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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
MARK ONE:
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM
TO
-------------------- --------------------
COMMISSION FILE NUMBER 0-11453
AMERICAN PHYSICIANS SERVICE GROUP, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1458323
(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) 328-0888
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b)OF THE ACT:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g)OF THE ACT:
Common Stock, $.10 Par Value
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K _____
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
Aggregate Market Value at March 27, 2000: $7,530,176
Indicate the number of shares outstanding of each of the registrant's class of
common stock, as of the latest practicable date.
NUMBER OF SHARES
OUTSTANDING AT
TITLE OF EACH CLASS MARCH 27, 2000
-------------------- ----------------
Common Stock, $.10 par value 2,745,233
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's definitive proxy material for the 1997
annual meeting of shareholders are incorporated by reference into Part III of
the Form 10-K. In addition, Item14(a) of Prime Medical Services, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1999 is incorporated by
reference.
============================================================================
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
PART I
ITEM 1. BUSINESS
GENERAL
American Physicians Service Group, Inc. (the "Company"), through its
subsidiaries, provides services that include management services to malpractice
insurance companies, and brokerage and investment services to individuals and
institutions. In 1999 the Company entered into the environmental consulting and
engineering services business. The Company also owns space in the office
building, which serves as its headquarters. Through its real estate subsidiary
it leases space that is surplus to its needs.
The Company was organized in October 1974 under the laws of the State of
Texas. The Company maintains its principal executive office at 1301 Capital of
Texas Highway, Suite C-300, Austin, Texas 78746, and its telephone number is
(512) 328-0888. Unless the context otherwise requires, all references herein to
the "Company" shall mean American Physicians Service Group, Inc. and its
subsidiaries.
Financial information about the Company's industry segments is disclosed
in Note 14 to the accompanying Consolidated Financial Statements in Appendix A.
FINANCIAL SERVICES
APS Investment Services, Inc. ("Investment Services"), is a wholly-owned
subsidiary of the Company. Through its subsidiaries, APS Financial Corporation
("APS Financial"), and APS Asset Management, Inc. (Asset Management"),
Investment Services provides investment and investment advisory services to
institutions and individuals throughout the United States. Revenues from this
segment were 57%, 60% and 44% of Company revenues in 1999, 1998 and 1997,
respectively.
APS Financial, a fully licensed broker/dealer, provides brokerage and
investment services primarily to institutional and high net worth individual
clients. APS Financial also provides portfolio accounting, analysis, and other
services, to insurance companies, banks, and public funds. APS Financial has its
main office in Austin, with a branch office in Houston.
APS Financial is a member of the National Association of Securities
Dealers, Inc. ("NASD"), the Securities Investor Protection Corporation ("SIPC"),
the Securities Industry Association, and, in addition, is licensed in 45 states.
Commissions are charged on both exchange and over-the-counter ("OTC")
transactions in accordance with industry practice. When OTC transactions are
executed by APS Financial as a dealer, APS Financial receives, in lieu of
commissions, markups or markdowns.
1
Every registered broker/dealer doing business with the public is subject
to stringent rules with respect to net capital requirements promulgated by the
SEC. These rules, which are designed to measure the financial soundness and
liquidity of broker dealers, specify minimum net capital requirements. Since the
Company is not itself a registered broker dealer, it is not subject to these
rules. However, APS Financial is subject to these rules. Compliance with
applicable net capital requirements could limit operations of APS Financial such
as trading activities that require the use of significant amounts of capital and
limit its ability to pay dividends. A significant operating loss or an
extraordinary charge against net capital could adversely affect the ability of
APS Financial to expand or even maintain its present levels of business. At
February 29, 2000, APS Financial was in compliance with all net capital
requirements.
APS Financial clears its transactions through Southwest Securities, Inc.
("Southwest") on a fully disclosed basis. Southwest also processes orders and
floor reports, matches trades, transmits execution reports to APS Financial and
records all data pertinent to trades. APS Financial pays Southwest a fee based
on the number and type of transactions performed by Southwest.
Asset Management, a Registered Investment Adviser, was formed and
registered with the Securities and Exchange Commission in 1998. Asset Management
was organized to manage fixed income and equity assets for institutional and
individual clients on a fee basis. Asset Management's mission is to provide
clients with investment results within specific client-determined risk
parameters.
INSURANCE SERVICES
APS Insurance Services, Inc., ("Insurance Services"), an 80% owned
subsidiary of the Company through its wholly-owned subsidiaries APS Facilities
Management, Inc. ("FMI") and American Physicians Insurance Agency, Inc.
("Agency"), provides management and agency services to medical malpractice
insurance companies. Revenues from this segment contributed 24%, 34% and 48% of
Company revenues in 1999, 1998 and 1997, respectively. Substantially all of the
revenue was attributable to American Physicians Insurance Exchange ("APIE"), a
reciprocal insurance exchange managed by FMI. A reciprocal insurance exchange is
an organization which sells insurance only to its subscribers, who pay, in
addition to their annual insurance premiums, a contribution to the exchange's
surplus. Such exchanges generally have no paid employees but instead enter into
a contract with an "attorney-in-fact", that provides all management and
administrative services for the exchange. As the attorney-in-fact for APIE, FMI
receives a percentage of the earned premiums of APIE, as well as a portion of
APIE's profits. The amount of these premiums can be adversely affected by
competition. Substantial underwriting losses or investment performance, which
might result in a curtailment or cessation of operations by APIE, would also
adversely affect FMI's revenue. To limit possible underwriting losses or adverse
investment performance, APIE currently reinsures its risk in excess of $250,000
per medical incident. APIE offers medical professional liability insurance for
physicians in Texas and Arkansas. FMI's assets are not subject to any insurance
claims by policyholders of APIE.
2
FMI organized APIE and has been its exclusive manager since its inception
in 1975. The management agreement between FMI and APIE basically provides for
full management by FMI of the affairs of APIE under the direction of APIE's
physician Board of Directors. Subject to the direction of this Board, FMI sells
and issues policies, investigates, settles and defends claims, and otherwise
manages APIE's affairs. In consideration for performing its services, FMI
receives a percentage fee based on APIE's earned premiums (before payment of
reinsurance premiums), as well as a portion of APIE's profits. FMI pays salaries
and personnel related expenses, rent and office operations costs, data
processing costs and many other operating expenses of APIE. APIE is responsible
for the payment of all claims, claims expenses, peer review expenses, directors'
fees and expenses, legal, actuarial and auditing expenses, its taxes and certain
other specific expenses. Under the management agreement, FMI's authority to act
as manager of APIE is automatically renewed each year unless a majority of the
subscribers to APIE elect to terminate the management agreement by reason of an
adjudication that FMI has been grossly negligent, has acted in bad faith or with
fraudulent intent or has committed willful misfeasance in its management
activities. Termination of FMI's management agreement with APIE would have a
material adverse effect on the Company.
During 1997, FPIC Insurance Group, Inc. ("FPIC"), purchased a 20% interest
in Insurance Services from the Company. In conjunction with that purchase,
FPIC's subsidiary, Florida Physicians Insurance Company, Inc. ("Florida
Physicians"), entered into agreements with Agency and APIE granting Agency the
exclusive right to market Florida Physician's policies in Texas. Agency has
sales, marketing, underwriting and claims handling authority for Florida
Physicians in Texas and receives commissions for such services. Florida
Physicians also entered into a reinsurance agreement with APIE in which APIE
reinsures substantially all of Florida Physicians' risk in Texas under medical
professional liability policies issued or renewed by Florida Physicians on
behalf of Texas health care providers after March 27, 1997. The Company had also
granted FPIC an option, exercisable at any time during 1999, to purchase an
additional 35% interest in Insurance Services from the Company. This option has
expired.
APIE is authorized to do business in the states of Texas and Arkansas.
Florida Physicians is a stock company licensed in several states. Both companies
specialize in writing medical professional liability insurance for health care
providers. The insurance written in Texas is primarily through purchasing groups
and is not subject to certain rate and policy form regulations issued by the
Texas Department of Insurance. Applicants for insurance coverage are reviewed
based on the nature of their practices, prior claims records and other
underwriting criteria. APIE is one of the largest medical professional liability
insurance companies in the State of Texas. APIE is the only professional
liability insurance company based in Texas that is wholly-owned by its
subscriber physicians.
Florida Physicians, together with its affiliates, insures over 6,800
physicians nationwide. Florida Physicians is rated A- (Excellent) by AM Best.
3
Generally, medical professional liability insurance is offered on either a
"claims made" basis or an "occurrence" basis. "Claims made" policies insure
physicians only against claims that occur and are reported during the period
covered by the policy. "Occurrence" policies insure physicians against claims
based on occurrences during the policy period regardless of when the claim is
actually made. APIE and Florida Physicians offer only a "claims made" policy in
Texas and Arkansas, but provide for an extended reporting option upon
termination of coverage. APIE and Florida Physicians reinsure 100% of all Texas
and Arkansas coverage per medical incident between $250,000 and the policy limit
$1,000,000, primarily through certain domestic and international insurance
companies.
The following table presents selected financial and other data for APIE.
The management agreement with FMI obligates APIE to pay management fees to FMI
based on APIE's earned premiums before payment of reinsurance premiums. The fee
percentage is 13.5% with the provision that any profits of APIE will be shared
equally with FMI so long as the total reimbursement (fees and profit sharing) do
not exceed a cap based on premium levels. In 1999, 1998, 1997, 1996, and 1995,
management fees attributable to profit sharing were $329,000, $1,750,000,
$1,961,000, $1,191,000, and $700,000, respectively. The decrease in 1999 is
primarily due to an overall increase in competition in medical professional
liability insurance in Texas as well as a continued trend of rising claims
against the insureds.
(In thousands, except for number of insureds)
Years Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Earned premiums before
reinsurance premiums $24,529 $22,931 $25,899 $28,754 $30,857
Total assets 66,377 75,173 81,594 90,193 101,251
Total surplus 13,925 13,592 11,854 10,017 9,402
Management fees (including profit
sharing) and commissions to FMI
and Agency 3,645 (2) 4,835 (2) 5,854 (2) $5,281 (2) $5,010 (2)
Number of insureds 2,882 2,743 2,629 (1) 3,019 3,226
- ----------------
(1) The decrease was the result of APIE's decision to raise premiums at the
risk of policy retention on certain unprofitable specialties. Included
in the totals are physicians for which APIE provides reinsurance
through a relationship with another malpractice insurance company.
(2) Includes commissions of $1,191, $835, $1,214, $860, and $676 in 1999,
1998, 1997, 1996 and 1995, respectively, from Florida Physicians and
other carriers directly related to APIE's controlled business.
4
CONSULTING
On October 31, 1996, the Company invested $3,300,000 in common stock of
Exsorbet Industries, Inc. ("Exsorbet") (NASDAQ:EXSO) with a put option. Exsorbet
was a diversified environmental and technical services company. On November 26,
1996, the Company exercised its put in exchange for a note receivable from
Exsorbet. The note was secured by the shares that were subject to the put option
plus all the stock and substantially all of the assets of a wholly owned
subsidiary of Exsorbet. Subsequently, Exsorbet became known as Consolidated
Eco-Systems, Inc. ("Con-Eco").
On June 17, 1998 the Company filed suit against Con-Eco, and its directors
and officers alleging breach of contract, negligent misrepresentation and
conspiracy. In February, 1999 the Company settled this litigation with the
directors and officers of Con-Eco. The Company recovered $950,000 for the full
release of all claims against the directors of Con-Eco.
In April, 1999, the Company's wholly owned subsidiary, APS Consulting
("APS Consulting"), acquired the business of Eco-Systems, Inc. ("Eco-Systems"),
a subsidiary of Con-Eco, in connection with a debt restructuring agreement with
Con-Eco. Under the terms of the restructuring agreement, Con-Eco had the right
to purchase back the business of Eco-Systems for a nominal amount upon the
occurrence of certain conditions. Accordingly, the Company did not initially
consolidate the operations of APS Consulting. In addition, the Company dismissed
its lawsuit against Con-Eco, but retained the right to reinstitute the
litigation at a later date.
Subsequently, the Company concluded that it was not probable that Con-Eco
would exercise its option to reacquire the stock and, effective September 1,
1999, the Company began consolidating APS Consulting. The acquisition was
recorded using the purchase method of accounting. In addition, the Company wrote
off the remaining balance of the note due from Con-Eco. During the twelve months
ended December 31, 1999 the Company wrote off to bad debt expense a total of
$1,293,000 related to this note bringing the total written off related to this
note since inception to $1,685,000.
APS Consulting is an environmental consulting/engineering firm, comprised
of scientists and engineers specializing in remedial investigations, remediation
engineering, air quality, waste water, regulatory compliance, solid waste
engineering, litigation support/expert testimony, environmental resources and
industrial hygiene and safety. APS Consulting offices are located in Jackson,
Mississippi; Mobile, Alabama; and Houston, Texas.
