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 67 lithotripters of which 60 are mobile and seven are fixed site. The Company's lithotripters performed approximately 36,000 procedures in the United States in 2000 through a network of approximately 450 hospitals and surgery centers in 34 states.
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 160,000 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 2000, the Company completed 13 acquisitions involving 58 lithotripters. Since 1992, the Company has divested its original non-lithotripsy businesses.
During 1997 the Company acquired a 75% interest in a manufacturing company which provides manufacturing services, and installation, refurbishment and repair of major medical equipment for mobile medical services providers. The primary intention of this acquisition was to provide vertical integration with the lithotripsy business. However, the non-lithotripsy business of the manufacturing segment has continued to increase. In addition to manufacturing services for lithotripsy trailers, the manufacturing segment also provides manufacturing services for magnetic resonance imaging ("MRI") trailers, cardiac catheterization lab trailers and postitron emission tomography ("PET") trailers.
During 1999 and 2000, the Company completed six acquisitions totaling eleven refractive centers in the rapidly growing field of refractive vision correction (RVC). These six acquisitions now operate fifteen laser vision correction facilities, which performed approximately 33,000 procedures on an annualized basis during 2000. These facilities provide laser vision correction of common
refractive vision disorders such as myopia (nearsightedness), hyperopia (farsightedness) and astigmatism. The Company also opened its first internally developed center in 2000.
There are currently two procedures that use the excimer laser ("laser") to correct vision disorders: Laser in-situ Keratomileusis ("LASIK") and Photorefractive Keratectomy ("PRK"). LASIK is an outpatient procedure that accounts for nearly 90% of laser procedures done today. In LASIK, an ophthalmic surgeon uses a special knife called a microkeratome to peal back the top layers of the cornea and ablates the underlying corneal tissue with the laser before replacing the corneal layer. LASIK has three key advantages over PRK where the laser is used without creating the corneal flap: less pain, shorter recovery time, and fewer visual side effects.
The Company has three reportable segments: lithotripsy, manufacturing and RVC. Other operating segments, which do not meet the qualitative thresholds for reportable segments, include prostatherapy services. See Note N to the consolidated financial statements for segment disclosures.
Lithotripsy Segment 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 preventive 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. During 2000 the Company received approximately 64% of its revenues from the lithotripsy segment.
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 two basic types of lithotripsy treatment currently available: electromagnetic and spark-gap. 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 55 electromagnetic machines and 12 spark-gap machines.
Electromagnetic Technology. These 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.
Manufacturing Segment Overview - ------------------------------
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. Certain members of AK management own the remaining 25% of AK. During 1998 AK became certified by General Electric Company ("GE") to provide trailers for MRI equipment, and during 1999 AK became certified by two additional companies to provide trailers for their equipment. These certifications have resulted in increased revenues in the manufacturing segment. Currently, AK manufactures MRI, cardiac catheterization lab and PET trailers. The sales prices for these trailers range from $270,000 to $360,000. AK either has a sales contract prior to beginning the manufacturing process or enters into a sales contract prior to
completion of the trailer. AK is certified to manufacture trailers for GE, Siemens, Philips and Marconi. In addition, AK repairs, refurbishes and upgrades existing trailers. Although repair and upgrade work was less than 5% of total sales in 2000, this opportunity will continue to grow as more and more units are placed into service. The Company received approximately 17 % of its revenues from the manufacturing segment in 2000.
RVC Segment Overview - --------------------
During 1999, the Company entered into the RVC field through two acquisitions. Effective September 1, 1999, the Company acquired a 60% interest in three refractive surgery centers, owned and operated by Barnet Dulaney Eye Center in Phoenix and Tucson, Arizona for approximately $8.8 million in cash, a warrant to purchase 29,000 shares of the Company's common stock and a contingent earn-out obligation totaling $1 million which was paid in 2000. Also effective September 1, 1999, the Company acquired, through a majority owned subsidiary, 60% of the outstanding stock of Horizon Vision Centers, Inc. ("Horizon") for approximately $10.9 million in cash, which operated four refractive surgery centers in the San Francisco and Oakland bay area. During 2000, Horizon opened three additional refractive centers.
Effective March 1, 2000, the Company purchased a 60% interest in a refractive surgery center owned and operated by the Mann Berkeley Caplan Laser Center of Austin, Texas. The Company paid approximately $3.8 million in cash and issued warrants to purchase 27,000 shares of the Company's common stock. Additionally in conjunction with this transaction, the Company issued warrants to purchase 28,000 shares of common stock to a third party.
Also effective March 1, 2000, the Company purchased a 60% interest in a refractive surgery center in Los Angeles owned and operated by the Caster Eye Center. The Company paid approximately $5.8 million in cash. Additionally in conjunction with this transaction, the Company issued warrants to purchase 44,000 shares of the Company's common stock to a third party.
Effective April 1, 2000, the Company purchased a 65% interest in a refractive surgery center in New York City owned and operated by New York Eye Specialists. The Company paid approximately $8.9 million in cash. Additionally in conjunction with this transaction, the Company issued warrants to purchase 67,000 shares of the Company's common stock to a third party. During 2000, this Company subsidiary opened a new center in Connecticut.
Effective September 1, 2000, the Company purchased a 65% interest in a Kansas City refractive surgery center owned and operated by Vision Correction Centers of Kansas City. The Company paid approximately $4.5 million in cash for the center in October 2000. Additionally in conjunction with this transaction, the Company issued warrants to purchase 33,750 shares of the Company's common stock to a third party.
In 2000, the Company also opened its first internally developed refractive vision correction center in St. Louis. This center was developed in conjunction with certain principals in Barnet Dulaney Eye Center and two local doctors.
The Company received approximately 18% of its revenue from the RVC segment in 2000.
Refractive Disorders
The primary function of the human eye is to focus light. The eye works much like a camera; light rays enter the eye through the cornea, which provides most of the focusing power. Light then travels through the lens where it is fine-tuned to focus properly on the retina. The retina, located at the back of the eye, acts like the film in the camera, changing light into electric impulses that are carried by the optic nerve to the brain. To see clearly, light must be focused precisely on the retina. The amount of refraction required to properly focus images depends on the curvature of the cornea and the size of the eye. If the curvature is not correct, the cornea cannot properly focus the light passing through it onto the retina, and the viewer will see a blurred image. Refractive disorders, such as myopia, hyperopia and astigmatism, result from an inability of the cornea and the lens to focus images on the retina properly.
Laser Vision Correction Procedures
In both PRK and LASIK the physician assesses the corneal correction required and programs the laser. The laser's software calculates the optimal number of pulses needed to achieve the corneal correction. Both PRK and LASIK are performed on an outpatient basis without general anesthesia, using only topical anesthetic eye drops. The eye drops eliminate the reflex to blink, while an eyelid holder is inserted to prevent blinking. The patient reclines in a chair, with his or her eye focused on a target, and the surgeon positions the patient's cornea for the procedure. The surgeon uses a foot pedal to apply the laser beam, which emits a rapid succession of laser pulses. The actual laser treatment takes 15 to 90 seconds to perform and the entire procedure, from set-up to completion, takes 10 to 15 minutes.
Prostatherapy Segment Overview - ------------------------------
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 operated three mobile thermotherapy devices servicing hospitals and surgery centers in eastern North Carolina, Texas, and southern California. The Company received approximately 1% of its revenues from the prostatherapy segment in 2000. In January 2001, the Company sold its prostatherapy segment in exchange for a three year unsecured non-recourse note receivable for $950,000. The Company also entered into a mutual covenant not to compete with the buyer in exchange for an unsecured non-recourse note receivable for $150,000.
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 $5,000,000, with a deductible of $50,000 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 for 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 all of its prostatherapy services (and the corresponding arrangements between such partnerships and other entities and the treating physicians who own interests therein and who use the lithotripsy and prostatherapy facilities owned by such partnerships and other entities) could potentially be questioned under the illegal remuneration prohibition and generally do 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 in and of itself 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 and Medicaid 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. 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. Physicians are investors in 51 of the Company's 65 lithotripsy operations, all of the three Company affiliates engaged in thermotherapy services and each of the Company's refractive vision correction facilities. 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 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 Health Care Financing Administration ("HCFA") published proposed regulations designed to interpret and clarify the application of Stark II. As these regulations were simply proposed and subject to future modification or repeal, the Company awaited the issuance of final Stark II regulations. On January 4, 2001 HCFA issued the first of two rules intended to implement the final Stark II regulations (the "Final Regulations"). The first rule ("Phase I") implements the Final Regulations pertaining to (i) Stark II's general prohibition against physician self-referrals to entities in which they have a financial relationship, (ii) the general exceptions applicable to both the ownership and compensation arrangement prohibitions, (iii) certain new regulatory exceptions, and (iv) the definitions that are used throughout Stark II. HCFA intends to publish a second final rule ("Phase II") shortly which will address the remainder of the Stark II statute and its application to the Medicaid program, as well as certain proposals for new exceptions not included in the proposed Stark II regulations, but suggested in the public comments thereto. Phase I will become effective on January 4, 2002. HCFA has delayed the effective date of Phase I to allow individuals and entities engaged in business arrangements impacted by Phase I time to restructure those arrangements to comply with the provisions in Phase I.
