opportunities. Where appropriate, the Company will seek
to increase its ownership interest in current lithotripsy operations by
purchasing interests of urologists and other investors who desire to divest due
to concerns over regulatory issues, a desire to realize a return on their
investment or retirement. The Company intends to fund the purchase price for
future acquisitions using borrowings under its senior credit facility, proceeds
from the offering of the Notes and cash flow from operations. In addition, the
Company may use shares of its common stock in such acquisitions where
appropriate.
The Company has announced a stock repurchase program of up to $15.0 million
of common stock. From time to time, the Company may purchase additional shares
of its common stock where, in the judgment of management, market valuations of
its stock do not accurately reflect the Company's past and projected results of
operations. The Company intends to fund any such purchases using available cash,
cash flow from operations and borrowings under its senior credit facility.
The Company's ability to make scheduled payments of principal of, or to pay
the interest on, or to refinance, its indebtedness, or to fund planned capital
expenditures will depend on its future performance, which, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond its control. Based upon the current level of
operations and anticipated cost savings and revenue growth, management believes
that cash flow from operations and available cash, together with available
borrowings under its senior credit facility, will be adequate to meet the
Company's future liquidity needs for at least the next several years. However,
there can be no assurance that the Company's business will generate sufficient
cash flow from operations, that anticipated revenue growth and operating
improvements will be realized or that future borrowings will be available under
the senior credit facility in an amount sufficient to enable the Company to
service its indebtedness or to fund its other liquidity needs.
Impact of Inflation
The assets of the Company are not affected by inflation because the Company
is not required
12
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.
New Accounting Pronouncements
In June 1997, the FASB issued FASB No. 131, Disclosures about Segments of
an Enterprise and Related Information, which the Company is required to adopt
for annual periods beginning after December 15, 1997 and interim periods
beginning in fiscal year 1999. SFAS No. 131 establishes standards for the way
that public companies report information about operating segments in annual
financial statements and requires that those companies report information about
segments in interim financial reports issued to shareholders. The Company has
not yet completed its analysis of this statement and the impact on its financial
statements.
Year 2000 Compliance
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The Company
does not anticipate that it will incur significant operating expenses or be
required to invest heavily in computer systems improvements to be year 2000
compliant. However, significant uncertainty exists concerning the potential
costs and effects associated with any year 2000 compliance. Any year 2000
compliance problem of either the Company or its vendors, third party payors or
customers could have a material adverse effect on the Company's business,
results of operations, financial condition and prospects.
ITEM 7.A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not required for 1997.
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.
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 1998 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.
13
EXECUTIVE OFFICERS OF THE REGISTRANT.
As of March 20, 1998, the executive officers of the Company are as follows:
Name Age Position
Kenneth S. Shifrin 48 Chairman of the Board
Joseph Jenkins, M.D., J.D. 50 President, Chief Executive Officer
and Director
Michael Madler 39 Senior Vice President - Operations
Dan Myers, M.D. 49 Senior Vice President - Development
Stan Johnson 44 Vice President
Cheryl L. Williams 46 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 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.
Dr. Jenkins has been President and Chief Executive Officer and a director
of the Company since April 1996. From May 1990 until December 1991, Dr. Jenkins
was a Vice President of Lithotripters, Inc. Since January 1992, Dr. Jenkins has
been President of Lithotripters, Inc. Dr. Jenkins is a board certified urologist
and is a founding member, a past president and currently a director of the
American Lithotripsy Society.
Mr. Madler has been Sr. 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 of Operations.
Dr. Myers has been Sr. 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. Johnson has been a Vice President of the Company and President of Sun
Medical Technologies, Inc. ("Sun"), a wholly-owned subsidiary of the Company,
since November 1995. Mr. Johnson was the Chief Financial Officer of Sun from
1990 to 1995.
14
Ms. Williams has been Chief Financial Officer, Vice President--Finance and
Secretary of the Company since October 1989. Ms. Williams was Controller of
Fairchild Aircraft Corporation from August 1988 to October 1989. From 1985 to
1988, Ms. Williams served as the Chief Financial Officer of APS Systems, Inc., a
wholly-owned subsidiary of APS.
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 1998 annual meeting
of shareholders, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this item is contained in the definitive proxy
statement of the Company to be filed in connection with its 1998 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 1998 annual meeting
of shareholders, which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) 1. Financial Statements.
The information required by this item is contained in Appendix A attached
hereto.
2. Financial Statement Schedules.
NONE
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.
