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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, 1997
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 18, 1998: $30,121,524
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 18, 1998
-------------------- ----------------
Common Stock, $.10 par value 4,154,693
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, 1997 is incorporated by
reference.
============================================================================
AMERICAN PHYSICIANS SERVICE GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
PART I
ITEM 1. BUSINESS
General
American Physicians Service Group, Inc. (the "Company"), through its
subsidiaries, provides financial services that include management services to
malpractice insurance companies, and brokerage and investment services to
individuals and institutions. 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 owns 3,064,000 shares of common stock of Prime Medical
Services, Inc. ("Prime Medical"), representing at March 15, 1998 approximately
16% of the outstanding shares of common stock of Prime Medical. Two of Prime
Medical's eight directors are members of the Company's five member board of
directors. The Company records its pro-rata share of Prime Medical's results on
the equity basis. 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. 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 offices of the
SEC.
On October 1, 1997, the Company formed APS Practice Management, Inc.,
later renamed Syntera HealthCare Corporation ("Syntera") with an initial
ownership of 85%. Syntera specializes in the management of OB/GYN and related
medical practices. In a typical transaction, Syntera acquires the non-medical
assets of a physician's practice, signs 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 is paid a variable management fee that rewards the efficient operation
and the expansion of the practice. Medical services are not provided by Syntera.
The Company expects its ownership interest in Syntera (currently 74%) to be
reduced to a minority level as Syntera exchanges its stock for assets of
additional physician practices. Due
1
to the short time frame anticipated for this change in ownership to occur, the
Company has accounted for its ownership in Syntera on the equity basis in 1997.
On October 31, 1996, the Company invested $3,300,000 in the common
stock of Consolidated Eco-Systems, Inc. (formerly Exsorbet Industries, Inc.)
("Con-Eco") (NASDAQ:EXSO) with a put option. Con-Eco is a diversified
environmental and technical services company. On November 26, 1996, the Company
exercised its put in exchange for a promissory note from Con-Eco. The promissory
note was secured by the shares which were subject to the put plus all of the
stock and substantially all of the assets of a wholly-owned subsidiary of
Con-Eco and the guarantees of all operating subsidiaries of Con-Eco. The Company
renegotiated the debt with Con-Eco in November, 1997. In connection with the
renegotiation, the Company extended the debt for two years and refinanced unpaid
accrued interest, resulting in a new promissory note for $3,788,000. No interest
income has been recognized by the Company. Con-Eco provided additional
collateral to the Company in the form of stock of two additional subsidiaries,
and a second lien on all assets of one of these subsidiaries. Payments under the
new note were scheduled to begin on January 1, but were delayed until March,
1998 with the Company's consent. The March 1998 payment has been received;
however, is anticipated that Con-Eco will be required to sell certain assets in
order to meet its obligations to the Company. The Company has declared Con-Eco
in default for failure to comply with certain non-payment obligations, but
believes its collateral position is sufficient to allow ultimate repayment of
the debt.
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 (other than affiliates Prime Medical and Syntera).
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 has assumed that all
clients will have migrated to other software products by the end of 1999 and has
reflected the expected financial impact of discontinuing this segment on that
date in the current financial statements.
The Company had previously published Spanish language buying guides of
U.S. businesses for distribution in Mexico. This business segment had been
unprofitable and, in 1995 substantially all of the assets of this business were
sold. There was no material financial impact on the Company.
2
FINANCIAL SERVICES
The Company's financial services consist of management services to
medical malpractice insurance companies by APS Insurance Services, Inc., an 80%
owned subsidiary of the Company ("Insurance Services"), and brokerage and
investment services primarily to institutional and high net worth individuals
performed by APS Financial Corporation, a wholly-owned subsidiary of the Company
("APS Financial").