Currently, Medicare and Medicaid only reimburse for lithotripsy if the service is provided through a hospital. The lithotripsy services to be provided by the Company Physician Entities pursuant to the hospital service contracts to Medicare/Medicaid hospital outpatients will be provided "under arrangements" with hospitals, with the treatment being billed under the hospital's provider billing number. HCFA acknowledged in its commentary to the proposed Stark II regulations that physician overutilization of lithotripsy is unlikely and solicited comments on whether there should be a regulatory exception to Stark II specifically for lithotripsy services. Upon consideration of numerous public comments received on the proposed regulations and upon review of the Stark II legislative history, HCFA concluded in its commentary to the Final Regulations that it does not have the authority to exclude lithotripsy from the inpatient and outpatient hospital services covered by Stark II. Consequently, the Company Physician Entities practice of providing lithotripsy services "under arrangements" to hospitals for treatment of Medicare and Medicaid patients must comply with the provisions of the Final Regulations.
Although the Final Regulations do not provide a specific Stark II exception for lithotripsy services, the regulations do provide needed clarity and certain opportunities for the Partnership to operate in compliance with Stark II. In the Commentary to the Final Regulations, HCFA notes its desire to permit physician-owned lithotripsy ventures to continue if such ventures are structured such that no direct or indirect compensation arrangement is created, or the arrangement fits within a compensation arrangement exception to Stark II. The Final Regulations accomplish HCFA's desire in part by: (i) clarifying that physician-owned lithotripsy vendors providing services "under arrangements" with hospitals can comply with Stark II by either being structured such that they are not compensation arrangements, as defined in the Final Regulations, or qualifying under a compensation exception (but not an ownership interest exception as well); (ii) broadening certain existing Stark II statutory exceptions by redefining certain standards to allow "per-use" lithotripsy payments, as long as such payments are at fair market value; and (iii) adding two new Stark II regulatory exceptions that are potentially available for Company Physician Entity operations.
In order for the Company Physician Entities to comply with Stark II as modified by the Final Regulations, the entities financial relationships with hospitals must either fall outside the definition of a compensation arrangement, or comply with a Stark II compensation arrangement exception. The Company has worked to establish a compliance program that is in the process of implementation. As noted above, due to the Final Regulations delayed effective date, the Company has until January 4, 2002 to take reasonable steps to review the Company Physician Entities operations under the Final Regulations. Specifically, the Company Physician Entities intend to work with hospitals to review and modify, if necessary, the service contracts so that they satisfy the standards set forth in the new Final Regulations. To the extent financial arrangements with the contract hospitals meet the definition of "indirect compensation arrangements" under the Final Regulations, then the Company Physician Entities intend to see that such agreements fit within the new indirect compensation arrangement exception. Indirect compensation arrangements have several important elements, including the presence of an intervening entity, that directly links referring physician owners with the entity providing the designated health service (e.g., the contract hospital). In order to comply with the indirect compensation exception, the Company Physician Entities hospital contracts must meet each of the following standards:
o The compensation received directly by the Company Physician Entities from the hospitals must be fair market value for the items or services provided under the arrangement and must not take into account the value or volume of referrals or other business generated by the referring physician for the contract hospital;
o The compensation arrangement between the Company Physician Entities and the hospitals must be set out in writing, signed by the parties, and specify the services covered by the arrangement; and
o The compensation arrangement must not violate the Anti-Kickback Statute or any laws or regulations governing billing or claims submission.
In regard to the Company Physician Entities proposed operations, the indirect compensation arrangement exception may be used with respect to any or all payments made by the hospitals to the entities, including payments for the use of the lithotripters, as well as the personal services of a technician and/or nurse. It is important to note that the Final Regulations allow fair market value per-use payments for lithotripsy services. The Company believes that its current financial relationships with hospitals are compliant or can be modified to the extent necessary to satisfy the requirements of the indirect compensation arrangement exception, and that accordingly, the Company Physician Entities will be able to operate in compliance with Stark II. To succeed with its compliance plan, the Company Physician Entities must obtain the hospitals' cooperation in making any necessary revisions to their service contracts consistent with the indirect compensation arrangement exception. Whereas the Company believes that the service contracts which create financial relationships with the hospitals have always met the fair market value standard, the Final Regulations place the burden on the contracting parties that rely on the indirect compensation exception to prove the standard is met. The Company intends to engage a valuation expert or pursue other commercially reasonable methodologies to assist it in meeting that burden of proof.
The Company believes it will successfully implement the above described compliance plan, however, there can be no assurance that such will be the case. The hospitals may not cooperate with the Company Physician Entities. If hospitals chose not to continue a financial relationship with the Company Physician Entities, this could have a material adverse effect on the entities. Should that occur, then the Company intends to explore and implement any other available options that would allow the Company Physician Entities to comply with Stark II, as well as all other material health care statutes and regulations. Such alternative options may include contracting with ambulatory surgery centers ("ASCs") rather than hospitals, since lithotripsy services at ASCs are not covered by Stark II. The Medicare and Medicaid programs, however, do not reimburse for lithotripsy services at ASCs at this time. It is anticipated that ASCs will receive reimbursement for treatment of Medicare and Medicaid patients in the near future, but there can be no assurance that such will be the case. It should be noted that there can be no assurance that compliance action taken by the Company under any potential alternative, or contract decisions by hospitals, will occur in a manner that does not have a material adverse effect on the Company Physician Entities.
Stark II compliance efforts 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 purchase prices calculated using various formulas ranging from capital account value to 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 physicians and otherwise have a material adverse impact on the Company. Regulatory developments 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 physicians 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 the Company's 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 and thermotherapy facilities 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 and thermotherapy equipment are subject to safety regulation by the U.S. Department of Transportation and the states in which the Company conducts its mobile lithotripsy and thermotherapy 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 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 $600,000. For mobile lithotripsy and thermotherapy, 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. The cost of the laser equipment utilized in RVC ranges from $300,000 to $500,000.
Employees - ---------
As of March 15, 2001, the Company employed approximately 350 full-time employees and approximately 50 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. The Company also competes with three public companies, all of which are also manufacturers of lithotripsy equipment, which may create different incentives for such providers 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.
The Company's manufacturing segment competes with at least three privately held, national companies. The primary competitive factors are price and quality, including product manufacturing differences. Additionally, two of the three largest competitors are certified to provide GE trailers. The Company believes it manufactures a high quality product at a competitive price.
The RVC market is fragmented and competitive. The Company competes with several national, public companies as well as individual ophthalmologists, hospitals and smaller service companies. The principal methods for competition are pricing and quality issues. The larger competitors are primarily focused on pricing, while the smaller competitors compete using both pricing and quality issues. While there are lower cost competitors in the geographic areas where the Company currently has operations, the Company believes it provides a higher quality service for a competitive price.
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 $18,000 per month, which includes rental payment for approximately 11,600 square feet of office space, reception and telephone services, and certain other services and facilities. The office space lease expires in December 2002.
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 - ------ -----------------
The Company is involved in various claims and legal actions that have arisen in the ordinary course of business. Management believes that any liabilities arising from these actions will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ ---------------------------------------------------
On June 14, 2000, an annual meeting of the shareholders of the Company was held to consider and vote on the proposal described below. Proxies for this meeting were solicited pursuant to Regulation 14 under the Act.
1) Election of seven directors to the board of directors;
The nominees for director were:
David Dulaney, M.D., Joseph Jenkins, M.D., J.D., J.A. McEntire IV, William A. Searles, Kenneth S. Shifrin, Michael J.Spalding, M.D. and James M. Usdan.
All nominees were elected. The voting was as follows:
Nominee Votes For Votes Against Votes Withheld
David Dulaney, M.D. 15,195,059 1,010,579 -- Joseph Jenkins, M.D., J.D. 15,195,059 1,010,579 -- J.A. McEntire IV 15,195,059 1,010,579 -- William A. Searles 15,195,059 1,010,579 -- Kenneth S. Shifrin 15,195,059 1,010,579 -- Michael J. Spalding, M.D. 15,195,059 1,010,579 -- James M. Usdan 15,195,059 1,010,579 --
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED - ------- ------------------------------------------------- STOCKHOLDER MATTERS -------------------
The following table sets forth the high and low closing prices for the Company's common stock in the over-the-counter market as reported by the National Association of Securities Dealers, Inc., Automated Quotations System, for the years ended December 31, 2000 and 1999 (NASDAQ Symbol "PMSI").
2000 1999 ---------------- ---------------- High Low High Low ---- --- ---- ---
First Quarter $ 9.06 $ 7.13 $ 8.44 $ 7.13 Second Quarter $ 9.06 $ 6.81 $ 7.56 $ 6.75 Third Quarter $ 9.50 $ 7.50 $ 9.75 $ 7.44 Fourth Quarter $ 8.25 $ 4.91 $ 10.63 $ 8.13
On March 15, 2001, the Company had approximately 594 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, debt covenants and such other factors as the Board of Directors may deem relevant.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - ------- -----------------------
Quarterly Data March 31 June 30 Sept. 30 Dec. 31 - -------------- -------- ------- --------- --------
- ----
Revenues $29,443 $32,966 $35,445 $32,841 Net income $3,297 $3,102 $3,168 $1,090 Per share amounts (basic): Net income $0.20 $0.19 $0.20 $0.07 Weighted average shares outstanding 16,435 16,218 15,943 15,749 Per share amounts (diluted):
Net income $0.20 $0.19 $0.20 $0.07 Weighted average shares outstanding 16,607 16,303 16,025 15,750
- ----
Revenues $25,382 $28,608 $30,632 $27,552 Net income $3,162 $4,302 $4,339 $3,236 Per share amounts (basic): Net income $0.18 $0.25 $0.26 $.20 Weighted average shares outstanding 17,387 17,098 16,818 16,553 Per share amounts (diluted)
Net income $0.18 $0.25 $0.26 $0.19 Weighted average shares outstanding 17,495 17,196 17,000 16,788
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS OF THE COMPANY ----------------------------
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, 2000 compared to the year ended December 31, 1999 - -------------------------------------------------------------------------
Total revenues increased $18,521,000 (17%) as compared to the same period in 1999. Revenues from lithotripter operations decreased by $5,845,000 (7%) primarily due to renegotiation of contracts which resulted in a larger number of contracts providing for per diem pricing, and slightly lower procedure volumes related to contracts lost due to non-renewal and competition. Manufacturing revenue increased by $4,630,000 (26%) due to increased sales of MRI and cardiac catheterization lab trailers as well as the Company's expansion into the sales of PET trailers. RVC revenues increased $20,087,000 (588%) as 2000 revenues included a full year of operations for five centers and partial year of operations for eleven new centers, while 1999 revenues included partial year of operations for two entities. Prostatherapy revenues decreased $256,000 (14%).