15
(c) Exhibits. (1)
3.1 Certificate of Incorporation of the Company. (2)
3.2 Bylaws of the Company. (2)
4.1 Specimen of Common Stock Certificate. (2)
10.1* Prime Medical Services, Inc. 1993 Stock Option Plan. (3)
10.2* First Amendment to the Prime Medical Services, Inc. 1993 Stock
Option Plan. (12)
10.3* Second Amendment to the Prime Medical Services, Inc. 1993 Stock
Option Plan. (12)
10.4 Rights Agreement dated October 18, 1993 between the Company and
American Stock Transfer and Trust Company. (3)
10.5 Form of Indemnification Agreement dated October 11, 1993 between
the Company and certain of its officers and directors. (3)
10.6 Partnership Agreement of Metro Atlanta Stonebusters, G.P. (5)
10.7 Management Agreement dated July 28, 1994 between the Alabama Renal
Stone Institute, Inc. and Alabama Kidney Stone Foundation, Inc. (6)
10.8 Asset Purchase Agreement, dated August 30, 1994, between Prime
Lithotripter Operations, Inc. and Alabama Lithotripsy Joint
Venture. (7)
10.9 Asset Purchase Agreement, dated August 30, 1994, between Prime
Lithotripter Operations, Inc. and Baptist Medical Center -
Montclair. (7)
10.10 Promissory Note, dated August 30, 1994, issued by Prime
Lithotripter Operations, Inc. to Baptist Medical Center -
Montclair. (7)
10.11 Management Agreement, dated August 30, 1994, between Prime
Lithotripter Operations, Inc. and Alabama Lithotripsy Associates,
Inc. (7)
10.12 Security Agreement dated August 30, 1994, between Prime
Lithotripter Operations, Inc. and Baptist Medical Center -
Montclair. (7)
10.13 Amended and Restated Joint Venture Agreement dated April, 1989,
between Prime Diagnostic Imaging Services, Inc. and The Shasta
Diagnostic Imaging Medical Group. (4)
16
10.14 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. (8)
10.15 First Amendment to Loan Agreement dated August 17, 1995 between
Prime Medical Services, Inc. and The First National Bank of Boston,
as agent. (9)
10.16 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. (11)
10.17 Second Amended and Restated Loan Agreement between Prime Medical
Services, Inc., The First National Bank of Boston, N.A. and
NationsBank of Texas, N.A., as agent. (12)
10.18 Revolving Credit Note, dated March 31, 1997 in the amount of
$14,111,111.11 issued by the Company to NationsBank of Texas, N.A.
as agent. (12)
10.19 Revolving Credit Note, dated March 31, 1997 in the amount of
$13,888,888.89 issued by the Company to The First National Bank of
Boston as agent. (12)
10.20 Revolving Credit Note, dated March 31, 1997 in the amount of
$8,333,333.33 issued by the Company to Bank One, Texas, N.A.
as agent. (12)
10.21 Revolving Credit Note, dated March 31, 1997 in the amount of
$6,666,666.67 issued by the Company to Imperial Bank as agent. (12)
10.22 Revolving Credit Note, dated March 31, 1997 in the amount of
$7,000,000.00 issued by the Company to The Sumitomo Bank, Limited as
agent. (12)
10.23 Term Note A, dated March 31, 1997 in the amount of $12,500,000.00
issued by the Company to NationsBank of Texas, N.A. as agent. (12)
10.24 Term Note A, dated March 31, 1997 in the amount of $12,500,000.00
issued by the Company to The First National Bank of Boston as
agent. (12)
10.25 Term Note A, dated March 31, 1997 in the amount of $7,500,000.00
issued by the Company to Bank One, Texas, N.A. as agent. (12)
10.26 Term Note A, dated March 31, 1997 in the amount of $7,500,000.00
issued by the Company to Imperial Bank as agent. (12)
17
10.27 Term Note A, dated March 31, 1997 in the amount of $5,000,000.00
issued by the Company to The Sumitomo Bank, Limited as agent. (12)
10.28 Term Note B, dated March 31, 1997 in the amount of $10,000,000.00
issued by the Company to NationsBank of Texas, N.A. as agent. (12)
10.29 Term Note B, dated March 31, 1997 in the amount of $5,000,000.00
issued by the Company to Crescent/MACH Partners, L.P. as agent.(12)
10.30 Term Note B, dated March 31, 1997 in the amount of $5,000,000.00
issued by the Company to Merrill Lynch Senior Floating Rate Fund,
Inc. as agent. (12)
10.31 Term Note B, dated March 31, 1997 in the amount of $5,000,000.00
issued by the Company to Pilgrim America Prime Rate Trust as
agent. (12)
10.32 Term Note B, dated March 31, 1997 in the amount of $5,000,000.00
issued by the Company to ING Capital Senior Secured High Income
Fund, L.P. as agent. (12)
10.33 Term Note B, dated March 31, 1997 in the amount of $5,000,000.00
issued by the Company to Van Kampen American Capital Prime Rate
Income as agent. (12)
10.34 Term Note B, dated March 31, 1997 in the amount of $5,000,000.00
issued by the Company to Paribas Capital Funding LLC as agent. (12)
10.35 Operating Agreement for Southern California Stone Center, L.L.C.(9)
10.36 Lease Agreement dated July 1, 1995 between Kidney Stone Center of
South Florida, L.C. and Madorsky and Pinon Kidney Stone Center of
South Florida, P.A. (9)
10.37* Employment Agreement dated October 27, 1995 between Prime Medical
Services, Inc. and Stan D. Johnson. (9)
10.38* Employment Agreement dated May 1, 1996 between Prime Medical
Services, Inc. and Joseph Jenkins, M.D., J.D. (11)
10.39* Employment Agreement dated April 1, 1997 between Prime Medical
Services, Inc. and William Walsh. (12)
10.40* Employment Agreement dated October 8, 1997 between Prime Medical
Services, Inc. and Robert Bachman. (12)
18
10.41* Employment Agreement dated October 8, 1997 between Prime Medical
Services, Inc. and Larry Sodomire. (12)
10.42 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. (10)
10.43 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. (10)
10.44 Partnership Interest Purchase Agreement dated May 1, 1997 among
Prime Lithotripter Operations, Inc., Tenn-Ga Stone Group Two, L.P.,
NGST, Inc. and all the shareholders of NGST, Inc. (12)
10.45 Stock Purchase Agreement dated June 1, 1997 between Sun Medical
Technologies, Inc. and Executive Medical Enterprises, Inc. (12)
10.46 Contribution Agreement dated October 8, 1997 between Prime Medical
Services, Inc. and AK Associates. (12)
10.47 Limited Partnership Agreement of Pacific Medical Limited
Partnership. (12)
10.48 Limited Partnership Agreement of California I Prostatherapy Limited
Partnership. (12)
10.49 Limited Partnership Agreement of Great Lakes Lithotripsy Limited
Partnership. (12)
10.50 Limited Partnership Agreement of Texas Lithotripsy Limited
Partnership VI, L.P. (12)
10.51 Limited Partnership Agreement of North Carolina Prostatherapy
Limited Partnership I. (12)
21.1 List of subsidiaries of the Company. (12)
23.1 Independent Auditors' Consent of KPMG Peat Marwick LLP. (12)
27 Financial Data Schedule (12)
--------------
* Executive compensation plans and arrangements.
