- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
to
Commission File Number: 0-22392
PRIME MEDICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2652727
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1301 Capital of Texas Highway, Austin, Texas 78746
(Address of principal executive offices) (Zip Code)
(512) 328-2892
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES x NO
---- ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Number of Shares Outstanding at
Title of Each Class May 1, 1998
------------------- -----------
Common Stock, $.01 par value 19,163,267
- --------------------------------------------------------------------------------
<PAGE>
PART I
FINANCIAL INFORMATION
-2-
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data) Three Months Ended
March 31,
---------
1998 1997
---- ----
Fee revenue:
Lithotripsy:
Fee revenues $ 18,512 $ 19,089
Management fees 1,069 1,351
Equity income 578 320
-------- --------
20,159 20,760
Manufacturing 2,433 --
Prostatherapy 83 --
Cardiac 120 129
-------- --------
Total fee revenue 22,795 20,889
Costs and expenses:
Cost of services and general
and administrative expense
Lithotripsy 5,409 5,798
Manufacturing 1,698 --
Prostatherapy 108 --
Cardiac 101 92
Corporate 1,161 1,362
Nonrecurring restructuring/
development costs 1,617 --
----- -----
10,094 7,252
Depreciation and amortization 2,568 2,419
----- -----
12,662 9,671
------ -----
Operating income 10,133 11,218
Other income (deductions):
Interest income 183 139
Interest expense (1,783) (1,764)
Financing costs (4,982) (360)
Other, net 156 103
------ ------
(6,426) (1,882)
------- -------
Income before provision for income taxes
and minority interest 3,707 9,336
Minority interest in consolidated income 5,032 5,530
Provision for income taxes (157) 930
--------- ---------
Net income (loss) $( 1,168) $ 2,876
========= =========
Basic earnings per share:
Net income (loss) $ (0.06) $ 0.15
========= ==========
Weighted average shares outstanding 19,313 19,218
====== ======
Diluted earnings per share:
Net income (loss) $ (0.06) $ 0.15
======= ==========
Weighted average shares outstanding 19,313 19,395
====== ======
See notes to consolidated financial statements.
-3-
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
($ in thousands)
March 31, December 31,
1998 1997
---- ----
ASSETS
Current assets:
Cash $ 37,885 $ 23,770
Accounts receivable, less allowance
for doubtful accounts of $602 in
1998 and $811 in 1997 18,656 19,387
Other receivables 1,860 1,103
Deferred income taxes 2,096 1,506
Prepaid expenses and other current assets 2,432 1,776
-------- ---------
Total current assets 62,929 47,542
Property and equipment:
Equipment, furniture and fixtures 33,369 32,673
Leasehold improvements 529 531
-------- ---------
33,898 33,204
Less accumulated depreciation and
amortization ( 14,249) (13,497)
-------- ---------
Property and equipment, net 19,649 19,707
Other investments 11,927 12,305
Goodwill, at cost, net of amortization 142,774 143,823
Other noncurrent assets 4,414 2,449
-------- ---------
$241,693 $225,826
======== ========
See accompanying notes to consolidated financial statements.
