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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, 1998
[ ] 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 30, 1999: $130,334,000
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 30, 1999
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Common Stock, $.01 par value 17,234,267
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's definitive proxy material for the
1999 annual meeting of shareholders are incorporated by reference into Part III
of the Form 10-K.
1
PRIME MEDICAL SERVICES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
PART I
ITEM 1. BUSINESS.
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Prime Medical Services, Inc., a Delaware corporation ("Prime" or the
"Company"), is the largest provider of lithotripsy services in the United
States. Lithotripsy is a non-invasive procedure for the treatment of kidney
stones, typically performed on an outpatient basis, that eliminates the need for
lengthy hospital stays and extensive recovery periods associated with surgery.
The Company has 62 lithotripters of which 55 are mobile and seven are fixed
site. The Company's lithotripters performed approximately 37,000 procedures in
the United States in 1998 through a 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 150,000 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 1998, the Company completed 12 acquisitions involving 57
lithotripter operations and internally developed five new operations. Since
1992, the Company has substantially divested its original non-lithotripsy
businesses.
The Company has two reportable segments, the medical segment, which
includes lithotripsy and prostatherapy services, and cardiac rehabilitation
services, and manufacturing segment. See Note O to the consolidated financial
statements for segment disclosures.
Lithotripsy Industry Overview
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Kidney stones develop from crystals made up primarily of calcium which
separate from urine and build up on the inner surfaces of the kidney. The exact
cause of kidney stone formation is unclear, and there is no known preventative
cure in the vast majority of cases. Approximately 25% of all kidney stones do
not pass spontaneously and therefore require medical or surgical treatment.
Kidney stone treatments used by urologists include lithotripsy, drug therapy,
endoscopic extraction or open surgery. While the nature and location of a kidney
stone impacts the choice of treatment, the Company believes the majority of all
kidney stones that require treatment are treated with lithotripsy because it is
non-invasive, typically requires no general anesthesia, and rarely requires
hospital stays. After fragmentation by lithotripsy, the resulting kidney stone
fragments pass out of the body naturally. Recovery from the procedure is usually
a matter of hours.
Kidney stone disease is most prevalent in the southern United States. Men
are afflicted with kidney stones more than twice as frequently as women, with
the highest incidence occurring in men 45 to 64 years of age.
1
Kidney Stone Treatment Methods
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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
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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
41 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.
2
Other Lines of Business:
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Medical segment
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 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 received approximately 1% of its
revenues from thermotherapy operations in 1998.
Prime Cardiac Rehabilitation Services, Inc. ("Prime Cardiac"), a
wholly-owned subsidiary of the Company, provides non-medical management services
for two 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, 1998.
Manufacturing segment
In September 1997, the Company, through its acquisition of a 75% interest
in AK Associates, L.L.C. ("AK"), began providing manufacturing services and
installation, upgrade, refurbishment and repair of major medical equipment for
mobile medical services providers. The Company paid $4.8 million for this
interest, plus an earn-out of $1.1 million, which was paid in February 1999. The
remaining 25% of AK is owned by certain members of AK management. The Company
received approximately 11% of its revenues from the manufacturing segment in
1998.
Potential Liabilities-Insurance
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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
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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 44 of the Company's 62
lithotripsy operations, and the two Company affiliates engaged in thermotherapy
services have urologist-investors (the Company lithotripsy and thermotherapy
affiliates with physician-investors are referred to herein as the "Company
Physician Entities").
Many key terms in Stark II are not adequately defined and the statute is
silent regarding its application to vendors, such as the Company Physician
Entities, contracting ''under arrangements'' with hospitals for the provision of
outpatient services. Prior to the publication of the Proposed Stark Regulations
described below, the Company interpreted Stark II consistently with the informal
view of the General Counsel for Health and Human Services, and concluded that
the statute did not apply to its method of conducting business. Based upon a
reasonable interpretation of Stark II, by referring
4
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 and senior subordinated notes, 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 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
5
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.
A number of proposals for healthcare reform have been made in recent years,
some of which have included radical changes in the healthcare system. Healthcare
reform could result in material changes in the financing and regulation of the
healthcare business, and the Company is unable to predict the effect of such
changes on its future operations. It is uncertain what legislation on healthcare
reform, if any, will ultimately be implemented or whether other changes in the
administration or interpretation of governmental healthcare programs will occur.
There can be no assurance that future healthcare legislation or other changes in
the administration or interpretation of governmental healthcare programs will
not have a material adverse effect on the results of operations of the Company.
6
Equipment
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The Company purchases its lithotripter equipment and maintenance is
generally provided pursuant to service contracts with the manufacturer or other
service companies. The cost of a new lithotripter ranges from $400,000 to
$1,000,000. 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
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As of March 15, 1999, the Company employed approximately 310 full-time
employees and approximately 38 part-time employees.
Competition
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The market to provide lithotripsy services is highly fragmented and
competitive. The Company competes with other private facilities and medical
centers that offer lithotripsy services and with hospitals, clinics and
individual medical practitioners that offer conventional medical treatment for
kidney stones. Certain of the Company's current and potential competitors have
substantially greater financial resources than the Company and may compete with
the Company for acquisitions and development of operations in markets targeted
by the Company. A decrease in the purchase price of lithotripters as a result of
the development of less expensive lithotripsy equipment could decrease the
Company's competitive advantage. Most of the Company's lithotripsy services
agreements have matured past their initial terms and are now in annual renewal
terms or are on a month-to-month basis. 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.
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The Company's principal executive office is located in Austin, Texas in an
office building owned by American Physicians Service Group, Inc. ("APS"). The
Company pays APS approximately $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 1999.
The Company leases approximately 11,000 square feet of office space in
Fayetteville, NC under two leases expiring in 2001. The current monthly lease
amount is approximately $10,000.
The Company's manufacturing subsidiary owns a building containing
approximately 78,000 square feet of manufacturing and office space in Harvey,
Illinois.
ITEM 3. LEGAL PROCEEDINGS.
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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
7
a material adverse effect on its business, financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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NONE.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCK HOLDER MATTERS.
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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, 1998 and 1997 (NASDAQ Symbol "PMSI").
Year Ended December 31, 1998 High Low
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First Quarter $13.38 $ 9.88
Second Quarter 12.06 8.62
Third Quarter 9.06 7.00
Fourth Quarter 8.00 6.88
Year Ended December 31, 1997 High Low
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First Quarter $12.38 $ 9.75
Second Quarter 11.81 8.94
Third Quarter 14.75 10.25
Fourth Quarter 14.69 11.75
On March 15, 1999, the Company had approximately 700 holders of record of
its common stock.
The Company has not declared any cash dividends on its common stock during
the last two years and has no present intention of declaring any cash dividends
in the foreseeable future. In addition, the Company is not permitted by its
current credit facility and terms of senior subordinated notes to declare or
make any payments for dividends. It is the present policy of the Board of
Directors to retain all earnings to provide funds for the growth of the Company.
The declaration and payment of dividends in the future will be determined by the
Board of Directors based upon the Company's earnings, financial condition,
capital requirements, loan covenants and such other factors as the Board of
Directors may deem relevant.
8
ITEM 6. SELECTED FINANCIAL DATA.
($ in thousands, except per share data)
Years Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Revenues:
Lithotripsy $ 92,053 $ 93,113 $ 71,602 $ 22,153 $ 14,843
Other 12,583 2,866 802 1,042 9,925
Total $104,636 $ 95,979 $ 72,404 $ 23,195 $ 24,768
Income:
Net income $ 10,794 $ 14,856 $ 8,961 $ 7,204 $ 4,504
Diluted earnings per share:
Net income $ 0.57 $ 0.76 $ 0.49 $ 0.48 $ 0.31
Dividends per share None None None None None
Total assets $241,119 $225,826 $202,534 $ 77,627 $ 53,861
Long-term obligations $100,987 $ 71,198 $ 70,910 $ 22,323 $ 12,734
9
Quarterly Data
($ in thousands, except share amounts)
3/31 6/30 9/30 12/31
---- ---- ---- -----
1998
Revenues $22,795 $25,029 $28,936 $27,876
Net income (loss) ( 1,168) 3,517 3,941 4,505
Per share amounts (basic):
Net income (loss) (0.06) 0.18 0.21 0.25
Weighted average shares
outstanding 19,313 19,088 18,437 17,781
Per share amounts (diluted):
Net income (loss) (0.06) 0.18 0.21 0.25
Weighted average shares
outstanding 19,313 19,223 18,561 17,890
1997
Revenues $20,899 $23,220 $26,361 $25,509
Net income 2,876 3,670 4,520 3,790
Per share amounts (basic):
Net income .15 .19 .23 .20
Weighted average shares
outstanding 19,218 19,277 19,299 19,306
Per share amounts (diluted):
Net income .15 .19 .23 .19
Weighted average shares
outstanding 19,395 19,435 19,483 19,496
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 expectations, hopes,
intentions or strategies regarding the future. Readers should not place undue
reliance on forward-looking statements. All forward-looking statements included
in this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements. It is important to note that the Company's actual results could
differ materially from those in such forward-looking statements. In addition to
any risks and uncertainties specifically identified in the text surrounding such
forward- looking statements, the reader should consult the Company's reports on
Form 10-Q and other filings under the Securities Act of 1933 and the Securities
Exchange Act of 1934, for factors that could cause actual results to differ
materially from those presented.
