ITEM 1. BUSINESS. - - ------- ---------
Prime Medical Services, Inc., a Delaware corporation ("Prime" or the "Company"), is the largest provider of lithotripsy services in the United States. Lithotripsy is a non-invasive procedure for the treatment of kidney stones, typically performed on an outpatient basis, that eliminates the need for lengthy hospital stays and extensive recovery periods associated with surgery. The Company has 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 - - -----------------------------
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.
Kidney Stone Treatment Methods - - ------------------------------
A number of kidney stone treatments are used by urologists ranging from non-invasive procedures, such as drug therapy or lithotripsy, to invasive procedures, such as endoscopic extraction or open surgery. The type of treatment a urologist chooses depends on a number of factors, such as the size and chemical make-up of the stone, the stone's location in the urinary system and whether the stone is contributing to other urinary complications such as blockage or infection.
Certain types of less common kidney stones may be dissolved by drugs which allow normal passage from the urinary system. Stones located in certain areas of the urinary tract may be extracted endoscopically. These procedures commonly require general or local anesthesia and can injure the involved areas of the urinary tract. Frequently, kidney stones are located where they are not accessible by an endoscopic procedure. Prior to the development of lithotripsy, stones lodged in the upper urinary tract were often treated by open surgery or percutaneous stone removal, both major operations requiring an incision to gain access to the stone. After such procedures, the patient typically spends several days in the hospital followed by a convalescence period of three to six weeks. As the technology for treating kidney stones has improved, there has been a shift from more expensive and complicated invasive procedures to safer, more cost efficient and less painful non- invasive procedures, such as lithotripsy.
Extracorporeal Shock Wave Lithotripsy - - -------------------------------------
General. The lithotripter has dramatically changed the course of kidney stone disease treatment since lithotripsy is normally performed on an outpatient basis, often without general anesthesia. Recovery times are generally only a few hours, and most patients can return to work the next day. There are three basic types of lithotripsy treatment currently available: electromagnetic, spark-gap and piezoelectric. A decision regarding which type is used in any instance may depend on several factors, among which are the treating physician's preferences, treatment times, stone location, and anesthesia considerations. The Company has 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.
Other Lines of Business: - - -----------------------
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 - - -------------------------------
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.
Government Regulation and Supervision - - -------------------------------------
The Company is subject to extensive regulation by both the federal government and the states in which the Company conducts its business. The Company is subject to Section 1128B of the Social Security Act (known as "the Illegal Remuneration Statute"), which imposes civil and criminal sanctions on persons who solicit, offer, receive or pay any remuneration, directly or indirectly, for referring, or arranging for the referral of, a patient for treatment that is paid for in whole or in part by Medicare, Medicaid or similar government programs. The federal government has published regulations that provide exceptions or a ''safe harbor'' for certain business transactions. Transactions that are structured within the safe harbors are deemed not to violate the Illegal Remuneration Statute. Transactions that do not satisfy all elements of a relevant safe harbor do not necessarily violate the Illegal Remuneration Statute, but may be subject to greater scrutiny by enforcement agencies. The arrangements between the Company and the partnerships and other entities in which it owns an indirect interest and through which the Company provides most of its lithotripsy services (and the corresponding arrangements between such partnerships and other entities and the treating physicians who own interests therein and who use the lithotripsy facilities owned by such partnerships and other entities) could potentially be questioned under the illegal remuneration prohibition and may not fall within the protection afforded by these safe harbors. Many states also have laws similar to the Federal Illegal Remuneration Statute. While failure to fall within the safe harbors may subject the Company to scrutiny under the Illegal Remuneration Statute, such failure does not constitute a violation of the Illegal Remuneration Statute. Nevertheless, these illegal remuneration laws, as applied to activities and relationships similar to those of the Company, have been subjected to limited judicial and regulatory interpretation, and the Company has not obtained or applied for any opinion of any regulatory or judicial authority that its business operations and affiliations are in compliance with these laws. Therefore, no assurances can be given that the Company's activities will be found to be in compliance with these laws if scrutinized by such authorities.
In addition to the Illegal Remuneration Statute, Section 1877 of the Social Security Act ("Stark II") imposes certain restrictions upon referring physicians and providers of certain designated health services under the Medicare, Medicaid and Champus Programs ("Government Programs"). Subject to certain exceptions, Stark II provides that if a physician (or a family member of a physician) has a financial relationship with an entity: (I) the physician may not make a referral to the entity for the furnishing of designated health services reimbursable under the Government Programs; and (ii) the entity may not bill Government Programs, any individual or any third-party payor for designated health services furnished pursuant to a prohibited referral under the Government Programs. The prohibitions of Stark II only apply to the treatment of Government Program patients, and have no application to services performed for non-government program patients. Entities and physicians committing an act in violation of Stark II will be required to refund amounts collected in violation of the statute and also are subject to civil money penalties and exclusion from the Government Programs. Urologists are investors in 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
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
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.
Equipment - - ---------
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 - - ---------
As of March 15, 1999, the Company employed approximately 310 full-time employees and approximately 38 part-time employees.