5
Because of the wide range of expertise of its consultants, APS Consulting
serves clients in a broad base of industries, including: petrochemicals;
agricultural chemicals; oil exploration, refining and marketing; gas pipelines;
pulp and paper/forest products; manufacturing; waste disposal and management;
state and local government; and law firms. Its consultants and engineers have
expertise in environmental engineering, chemical engineering, hydrogeology,
computer-aided drafting and design, civil engineering, geology, biology and
micro biology. Revenues from APS Consulting contributed 4% of Company revenues
in 1999. As revenues and expenses of APS Consulting were not consolidated into
the totals of the Company until September, 1999, this percentage reflects only
four months of revenues from APS Consulting.
REAL ESTATE
APS Realty, Inc., ("APS Realty"), a wholly-owned subsidiary of the
Company, owns condominium space in an office project located in Austin, Texas.
APS Realty leases approximately 58% of this space to the Company, its
subsidiaries and affiliate. The remainder is leased to unaffiliated parties.
Revenues from APS Realty contributed 4%, 4% and 5% of Company revenues in 1999,
1998 and 1997, respectively.
OTHER INVESTMENTS
The Company owns 2,344,000 shares of common stock of Prime Medical
Services, Inc. ("Prime Medical"), representing at March 15, 2000 approximately
14% of Prime Medical's outstanding shares of common stock. Two of Prime
Medical's seven directors are members of the Company's four member board of
directors. In addition Mr. Hummel, executive vice president and chief operating
officer of Prime Medical, is a member of the Company's Board of Directors. The
Company records its pro-rata share of Prime Medical's results utilizing the
equity method. Prime Medical is the largest provider of lithotripsy services in
the United States, currently servicing over 450 hospitals and surgery centers in
34 states. Lithotripsy is a non-invasive method of treating kidney stones
through the use of shock waves. During 1999, Prime Medical also entered into the
refractive surgery field through two acquisitions. LASIK refractive surgery, one
of the most advanced forms of laser vision correction, is designed to improve
vision and reduce dependence on glasses and contacts by correcting
nearsightedness, farsightedness and astigmatism. The common stock of Prime
Medical is traded on the NASDAQ National Market under the symbol "PMSI". Prime
Medical is a Delaware corporation which is required to file annual, quarterly
and other reports and documents with the Securities and Exchange Commission (the
"SEC"), which reports and documents contain financial and other information
regarding Prime Medical. The summary information regarding Prime Medical
contained herein is qualified in its entirety by reference to such reports and
documents. Such reports and documents may be examined and copies may be obtained
from the SEC.
6
On January 1, 1998 the Company invested approximately $2,000,000 in the
Convertible Preferred Stock of Uncommon Care, Inc. ("Uncommon Care"). The
Company also made available to Uncommon Care three lines of credit totaling
$4,850,000. The loans are at interest rates varying from ten percent to twelve
percent, payable quarterly until June 30, 2005, at which time the outstanding
principal and any accrued but unpaid interest are due and payable. Uncommon Care
is a developer and operator of dedicated Alzheimer's care facilities. The
preferred shares owned by the Company are convertible into approximately a 34%
interest in the equity of Uncommon Care. Two of Uncommon Care's five directors
are members of the Company's board of directors. The Company records its
investment at cost.
In 1997, the Company formed APS Practice Management, Inc., later renamed
Syntera HealthCare Corporation ("Syntera") with an initial ownership of 85%.
Syntera specialized in the management of OB/GYN and related medical practices.
In a typical transaction, Syntera acquired the non-medical assets of a
physician's practice and signed a long-term management contract with the
physician to provide the majority of the non-medical requirements of the
practice, such as non-professional personnel, office space, billing and
collection, and other day-to-day non-medical operating functions. In turn,
Syntera was paid a variable management fee that rewarded the efficient operation
and the expansion of the practice. On June 30, 1999 the Company merged Syntera
with another unaffiliated practice management company, FemPartners, Inc.,
resulting in the Company owning approximately 12% of the total equity of
FemPartners, Inc., the surviving company. Prior to June 30, 1999 the Company has
accounted for its ownership in Syntera on the equity basis. Beginning July 1,
1999, as a result of the merger with FemPartners, Inc., the Company began
recording its interest on the cost basis.
DISCONTINUED OPERATIONS
The Company, through its wholly owned subsidiary, APS Systems, Inc. ("APS
Systems"), had previously developed software and marketed it to medical clinics
and medical schools. This business segment became unprofitable in 1996. A joint
venture with a software developer was formed in 1996 with a plan to develop new
products, but was discontinued in 1997 when it was determined that the high cost
of developing competitive products precluded an adequate return on investment.
Subsequently, the Company ceased marketing the software and reduced the scope of
APS Systems' operations to a level adequate to service existing clients through
the terms of their contracts. The Company reflected the expected financial
impact of discontinuing this segment in the 1997 financial statements.
7
COMPETITION
APS Financial and Asset Management are both engaged in a highly
competitive business. Their competitors include, with respect to one or more
aspects of business, all of the member organizations of the New York Stock
Exchange and other registered securities exchanges, all members of the NASD,
registered investment advisors, members of the various commodity exchanges and
commercial banks and thrift institutions. Many of these organizations are
national rather than regional firms and have substantially greater personnel and
financial resources than the Company's. Discount brokerage firms oriented to the
retail market, including firms affiliated with commercial banks and thrift
institutions, are devoting substantial funds to advertising and direct
solicitation of customers in order to increase their share of commissions and
other securities related income. In many instances APS Financial is competing
directly with such organizations. In addition, there is competition for
investment funds from the real estate, insurance, banking and thrift industries.
APIE competes with numerous insurance companies in Texas and Arkansas,
primarily Medical Protective Insurance Company, St. Paul Fire and Marine
Insurance Company, State Volunteer Mutual Company, Frontier Insurance Group,
Texas Medical Liability Trust, Medical Interinsurance Exchange Group of New
Jersey and PHICO Insurance. Many of these firms have substantially greater
resources than APIE. The primary competitive factor in selling insurance is a
combination of price, terms of the policies offered, claims service and other
services, and claims settlement philosophy.
APS Consulting operates in the environmental services industry that is
characterized by intense competition. Many companies of all sizes are engaged in
activities similar to those of the APS Consulting and many of APS Consulting's
competitors have substantially greater assets and capital resources. APS
Consulting operates primarily in the Southeastern United States, however, the
Company has projects throughout the United States. APS Consulting seeks to
distinguish its services by (i) providing timely, high quality and
cost-effective solutions to the various environmental issues facing its clients,
(ii) maintaining long-term relationships with its clients, and (iii) utilizing
technology to provide state of the art services in accordance with applicable
regulatory standards. There can be no assurance, however, that APS Consulting
can compete successfully against its competitors, given the size, resources and
marketing capabilities of many of its competitors.
REGULATION
APS Financial and Asset Management are subject to extensive regulation
under both federal and state laws. The SEC is the federal agency charged with
administration of the federal securities and investment advisor laws. Much of
the regulation of broker dealers, however, has been delegated to self-regulatory
organizations, principally the NASD and the national securities exchanges. These
self-regulatory organizations adopt rules (subject to approval by the SEC) which
govern the industry and conduct periodic examinations of member broker/dealers.
APS Financial is also subject to regulation by state and District of Columbia
securities commissions.
8
The regulations to which APS Financial is subject cover all aspects of the
securities business, including sales methods, trade practices among broker
dealers, uses and safekeeping of customers' funds and securities, capital
structure of securities firms, record keeping and the conduct of directors,
officers and employees. Additional legislation, changes in rules promulgated by
the SEC and by self regulatory organizations, or changes in the interpretation
or enforcement of existing laws and rules, may directly affect the method of
operation and profitability of APS Financial. The SEC, self regulatory
organizations and state securities commissions may conduct administrative
proceedings which can result in censure, fine, suspension or expulsion of APS
Financial, its officers or employees. The principal purpose of regulation and
discipline of broker/dealers is the protection of customers and the securities
markets, rather than protection of creditors and shareholders of broker/dealers.
APS Financial, as a registered broker dealer and NASD member organization,
is required by federal law to belong to the SIPC. When the SIPC fund falls below
a certain minimum amount, members are required to pay annual assessments in
varying amounts not to exceed .5% of their adjusted gross revenues to restore
the fund. The last assessment of APS Financial by the SIPC was in 1995 and
amounted to approximately $7,300. The SIPC fund provides protection for customer
accounts up to $500,000 per customer, with a limitation of $100,000 on claims
for cash balances.
FMI has received certificates of authority from the Texas and Arkansas
insurance departments, licensing it on behalf of the subscribers of APIE. APIE,
as an insurance company, is subject to regulation by the insurance departments
of the States of Texas and Arkansas. These regulations strictly limit all
financial dealings of a reciprocal insurance exchange with its officers,
directors, affiliates and subsidiaries, including FMI. Premium rates,
advertising, solicitation of insurance, types of insurance issued and general
corporate activity are also subject to regulation by various state agencies.
APS Consulting is subject to extensive laws and regulations promulgated by
the Federal, state and local governments and regulatory authorities dealing with
the discharge of materials into the environment or otherwise relating to the
protection of the environment. The Company believes it is in compliance in all
material respects with all such laws and regulations.
EMPLOYEES
At March 1, 2000, the Company employed, on a full time basis,
approximately 128 persons, including 48 by Insurance Services, 50 by APS
Investment Services, 18 by APS Consulting and 12 directly by the Company. The
Company considers its employee relations to be good. None of the Company's
employees is represented by a labor union and the Company has experienced no
work stoppages.
9
ITEM 2. PROPERTIES
APS Realty owns approximately 53,000 square feet of condominium space in
an office project in Austin, Texas. The Company, its subsidiaries and affiliate
occupy approximately 31,000 square feet of this space as their principal
executive offices, and APS Realty leases the remainder to third parties. The
area available for lease to third parties is 100% occupied as of March 15, 2000.
APS Investment Services also leases office space at 2550 Gray Falls Dr,
Suite 350, Houston, Texas.
APS Consulting leases offices at: 439 Katherine Drive, Suite 2A, Jackson,
Mississippi; 17171 Park Row, Suite 120, Houston, Texas; 384 Fairhope Avenue,
Suite 7, Fairhope, Alabama.
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 of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting was held June 8, 1999. The agenda items were
the election of directors and approval of an amendment to the stock option plan.
Voting results follow:
BOARD ELECTION
Nominee For Against Abstain
------- --- ------- -------
Brad A. Hummel 2,755,051 35,491 --
Robert L. Myer 2,755,051 35,491 --
William A. Searles 2,755,051 35,491 --
Kenneth S. Shifrin 2,755,051 35,491 --
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table represents the high and low prices of 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 years
ended December 31, 1999 and 1998. On March 1, 2000, the Company had
approximately 422 holders of record of its common stock.
1999 1998
------------------------- ------------------------
High Low High Low
---- --- ---- ---
First Quarter $5 1/8 $1 7/8 $7 5/8 $6 7/8
Second Quarter $3 7/8 $2 1/4 $7 1/2 $6 5/8
Third Quarter $5 1/16 $3 7/32 $7 1/4 $4 7/8
Fourth Quarter $7 $3 1/2 $5 1/2 $3 1/4
The Company has not declared any cash dividends on its common stock during
the last two years and has no present intention of paying any cash dividends in
the foreseeable future. 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 and such other factors as the Board of Directors may deem
relevant.
11
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Selected income statement data:
Revenues $19,115 $16,403 $13,065 $10,437 $16,124
Earnings from continuing operations before income taxes
and minority interests
1,732 2,255 5,984 3,006 3,007
Net earnings 1,413 1,545 2,538 1,924 2,024
Per share amounts - diluted:
Net earnings $.45 $.31 $.59 $.46 $.53
Diluted weighted average shares outstanding 3,168 4,692 4,241 4,219 3,798
Selected balance sheet data:
Total assets $32,924 $33,126 $30,737 $24,468 $23,740
Long-term obligations 3,298 -- -- -- 574
Total liabilities 11,647 8,471 7,458 4,086 6,146
Minority interests 48 53 175 -- --
Total equity 21,229 24,602 23,104 20,382 17,594
Book value per share 7.73 5.91 5.55 5.03 4.80
12
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
Forms 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 relating 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 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.
13
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
Revenues from continuing operations increased 17% in 1999 compared to
1998. Net income decreased 9% and diluted earnings per share increased 45%. The
reasons for these changes are described below.
FINANCIAL SERVICES
Financial services revenues increased 9% in 1999 compared to 1998. The
increase resulted from greater commissions earned at APS Financial, the
broker/dealer division of Investment Services, resulting from greater volatility
in world bond markets which caused clients to realign portfolios. This activity
created more transactions and thus more commissions. Also contributing to the
increase was a greater emphasis on internally generated market research and
continued success at recruiting experienced, proven producers. Internal market
research contributes to higher commissions by providing additional investment
ideas to be marketed by the brokers to a greater number of customers. Finally,
inventory losses, which lower revenues, were greater in 1998 than in 1999.
Financial services expenses increased 8% in 1999 compared to 1998. The
large increase in transaction activity at APS Financial resulted in
proportionately greater sales commission expense, support personnel expense,
transaction charges and financial information services expense. Greater profits
in 1999 also increased expenses under the incentive compensation plan. Personnel
costs also increased in 1999 primarily as a result of incurring a full year of
personnel costs at APS Asset Management, the portfolio management division of
Investment Services. Only six months of personnel costs were incurred in 1998,
as the subsidiary was formed in June, 1998.