The forward-looking statements included herein are necessarily based on
various assumptions and estimates and are inherently subject to various risks
and uncertainties, including risks and uncertainties relating to the possible
invalidity of the underlying assumptions and estimates and possible changes or
developments in social, economic, business, industry, market, legal and
regulatory circumstances and conditions and actions taken or omitted to be taken
by third parties, including customers, suppliers, business partners and
competitors and legislative, judicial and other governmental authorities and
officials. Assumptions related to the foregoing involve judgements with respect
to, among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Any of such
assumptions could be inaccurate and therefore, there can be no assurance that
the forward-looking statements included in this Report on Form 10-K
10
will prove to be accurate.
Year ended December 31, 1998 compared to the year ended December 31, 1997
- - -------------------------------------------------------------------------
Total revenues increased $8,657,000 (9%) as compared to the same period in
1997. Revenues from lithotripter operations decreased by $1,060,000 (1%)
primarily due to a decline in average reimbursement per procedure. Manufacturing
revenue increased by $8,708,000 (369%) due to the fact that the 1998 revenues
were for the full year while 1997 revenues were for four months of operations.
The Company acquired the trailer manufacturer in September 1997. Prostatherapy
revenues rose $1,207,000 due to the fact that 1998 revenues were for the full
year for one entity and a partial year for another entity, while 1997 revenues
included one entity which began operations in the fourth quarter. Revenues from
cardiac and other decreased $198,000 primarily due to four discontinued/sold
cardiac centers.
Costs and expenses (excluding depreciation and amortization) increased from
35% to 38% of revenues and increased $6,188,000 (19%) in absolute terms,
compared to the same period in 1997. Cost of services associated with
lithotripter operations decreased $2,707,000 (10%) in absolute terms and from
27% to 25% of lithotripter revenues. Cost of services associated with
manufacturing increased $7,461,000 (428%), due to full year of operations in
1998 while 1997 costs represent four months of operations. Cost of services
associated with prostatherapy increased $803,000 due to a full year of
operations for the first time in 1998. Cost of services associated with cardiac
centers decreased $229,000 (48%) primarily due to four discontinued/sold cardiac
centers. Corporate expenses decreased from 6% to 5% of revenues as the Company
was able to successfully grow without proportionately adding overhead. Corporate
expenses decreased $757,000 (13%) primarily due to a consolidation of corporate
functions.
Other deductions increased $4,635,000 primarily due to (i) the increase of
$4,618,000 for the writeoff in fees paid to lenders to obtain financing, and
(ii) an increase in interest expense of $992,000 due to an increase in new
borrowings in March 1998 related to the $100 million senior subordinated notes
offering. The increased deductions were offset partially by an increase in
interest income of $677,000.
Minority interest in consolidated income decreased $251,000 primarily due
to the decline in revenue discussed above in certain of the Company's
subsidiaries. Earnings before interest, taxes, depreciation, and amortization
(EBITDA) attributable to minority interests was $28,077,000 for the year ended
December 31, 1998 compared to $28,591,000 for the same period in 1997. EBITDA is
not intended to represent net income or cash flows from operating activities in
accordance with generally accepted accounting principles and should not be
considered a measure of the Company's profitability or liquidity.
Income tax expense for the year ended December 31, 1998 increased
$1,582,000, despite the 12% reduction in pretax earnings, compared to the same
period in 1997 as the 1997 provision included the effect of a reduction in the
Company's valuation allowance related to net operating loss carryforwards.
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 (30%) 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
11
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 on September 1, 1997. Revenues from
cardiac centers decreased $294,000 (37%) 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 limited partners' 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.
Liquidity and Capital Resources
- - -------------------------------
Cash was $40,146,000 and $23,770,000 at December 31, 1998 and 1997,
respectively. Cash provided by operations was $45,551,000 for the year ended
December 31, 1998 and $51,693,000 for the year ended December 31, 1997. 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, 1998 and 1997, the Company's
subsidiaries distributed cash of approximately $25,799,000 and $28,667,000,
respectively, to minority interest holders.
Cash used by investing activities for the year ended December 31, 1998 was
$2,142,000 primarily due to $5,213,000 for the purchase of equipment and
leasehold improvements, partially offset by $2,532,000 in distributions from
investments. Cash used by investing activities for the year ended December 31,
1997 was $22,949,000 primarily due to expenditures of $20,217,000 associated
with acquisitions and $4,546,000 for the purchase of equipment and leasehold
improvements. This was partially offset by $1,690,000 in distributions from
investments.
Cash used in financing activities for the year ended December 31, 1998 was
$27,033,000,
12
primarily due to distributions to minority interests of $25,799,000, $16,439,000
of purchases of treasury stock and debt issuance costs of $4,417,000, offset by
net borrowings of $19,541,000. Cash used in financing activities for the year
ended December 31, 1997 was $25,070,000, which was primarily due to
distributions to minority interests of $28,667,000 offset by net borrowings of
$873,000 and contributions received from holders of minority interests related
to new partnership formations totaling $2,381,000.
The Company's existing credit facility is comprised of a revolving line of
credit. The revolving line of credit has a borrowing limit of $100 million, none
of which was drawn at December 31, 1998 and March 15, 1999.
On March 27, 1998, the Company completed an offering of $100 million of
senior subordinated notes due 2008 (the "Notes") to qualified institutional
buyers. The net proceeds from the offering of approximately $96 million was used
to repay all outstanding indebtedness under the Company's bank facility, with
the remainder to be used for general corporate purposes, including acquisitions.
In connection therewith, the Company recorded a charge to earnings of
approximately $4.4 million for debt issuance costs associated with the Notes.
The Notes bear interest at 8.75% and interest is payable semi-annually on April
1st and October 1st. Principal is due April 2008.
The Company 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.
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.
During 1998, the Company announced a stock repurchase program of up to
$25.0 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 has purchased 2,120,000 shares of stock for a total
of $18,605,000 as of March 30, 1999.
13
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 significantly affected by inflation
because the Company is not required to make large investments in fixed assets.
However, the rate of inflation will affect certain of the Company's expenses,
such as employee compensation and benefits.
Year 2000 Compliance
- - --------------------
The "Year 2000 " issue refers to the phenomenon whereby computer programs,
having been written using two digits rather than four to define the applicable
year, may erroneously recognize a date using "00" as the year 1900 rather than
the year 2000. This error could potentially result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in similar
normal business activities.
The Company formed a Year 2000 Committee in mid 1998. The Committee was
charged with examining (1) internal hardware and software systems; (2) medical
equipment (3) physical facilities;
14
and (4) outside suppliers, as these items relate to potential problems that
could be caused by the inability to process dates beyond December 31, 1999.
The Committee divided its task into four parts - assessment, remediation
planning, implementation and testing and contingency planning. Assessment and
remediation planning have been substantially completed for all four phases of
the project. Implementation and testing and contingency planning are discussed
below.
Internal hardware and software systems: The Company has completed
substantially all of the needed upgrades to its hardware and software systems.
The remaining hardware and software upgrades/replacements are expected to be
complete by June 30, 1999.
Medical Equipment: A review of the Company's lithotripters has determined
that their operation is not affected directly by the Year 2000 issue. The
Company is currently reviewing the miscellaneous ancillary medical equipment to
determine compliance and expects to be completed by September 30, 1999.
Physical facilities: The Committee has evaluated its non-computer equipment
and has determined that, except for its telephone system, there are no devices
whose failure would materially affect the ability to carry out the business of
the Company. A compliant telephone system is expected to be installed by June
30, 1999. The outside managers of the Company's office buildings have reported
that all aspects of the physical facilities - elevators, fire and security
systems, etc. are compliant. Their further inquiry of those supplying public
utilities have produced assurances of best efforts but no guarantee of
performance.
Outside suppliers: The Company is currently inquiring about the state of
Year 2000 readiness of those outside suppliers who were determined to be
critical to the Company's ability to carry out its business. This survey is
expected to be complete by June 30, 1999.
Contingency planning: The Company cannot be certain that it has identified
and will be successful in bringing into compliance all Year 2000 issues within
its control. It can be even less certain of critical services being supplied by
third parties beyond its control. Upon completion of the implementation and
testing phases of the plan, the Company will formalize plans for carrying on its
business in the event of unanticipated Year 2000-related failures. Presently,
the Company believes that the most reasonably likely worst case scenario would
be a failure of relatively short duration of basic third party services such as
the power grid. With such a failure the Company's planning will be directed
toward a temporary suspension of operations followed by plans for resumption and
catch up operations. Due to the magnitude of the uncertainties related to Year
2000 issues, the Company is unable to fully assess the consequences of Year 2000
failures and, consequently, there could be a material adverse effect on the
Company's results of operations, financial position and cash flows.
To date, the Company has not experienced significant costs associated with
the Year 2000 issue and does not expect significant costs to be incurred in
order to correct the Year 2000 issue. The Company is reviewing its current
billing and collecting software to determine if the Company will replace it
prior to the Year 2000. If the system is replaced, it is considered part of the
ongoing operations of the Company and not related to the Year 2000 issue.