19
(1) The exhibits listed above will be furnished to any security holder upon
written request for such exhibit to Cheryl L. Williams, Prime Medical Services,
Inc., 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746. The
Securities and Exchange Commission (the "SEC") maintains a website that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC at "http://www.sec.gov".
(2) Filed as an Exhibit to the Registration Statement on Form S-4
(Registration No. 33-56900) of the Company and incorporated herein by reference.
(3) Filed as an Exhibit to the Current Report on Form 8-K of the Company
dated October 18, 1993 and incorporated herein by reference.
(4) Filed as an Exhibit to the Annual Report on Form 10-K of Old Prime,
Commission File Number 0-9963, for the year ended December 31, 1992 and
incorporated herein by reference.
(5) Filed as an Exhibit to the Current Report on Form 8-K dated May 5, 1994
of the Company and incorporated herein by reference.
(6) Filed as an Exhibit to the Current Report on Form 8-K dated July 28,
1994 of the Company and incorporated herein by reference.
(7) Filed as an Exhibit to the Current Report on Form 8-K dated September
13, 1994 of the Company and incorporated herein by reference.
(8) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1994.
(9) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1995.
(10) Filed as an Exhibit to the Current Report on Form 8-K dated April 26,
1996 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, 1996.
(12) Filed herewith.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRIME MEDICAL SERVICES, INC.
By /s/ Joseph Jenkins, M.D., J.D.
------------------------------
Joseph Jenkins, M.D., J.D., President,
Chief Executive Officer and Director
Date: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Kenneth S. Shifrin
-----------------------
Kenneth S. Shifrin
Chairman of the Board
Date: March 30, 1998
By: /s/ Cheryl L. Williams
-----------------------
Cheryl L. Williams
Vice President of Finance, Secretary
and Chief Financial Officer (Principal
Financial and Accounting Officer)
Date: March 30, 1998
By: /s/ Joseph Jenkins
-------------------
Joseph Jenkins, M.D., President,
Chief Executive Officer and Director
Date: March 30, 1998
21
By: /s/ Paul R. Butrus
------------------
Paul R. Butrus, Director
Date: March 30, 1998
By: /s/ William E. Foree
--------------------
William E. Foree, M.D., Director
Date: March 30, 1998
By: /s/ Irwin Katz
---------------
Irwin Katz, Director
Date: March 30, 1998
By: /s/ John McEntire
-----------------
John McEntire, Director
Date: March 30, 1998
By: /s/ William A. Searles
----------------------
William A. Searles, Director
Date: March 30, 1998
By: /s/ Michael Spalding
---------------------
Michael Spalding, M.D., Director
Date: March 30, 1998
22
APPENDIX A
INDEX
Page
Independent Auditors' Report A-2
Consolidated Financial Statements:
Consolidated Statements of Income
for the years ended December 31, 1997, 1996 and 1995. A-3
Consolidated Balance Sheets at December 31, 1997 and 1996. A-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995. A-6
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995. A-7
Notes to Consolidated Financial Statements. A-11
A-1
Independent Auditors' Report
The Board of Directors and Shareholders
Prime Medical Services, Inc.:
We have audited the accompanying consolidated financial statements of Prime
Medical Services, Inc. and subsidiaries ("Company") as listed in the
accompanying index. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Prime Medical
Services, Inc. and subsidiaries at December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick, LLP
- --------------------------
Austin, Texas
February 27, 1998, except Note N,
to which the date is March 27, 1998
A-2
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data) Years Ended December 31,
1997 1996 1995
---- ---- ----
Fee Revenue:
Lithotripsy:
Fee revenues $84,537 $65,138 $19,306
Management fees 6,237 4,698 1,617
Equity income 2,339 1,766 1,230
-------- --------- ----------
93,113 71,602 22,153
Manufacturing 2,358 -- --
Cardiac 479 802 1,042
Other 29 -- --
-------- ----------- ------------
Total fee revenue 95,979 72,404 23,195
-------- ----------- ------------
Cost of services and general and
administrative expenses
Lithotripsy 25,381 19,922 5,979
Manufacturing 1,743 -- --
Cardiac 310 632 1,505
Other 168 -- --
Corporate 5,683 4,245 2,573
-------- --------- ----------
33,285 24,799 10,057
Depreciation and amortization 9,911 8,422 3,195
-------- --------- ----------
Total operating expenses 43,196 33,221 13,252
------- --------- ---------
Operating income 52,783 39,183 9,943
Other income (deductions):
Interest and dividends 740 459 152
Interest expense (7,477) (5,977) ( 1,231)
Loan fees and stock offering costs (360) (3,535) --
Other, net 6 370 647
---------- ----------- ------------
(7,091) (8,683) ( 432)
--------- ----------- -----------
Income before provision for income taxes
and minority interest 45,692 30,500 9,511
Minority interest in
consolidated income 25,041 19,543 1,421
Provision for income taxes 5,795 1,996 886
-------- ---------- -----------
Net income $14,856 $ 8,961 $ 7,204
========= ========= ==========
Basic earnings per share:
Net income $0.77 $0.51 $0.51
===== ===== =====
Weighted average shares
outstanding 19,275 17,633 14,226
====== ====== ======
Diluted earnings per share:
Net income $0.76 $0.49 $0.48
===== ===== =====
Weighted average shares
outstanding 19,461 18,638 15,350
====== ====== ======
See accompanying notes to consolidated financial statements.