MANAGEMENT SERVICES TO MEDICAL MALPRACTICE INSURANCE COMPANIES
Insurance Services, through its wholly-owned subsidiaries APS
Facilities Management, Inc. ("FMI") and American Physicians Insurance Agency,
Inc. ("Agency"), provides management services to medical malpractice insurance
companies. The primary insurance company client, American Physicians Insurance
Exchange ("APIE") is a reciprocal insurance exchange. 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 profit. The amount of these premiums can be adversely affected by
competition. Substantial underwriting losses, which might result in a
curtailment or cessation of operations by APIE, would also adversely affect
FMI's revenue. To limit possible underwriting losses, APIE currently reinsures
its risk in excess of $250,000 per medical incident. APIE offers medical
professional liability insurance for doctors in Texas and Arkansas. FMI's assets
are not subject to any insurance claims by policyholders of APIE.
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 profit. FMI pays all
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.
During 1997, 1996 and 1995 approximately 48%, 57% and 35%,
respectively, of the Company's revenues from continuing operations, and
substantially all of Insurance Services'
3
revenues were received pursuant to the agreement with APIE discussed above.
Termination of the 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 has also
granted FPIC an option, exercisable at any time during 1999, to purchase an
additional 35% interest in Insurance Services from the Company at a price based
on the average net earnings of Insurance Services for 1997 and 1998.
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 the third largest medical professional liability
insurance company in the State of Texas and is one of the largest in the State
of Arkansas. APIE is the only insurance company based in Texas that is
wholly-owned by its subscriber physicians.
Florida Physicians is one of the larger physician insurers in the
country, insuring over 5,000 physicians nationwide. Florida Physicians is rated
A- (Excellent) by AM Best.
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 actually made 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. APIE
and Florida Physicians reinsure 100% of all Texas and Arkansas coverage per
medical incident between $250,000 and $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
4
reimbursement (fees and profit sharing) do not exceed a cap based on premium
levels. No profit sharing fee was received in 1993. In 1997, 1996, 1995, and
1994, management fees attributable to profit sharing were $1,961,000,
$1,191,000, $700,000, and $1,107,000, respectively.
Years Ended December 31,
1997 1996 1995 1994 1993
------ ------ ------ ---- -----
(thousands, except for
number of insureds)
Earned premiums before
reinsurance premiums...... $25,899 $28,754 $30,857 $30,261 $29,205
Total assets................ 81,594 90,193 101,251 98,302 94,019
Total surplus............... 11,854 10,017 9,402 9,315 9,196
Management fees and
commissions to FMI and
Agency ................... 5,854 (4) 5,281 (4) 5,010 (4) 4,703 (2) 3,790 (1)
Number of insureds......... 2,629 (3) 3,019 3,226 3,216 (3) 3,575
- ----------------
(1) Gross fee of $3,942 less tax refund of $152 attributable to
APIE's association with FMI.
(2) Gross fee of $5,193 less tax credit of $490 attributable to
APIE's association with FMI.
(3) The decrease was the result of APIE's decision to raise
premiums on certain unprofitable specialties. Included in the
totals are doctors for which APIE provides reinsurance through
a relationship with another malpractice insurance company.
(4) Includes commissions of $1,214, $860 and $676 in 1997, 1996
and 1995, respectively, from Florida Physicians and other
carriers directly related to APIE's controlled business.
BROKERAGE AND INVESTMENT SERVICES
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 complete portfolio accounting, analysis,
and management services, to insurance companies, banks, and public funds.
APS Financial's employees have extensive investment expertise and
knowledge. 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 44 states.
Commissions are charged on both exchange and over-the-counter ("OTC")
transactions generally in accordance with industry practice. When OTC
transactions are executed by APS Financial as a dealer, APS Financial receives,
in lieu of commissions, mark-ups or mark-downs.
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
5
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. 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
December 31, 1997, APS Financial was in compliance with all net capital
requirements.
APS Financial clears and executes 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.
REAL ESTATE
APS Realty, Inc., a wholly-owned subsidiary of the Company ("APS
Realty"), 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 Prime Medical. The remainder is leased to unaffiliated parties.
COMPETITION
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,
Insurance Company of America, Texas Medical Liability Trust and CNA Insurance
Company. 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 and other service and claims settlement
philosophy.