Costs of services and general and administrative expenses (excluding depreciation and amortization) increased from 40% to 47% of revenues and increased $16,955,000 (38%) in absolute terms, compared to the same period in 1999. Cost of services associated with lithotripter operations decreased $585,000 (3%) in absolute terms and increased from 26% to 27% of lithotripter revenues. Cost of services associated with manufacturing increased $4,269,000 (33%) in absolute terms and from 73% to 77% of manufacturing revenues due to expansion into new product lines. Cost of services associated with RVC operations increased $11,902,000 (609%) in absolute terms, and from 57% to 59% of RVC revenues due to full year of operation for five centers in 2000 and partial year of operations for the additional eleven centers. Cost of services associated with prostatherapy increased $39,000 and the Company recognized an impairment on its prostatherapy segment of $1,230,000 in 2000 in connection with approving the disposal of this segment in a transaction which closed in January 2001. Corporate expenses decreased from 4% to 3% of revenues, as the Company was able to successfully grow without proportionately adding overhead. Corporate expenses decreased $541,000 (11%) primarily due to a consolidation of corporate functions.
Other deductions increased $2,069,000 from 1999 to 2000. This increase is partially attributable to an increase in interest expense of $1,155,000 during 2000. Also contributing to the increase in other deductions was income recognition in 1999 of $1,140,000 due to the release of a contractual obligation related to a management incentive compensation program accrued at December 31, 1998.
Minority interest in consolidated income increased $3,246,000 primarily due to the decline in lithotripsy revenue discussed above. Earnings before interest, taxes, depreciation, and amortization (EBITDA) attributable to minority interests was $32,328,000 for the year ended December 31, 2000 compared to $28,554,000 for the same period in 1999. 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 2000 decreased $2,706,000 over 1999 primarily due to the decrease in pretax income.
Year ended December 31, 1999 compared to the year ended December 31, 1998 - -------------------------------------------------------------------------
Total revenues increased $7,538,000 (7%) as compared to the same period in 1998. Revenues from lithotripter operations decreased by $2,873,000 (3%) primarily due to renegotiation of contracts which resulted in a larger number of contracts providing for per diem pricing, and contracts lost due to non-renewal and competition. Despite the lithotripsy revenue declines, lithotripsy procedure volume was constant from 1998 to 1999, which the Company believes is indicative of its market share preservation. Manufacturing revenue increased by $6,461,000 (58%) due to increased sales of MRI trailers as well as the Company's expansion into manufacturing and sales of cardiac catheterization lab trailers. RVC revenues were $3,414,000 in 1999 and included fee revenue of $3,004,000 and equity income of $410,000. The RVC operations were acquired during the third quarter of 1999. Prostatherapy revenues increased $627,000 (52%) as1999 revenues included a full year of operations for three entities, while 1998 revenues included a full year of operations for one entity and a partial year of operations for two entities.
Costs of services and general and administrative expenses (excluding depreciation and amortization) increased from 38% to 40% of revenues and increased $5,466,000 (14%) in absolute terms, compared to the same period in 1998. Cost of services associated with lithotripter operations increased $327,000 (1%) in absolute terms and from 25% to 26% of lithotripter revenues. Cost of services associated with manufacturing increased $3,676,000 (40%) due to the increase in sales. Cost of services associated with RVC was $1,954,000, which represents approximately 4 months of operations. Cost of services associated with prostatherapy increased $482,000 due to increased operations. Corporate expenses decreased from 5% to 4% of revenues and increased $101,000 (2%) in absolute terms, as the Company was able to successfully grow without proportionately adding overhead.
Other deductions decreased $4,318,000 from 1998 to 1999. This decrease is attributable to a decrease in loan fees and stock offering costs of $4,412,000 due to costs recognized in 1998 of $4,978,000 associated with the $100 million senior subordinated notes offering and the $50 million increase in the senior revolving credit facility, partially offset by 1999 expenses of $566,000 related to a restructuring of the Company's $100 million senior revolving credit facility. Also contributing to the decrease in other deductions was income recognition in 1999 of $1,140,000 due to the release of a contractual obligation related to a management incentive compensation program accrued at December 31, 1998. These decreases were partially offset by an increase in interest expense of $939,000, primarily due to the $100 million debt offering which closed in March 1998.
Minority interest in consolidated income decreased $282,000 in 1999 as compared to 1998 primarily due to the decline in lithotripsy revenue discussed above. EBITDA attributable to minority interests was $28,554,000 for the year ended December 31, 1999 compared to $28,077,000 for the same period in 1998.
Income tax expense for 1999 increased $2,055,000 over 1998 primarily due to the increase in pretax income.
Liquidity and Capital Resources - -------------------------------
Cash and cash equivalents were $15,530,000 and $20,064,000 at December 31, 2000 and 1999, respectively. 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, 2000 and 1999, the Company's subsidiaries distributed cash of approximately $27,092,000 and $27,180,000, respectively, to minority interest holders.
Cash provided by operations was $45,180,000 for the year ended December 31, 2000 and $35,744,000 for the year ended December 31, 1999. From 1999 to 2000 fee and other revenue collected increased by $12,256,000 and was offset by the increase in cash paid to employees, suppliers of goods and others of $11,092,000. These fluctuations are attributable to increased operations as well as the timing of accounts receivable collections and accounts payable and accrued expense payments. An increase in interest payments of $1,052,000 was due to the Company drawing on its line of credit during 2000 related to the refractive acquisitions
made during 2000. Taxes paid decreased $2,555,000 from 1999 to 2000. Additionally, the Company purchased investments of $3,714,000 during 2000, offset by proceeds from sales and maturities of $6,615,000.
Cash used by investing activities for the year ended December 31, 2000, was $33,802,000 primarily due to $23,784,000 used in four refractive acquisitions and as well as payments of earnouts related to a prior year acquisition. The Company purchased equipment and leasehold improvements totaling $12,975,000. The Company received $2,680,000 in distributions from investments. Cash used by investing activities for the year ended December 31, 1999, was $26,241,000 primarily due to $23,580,000 used in two refractive acquisitions and as well as payments totaling $5,790,000 for the purchase of equipment and leasehold improvements. The Company received $2,352,000 in distributions from investments.
Cash used in financing activities for the year ended December 31, 2000, was $15,912,000, which was primarily due to distributions to minority interests of $27,092,000 and purchases of treasury stock of $7,703,000 partially offset by net borrowings of $18,517,000 and contributions of $202,000 received from holders of minority interests related to expansion of existing partnerships and new partnership formations. Cash used in financing activities for the year ended December 31, 1999, was $29,585,000, primarily due to distributions to minority interests of $27,180,000, purchases of treasury stock of $8,382,000, partially offset by net borrowings of $3,181,000 and contributions of $2,636,000 received from holders of minority interests related to expansion of existing partnerships and new partnership formations.
The Company's credit facility as of December 31, 2000 is comprised of a revolving line of credit. The revolving line of credit has a borrowing limit of $100 million, $18 million and $12 million of which was drawn at December 31, 2000 and March 15, 2001, respectively. During 2000, the Company completed a restructuring of its revolving line of credit to enable the Company to borrow for RVC acquisitions. The restructuring split the credit facility into two facilities: one for $14,000,000 for refractive acquisitions by certain subsidiaries, another for the remaining $86,000,000 for lithotripsy, manufacturing, refractive and prostatherapy acquisitions, stock repurchases and working capital. 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 used for general corporate purposes, including acquisitions. In connection therewith, the Company recorded a charge to earnings in 1998 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 intends to increase the number of its lithotripsy operations primarily through acquisitions, the number of its RVC operations through both acquisitions and development, and its manufacturing operations through acquisitions and by increasing its product lines through additional certifications. The Company intends to fund the purchase price for future acquisitions and developments using borrowings under its senior credit facility 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. In February 2000, the Company announced an increase in the authorized repurchase amount from $25.0 million to $35.0 million and in January 2001 this amount was increased to $45.0 million. 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 3,820,200 shares of stock for a total of $32,524,000 as of March 15, 2001.
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.
Inflation - ---------
The operations 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.
ITEM 7. A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - --------- ---------------------------------------------------------- Interest Rate Risk
As of December 31, 2000, the Company had long-term debt (including current portion) totaling $125,709,000, of which $100 million has a fixed rate of interest of 8.75%, $1,517,000 has fixed rates of 6% to 9%, $6,030,000 bears interest at a variable rate equal to a specified prime rate, $18 million bears interest at a variable rate equal to LIBOR + 1 to 2% and $162,000 does not bear any interest. The Company is exposed to some market risk due to the floating interest rate debt totaling $24,030,000. The Company makes monthly or quarterly payments of principal and interest on $6,030,000 of the floating rate debt. An increase in interest rates of 1.5% would result in a $360,000 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 2001 annual meeting of shareholders, except for the information regarding executive officers of the Company, which is presented below. The information required by this item contained in such definitive proxy material is incorporated herein by reference.