4
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(continued)
($ in thousands)
March 31, December 31,
1998 1997
---- ----
LIABILITIES:
Current liabilities:
Current portion of long-term debt $ 1,011 $ 11,138
Accounts payable 7,659 5,386
Accrued expenses 15,055 20,859
-------- ---------
Total current liabilities 23,725 37,383
Long-term debt, net of current portion 102,023 71,198
Deferred income taxes 6,461 5,809
-------- ---------
Total liabilities 132,209 114,390
-------- ---------
Minority interest 18,540 19,372
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
1,000,000 shares authorized;
none outstanding -- --
Common stock, $.01 par value,
40,000,000 shares authorized;
19,314,267 issued in 1998 and
19,306,267 issued in 1997 193 193
Capital in excess of par value 84,098 84,050
Accumulated earnings 6,653 7,821
-------- ---------
Total stockholders' equity 90,944 92,064
-------- ---------
$241,693 $225,826
======== ========
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in thousands)
Three Months Ended
March 31,
---------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Fee and other revenue collected $ 23,103 $ 21,322
Cash paid to employees, suppliers
of goods and others (14,742) (9,166)
Interest received 183 139
Interest paid (2,295) (2,174)
Income taxes paid (3,258) (625)
---------- ------------
Net cash provided by
operating activities 2,991 9,496
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on lithotripter entities acquired -- (10,503)
Purchase of equipment and
leasehold improvements (1,500) ( 216)
Distributions from investments 808 557
Purchase of investments -- (129)
Other (205) (141)
Net cash (used in) -------- ---------
investing activities (897) (10,432)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable 100,025 50,000
Payments on notes payable,
exclusive of interest (79,326) (42,091)
Distributions to minority interest (8,702) (11,040)
Exercise of stock options 24 251
Net cash provided by (used in) -------- ---------
financing activities 12,021 (2,880)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 14,115 (3,816)
Cash and cash equivalents,
beginning of period 23,770 20,096
-------- ---------
Cash and cash equivalents, end of period $ 37,885 $ 16,280
======== ===========
See notes to consolidated financial statements
-6-
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in thousands)
Three Months Ended
March 31,
---------
1998 1997
---- ----
Reconciliation of net income (loss) to
cash provided by operating activities
Net income (loss) $ (1,168) $ 2,876
Adjustments to reconcile net income
(loss) to cash provided by
operating activities:
Minority interest in
consolidated income 5,032 5,530
Depreciation and amortization 2,568 2,419
Provision for deferred income taxes (539) 313
Provision for uncollectible accounts -- 60
Equity in earnings of affiliates (578) (320)
Other -- 38
Changes in operating assets and
liabilities, net of effect of
purchase transactions:
Accounts receivable 731 589
Other receivables ( 756) (80)
Other current assets (656) 46
Accounts payable 2,273 (1,187)
Accrued expenses (3,916) ( 788)
------ - ---
Total adjustments 4,159 6,620
------ -----
Net cash provided by
operating activities $ 2,991 $ 9,496
======= ========
See notes to consolidated financial statements
-7-
<PAGE>
PRIME MEDICAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(Unaudited)
1. General
- -- -------
The accompanying unaudited consolidated financial statements have been
prepared in conformity with the accounting principles stated in the audited
financial statements for the year ended December 31, 1997 and reflect all
adjustments which are, in the opinion of management, necessary for a fair
statement of the financial position as of March 31, 1998 and the results of
operations for the periods presented. These statements have not been audited or
reviewed by the Company's independent certified public accountants. The
operating results for the interim periods are not necessarily indicative of
results for the full fiscal year.
The notes to consolidated financial statements appearing in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 filed with the
Securities Exchange Commission should be read in conjunction with this Quarterly
Report on Form 10-Q. There have been no significant changes in the information
reported in those notes other than from normal business activities of the
Company.
2. Noncash Investing and Financing Activities:
- -- -------------------------------------------
In March 1998, the Company completed an offering of an aggregate $100
million of senior subordinated notes ("Notes") due 2008. The issue price of the
notes was 99.50 with an 8.75% coupon. Interest is payable semiannually on April
1 and October 1, beginning October 1, 1998. The financing costs associated with
this offering totaling $4,418,000 were expensed on the accompanying consolidated
statements of operations. A portion of the proceeds from the offering was used
to pay off the Company's $77 million of term loans under its existing credit
facility.
The Company increased its senior revolving credit facility by $50 million
to $100 million. The interest rate on draws on this facility is based on LIBOR
plus a margin ranging from 100 to 200 basis points. No amounts have been drawn
on the revolver. Loan fees of $560,000 associated with the credit facility
increase were expensed in March 1998 on the accompanying consolidated statements
of operations.
In March 1998, the Company recorded a write off of development costs
totaling $1,617,000 due to the uncertainty associated with the proposed Stark II
regulations issued in January 1998. These costs include development costs
associated with proposed partnerships and certification of its manufacturing
entity.