Competition - - -----------
The market to provide lithotripsy services is highly fragmented and competitive. The Company competes with other private facilities and medical centers that offer lithotripsy services and with hospitals, clinics and individual medical practitioners that offer conventional medical treatment for kidney stones. Certain of the Company's current and potential competitors have substantially greater financial resources than the Company and may compete with the Company for acquisitions and development of operations in markets targeted by the Company. A decrease in the purchase price of lithotripters as a result of the development of less expensive lithotripsy equipment could decrease the Company's competitive advantage. Most of the Company's lithotripsy services agreements have matured past their initial terms and are now in annual renewal terms or are on a month-to-month basis. Another significant provider of lithotripsy services is also a manufacturer of lithotripsy equipment, which may create different incentives for such provider in pricing lithotripsy services. Moreover, while the Company believes that lithotripsy has emerged as the superior treatment for kidney stone disease, the Company competes with alternative kidney stone disease treatments.
ITEM 2.
ITEM 2. PROPERTIES. - - ------- -----------
The Company's principal executive office is located in Austin, Texas in an office building owned by American Physicians Service Group, Inc. ("APS"). The Company pays APS approximately $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.
ITEM 3. LEGAL PROCEEDINGS. - - ------- ------------------
From time to time, the Company may be named as a party to litigation proceedings incidental to its business. The Company does not believe the outcome of any such litigation is likely to have
a material adverse effect on its business, financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - - ------- ----------------------------------------------------
NONE.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCK HOLDER MATTERS. - - ------------------------------------------------------------------------------
The following table sets forth the high and low closing prices for the Company's common stock in the over-the-counter market as reported by the National Association of Securities Dealers, Inc., Automated Quotations System, for the years ended December 31, 1998 and 1997 (NASDAQ Symbol "PMSI").
Year Ended December 31, 1998 High Low ---------------------------- ---- ---
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 ---------------------------- ---- ---
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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
($ in thousands, except per share data)
Quarterly Data ($ in thousands, except share amounts) 3/31 6/30 9/30 12/31 ---- ---- ---- -----
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
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.
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
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
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,
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.
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;
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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - - ------- --------------------------------------------
The information required by this item is contained in Appendix A attached hereto.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON - - ------- ------------------------------------------------- ACCOUNTING AND FINANCIAL DISCLOSURE. ------------------------------------
NONE.
PART III
ITEM 10.
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
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.
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.
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.
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.
PART IV
ITEM 14.
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)
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)
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)
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.
(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.
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
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
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)
See accompanying notes to consolidated financial statements. A-3
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
($ in thousands)
(continued) See accompanying notes to consolidated financial statements. A-4
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued)
($ in thousands)
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)
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)
See accompanying notes to consolidated financial statements. A-9
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
($ in thousands)
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)
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
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 ======= ====== ========
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
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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 ========= =======
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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:
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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 $100 million fixed rate senior subordinated notes were present valued using the market rate of 10.456% as quoted by Bloomberg Financial Services. The carrying value of the debt bearing interest at prime rate approximates fair value.
Accounts Payable
The carrying value of the payables approximates fair value due to the short-term nature of the obligation.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Fair value estimates are based on existing on balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include the deferred tax assets and liabilities, property and equipment, equity investment in partnerships, goodwill, other noncurrent assets and accrued expenses. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the aforementioned estimates.
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31, December 31, 1998 1997 ---- ---- ($ 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 $12,204 ======= =======
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
G. INDEBTEDNESS
Long-term debt is as follows:
($ 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
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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.
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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:
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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:
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 $0.44 ===== ===== =====
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Statement 123 calls for a prospective application of compensation relating to the grant of stock options and, consequently pro-forma financial information may not be indicative of future amounts until the new rules are applied to all outstanding nonvested awards.
K. OTHER INCOME (EXPENSE)
Included in other, net in the consolidated statements of income are the following components:
Years Ended December 31, ($ 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 $1,996 ====== ====== ======
A reconciliation of expected income tax (computed by applying the United States statutory income tax rate of 35% for 1998 and 1997 and 34% for 1996, to earnings before income taxes) to total income tax expense in the accompanying consolidated statements of income follows:
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ 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
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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.
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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.
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 $202,534 ======== ======== ========
The reconciliation of the other significant items to the amounts reported on the consolidated financial statements is as follows:
The adjustments in 1998, 1997 and 1996 for interest revenue and expense, depreciation and amortization and expenditures for segment assets represent amounts recorded by the operations of the Company's corporate functions, which have not been allocated to the segments.
P. CONDENSED FINANCIAL INFORMATION REGARDING GUARANTOR SUBSIDIARIES
Condensed consolidating financial information regarding the Company, Guarantor Subsidiaries and non-guarantor subsidiaries as of December 31, 1998 and 1997 and for each of the years in the three-year period ended December 31, 1998 is presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. Separate financial statements and other disclosures concerning each Guarantor Subsidiary have not been presented because management has determined that such information is not material to investors. The Guarantor Subsidiaries are wholly- owned subsidiaries of the Company who have fully and unconditionally guaranteed the Notes described in Note G.
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Condensed Consolidating Statement of Income
Year Ended December 31, 1998
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Condensed Consolidating Statement of Income
Year Ended December 31, 1997 ($ in thousands)
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Condensed Consolidating Statement of Income
Year Ended December 31, 1996
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET
($ in thousands) December 31, 1998
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET
($ in thousands) December 31, 1997
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
($ in thousands) Year Ended December 31, 1998
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
($ in thousands) Year Ended December 31, 1997
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
($ in thousands)
Year Ended December 31, 1996
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