Results in this segment can vary from year to year. The broker/dealer,
primarily a provider of fixed income securities, is subject to general market
conditions as well as interest rates and is in an industry characterized by
competition for top producing brokers. In an effort to add to the segment's
overall profitability, and to add stability from year to year, the Company
entered the asset management business in 1998. As a registered investment
advisor, Asset Management, seeks to manage the portfolios of institutions and
high net worth individuals. Asset Management is in a competitive business and
was not profitable in 1999, incurring a loss of $169,000. The Company cannot
predict when or if it will achieve profitability.
14
INSURANCE SERVICES
Insurance Service's revenues decreased 17% in 1999 compared to 1998. The
primary reason for the decrease in 1999 was due to lower profit sharing. The
insurance management fee contract between Insurance Services and APIE contains a
provision to share in the profits of APIE. Due to an overall increase in
competition in medical professional liability insurance in Texas as well as a
continued trend of rising claims against the insureds, profits, and
consequently, profit sharing, were lower in 1999.
Insurance Services' expenses increased 10% in 1999 compared to 1998. The
increase was primarily due to higher commission rates paid to sales agents as
well as to increased business received through agents requiring commissions to
be paid. Personnel costs also increased in 1999, primarily due to normal annual
merit raises.
Due to the profit sharing provision in Insurance Services most significant
contract, results can vary from year to year. In the last five years under the
contract, profit sharing has ranged from 7% to 31% of the segment's revenues.
CONSULTING
The Company began consolidating the earnings of APS Consulting in
September, 1999. No comparison to prior year, therefore, is possible. Unaudited
pro-forma financials show that revenues decreased 28% in 1999 due primarily to
the loss of a major client resulting from the uncertainty that arose with the
breakup of Con-Eco.
Expenses at Consulting decreased 4% in 1999 primarily as a result of fewer
personnel. The uncertainty that arose with the breakup of Con-Eco caused some
personnel to seek other employment opportunities.
REAL ESTATE
Revenue decreased less than 1% compared to 1998. The decrease reflects a
higher vacancy rate, partially offset by higher lease rates.
The 4% increase in real estate expenses resulted from increased property
taxes due to higher real estate taxable values and increased fees paid for
building maintenance and improvements.
INVESTMENT AND OTHER
The substantial rise in investment and other income was primarily due to
gains from the exchanges of Prime Medical common stock for the Company's common
stock. As part of a buy-back strategy, the Company exchanged 720,700 shares of
Prime Medical common stock for 1,441,400 shares of the Company's common stock
held by two mutual fund companies. The Company's common stock was then retired
and gains totaling $1,635,000 were recorded. In addition, interest of $349,000
was earned from line of credit loans granted by the Company to its former
physician practice management affiliate, Syntera and to Uncommon Care.
15
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 98% over 1998. The increases
resulted primarily from recognizing $1,293,000 of bad debt expense related to
the write-off of the Con-Eco note receivable and from expenses related to the
merger of Syntera with FemPartners. Partially offsetting these expense increases
was lower legal fees in 1999. Work performed in 1998 related to the Uncommon
Care preferred stock investment increased legal fees in 1998.
INTEREST
Interest expense increased 330% over 1998 as a result of an increase in
notes payable. Draws taken from the Company's line of credit with Bank of
America to fund the Company's investments in Syntera and Uncommon Care resulted
in an ending balance of $3,275,000 at December 31, 1999 compared to zero at
December 31, 1998.
AFFILIATES
The Company has one affiliate accounted for on the equity basis, Prime
Medical, as of December 31, 1999. Prime Medical's operating income increased in
1999 but the Company recognized a smaller percentage (18% in 1998 vs. 14% in
1999) as a result of its exchange of Prime Medical shares to acquire shares of
the Company's common stock. Even with this drop in ownership percentage, equity
earnings from Prime Medical increased 23% in 1999. The Company, through its
status as Prime Medical's largest shareholder and through its representation on
PrimeMedical's board, continues to have significant influence at Prime Medical
and continues to account for its investment using the equity method.
Also included in equity in earnings of unconsolidated affiliates are
losses totaling $119,000 which represents the Company's portion of losses of
Syntera. from January 1 to June 30, 1999. Subsequent to the merger with
FemPartner's, the Company began accounting for it's resulting 12% interest in
FemPartners on the cost basis.
1998 COMPARED TO 1997
Revenues from continuing operations increased 26% in 1998 compared to
1997. Net income decreased 39% and diluted earnings per share decreased 48%. The
reasons for these changes are described below.
16
INVESTMENT SERVICES
Investment services' revenues increased 73% in 1998 compared to 1997. The
increase resulted from volatility in world bond markets which caused clients to
realign portfolios. This activity created more transactions and thus more
commissions. Also contributing to the increase was the full development of a
second office, which opened in 1997. Revenues at this office in 1998 increased
approximately 90% over 1997.
Investment services' expenses increased 71% from 1997. 94% of the increase
was at APS Financial and was transaction volume-related. The large increase in
revenues resulted in proportionately greater sales commission expense, support
personnel expense, transaction charges and financial information services
expense. Lower legal fees partially offset these increases. Greater profits in
1998 also increased expenses under the incentive compensation plan. The
remainder of the increase in expenses was the result of starting Asset
Management in 1998.
INSURANCE SERVICES
Insurance Services' revenues decreased 10% in 1998 compared to 1997. The
loss of one significant client by APIE caused most of the variance. The client
purchased extended reporting period or "tail" coverage, which increased premiums
in 1997. 1998 revenues were lower by both the standard premium and the extra
tail premiums lost in 1997. The Company's premium-based management fee was also
proportionately lower. The remainder of the decrease was related to profit
sharing. The insurance management fee contract contains a provision to share in
the profits of the managed insurance exchange. Due to the loss of the client
mentioned above and an overall increase in competition in medical professional
liability insurance in Texas, profits, and consequently, profit sharing, were
lower in 1998.
Insurance Services' expenses increased 8% over 1997. The increase was the
result of increased commission expense and was due to the greater utilization of
commissioned outside sales agents, compared to salaried internal personnel in
prior years. Lower salary expense, primarily due to lower incentive payments,
partially offset the increased commissions.
Due to the profit sharing provision in this segment's major contract,
results can vary from year to year. In the last five years under the contract,
profit sharing has ranged from 12% to 31% of the segment's revenues.
REAL ESTATE
Revenue increased 1% compared to 1997. The increase reflects higher lease
rates, partially offset by a higher vacancy rate.
The 5% increase in real estate expenses resulted from increased property
taxes due to higher real estate values.
17
INVESTMENT AND OTHER
The decline in investment and other income was primarily due to lower
interest income, a result of available cash being fully invested in new start-up
companies, which yielded no current return.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 37% over 1997. The increases
resulted from recognizing bad debt expense related to the impairment of the
Con-Eco note receivable and from expenses related to guaranteeing an individual
investor's investment return. The Company had agreed to the guaranteed return to
settle a dispute on the customer's account in 1995. The portfolio
under-performed in 1998 and additional funds were contributed by the Company.
Lower management incentive expenses partially offset these increases in 1998.
Interest expense increased from $21,000 in 1997 to $59,000 in 1998. The
increase reflects funds borrowed under the line of credit to fund the Company's
investments Syntera and Uncommon Care.
AFFILIATES
The Company had two affiliates accounted for on the equity basis, Prime
Medical and Syntera. Prime Medical's operating income increased in 1998 but net
earnings were reduced by non-recurring financing and development costs. This
resulted in a 23% decrease in equity earnings compared to 1997. Syntera, which
was started in 1997, continued in the development phase and reported a loss in
1998. The Company's share of Syntera's loss increased approximately 5% in 1998.
Prime had issued additional shares in 1996 reducing the Company's
ownership from 21% to 16%. In 1998 Prime established a stock repurchase plan and
reduced its shares outstanding, increasing the Company's ownership percentage to
approximately 18%.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $1,582,000 and $1,782,000 at December 31, 1999 and
1998, respectively. The decrease in the current year is due primarily to
payments for purchases of property and equipment. Historically, the Company has
maintained a strong working capital position and, using that base, has been able
to satisfy its operational and capital expenditure requirements with cash
generated from its operating and investing activities. These same sources of
funds have also allowed the Company to pursue investment and expansion
opportunities consistent with its growth plans. In 1999, the Company
supplemented these traditional sources of funds with short-term bank borrowings.
Although it is uncertain that operating activities will provide positive cash
flow in the year 2000, the Company has sufficient borrowing capacity as well as
ample liquidity in its holdings of Prime Medical shares to meet its working
capital requirements for the foreseeable future.
18
In 1998, the Company entered into a three year $10,000,000 revolving
credit agreement with NationsBank of Texas, N.A. (subsequently acquired by Bank
of America, N.A.). Funds advanced under the agreement bear interest at the prime
rate less 1/4 %, such interest to be payable quarterly. The Company will pledge
shares of Prime Medical to the bank as funds are advanced under the line. In May
1999, as a result of the exchange of Prime Medical shares for common stock of
the Company, the revolving credit agreement was amended to lower the total funds
available to the Company from $10,000,000 to $7,500,000. Funds totaling
$3,275,000 and $2,625,000 had been advanced as of December 31, 1999 and March
15, 2000, respectively.
Capital expenditures for equipment were $413,000, $206,000, and $312,000,
in 1999, 1998, and 1997, respectively. Capital expenditures were higher in 1999
due to purchases necessary to reach compliance with Year 2000 computer issues as
well as to higher expenditures for improved office space and leasing fees. The
Company expects capital expenditures in 2000 to be significantly less than 1999.
The Company's ability to make scheduled payments of principal of, or to
pay the interest on, or to refinance, its indebtedness, or to fund planned
capital expenditures will depend on its future performance, which, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond its control. Based upon the current
level of operations and anticipated revenue growth, management believes that
cash flow from operations and available cash, together with available borrowings
under its bank line of credit, 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 line of credit 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, having no manufacturing operations, 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.
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the AICPA issued Statement of Position (SOP) 98-5,
Reporting on the Costs of Start-Up Activities, which is effective for financial
statements for fiscal years beginning after December 15, 1998. The SOP requires
costs of start-up activities and organization costs to be expensed as incurred.
No start-up costs were incurred by the Company or its affiliate during 1999. The
Company does not have any significant capitalized start-up costs that would be
required to be expensed in 2000.
19
ITEM 7 (a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has some exposure to cash flow and fair value risk from
changes in interest rates, which may affect its financial position, results of
operation and cash flows. The Company does not use financial instruments for
speculative purposes, but does maintain a trading account inventory to
facilitate the business of its broker/dealer subsidiary. At the end of 1999 the
inventory balance was $635,000. Historically, the Company has turned this
inventory rapidly and has neither significant realized gains nor losses.
The Company has notes receivable, in the form of lines of credit to
related companies, which are at fixed rates ranging from 8% to 12%. Their fair
value will increase and decrease inversely with interest rates.
The Company has debt totaling $3,310,000, most of which was drawn on a
$7,500,000 revolving line of credit with a floating interest rate. For each $1
million that the Company should borrow in 2000, a 1% increase in interest rate
would result in a $10,000 annual increase in interest expense.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in Appendix A attached
hereto.
Financial information and schedules relating to Prime Medical Services,
Inc. are contained in Item 14(a) of the Annual Report on Form 10-K for the year
ended December 31, 1999 of Prime Medical Services, Inc., which Item 14(a) is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in the definitive proxy
material of the Company to be filed in connection with its 2000 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, 2000, the executive officers of the Company are as
follows:
Name Age Position
- ---- --- --------
Kenneth S. Shifrin 50 Chairman of the Board, President
and Chief Executive Officer
Duane K. Boyd, Jr. 55 Senior Vice President - Insurance
William H. Hayes 52 Senior Vice President - Finance
and Secretary
George S. Conwill 43 Vice President - Investment Services
Thomas R. Solimine 41 Controller
All officers serve until the next annual meeting of directors and until
their successors are elected and qualified.
Mr. Shifrin has been Chairman of the Board since March 1990. He has been
President and Chief Executive Officer since March 1989 and was President and
Chief Operating Officer from June 1987 to February 1989. He has been a Director
of the Company since February 1987. From February 1985 until June 1987, Mr.
Shifrin served as Senior Vice President - Finance and Treasurer. He has been
Chairman of the Board of Prime Medical since October 1989. Mr. Shifrin has been
a member of the Board of Directors of Uncommon Care since January 1998. Mr.
Shifrin became a member of the Board of Directors of EarthSports.com in January,
2000 and is a member of the World Presidents Organization.
Mr. Boyd has been Senior Vice President - Insurance since July 1991 and has
also been President and Chief Operating Officer of FMI since July 1991. Mr. Boyd
has been a Director of Uncommon Care since January 1998 and a Director of Grand
Adventures Tour and Travel Publishing Corp. since July 1998. Mr. Boyd is a
Certified Public Accountant and was with KPMG LLP from 1974 until June 1991. He
was a partner specializing in the insurance industry prior to joining the
Company.
21
Mr. Hayes has been Senior Vice President - Finance since June 1995. Mr.