3. Earnings per share:
- -- -------------------
SFAS No. 128 was adopted by the Company in 1997. The earnings per share
data for the quarter ended March 31, 1997 has been restated to comply with
SFAS No. 128. Basic EPS is based on weighted average shares outstanding without
any dilutive effects considered. Diluted EPS reflects dilution from all
contingently issuable shares, including options. A reconciliation of such EPS
data is as follows:
-8-
<PAGE>
PRIME MEDICAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(Unaudited)
(continued)
3. Earnings per share: (continued)
- -- -------------------
Basic Diluted
earnings earnings
per share per share
--------- ---------
(in thousands, except
per share data)
1998
- ----
Net loss applicable to common stock $ (1,168) $ (1,168)
========== ========
Average number of shares outstanding 19,313 19,313
Average stock option shares -- --
---------- --------
Shares for EPS calculation 19,313 19,313
====== ======
Net loss per share $ (0.06) $ (0.06)
========== ========
1997
- ----
Net income applicable to common stock $ 2,876 $ 2,876
========= ========
Average number of shares outstanding 19,218 19,218
Average stock option shares -- 177
--------- --------
Shares for EPS calculation 19,218 19,395
====== ======
Net income per share $ 0.15 $ 0.15
========= ========
Unexercised stock options to purchase 1,358,000 shares of the Company's
common stock as of March 31, 1998 were not included in the computation of
diluted EPS because the effect would be antidilutive. Unexercised stock options
to purchase 706,000 shares of the Company's common stock as of March 31, 1997
were not included in the computation of diluted EPS because the exercise price
was greater than the average market price of the Company's common stock for such
period.
4. Condensed Financial Information Regarding Guarantor Subsidiaries:
- -- -----------------------------------------------------------------
Condensed consolidating financial information regarding the Company,
Guarantor Subsidiaries and Non-guarantor subsidiaries as of March 31, 1998 and
and the periods ended March 31, 1998 and 1997 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 2 above.
-9-
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Condensed Consolidated Statement of Operations
<TABLE>
Three Months Ended March 31, 1998
---------------------------------
<S> <C> <C> <C> <C> <C>
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services Inc. Subsidiaries Subsidiaries Entries Total
------------- ------------ ------------ ------- -----
($ in thousands)
Fee revenue:
Lithotripsy:
Fee revenues $ -- $ 4,805 $ 13,707 $ -- $ 18,512
Management fees -- 677 392 -- 1,069
Equity income 6,656 4,308 -- (10,386) 578
Manufacturing -- -- 2,433 2,433
Prostatherapy -- -- 83 -- 83
Cardiac -- 120 -- -- 120
----------- ----------- ----------- --------- ----------
Total Revenues 6,656 9,910 16,615 (10,386) 22,795
Costs and expenses:
Cost of services and general and
administrative expenses:
Lithotripsy -- 472 4,937 -- 5,409
Manufacturing -- -- 1,698 -- 1,698
Prostatherapy -- -- 108 -- 108
Cardiac -- 101 -- -- 101
Corporate 49 1,112 -- -- 1,161
Nonrecurring restructuring/
development costs 1,617 -- -- -- 1,617
----------- ----------- ----------- --------- ----------
Total Cost and Expenses 1,666 1,685 6,743 -- 10,094
Depreciation and amortization 2 1,376 1,190 -- 2,568
----------- ----------- ----------- --------- ----------
Operating income 4,988 6,849 8,682 (10,386) 10,133
----------- ----------- ----------- --------- ----------
Other income (deductions):
Interest income 13 59 111 -- 183
Interest expense (1,731) (15) (37) -- (1,783)
Financing costs (4,978) -- (4) -- (4,982)
Other, net -- 131 25 -- 156
----------- ----------- ----------- --------- ----------
Total other income
(deductions) (6,696) 175 95 -- (6,426)
Income before provision for income
taxes (1,708) 7,024 8,777 (10,386) 3,707
Minority interest in consolidated
income . -- -- -- 5,032 5,032
Provision for income taxes (540) 368 15 -- (157)
----------- ----------- ----------- --------- ----------
Net income $ (1,168) $ 6,656 $ 8,762 $(15,418) $ (1,168)
=========== =========== =========== ========= ===========
</TABLE>
-10-
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Condensed Consolidated Statement of Operations
<TABLE>
Three Months Ended March 31, 1997
---------------------------------