APS Financial is also engaged in a highly competitive business. Its
competitors include, with respect to one or more aspects of its 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. 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 commission dollars 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.
6
REGULATION
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 Financial is subject to extensive regulation under both federal and
state laws. The SEC is the federal agency charged with administration of the
federal securities 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.
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 (as it did in 1995), members are
required to pay annual assessments in varying amounts not to exceed .5% of their
adjusted gross revenues to restore the fund. This assessment amounted to
approximately $7,300 in 1995. 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.
EMPLOYEES
At March 1, 1998, the Company employed, on a full time basis,
approximately 128 persons, including 52 by Insurance Services, 45 by APS
Financial, 18 by APS Systems and 13 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.
7
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 Prime
Medical use 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 fully occupied as of March 20,
1998.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions that have
arisen in the ordinary course of business. The Company believes that the
liability provision in its financial statements is sufficient to cover any
unfavorable outcome related to lawsuits in which it is currently named.
Management believes that liabilities, if any, arising from these actions will
not have a significant adverse effect on the financial condition of the Company.
However, due to the uncertain nature of legal proceedings, the actual outcome of
these lawsuits may differ from the liability provision recorded in the Company's
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting was held June 19, 1997. The sole agenda
item was the election of directors. Results of the election follow:
Nominee For Against Abstain Broker Non-Vote
Richard Clark 3,598,632 22,000 -- --
Jack Murphy 3,599,631 22,001 -- --
Robert L. Myer 3,598,632 22,000 -- --
William A. Searles 3,598,632 22,000 -- --
Kenneth S. Shifrin 3,598,632 22,000 -- --
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, 1997 and 1996. On March 1, 1998, the Company had
approximately 500 holders of record of its common stock.
8
1997 1996
----------------- ------------------
High Low High Low
First Quarter $7 5/8 $6 3/8 $10 1/8 $5 1/4
Second Quarter 6 7/8 4 3/4 12 7/8 8
Third Quarter 8 7/8 5 7/8 10 5 7/8
Fourth Quarter 8 6 7 3/8 5 5/8
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.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(In thousands, except per share data)
For the Year Ended or At December 31,
1997 1996 1995 1994 1993
---- ---- ------ -------- -----
Selected income statement data:
Revenues $13,065 10,437 16,124 12,333 12,541
Earnings from continuing operations before
income taxes, minority interests and accounting
changes $ 5,984 3,006 3,007 1,784 1,471
Net earnings $ 2,538 1,924 2,024 1,254 1,086
Per share amounts - diluted:
Net earnings $ .59 .46 .53 .36 .31
Diluted weighted average
shares outstanding 4,241 4,219 3,798 3,488 3,549
Selected balance sheet data:
Total assets $29,401 24,468 23,740 19,918 18,326
Long-term obligations $ -- -- 574 878 1,215
Total liabilities $ 6,122 4,086 6,146 4,927 4,562
Minority interests $ 175 -- -- -- 76
Total equity $23,104 20,382 17,594 14,991 13,688
Book value per share $ 5.59 5.03 4.80 4.47 4.15
9
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.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Revenues from continuing operations increased 25% in 1997 compared to 1996. Net
income increased 32% and diluted earnings per share increased 28%. The reasons
for these changes are described below.
Financial Services
Financial services revenues increased 30% in 1997 compared to 1996.
Insurance management operations were up by 6% as a result of a higher contingent
fee, which was based on improved profits at the managed insurance company.
Broker dealer revenues increased 73%.
10
Approximately 71% of the increase was attributable to expanding the sales force
with the opening of an additional office location. The balance of the increase
was primarily a result of lower interest rates creating more activity in the
bond market.
Financial services expenses increased 12% from 1996. The increase reflects
increased sales and expanded office operations at the broker/dealer with the
resultant higher commissions and payroll expense. Better control of legal costs
and a lower allocation of corporate overhead partially offset the increases.
Insurance mangement expenses decreased 9%, again in the areas of legal and
professional fees and allocated corporate overhead.