A-3
A-3
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
December 31,
1997 1996
-------- --------
ASSETS
Current assets:
Cash $ 23,770 $ 20,096
Accounts receivable, less allowance
for doubtful accounts of $811 in 1997
and $335 in 1996 19,387 16,346
Other receivables 1,103 1,842
Deferred income taxes 1,506 948
Prepaid expenses and other current assets 1,776 841
--------- ----------
Total current assets 47,542 40,073
-------- --------
Property and equipment:
Equipment, furniture and fixtures 32,673 28,318
Leasehold improvements 531 113
--------- ---------
33,204 28,431
Less accumulated depreciation and
amortization (13,497) (8,089)
-------- --------
Property and equipment, net 19,707 20,342
-------- -------
Other investments 12,305 8,100
Goodwill, at cost, net of amortization 143,823 131,415
Other noncurrent assets 2,449 2,604
--------- ---------
$225,826 $202,534
======== ========
(continued)
See accompanying notes to consolidated financial statements.
A-4
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
($ in thousands)
December 31,
1997 1996
---------- -----------
LIABILITIES:
Current Liabilities:
Current portion of long-term debt $ 11,138 $ 10,522
Accounts payable 5,386 4,451
Accrued expenses 20,859 16,582
---------- ---------
Total current liabilities 37,383 31,555
Long-term debt, net of current portion 71,198 70,910
Deferred income taxes 5,809 4,907
----------- ----------
Total liabilities 114,390 107,372
Minority interest 19,372 18,735
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
1,000,000 shares authorized;
none outstanding -- --
Common stock, $.01 par value,
40,000,000 shares authorized;
19,306,267 issued in 1997 and
19,078,933 issued in 1996 193 191
Capital in excess of par value 84,050 83,271
Accumulated earnings (deficit) 7,821 ( 7,035)
----------- -----------
Total stockholders' equity 92,064 76,427
---------- ----------
$ 225,826 $202,534
========= ========
See accompanying notes to consolidated financial statements.
A-5
PRIME MEDICAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
($ 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, 1995 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
including tax benefit of
$130 on non-qualifying
exercises 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
Net income for the year -- -- -- 14,856 -- -- -- 14,856
Exercise of stock options
including tax benefit of
$438 on non-qualifying
exercises 227,334 2 779 -- -- -- -- 781
-------------- ---------- ---------- --------- --------- -------- ------------- ---------
Balance, December 31, 1997 19,306,267 $ 193 $ 84,050 $ 7,821 -- $ -- $ -- $ 92,064
============== ========== ========== ========= ========= ======== ============= =========
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,
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Fee and other revenue collected $90,924 $ 72,452 $ 21,640
Cash paid to employees, suppliers
of goods and others (31,685) (25,190) ( 9,094)
Interest received 739 459 157
Interest paid ( 7,521) ( 5,104) ( 1,275)
Taxes paid ( 764) ( 1,015) ( 530)
-------- --------- ---------
Net cash provided by operating activities 51,693 41,602 10,898
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of lithotripter entities (20,217) (66,742) (15,033)
Proceeds from sale of investment in American
Physicians Service Group, Inc. stock -- -- 2,753
Purchases of equipment and leasehold
improvements ( 4,546) ( 2,526) ( 473)
Deferred payments on lithotripter entities -- ( 3,387) --
Proceeds from sales of equipment 30 6 21
Investments 1,690 1,257 864
Other 94 ( 378) ( 6)
-------- --------- ---------
Net cash used by investing activities (22,949) (71,770) ( 11,874)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable & capital leases,
exclusive of interest (50,328) (15,351) ( 9,588)
Borrowings on notes payable 51,201 74,000 14,284
Distributions to minority interest (28,667) (13,440) ( 1,644)
Contributions by minority interest 2,381 -- --
Exercise of stock options 343 363 70
Other -- -- ( 366)
-------- --------- ---------
Net cash provided by (used in)
financing activities (25,070) 45,572 2,756
-------- --------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 3,674 15,404 1,780
Cash and cash equivalents, beginning of period 20,096 4,692 2,912
-------- --------- ---------
Cash and cash equivalents, end of period $23,770 $ 20,096 $ 4,692
======== ========= =========
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,
1997 1996 1995
---- ---- ----
Reconciliation of net income to net
cash provided by operating activities
Net income $ 14,856 $ 8,961 $ 7,204
Adjustments to reconcile net
income to cash provided by
operating activities:
Minority interest in consolidated income 25,041 19,543 1,421
Depreciation and amortization 9,911 8,422 3,195
Provision for uncollectible accounts 427 319 771
Equity in earnings of affiliates (2,342) ( 1,773) (1,234)
Gain on sale of investment in American
Physicians Service Group, Inc. stock -- -- ( 559)
Provision for deferred income taxes 68 974 193
Writeoff of loan fees -- 696 --
Other 1,162 -- (226)
Changes in operating assets and liabilities,
net of effect of purchase transactions:
Accounts receivable (3,156) 1,284 ( 541)
Other receivables 754 472 2,197
Other current assets (602) 529 (447)
Accounts payable 934 452 (1,224)
Accrued expenses 4,640 1,723 148
-------- --------- -----------
Total adjustments 36,837 32,641 3,694
-------- -------- ----------
Net cash provided by operating activities $ 51,693 $ 41,602 $ 10,898
======== ======== ========
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,
1997 1996 1995
---- ---- ----
SUPPLEMENTAL INFORMATION OF
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
In 1997, the Company acquired (1)
additional ownership interests in 10
partnerships (2) a 38.25% general
partnership interest in a lithotripter
operation (3) 100% of the stock of a
lithotripter operator and (4) 75% equity
interest in a trailer manufacturer.