<S> <C> <C> <C> <C> <C>
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services Inc. Subsidiaries Subsidiaries Entries Total
------------- ------------ ------------ ------- -----
($ in thousands)
Fee Revenue:
Lithotripsy:
Fee revenues $ -- $ 4,448 $ 14,641 $ -- $ 19,089
Management fees -- 923 428 -- 1,351
Equity income 5,880 3,360 -- (8,920) 320
Cardiac -- 129 -- -- 129
----------- ----------- ----------- --------- ----------
Total Revenues 5,880 8,860 15,069 (8,920) 20,889
Cost and expenses:
Cost of services and general and
administrative expenses
Lithotripsy -- 884 4,914 -- 5,798
Cardiac -- 92 -- -- 92
Corporate 335 1,027 -- -- 1,362
----------- ----------- ----------- --------- ----------
Total Cost and Expenses 335 2,003 4,914 -- 7,252
Depreciation and amortization 2 913 1,504 -- 2,419
----------- ----------- ----------- --------- ----------
Operating income 5,543 5,944 8,651 (8,920) 11,218
----------- ----------- ----------- --------- ----------
Other income (deductions):
Interest income -- 58 81 -- 139
Interest expense (1,684) (17) (63) -- (1,764)
Financing costs (360) -- -- -- (360)
Other, net -- 185 (82) -- 103
----------- ----------- ----------- --------- ----------
Total other income (deductions) (2,044) 226 (64) -- (1,882)
Income before provision for income taxes 3,499 6,170 8,587 (8,920) 9,336
Minority interest in consolidated income -- -- -- 5,530 5,530
Provision for income taxes 623 290 17 -- 930
----------- ----------- ----------- --------- ----------
Net income $ 2,876 $ 5,880 $ 8,570 $ (14,450) $ 2,876
=========== =========== =========== ========= ==========
</TABLE>
-11-
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Condensed Consolidated Balance Sheet
<TABLE>
March 31, 1998
--------------
<S> <C> <C> <C> <C> <C>
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services, Inc. Subsidiaries Subsidiaries Entries Total
-------------- ------------ ------------ ------- -----
($ in thousands)
ASSETS:
Current Assets:
Cash $ 18,158 $ 2,959 $ 16,768 $ -- $ 37,885
Accounts receivable, net -- 4,443 14,213 -- 18,656
Other receivables 544 1,956 (640) -- 1,860
Deferred income taxes 1,369 727 -- -- 2,096
Prepaid expenses and other current assets. 8 1,013 1,411 -- 2,432
----------- ----------- ----------- --------- ----------
Total current assets 20,079 11,098 31,752 -- 62,929
----------- ----------- ----------- --------- ----------
Property and equipment:
Equipment, furniture and fixtures -- 6,182 27,187 -- 33,369
Leasehold improvements -- 490 39 -- 529
Less accumulated depreciation
and amortization -- (4,139) (10,110) -- (14,249)
----------- ----------- ----------- --------- ----------
Property and equipment, net -- 2,533 17,116 -- 19,649
----------- ----------- ----------- --------- ----------
Investment in subsidiaries and
other investments 178.680 34,307 -- (201,060) 11,927
Goodwill, at cost, net of amortization -- 142,764 10 -- 142,774
Other noncurrent assets 401 3,601 412 -- 4,414
----------- ----------- ----------- --------- ----------
Total Assets $ 199,160 $ 194,303 $ 49,290 $(201,060) $ 241,693
=========== =========== =========== ========= ==========
LIABILITIES:
Current Liabilities:
Current portion of long-term debt $ -- $ 3 $ 1,008 $ -- $ 1,011
Accounts payable 133 3,016 4,510 -- 7,659
Accrued expenses 5,324 8,741 990 -- 15,055
----------- ----------- ----------- --------- ----------
Total current liabilities 5,457 11,760 6,508 -- 23,725
----------- ----------- ----------- --------- ----------
Long-term debt, net of current portion 100,000 161 1,862 -- 102,023
Deferred income taxes 2,759 3,702 -- -- 6,461
----------- ----------- ----------- --------- ----------
Total liabilities 108,216 15,623 8,370 -- 132,209
----------- ----------- ----------- --------- ----------
Minority interest -- -- -- 18,540 18,540
STOCKHOLDERS' EQUITY:
Common stock 193 -- -- -- 193
Capital in excess of par value 84,098 -- -- -- 84,098
Retained earnings 6,653 -- -- -- 6,653
Subsidiary net equity -- 178,680 40,920 (219,600) --
----------- ----------- ----------- --------- ----------
Total stockholders' equity 90,944 178,680 40,920 (219,600) 90,944
----------- ----------- ----------- --------- ----------
Total Liabilities and
stockholders' equity $ 199,160 $ 194,303 $ 49,290 $(201,060) $ 241,693
=========== =========== =========== ========= ==========
</TABLE>
-12-
