The Boring Portfolio

ANN ARBOR, MI, June 6, 1996 -- Apologies for being late with tonight's report. I've spent a chunk of time this afternoon poring over the very long propsectus for the Prime Medical Services stock offering; it took longer than I had anticipated. But I think it was worth it.

As was the case yesterday, the big hit the Borefolio took today resulted from momentum players abandoning PMSI, presumably on the assumption that the proposed public offering of 9.9 million shares would dilute EPS and appreciably slow share price appreciation. The sell-off may have been further accelerated by news that an insider sold 75,000 PMSI shares just the other day. Clearly, it's time to take what's left of one's profits and head for the Texas Hill Country, right?

Wrong. First, let's all take a deep breath. There, that's better. Now, lets walk through the facts, shall we? I admit, it won't be as exciting as flying bears; but it will make more sense.

Fact #1: The insider, Irwin Katz a Director of PMSI, sold options that were exercisable by him. Mr. Katz also happens to be 76 years old, and has been with the company since 1986. Dear bears, have you ever heard the phrase "You can't take it with you?"

Fact #2: As noted here last night (and as most PMSI folks should know by now), only 5 million of the 9.9 million are "new" shares. The other 4.9 million are roughly half shares held by American Physicians Group (PMSI sold its interest in AMPH last year, and now AMPH is returning the favor) and half shares and warrants held by various insiders.

Fact #3: Also as noted here last night: THE SECONDARY IS NOT DILUTIVE. The full prospectus is now available on EDGAR for your downloading pleasure, all 450K of it. Anyone who owns PMSI shares, or is thinking about doing so, or used to before the past couple of days, should read it over. I did (well, most of it, so far) and learned some good stuff.

Such as? Well, here's a few highlights.

PMSI's stone-busters (including those newly acquired with Lithotripter's Inc.) performed approximately 31,000 of the estimated 180,000 lithotripsy procedures performed in the U.S. in 1995 (i.e., approximately 17%). Approximately 1,850 urologists utilized the Company's lithotripters in 1995, representing approximately 25% of the estimated 7,300 active urologists in the U.S. The point being that PMSI is both the largest and the fastest growing company in its field, period.

More to the point (and this is from the prospectus), in the quarter that ended on March 31 (before the Litho, Inc. acquisition), PMSI's machines performed 3,672 lithotripsies. Based on weighted average shares of 17.4 million, that works out to 0.21 procedures per share.

If on a pro forma basis you lump the old PMSI and Litho, Inc. together as if they had already been merged, you come up with 7,350 procedures. Divide that by the 24.5 million shares that will be outstanding after the secondary, and you come up with 0.30 procedures per share -- a 43% gain! In terms of pre-tax earnings, that works out to $5.15 million on a pro forma basis versus PMSI's $2.17 million that it made in that quarter -- or $0.21/share in pre-tax EPS versus the old $0.12.

And if that weren't sufficient to nail the case closed, stockholders' equity after the secondary (again, pro-forma) will increase from $3.62 per share to $6.01 per share, while total long-term debt will drop from $87.6 million to $8.1 million, as the proceeds from the secondary are used to pay of the loan used to acquire Lithotripters, Inc.

Is there something I'm missing here? I really don't think so. This secondary is a terrific plus for the company -- and for the shareholders. If folks were looking for a chance to get into PMSI at a great price, the opportunity is here.

P.S: Just as I was about to file this, I spotted a news release from from PMSI. In it, Kenneth Shifrin, chairman, stated, "We expect this offering to not be dilutive to earnings per share, as the proceeds to be received by the company will primarily be used to repay debt which the company incurred in connection with the recent acquisition of Lithotripters, Inc., resulting in reduced interest costs."

Perhaps the message will sink in tomorrow? If not, then all the more of a bargain.

Transmitted: 6/6/96