As of March 15, 2001, the executive officers of the Company are as follows:
Name Age Position
Kenneth S. Shifrin 51 Chairman of the Board Brad A. Hummel 44 Chief Executive Officer and President Cheryl L. Williams 49 Chief Financial Officer, Senior Vice President-Finance and Secretary Stan Johnson 47 Vice President David Vela, M. D. 53 Vice President
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 World Presidents' Organization.
Mr. Hummel has been President and Chief Executive Officer since June 2000. From October 1999 until June 2000, Mr. Hummel was Executive Vice President and Chief Operating Officer of the Company. Prior to joining the Company, Mr. Hummel was with Diagnostic Health Services, Inc. ("DHS") since 1984, most recently serving as the President and Chief Executive Officer, and as a member of the Board of Directors. DHS filed for Chapter 11 bankruptcy reorganization in March 2000 and re-emerged from bankruptcy in October 2000. From 1981 to 1984, Mr. Hummel was an associate with Covert, Crispin and Murray, a Washington, D.C. and London-based management consulting firm. Mr. Hummel also serves as a member of APS's Board of Directors.
Ms. Williams has been Chief Financial Officer, Senior 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.
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. In March 2000, Mr. Johnson was named a Group Vice President of the Company. Mr. Johnson was the Chief Financial Officer of Sun from 1990 to 1995.
Dr. Vela has been a Group Vice President of the Company since March 2000. Dr. Vela received his medical degree in 1984. Dr. Vela developed and operated various outpatient centers throughout the United States from 1986 to 1995. From February 1997 to March 2000, Dr. Vela served as Regional Vice President of the Company for the Central Region.
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 2001 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 2001 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 2001 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 July 21, 1999 among Prime Lithotripsy Services, Inc., Reston Hospital Lithotripter Joint Venture, Reston Lithotripsy Associates, Inc., Columbia Arlington Healthcare System, L.L.C. and Robert Ball,M.D. (15)
10.10 Not used
10.11 Not used
10.12 Not used
10.13 Not used
10.14 Amended and Restated Joint Venture Agreement dated April,1989, between Prime Diagnostic Imaging Services, Inc. and The Shasta Diagnostic Imaging Medical Group. (4)
10.15 Agreement of Limited Partnership of Mobile Kidney Stone Centers of California III, L.P. (15)
10.16 Amendments to First Amended and Restated Agreement of Limited Partnership of Ohio Mobile Lithotripter, Ltd. (15)
10.17 Second Amendment to Agreement of Limited Partnership of Pacific Medical Limited Partnership (15)
10.18 Amendments to Agreement of Limited Partnership of Texas Lithotripsy Limited Partnership VII, L.P. (15)
10.19 Fourth Amendment to Agreement of Limited Partnership of San Diego Lithotripters Limited Partnership (15)
10.20 Amendment to Agreement of Limited Partnership of Fayetteville Lithotripters Limited Partnership - Virginia I (15)
10.21 Amendments to Agreement of Limited Partnership of Fayetteville Lithotripters Limited Partnership - South Carolina I (15)
10.22 Amendment to Agreement of Limited Partnership of Fayetteville Lithotripters Limited Partnership - Utah I (15)
10.23 Third Amendment to Agreement of Limited Partnership of Florida Lithotripters Limited Partnership I (15)
10.24 Fourth Amendment to Agreement of Limited Partnership of Indiana Lithotripters Limited Partnership I (15)
10.25 Sixth Amendment to Agreement of Limited Partnership of Texas Lithotripsy Limited Partnership III, L.P. (15)
10.26 Agreement of Limited Partnership of Mobile Kidney Stone Centers of California II, L.P. (15)
10.27 Fourth Amendment to Agreement of Limited Partnership of Louisiana Lithotripsy Investment Limited Partnership (15)
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 Not used
10.31 Not used
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 Not used
10.41 Not used
10.42 Not used
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)
10.47 Loan Agreement dated January 31, 2000 for $14,000,000 Advancing Term Loan between Prime Refractive Management, L.L.C., Bank of America, N.A. as Administrative Agent, Bank Boston, N.A. as Documentation Agent and the Lenders Named Therein (15)
10.48 Fourth Amended and Restated Loan Agreement dated January 31, 2000 for $86,000,000 Revolving Credit Loan between Prime Medical Services Inc., Bank of America, N.A. as Administrative Agent, BankBoston, N.A. as Documentation Agent and the Lenders Named Therein (15)
10.49 Pledge and Security Agreements dated January 31, 2000 relating to $14,000,000 Advancing Term Loan and $86,000,000 Revolving Credit Loan (15)
10.50 Borrower Security Agreements dated January 31, 2000 relating to $14,000,000 Advancing Term Loan and $86,000,000 Revolving Credit Loan (15)
10.51 Guarantor Security Agreements dated January 31, 2000 relating to $14,000,000 Advancing Term Loan and $86,000,000 Revolving Credit Loan (15)
10.52 Guarantor Copyright Security Agreements dated January 31, 2000 relating to $14,000,000 Advancing Term Loan and $86,000,000 Revolving Credit Loan (15)
10.53 Guaranty Agreements dated January 31, 2000 relating to $14,000,000 Advancing Term Loan and $86,000,000 Revolving Credit Loan (15)
10.54 Note dated January 31, 2000 in the amount of $1,050,000 between Prime Refractive Management and Guaranty Federal Bank, F.S.B. (15)
10.55 Note dated January 31, 2000 in the amount of $1,575,000 between Prime Refractive Management and Fleet National Bank (15)
10.56 Note dated January 31, 2000 in the amount of $3,150,000 between Prime Refractive Management and BankBoston, N.A. (15)
10.57 Note dated January 31, 2000 in the amount of $4,725,000 between Prime Refractive Management and Bank of America, N.A. (15)
10.58 Note dated January 31, 2000 in the amount of $2,100,000 between Prime Refractive Management and Bank One, Texas, N.A. (15)
10.59 Note dated January 31, 2000 in the amount of $12,900,000 between Prime Medical Services, Inc. and Bank One, Texas, N.A. (15)
10.60 Note dated January 31, 2000 in the amount of $8,600,000 between Prime Medical Services, Inc. and LaSalle Bank, National Association (15)
10.61 Note dated January 31, 2000 in the amount of $8,600,000 between Prime Medical Services, Inc. and Cooperative Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland", New York Branch (15)
10.62 Note dated January 31, 2000 in the amount of $8,600,000 between Prime Medical Services, Inc. and Credit Lyonnais New York Branch (15)
10.63 Note dated January 31, 2000 in the amount of $5,375,000 between Prime Medical Services, Inc. and Fleet National Bank (15)
10.64 Note dated January 31, 2000 in the amount of $8,600,000 between Prime Medical Services, Inc. and Imperial Bank(15)
10.65 Note dated January 31, 2000 in the amount of $6,450,000 between Prime Medical Services, Inc. and Guaranty Federal Bank, F.S.B. (15)
10.66 Note dated January 31, 2000 in the amount of $16,125,000 between Prime Medical Services, Inc. and Bank of America, N.A. (15)
10.67 Note dated January 31, 2000 in the amount of $10,750,000 between Prime Medical Services, Inc. and BankBoston, N.A. (15)
10.68 Note dated January 31, 2000 in the amount of $1,400,000 between Prime Refractive Management and LaSalle Bank, National Association (15)
10.69 Not used
10.70 Contribution Agreement dated September 1, 1999 and First Amendment dated January 31, 2000 among Barnet Dulaney Eye Center,P.L.L.C., David Dulaney, M.D., Ronald W. Barnet, M.D., Mark Rosenberg, Prime Medical Services Inc., Prime Medical Operating Inc., LASIK Investors, L.L.C., Prime/BDR Acquisition, L.L.C. and Prime/BDEC Acquisition, L.L.C (15)
10.71 Loan Agreement dated September 1, 1999 between Prime Medical Operating, Inc. and Prime/BDR Acquisition, L.L.C. (15)
10.72 Limited Liability Company Agreement of Prime/BDR Acquisition, L.L.C. (15)
10.73 Limited Liability Company Agreement of Prime/BDEC Acquisition, L.L.C. (15)
10.74 Non-Competition Agreements dated September 1, 1999 between Robert B. Pinkert, O.D. and Scott A. Perkins, M.D. for the benefit of Prime Medical Services Inc., Prime Medical Operating, Inc., Prime/BDR Acquisition, L.L.C., Prime/BDEC Acquisition, L.L.C., Barnet Dulaney Eye Center, P.L.L.C., LASIK Investors, L.L.C., Ronald W. Barnet, M.D., David D. Dulaney, M.D., and Mark Rosenberg (15)
10.75 Promissory Note dated September 1, 1999 from Prime/BDR Acquisition, L.L.C., to Prime Medical Operating, Inc. (15)
10.76 Collocation Agreement dated September 1, 1999 by and between Barnet Dulaney Eye Center, P.L.L.C. and Prime/BDR Acquisition, L.L.C. (15)
10.77 Membership Interest Transfer Restriction Agreement dated September 1, 1999 (15)
10.78 Assignment and Security Agreement dated September 1, 1999 between Prime Medical Operating, Inc. and LASIK Investors, L.L.C.(15)
10.79 Promissory Note dated September 1, 1999 from Prime/BDR Acquisition, L.L.C., to Prime Medical Operating, Inc. (15)
10.80 Loan Agreement dated January 31, 2000 between Prime Refractive, L.L.C. and Prime Refractive Management, L.L.C.(15)
10.81 Promissory Note dated January 31, 2000 between Prime Refractive, L.L.C. and Prime Refractive Management, L.L.C.(15)
10.82 Assignment and Security Agreement dated January 31, 2000 between Prime Refractive Management, L.L.C. and LASIK Investors, L.L.C. (15)
10.83 Limited Liability Company Agreement dated September 1, 1999 of Prime Refractive, L.L.C. (15)
10.84 Stock Purchase Agreements dated September 1, 1999 relating to the acquisition of Horizon Vision Center, Inc. (15)
10.85 Assignment and Security Agreements relating to the acquisition of Horizon Vision Center, Inc. (15)
10.86 Exclusive Use Agreements relating to the acquisition of Horizon Vision Center, Inc. (15)
10.87 Amended and Restated Bylaws for the regulation of Horizon Vision Center, Inc. (15)