Hayes was Vice President from June 1988 to June 1995 and was Controller from
June 1985 to June 1988. He has been Secretary of the Company since February 1987
and Chief Financial Officer since June 1987. Mr. Hayes is a Certified Public
Accountant.
Mr. Conwill has been Vice President - Investment Services since June 1998.
He has served as Chief Operating Officer of APS Financial since May 1995, and as
President and Chief Operating Officer since March 1998. In May 1998 he assumed
responsibility as President of APS Investment Services.
Mr. Solimine has been Controller since June 1994. He has served as
Secretary for APS Financial since February 1995. From July 1989 to June 1994,
Mr. Solimine served as Manager of Accounting for the Company.
There are no family relationships, as defined, between any of the above
executive officers, and there is no arrangement or understanding between any of
the above executive officers and any other person pursuant to which he was
selected as an officer. Each of the above executive officers was elected by the
Board of Directors to hold office until the next annual election of officers and
until his successor is elected and qualified or until his earlier resignation or
removal. The Board of Directors elects the officers in conjunction with each
annual meeting of the stockholders.
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 2000 annual meeting
of shareholders, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the definitive proxy
statement of the Company to be filed in connection with its 2000 annual meeting
of shareholders, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the definitive proxy
statement of the Company to be filed in connection with its 2000 annual meeting
of shareholders, which information is incorporated herein by reference.
22
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
All schedules are omitted because they are not applicable or
not required or because the required information is not
material or is presented in the Consolidated Financial
Statements and related notes.
(b) Reports on Form 8-K
(c) Exhibits (1)
3.1 Restated Articles of Incorporation of the Company,
as amended. (5)
3.2 Amended and Restated Bylaws of the Company. (5)
4.1 Specimen of Common Stock Certificate. (2)
4.2 Rights Agreement, dated as of August 15,
1999, between American Physicians Service
Group, Inc. and American Stock Transfer &
Trust Company which includes the form of
Statement of Resolutions setting forth the
terms of the Junior Participating Preferred
Stock, Series A, the form of Rights
Certificate as Exhibit B and the Summary of
Rights to Purchase Preferred Shares as
Exhibit C. (10)
*10.1 American Physicians Service Group, Inc. Employees Stock
Option Plan. (2)
*10.2 Form of Employees Incentive Stock Option Agreement. (2)
*10.3 Form of Employees Non-Qualified Stock Option Agreement. (2)
*10.4 American Physicians Service Group, Inc. Directors Stock
Option Plan. (2)
*10.5 Form of Directors Stock Option Agreement. (2)
*10.6 1995 Non-Employee Directors Stock Option Plan of American
Physicians Service Group, Inc. (6)
*10.7 Form of Non-Employee Directors Stock Option Agreement. (6)
23
*10.8 1995 Incentive and Non-Qualified Stock Option Plan of
American Physicians Service Group, Inc. (6)
*10.9 Form of Stock Option Agreement (ISO). (6)
*10.10 Form of Stock Option Agreement (Non-Qualified). (6)
10.11 Management Agreement of Attorney-in-Fact, dated August 13,
1975, between FMI and American Physicians Insurance
Exchange. (2)
*10.14 Profit Sharing Plan and Trust, effective December 1, 1984,
of the Company. (3)
10.17 Stock Purchase Agreement dated September 30, 1996 between
the Company and Exsorbet Industries, Inc. (7)
10.18 Stock Put Agreement dated September 30, 1996 between the
Company and Exsorbet Industries, Inc. (7)
10.19 Shareholder Rights Agreement dated September 30, 1996
between the Company and Exsorbet Industries, Inc. (7)
10.20 Warrant dated September 30, 1996 for shares of common
stock issued to the Company by Exsorbet Industries, Inc.(7)
10.21 Contingent Warrant Agreement dated September 30, 1996
for shares of common stock issued to the Company by
Exsorbet Industries, Inc. (7)
10.22 Option Agreements dated September 30, 1996 for shares of
Exsorbet common stock issued to the Company by officers
and directors of Exsorbet Industries, Inc. (7)
10.23 Agreement dated September 30, 1996 with Exsorbet Industries,
Inc. related to options issued by officers and directors
of Exsorbet Industries. (7)
10.24 Guaranty Agreements dated September 30, 1996 between the
Company and subsidiaries of Exsorbet Industries, Inc. (7)
10.25 Promissory Note dated November 26, 1996 executed by Exsorbet
Industries, Inc. and payable to the Company in the amount
of $3,300,000. (7)
24
10.26 Stock Purchase Agreement dated October 1, 1997 between the
Company, APS Practice Management, Inc., Michael Beck, John
Hendrick, and et al. (8)
10.27 Bylaws of APS Practice Management, Inc., (8)
10.28 Amended and Restated Articles of Incorporation APS Practice
Management, Inc., (8)
10.29 APS Practice Management, Inc., Certificate of Designation
of Rights and Preferences Series A Serial Founder's Common
Stock dated September 30, 1997. (8)
10.30 Resolutions to organizational matters concerning Syntera,
Inc. dated October 1, 1997. (8)
10.31 Master Refinancing Agreement dated November 6, 1997
between the Company and Consolidated Eco-Systems, Inc. (8)
10.32 Promissory Note dated November 6, 1997 executed by
Consolidated Eco-Systems, Inc. and payable to the Company
in the amount of $3,788,580. (8)
10.33 Assignment and Security Agreement dated November 6, 1997
between the Company and Consolidated Eco-Systems, Inc. (8)
10.34 Security Agreement dated November 6, 1997 between the Company
and Consolidated Eco-Systems, Inc. (8)
10.35 Share Exchange Agreements dated October 31, 1997 between the
Company and Devin Garza, M.D., Robert Casanova, M.D. and
Shelley Nielsen, M.D. (8)
*10.36 First Amendment to 1995 Incentive and Non-Qualified Stock
Option Plan of American Physicians Service Group, Inc.
Dated December 10, 1997. (8)
*10.37 First Amendment to 1995 Non-Employee Director Stock Option
Plan of American Physicians Service Group, Inc. Dated
December 10, 1997. (8)
10.38 Share Exchange Agreement dated February 16, 1998 between the
Company and Michael T. Breen, M.D. (9)
10.39 Share Exchange Agreement dated April 1, 1998 between the
Company and Antonio Cavazos, Jr., M.D. (9)
25
10.40 Share Exchange Agreement dated April 1, 1998 between the
Company and Antonio Cavazos, III, M.D. (9)
10.41 Share Exchange Agreement dated May 18, 1998 between the
Company and Jonathan B. Buten, M.D. (9)
10.42 Share Exchange Agreement dated June 30, 1998 between the
Company and Gary R. Jones, M.D. (9)
10.43 Share Exchange Agreement dated July 31, 1998 between the
Company and Joe R. Childress, M.D. (9)
10.44 Share Exchange Agreement dated August 1, 1998 between the
Company and M. Reza Jafarnia, M.D. (9)
10.45 Share Exchange Agreement dated September 15, 1998 between the
Company and Donald Columbus, M.D. (9)
10.46 Share Exchange Agreement dated December 31, 1998 between the
Company and David L. Berry, M.D. (9)
10.47 Contribution and Stock Purchase Agreement dated January 1,
1998 between the Company, Additional Purchasers, Barton
Acquisition, Inc., Barton House, Ltd., Barton House at
Oakwell Farms, Ltd., Uncommon Care, Inc., George R.
Bouchard, John Trevey, and Uncommon Partners, Ltd. (9)
10.48 Stock Transfer Restriction and Shareholders Agreement dated
January 1, 1998 between the Company, Additional Purchasers,
Barton Acquisition, Inc., Barton House, Ltd., Barton House
at Oakwell Farms, Ltd., Uncommon Care, Inc., George R.
Bouchard, John Trevey, and Uncommon Partners, Ltd. (9)
10.49 Loan Agreement dated January 1, 1998 between the Company and
Barton Acquisition, Inc. (9)
10.50 Promissory Note (Line of Credit) dated January 1, 1998 between
the Company and Barton Acquisition, Inc. in the amount of
$2,400,000. (9)
10.51 Security Agreement dated January 1, 1998 between the Company
and Barton Acquisition, Inc. (9)
26
10.52 Participation Agreement dated March 16, 1998 between the
Company and Additional Purchasers referred to as
Participants. (9)
10.53 Revolving Credit Loan Agreement dated February 10, 1998 between
the Company and NationsBank of Texas, N.A. in an amount not
to exceed $10,000,000. (9)
10.54 Revolving Credit Note dated February 10, 1998 between the
Company and NationsBank of Texas, N.A. in the amount of
$10,000,000. (9)
10.55 Pledge Agreement dated February 10, 1998 between the Company
and NationsBank of Texas, N.A. (9)
10.56 Continuing and Unconditional Guaranty dated February 10, 1998
between the Company and NationsBank of Texas, N.A. (9)
10.57 Restructuring Agreement dated March 25, 1999 between the
Company and Consolidated Eco-Systems, Inc., and all of the
wholly or partially owned subsidiaries of Consolidated
Eco-Systems, Inc. (except for 7-7, Inc.). (9)
10.58 Assignment and Security Agreement dated March 25, 1999 between
the Company and Consolidated Eco-Systems, Inc. (9)
10.59 Security Agreement dated March 25, 1999 between the Company and
Consolidated Eco-Systems, Inc. (9)
10.60 Security Agreement dated March 25, 1999 between the Company and
Eco-Acquisition, Inc. (9)
10.61 Security Agreement dated March 25, 1999 between the Company and
Exsorbet Technical Services, Inc. (9)
10.62 Security Agreement dated March 25, 1999 between the Company and
KR Industrial Service of Alabama, Inc. (9)
10.63 Agreement of Plan of Merger dated August 31, 1999 between
FemPartners, Inc. and Syntera HealthCare Corporation. (11)
27
10.64 Share Exchange Agreement dated August 31, 1999 between the
Company and David L. Berry, M.D. (11)
10.65 Share Exchange Agreement dated August 31, 1999 between the
Company and Michael T. Breen, M.D. (11)
10.66 Share Exchange Agreement dated August 31, 1999 between the
Company and Jonathan B. Buten, M.D. (11)
10.67 Share Exchange Agreement dated August 31, 1999 between the
Company and Robert Casanova, M.D. (11)
10.68 Share Exchange Agreement dated August 31, 1999 between the
Company and Antonio Cavazos, III, M.D. (11)
10.69 Share Exchange Agreement dated August 31, 1999 between the
Company and Joe R. Childress, M.D. (11)
10.70 Share Exchange Agreement dated August 31, 1999 between the
Company and Donald Columbus, M.D. (11)
10.71 Share Exchange Agreement dated August 31, 1999 between the
Company and Devin Garza, M.D. (11)
10.72 Share Exchange Agreement dated August 31, 1999 between the
Company and M. Reza Jafarnia, M.D. (11)
10.73 Share Exchange Agreement dated August 31, 1999 between the
Company and Gary L. Jones, M.D. (11)
10.74 Share Exchange Agreement dated August 31, 1999 between the
Company and Shelley Nielson, M.D. (11)
10.75 Share Exchange Agreement dated August 31, 1999 between the
Company and Lawrence M. Slocki, M.D. (11)
10.76 Loan Agreement dated June 16, 1999 between APS Consulting, Inc.
and APSC, Inc. (11)
10.77 Promissory Note dated June 16, 1999 between APS Consulting,
Inc. and APSC, Inc. (11)
10.78 Security Agreement dated June 16, 1999 between APS Consulting,
Inc. and APSC, Inc. (11)
28
10.79 Subordination Agreement dated June 16, 1999 between the Company
and APSC, Inc. (11)
10.80 Convertible Promissory Note dated April 27, 1999 between the
Company and Uncommon Care, Inc. (11)
10.81 Replacement Convertible Promissory Note dated September 30,
1999 between the Company and Uncommon Care, Inc. (11)
10.82 Liquidity Promissory Note dated September 30, 1999 between the
Company and Uncommon Care, Inc. (11)
10.83 Replacement Liquidity Note dated October 15, 1999 between the
Company and Uncommon Care, Inc. (11)
10.84 Co-Sale Rights Agreement dated August 31, 1999 between the
Company and FemPartners, Inc. (11)
10.85 Replacement Promissory Note dated August 31, 1999 between the
Company and FemPartners, Inc. (11)
10.86 Guaranty Agreement dated August 31, 1999 between the Company
and FemPartners, Inc. (11)
21.1 List of subsidiaries of the Company. (11)
23.1 Independent Auditors Consent of KPMG LLP. (11)
27.1 Financial Data Schedule (EDGAR filing).
(*) Executive Compensation plans and arrangements.
- -----------------
(1) The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and, in accordance
therewith, files reports, proxy statements and other information with
the Commission. Reports, proxy statements and other information filed
by the Company can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's
29
Regional Offices at Seven World Trade Center, 13th Floor, New York, New York
10048 and CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can be obtained by mail from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such reports, proxy statements
and other information concerning the Company are also available for
inspection at the offices of The NASDAQ National Market, Reports Section,
1735 K Street, N.W., Washington, D.C. 20006. The Commission maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the
Commission at "http://www.sec.gov " and makes available the same documents
through Disclosure, Inc. at 800-638-8241.