15
ITEM 7.A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- - -------- -----------------------------------------------------------
Interest Rate Risk:
The Company has long-term debt (including current portion) totaling
$101,877,000, of which $100 million has a fixed rate of interest of 8.75% and
$162,000 does not bear any interest. The remaining $1,715,000 bears interest at
the prime rate. The Company is exposed to some market risk due to the floating
interest rate on the $1,715,000. The Company makes monthly or quarterly payments
of principal and interest on the $1,715,000. A 1.50% rise in interest rates
would result in a $26,000 annual increase in interest expense on this existing
principal balance.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- - ------- --------------------------------------------
The information required by this item is contained in Appendix A attached
hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- - ------- -------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
------------------------------------
NONE.
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 1999 annual meeting
of shareholders, except for the information regarding executive officers of the
Company which is provided below. The information required by this item contained
in such definitive proxy material is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT.
As of March 15, 1999, the executive officers of the Company are as follows:
Name Age Position
Kenneth S. Shifrin 49 Chairman of the Board
Joseph Jenkins, M.D., J.D. 51 President, Chief Executive Officer
and Director
Stan Johnson 45 Vice President
Cheryl L. Williams 47 Chief Financial Officer, Vice
President-Finance, and Secretary
16
The foregoing does not include positions held in the Company's
subsidiaries. Officers are elected for annual periods. There are no family
relationships between any of the executive officers and/or directors of the
Company.
Mr. Shifrin has been Chairman of the Board and a director of the Company
since October 1989. In addition, Mr. Shifrin has served in various capacities
with APS since February 1985, and is currently Chairman of the Board and Chief
Executive Officer of APS. Mr. Shifrin is a member of the Young Presidents'
Organization.
Dr. Jenkins has been President and Chief Executive Officer and a director
of the Company since April 1996. From May 1990 until December 1991, Dr. Jenkins
was a Vice President of Lithotripters, Inc. Since January 1992, Dr. Jenkins has
been President of Lithotripters, Inc. Dr. Jenkins is a board certified urologist
and is a founding member, a past president and currently a director of the
American Lithotripsy Society.
Mr. 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.
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 1999 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 1999 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 1999 annual meeting
of shareholders, which information is incorporated herein by reference.
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- - -------- -----------------------------------------------------------------
(a) 1. Financial Statements.
The information required by this item is contained in Appendix A attached
hereto.
2. Financial Statement Schedules.
None.
(b) Reports on Form 8-K.
None.
(c) Exhibits. (1)
3.1 Certificate of Incorporation of the Company. (2)
3.2 Bylaws of the Company. (2)
4.1 Specimen of Common Stock Certificate. (2)
10.1* Prime Medical Services, Inc. 1993 Stock Option Plan. (3)
10.2* First Amendment to the Prime Medical Services, Inc.
1993 Stock Option Plan. (12)
10.3* Second Amendment to the Prime Medical Services, Inc.
1993 Stock Option Plan. (12)
10.4* Third Amendment to the Prime Medical Services, Inc.
1993 Stock Option Plan. (13)
10.5 Rights Agreement dated October 18, 1993 between the
Company and American Stock Transfer and Trust Company. (3)
10.6 Form of Indemnification Agreement dated October 11, 1993
between the Company and certain of its officers and
directors. (3)
10.7 Partnership Agreement of Metro Atlanta Stonebusters, G.P.
(5)
10.8 Management Agreement dated July 28, 1994 between the
Alabama Renal Stone Institute, Inc. and Alabama Kidney
Stone Foundation, Inc. (6)
18
10.9 Asset Purchase Agreement, dated August 30, 1994, between
Prime Lithotripter Operations, Inc. and Alabama
Lithotripsy Joint Venture. (7)
10.10 Asset Purchase Agreement, dated August 30, 1994, between
Prime Lithotripter Operations, Inc. and Baptist Medical
Center - Montclair. (7)
10.11 Promissory Note, dated August 30, 1994, issued by Prime
Lithotripter Operations, Inc. to Baptist Medical Center -
Montclair. (7)
10.12 Management Agreement, dated August 30, 1994, between Prime
Lithotripter Operations, Inc. and Alabama Lithotripsy
Associates, Inc. (7)
10.13 Security Agreement dated August 30, 1994, between Prime
Lithotripter Operations, Inc. and Baptist Medical Center -
Montclair. (7)
10.14 Amended and Restated Joint Venture Agreement dated April
1989, betweenPrime Diagnostic Imaging Services, Inc. and
The Shasta Diagnostic Imaging Medical Group. (4)
10.15 Not used
10.16 Not used
10.17 Not used
10.18 Not used
10.19 Third Amended and Restated Loan Agreement dated April 20,
1998 between Prime Medical Services, Inc., Bank Boston,
N.A., NationsBank of Texas,N.A., and Nationsbanc
Montgomery Securities LLC, as agent. (13)
10.20 Revolving Credit Note, dated April 20, 1998 in the amount
of $20,000,000.00 issued by the Company to NationsBank of
Texas, N.A., as agent. (13)
10.21 Revolving Credit Note, dated April 20, 1998 in the amount
of $20,000,000.00 issued by the Company to The First
National Bank of Boston, as agent. (13)
10.22 Revolving Credit Note, dated April 20, 1998 in the amount
of $10,000,000.00 issued by the Company to Bank One,
Texas, N.A., as agent. (13)
10.23 Revolving Credit Note, dated April 20, 1998 in the amount
of $10,000,000.00 issued by the Company to Imperial Bank,
as agent. (13)
10.24 Revolving Credit Note, dated April 20, 1998 in the amount
of $10,000,000.00 issued by the Company to Credit Lyonnais
New York Branch, as agent. (13)
19
10.25 Revolving Credit Note, dated April 20, 1998 in the amount
of $10,000,000.00 issued by the Company to Fleet National
Bank, as agent. (13)
10.26 Revolving Credit Note, dated April 20, 1998 in the amount
of $10,000,000.00 issued by the Company to LaSalle
National Bank, as agent.(13)
10.27 Revolving Credit Note, dated April 20, 1998 in the amount
of $10,000,000.00 issued by the Company to Cooperatieve
Centrale Raiffeisen - Boeren Leenbank B.A. "Rabobank
Nederland", as agent. (13)
10.28 Operating Agreement for Southern California Stone Center,
L.L.C. (9)
10.29 Lease Agreement dated July 1, 1995 between Kidney Stone
Center of South Florida, L.C. and Madorsky and Pinon
Kidney Stone Center of South Florida, P.A. (9)
10.30* Employment Agreement dated October 8, 1997 between Prime
Medical Services, Inc. and Robert Bachman. (12)
10.31* Employment Agreement dated October 8, 1997 between Prime
Medical Services, Inc. and Larry Sodomire. (12)
10.32 Partnership Interest Purchase Agreement dated May 1, 1997
among Prime Lithotripter Operations, Inc., Tenn-Ga Stone
Group Two, L.P., NGST, Inc. and all the shareholders of
NGST, Inc. (12)
10.33 Stock Purchase Agreement dated June 1, 1997 between Sun
Medical Technologies, Inc. and Executive Medical
Enterprises, Inc. (12)
10.34 Contribution Agreement dated October 8, 1997 between Prime
Medical Services, Inc. and AK Associates. (12)
10.35 Confidential Assignment Summary for Pacific Medical
Limited Partnership.(14)
10.36 Limited Partnership Agreement for Texas Lithotripsy VII,
L.P. (14)
10.37 Agreement and Plan of Merger of Texas Lithotripsy Limited
Partnership II, L.P., Texas Lithotripsy Limited
Partnership IV, L.P. and Texas ESWL/Laser Lithotripter,
Ltd. (14)
10.38 Limited Partnership Agreement for Big Sky Urological
Limited Partnership.(14)
20
10.39 Operating Agreement for Kentucky I Lithotripsy, LLC. (14)
10.40 Confidential Private Placement Memorandum for Tennessee
Valley Lithotripter Limited Partnership. (14)
10.41 Confidential Private Placement Memorandum for Fayetteville
Lithotripters Limited Partnership - Arkansas I. (14)
10.42 Confidential Private Placement Memorandum for Texas
Lithotripsy Limited Partnership I, L.P. (14)
10.43 Operating Agreement for Washington Urological Services,
LLC. (14)
10.44* Amended and Restated 1993 Stock Option Plan, as amended
June 10, 1998. (10)
10.45 Agreement of Limited Partnership of Wyoming Urological
Services, L.P. (14)
10.46 Indenture Agreement dated March 27, 1998 between Prime
Medical Services, Inc. and State Street Bank and Trust
Company of Missouri, N.A. (8)
12 Computation of ratio of earnings to fixed charges (14)
21.1 List of subsidiaries of the Company. (14)
23.1 Independent Auditors' Consent of KPMG LLP. (14)
27 Financial Data Schedule (14)
______________
* Executive compensation plans and arrangements.
(1) The exhibits listed above will be furnished to any security holder upon
written request for such exhibit to Cheryl L. Williams, Prime Medical Services,
Inc., 1301 Capital of Texas Highway, 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.
21
(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 Quarterly Report on Form 10Q for the period
ended June 30, 1998.
(9) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1995.
(10) Filed as an Exhibit to the Registration Statement on Form S-8
(Registration No. 333- 62245) of the Company and incorporated herein by
reference.
(11) Not used.
(12) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1997.
(13) Filed as an Exhibit to the Quarterly Report on Form 10Q for the period
ended September 30, 1998.
(14) Filed herewith.