10.88 Assignment and Security Agreement by and between Prime Medical Operating, Inc. and Prime/BDR Acquisition, L.L.C. (15)
10.89 Limited Liability Company Agreement of Caster One, L.L.C. (16)
10.90 Contribution Agreement dated March 1, 2000 among Prime Medical Services, Inc., Prime Refractive, L.L.C., Andrew Caster, M.D., and Caster Eye Center Medical Group (16)
10.91 Facility Use Agreement dated March 1, 2000 by and among Caster One,L.L.C., Andrew Caster, M.D., and Caster Eye Center Medical Group (16)
10.92 First Amendment and Restated Limited Liability Company Agreement dated March 1, 2000 of Caster One, L.L.C. (16)
10.93 First Amendment to Facility Use Agreement dated July 2000 by and among Caster One, L.L.C., Andrew Caster, M.D., and Caster Eye Center Medical Group (16)
10.94 Contribution Agreement dated September 1, 2000 among Prime Medical Services, Inc., Prime RVC, Inc., Prime Refractive - Kansas City, L.L.C., Vision Correction Centers of Kansas City, P.C., Kansas City Laser Vision Correction Centers, L.L.C., and Jeffrey Couch, M.D. (16)
10.95 Limited Liability Company Agreement dated September 1, 2000 of Prime Refractive - Kansas City, L.L.C. (16)
10.96 Facility Use Agreement dated September 2000 by and among Vision Correction Centers of Kansas City, P.C., Kansas City Laser Vision Correction Centers, L.L.C., Jeffrey Couch, M.D. and Prime Refractive - Kansas City (16)
10.97 Limited Liability Company Agreement of Horizon Vision Centers, L.L.C. (16)
10.98 Non-Competition Agreement dated April 1, 2000 by Horizon Vision Centers, L.L.C., for the benefit of Prime RVC and each of Prime RVC's affiliates (16)
10.99 Specimen of First Amendment to Assignment and Security Agreement dated April 1, 2000 relating to Horizon Vision Centers, Inc. (16)
10.100 Specimen of Consent and Agreement dated April 1, 2000 of Horizon Vision Centers, Inc., for the benefit of the Existing Center, Horizon Vision Centers, L.L.C., Prime RVC, Inc., and the parent companies and affiliates of each of the Existing Center, the New Center and Prime RVC (16)
10.101 Contribution Agreement dated March 1, 2000 among Prime MBC, L.L.C., MBC Holding Company, L.L.C., Mann Berkeley Eye Center, P.A., Paul Michael Mann, M.D., Ralph G. Berkeley, M.D., Michael B. Caplan, M.D., Mark F. Micheletti and Prime RVC, Inc. (16)
10.102 Membership Interest - Transfer Restriction Agreement dated March 1, 2000 by and among MBC Holding Company, L.L.C., Prime RVC, Inc., Paul Michael Mann, M.D., Ralph G. Berkeley, M.D. Michael B. Caplan, M.D., and Mark Micheletti (16)
10.103 Limited Liability Company Agreement of Prime MBC, L.L.C. (16)
10.104 Refractive Laser Center Management Agreement dated March 1, 2000 by and between Prime MBC, L.L.C. and Mann Berkeley Eye Center, P.A. (16)
10.105 Incidental Registration Rights Agreement dated March 1, 2000 by and among Prime Medical Services, Inc. and MBC Holding Company, L.L.C. (16)
10.106 Contribution Agreement dated April 1, 2000 among Prime Medical Services, Inc., Prime RVC, Inc., New York Laser Management, L.L.C., Ken Moadel, M.D., and Ken Moadel, M.D., P.C. (16)
10.107 Limited Liability Company Agreement of New York Laser Management, L.L.C. (16)
10.108 Office and Equipment Use Agreement dated April 1, 2000 by and among New York Laser Management, L.L.C., Ken Moadel, M.D. and Ken Moadel, M.D., P.C. (16)
10.109 Loan Agreement dated April 1, 2000 by and between Prime Medical Services, Inc. and New York Laser Management,L.L.C(16)
10.110 Assignment and Security Agreement dated April 1, 2000 by and between Prime Medical Services, Inc. and Ken Moadel, M.D. (16)
10.111 Limited Liability Company Agreement of Prime Refractive Management, L.L.C. (16)
10.112 Delaware Certificate of Incorporation Prime RVC, Inc. (16)
10.113 Bylaws as of January 31, 2000 of Prime RVC, Inc. (16)
10.114 Intercompany Agreement dated April 1, 2000 by and between Prime Medical Operating,Inc., Prime RVC, Inc.,Prime Refractive Management, L.L.C. and Prime/BDR Acquisition, L.L.C. (16)
10.115 First Amended and Restated Limited Liability Company Agreement dated September 1, 1999 of Prime/BDEC Acquisition, L.L.C. (16)
10.116 Consent and Liability Waiver dated March 31, 2000 by David D. Dulaney, M.D., Ronald W. Barnet, M.D., Mark Rosenberg, Barnet Dulaney Eye Center, P.L.L.C., LASIK Investors, L.L.C., Prime Refractive, L.L.C., Prime/BDR Acquisition, L.L.C. for the benefit of Prime Medical Services, Inc. (16)
10.117 Assignment Agreement and Second Amendment to Contribution Agreement dated April 1, 2000 by and between Prime Medical Services, Inc., Prime Medical Operating, Inc., Prime RVC,Inc., Prime Refractive Management,L.L.C., Barnet Dulaney Eye Center, P.L.L.C., LASIK Investors, L.L.C., Prime/BDR Acquisition, L.L.C., Prime/BDEC Acquisition, L.L.C., Prime Refractive, L.L.C., David D. Dulaney, M.D., Ronald W. Barnet, M.D. and Mark Rosenberg (16)
10.118 Stock Purchase Agreement dated December 31, 2000 by and between Prime Medical Services, Inc. and Innovative Medical Technologies, Inc. (16)
10.119 Mutual Non-Competition Agreement dated December 31, 2000 between Prime Medical Services, Inc., Prostatherapies, Inc., Innovative Medical Technologies, Inc. and Ronald Sorensen, M.D. (16)
10.120 Assignment and Security Agreement dated December 31, 2000 by and between Prime Medical Services, Inc. and Innovative Medical Technologies, Inc. (16)
10.121 Promissory Note dated December 31, 2000 by Innovative Medical Technologies, Inc. to Prime Medical Services Inc. (16)
10.122 Promissory Note dated December 31, 2000 by Innovative Medical Technologies, Inc. to Prime Medical Services Inc. (16)
10.123 Executive Employment Agreement dated November 1, 2000 by and between Prime Medical Services,Inc. and Kenneth S, Shifrin(16)
10.124 Executive Employment Agreement dated November 1, 2000 by and between Prime Medical Services, Inc. and Brad A. Hummel (16)
10.125 Executive Employment Agreement dated September 1, 2000 by and between Prime Medical Services, Inc. and Cheryl Williams (16)
10.126 Non-Competition Release and Severance Agreement dated December 29, 2000 by and between Prime Medical Services, Inc. and Joseph Jenkins, M.D. (16)
10.127 Confidential Private Placement Memorandum for Fayetteville Lithotripters Limited Partnership - Arizona I (16)
10.128 First Amendment to the Confidential Private Placement Memorandum dated August 14,2000 for Fayetteville Lithotripters Limited Partnership - Arizona I (16)
10.129 Second Amendment to the Confidential Private Placement Memorandum dated February 6, 2001 for Fayetteville Lithotripters Limited Partnership - Arizona I (16)
10.130 Confidential Private Placement Memorandum for Florida Lithotripters Limited Partnership I (16)
10.131 First Amendment to the Confidential Private Placement Memorandum dated March 31, 2000 for Florida Lithotripters Limited Partnership I (16)
10.132 Second Amendment to the Confidential Private Placement Memorandum dated April 14, 2000 for Florida Lithotripters Limited Partnership I (16)
10.133 Third Amendment to the Confidential Private Placement Memorandum dated April 19, 2000 for Florida Lithotripters Limited Partnership I (16)
10.134 Fourth Amendment to the Confidential Private Placement Memorandum dated May 2, 2000 for Florida Lithotripters Limited Partnership I (16)
10.135 Confidential Private Placement Memorandum for Indiana Lithotripters Limited Partnership I (16)
10.136 First Amendment to the Confidential Private Placement Memorandum dated August 9, 2000 for Indiana Lithotripters Limited Partnership I (16)
10.137 Second Amendment to the Confidential Private Placement Memorandum dated September 12, 2000 for Indiana Lithotripters Limited Partnership I (16)
10.138 Third Amendment to the Confidential Private Placement Memorandum dated September 26, 2000 for Indiana Lithotripters Limited Partnership I (16)
10.139 Confidential Private Placement Memorandum for Mobile Kidney Stone Centers of California III, L.P. (16)
10.140 First Amendment to the Confidential Private Placement Memorandum dated June 28, 2000 for Mobile Kidney Stone Centers of California III, L.P. (16)
10.141 Confidential Private Placement Memorandum for Mobile Kidney Stone Centers of California II, L.P. (16)
10.142 First Amendment to the Confidential Private Placement Memorandum dated June 1, 2000 for Mobile Kidney Stone Centers of California II, L.P. (16)
10.143 Second Amendment to the Confidential Private Placement Memorandum dated September 28, 2000 for Mobile Kidney Stone Centers of California II, L.P. (16)
10.144 Confidential Private Placement Memorandum for Fayetteville Lithotripters Limited Partnership - South Carolina II (16)
10.145 Amendment to the Confidential Private Placement Memorandum and Consent dated February 18, 2000 for Fayetteville Lithotripters Limited Partnership - South Carolina II (16)
10.146 First Amendment to the Confidential Private Placement Memorandum dated December 22, 1999 for Fayetteville Lithotripters Limited Partnership - South Carolina II (16)
10.147 Second Amendment to the Confidential Private Placement Memorandum dated January 14, 2000 for Fayetteville Lithotripters Limited Partnership - South Carolina II (16)
10.148 Confidential Private Placement Memorandum for Tennessee Lithotripters Limited Partnership I (16)
10.149 First Amendment to the Confidential Private Placement Memorandum dated January 14, 2000 for Tennessee Lithotripters Limited Partnership I Assignment Offering (16)
10.150 Second Amendment to the Confidential Private Placement Memorandum dated February 29, 2000 for Tennessee Lithotripters Limited Partnership I Assignment Offering (16)
10.151 Confidential Private Placement Memorandum for Fayetteville Lithotripters Limited Partnership - Utah I (16)
10.152 First Amendment to the Confidential Private Placement Memorandum dated October 17, 2000 for Fayetteville Lithotripters Limited Partnership - Utah I (16)
10.153 Confidential Private Placement Memorandum for Washington Urological Services, LLC (16)