(2) Filed as an Exhibit to the Registration Statement on Form S-1,
Registration No. 2-85321, of the Company, and incorporated herein by
reference.
(3) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1984 and incorporated herein by
reference.
(4) Filed as an Exhibit to the Current Report on Form 8-K of the Company
dated September 5, 1989 and incorporated herein by reference.
(5) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1990 and incorporated herein by
reference.
(6) Filed as an Exhibit to the Annual Report on Form 10-KSB of the Company
for the year ended December 31, 1995 and incorporated herein by
reference.
(7) Filed as an Exhibit to the Annual Report on Form 10-KSB of the Company
for the year ended December 31, 1996 and incorporated herein by
reference.
(8) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1997 and incorporated herein by
reference.
(9) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1998 and incorporated herein by
reference.
(10) Filed as an Exhibit to the Current Report on Form 8-K of the Company
dated September 22, 1999 and incorporated by reference herein.
(11) Filed herewith.
30
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.
AMERICAN PHYSICIANS SERVICE GROUP, INC.
By: /s/ Kenneth S. Shifrin
-------------------------------
Kenneth S. Shifrin, Chairman of the
Board and Chief Executive Officer
Date: March 29, 2000
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 and
Chief Executive Officer
(Principal Executive Officer)
Date: March 29, 2000
By: /s/ W. H. Hayes
----------------------
W. H. Hayes
Senior Vice President - Finance, Secretary
and Chief Financial Officer
(Principal Financial Officer)
Date: March 29, 2000
By: /s/ Thomas R. Solimine
-----------------------
Thomas R. Solimine
Controller
(Principal Accounting Officer)
Date: March 29, 2000
By: /s/ Robert L. Myer
-----------------------
Robert L. Myer, Director
Date: March 29, 2000
By: /s/ William A. Searles
-------------------------
William A. Searles, Director
Date: March 29, 2000
By: /s/ Brad A. Hummel
----------------------
Brad A. Hummel, Director
Date: March 29, 2000
31
A-1
APPENDIX A
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report A-2
Financial Statements
Consolidated Statements of Operations for the years
ended December 31, 1999, 1998, and 1997 A-3
Consolidated Balance Sheets at December 31, 1999
and December 31, 1998 A-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997 A-7
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1999, 1998 and 1997 A-9
Notes to Consolidated Financial Statements A-10
A-1
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
American Physicians Service Group, Inc.:
We have audited the accompanying consolidated financial statements of
American Physicians Service Group, Inc. and subsidiaries ("Company") as
listed in the accompanying index. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
American Physicians Service Group, Inc. and subsidiaries at December
31, 1999 and 1998, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31,
1999, in conformity with generally accepted accounting principles.
/s/ KPMG, LLP
-------------
Austin, Texas
March 28, 2000
A-2
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
-------------------------------------------------
1999 1998 1997
------------ --------------- ------------
REVENUES:
Financial services $10,835 $9,914 $5,726
Insurance services (Note 2) 4,683 5,655 6,287
Consulting 768 --- ---
Real estate (Note 5) 710 713 704
Investments and other 2,119 121 348
------ ------ ------
Total revenues 19,115 16,403 13,065
EXPENSES:
Financial services 9,764 9,039 5,299
Insurance services 4,558 4,129 3,819
Consulting 712 --- ---
Real estate 548 527 503
General and administrative (Note 18) 3,663 1,851 1,352
Interest 254 59 21
------ ----- ------
Total expenses 19,499 15,605 10,994
------ ------ ------
Operating income (loss) (384) 798 2,071
Equity in earnings of unconsolidated
affiliates (Note 13) 2,116 1,457 2,014
Gain on sale of portion of subsidiary --- --- 1,899
----- ------ ------
Earnings from continuing operations before
income taxes 1,732 2,255 5,984
Income tax expense (Note 9) 621 863 2,341
Minority interest 5 (178) (175)
----- ------ ------
Earnings from continuing operations 1,116 1,214 3,468
DISCONTINUED OPERATIONS: (Note 12)
Profit/(loss) from discontinued operations of income
tax expense/(benefit) of $153, $171 and ($48) in 1999,
1998 and 1997, respectively 297 331 (94)
Loss on disposal of computer software segment,
net of income tax benefit of $431 in 1997 --- --- (836)
------ ------ ------
Net gain / (loss) from discontinued operations 297 331 (930)
------ ------ ------
NET EARNINGS $1,413 $1,545 $2,538
====== ======= ======
See accompanying notes to consolidated financial statements
A-3
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS, continued
(In thousands, except per share data)
Year Ended December 31,
-------------------------------------------------
1999 1998 1997
-------- --------- -------------
Earnings per common share: (Note 15)
Basic:
Earnings from continuing operations $0.36 $0.29 $0.84
Discontinued operations 0.09 0.08 (0.22)
----- ----- ------
Net earnings $0.45 $0.37 $0.62
====== ===== =====
Diluted:
Earnings from continuing operations $0.35 $0.24 $0.81
Discontinued operations 0.09 0.07 (0.22)
------ ----- -----
Net earnings $0.45 $0.31 $0.59
====== ===== =====
Basic weighted average shares outstanding 3,142 4,163 4,106
====== ===== =====
Diluted weighted average shares outstanding 3,168 4,692 4,241
====== ===== =====
See accompanying notes to consolidated financial statements
A-4
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
December 31,
----------------------------------
1999 1998
----------- ----------
ASSETS
Current Assets:
Cash and cash investments $2,275 $3,214
Cash - restricted (Note 16) 376 --
Trading account securities 635 641
Management fees and other
receivables (Note 2) 1,344 968
Notes receivable, net - current (Note 3) 270 196
Deposit with clearing broker 1,042 1,036
Receivable from clearing broker 147 106
Prepaid expenses and other 279 339
Income taxes receivable 200 --
Deferred income tax asset (Note 9) 633 1,279
------ ------
Total current assets 7,201 7,779
Notes receivable, net - less current
portion (Note 3) 4,937 4,287
Property and equipment (Note 5) 1,820 1,653
Investment in affiliate (Note 13) 12,096 13,089
Other investments (Note 17) 6,078 6,052
Goodwill (Note 18) 573 --
Other assets 219 266
------ -------
Total Assets $32,924 $33,126
======= =======
See accompanying notes to consolidated financial statements
A-5
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
(In thousands, except share data)
December 31,
--------------------------------
1999 1998
-------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $1,242 $910
Payable to clearing broker 624 593
Notes payable - short term (Note 7) 12 --
Income taxes payable -- 292
Accrued incentive compensation 818 823
Accrued expenses and other
liabilities (Note 6) 2,923 3,379
----- -----
Total current liabilities 5,619 5,997
Net deferred income tax liability
(Note 9) 2,730 2,474
Notes payable - long term (Note 7) 3,298 --
----- ------
Total liabilities 11,647 8,471
Minority interest 48 53
Shareholders' Equity:
Preferred stock, $1.00 par value, 1,000,000
shares authorized -- --
Common stock, $0.10 par value, 20,000,000;
issued 2,745,233 at 12/31/99 and
4,160,083 at 12/31/98 278 416
Additional paid-in capital 5,549 5,481
Retained earnings 15,402 18,705
------ ------
Total shareholders' equity 21,229 24,602
Commitments and contingencies
(Notes 5, 7, 8, 10, 11, 12,16)
Total Liabilities and Shareholders'
Equity $32,924 $33,126
======= =======
See accompanying notes to consolidated financial statements
A-6
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
------------------------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Cash received from customers $17,205 $16,017 $13,080
Cash paid to suppliers and employees (16,770) (14,390) (9,247)
Change in trading account securities 6 (86) 250
Change in receivable from clearing broker 16 (447) (177)
Interest paid (254) (59) (21)
Income taxes paid (385) (439) (772)
Interest and other investment proceeds 484 234 219
-------- --------- ---------
Net cash provided by operating activities 302 830 3,332
Cash flows from investing activities:
Proceeds from the sale of property and equipment --- 13 55
Payments for purchase property and equipment (413) (206) (312)
Net change in marketable securities (100) --- 5
Proceeds from equity owners investment --- 259 ---
Investment in preferred stock --- (2,073) (5,292)
Proceeds from sale of insurance exchange --- --- 1,000
Proceeds from sale of 20% of Insurance Serv --- --- 2,000
Proceeds received in acquisition 75 --- ---
Proceeds from prior year disposition 40 --- ---
Funds loaned to others (4,992) (3,020) (834)
Collection of notes receivable 1,488 2,085 109
Discontinued Operations (578) 502 ---
Other (59) --- (82)
-------- --------- ---------
Net cash used in by investing activities (4,539) (2,440) (3,351)
Cash flows from financing activities:
Repayment of long term obligations --- --- (542)
Proceeds from long-term obligations 3,825 8 ---
Payment of long-term debt (577) --- ---
Funds held for others 376 --- ---
Purchase/retire treasury stock (25) (147) (337)
Exercise of stock options 75 75 316
Distribution to minority interest --- (300) ---
-------- --------- ---------
Net cash (used in)/ provided by financing activities 3,674 (364) (563)
-------- --------- ---------
Net change in cash and cash equivalents ($563) ($1,974) ($582)
-------- --------- ---------
Cash and cash equivalents at beginning of period 3,214 5,188 5,770
-------- --------- ---------
Cash and cash equivalents at end of period, including
restricted cash $2,651 $3,214 $5,188
======== ========= =========
See accompanying notes to consolidated financial statements
A-7
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In thousands)
Year Ended December 31,
-----------------------------------------
1999 1998 1997
---- ---- ----
Reconciliation of net earnings to net cash from operating activities:
Net earnings $1,413 $1,545 $2,538
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization 733 618 436
(Earnings)/loss from discontinued operations (450) (502) 200
Loss on disposal of discontinued operations --- --- 1,209
Minority interest in consolidated earnings/(loss) (5) 178 175
Undistributed earnings of affiliate (2,116) (1,457) (2,014)
Provision for bad debts 2,023 361 ---
Gain on exchange of stock (1,635) --- ---
Stock warrants received (45) --- ---
Gain on sale of fixed assets --- (1) ---
Gain on sale or disposition of assets --- --- (2,032)
(Gain) loss on sale of securities --- --- 41
Change in federal income tax payable (492) 66 876
Provision for deferred taxes 826 373 56
Change in trading securities 6 (86) 250
Change in receivable from clearing broker 16 (447) 177
Change in management fees & other receivables 209 (153) (26)
Change in prepaids & other current assets 96 169 (191)
Change in long term assets --- 52 ---
Change in trade payables 202 9 90
Change in accrued expenses & other liabilities (479) 105 1,547
------ ----- -----
Net cash from operating activities $302 $830 $3,332
===== ===== ======
Summary of non-cash transactions:
During 1999, the Company acquired 100% of the outstanding stock of
Eco-Systems, Inc. in a non-cash foreclosure transaction. The acquired assets
and liabilities were as follows:
Current assets increased by $ 588,000
Non-current assets increased by 149,000
Goodwill increased by 573,000
Current liabilities increased by 239,000
Non-current liabilities increased by 120,000
During 1999, non-qualified employee stock options were exercised which
resulted in a reduction of income tax payable and a corresponding addition to
paid-in-capital of $20.
During 1998, non-qualified employee stock options were exercised which
resulted in a reduction of income tax payable and a corresponding addition to
paid-in-capital of $25.
During 1997, non-qualified employee stock options were exercised which
resulted in a reduction of income tax payable and a corresponding addition to
paid-in-capital of $194.
See accompanying notes to consolidated financial statements
A-8
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
(In thousands, except share data)
Additional Unrealized Total
Common Stock Paid-In Holding Retained Shareholders'
Shares Amount Capital Gains Earnings Equity
------------- ----------- -------------- --------------- ------------- --------------
------------- ----------- -------------- --------------- ------------- --------------
Balance January 1, 1997 4,049,195 $405 5,366 (11) 14,622 20,382
Net earnings -- -- -- -- 2,538 2,538
Unrealized loss on securities
available for sale, net of tax -- -- -- 11 -- 11
Shares issued (Note 11) 164,666 16 300 -- -- 316
Shares repurchased & cancelled (53,000) (5) (332) -- -- ( 337)
Income tax benefit of non-qualified
option exercises -- -- 194 -- -- 194
------------- ----------- -------------- --------------- ------------- --------------
Balance December 31, 1997 4,160,861 416 5,528 -- 17,160 23,104
Net earnings -- -- -- -- 1,545 1,545
Shares issued (Note 11) 25,833 3 72 -- -- 75
Shares repurchased & cancelled (26,611) (3) (144) -- -- (147)
Income tax benefit of non-qualified
option exercises -- -- 25 -- -- 25
------------- ----------- -------------- --------------- ------------- --------------
Balance December 31, 1998 4,160,083 416 5,481 -- 18,705 24,602
Net earnings -- -- -- -- 1,413 1,413
Shares issued (Note 11) 32,950 3 72 -- -- 75
Shares repurchased & cancelled (1,447,800) (141) (24) -- (4,716) (4,881)
Income tax benefit of non-qualified
option exercises -- -- 20 -- -- 20
------------- ----------- -------------- --------------- ------------- --------------
Balance December 31, 1999 2,745,233 $278 5,549 -- 15,402 21,229
=====================================================================================
See accompanying notes to consolidated financial statements.