Results in this segment can vary from year to year. Insurance management
has a provision in its contract whereby it receives a portion of the managed
insurance company's profits. In the eight years under the contract,
profit-sharing has ranged from zero to 16% of the segment's revenues. 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. The broker/dealer continually seeks
quality brokers and has opened an office in another city in an effort to expand
its recruiting and sales base.
REAL ESTATE
Revenue decreased 2% compared to 1996. The small decrease reflects greater
utilization of the office building by the Company and affiliates at lower rates
than outside tenants.
The 3% decrease in real estate expenses in 1997 reflects lower corporate
overhead allocations.
INVESTMENT AND OTHER
The decline in investment and other income was primarily due to lower
interest income, the result of a note receivable being on non-accrual during all
of 1997.
On October 31, 1996, the Company invested $3,300,000 in the common stock of
Con-Eco with a put option. On November 26, 1996, the Company exercised its put
in exchange for a note receivable from Con-Eco. The Company renegotiated the
debt with Con-Eco in November 1997. In connection with the renegotiation, the
Company extended the debt for two years and refinanced unpaid accrued interest,
resulting in a new promissory note for $3,788,000. No interest income has been
recognized by the Company. Payments under the new note were scheduled to begin
on January 1, but were delayed until March 1998 with the Company's consent. The
March 1998 payment has been received; however, it is anticipated that Con-Eco
will be required to sell certain assets in order to meet its obligations to the
Company. The Company has declared Con-Eco in default for failure to comply with
certain non-payment obligations, but believes its collateral position is
sufficient to allow ultimate repayment of the debt.
General and Administrative Expenses
The 800% increase in expenses was a result of changes in accounting
estimates rather than fundamental changes in
11
operations. 1996's expenses reflected favorable adjustments to a contingency
provision related to a guarantee, as well as favorable adjustments to allowances
for doubtful accounts, a result of collecting the accounts. No such adjustments
were required in 1997.
Interest expense declined 61% primarily due to paying off the Company's
real estate loan early in 1997.
AFFILIATES
Earnings from affiliates increased 43% compared to 1996. Prime Medical
continued to grow and did not have the substantial offering and acquisition
expenses it incurred in 1996. As a result, the Company's equity in earnings grew
67% in 1997. Partially offsetting this increase was a loss in equity earnings of
Syntera. Syntera was established in 1997 and the loss reflects start-up and
development costs incurred in this early phase.
Prime had issued additional shares in 1996 reducing the Company's ownership
from 21% to 16%. The Company, through its status as Prime's largest shareholder
and through its representation on Prime's board, continues to have significant
influence at Prime and accounts for its investment using the equity method.
1996 COMPARED TO 1995
Revenues from continuing operations decreased 35% in 1996 compared to 1995. Net
income decreased 5% and diluted earnings per share decreased 13%. The reasons
for these changes are described below.
FINANCIAL SERVICES
Financial services revenues declined 35% in 1996 compared to 1995.
Insurance management operations were up by 5% as a result of a higher contingent
fee, which was based on improved profits at the managed insurance company.
Broker dealer revenues declined 61%. Approximately 60% of the decline was from
not being able to replace the sales of a key broker who left at the beginning of
1996. The balance of the decline was primarily attributed to higher interest
rates, which reduced activity in the bond market.
Financial services expenses declined 32% from 1995. The decline reflects
lower activity at the broker/dealer where lower commissions, payroll, legal and
office operations expenses combined for a 51% decline compared to 1995.
Insurance management expenses increased 7%, primarily in the areas of employment
taxes and benefits and state taxes.
REAL ESTATE
Revenue increased 7% over 1995. The increase reflects rising lease rates in
Austin, Texas.
12
The 2% increase in real estate expenses reflects overall inflation from
1995 to 1996.
INVESTMENT AND OTHER
The decline in investment and other income was primarily in the "other"
category, where 1995 results included a favorable settlement of prior
litigation. No similar benefit was received in 1996.