10.154 First Amendment to the Confidential Private Placement Memorandum dated June 6, 2000 for Washington Urological Services, L.L.C. (16)
10.155 Second Amendment to the Confidential Private Placement Memorandum dated September 28, 2000 for Washington Urological Services, LLC (16)
10.156 Confidential Private Placement Memorandum for Western Kentucky Lithotripters Limited Partnership(16)
10.157 Agreement of Limited Partnership for Western Kentucky Lithotripters Limited Partnership (16)
10.158 First Amendment to the Confidential Private Placement Memorandum dated January 31, 2000 for Western Kentucky Lithotripters Limited Partnership (16)
10.159 Second Amendment to the Confidential Private Placement Memorandum dated February 24, 2000 for Western Kentucky Lithotripters Limited Partnership (16)
10.160 Third Amendment to the Confidential Private Placement Memorandum dated March 29, 2000 for Western Kentucky Lithotripters Limited Partnership (16)
10.161 Limited Liability Company Agreement of Connecticut Laser Management, L.L.C. (16)
10.162 Limited Liability Company Agreement of Prime Refractive - St. Louis, L.L.C. (16)
10.163 Amended and Restated Agreement of Limited Partnership of Texas Lithotripsy Limited Partnership VIII (16)
10.164 Management Agreement dated October 13, 2000 by and between Texas Lithotripsy Limited Partnership VIII and Lithotripers, Inc. (16)
10.165 Acquisition of 100% of the Issued and Outstanding Capital Stock of the Windsor Group, Inc. (16)
10.166 Confidential Private Placement Memorandum for Texas Lithotripsy Limited Partnership VII, L.P.(16)
10.167 First Amendment to Confidential Private Placement Memorandum for Texas Lithotripsy Limited Partnership VII, L.P.(16)
10.168 Second Amendment to Confidential Private Placement Memorandum for Texas Lithotripsy Limited Partnership VII, L.P.(16)
10.169 Third Amendment to Confidential Private Placement Memorandum for Texas Lithotripsy Limited Partnership VII, L.P.(16)
12 Computation of ratio of earnings to fixed charges. (16)
21.1 List of subsidiaries of the Company. (16)
23.1 Independent Auditors' Consent of KPMG LLP. (16)
--------------
* 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 10-Q 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 10-Q for the period ended September 30, 1998.
(14) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1998.
(15) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1999.
(16) 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/ Brad A. Hummel ---------------------- Brad A. Hummel, President and Chief Executive Officer
Date: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Kenneth S. Shifrin - -------------------------- Kenneth S. Shifrin Chairman of the Board
Date: March 30, 2001
By: /s/ Cheryl L. Williams - -------------------------- Cheryl L. Williams
Senior Vice President of Finance, Secretary and Chief Financial Officer (Principal Financial and Accounting Officer)
Date: March 30, 2001
By: /s/ Joseph Jenkins - ---------------------- Joseph Jenkins, M.D., Director
Date: March 30, 2001
By: /s/ John McEntire - --------------------- John McEntire, Director
Date: March 30, 2001
By: /s/ William A. Searles - -------------------------- William A. Searles, Director
Date: March 30, 2001
By: /s/ Michael Spalding - ------------------------ Michael Spalding, M.D., Director
Date: March 30, 2001
By: /s/ James M. Usdan - ---------------------- James M. Usdan, Director
Date: March 30, 2001
By: /s/ David Dulaney, M. D. - ---------------------------- David Dulaney, M. D., Director
Date: March 30, 2001
APPENDIX A
INDEX
Page
Independent Auditors' Report A-2
Consolidated Financial Statements:
Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998. A-3
Consolidated Balance Sheets at December 31, 2000 and 1999. A-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998. A-6
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998. A-7
Notes to Consolidated Financial Statements. A-10
Independent Auditors' Report
The Board of Directors and Shareholders Prime Medical Services, Inc.:
We have audited the 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
/s/:KPMG LLP
Austin, Texas March 6, 2001
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)
See accompanying notes to consolidated financial statements. A-4
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued)
($ in thousands, except share data)
See accompanying notes to consolidated financial statements.
A-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended December 31, 2000, 1999 and 1998
($ 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)
See accompanying notes to consolidated financial statements.
A-7
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
($ in thousands)
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
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 for lithotripsy, refractive and prostatherapy operations. The Company provides its services in 34 states. The Company also manufactures trailers for major medical equipment manufacturers and mobile medical service providers. References to the Company are to Prime and its controlled and affiliated entities.
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 have significant influence, 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, 2000, the Company had recognized approximately $274,000 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 have significant influence. 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.
Investments
The Company classifies its investments in debt securities as trading securities in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Trading securities are reported at fair value, with unrealized gains and losses included in earnings. The change in net unrealized holding gain or loss on trading securities was not material for the years ended December 31, 2000 and 1999.
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 three to ten years. Leasehold improvements are generally amortized over ten years or the term of the lease, whichever is shorter. When assets are sold or retired, the corresponding cost and accumulated depreciation or amortization are removed from the related accounts and any gain or loss is credited or charged to operations.
A-10
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Intangible Assets
The Company records as goodwill the excess of the purchase price over the fair value of the net assets associated with acquired businesses. Goodwill is amortized using the straight-line basis over a period not to exceed twenty five years for the refractive segment and forty years for the lithotripsy segment. Accumulated amortization at December 31, 2000 and 1999 is $23,950,000 and $18,155,000, 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 discounted cash flows and carrying value of the goodwill.
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. The Company's refractive revenues are based on fees charged for services to individuals or commercial insurance carriers, net of contractual fee reductions.
Major Customers and Credit Concentrations
A significant portion of the Company's manufacturing revenues are from four customers. For the years ended December 31, 2000 and 1999, sales to these four customers accounted for 80% and 71% of each year's manufacturing revenues, respectively.
Concentrations of credit risk with respect to receivables are limited due to the wide variety of customers, as well as their dispersion across many geographic areas. Other than as disclosed below, the Company does not consider itself to have any significant concentrations of credit risk. At December 31, 2000, approximately 15% of accounts receivable relate to units operating in Texas, 8% relate to units located in Louisiana, 8% relate to units operating in Virginia, and 9% relate to units located in California. At December 31, 1999, approximately 14% of accounts receivable relate to units operating in Texas, 8% relate to units located in Louisiana, 7% relate to units located in Virginia, and 12% 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
A-11
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using the average cost method. Certain components that meet the Company's manufacturing requirements are only available from a limited number of suppliers. The inability to obtain components as required or to develop alternative sources, if and as required in the future, could result in delays or reduction in product shipments, which in turn could have a material adverse effect on the Company's manufacturing business, financial condition and results of operations.
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).
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
A-12
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 1999 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 warrants. A reconciliation of such earnings per share data is as follows:
(In thousands, except per share data)
Net Per Share For the year ended December 31, 2000 Income Shares Amounts - ------------------------------------ ------ ------ -------
Basic $10,657 16,085 $0.66 ===== Effect of dilutive securities: Options - 85 ------- ------ ----- Diluted $10,657 16,170 $0.66 ======= ====== ===== For the year ended December 31, 1999 - ------------------------------------ Basic $15,039 16,958 $0.89 ===== Effect of dilutive securities: Options - 156 ------- ------ ----- Diluted $15,039 17,114 $0.88 ======= ====== ===== For the year ended December 31, 1998 - ------------------------------------ Basic $10,794 18,650 $0.58 ===== Effect of dilutive securities: Options - 133 ------- ------ ----- Diluted $10,794 18,783 $0.57 ======= ====== =====
Unexercised employee stock options and warrants to purchase 1,638,000, 1,247,000 and 1,708,000 shares of Prime common stock as of December 31, 2000, 1999 and 1998, respectively, were not included in the computations of diluted EPS because the exercise prices were greater than the average market price of Prime's common stock during the respective periods.