A-9
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(1) Summary of Significant Accounting Policies
(a) General
American Physicians Service Group, Inc. through its subsidiaries,
provides financial services that include brokerage and asset management
services to individuals and institutions, and insurance services that
consist of management services for malpractice insurance companies. The
financial services business has clients nationally. Insurance
management is a service provided primarily in Texas, but is available
to clients nationally. American Physicians Service Group, Inc. also
owns space in the office building which serves as its headquarters.
Through its real estate subsidiary it leases space that is surplus to
its needs. During the three years presented in the financial
statements, financial services generated 57% of total revenues and
insurance services generated 24%.
American Physicians Services Group, Inc. has one affiliate; Prime
Medical Services, Inc., of which it owns approximately 14%. Prime
Medical is the country's largest provider of lithotripsy (non-invasive
kidney stone fracturing) services. The Company also has a preferred
stock investment in a company which develops and operates Alzheimer's
care facilities.
(b) Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of American
Physicians Service Group, Inc. and of subsidiary companies more than
50% owned ("Company"). Investments in affiliated companies and other
entities in which the Company's investment is less than 50% of the
common shares outstanding and where the Company exerts significant
influence are accounted for by the equity method. Investments in other
entities in which the Company's investment is less than 20% is
accounted for by the cost method.
All significant intercompany transactions and balances have been
eliminated from the accompanying consolidated financial statements.
A-10
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
Summary of Significant Accounting Policies, continued
(d) Revenue Recognition
Investment services revenues related to securities transactions are
recognized on a trade date basis.
Insurance services revenues related to management fees are recognized
monthly as a percentage of the earned premiums of the managed company.
The profit sharing component of these fees is recognized when it is
reasonably certain that the managed company will have an annual profit,
generally in the fourth quarter of each year.
Consulting revenues related to environmental engineering/consulting is
recognized monthly based upon billable hours.
Real estate rental income is recognized monthly over the term of the
lease. Costs of leasehold improvements are capitalized and amortized
monthly over the term of the lease.
Investment revenues are recognized as accrued on highly rated
investments and as received on lesser grades.
(e) Marketable Securities
The Company's investments in debt and equity securities are classified
in three categories and accounted for as follows:
Classification Accounting
Held to maturity Amortized cost
Trading securities Fair value, unrealized
gains and losses included
in earnings
Available for sale Fair value,
unrealized gains and
losses excluded from
earnings and reported as
a separate component of
stockholders' equity, net
of applicable income
taxes
A-11
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(1) Summary of Significant Accounting Policies, continued
The Company has included its marketable securities, held as inventory
at its broker/dealer, in the trading securities category.
(f) Property and Equipment
Property and equipment are stated at cost. Property and equipment and
rental property are depreciated using the straight-line method over the
estimated useful lives of the respective assets (3 to 40 years).
(g) 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 if
there is a difference between the fair value and carrying value of the
asset.
(h) Goodwill
Goodwill represents the excess of consideration paid over the net
assets acquired in purchase business combinations. It is amortized
using the straight-line method over a period of ten years.
(i) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
(j) Earnings Per Share
Basic earnings per share is based on the weighted average shares
outstanding without any diluted effects considered. Diluted earnings
per share reflect dilution from all contingently issuable shares,
including options.
A-12
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(1) Summary of Significant Accounting Policies, continued
(k) Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
with an original maturity of 90 days or less.
(l) Notes Receivable
Notes receivable are recorded at cost, less allowances for doubtful
accounts when deemed necessary. Management, considering current
information and events regarding the borrowers ability to repay their
obligations, considers a note to be impaired when it is probable that
the Company will be unable to collect all amounts due according to the
contractual terms of the note agreement. When a loan is considered to
be impaired, the amount of the impairment is measured based on the
present value of expected future cash flows discounted at the note's
effective interest rate. Impairment losses are included in the
allowance for doubtful accounts through a charge to bad debt expense.
The present value of the impaired loan will change with the passage of
time and may change because of revised estimates of cash flows or
timing of cash flows. Such value changes shall be reported as bad debt
expense in the same manner in which impairment initially was recognized
or as a reduction in the amount of bad debt expense that would be
reported.
(m) Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("Statement 123"), but applies Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
for its stock option plans.
(n) Reclassification
Certain reclassifications have been made to amounts presented in
previous years to be consistent with the 1999 presentation.
(o) Other Comprehensive Income
For the three years ended December 31, 1999, the Company did not have
any significant other comprehensive income.
A-13
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(2) Management Fees and Other Receivables
Management fees and other receivables consist of the following:
December 31,
1999 1998
-------- -------
Management fees receivable $304,000 501,000
Trade accounts receivable 778,000 173,000
Less: allowance for doubtful
accounts (20,000) (8,000)
Accrued interest receivable 162,000 21,000
Other receivables 120,000 281,000
------- -------
$1,344,000 968,000
========== =======
The Company earns management fees by providing management services to
American Physicians Insurance Exchange ("APIE") under the direction of
APIE's Board of Directors. Subject to the direction of this Board, FMI
sells and issues policies, investigates, settles and defends claims,
and otherwise manages APIE's affairs. The Company has previously
managed other insurance companies.
The Company earned management fees and other related income of
$4,683,000, $5,655,000 and $6,287,000 and received expense
reimbursements of $1,454,000, $1,420,000 and $664,000 for the years
ended December 31, 1999, 1998 and 1997, respectively, related to these
agreements.
A-14
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(3) Notes Receivable
Notes receivable consist of the following:
December 31,
1999 1998
---- ----
Reagan Publishing Company
This unsecured note had an original rate of 7% and a maturity of December 31,
1997. The borrower defaulted in 1998 and the Company litigated. The Company
collected $41,000 as payment in full during 1999. -- $156,000
Consolidated Eco-Systems, Inc.
This note originated on November 26, 1996 in the amount of $3,300,000. The
Company declared the note in default in 1998 and negotiated multiple
restructuring agreements thereafter. In 1999, the Company foreclosed 100% of the
assets of Eco-Systems (See note 18).
-- 3,709,000
Uncommon Care, Inc.
Revolving Line of Credit: This note is unsecured with a maximum of $1,250,000. The note is
interest only at 12%, payable semi-annually. The note matures April 30, 2000, but may be
extended until November 30, 2001. Maturity may be accelerated if the borrower obtains specific 730,000 --
levels of equity financing. The borrower may at that time pay off the loan in full or convert
it into non-voting preferred stock of the borrower.
Revolving Line of Credit: This note is secured by substantially all of the assets of
Uncommon Care and is subordinated to bank loans for various real estate purchases. The
maximum allowed on this note is $2,400,000. This note is interest only at 10%, payable 2,141,000 745,000
quarterly. Any outstanding principal is due June 30, 2005.
FemPartners, Inc. (Formerly Syntera HealthCare Corporation)
Upon the merger of Syntera HealthCare Corporation with FemPartners, APS
restructured the line of credit, which now bears interest at 8%. Payments are
interest only, paid quarterly through November 30, 2001. Quarterly combined
principal and interest payments begin December 1, 2001 and continue through
September 1, 2004, at which time the total outstanding balance is due. The
maturity date of this note can be accelerated if FemPartners conducts an initial
public offering or other public sale of its common stock. If such occurs, the
note shall mature and become due and payable the latter of September 1, 2002 or the
5th business day after the date of such initial public offering or other public sale. 2,193,000 580,000
Employees
Three employees have loans from the Company as employment inducements, totaling $200,000.
The notes are non-interest bearing and are being forgiven and amortized monthly over three to
four year periods. The notes are due and payable should the employees terminate employment.
A fourth employee note in the amount of $50,000 was issued in December 1999 and paid in full
on March 2, 2000. In addition, loans totaling $86,000 were granted to a key employee for
advanced education fees. $20,000 is due June 30, 2000 while an additional $32,850 payment is
due at June 30, 2003 and 2004, respectively.The latter two notes are forgivable in the amount
of approximately $14,000 on each December 31st that the employee is employed by the Company 336,000 437,000
beginning in 2000 and continuing through 2004. ------- -------
5,400,000 5,627,000
Less allowance for doubtful accounts (193,000) (1,144,000)
--------- ----------
5,207,000 4,483,000
Less current portion 270,000 196,000
--------- ----------
Long term portion $4,937,000 $4,287,000
========== ==========
A-15
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(3) Notes Receivable, continued
Various officers and directors of the Company participated in the
$2,400,000 line of credit to Uncommon Care. For financial purposes this
participation has been treated as the sale of a financial asset. In the
aggregate these officers and directors contributed approximately
$259,000 to fund a 10.8% interest in the loan. They participated in the
earnings from the loan on a pro-rata basis.
On October 31, 1996, the Company invested $3,300,000 in common stock of
Exsorbet Industries, Inc. ("Exsorbet") (NASDAQ:EXSO) with a put option.
Exsorbet was a diversified environmental and technical services
company. On November 26, 1996, the Company exercised its put in
exchange for a note receivable from Exsorbet. The note was secured by
the shares that were subject to the put option plus all the stock and
substantially all of the assets of a wholly owned subsidiary of
Exsorbet. Subsequently, Exsorbet became known as Consolidated
Eco-Systems, Inc. ("Con-Eco").
On June 17, 1998 the Company filed suit against Con-Eco, and its
directors and officers alleging breach of contract, negligent
misrepresentation and conspiracy. In February, 1999 the Company settled
this litigation with the directors and officers of Con-Eco. The Company
recovered $950,000 for the full release of all claims against the
directors of Con-Eco.
In April, 1999, the Company's wholly owned subsidiary, APS Consulting
("APS Consulting"), acquired the business of Eco-Systems, Inc.
("Eco-Systems"), a subsidiary of Con-Eco, in connection with a debt
restructuring agreement with Con-Eco. Under the terms of the
restructuring agreement, Con-Eco had the right to purchase back the
business of Eco-Systems for a nominal amount upon the occurrence of
certain conditions. Accordingly, the Company did not initially
consolidate the operations of APS Consulting. In addition, the Company
dismissed its lawsuit against Con-Eco, but retained the right to
reinstitute the litigation at a later date.
Subsequently, the Company concluded that it was not probable that
Con-Eco would exercise its option to reacquire the stock and, effective
September 1, 1999, the Company began consolidating APS Consulting. The
acquisition was recorded using the purchase method of accounting. In
addition, the Company wrote off the remaining balance of the note due
from Con-Eco. During the year ended December 31, 1999 the Company
wrote off to bad debt expense a total of $1,293,000 bringing the total
written off since inception to $1,685,000.
A-16
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(3) Notes Receivable, continued
At December 31, 1998, the Company's note receivable from Consolidated
Eco-Systems, Inc. was in excess of 10% of stockholder's equity and
represented a concentration of credit risk. No interest income had been
recognized by the Company as of December 31, 1998.
Following a renegotiation of the debt in November 1997, Con-Eco
defaulted on the note. Con-Eco's stock was delisted during 1998 as the
Company considered the loan to be impaired. A portion of the note
receivable was written off in 1999 prior to the acquisition of
Eco-Systems (See Note 18) and has been recorded as follows:
December 31,
1999 1998
---- ----
Recorded loan amount $ -- $3,709,000
Less allowance for impairment -- 880,000
----- ----------
$ -- $2,829,000
====== ==========
A reconciliation of the allowance for impairment of the Company's notes
receivable follows:
Year Ended December 31,
1999 1998
---- ----
Balance at the beginning of the period $1,144,000 $ 653,000
Amounts charged off (1,144,000) (100,000)
Additional provision 193,000 591,000
---------- ----------
Balance at the end of period $ 193,000 $1,144,000
========= ==========
A-17
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standards No. 107, "Disclosures
About Fair Value of Financial Instruments" (Statement 107), requires
that the Company disclose estimated fair values for its financial
instruments as of December 31, 1999 and 1998.
For financial instruments the fair value equals the carrying value as
presented in the consolidated balance sheets. Fair value estimates,
methods, and assumptions are set forth below for the Company's
financial instruments.
CASH AND CASH EQUIVALENTS
The carrying amounts for cash and cash equivalents approximate fair
value because they mature in less than 90 days and do not present
unanticipated credit concerns.
TRADING ACCOUNT SECURITIES
The fair value of securities owned is estimated based on bid prices
published in financial newspapers or bid quotations received from
securities dealers. Trading account securities are carried at market
value.
MANAGEMENT FEES AND OTHER RECEIVABLES
The fair value of these receivables approximates the carrying value due
to their short-term nature and historical collectibility.
NOTES RECEIVABLE
The fair value of notes has been determined using discounted cash flows
based on management's estimate of current interest rates for notes of
similar credit quality. On notes determined to be impaired, the notes
have been discounted based on the original interest rate of the note.
RECEIVABLE FROM CLEARING BROKER
The carrying amounts approximate fair value because the funds can be
withdrawn on demand and there is no unanticipated credit concern.
A-18
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(4) Fair Value of Financial Instruments, continued
OTHER INVESTMENTS
The fair value has been determined using discounted cash flows based on
estimates of future earnings.