GENERAL AND ADMINISTRATIVE EXPENSES
The 93% decline in expenses was primarily a result of timing rather than
fundamental changes in operations. 1995's expenses included a contingency
provision established to guarantee a future yield on an account. In 1996, this
contingency provision was adjusted downward as a result of the account's actual
performance. Approximately 72% of the change between 1996 and 1995 resulted from
this contingency provision. Additionally, the successful collection of certain
accounts receivable in 1996 caused the reversal in 1996 of an allowance for
doubtful accounts, established in 1995, and accounts for approximately 16% of
the change between 1996 and 1995. Approximately 9% of the decrease in 1996
expenses was from lower payroll costs. Costs were lower due to reduced
performance-based incentives, which are based on the Company's pretax income and
market price.
Interest expense declined 56% primarily due to reduced inventories at the
broker/dealer and the resultant reduction in margin borrowing.
AFFILIATES
Earnings from affiliates decreased 6% compared to 1995. Prime Medical grew
dramatically in 1996, but costs associated with acquisitions and a stock
offering reduced the impact of the growth in 1996. Prime Medical's issuance of
additional shares in 1996 reduced the Company's ownership from 21% to 16%.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $3,360,000 and $8,305,000 at December 31, 1997 and
1996, respectively. The decrease in working capital resulted from current notes
receivable being moved to long term, as a result of amended terms, and a
significant increase in accrued liabilities related to the estimated disposal
cost of the computer software segment. Equally significant, the Company's $4.6
million investment in Syntera was funded from working capital and current
operations. 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.
13
In February 1998, the Company entered into a three year $10,000,000
revolving credit agreement with NationsBank of Texas, N.A. Funds advanced under
the agreement will 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. No funds had been advanced as of the
date of this report.
Capital expenditures for equipment were $312,000, $123,000 and $419,000, in
1997, 1996, and 1995, respectively. In addition, the Company improved or
purchased office space in 1996 and 1995 for $21,000 and $64,000, respectively.
The Company expects capital expenditures in 1998 to be within the range of the
prior three years.
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.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two digit year value to 00. The issue is
whether computer systems will properly recognize data sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The Company
anticipates that necessary actions to be year 2000 compliant will be performed
internally in the ordinary course of business at a cost not expected to exceed
$100,000. However, significant uncertainty exists concerning the potential costs
and effects associated with any year 2000 compliance. Any year 2000 compliance
problem of either the Company or its vendors, third party payors or customers
could have a material adverse effect on the Company's business, results of
operations,
14
financial condition and prospects.
ITEM 7.(a) Quantitative and Qualitative Disclosures about Market Risk.
Not required for 1997.
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, 1997 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.
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 1998 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 1, 1998, the executive officers of the Company are as follows:
Name Age Position
Kenneth S. Shifrin 48 Chairman of the Board, President and
Chief Executive Officer
Duane K. Boyd, Jr. 53 Senior Vice President - Insurance
William H. Hayes 50 Senior Vice President - Finance and
Secretary
Thomas R. Solimine 39 Controller
All officers serve until the next annual meeting of directors and until
their successors are
15
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 is a
Certified Public Accountant and is a member of the Young 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 is a Certified Public Accountant and was with KPMG Peat Marwick from 1974
to June 1991. He was a partner specializing in the insurance industry prior to
joining the Company.
Mr. Hayes has been the 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. 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 1998 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 1998 annual
meeting of shareholders, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
16
The information required by this item is contained in the definitive
proxy statement of the Company to be filed in connection with its 1998 annual
meeting of shareholders, which information is incorporated herein by reference.
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
None.