22
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 31, 1999
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 31, 1999
By: /s/ Cheryl L. Williams
--------------------------
Cheryl L. Williams
Vice President of Finance, Secretary
and Chief Financial Officer (Principal
Financial and Accounting Officer)
Date: March 31, 1999
By: /s/ Joseph Jenkins
----------------------
Joseph Jenkins, M.D., President,
Chief Executive Officer and Director
Date: March 31, 1999
23
By: /s/ Paul Butrus
- - -------------------
Paul Butrus, Director
Date: March 31, 1999
By: /s/ William E. Foree
- - ------------------------
William E. Foree, M.D., Director
Date: March 31, 1999
By: /s/ John McEntire
- - ---------------------
John McEntire, Director
Date: March 31, 1999
By: /s/ William A. Searles
- - --------------------------
William A. Searles, Director
Date: March 31, 1999
By: /s/ Michael Spalding
- - ------------------------
Michael Spalding, M.D., Director
Date: March 31, 1999
24
APPENDIX A
INDEX
Page
Independent Auditors' Report A-2
Consolidated Financial Statements:
Consolidated Statements of Income for the years
ended December 31, 1998, 1997 and 1996. A-3
Consolidated Balance Sheets at December 31, 1998 and 1997. A-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996. A-6
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Austin, Texas
March 1, 1999
A-2
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
Years Ended December 31,
1998 1997 1996
-------- ------- -------
Fee Revenue:
Lithotripsy:
Fee revenues $ 83,879 $84,537 $65,138
Management fees 5,284 6,237 4,698
Equity income 2,890 2,339 1,766
-------- ------- -------
92,053 93,113 71,602
Manufacturing 11,066 2,358 --
Prostatherapy 1,207 -- --
Cardiac and other 310 508 802
-------- ------- -------
Total fee revenue 104,636 95,979 72,404
-------- ------- -------
Cost of services and general and
administrative expenses:
Lithotripsy 22,674 25,381 19,922
Manufacturing 9,204 1,743 --
Prostatherapy 803 -- --
Cardiac and other 249 478 632
Corporate 4,926 5,683 4,245
Nonrecurring development and other costs 1,617 -- --
-------- ------- -------
39,473 33,285 24,799
Depreciation and amortization 10,476 9,911 8,422
-------- ------- -------
Total operating expenses 49,949 43,196 33,221
-------- ------- -------
Operating income 54,687 52,783 39,183
Other income (deductions):
Interest and dividends 1,417 740 459
Interest expense (8,469) (7,477) (5,977)
Loan fees and stock offering costs (4,978) (360) (3,535)
Other, net 304 6 370
-------- ------- -------
(11,726) (7,091) (8,683)
Income before provision for income taxes
and minority interest 42,961 45,692 30,500
Minority interest in consolidated income 24,790 25,041 19,543
Provision for income taxes 7,377 5,795 1,996
-------- ------- -------
Net income $ 10,794 $14,856 $ 8,961
======== ======= =======
Basic earnings per share:
Net income $0.58 $0.77 $0.51
===== ===== =====
Weighted average shares outstanding 18,650 19,275 17,633
====== ====== ======
Diluted earnings per share:
Net income $0.57 $0.76 $0.49
===== ===== =====
Weighted average shares outstanding 18,783 19,461 18,638
====== ====== ======
See accompanying notes to consolidated financial statements.
A-3
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
December 31,
1998 1997
--------- ---------
ASSETS
Current assets:
Cash $ 40,146 $ 23,770
Accounts receivable, less allowance
for doubtful accounts of $966 in 1998
and $811 in 1997 22,321 19,387
Other receivables 2,228 1,103
Deferred income taxes 2,330 1,506
Prepaid expenses and other current assets 2,774 1,776
--------- ---------
Total current assets 69,799 47,542
--------- ---------
Property and equipment:
Equipment, furniture and fixtures 34,485 32,673
Building and leasehold improvements 2,073 531
--------- ---------
36,558 33,204
Less accumulated depreciation and
amortization (18,471) (13,497)
--------- ---------
Property and equipment, net 18,087 19,707
--------- ---------
Other investments 11,491 12,305
Goodwill, at cost, net of amortization 140,863 143,823
Other noncurrent assets 879 2,449
--------- ---------
$241,119 $225,826
======== ========
(continued)
See accompanying notes to consolidated financial statements.
A-4
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
($ in thousands)
December 31,
1998 1997
--------- ---------
LIABILITIES:
Current liabilities:
Current portion of long-term debt $ 890 $ 11,138
Accounts payable 6,208 5,386
Accrued distributions to minority interests 8,951 8,655
Accrued expenses 12,051 12,204
--------- ---------
Total current liabilities 28,100 37,383
Long-term debt, net of current portion 100,987 71,198
Deferred income taxes 4,789 5,809
--------- ---------
Total liabilities 133,876 114,390
Minority interest 17,493 19,372
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
1,000,000 shares authorized;
none outstanding -- --
Common stock, $.01 par value,
40,000,000 shares authorized;
19,350,267 issued in 1998 and
19,306,267 issued in 1997 194 193
Capital in excess of par value 87,380 84,050
Accumulated earnings 18,615 7,821
Treasury stock, at cost, 1,845,200 shares (16,439) --
--------- ---------
Total stockholders' equity 89,750 92,064
--------- ---------
$ 241,119 $ 225,826
========= =========
See accompanying notes to consolidated financial statements.
A-5
PRIME MEDICAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
($ in thousands, except share data)
Issued Capital in Accumulated
Common Stock Excess of Earnings Treasury Stock
Shares Amount Par Value (Deficit) Shares Amount Total
---------- ------ ----------- ------------ ---------- --------- ---------
Balance, January 1, 1996 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
Net income for the year -- -- -- 10,794 -- -- 10,794
Tax benefits on exercised -- -- 3,096 -- -- -- 3,096
warrants
Exercise of stock options
including tax benefit of
$140 on non-qualifying
exercises 44,000 1 234 -- -- -- 235
Purchase of treasury stock -- -- (1,845,200) (16,439) (16,439)
----------- ------- ----------- ------------ ----------- -------- ---------
Balance, December 31, 1998 19,350,267 $194 $87,380 $ 18,615 (1,845,200) $(16,439) $ 89,750
========== ==== ======= ========== ========== ======== =========
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,
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Fee and other revenue collected $ 98,649 $90,924 $72,452
Cash paid to employees, suppliers
of goods and others (39,748) (31,685) (22,455)
Interest received 1,417 739 459
Interest paid ( 7,261) ( 7,521) ( 5,104)
Taxes paid ( 7,506) ( 764) ( 1,015)
------- ------- -------
Net cash provided by
operating activities 45,551 51,693 44,337
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of lithotripter entities -- (20,217) (66,742)
Purchases of equipment and leasehold
improvements ( 5,213) ( 4,546) ( 2,526)
Deferred payments on
lithotripter entities -- -- ( 3,387)
Proceeds from sales of equipment 224 30 6
Investments 2,532 1,690 1,257
Other 315 94 ( 378)
--- -- -------
Net cash used by
investing activities ( 2,142) (22,949) (71,770)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable
exclusive of interest ( 80,484) (50,328) (15,351)
Borrowings on notes payable 100,025 51,201 74,000
Distributions to minority interest ( 25,799) (28,667) (13,440)
Debt issuance costs (4,417) -- ( 2,735)
Contributions by minority interest 72 2,381 --
Exercise of stock options 9 343 363
Purchase of treasury stock ( 16,439) -- --
------- ------- -------
Net cash provided by
(used in) financing
activities ( 27,033) (25,070) 42,837
-------- ------- ------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 16,376 3,674 15,404
Cash and cash equivalents,
beginning of period 23,770 20,096 4,692
------ ------ -----
Cash and cash equivalents,
end of period $ 40,146 $23,770 $20,096
======== ======= =======
See accompanying notes to consolidated financial statements.
A-7
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
($ in thousands)
Years Ended December 31,
1998 1997 1996
---- ---- ----
Reconciliation of net income to net
cash provided by operating activities
Net income $ 10,794 $14,856 $ 8,961
Adjustments to reconcile net
income to cash provided by
operating activities:
Minority interest in consolidated income 24,790 25,041 19,543
Depreciation and amortization 10,476 9,911 8,422
Provision for uncollectible accounts 252 427 319
Equity in earnings of affiliates (2,890) (2,339) (1,766)
Debt issuance costs 4,417 -- 2,735
Provision for deferred income taxes (442) 68 974
Writeoff of loan fees -- -- 696
Other (100) 1,159 (7)
Changes in operating assets and liabilities,
net of effect of purchase transactions:
Accounts receivable (3,186) (3,156) 1,284
Other receivables (910) 754 472
Other current assets (1,244) (602) 529
Accounts payable 822 934 452
Accrued expenses 2,772 4,640 1,723
----- ----- -----
Total adjustments 34,757 36,837 35,376
------ ------ ------
Net cash provided by
operating activities $45,551 $51,693 $44,337
======= ======= =======
See accompanying notes to consolidated financial statements.
A-8
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
($ in thousands)
Years Ended December 31,
1998 1997 1996
---- ---- ----
SUPPLEMENTAL INFORMATION OF
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
At December 31, 1998, the Company had accrued
distributions payable to minority interests. The
effect of this transaction was as follows:
Current liabilities increased by $8,951
Minority interest decreased by 8,951
In 1998, the Company recognized tax benefits associated
with warrants previously exercised. The effect of this
was as follows:
Current liabilities decreased by 1,512
Noncurrent liabilities decreased by 1,584
Stockholders' equity increased by 3,096
In 1997, the Company acquired (1) additional
ownership interests in 10 partnerships
(2) a 38.25% general partnership interest in a
lithotripter operation (3) 100% of the stock
of a lithotripter operator and (4) 75% equity
interest in a trailer manufacturer. These
transactions are discussed further in Notes C and D.