Accounts Payable
The fair value of the payable approximates carrying 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-and-off
balance sheet financial instruments without attempting to estimate the
value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. Other
significant assets and liabilities that are not considered financial
assets or liabilities include the deferred tax assets, property and
equipment, investment in affiliates, other assets, accrued expenses and
income tax payable. 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.
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
-------------------------
1999 1998
--------- --------
Office condominium $1,574,000 1,796,000
Furniture and equipment 2,582,000 3,173,000
--------- ---------
4,156,000 4,969,000
Accumulated depreciation and amortization 2,336,000 3,316,000
--------- ---------
1,820,000 1,653,000
========= =========
A-19
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(5) Property and Equipment, continued
The Company owns approximately 53,000 square feet in the condominium
building in which its principal offices are located. The Company, its
subsidiaries and affiliate occupy approximately 31,000 square feet and
the remainder is leased to third parties. Rental income received from
third parties during the years ended December 31, 1999, 1998 and 1997
totaled approximately $255,000, $355,000 and $385,000 respectively.
Future minimum lease payments to be received under the terms of the
office condominium leases are as follows: 2000 - $369,000; 2001 -
$327,000; 2002 - $238,000; 2003 - $153,000; and 2004 - $78,000.
(6) Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consists of the following:
1999 1998
--------- ----------
APS Systems disposition costs
(discontinued operations)
$10,000 $1,026,000
Taxes payable - other 160,000 115,000
Deferred income 528,000 740,000
Contractual/legal claims 1,409,000 1,202,000
Vacation payable 116,000 134,000
Funds held for others 402,000 20,000
Other 298,000 142,000
------- -------
$2,923,000 $3,379,000
========== =========
(7) Notes Payable
The Company has a $7,500,000 line of credit with Bank of America, N. A.
The Company has pledged shares of Prime Medical to the bank as funds
are advanced under the line. Funds advanced under the agreement
were $3,275,000 at December 31, 1999. Funds advanced under
the agreement will bear interest at the prime rate less 1/4 %. The
unused portion of the line carries a 1/4 % commitment fee. All interest
is to be paid quarterly. Any outstanding principal is to be paid at
maturity in February 2001.
In order to receive advances under the line, the Company must maintain
certain levels of liquidity and net worth. In addition, the market
value of the collateral must exceed a certain multiple of the funds
advanced under the line and there must be no occurrence which would
have a material adverse effect on the Company's ability to meet its
obligations to the bank. As of December 31, 1999, the Company is in
Compliance with all covenants of its loan agreements.
A-20
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(8) Commitments and Contingencies
In connection with the development of Syntera HealthCare Corporation,
the Company entered into Share Exchange Agreements ("Agreements") with
the physician shareholders of Syntera. The Agreements provide that the
Syntera shareholders may, at their option, exchange their shares for
a fixed dollar amount of the Company's common stock in the event that
the Syntera shares are not publicly traded by certain dates.The Company
has the option of purchasing any or all of the shares at the weighted
average dollar amount of $5.26 per share rather than exchanging for its
common stock. As a result of Syntera's merger with FemPartners, Inc. in
1999, the Syntera shares were converted to FemPartners shares, with
such shares retaining all of the conversion features. These shares
begin to become eligible to exchange in the first quarter of 2000 and
continue to become eligible into the first quarter of 2002. Should all
eligible FemPartners shares (248,000) be presented for exchange and the
Company elected to purchase the shares for cash, the amount would be
approximately $3,900,000. If the Company elected to issue its common
shares, the quantity would be determined by the market price of its
shares at the time of the exchange. For example, at the closing price
at December 31, 1999 ($3.688) approximately 1,100,000 shares would be
issued in the exchange. Since it is unknown how many, if any, of the
shares will be presented for exchange or what the value of
privately-held FemPartners shares will be in the future, the Company
has made no provision related to potential exchanges in its financial
statements. The Company will record the effect, if any, of share
exchanges in the quarter in which it is notified by FemPartners
shareholders of their intent to exchange.
The Company has extended three lines of credit to Uncommon Care, Inc.
The first is to a maximum amount of $2,400,000. The note is interest
only at 10%, payable quarterly. The note matures June 30, 2005, at
which time all principal and accrued but unpaid interest are due. The
second is to a maximum of $1,250,000 with interest at 12%, payable
semi-annually. The note matures April 30, 2000, but may be extended
until November 30, 2001. The maturity may be accelerated by Uncommon
Care securing certain equity capital. The third is to a maximum of
$1,200,000 with interest at 10%, payable semi-annually. The note
matures the earlier of September 30, 2001, or upon Uncommon Care
securing certain equity capital. Advances under the lines are subject
to Uncommon Care meeting certain qualifications at the date of each
advance request.
A-21
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(8) Commitments and Contingencies, continued
The Company has guaranteed the future yield of a customer's investment
portfolio beginning in January 1995 for up to a five and one-half year
period. Management believes that the Company's financial statements
adequately provide for any loss that might occur under this agreement;
however, as defined in AICPA Statement of Position 94-6, it is
reasonably possible that the Company's estimate of loss could change
over the remaining term of the agreement. Management is unable to
determine the range of potential adjustment since it is based on
securities markets, which are beyond its ability to control.
The Company had guaranteed a loan in the amount of $85,000 for one of
its directors at December 31, 1999. The guarantee was collateralized by
securities the Company believed sufficient to cover its potential
liability. The loan was paid in full and the Company was released from
its guarantee on March 5, 2000.
Rent expense under all operating leases for the years ended December
31, 1999, 1998 and 1997 was $84,000, $44,000 and $89,000 respectively.
Future minimum payments for leases which extend for more than one year
were $334,000 at December 31, 1999.
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 significant
adverse effect on the financial condition of the Company.
(9) Income Taxes
Income tax expense (benefit) consists of the following:
Year Ended December 31,
-----------------------------------
1999 1998 1997
---- ---- ----
Continuing Operations
Federal
Current $(245,000) $332,000 $1,394,000
Deferred 826,000 399,000 777,000
State 40,000 132,000 170,000
Discontinued Operations 153,000 171,000 (479,000)
------- ------- ---------
$774,000 $1,034,000 $1,862,000
======== ========= ==========
A reconciliation of expected income tax expense (computed by applying the United
States statutory income tax rate of 34% to earnings before income taxes) to
total tax expense in the accompanying consolidated statements of earnings
follows:
A-22
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(9) Income Taxes, continued
Year Ended December 31,
--------------------------------------
1999 1998 1997
---- ---- ----
Expected federal income tax
expense
$744,000 $877,000 $1,556,000
State taxes 40,000 132,000 170,000
Other, net (10,000) 25,000 136,000
------ -------- ---------
$774,000 $1,034,000 $1,862,000
======== ========== ==========
The tax effect of temporary differences that gives rise to significant
portions of deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are presented below:
Year Ended December 31,
---------------------------------
1999 1998
---- ----
Deferred tax assets:
Net operating loss carryforwards $172,000 $186,000
Accrued expenses 537,000 774,000
Accounts receivable, principally due
to allowance for doubtful accounts 96,000 94,000
Deferred income (26,000) 378,000
Market value allowance 2,000 17,000
Other 56,000 48,000
------ ------
Total gross deferred tax assets 837,000 1,497,000
Less valuation allowance (172,000) (186,000)
--------- ---------
Net deferred tax assets 665,000 1,311,000
------- ---------
Deferred tax liabilities:
Investment in Prime Medical Services,
Inc. due to use of equity method for
financial reporting
(2,730,000) (2,474,000)
Capitalized expenses, principally
due to deductibility for tax
purposes (32,000) (32,000)
-------- --------
Total gross deferred tax liabilities (2,762,000) (2,506,000)
---------- -----------
Net deferred tax liability $(2,097,000) $(1,195,000)
============ ============
A-23
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(9) Income Taxes, continued
The net change in the total valuation allowance for the years ended
December 31, 1999 and 1998 was a decrease of $14,000 and $2,000,
respectively. The Company believes that the valuation allowance at
December 31, 1999 is necessary due to uncertainties regarding the use
of the net operating loss carryforwards from separate return years of a
subsidiary acquired in 1997.
At December 31, 1999, net operating loss carryforwards available to
reduce future taxable income amounted to approximately $505,000 and
expire in 2011 and 2012.
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 realiza-
tion of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary defferences
become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upin the level of
historical taxable income and projections for future taxable income
over the periods which the deferred tax assets are deductible, manage-
ment believes it is more likely than not that the Company will realize
the benefits of these deductible differences net of existing valuation
allowances at December 31, 1999 and 1998.
(10) Employee Benefit Plans
The Company has an employee benefit plan qualifying under Section
401(k) of the Internal Revenue Code for all eligible employees.
Employees become eligible upon meeting certain service and age
requirements. Employees may defer up to 15% (not to exceed $10,000 in
1999) of their annual compensation under the plan. The Company, at its
discretion, may contribute up to 200% of the employees' deferred
amount. For the years ended December 31, 1999, 1998 and 1997,
contributions by the Company aggregated, $121,000, $126,000 and
$92,000, respectively.
(11) Stock Options
The Company has adopted, with shareholder approval, the "1995
Non-Employee Directors Stock Option Plan" ("Directors Plan") and the
"1995 Incentive and Non-Qualified Stock Option Plan" ("Incentive
Plan"). The Directors Plan provides for the issuance of up to 200,000
shares of common stock to non-employee directors who serve on the
Compensation Committee. The Directors Plan is inactive and it is
assumed the remaining 50,000 shares will not be granted. The Incentive
Plan, as amended with shareholder approval in 1998, provides for the
issuance of up to 1,200,000 share of common stock to directors and key
employees.
A-24
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(11) Stock Options, continued
The exercise price for each non-qualified option share is determined by
the Compensation Committee of the Board of Directors ("the Committee").
The exercise price of a qualified incentive stock option has to be at
least 100% of the fair market value of such shares on the date of grant
of the option. Under the Plans, option grants are limited to a maximum
of ten-year terms; however, the Committee has issued all currently
outstanding grants with five-year terms. The Committee also determines
vesting for each option grant and all outstanding options vest in three
approximately equal annual installments beginning one year from the
date of grant.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("Statement 123"), but applies Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
for its stock option plans. No cost from stock-based compensation
awards was recognized in 1999, 1998 or 1997. If the Company had elected
to recognize compensation cost of options granted based on the fair
value at the grant dates, consistent with Statement 123, net income and
earnings per share would have changed to the pro forma amounts
indicated below:
Year Ended December 31,
----------------------------------------------------
1999 1998 1997
---- ---- ----
Pro forma net income $859,000 $810,000 $1,989,000
Pro forma earnings per share - basic 0.27 0.19 0.48
- diluted 0.27 0.16 0.46
The fair value of the options used to compute the pro forma amounts is
estimated using the Black Scholes option-pricing model with the
following assumptions:
1999 1998 1997
---- ---- ----
Risk-free interest rate 5.60% 5.21% 6.16%
Expected holding period 3.90 years 3.90 years 3.90 years
Expected volatility .689 .401 .480
Expected dividend yield -0- -0- -0-
Presented below is a summary of the stock options held by the Company's
employees and directors and the related transactions for the years
ended December 31, 1999, 1998 and 1997. Remaining options outstanding
from the Company's previous 1983 plans are included.
A-25
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(11) Stock Options, continued
Year Ended December 31,
--------------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Balance at January 1 1,345,000 6.36 774,000 $6.60 651,000 $5.64
Options granted 215,000 4.01 597,000 5.92 293,000 9.32
Options exercised 33,000 2.28 26,000 2.90 165,000 1.92
Options forfeited/expired 245,000 6.30 -- -- 5,000 7.13
Balance at December 31 1,282,000 6.09 1,345,000 6.36 774,000 6.60
========= ==== ========= ==== ======= ====
Options exercisable 668,000 6.72 460,000 $6.44 244,000 $5.84
======= ==== ======= ===== ======= =====
The weighted average fair value of Company stock options, calculated
using the Black Scholes option pricing model, granted during the years
ended December 31, 1999, 1998 and 1997 is $2.23, $2.33 and $2.68 per
option, respectively.
The following table summarizes the Company's options outstanding and
exercisable options at December 31, 1999:
Stock Options Stock Options Exercisable
Outstanding
-------------------------------------------- ----------------------------
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
--------- --------- ------ ------- ------
$3.25 to $5.00 487,000 3.7 years $ 3.93 170,000 $ 3.76
$5.01 to $7.75 617,000 2.8 years $ 6.71 322,000 $ 6.57
$7.76 to $10.50 178,000 1.5 years $ 9.85 176,000 $ 9.87
------- --------- ------ ------- ------
Total 1,282,000 668,000
========= =======
(12) Discontinued Operations
The Company, through its wholly owned subsidiary, APS Systems, Inc.