A-13
C. INVESTMENTS
Barnet Dulaney Eye Center
Effective September 1, 1999 the Company purchased a 60% interest in two laser (refractive) surgery centers operated by Barnet Dulaney Eye Center for approximately $8,807,000 in cash and a warrant to purchase 29,000 shares of Company common stock, plus a contingent earn-out obligation totaling $1 million which was paid in 2000 at the end of the first year of post- acquisition operations. The contingent earn-out obligation was based on the operating performance of one of the two surgery centers for one year. This investment was accounted for using the equity method until June 30, 2000. Effective July 1, 2000, the Company amended certain agreements related to its 60% interest in Barnet Dulaney Eye Center. As a result of these amendments, the Company's investment in the Barnet Dulaney Eye Center has been consolidated in the accompanying financial statements as of July 1, 2000.
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.
Ohio and Louisiana Partnerships
In December 1994, the Company acquired all of the common stock of two corporations. Each corporation is the general partner and holds an approximate 20% interest in a limited partnership which operates a mobile lithotripter. Ohio Mobile Lithotripter, Ltd. operates a mobile lithotripter in Ohio. Arklatx Mobile Lithotripter, L.P. operates a mobile lithotripter in Louisiana. These investments are accounted for using the equity method.
American Physicians Service Group, Inc.
At December 31, 2000 and 1999, the Company owned 111,000 and 1,000 shares of common stock, respectively, representing less than 1%, of the outstanding common stock of American Physicians Service Group, Inc. (APS). APS owned approximately 15% and 14% of the outstanding common stock of the Company at December 31, 2000 and 1999, respectively. Two of the Company's six board members are also on the board of APS.
The Company occupies approximately 11,600 square feet of office space owned by APS. The Company also shares certain personnel with APS. The monthly rent and personnel cost is approximately $18,000. The Company purchased treasury stock shares through APS Financial
A-14
C. INVESTMENTS (continued)
Services, Inc. (a wholly owned subsidiary of APS). For the years ended December 31, 2000 and 1999, the Company paid commissions of approximately $8,000 and $25,000, respectively, to acquire 136,200 and 420,100 shares, respectively, which management believes was competitive with commissions charged by other firms offering such services.
D. ACQUISITIONS
Effective March 1, 2000, the Company purchased a 60% interest in the Mann Berkeley Caplan Laser Center of Austin, Texas, a refractive vision correction center. The Company paid approximately $3.8 million in cash and issued warrants to purchase 27,000 shares of common stock, and has accounted for this transaction using the purchase method of accounting. Additionally in conjunction with this transaction, the Company issued warrants to purchase 28,000 shares of common stock to a third party.
Effective March 1, 2000, the Company purchased a 60% interest in the Caster Eye Center, a refractive vision correction center. The Company paid approximately $5.8 million in cash, and has accounted for this transaction using the purchase method of accounting. Additionally in conjunction with this transaction, the Company issued warrants to purchase 44,000 shares of common stock to a third party.
Effective April 1, 2000, the Company purchased a 65% interest in New York Eye Specialists, a refractive vision correction center. The Company paid approximately $8.9 million in cash, and has accounted for this transaction using the purchase method of accounting. Additionally in conjunction with this transaction, the Company issued warrants to purchase 67,000 shares of common stock to a third party.
Effective September 1, 2000, the Company purchased a 65% interest in Vision Correction Centers of Kansas City, a refractive vision correction center. The Company paid approximately $4.5 million in cash for the center in October 2000, and has accounted for this transaction using the purchase method of accounting. Additionally in conjunction with this transaction, the Company issued warrants to purchase 34,000 shares of common stock to a third party.
Effective September 1, 1999, the Company acquired 60% of the outstanding stock of Horizon Vision Centers, Inc. (Horizon). Horizon operates seven laser (refractive) surgery centers in California. The Company paid approximately $10.9 million in cash for this acquisition and has accounted for the transaction using the purchase method of accounting. Additionally in conjunction with a modification to the purchase agreement in 2000, the Company issued warrants to purchase 81,000 shares of common stock to a third party.
Certain of the acquisitions discussed above have contingent earn-out clauses based on the future operations of the related centers exceeding certain performance measurements. The Company does not believe any future payments would be significant.
A-15
D. ACQUISITIONS (continued)
Unaudited proforma combined income data for the years ended December 31, 2000 and 1999 of the Company, the acquisitions discussed above and the acquisition of Barnet Dulaney Eye Center's refractive surgery centers discussed in Note C assuming they were effective January 1, 1999 is as follows:
($ in thousands, except per share data) 2000 1999 ---- ----
Total revenues $140,865 $139,919 Total expenses $128,485 $122,516 -------- --------
Net income $ 12,380 $17,403 ======== =======
Diluted earnings per share $0.77 $1.02 ======== ========
E. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's significant financial instruments as of December 31, 2000 and 1999 are as follows:
2000 1999 ---- ---- Carrying Fair Carrying Fair ($in thousands) Amount Value Amount Value ------ ----- ------ ----- Financial assets: Cash $15,530 $15,530 $20,064 $20,064 Investments 1,241 1,241 4,120 4,120 Accounts receivable 30,152 30,152 23,273 23,273 Other receivables 6,619 6,619 3,637 3,637
Financial liabilities: Debt 125,709 111,709 105,560 97,560 Accounts payable 4,611 4,611 3,290 3,290
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.
Investments
The carrying value of investments approximates fair value as they are reported based on quoted market rates.
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E. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
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 fair value at December 31, 2000 and 1999 for the $100 million fixed rate senior subordinated notes was valued using the market rate of 11.66% and 10.2%, respectively. The carrying value of the debt bearing interest at prime rate approximates fair value.
Accounts Payable
The carrying value of the payables approximates fair value due to the short-term nature of the obligation.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Fair value estimates are based on existing on balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax assets and liabilities, property and equipment, equity investment in partnerships, goodwill, other noncurrent assets and accrued expenses. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the aforementioned estimates.
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F. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31, ($ in thousands) 2000 1999 ---- ---- Legal fees $ 146 $291 Accrued group insurance costs 60 193 Compensation and payroll related expense 1,472 1,393 Taxes, other than income taxes (benefit) (26) 343 Accrued interest 2,404 2,247 Deferred payments for acquisitions -- 54 Other 2,852 2,733 ----- -----
$ 6,908 $ 7,254 ===== =====
G. INDEBTEDNESS
Long-term debt is as follows:
($ in thousands) December 31, 2000 1999 ---- ---- Interest Rates Maturities
8.75% 2000-2008 $100,000 $100,808 Floating 2000-2003 24,030 4,464 None 2000-2006 162 162 6%-9% 2000-2004 1,517 126 ----------- ------------ $125,709 $105,560
Less current portion of long-term debt 3,705 1,763 ----------- ----------- $122,004 $103,797 ======== ========
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 semi-annually on April 1 and October 1, beginning October 1, 1998. The financing costs associated with this offering totaling $4,418,000 were expensed during 1998 in 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.
The Note 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,
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G. INDEBTEDNESS (continued)
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 syndicated bank facility 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, 2000, the Company had drawn $18 million on the revolving credit facility. At December 31, 2000, interest on the Company's bank facility was 8.59%. The assets of the Company and the stock of its subsidiaries collateralize the bank facility.
The stated principal repayments for all indebtedness as of December 31, 2000 are payable as follows:
($ in thousands) 2001 $ 3,705 2002 2,292 2003 19,165 2004 217 2005 261 Thereafter 100,069
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, 2000 1999 1998 ---- ---- ---- ($ in thousands)
Salaries, wages and benefits $19,767 $16,230 $16,294 Other costs of services 11,121 7,789 7,136 General and administrative 6,844 5,770 3,225 Legal and professional 2,516 2,167 2,551 Manufacturing costs 15,851 11,902 8,294 Advertising 3,143 255 157 Other 2,652 826 1,816 ------- ------- ------- $61,894 $44,939 $39,473 ======= ======= =======
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I. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions that have arisen in the ordinary course of business. Management believes that any liabilities arising from these actions will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
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, 2000, the Company had 256 employees enrolled in the plan. The plan provides non-contributory coverage for employees and contributory coverage for dependents. The Company's contributions totaled $1,025,000, $966,000 and $623,000, in 2000, 1999 and 1998 respectively.
In 2000, 147,000 options were exercised with exercise prices of $.25 and $.56 in conjunction with the establishment of a deferred compensation plan. The related common stock is held in the deferred compensation plan.The Company has a related deferred compensation liability of $1,168,000 recorded on the accompanying balance sheet.
J. COMMON STOCK OPTIONS AND WARRANTS
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. In June 1999 the Company adopted an amendment to the 1993 Stock Option Plan that authorized an additional 400,000 shares.
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J. COMMON STOCK OPTION AND WARRANTS (continued)
A summary of the Company's stock option activity, and related information for the years ended December 31, follows:
The following table summarizes the Company's outstanding options at December 31, 2000:
Proforma 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 2000, 1999 and 1998, respectively: risk-free interest rates of 6.6%, 6.5% and
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J. COMMON STOCK OPTION AND WARRANTS (continued)
5.2%; dividend yields of 0%, 0% and 0%; volatility factors of the expected market price of the Company's common stock of .42, .44 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 proforma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's proforma information follows (in thousands except for earnings per share information):
2000 1999 1998
Pro forma net income $8,512 $11,960 $7,817 Pro forma earning per share: Basic $0.53 $0.71 $0.42 Diluted $0.53 $0.70 $0.42
As of December 31, 2000, the Company had issued warrants to purchase approximately 310,000 shares of common stock to third parties. The exercise prices of the warrants range from $7.73 to $10.38 per share. These warrants were issued in conjunction with the refractive acquisitions discussed in Note D.