The acquired assets and liabilities were as follows:
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 by 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
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,
1998 1997 1996
---- ---- ----
In 1996, the Company acquired (1) 100%
of the outstanding stock of a corporation
which operated 31 lithotripters and (2)
increased ownership in two partnerships, in
which the Company is the managing general
partner. These transactions are discussed
further in Note D. The acquired assets
and liabilities were as follows:
Current assets increased by $19,032
Noncurrent assets increased by 12,630
Goodwill increased by 82,297
Current liabilities increased by 13,110
Noncurrent liabilities increased by 69,712
Minority interest increased by 16,218
Stockholders' equity 14,919
In 1996, several holders of notes issued by the
Company elected to convert the outstanding
balances of the notes into 921,000 shares
of the Company stock. In addition, certain
holders of warrants exercised their warrants and
the Company issued 1,344,000 shares of the
Company's stock to the warrant holders. The
effect of these transactions were as follows:
Current assets increased by 1,749
Current liabilities decreased by 4,062
Noncurrent liabilities decreased by 3,493
Stockholders' equity increased by 9,304
At December 31, 1996, the Company had accrued
distributions payable to minority interests. The
effect of this transaction was as follows:
Current liabilities increased by 10,705
Minority interest decreased by 10,705
See accompanying notes to consolidated financial statements.
A-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, 1998, the Company had recognized $435,000 in undistributed earnings
using the equity method. This amount represents undistributed earnings from
entities, in which the Company owns 50% or less, and does not exhibit control.
All significant intercompany accounts and transactions have been eliminated.
Cash Equivalents
The Company considers as cash equivalents demand deposits and all
short-term investments with an original maturity of three months or less.
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.
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, 1998 and 1997 is $13,807,000 and
$9,745,000, respectively. Goodwill is reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows is less
than the carrying amount of the goodwill, a loss is recognized for the
difference between the fair value and carrying value of the goodwill.
A-11
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenue Recognition
Revenues generated from management services and the manufacture of trailers
are recognized as they are earned.
The Company's lithotripsy fee revenues are based upon fees charged for
services to hospitals, commercial insurance carriers, state and federal health
care agencies, and individuals, net of contractual fee reductions.
At December 31, 1998, approximately 17% of accounts receivable relate to
units operating in Texas, 11% relate to units located in Louisiana, and 10%
relate to units located in California.
Income Tax
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
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
Upon adoption of Statement of Financial Accounting Standards No.123,
Accounting for Stock-Based Compensation ("Statement 123"), in 1996, the Company
continued to measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by APB Opinion
No. 25, Accounting for Stock Issued to Employees. The Company provides proforma
disclosures of net income and earnings per share as if the fair value-based
method prescribed by Statement 123 had been applied in measuring compensation
expense. (See Note J).
A-12
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 1998 presentation.
Earnings Per Share
Basic earnings per share is based on the weighted average shares
outstanding without any dilutive effects considered. Diluted earnings per share
reflects dilution from all contingently issuable shares, including options and
convertible debt. A reconciliation of such earnings per share data is as
follows:
(In thousands, except per share data)
1998
Per Share
Income Shares Amount
------ ------ ------
Basic EPS
Net Income..................... $ 10,794 18,650 $ 0.58
========
Effect of dilutive securities:
Options . . .................. 133
---
Diluted EPS.................... $ 10,794 18,783 $ 0.57
======== ====== ========
A-13
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Earnings Per Share continued
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
======= ====== ========
Unexercised employee stock options to purchase 1,708,000, 841,000 and
706,000 shares of Prime common stock as of December 31, 1998, 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.
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
A-14
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 1998 and 1997, the Company owned 1,000 and 50,000 shares of
common stock, representing less than 1%, of the outstanding common stock of
American Physicians Service Group, Inc. (APS). APS owned approximately 18% and
16% of the outstanding common stock of the Company at December 31, 1998 and
1997, respectively. Two of the Company's seven 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.
The Company purchased treasury stock shares through APS Financial Services,
Inc. The Company paid commissions of $100,000 to acquire 1,845,000 shares.
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. The contingent
consideration was accrued at December 31, 1998 and paid in the first quarter of
1999. This transaction was accounted for using the purchase method of
accounting.
Effective June 1, 1997, the Company acquired 100% of the stock of Executive
Medical Enterprises, Inc. ("EME"), which operated three lithotripters in
California, Oregon and Washington. The purchase price was $1,339,000 in cash and
potential contingent consideration based upon the performance of these
operations during 1998, 1999 and 2000. $400,000 of the contingent consideration
was paid in 1998 and $843,000 was accrued at December 31, 1998 and paid in the
first quarter of 1999. The transaction was accounted for using the purchase
method of accounting.
In January 1997, the Company purchased additional ownership interests in 10
partnerships, which the Company controls. The purchase price for the additional
ownership interests was $10,510,000 in cash. These transactions were accounted
for using the purchase method of accounting.
Unaudited proforma combined income data for the years ended December 31,
1997 and 1996 of the Company and the acquisitions discussed above assuming all
were effective January 1, 1996 is as follows:
($ 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
========= =======
A-15
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 $1,291,000 in cash. This transaction was
accounted for using the purchase method of accounting.
E. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments (Statement 107), requires that the Company
disclose estimated fair values for its financial instruments as of December 31,
1998 and 1997. The carrying amounts and fair values of the Company's significant
financial instruments are as follows:
1998 1997
---- ----
Carrying Fair Carrying Fair
($ in Thousands) Amount Value Amount Value
---------------- ------ ----- ------ -----
Financial assets:
Cash $40,146 $40,146 $23,770 $23,770
Accounts receivable 22,321 22,321 19,387 19,387
Other receivables 2,228 2,228 1,103 1,103
Financial liabilities:
Debt 101,877 92,603 82,336 82,336
Accounts payable 6,208 6,208 5,386 5,386
A-16
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
Debt
The carrying value of debt in 1997 approximates fair value since the
majority was primarily floating rate debt based on current market rates. The
fair value at December 31, 1998 for the $100 million fixed rate senior
subordinated notes were present valued using the market rate of 10.456% as
quoted by Bloomberg Financial Services. The carrying value of the debt bearing
interest at prime rate approximates fair value.
Accounts Payable
The carrying value of the payables approximates fair value due to the
short-term nature of the obligation.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument. Fair
value estimates are based on existing on balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments.
Other significant assets and liabilities that are not considered financial
assets or liabilities include the deferred tax assets and liabilities, property
and equipment, equity investment in partnerships, goodwill, other noncurrent
assets and accrued expenses. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the aforementioned
estimates.
A-17
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31, December 31,
1998 1997
---- ----
($ in Thousands)
Legal fees $ 1,280 $ 634
Accrued group insurance costs 206 228
Compensation and payroll
related expense 2,958 1,787
Taxes, other than income taxes 1,301 439
Accrued interest 2,192 984
Income taxes payable 1,229 4,229
Deferred payments for acquisitions 1,950 1,339
Other 935 2,564
--- -----
$12,051 $12,204
======= =======
A-18
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
G. INDEBTEDNESS
Long-term debt is as follows:
($ in thousands)
Interest December 31,
Rates Maturities 1998 1997
----- ---------- ---- ----
8.75% 2008 $100,000 $ --
60-day LIBOR
plus 2 1/2% 1998 -- 79,000
Prime 1999-2001 1,715 2,969
Prime + 1% 1998 -- 200
None 2000-2006 162 161
11.50% 1998 -- 6
------- ------
101,877 82,336
Less current portion of
long-term debt 890 11,138
--- ------
$100,987 $71,198
======== =======
In March 1998, the Company completed an offering of an aggregate $100
million of unsecured senior subordinated notes (the "Notes") due 2008. The issue
price of the notes was 99.50 with an 8.75% coupon. Interest is payable
semiannually on April 1 and October 1, beginning October 1, 1998. The financing
costs associated with this offering totaling $4,418,000 were expensed on the
accompanying consolidated statements of income. A portion of the proceeds from
the offering were used to pay off the Company's $77 million of term loans under
its existing credit facility. (See Note P).
The Notes Indenture restricts, among other things, the ability of the
Company and its Restricted Subsidiaries to incur additional indebtedness and
issue preferred stock, enter into sale and leaseback transactions, incur liens,
pay dividends or make certain other restricted payments, apply net proceeds from
certain asset sales, enter into certain transactions with affiliates, merge or
consolidate with any other person, sell stock of subsidiaries and assign,
transfer, lease, convey or otherwise dispose of substantially all of the assets
of the Company.
During 1998, the Company amended its bank facility with Bank Boston from
$135 million to $100 million. The facility consists of a $100 million revolving
credit facility bearing interest of LIBOR +1 to 2%, maturing in April 2003. At
December 31, 1998, the entire $100 million revolving credit facility was
undrawn. At December 31, 1998, interest on the Company's bank facility was 8.6%.
The bank facility is collateralized by the assets of the Company, including the
stock of its subsidiaries.