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Condensed Consolidated Statement of Cash Flows
<TABLE>
Three Months Ended March 31, 1998
--------------------------
<S> <C> <C> <C> <C> <C>
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services, Inc. Subsidiaries Subsidiaries Entries Total
-------------- ------------ ------------ ------- -----
($ in thousands)
Net cash (used) provided by
operating activities $ (5,942) $ (5,393) $ 14,326 $ -- $ 2,991
----------- ----------- ----------- --------- ----------
Cash flows from investing activities:
Purchases of equipment and leasehold
improvements -- (304) (1,196) -- (1,500)
Distributions from subsidiaries 3,058 4,720 -- (7,778) --
Investments -- 808 -- -- 808
Other -- (72) (133) -- (205)
----------- ----------- ----------- --------- ----------
Net cash provided (used) by
investing activities 3,058 5,152 (1,329) (7,778) (897)
Cash flows from financing activities:
Payments on notes payable,
exclusive of interest (79,000) (2) (324) -- (79,326)
Borrowings on notes payable 100,000 -- 25 -- 100,025
Distribution to minority interest -- -- -- (8,702) (8,702)
Other 24 -- -- -- 24
Distributions to equity owners -- (3,058) (13,422) 16,480 --
----------- ----------- ----------- --------- ----------
Net cash provided (used) by
financing activities 21,024 (3,060) (13,721) 7,778 12,021
----------- ----------- ----------- --------- ----------
Net increase (decrease) in cash and
cash equivalents 18,140 (3,301) (724) -- 14,115
Cash and cash equivalents at beginning
of period 18 6,260 17,492 -- 23,770
----------- ----------- ----------- --------- ----------
Cash and cash equivalents at end of
period $ 18,158 $ 2,959 $ 16,768 $ -- $ 37,885
=========== =========== =========== ====== ==========
</TABLE>
-13-
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Condensed Consolidated Statement of Cash Flows
<TABLE>
Three Months Ended March 31, 1997
---------------------------------
<S> <C> <C> <C> <C> <C>
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services, Inc. Subsidiaries Subsidiaries Entries Total
-------------- ------------ ------------ ------- -----
($ in thousands)
Net cash (used) provided by
operating activities $ (3,674) $ 3,159 $ 10,011 $ -- $ 9,496
----------- ----------- ----------- --------- ----------
Cash flows from investing activities:
Purchase of lithotripter entities -- (10,503) -- -- (10,503)
Purchases of equipment and leasehold
improvements -- (46) (170) -- (216)
Investments -- 428 -- -- 428
Distributions from subsidiaries -- 4,745 -- (4,745) --
Contributions to subsidiaries (3,319) -- -- 3,319 --
Other -- (47) (94) -- (141)
----------- ----------- ----------- --------- ----------
Net cash used by investing
activities (3,319) (5,423) (264) (1,426) (10,432)
----------- ----------- ----------- --------- ----------
Cash flows from financing activities:
Payments on notes payable,
exclusive of interest (41,750) (27) (314) -- (42,091)
Borrowings on notes payable 50,000 -- -- -- 50,000
Distribution to minority interest -- -- -- (11,040) (11,040)
Exercise of stock option 251 -- -- -- 251
Contributions from parent -- 3,319 -- (3,319) --
Distributions to equity owners -- -- (15,785) 15,785 --
----------- ----------- ----------- --------- ----------
Net cash provided (used) by
financing activities 8,501 3,292 (16,099) 1,426 (2,880)
----------- ----------- ----------- --------- ----------
Net increase (decrease) in cash
and cash equivalents 1,508 1,028 (6,352) -- (3,816)
Cash and cash equivalents at beginning
of period 1 2,598 17,497 -- 20,096
----------- ----------- ----------- --------- ----------
Cash and cash equivalents at end of
period $ 1,509 $ 3,626 $ 11,145 $ -- $ 16,280
=========== =========== =========== ====== ==========
</TABLE>
-14-
<PAGE>
Management's Discussion and Analysis
of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
Revenues
- --------
Total revenues for the three months ended March 31, 1998 increased
$1,906,000 (9%) as compared to the same period in 1997. Revenues from
manufacturing increased $2,433,000 due to the acquisition of a 75% interest in a
manufacturing entity in September 1997. Revenues from lithotripter operations
decreased by $601,000 (3%) primarily due to a decline in the average
reimbursement per procedure. Revenues from cardiac centers decreased $9,000
primarily due to one discontinued/sold cardiac center.