These transactions are discussed
further in Notes C and D. The acquired assets
and liabilities were as follows:
Current assets decreased by $ 9,532
Noncurrent assets increased by 4,041
Goodwill increased by 15,836
Current liabilities increased by 1,343
Noncurrent liabilities increased 10,000
Minority interest decreased by 998
At December 31, 1997, the Company had accrued
distributions payable to minority interests. The
effect of this transaction was as follows:
Current liabilities increased by 8,655
Minority interest decreased by 8,655
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 $19,032
Noncurrent assets increased by 12,630
Goodwill increased by 82,297
Current liabilities increased by 13,110
Noncurrent liabilities increased by 69,712
Minority interest increased by 16,218
Stockholders' equity 14,919
See accompanying notes to consolidated financial statements.
A-9
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
($ in thousands)
Years Ended December 31,
1997 1996 1995
---- ---- ----
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
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
Stockholders' equity 7
See accompanying notes to consolidated financial statements.
A-10
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, prostatherapy, and cardiac rehabilitation centers.
References to the Company are to Prime and its controlled and
affiliated entities. The Company also manufactures trailers for major
medical equipment manufacturers and mobile medical service providers.
The Company operates lithotripters in 34 states.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of
Prime, its wholly-owned subsidiaries, entities more than 50% owned
and partnerships where Prime has control, even though its
ownership is less than 50%. Investments in entities in which the
Company's investment is less than 50% ownership, and the Company does
not control, are accounted for by the equity method if ownership is
between 20% - 50%, or by the cost method if ownership is less than 20%.
Through December 31, 1997, the Company had recognized $466,000 in
undistributed 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 control. All significant
intercompany accounts and transactions have been eliminated.
Cash Equivalents
The Company considers as cash equivalents demand deposits and all
short-term investments with an original maturity of three months or
less.
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.
A-11
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Intangible Assets
The Company records as goodwill the excess of the purchase price over
the fair value of the net assets associated with acquired businesses.
Goodwill is amortized over a period not to exceed forty years using the
straight-line basis. Accumulated amortization at December 31, 1997 and
1996 is $9,745,000 and $5,798,000, 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.
Revenue Recognition
Revenues generated from management services are recognized as they are
earned.
The Company's lithotripsy fee revenues are based upon fees charged for
services to hospitals, commercial insurance carriers, state and
federal health care agencies, and individuals, net of contractual fee
reductions.
Revenues for the manufacture of trailers are recognized using the
percentage of completion method.
At December 31, 1997, approximately 15% of accounts receivable relate
to units operating in Texas, 11% relate to units located in California,
11% relate to operations located in North Carolina and 9% relate to
units located in Louisiana.
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%
in 1995, reciprocal stockholdings were eliminated.
A-12
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
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.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows
is less than the carrying amount of the asset, a loss is recognized,
for the difference between the fair value and carrying value of the
asset.
Accounts Receivable
Accounts receivable are recorded based on revenues, less allowance for
doubtful accounts and contractual adjustments.
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 J).
A-13
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Debt Issuance Costs
The Company expenses debt issuance costs as incurred.
Estimates Used to Prepare Financial Statements
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles.
Those estimates and assumptions affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities,
and the reported revenues and expenses. Actual results could vary from
the estimates that were assumed in preparing the financial statements.
Reclassification
Certain reclassifications have been made to amounts presented in
previous years to be consistent with the 1997 presentation.
Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings per
Share", specifies new measurement, presentation and disclosure
requirements for earnings per share and is required to be applied
retroactively upon initial adoption. The Company has adopted SFAS No.
128 effective with the release of December 31, 1997 earnings data, and
accordingly, has restated herein all previously reported earnings per
share data. Basic earnings per share is based on the weighted average
shares outstanding without any dilutive effects considered. Diluted
earnings per share reflects dilution from all contingently issuable
shares, including options and convertible debt. A reconciliation of
such earnings per share data is as follows:
A-14
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
($ in thousands, except per share data)
1997
Per Share
Income Shares Amounts
Basic EPS
Net Income..................... $14,856 19,275 $ 0.77
========
Effect of dilutive securities:
Options . 186
-------- ---
Diluted EPS.................... $14,856 19,461 $ 0.76
======= ====== ========
1996
Per Share
Income Shares Amounts
Basic EPS
Net Income..................... $ 8,961 17,633 $ 0.51
========
Effect of dilutive securities:
Warrants....................... 400
Convertible Debt............... 101 224
Options . 381
-------- ---
Diluted EPS.................... $9,062 18,638 $ 0.49
====== ====== ========
1995
Per Share
Income Shares Amounts
Basic EPS
Net Income..................... $ 7,204 14,226 $ 0.51
========
Effect of dilutive securities:
Warrants....................... 402
Convertible Debt............... 97 209
Options . 513
-------- ---
Diluted EPS.................... $7,301 15,350 $ 0.48
====== ====== ========
Unexercised employee stock options to purchase 841,000 and 706,000
shares of Prime common stock as of December 31, 1997 and 1996,
respectively, were not included in the computations of diluted EPS
because the options exercise prices were greater than the average market
price of Prime's common stock during the respective periods.