(c) Exhibits (1)
3.1 Restated Articles of Incorporation of the
Company, as amended.(6)
3.2 Amended and Restated Bylaws of the Company.(6)
4.1 Specimen of Common Stock Certificate.(2)
*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.(8)
17
*10.7 Form of Non-Employee Directors Stock Option
Agreement.(8)
*10.8 1995 Incentive and Non-Qualified Stock Option Plan
of American Physicians Service Group, Inc.(8)
*10.9 Form of Stock Option Agreement (ISO).(8)
*10.10 Form of Stock Option Agreement (Non-Qualified).(8)
*10.11 Management Agreement of Attorney-in-Fact, dated
August 13, 1975, between the Company and American
Physicians Insurance Exchange.(2)
10.12 Rights Agreement dated August 16, 1989
between the Company and Texas American
Bridge Bank N.A., as rights agent, and
letter to the Company stockholders, dated
August 16, 1989.(5)
10.13 Stock Purchase Agreement dated October 11,
1989 between the Company and Texas American
Energy Corporation ("TAE"), Standstill
Agreement dated October 11, 1989 among the
Company, TAE, Shamrock Associates and Paul
O. Koether, and Agreement dated October 11,
1989 among the Company, Prime Medical and
Shamrock Associates.(3)
*10.14 Profit Sharing Plan or Trust, effective December 1,
1984, of the Company.(4)
10.15 Loan Agreement dated April 7, 1992, among the
Company, APS Realty and NationsBank of Texas,
N.A.(7)
10.16 Promissory Note dated April 7, 1992,
executed by APS Realty in the principal
amount of $1,000,000 payable to NationsBank
of Texas, N.A.(7)
10.17 Stock Purchase Agreement dated September 30,
1996 between the Company and Exsorbet
Industries, Inc.(9)
10.18 Stock Put Agreement dated September 30, 1996
between the Company and Exsorbet Industries,
Inc.(9)
10.19 Shareholder Rights Agreement dated September
30, 1996 between the Company and Exsorbet
Industries, Inc.(9)
10.20 Warrant dated September 30, 1996 for shares of
common stock issued
18
to the Company by Exsorbet Industries, Inc.(9)
10.21 Contingent Warrant Agreement dated September 30,
1996 for shares of common stock issued
to the Company by Exsorbet Industries,
Inc.(9)
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.(9)
10.23 Agreement dated September 30, 1996 with Exsorbet
Industries, Inc. related to options issued by
officers and directors of Exsorbet.(9)
10.24 Guaranty Agreements dated September 30, 1996
between the Company and subsidiaries of
Exsorbet Industries, Inc.(9)
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.(9)
10.26 Stock Purchase Agreement dated October 1, 1997
between the Company, APS Practice Management, Inc.,
Michael Beck, John Hendrick, et al.(10)
10.27 Bylaws of APS Practice Management, Inc.(10)
10.28 Amended and Restated Articles of Incorporation APS
Practice Management, Inc.(10)
10.29 APS Practice Management, Inc. Certificate of
Designation of Rights and Preferences Series A
Serial Founder's Common Stock dated September 30,
1997.(10)
10.30 Resolutions to organizational matters concerning
APS Practice Management, Inc. dated October 1, 1997
(10)
10.31 Master Refinancing Agreement dated November 6,
1997 between the Company and Consolidated
Eco-Systems, Inc.(10)
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.(10)
10.33 Assignment and Security Agreement dated
November 6, 1997 between the Company and
Consolidated Eco-Systems, Inc.(10)
19
10.34 Security Agreement dated November 6, 1997 between
the Company and Consolidated Eco-Systems, Inc.(10)
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.(10)
10.36 First Amendment to 1995 Incentive and Non-Qualified
Stock Option Plan of American Physicians Service
Group, Inc. Dated December 10, 1997.(10)
10.37 First Amendment to 1995 Non-Employee Director Stock
Option Plan of American Physicians Service Group,
Inc. Dated December 10, 1997.(10)
21.1 List of subsidiaries of the Company.(10)
23.1 Independent Auditors Consent of KPMG Peat Marwick
LLP.(10)
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 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.
20
(3) Filed as an Exhibit to the Current Report on Form 8-K of the Company
dated October 20, 1989 and incorporated herein by reference.
(4) 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.
(5) Filed as an Exhibit to the Current Report on Form 8-K of the Company
dated September 5, 1989 and incorporated herein by reference.
(6) 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.
(7) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1992 and incorporated herein by reference.
(8) 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.
(9) 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.