("APS Systems"), had previously developed software and marketed it to
medical clinics and medical schools. This business segment became
unprofitable in 1996. A joint venture with a software developer was
formed in 1996 with a plan to develop new products, but was
discontinued in 1997 when it was determined that the high cost of
developing competitive products precluded an adequate return on
investment. Subsequently, the Company ceased marketing the software and
reduced the scope of APS Systems' operations to a level adequate to
service
A-26
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(12) Discontinued Operations, continued
existing clients through the terms of their contracts. The Company
originally assumed that all clients would have migrated to other
software products by the end of 1999 and reflected the expected
financial impact of discontinuing this segment on that date in the 1997
financial statements. The measurement date for determining expected
losses from the disposal was May 15, 1997. Support for all clients was
terminated as of December 31, 1999 including two clients whose original
support contracts extended beyond 1999. These clients have successfully
migrated to other software platforms and have signed documents
releasing the Company of any support obligations beyond December 31,
1999.
Net assets/(liabilities) of the discontinued computer systems and
software segment as of December 31, 1999 consisted of the following:
Cash and cash investments $31,000
Trade accounts receivable 9,000
Intercompany receivables 1,000
Accrued expenses (16,000)
-------
Net assets $25,000
=======
Summary operating data for the year ended December 31, 1999 is as
follows:
Total revenue $266,000
Cost of sales (12,000)
Other operating expenses (296,000)
Reversal of allowance 492,000
Income taxes (153,000)
--------
Net income $297,000
========
(13) Investment in Affiliate
On October 12, 1989, the Company purchased 3,540,000 shares (42%) of
the common stock of Prime Medical Services, Inc. ("Prime Medical").
Members of the Company's Board currently serve as two of the seven
directors of Prime Medical, and Mr. Hummel, executive vice president
and chief operating officer of Prime Medical, is a member of the
Company's Board of Directors. Prime Medical provides non-medical
management services to lithotripsy centers. In conjunction with the
acquisition of additional lithotripsy operations in June 1992, October
1993, and May 1996, the outstanding shares of Prime Medical increased.
These increases, the sale of Prime Medical shares owned by the Company
under an option agreement, the repurchase by Prime Medical of its own
shares, and the exchange of Prime Medical shares for common stock of
the Company, in the
A-27
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(13) Investment in Affiliate, continued
aggregate, have reduced the Company's ownership to 14% of the
outstanding common stock of Prime Medical. The Company's investment in
Prime Medical is accounted for using the equity method. The 2,344,000
shares of Prime Medical common stock held by the Company had an
approximate market value of $21,387,000 (carrying amount of
$12,096,000) at December 31, 1999 based on the market closing price of
$9.125 per share.
At December 31, 1999 and 1998, the Company's retained earnings included
undistributed earnings, net of deferred tax, of Prime Medical totaling
$7,058,000 and $5,583,000, respectively.
The condensed balance sheet and statement of operations for Prime
Medical follows:
Condensed balance sheet at December 31, 1999 and 1998
-----------------------------------------------------
1999 1998
---- ----
Current assets $58,012,000 70,006,000
Long-term assets 188,815,000 171,320,000
----------- -----------
Total assets 246,827,000 241,326,000
=========== ===========
Current liabilities $20,493,000 28,465,000
Long-term liabilities 129,651,000 123,111,000
Shareholders' equity 96,683,000 89,750,000
---------- ----------
Total liabilities and equity $246,827,000 241,326,000
============ ===========
Condensed statement of operations for the years
-----------------------------------------------
ended December 31, 1999 and 1998
--------------------------------
1999 1998
---- ----
Total revenue $112,174,000 104,636,000
============ ===========
Net income $15,039,000 10,794,000
=========== ==========
(14) Segment Information
The Company's segments are distinct by type of service provided. Each
segment has its own management team and separate financial reporting.
The Company's Chief Executive Officer allocates resources and provides
overall management based on the segments' financial results.
The financial services segment includes brokerage and asset management
services to individuals and institutions.
A-28
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(14) Segment Information, continued
The insurance services segment includes financial management for an
insurance company that provides professional liability insurance to
doctors.
The consulting segment includes environmental consulting and
engineering services to private and public institutions.
Real Estate income is derived from the leasing of office space.
Corporate is the parent company and derives its income from interest
and investments.
Discontinued operations include medical software sales.
1999 1998 1997
---- ---- ----
Operating Revenues:
Financial services $10,835,000 $9,914,000 $5,726,000
Insurance services 4,683,000 5,655,000 6,287,000
Consulting 768,000 -- --
Real estate 853,000 865,000 867,000
Corporate 4,839,000 1,721,000 982,000
--------- --------- -------
$21,978,000 18,155,000 13,862,000
=========== ========== ==========
Reconciliation to Consolidated
Statement of Earnings:
Total segment revenues $21,978,000 18,155,000 13,862,000
Less: intercompany profits (143,000) (152,000) (163,000)
intercompany dividends (2,720,000) (1,600,000) (634,000)
----------- ----------- ---------
Total Revenues $19,115,000 $16,403,000 $13,065,000
=========== =========== ===========
Operating Profit (Loss):
Financial services $998,000 $810,000 372,000
Insurance services 40,000 1,437,000 2,385,000
Consulting 58,000 -- --
Real estate 305,000 338,000 362,000
Corporate 935,000 (187,000) (389,000)
------- --------- ---------
$2,336,000 $2,398,000 $2,730,000
========== ========== ==========
Reconciliation to Consolidated
Statement of Earnings:
Total segment operating profits 2,336,000 2,398,000 2,730,000
Less: intercompany dividends (2,720,000) (1,600,000) (634,000)
other -- -- (25,000)
---------------- ---------------- --------
Operating Income $(384,000) $798,000 $2,071,000
A-29
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(14) Segment Information, continued
1999 1998 1997
---- ---- ----
Equity in earnings of affiliates 2,116,000 1,457,000 2,014,000
Gain on sale of interest in subsidiary -- 1,899,000
---------------- ---------------- ---------
--
Earnings from continuing operations before income
taxes and minority interests
1,732,000 2,255,000 5,984,000
Income tax expense 621,000 863,000 2,341,000
Minority interests 5,000 (178,000) (175,000)
----- --------- ---------
Earnings from continuing operations 1,116,000 1,214,000 3,468,000
--------- --------- ---------
Net profit(loss) from discontinued operations,
net of income tax 297,000 331,000 (930,000)
------- ------- ---------
Net earnings $1,413,000 $1,545,000 $2,538,000
========== ========== ==========
Identifiable assets:
Financial Services $4,480,000 3,964,000 2,346,000
Insurance Services 1,281,000 1,640,000 2,585,000
Consulting 1,155,000 -- --
Real Estate 1,286,000 1,324,000 1,283,000
Corporate:
Investment in equity
method investees 12,096,000 17,064,000 15,606,000
Other 12,586,000 8,928,000 8,561,000
Discontinued Operations 40,000 206,000 356,000
------ ------- -------
$32,924,000 $33,126,000 $30,737,000
=========== =========== ===========
Capital expenditures:
Financial Services $47,000 55,000 154,000
Insurance Services 44,000 44,000 33,000
Consulting -- -- --
Real Estate 129,000 58,000 --
Corporate 193,000 49,000 26,000
Discontinued Operations -- -- 99,000
------------ ----------- ------
$413,000 $206,000 $312,000
======== ======= =======
A-30
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(14) Segment Information, continued
1999 1998 1997
---- ---- ----
Depreciation/amortization expenses:
Financial Services $413,000 $279,000 $118,000
Insurance Services 94,000 90,000 90,000
Consulting 31,000 -- --
Real Estate 103,000 107,000 110,000
Corporate 74,000 78,000 62,000
Discontinued Operations 18,000 64,000 56,000
--------------- ------ ------
$733,000 $618,000 $436,000
======== ======== ========
Revenues attributable to customers generating greater than 10% of the
consolidated revenues of the Company:
Insurance services
Company A $2,454,000 $3,970,000 $4,659,000
At December 31, 1999 the Company had long-term contracts with company A
and was therefore not vulnerable to the risk of a near-term severe
impact from a reasonably possible loss of the revenue.
Operating profit is operating revenues less related expenses and is all
derived from domestic operations. Identifiable assets are those assets
that are used in the operations of each business segment (after
elimination of investments in other segments). Corporate assets consist
primarily of cash and cash investments, notes receivable and
investments in affiliates and preferred stock.
(15) Earnings Per Share
Basic earnings per share are based on the weighted average shares
outstanding without any dilutive effects considered. Diluted earnings
per share reflects dilution from all contingently issuable shares,
including options and convertible debt. A reconciliation of income and
average shares outstanding used in the calculation of basic and diluted
earnings per share from continuing operations follows:
A-31
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(15) Earnings Per Share, cont.
For the Year Ended December 31, 1999
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ----------- ---------
Earnings from continuing operations
$1,116,000
Basic EPS
Income available to common stockholders
1,116,000 3,142,000 $.36
====
Effect of Dilutive Securities
Options -- 26,000
--------- ---------
Diluted EPS
Income available to common stockholders and
assumed conversions
$1,116,000 3,168,000 $.35
========== ========= ====
For the Year Ended December 31, 1998
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ ------
Earnings from continuing operations
$1,214,000
Basic EPS
Income available to common stockholders
$1,214,000 4,163,000 $.29
====
Effect of Dilutive Securities
Options -- 74,000
Contingently issuable shares (76,000) 456,000
-------- -------
Diluted EPS
Income available to common stockholders and
assumed conversions
$1,138,000 4,692,000 $.24
========== ========= ====
A-32
(15) Earning Per Share, continued
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
For the Year Ended December 31, 1997
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------
Earnings from continuing operations
$3,468,000
Basic EPS
Income available to common stockholders
3,468,000 4,106,000 $.84
====
Effect of Dilutive Securities
Options -- 114,000
Contingently issuable shares (18,000) 21,000
-------- ------
Diluted EPS
Income available to common stockholders and
assumed conversions
$3,450,000 4,241,000 $.81
========== ========= ====
Unexercised employee stock options to purchase 815,000, 295,000 and
295,000 shares of the Company's common stock as of December 31, 1999,
1998 and 1997, respectively, were not included in the computations of
diluted EPS because the options' exercise prices were greater than the
average market price of the Company's common stock during the
respective periods.
(16) Cash - Restricted
APS Financial acted as the placement agent for a private offering of
500,000 shares of preferred stock for one of its customers during 1999.
The customer acted as its own underwriter and APS Financial placed the
securities on a best effort basis. The private offering closed December
15, 1999. In association with this transaction, APS Financial acted in
a trustee capacity and established an escrow fund that was used to
account for funds received from participating investors. These funds
were subsequently disbursed to the customer based on the satisfaction
of certain criteria. As of December 31, 1999, there was $3,494
maintained in the escrow fund related to interest earnings on escrow
fund balances that are payable to the customer. In addition to
establishing the escrow fund, the customer was required to deposit a
specified amount with APS Financial as part of the private offering
agreement. As of December 31, 1999, APS Financial was holding $372,922
as a deposit for the customer.
A-33
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(17) Other Investments
Other investments consists of the
following investments: 1999 1998
---------- -----------
Investment in Uncommon Care, Inc. $2,078,000 $2,078,000
Investment in FemPartners, Inc. 3,855,000 --
Investment in Syntera HealthCare -- 3,974,000
Investment in Probex 100,000 --
Stock warrants in Probex 45,000 --
---------- -----------
Total $6,078,000 $6,052,000
========= =========
On January 1, 1998 the Company invested approximately $2,078,000 in the
Convertible Preferred Stock of Uncommon Care, Inc. ("Uncommon Care").
Uncommon Care is a developer and operator of dedicated Alzheimer's care
facilities. The preferred shares owned by the Company are convertible
into approximately a 34% interest in the equity of Uncommon Care.
On June 30, 1999 the Company merged Syntera with another unaffiliated
practice management company, FemPartners, Inc., resulting in the
Company owning approximately 12% of the total equity of FemPartners,
Inc. Prior to June 30, 1999 the Company has accounted for its ownership
in Syntera on the equity basis. Beginning July 1, 1999, as a result of
the merger with FemPartners, Inc., the Company began recording its
interest on the cost basis.
In addition to acting as the placing agent for the private offering as
described in Note 16, APS Financial purchased 10,000 shares which has
been recorded as a preferred stock investment with a cost basis of
$100,000 at December 31, 1999.
In addition to receiving commission revenue for acting as the placement
agent for the private offering, APS Financial received warrants to
purchase 251,325 shares of restricted common capital stock exercisable
at a price of $1.875 per share of common stock. The warrants expire on
December 15, 2004 and have been recorded at a fair value of $45,000 at
December 31, 1999. None of the warrants have been exercised as of
December 31, 1999.
A-34
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(18) Acquisition Through Foreclosure
Effective September 1, 1999 the Company began consolidating Eco-
Systems as a wholly-owned subsidiary . The Company's basis in its
investment represents the remainder of the note due from
Eco-Systems, approximately $630,000 as of September, 1999. The Company
has accounted for the transaction using the purchase method of
accounting. Goodwill is amortized using the straight line method of
amortization over a period of ten years. At December 31, 1999 the
Company has amortized a total of $20,000.
Unaudited proforma combined income data for the years ended December
31, 1999 and 1998 of the Company, assuming the purchase was effective
January 1, 1998 is as follows:
($ in thousands, except per share data)
1999 1998
------ ----
Total revenues $20,798 $19,819
Total expenses 19,619 17,895
------ ------
Net income $1,179 $1,924
====== ======
Diluted earnings per share $.37 $.39
==== ====
A-35