A-15
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. INVESTMENTS
Tenn-Ga
In May 1997, the Company acquired a 38.25% general partner interest in a
partnership that provides mobile lithotripsy service in Tennessee and
Georgia. The purchase price was cash of $3,470,000. This investment is
accounted for using the equity method.
Southern California
Effective June 1, 1995, the Company acquired a 32.5% interest in a
limited liability company that operates a fixed site lithotripter near
Los Angeles, California. This investment is accounted for using the
equity method.
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. This investment is accounted for using the equity method.
American Physicians Service Group, Inc.
At December 31, 1997 and 1996, 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% of the outstanding common stock of the Company at December 31, 1997
and 1996. 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). Two of the Company's eight
board members are also on the board of APS.
The Company occupies approximately 5,600 square feet of office space
owned by APS. The Company also shares certain personnel with APS. The
monthly rent and personnel cost is approximately $8,000.
D. ACQUISITIONS
Effective September 1, 1997, the Company acquired a 75% equity interest
in AK Associates, LLC ("AK"), which provides installation, upgrade,
manufacturing, refurbishment and repair services for major medical
equipment manufacturers and mobile medical service providers. The
purchase price was $4,761,000 in cash with contingent consideration up
to another $1,050,000 being payable based upon certain performance
criteria being met by AK during 1998. This transaction was accounted
for using the purchase method of accounting.
A-16
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D. ACQUISITIONS, continued
Effective June 1, 1997, the Company acquired 100% of the stock of
Executive Medical Enterprises, Inc. ("EME"), which operated three
lithotripters in California, Oregon and Washington. The purchase price
was $1,339,000 in cash and potential contingent consideration based
upon the performance of these operations during 1998, 1999 and 2000.
The transaction was accounted for using the purchase method of
accounting.
In January 1997, the Company purchased additional ownership
interests in 10 partnerships, which the Company controls. The
purchase price for the additional ownership interests was $10,510,000
in cash. These transactions were accounted for using the purchase
method of accounting.
Unaudited proforma combined income data for the years ended December
31, 1997 and 1996 of the Company and the acquisitions
discussed above assuming all were effective January 1, 1996 is as
follows:
($ in thousands except per share data)
1997 1996
-------- -------
Total revenues $100,228 $81,143
Total expenses 84,941 71,080
-------- --------
Net income $ 15,287 $10,063
======== =======
Diluted earnings per share $0.79 $0.54
===== =====
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.
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 $1,291,000 in cash. This transaction was accounted for using
the purchase method of accounting.
Unaudited proforma combined income data for the years ended December
31, 1996 and 1995 of the Company and the acquisitions
discussed immediately above assuming both were effective January 1,
1995 is as follows:
A-17
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D. ACQUISITIONS, continued
($ in thousands except per share data)
1996 1995
------ -------
Total revenues $92,499 $82,934
Total expenses 82,684 74,409
------- -------
Net income $ 9,815 $ 8,525
======= ========
Diluted earnings per share $ 0.51 $ 0.50
======= ========
Effective October 1, 1995, the Company acquired 100% of the outstanding
stock of Sun Medical Technologies, Inc. ("Sun"). Sun operates eight
lithotripters serving 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 were convertible into 672,000 shares of the Company's common
stock. 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 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 $1,665,000, which could be converted into 326,000
shares of the Company's common stock. The noteholder elected to convert
the outstanding balance of such note into the Company's stock in 1996.
The acquisition was accounted for using the purchase method of
accounting.
A-18
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
E. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures About
Fair Value of Financial Instruments (Statement 107), requires that the
Company disclose estimated fair values for its financial instruments as
of December 31, 1997 and 1996. The carrying amounts and fair values of
the Company's financial instruments are as follows:
1997 1996
---------------------- -------------------------
Carrying Fair Carrying Fair
($ in Thousands) Amount Value Amount Value
------ ----- ------ -----
Financial assets:
Cash $23,770 $23,770 $20,096 $20,096
Accounts receivable 19,387 19,387 16,346 16,346
Other receivables 1,103 1,103 1,842 1,842
Investment in American
Physicians Service Group, Inc. 173 356 173 325
Financial liabilities:
Debt 82,336 82,336 81,432 81,432
Accounts payable 5,386 5,386 4,451 4,451
The following methods and assumptions were used by the Company
in estimating its fair value disclosures for financial instruments.
Cash
The carrying amounts for cash approximate fair value because they
mature in less than 90 days and do not present unanticipated credit
concerns.
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.
A-19
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
E. FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
Accounts Payable
The carrying value of the payables approximates fair value due to the
short-term nature of the obligation.
Limitations
Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial
instrument. Fair value estimates are based on existing on-balance
sheet financial instruments without attempting to estimate the value
of anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Other significant
assets and liabilities that are not considered financial assets or
liabilities include 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.
F. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31, December 31,
1997 1996
($ in Thousands)
Legal fees $ 634 $ 452
Accrued group insurance costs 228 164
Compensation and payroll
related expense 1,787 1,502
Taxes, other than income taxes 439 334
Accrued interest 984 1,028
Provision for closed centers 159 163
Income taxes payable 4,229 761
Dividends payable to minority interest 8,655 10,705
Deferred payments for acquisitions 1,339 --
Other 2,405 1,473
------- -------
$20,859 $16,582
======= =======
A-20
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. INDEBTEDNESS
Long-term debt, other than bank debt, are as follows:
($ in thousands)
Interest December 31,
Rates Maturities 1997 1996
-------- ---------- ------- ------
None 2000 - 2006 $ 161 $ 241
6% -- -- 984
11.5% 1998 6 12
------- -------
167 1,237
Less current portion of
long-term debt 6 1,100
------- ------
$ 161 $ 137
======= ======
The non-interest bearing notes totaling $161,000 are unsecured. The 11.5%
note is secured by computer equipment.