The stated principal repayments for all indebtedness as of December 31,
1998 are payable as follows:
($ in thousands)
1999 $ 890
2000 449
2001 355
2002 51
2003 0
Thereafter 100,132
A-19
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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,
-------------------------
1998 1997 1996
---- ---- ----
($ in Thousands)
Salaries, wages and benefits $16,294 $15,779 $ 11,953
Other costs of services 7,136 7,569 6,878
General and administrative 3,225 3,595 1,941
Legal and professional 2,551 2,064 1,315
Manufacturing costs 8,294 1,394 --
Other 1,973 2,884 2,712
----- ----- -----
$39,473 $33,285 $24,799
======= ======= =======
I. COMMITMENTS AND CONTINGENCIES
At December 31, 1998, minimum annual rental commitments under
non-cancelable operating leases for equipment and office space are:
($ in thousands)
1999 $291
2000 260
2001 2
Rent expense for equipment and office space for the years ended December
31, 1998, 1997, and 1996 was $623,000, $568,000, and $360,000, 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, 1998,
the Company had 244 employees enrolled in the plan. The plan provides
non-contributory coverage for employees and contributory coverage for
dependents. The Company's contributions totaled $623,000, in 1998, $351,000 in
1997, and $224,000 in 1996.
A-20
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 authorized an additional 500,000 shares.
In June 1998, the Company adopted an amendment to the 1993 Stock Option
Plan that authorized an additional 750,000 shares.
A summary of the Company's stock option activity, and related information
for the years ended December 31, follows:
1998 1997 1996
Options Weighted-Average Options Weighted-Average Options Weighted-Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
----- -------------- ----- -------------- ----- --------------
Outstanding - beginning
of year 1,394 $11.04 1,228 $ 8.99 975 $ 1.31
Granted 825 8.63 428 11.94 730 13.87
Exercised (44) 3.73 (227) 1.51 (477) 0.52
Forfeited (283) 12.58 (35) 12.19 (--) --
---- --- -----
Outstanding-end of year 1,892 $10.10 1,394 $11.04 1,228 $ 8.99
======= ======== =====
Exercisable at end of year 806 $10.74 466 $ 8.21 422 $2.03
=== ====== === ====== === =====
Weighted-average fair
value of options granted
during the year $3.40 -- $5.21 -- $6.13 --
===== ===== =====
A-21
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the Company's outstanding options at
December 31, 1998:
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 - $ 4.12 155 1.6 years $ 0.44 151 $ 0.37
$ 4.13 - $ 8.25 464 4.7 years $ 7.45 11 $ 5.99
$ 8.26 - $12.37 565 1.2 years $ 10.05 114 $ 10.36
$ 12.38 - $16.50 708 2.9 years $ 14.00 530 $ 13.87
----- ---
Total 1,892 806
===== ===
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 1996, 1997 and 1998, respectively: risk-free interest rates of
6.2%, 6.2%, and 5.2%; dividend yields of 0%, 0% and 0%; volatility factors of
the expected market price of the Company's common stock of .53, .46, and .42;
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):
1998 1997 1996
---- ---- ----
Pro forma net income $7,817 $12,448 $8,109
====== ======= ======
Pro forma earnings
per share
Basic $0.42 $0.65 $0.46
===== ===== =====
Diluted $0.42 $0.64 $0.44
===== ===== =====
A-22
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Statement 123 calls for a prospective application of compensation relating
to the grant of stock options and, consequently pro-forma financial information
may not be indicative of future amounts until the new rules are applied to all
outstanding nonvested awards.
K. OTHER INCOME (EXPENSE)
Included in other, net in the consolidated statements of income are the
following components:
Years Ended December 31,
($ in thousands) 1998 1997 1996
- - ---------------- ---- ---- ----
Collections on amounts
previously written off $ -- $ -- $ 192
Gain on sale of investment in stock 144 -- --
Equipment rental -- -- 58
Other income 160 6 120
--- ----- ---
Other, net $304 $ 6 $ 370
==== ===== =====
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,
1998 1997 1996
---- ---- ----
Federal
Current $6,404 $ 4,369 $ 97
Deferred (442) 68 974
State 1,415 1,358 925
----- ----- ---
$7,377 $5,795 $1,996
====== ====== ======
A reconciliation of expected income tax (computed by applying the United
States statutory income tax rate of 35% for 1998 and 1997 and 34% for 1996, to
earnings before income taxes) to total income tax expense in the accompanying
consolidated statements of income follows:
A-23
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ in thousands)
Years ended December 31,
1998 1997 1996
---- ---- ----
Expected federal income tax $6,360 $7,228 $3,725
Change in beginning of year
valuation allowance -- (2,399) (3,093)
State taxes 1,415 1,358 925
Other (398) ( 392) 439
---- ------- ---
$7,377 $5,795 $1,996
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are presented below:
($ in thousands)
1998 1997
---- ----
Deferred tax assets:
Capitalized costs $2,381 $932
Loan origination fees amortizable for
tax purposes 1,267 --
Accounts receivable, principally due
to allowance for doubtful accounts 248 266
Accrued expenses deductible for tax
purposes when paid 2,082 1,240
----- -----
Total gross deferred tax assets 5,978 2,438
Less valuation allowance -- --
----- -----
Net deferred tax assets 5,978 2,438
===== =====
Deferred tax liabilities:
Property and equipment, principally due
to differences in depreciation $( 166) $ (583)
Investments in affiliated entities,
principally due to undistributed income(2,703) (2,807)
Intangible assets, principally due to
differences in amortization periods for
tax purposes (5,568) (2,419)
------ ------
Total gross deferred tax liability (8,437) (5,809)
------ ------
Net deferred tax liability $2,459 $3,371
====== ======
There is no valuation allowance for deferred tax assets at December 31,
1998 and 1997. A decrease of $2,399,000 in 1997, primarily due to utilization of
net operating loss carryforwards was recorded in 1997. The valuation allowance
for deferred tax assets as of December 31, 1996 was $2,399,000. The valuation
A-24
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
allowance at December 31, 1996 was a result of 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 at December 31, 1998.
M. RELATED PARTY TRANSACTIONS
See Note C for additional related party transactions involving investments
in affiliates.
O. SEGMENT REPORTING
The Company has two reportable segments: Medical, which includes
lithotripsy, prostatherapy and cardiac rehabilitation and Manufacturing.
Lithotripsy and prostatherapy provides services related to the operation of the
lithotripters and prostatherapy units, including scheduling, staffing, training,
quality assurance, maintenance, regulatory compliance and contracting with
payors, hospitals and surgery centers; and cardiac rehabilitation provides
non-medical management services for several cardiac rehabilitation centers
pursuant to agreements with physicians, clinics and hospitals. The manufacturing
segment provides manufacturing services and installation, upgrade, refurbishment
and repair of major medical equipment for mobile medical service providers.
The accounting policies of the segments are the same as those described in
Note B, the summary of significant accounting policies. The Company measures
performance based on the pretax income or loss from its operating segments,
which do not include unallocated corporate general and administrative expenses
and corporate interest revenue and expense.
The Company's segments are divisions that offer different services, and
require different technology and marketing approaches. The majority of the
lithotripsy segment is comprised of acquired entities, as is the manufacturing
segment. Prostatherapy and cardiac segments were developed internally.
A-25
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
All of the Company's revenues are earned in the United States and
long-lived assets are located in the United States. The Company does not have
any major customers who account for more than 10% of its revenues.
(Amounts in 1998 1998 1997 1997 1996 1996
thousands)
Medical Manufacturing Medical Manufacturing Medical Manufacturing
------- ------------- ------- ------------- ------- -------------
Revenue from
external
customers $93,570 $11,066 $93,621 $2,358 $72,404 $-0-
Intersegment
revenues 0 255 0 185 0 0
Interest
revenue 511 0 560 0 374 0
Interest
expense 235 38 314 0 539 0
Depreciation
and
amortization 10,359 72 9,868 18 8,274 0
Segment profit 33,189 1,753 31,666 403 23,209 0
Segment assets 235,248 4,892 219,166 1,152 196,731 0
Investment in
equity method
investees 10,605 0 11,453 0 7,377 0
Capital
Expenditures 3,557 1,580 4,473 23 2,507 0
The following is a reconciliation of revenues per above to the consolidated
revenues per the consolidated statements of income:
(Amounts in thousands) 1998 1997 1996
- - ---------------------- ---- ---- ----
Total revenues for reportable segments $104,891 $96,164 $72,404
Elimination of intersegment revenues (255) (185) --
-------- ------- -------
Total consolidated revenues $104,636 $95,979 $72,404
======== ======= =======
The following is a reconciliation of the measure of segment profit per
above to consolidated income before income taxes per the consolidated
statements of income:
(Amounts in thousands) 1998 1997 1996
- - ---------------------- ---- ---- ----
Total segment profit for reportable segments $34,942 $32,069 $23,209
Unallocated corporate expenses:
General and administrative ( 3,035) ( 4,070) ( 3,413)
Net interest expense ( 7,292) ( 6,983) ( 5,354)
Loan fees and stock offering costs ( 4,978) ( 360) ( 3,535)
Nonrecurring development and other costs ( 1,617) -- --
Other, net 151 ( 5) 50
-------- -------- --------
Unallocated corporate expenses total (16,771) (11,418) (12,252)
------- ------- -------
Income before income taxes $18,171 $20,651 $10,957
======= ======= =======
The following is a reconciliation of segment assets per above to the
consolidated assets per the consolidated balance sheets:
(Amounts in thousands) 1998 1997 1996
- - ---------------------- ---- ---- ----
Total segment assets $240,140 $220,318 $196,731
Unallocated corporate assets 979 5,508 5,803
-------- -------- --------
Consolidated total $241,119 $225,826 $202,534
======== ======== ========
The reconciliation of the other significant items to the amounts reported
on the consolidated financial statements is as follows:
(Amounts in 1998 1998 1998 1997 1997 1997 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
thousands)
Segment Corp- Consoli- Segment Corp- Consoli- Segment Corp- Consoli-
Totals orate dated Totals orate dated Totals orate dated
Totals Totals Totals
------ ------ ------
Interest revenue $511 $906 $1,417 $560 $180 $740 $374 $85 $ 459
Interest expense 273 8,196 8,469 314 7,163 7,477 539 5,438 5,977
Depreciation
and amortization 10,431 45 10,476 9,886 25 9,911 8,274 148 8,422
Capital
Expenditures 5,137 76 5,213 4,496 50 4,546 2,507 19 2,526
The adjustments in 1998, 1997 and 1996 for interest revenue and expense,
depreciation and amortization and expenditures for segment assets represent
amounts recorded by the operations of the Company's corporate functions, which
have not been allocated to the segments.