Expenses
- --------
Costs and expenses (excluding depreciation and amortization) for the three
months ended March 31, 1998 increased from 35% to 44% of revenues, primarily due
to certain nonrecurring restructuring/development costs of $1,617,000 and the
lower margins experienced by manufacturing compared to lithotripsy, and
increased $2,842,000 (39%) in absolute terms, compared to the same period in
1997. Cost of services and general and administrative expenses associated with
manufacturing increased $1,698,000 due to the acquisition discussed above. Costs
of services associated with lithotripter operations decreased $389,000 (7%) in
absolute terms and decreased from 28% to 27% of lithotripter revenues primarily
due to cost containment measures enacted. Cost of services associated with
cardiac centers increased $9,000 (10%). Corporate expenses decreased from 7% to
5% of revenues as the Company was able to successfully grow without
proportionately adding overhead. Corporate expenses decreased $201,000 (15%)
primarily due to consolidation of functions and a reduction in the amounts due
under management incentive plans which are tied to the performance of the
Company.
Other Income (Deductions)
- -------------------------
Other deductions for the three months ended March 31, 1998 increased
$4,544,000 compared to the same period in 1997, primarily due to financing costs
totaling $4,982,000 associated with the $100 million debt offering and the $50
million increase in the senior revolving credit facility which resulted in an
increase of $4,622,000 over the same period in 1997, and was partially offset by
$97,000 increase in interest and other income.
Minority Interest In Consolidated Income
- ----------------------------------------
Minority interest in consolidated income for the three months ended March
31, 1998 decreased $498,000 compared to the same period in 1997, primarily due
to a decline in fee revenue in certain of the partnerships. Earnings before
interest, taxes, depreciation and amortization (EBITDA) attributable to minority
interests was $6,106,000 for the three months ended March 31, 1998 compared to
$6,638,000 for the same period in 1997. EBITDA is not intended to represent net
income or cash flows from operating activities in accordance with generally
accepted accounting principles and should not be considered a measure of the
Company's profitability or liquidity.
Provision for income taxes
- --------------------------
Provision for income taxes for the three months ended March 31, 1998
decreased $1,087,000 compared to the same period in 1997 due to the loss arising
from the financing and development costs written off.
Liquidity and Capital Resources
- -------------------------------
Cash was $37,885,000 and $23,770,000 at March 31, 1998 and December 31,
1997, respectively. Cash provided by operations for the quarter ended March 31,
1998 was $2,991,000 compared to cash provided by operations for the quarter
ended March 31, 1997 in the amount of $9,496,000. The decline was primarily
attributable to financing costs and development costs incurred in the quarter
ended March 31, 1998.
-15-
<PAGE>
Cash used in investing activities for the quarter ended March 31, 1998 was
$897,000 compared to cash used in investing activities for the quarter ended
March 31, 1997 in the amount of $10,432,000. The difference was attributable to
acquisition of additional partnership interests of $10,503,000 in January, 1997.
Cash provided by financing activities for the quarter ended March 31, 1998 was
$12,021,000 which included $100,025,000 in new borrowings, which was partially
offset by payments on notes payable and distributions to minority interest
totaling $88,028,000. Cash used in financing activities for the quarter ended
March 31, 1997 was $2,880,000 which included $53,131,000 for payments on notes
payable and distributions to minority interest, which was partially offset by
new borrowings totaling $50,000,000.
In March 1998, the Company completed an offering of $100 million of senior
subordinated notes due 2008 ("Notes"). A portion of the net proceeds from the
offering of approximately $96 million were used to repay all of the outstanding
indebtedness under the Company's bank facility, and the remainder will be used
for general corporate purposes, including acquisitions. The Company increased
its senior revolving credit facility by $50 million to $100 million. Advances
under the revolver will be used to fund future acquisitions and to finance
capital expenditure and working capital needs of the Company.