Long-term bank notes payable are as follows:
($ in thousands)
Interest December 31,
Rates Maturities 1997 1996
-------- ---------- ------- ------
60-day LIBOR
plus 2 1/2% 1998-2003 $79,000 $76,750
Prime 1998-2001 2,969 3,245
Prime + 1% 1998 200 200
------- -------
82,169 80,195
Less current portion of
long-term bank debt 11,132 9,422
------- -------
$71,037 $70,773
======= =======
During 1997, the Company increased its bank facility with Bank Boston
from $90 million to $135 million. The facility consists of three separate
loans: (1) a $45 million term loan bearing an interest rate of LIBOR +2
to 3%, payable quarterly, with quarterly principal payments, maturing in
April 2001, (2) a $40 million term loan bearing an interest rate of LIBOR
+2 to 3%, payable quarterly, with annual principal payments, maturing in
April 2003, and (3) a $50 million revolving credit facility bearing
interest of LIBOR +2 to 3%, maturing in April 2001. At December 31, 1997,
the entire $50 million revolving credit facility was undrawn. At December
31, 1997,
A-21
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. INDEBTEDNESS, continued
interest on the Company's bank facility was 8.6%. The bank facility is
collateralized by the assets of the Company, including the stock of its
subsidiaries. (See Note N)
The stated principal repayments for all indebtedness as of December 31,
1997 are payable as follows:
($ in thousands)
1998 $11,138
1999 13,134
2000 13,706
2001 7,426
2002 800
Thereafter 36,132
H. COSTS OF SERVICES AND GENERAL AND ADMINISTRATIVE EXPENSES
Costs of services and general and administrative expenses consist of
the following:
Years Ended December 31,
1997 1996 1995
---------- --------- ---------
($ in thousands)
Salaries, wages and benefits $15,779 $11,953 $ 4,027
Other costs of services 7,569 6,878 3,412
General and administrative 3,595 1,941 718
Legal and professional 2,064 1,315 659
Manufacturing costs 1,394 -- --
Other 2,884 2,712 1,241
--------- ------- -------
$33,285 $24,799 $10,057
========= ======= =======
I. COMMITMENTS AND CONTINGENCIES
At December 31, 1997, minimum annual rental commitments under
non-cancelable operating leases for equipment and office space, which
may contain renewal and escalation clauses through 2001, are:
($ in thousands)
1998 $ 439
1999 365
2000 309
2001 2
A-22
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. COMMITMENTS AND CONTINGENCIES
Rent expense for equipment and office space for the years ended
December 31, 1997, 1996 and 1995 are $568,000, $360,000, and
$239,000, respectively.
The Company sponsors a partially, self-insured group medical
insurance plan. The plan is designed to provide a specified level of
coverage, with stop-loss coverage provided by a commercial insurer.
The Company's maximum claim exposure is limited to $35,000 per person
per policy year. At December 31, 1997, the Company had 172 employees
enrolled in the plan. The plan provides non-contributory coverage for
employees and contributory coverage for dependents. The Company's
contributions totaled $351,000 in 1997, $224,000 in 1996, and
$150,000 in 1995.
J. COMMON STOCK OPTIONS
1993 Stock Option Plan:
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25")
and related Interpretations in accounting for its employee stock
options. The Company provides proforma disclosures of net income and
earnings per share as if the fair-value based method prescribed by
Statement 123 had been applied in measuring compensation expense.
Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
On October 12, 1993, the Company adopted the 1993 Stock Option Plan
which authorizes the grant of up to 2,000,000 shares to certain key
employees, directors, and consultants and advisors to the Company.
Options granted under the 1993 Stock Option Plan shall terminate
no later than ten years from the date the option is granted, unless
the option terminates sooner by reason of termination of employment,
disability or death.
In June 1997, the Company adopted an amendment to the 1993 Stock
Option Plan that raised the number of shares to be issued by 500,000.
A summary of the Company's stock option activity, and related
information for the years ended December 31, follows:
A-23
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. COMMON STOCK OPTIONS, continued
1997 1996 1995
--------------------------- -------------------------- --------------------
Options Weighted-Average Options Weighted-Average Options Weighted-Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
Outstanding - beginning
of year 1,228 $8.99 975 $1.31 1,055 $0.98
Granted 428 11.94 730 13.87 55 5.58
Exercised (227) 1.51 (477) 0.52 (135) 0.52
Forfeited (35) 12.19 (--) -- (--) --
------ -------
Outstanding-end of year 1,394 $11.04 1,228 $8.99 975 $1.31
====== ======= =======
Exercisable at end of year 466 $ 8.21 422 $2.03 816 $0.75
Weighted-average fair
value of options granted
during the year $5.21 -- $6.13 -- $2.07 --
The following table summarizes the Company's outstanding options at
December 31, 1997:
Outstanding options Exercisable options
------------------------- ----------------------
Average Weighted Weighted
Remaining Average Average
Options Contractual Exercise Options Exercise
Range of Exercise Prices (000) Life Price (000) Price
------------------------ ------ ----------- --------- ------- --------
$ 0.25 - $ 4.12 223 2.0 years $ 1.39 195 $ 1.10
$ 4.13 - $ 8.25 37 3.9 years $ 5.75 10 $ 5.99
$ 8.26 - $12.37 292 2.3 years $ 10.55 5 $ 8.94
$12.38 - $16.50 842 3.9 years $ 14.04 256 $13.72
------ -------
Total 1,394 466
======= =======
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 option pricing
model with the following weighted-average assumptions for 1995, 1996,
and 1997
A-24
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. COMMON STOCK OPTIONS, continued
respectively: risk-free interest rates of 5.7%, 6.2% and 6.2%;
dividend yields of 0%, 0% and 0%; volatility factors of the expected
market price of the Company's common stock of .38, .53 and .46; 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.