P. CONDENSED FINANCIAL INFORMATION REGARDING GUARANTOR SUBSIDIARIES
Condensed consolidating financial information regarding the Company,
Guarantor Subsidiaries and non-guarantor subsidiaries as of December 31, 1998
and 1997 and for each of the years in the three-year period ended December 31,
1998 is presented below for purposes of complying with the reporting
requirements of the Guarantor Subsidiaries. Separate financial statements and
other disclosures concerning each Guarantor Subsidiary have not been presented
because management has determined that such information is not material to
investors. The Guarantor Subsidiaries are wholly- owned subsidiaries of the
Company who have fully and unconditionally guaranteed the Notes described in
Note G.
A-26
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Condensed Consolidating Statement of Income
Year Ended December 31, 1998
($ in thousands)
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services Inc. Subsidiaries Subsidiaries Entries Total
------------- ------------ ------------- --------- -------
Fee revenue:
Lithotripsy:
Fee revenues $ -- $22,487 $ 61,392 $ -- $ 83,879
Management fees -- 3,126 2,158 -- 5,284
Equity income 30,952 20,077 -- (48,139) 2,890
Manufacturing -- -- 11,066 -- 11,066
Prostatherapy -- -- 1,207 -- 1,207
Cardiac -- 310 -- -- 310
---------- ------- --------- ------- ---------
30,952 46,000 75,823 (48,139) 104,636
Costs and expenses:
Cost of services and general and
administrative expenses:
Lithotripsy -- 3,977 18,697 -- 22,726
Manufacturing -- -- 9,204 -- 9,204
Prostatherapy -- -- 803 -- 803
Cardiac -- 249 -- -- 249
Corporate 203 4,723 -- -- 4,926
Nonrecurring development
and other costs 1,617 -- -- -- 1,617
---------- ------- --------- ------- ---------
1,820 8,949 28,704 -- 39,473
Depreciation and amortization 7 5,221 5,248 -- 10,476
---------- ------- --------- ------- ---------
Operating income 29,125 31,830 41,871 (48,139) 54,687
---------- ------- --------- ------- ---------
Other income (deductions):
Interest income 735 305 377 -- 1,417
Interest expense (8,234) (44) (191) -- (8,469)
Financing costs (4,978) -- -- -- (4,978)
Other, net (39) 331 12 -- 304
---------- ------- --------- ------- ---------
Total other income
(deductions) (12,516) 592 198 -- (11,726)
Income before provision for income
taxes and minority interest 16,609 32,422 42,069 (48,139) 42,961
Minority interest in consolidated
income -- -- -- 24,790 24,790
Provision for income taxes 5,815 1,470 92 -- 7,377
---------- ------- --------- ------- ---------
Net income $ 10,794 $30,952 $ 41,977 $(72,929) $ 10,794
========== ======= ========= ======== =========
A-27
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Condensed Consolidating Statement of Income
Year Ended December 31, 1997
($ in thousands)
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services, Inc. Subsidiaries Subsidiaries Entries Total
Fee revenue:
Lithotripsy:
Fee revenues $ -- $ 20,863 $63,674 $ -- $ 84,537
Management fees -- 3,978 2,259 -- 6,237
Equity income 27,386 18,587 -- (43,634) 2,339
27,386 43,428 65,933 (43,634) 93,113
Manufacturing -- -- 2,358 -- 2,358
Cardiac -- 479 -- -- 479
Other -- 29 -- -- 29
---------- ------- -------- ------- ---------
Total fee revenue 27,386 43,936 68,291 (43,634) 95,979
Costs of services and general and
administrative expenses
Lithotripsy -- 4,646 20,735 -- 25,381
Manufacturing -- -- 1,743 -- 1,743
Cardiac -- 310 -- -- 310
Other -- 168 -- -- 168
Corporate 567 5,116 -- -- 5,683
---------- ------- -------- ------- ---------
567 10,240 22,478 -- 33,285
Depreciation and amortization 7 5,157 4,747 -- 9,911
---------- ------- -------- ------- ---------
Total operating expenses 574 15,397 27,225 -- 43,196
---------- ------- -------- ------- ---------
Operating income 26,812 28,539 41,066 (43,634) 52,783
---------- ------- -------- ------- ---------
Other income (deductions):
Interest and dividends -- 309 431 -- 740
Interest expense (7,160) (52) (265) -- (7,477)
Loan fees and stock offering costs (360) -- -- -- (360)
Other, net -- (128) 134 -- 6
---------- ------- -------- ------- ---------
(7,520) 129 300 -- (7,091)
Income before provision for income
taxes and minority interest 19,292 28,668 41,366 (43,634) 45,692
Minority interest in consolidated
income -- -- -- 25,041 25,041
Provision for income taxes 4,436 1,282 77 -- 5,795
------- ------- -------- ------- ---------
Net income $ 14,856 $ 27,386 $ 41,289 $ (68,675) $ 14,856
========= ========== ========= ========= ==========
A-28
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Condensed Consolidating Statement of Income
Year Ended December 31, 1996
($ in thousands)
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services, Inc. Subsidiaries Subsidiaries Entries Total
-------------- ------------- ------------ ------- -----
Fee revenue:
Lithotripsy:
Fee revenues $ -- $ 18,688 $ 46,450 $ -- $ 65,138
Management fees -- 3,180 1,518 -- 4,698
Equity income 19,382 10,701 -- (28,317) 1,766
------- ------- -------- ------- ---------
19,382 32,569 47,968 (28,317) 71,602
Cardiac -- 802 -- -- 802
------- ------- -------- ------- ---------
Total fee revenue 19,382 33,371 47,968 (28,317) 72,404
Costs of services and general and
administrative expenses
Lithotripsy -- 5,093 14,829 -- 19,922
Cardiac -- 632 -- -- 632
Corporate 257 3,988 -- -- 4,245
------- ------- -------- ------- ---------
257 9,713 14,829 -- 24,799
Depreciation and amortization 127 3,537 4,758 -- 8,422
------- ------- -------- ------- ---------
Total operating expenses 384 13,250 19,587 -- 33,221
------- ------- -------- ------- ---------
Operating income 18,998 20,121 28,381 (28,317) 39,183
------- ------- -------- ------- ---------
Other income (deductions):
Interest and dividends -- 202 257 -- 459
Interest expense (5,431) (299) (247) -- (5,977)
Loan fees and stock offering costs (3,535) -- -- -- (3,535)
Other, net -- 207 163 -- 370
------- ------- -------- ------- ---------
(8,966) 110 173 -- (8,683)
Income before provision for income
taxes and minority interest 10,032 20,231 28,554 (28,317) 30,500
Minority interest in consolidated
income -- -- -- 19,543 19,543
Provision for income taxes 1,071 849 76 -- 1,996
------- ------- -------- ------- ---------
Net income $ 8,961 $ 19,382 $ 28,478 $ (47,860) $ 8,961
========= ========== ========= ========== ==========
A-29
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
($ in thousands) December 31, 1998
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services, Inc. Subsidiaries Subsidiaries Entries Total
-------------- ------------ ------------ ------- -----
ASSETS:
Current Assets:
Cash $ 15,798 $ 7,585 $ 16,763 $ -- $ 40,146
Accounts receivable, net -- 4,240 18,081 -- 22,321
Other receivables -- 2,228 -- -- 2,228
Deferred income taxes 1,603 727 -- -- 2,330
Prepaid expenses and
other current assets -- 456 2,318 -- 2,774
--------- ------- -------- -------- ---------
Total current assets 17,401 15,236 37,162 -- 69,799
--------- ------- -------- -------- ---------
Property and equipment:
Equipment, furniture and fixtures -- 5,301 29,184 -- 34,485
Building and leasehold improvements -- 491 1,582 -- 2,073
--------- ------- -------- -------- ---------
-- 5,792 30,766 -- 36,558
Less accumulated depreciation
and amortization -- (4,485) (13,986) -- (18,471)
--------- ------- -------- -------- ---------
Property and equipment, net -- 1,307 16,780 -- 18,087
--------- ------- -------- -------- ---------
Investment in subsidiaries and other 178,611 24,003 -- (191,123) 11,491
investments
Goodwill, at cost, net of amortization -- 140,863 -- -- 140,863
Other noncurrent assets 105 488 286 -- 879
--------- ------- -------- -------- ---------
Total Assets $ 196,117 $ 181,897 $ 54,228 $(191,123) $ 241,119
========== ========= ========= ========= ==========
LIABILITIES:
Current Liabilities:
Current portion of long-term debt $ -- $ -- $ 890 $ -- $ 890
Accounts payable 1,501 2,175 2,532 -- 6,208
Accrued expenses 3,563 1,929 15,510 -- 21,002
--------- ------- -------- -------- ---------
Total current liabilities 5,064 4,104 18,932 -- 28,100
Long-term debt, net of current portion 100,000 162 825 -- 100,987
Deferred income taxes 1,303 3,486 -- -- 4,789
--------- ------- -------- -------- ---------
Total liabilities 106,367 7,752 19,757 -- 133,876