In January 1998, the federal government published proposed regulations
under the "Stark II" provisions of the Social Security Act (the "Proposed Stark
Regulations"). The Company is currently evaluating its alternatives in light of
the Proposed Stark Regulations. While the Proposed Stark Regulations may have a
material adverse effect on the Company, the Company believes the changing
regulatory environment may benefit the Company by creating new lithotripsy
acquisition opportunities. The Company is reevaluating its historical model for
providing lithotripsy and thermotherapy services which include
physician-investors and has delayed the organization of physician partnerships
that were in various stages of development.
The Company intends to increase the number of its lithotripsy operations
primarily through acquisitions. The Company believes that the fragmented nature
of the lithotripsy industry, combined with the operational challenges created by
increasing regulatory and business complexities, including Stark II, the Illegal
Remuneration Statute and similar state laws, will provide significant
lithotripsy acquisition opportunities. Where appropriate, the Company will seek
to increase its ownership interest in current lithotripsy operations by
purchasing interests of urologists and other investors who desire to divest due
to concerns over regulatory issues, or who have a desire to realize a return on
their investment or retirement. The Company intends to fund the purchase price
for future acquisitions using borrowings under its senior credit facility,
proceeds from the offering of the Notes and cash flow from operations. In
addition, the Company may use shares of its common stock in such acquisitions,
where appropriate.
The Company has announced a stock repurchase program of up to $15 million
of common stock. From time to time, the Company may purchase additional shares
of its common stock where, in the judgment of management, market valuations of
its stock do not accurately reflect the Company's past and projected results of
operations. The Company intends to fund any such purchases using available cash,
cash flow from operations and borrowings under its senior credit facility. The
Company has purchased 159,000 shares of stock for a total of $1,864,000 as of
May 1, 1998.
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.
-16-
<PAGE>
Forward-Looking Statements
- --------------------------
The statements contained in this Report on Form 10-Q, that are not purely
historical, are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectation, hopes,
intentions or strategies regarding the future. Readers should not place undue
reliance on forward-looking statements. All forward-looking statements included
in this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements. It is important to note that the Company's actual results could
differ materially from those in such forward-looking statements. In addition to
any risks and uncertainties specifically identified in the text surrounding such
forward-looking statements, the reader should consult the Company's reports on
Form 10-K 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-Q will prove
to be accurate.
-17-
<PAGE>
PART II
OTHER INFORMATION
-18-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
12. Computation of ratio of earnings to fixed charges
27. Financial Data Schedule
(b) Current Reports on Form 8-K
NONE
-19-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements 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.
Date: May 15, 1998 By: /s/ Cheryl L. Williams
--------------------------
Cheryl L. Williams, Vice President
and Chief Financial Officer
-20-
EXHIBIT 12
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
Three Months Ended March 31,
1997 1998
---- ----
Income (loss) before income taxes and
after minority interest $( 1,325) $ 3,806
Undistributed equity income ( 9) --
Minority interest income of
subsidiaries with fixed charges 1,127 1,329
----- -----
Adjusted earnings ( 207) 5,135
Interest on debt 1,783 1,764
Debt issuance costs 4,982 360
----- ---
Total fixed charges 6,765 2,124
----- -----
Total available earnings before fixed charges 6,558 7,259
----- -----
Ratio (a) 3.4
=== ===
(a) Earnings were inadequate to cover fixed charges in the amount of $207,000.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the March 31, 1998 Form 10-Q and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 37,885
<SECURITIES> 0
<RECEIVABLES> 18,656
<ALLOWANCES> 602
<INVENTORY> 0
<CURRENT-ASSETS> 62,929
<PP&E> 33,898
<DEPRECIATION> 14,249
<TOTAL-ASSETS> 241,693
<CURRENT-LIABILITIES> 23,725
<BONDS> 0
0
0
<COMMON> 193
<OTHER-SE> 90,751
<TOTAL-LIABILITY-AND-EQUITY> 241,693
<SALES> 0
<TOTAL-REVENUES> 22,795
<CGS> 0
<TOTAL-COSTS> 10,094
<OTHER-EXPENSES> 2,568
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,783
<INCOME-PRETAX> (1,325)
<INCOME-TAX> (157)
<INCOME-CONTINUING> (1,168)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,168)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
<FN>
NOTE: Due to the change in computing EPS per FASB No. 128, the tags per the
FDS schedule will correspond to FASB No. 128 as follows:
FDS tag FASB No. 128
EPS - Primary EPS - Basic
EPS - Diluted EPS - Diluted
</FN>
</TABLE>