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):
1997 1996 1995
------- ------- ------
Pro forma net income $12,448 $ 8,109 $7,197
Pro forma earnings
per share
Basic $0.65 $0.46 $0.51
Diluted $0.64 $0.44 $0.47
Statement 123 calls for a prospective application of compensation
relating to the grant of stock options and, consequently pro-forma
financial information may not be indicative of future amounts until
the new rules are applied to all outstanding nonvested awards.
K. OTHER INCOME (EXPENSE)
Included in other, net in the consolidated statements of operations are
the following components:
($ in thousands)
Years Ended December 31,
1997 1996 1995
Collections on amounts ----- ----- -----
previously written off $ -- $ 192 --
Gain on sale of investment
in American Physicians Service
Group, Inc. Stock -- -- 559
Equipment rental -- 58 --
Other income 6 120 88
----- ----- -----
Other, net $ 6 $ 370 $ 647
===== ===== =====
A-25
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L. INCOME TAXES
The Company files a consolidated tax return with its wholly owned
subsidiaries. A substantial portion of consolidated income is not
taxed at the corporate level as it represents income from partnerships.
Accordingly, only the portion of income from these partnerships
attributable to the Company's ownership interests is included in
taxable income in the consolidated tax return and financial statements.
The minority interest portion of this income is the responsibility of
the individual partners.
Income tax expense consists of the following:
($ in thousands)
Years ended December 31,
----------------------------
1997 1996 1995
------ ------ ------
Federal
Current $4,369 $ 97 $ 110
Deferred 68 974 193
State 1,358 925 583
------ ------ -----
$5,795 $1,996 $ 886
====== ====== =====
A reconciliation of expected income tax (computed by applying the
United States statutory income tax rate of 35% for 1997 and 34% for
1996 and 1995, to earnings before income taxes) to total income
tax expense in the accompanying consolidated statements of income
follows:
($ in thousands) Years ended December 31,
------------------------
1997 1996 1995
------ ------ ------
Expected federal income tax $7,228 $3,725 $2,751
Change in beginning of year
valuation allowance (2,399) (3,093) (2,091)
State taxes 1,358 925 583
Other ( 392) 439 ( 357)
------ ------ ------
$5,795 $1,996 $ 886
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below.
($ in thousands)
1997 1996
----- ------
Deferred tax assets:
Accounts receivable,
principally due to allowance
for doubtful accounts $ 266 $ 114
AMT credit carryforwards -- 249
Net operating loss carryforwards -- 944
Investment tax credit carryforwards -- 1,200
Accrued expenses deductible
for tax purposes when paid 1,240 834
Property and equipment,
principally due to
differences in depreciation -- 656
Other 932 829
----- ------
Total gross deferred tax assets 2,438 4,826
Less valuation allowance -- (2,399)
----- ------
Net deferred tax assets 2,438 2,427
----- ------
Deferred tax liabilities:
Property and equipment,
principally due to
differences in depreciation ( 583) --
Investments in affiliated
entities, principally due to
undistributed income (2,807) (2,860)
Intangible assets, principally
due to differences in
amortization periods for tax
purposes (2,419) (1,872)
IRS Section 481(A) adjustment
for partnerships acquired ( -- ) ( 175)
------- ------
A-26
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L. INCOME TAXES, continued
1997 1996
Total gross deferred tax ------- -------
liabilities ( 5,809) ( 4,907)
------- -------
Net deferred tax liability ($3,371) ($2,480)
======= =======
The valuation allowance for deferred tax assets as of December 31, 1997
was $-0- representing a decrease of $2,399,000, primarily due to
utilization of net operating loss carryforwards. The valuation
allowance for deferred tax assets as of January 1, 1996 was $5,492,000
with the change in the total valuation allowance for the year ended
December 31, 1996 being a decrease of $3,093,000. The Company believed
that the valuation allowance at December 31, 1996 was necessary due to
uncertainties regarding the Company's use of the net operating loss
carryforwards and tax credit carryforwards which could have become
limited in the event that the Company experienced a greater than 50%
stock ownership change in a three-year period (as defined in the
Internal Revenue Service regulations).
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deductible temporary
differences reverse, management believes it is more likely than not the
Company will realize the benefits of these deductible differences, net
of the existing valuation allowances.
M. RELATED PARTY TRANSACTIONS
See Notes B and C for additional related party transactions involving
investments in affiliates.
N. SUBSEQUENT EVENT
On March 27, 1998, the Company completed an offering of $100 million of
senior subordinated notes due 2008 (the "Notes") to qualified
institutional buyers. The net proceeds from the offering of
approximately $96.0 million will be used to repay all outstanding
indebtedness under the Company's bank facility, with the remainder to
be used for general corporate purposes, including acquisitions.
In connection herewith, the Company will take a charge to earnings of
approximately $3.8 million for debt issuance costs associated with the
Notes. (See Note B)
A-27