Minority interest -- -- -- 17,493 17,493
STOCKHOLDERS' EQUITY:
Common stock 194 -- -- -- 194
Capital in excess of par value 87,380 -- -- -- 87,380
Accumulated earnings 18,615 -- -- -- 18,615
Treasury stock (16,439) -- -- -- (16,439)
Subsidiary net equity -- 178,645 34,471 (213,116) --
--------- ------- -------- -------- ---------
Total stockholders' equity 89,750 178,645 34,471 (213,116) 89,750
--------- ------- -------- -------- ---------
Total Liabilities and
stockholders' equity $ 196,117 $ 186,397 $ 54,228 $ (195,623) $ 241,119
========== ========= ========= ========== ==========
A-31
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
($ in thousands) December 31, 1997
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services, Inc. Subsidiaries Subsidiaries Entries Total
-------------- ------------ ------------ ------- -----
ASSETS:
Current Assets:
Cash $ 18 $ 6,260 $ 17,492 $ -- $ 23,770
Accounts receivable, net -- 4,564 14,823 -- 19,387
Other receivables 291 578 234 -- 1,103
Deferred income taxes 779 727 -- -- 1,506
Prepaid expenses and
other current assets 24 1,098 654 -- 1,776
--------- ------- ------- -------- ---------
Total current assets 1,112 13,227 33,203 -- 47,542
--------- ------- ------- -------- ---------
Property and equipment:
Equipment, furniture and fixtures -- 5,970 26,703 -- 32,673
Leasehold improvements -- 515 16 -- 531
--------- ------- ------- -------- ---------
-- 6,485 26,719 -- 33,204
Less accumulated depreciation
and amortization -- (4,646) (8,851) -- (13,497)
--------- ------- ------- -------- ---------
Property and equipment, net -- 1,839 17,868 -- 19,707
--------- ------- ------- -------- ---------
Investment in subsidiaries and other 175,082 24,376 -- (187,153) 12,305
investments
Goodwill, at cost, net of amortization -- 143,790 33 -- 143,823
Other noncurrent assets 344 1,721 384 -- 2,449
--------- ------- ------- -------- ---------
Total Assets $ 176,538 $ 184,953 $ 51,488 $(187,153) $ 225,826
========== =========== ========= ========= ==========
LIABILITIES:
Current Liabilities:
Current portion of long-term debt $ 9,800 $ 6 $ 1,332 $ -- $ 11,138
Accounts payable -- 3,439 1,947 -- 5,386
Accrued expenses 3,367 2,563 14,929 -- 20,85
--------- ------- ------- -------- ---------
Total current liabilities 13,167 6,008 18,208 -- 37,383
--------- ------- ------- -------- ---------
Long-term debt, net of current portion 69,200 161 1,837 -- 71,198
Deferred income taxes 2,107 3,702 -- -- 5,809
--------- ------- ------- -------- ---------
Total liabilities 84,474 9,871 20,045 -- 114,390
--------- ------- ------- -------- ---------
Minority interest -- -- -- 19,372 19,372
STOCKHOLDERS' EQUITY:
Common stock 193 -- -- -- 193
Capital in excess of par value 84,050 -- -- -- 84,050
Accumulated earnings 7,821 -- -- -- 7,821
Subsidiary net equity -- 175,082 31,443 (206,525) --
--------- ------- ------- -------- ---------
Total stockholders' equity 92,064 175,082 31,443 (206,525) 92,064
--------- ------- ------- -------- ---------
Total Liabilities and
stockholders' equity $ 176,538 $ 184,953 $ 51,488 $ (187,153) $ 225,826
========== =========== ========= ========== ==========
A-32
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
($ in thousands) Year Ended December 31, 1998
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services, Inc. Subsidiaries Subsidiaries Entries Total
-------------- ------------ ------------ ------- -----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by (used in)
operating activities $ (10,215) $ 9,608 $ 46,158 $ -- $ 45,551
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of equipment and leasehold
improvements -- (2,000) (3,213) -- (5,213)
Proceeds from sales of equipment -- 179 45 -- 224
Distributions from subsidiaries 26,228 16,665 -- (42,893) --
Investments 408 2,940 -- -- 2,532
Other 22 166 127 -- 315
--------- ------- ------- -------- ---------
Net cash provided by (used in)
investing activities 25,842 17,950 (3,041) (42,893) (2,142)
--------- ------- ------- -------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on notes payable exclusive of
interest (79,000) (5) (1,479) -- (80,484)
Borrowings on notes payable 100,000 -- 25 -- 100,025
Distributions to minority interest -- -- -- (25,799) (25,799)
Debt issuance costs (4,417) -- -- -- (4,417)
Contributions by minority interest -- -- 72 -- 72
Exercise of stock options 9 -- -- -- 9
Distributions to equity owners -- (26,228) (42,464) 68,692 --
--------- ------- ------- -------- ---------
Net cash provided by (used in)
financing activities 153 (26,233) (43,846) 42,893 (27,033)
--------- ------- ------- -------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 15,780 1,325 (729) -- 16,376
Cash and cash equivalents, beginning
of period 18 6,260 17,492 -- 23,770
--------- ------- ------- -------- ---------
Cash and cash equivalents, end of
period $ 15,798 $ 7,585 $ 16,763 $ -- $ 40,146
========= ======== ========= ========== ==========
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
($ in thousands) Year Ended December 31, 1997
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services, Inc. Subsidiaries Subsidiaries Entries Total
--------------------------- ------------ ------- -----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by (used in)
operating activities $ (9,441) $ 14,879 $ 46,255 $ -- $ 51,693
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of lithotripter entities -- (20,217) -- -- (20,217)
Purchases of equipment and leasehold
improvements -- (1,516) (3,030) -- (4,546)
Proceeds from sales of equipment -- 30 -- -- 30
Distributions from subsidiaries 6,865 16,667 -- (23,532) --
Investments -- 1,690 -- -- 1,690
Other -- 94 -- -- 94
Net cash provided by (used in)
investing activities 6,885 (3,252) (3,030) (23,532) (22,949)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on notes payable exclusive of
interest (47,750) (1,100) (1,478) -- (50,328)
Borrowings on notes payable 50,000 -- 1,201 -- 51,201
Distributions to minority interest -- -- -- (28,667) (28,667)
Contributions by minority interest -- -- 2,381 -- 2,381
Exercise of stock options 343 -- -- -- 343
Distributions to equity owners -- (6,865) (45,334) 52,199 --
Net cash provided by (used in)
financing activities 2,593 (7,965) (43,230) 23,532 (25,070)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 17 3,662 (5) -- 3,674
Cash and cash equivalents, beginning
of period 1 2,598 17,497 -- 20,096
Cash and cash equivalents, end of
period $ 18 $ 6,260 $ 17,492 $ -- $ 23,770
=========== ========= ========= ========== ==========
A-34
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
($ in thousands)
Year Ended December 31, 1996
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services, Inc. Subsidiaries Subsidiaries Entries Total
-------------- ------------ ------------ ------- -----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by (used in)
operating activities $ (4,310) $ 7,912 $ 40,735 $ -- $ 44,337
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of lithotripter entities -- (66,742) -- -- (66,742)
Purchases of equipment and leasehold
improvements -- (1,131) (1,395) -- (2,526)
Deferred payments on lithotripter
entities -- (3,387) -- -- (3,387)
Proceeds from sales of equipment -- -- 6 -- 6
Contributions to subsidiaries (57,510) -- -- 57,510 --
Distributions from subsidiaries -- 7,180 -- (7,180) --
Investments -- 1,257 -- -- 1,257
Other -- (378) -- -- (378)
Net cash provided by (used in)
investing activities (57,510) (63,201) (1,389) 50,330 (71,770)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on notes payable exclusive
of interest (12,300) (1,515) (1,536) -- (15,351)
Borrowings on notes payable 74,000 -- -- -- 74,000
Distributions to minority interest -- -- -- (13,440) (13,440)
Contributions from parent -- 57,510 -- (57,510) --
Debt issuance costs (2,735) -- -- -- (2,735)
Exercise of stock options 363 -- -- -- 363
Distributions to equity owners -- -- (20,620) 20,620 --
Net cash provided by (used in)
financing activities 59,328 55,995 (22,156) (50,330) 42,837
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,492) 706 17,190 -- 15,404
Cash and cash equivalents, beginning
of period 2,493 1,892 307 -- 4,692
Cash and cash equivalents, end of
period $ 1 $ 2,598 $ 17,497 $ -- $ 20,096
========== ========= ========= ========= ==========
A-35