K. LONG-LIVED ASSETS TO BE DISPOSED OF
In accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, equipment which management has both the ability and intent to remove from service is reported in the financial statements at the lower of carrying amount or fair value less costs to sell. In December 2000, the Company committed to dispose of its prostatherapy segment and entered into an agreement to dispose of this segment in January 2001. In exchange for 100% of its interest in its prostatherapy segment, the Company received an unsecured non-recourse note receivable. An estimated impairment of $1,230,000 was recognized to adjust the segment net assets to fair value less the estimated costs to sell in the caption "nonrecurring development, impairment and other costs, net" in the accompanying statement of income.
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K. LONG-LIVED ASSETS TO BE DISPOSED OF (continued)
During 1999, the Company approved the removal from service of five lithotripter units. Three of these units were removed from service by the end of 1999 and the remaining two were removed from service in the first quarter of 2000. These assets were held by the lithotripsy segment. The customers of these units are now serviced by other equipment. A loss of approximately $1.1 million was recognized on the write-down to fair value less costs to sell in the caption "nonrecurring development, impairment and other costs, net" of the accompanying statement of income. The minority interest portion of this loss was approximately $600,000.
L. INCOME TAXES
The Company files a consolidated tax return with its wholly owned subsidiaries. A substantial portion of consolidated income is not taxed at the corporate level as it represents income from partnerships. Accordingly, only the portion of income from these partnerships attributable to the Company's ownership interests is included in taxable income in the consolidated tax return and financial statements. The minority interest portion of this income is the responsibility of the individual partners.
Income tax expense consists of the following:
Years Ended December 31, ($ in thousands) 2000 1999 1998 ---- ---- ---- Federal: Current $4,494 $5,490 $6,404 Deferred 1,298 2,875 (442) State 934 1,067 1,415 ------ ------ ------ $6,726 $9,432 $7,377 ====== ====== ======
A reconciliation of expected income tax (computed by applying the United States statutory income tax rate of 35% to earnings before income taxes) to total income tax expense in the accompanying consolidated statements of income follows:
Years Ended December 31, ($ in thousands) 2000 1999 1998 ---- ---- ----
Expected federal income tax $6,084 $8,565 $6,360 State taxes 607 694 920 Other 35 173 97 ------ ------ ------ $6,726 $9,432 $7,377 ====== ====== ======
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L. INCOME TAXES (continued)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999 are presented below:
($ in thousands) 2000 1999 ---- ---- Deferred tax assets: Capitalized costs $1,079 $1,948 Loan origination fees amortizable for tax purposes 644 949 Accounts receivable, principally due to allowance for doubtful accounts - 73 Accrued expenses deductible for tax purposes when paid 1,032 994 ----- ----- Total gross deferred tax assets 2,755 3,964 Less valuation allowance -- -- ----- ----- Net deferred tax assets $2,755 $3,964 ----- -----
($ in thousands) 2000 1999 ---- ---- Deferred tax liabilities: Property and equipment, principally due to differences in depreciation $ (245) $ (99) Investments in affiliated entities, principally due to undistributed income (1,820) (2,329) Intangible assets, principally due to differences in amortization periods for tax purposes (9,160) (6,870) ------ ------ Total gross deferred tax liability (11,225) (9,298) ------- ------ Net deferred tax liability $ (8,470) $ (5,334) ======= ======
There is no valuation allowance for deferred tax assets at December 31, 2000 and 1999.
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, 2000.
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M. SEGMENT REPORTING
The Company has three reportable segments: lithotripsy, manufacturing and refractive. The lithotripsy segment provides services related to the operation of the lithotripters, including scheduling, staffing, training, quality assurance, maintenance, regulatory compliance and contracting with payors, hospitals and surgery centers. The manufacturing segment provides manufacturing services and installation, upgrade, refurbishment and repair of major medical equipment for mobile medical service providers. The refractive segment, which was added in 1999, provides services related to the operations of refractive vision correction centers. Other operating segments which do not meet the quantitative thresholds for reportable segments include prostatherapy services, which was disposed in January 2000.
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 after consideration of minority interests from its operating segments, which do not include unallocated corporate general and administrative expenses and corporate interest income and expense. Additionally, certain consolidated entities that are reported as "corporate" own and operate lithotripsy equipment. The revenue and depreciation expense related to this equipment is included in the lithotripsy segment. However, the equipment is included in corporate assets.
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 are the manufacturing and refractive segments. The prostatherapy segment was developed internally. The presentation of segments for 1998, which included two segments for medical and manufacturing, have been recast to conform to the Company's operating segments for 2000 and 1999.
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.
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M. SEGMENT REPORTING (continued)
($ in thousands) Lithotripsy Manufacturing Refractive Other ----------- ------------- ---------- ----- - ---- Revenue from external customers $83,335 $22,157 $23,501 $1,702
Intersegment revenues -- 298 -- --
Interest income 408 12 5 14
Interest expense 499 125 1,003 --
Depreciation and amortization 9,798 165 3,688 394
Segment profit 26,916 3,541 2,418 82
Segment assets 193,683 13,489 57,403 4
Investment in equity method investees 9,696 -- -- --
Capital expenditures 4,961 172 6,283 500
- ---- Revenue from external customers $89,180 $17,527 $3,414 $2,053
Intersegment revenues -- 243 -- --
Interest income 341 -- -- 4
Interest expense 269 98 457 --
Depreciation and amortization 9,754 264 363 336
Segment profit 32,115 3,430 450 337
Segment assets 195,012 13,122 23,254 3,021
Investment in equity method investees 8,814 - 9,375 --
Capital expenditures 4,367 161 548 298
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M. SEGMENT REPORTING (continued)
($ in thousands) Lithotripsy Manufacturing Refractive Other ----------- ------------- ---------- ----- ---- Revenue from external customers $92,053 $11,066 -- $1,517
Intersegment revenues -- 255 -- --
Interest income 444 -- -- 3
Interest expense 235 38 -- --
Depreciation and amortization 9,899 223 -- 252
Segment profit 35,484 1,142 -- 209
Segment assets 203,653 9,916 -- 2,628
Investment in equity method investees 10,696 -- -- --
Capital expenditures 2,770 1,580 -- 787
The following is a reconciliation of revenues per above to the consolidated revenues per the consolidated statements of income:
($ in thousands) 2000 1999 1998 ---- ---- ----
Total revenues for reportable segments $129,291 $110,364 $103,374
Other segment 1,702 2,053 1,517
Elimination of intersegment revenues (298) (243) (255) -------- ------- --------
Total consolidated revenues $130,695 $112,174 $104,636 ======== ======== ========
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M. SEGMENT REPORTING (continued)
The following is a reconciliation of profit per above to income before taxes per the consolidated statements of income:
($ in thousands) 2000 1999 1998 ---- ---- ----
Total profit for reportable segments $32,875 $35,995 $36,626
Other segment 82 337 209
Unallocated corporate expenses:
General and administrative (4,486) (5,027) (4,926)
Net interest expense (8,199) (7,424) (7,226)
Loan fees and stock offering costs (173) (566) (4,978)
Relocation of central billing office (698) -- --
Nonrecurring development and other costs (1,830) 475 (1,617)
Release of contractual obligation -- 1,140 --
Other, net (188) (459) 83 -------- -------- --------
Unallocated corporate expenses total (15,574) (11,861) (18,664) -------- ------- -------
Income before income taxes $17,383 $24,471 $18,171 ======= ======= =======
The following is a reconciliation of segment assets per above to the consolidated assets per the consolidated balance sheets:
($ in thousands) 2000 1999 1998 ---- ---- ----
Total assets for reportable segments $264,575 $231,388 $213,569
Other segment 4 3,021 2,628
Unallocated corporate assets 11,639 12,563 24,001 -------- -------- --------
Consolidated total $276,218 $246,972 $240,198 ======== ======== ========
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M. SEGMENT REPORTING (continued)
The reconciliation of the other significant items to the amounts reported in the consolidated financial statements is as follows:
Eliminating ($ in thousands) Segments Corporate Entries Consolidated -------- --------- ------- ------------
Interest income $439 $1,992 $(1,255) $1,176 Interest expense 1,627 10,191 (1,255) 10,563 Depreciation and amortization 14,045 142 -- 14,187 Capital expenditures 11,916 1,059 -- 12,975
Interest income $345 $1,250 $(90) $1,505 Interest expense 824 8,674 (90) 9,408 Depreciation and amortization 10,717 131 -- 10,848 Capital expenditures 5,374 416 -- 5,790
Interest income $447 $1,007 $(37) $1,417 Interest expense 273 8,233 (37) 8,469 Depreciation and amortization 10,374 102 -- 10,476 Capital expenditures 5,137 76 -- 5,213
The amounts in 2000, 1999 and 1998 for interest income and expense, depreciation and amortization and capital expenditures represent amounts recorded by the operations of the Company's corporate functions, which have not been allocated to the segments.
N. CONDENSED FINANCIAL INFORMATION REGARDING GUARANTOR SUBSIDIARIES
Condensed consolidating financial information regarding the Company, Guarantor Subsidiaries and non-guarantor subsidiaries as of December 31, 2000 and 1999 and for each of the years in the three-year period ended December 31, 2000 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 Condensed Consolidating Statement of Income Year Ended December 31, 2000
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statement of Income Year Ended December 31, 1999
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Condensed Consolidating Balance Sheet December 31, 2000
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Balance Sheet December 31, 1999
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statement of Cash Flows Year Ended December 31, 2000
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statement of Cash Flows Year Ended December 31, 1999
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PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statement of Cash Flows Year Ended December 31, 1998
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