(10) Filed herewith.
21
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 27, 1998
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 27, 1998
By: /s/ W. H. Hayes
W. H. Hayes
Senior Vice President - Finance, Secretary
and Chief Financial Officer
(Principal Financial Officer)
Date: March 27, 1998
By: /s/ Thomas R. Solimine
Thomas R. Solimine
Controller
(Principal Accounting Officer)
22
Date: March 27, 1998
By: /s/ Richard J. Clark
Richard J. Clark, Director
Date: March 27, 1998
By: /s/ Jack Murphy
Jack Murphy, Director
Date: March 27, 1998
By: /s/ Robert L. Myer
Robert L. Myer, Director
Date: March 27, 1998
By: /s/ William A. Searles
William A. Searles, Director
Date: March 27, 1998
23
APPENDIX A
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report A-2
Financial Statements
Consolidated Statements of Earnings for the years A-3
ended December 31, 1997, 1996 and 1995.
Consolidated Balance Sheets at December 31, 1997 A-5
and December 31, 1996.
Consolidated Statements of Cash Flows for the years A-7
ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Shareholders' Equity A-9
at December 31, 1997, 1996 and 1995.
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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Austin, Texas
March 6, 1998
A-2
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Year Ended
December 31,
1997 1996 1995
---- ---- ----
Revenues:
Financial services (Note 3) $12,013 9,244 14,134
Real estate (Note 6) 704 717 668
Investments and other (Note 2) 348 476 1,322
-------- ------- -------
Total revenues 13,065 10,437 16,124
------- ------- -------
Expenses:
Financial services 9,118 8,117 11,954
Real estate 503 521 510
General and administrative 1,352 150 2,037
Interest 21 54 124
------ ------ -------
Total expenses 10,994 8,842 14,625
------ ------ -------
Operating income 2,071 1,595 1,499
Equity in earnings of
unconsolidated affiliates (Note 13) 2,014 1,411 1,508
Gain on sale of interest in subsidiary 1,899 -- --
------ ------- -------
Earnings from continuing operations before
income taxes and minority interests 5,984 3,006 3,007
Income tax expense (Note 9) 2,341 1,058 946
Minority interests (175) -- --
------- -------- --------
Earnings from continuing operations 3,468 1,948 2,061
------ ------ ------
Discontinued operations:
Loss from operations of discontinued segment,
net of income tax benefit of $48, $13 and $19 in
1997, 1996 and 1995, respectively (94) (24) (37)
Estimated loss on disposal of discontinued segment,
net of income tax benefit of $431 in 1997 (836) -- --
------ -------- --------
Net loss from discontinued operations (930) (24) (37)
------- --------- --------
Net earnings $2,538 1,924 2,024
====== ======= =======
See accompanying notes to consolidated financial statements.
A-3
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS, continued
(In thousands, except per share amounts)
1997 1996 1995
---- ---- ------
Earnings per common share:
Basic:
Earnings from continuing operations $0.84 0.48 0.59
Discontinued operations (0.22) -- (0.01)
------ ----- ------
Net earnings $0.62 0.48 0.58
====== ===== ======
Diluted:
Earnings from continuing operations $0.81 0.46 0.54
Discontinued operations (0.22) -- (0.01)
----- ----- ------
Net earnings $0.59 0.46 0.53
===== ===== ======
Basic weighted average shares
outstanding 4,106 4,025 3,480
===== ====== =======
Diluted weighted average
shares outstanding 4,241 4,219 3,798
===== ====== =======
See accompanying notes to consolidated financial statements.
A-4
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents $5,188 5,770
Marketable securities (Note 2) -- 29
Trading account securities 449 699
Management fees and other receivables
(Note 3) 815 512
Income tax receivable -- 650
Notes receivable - current (Note 4) 1,157 3,447
Receivable from clearing broker 543 279
Prepaid expenses and other 508 239
----- ------
Total current assets 8,660 11,625
Notes receivable, less current portion
(Note 4) 2,982 179
Property and equipment, net (Note 6) 1,830 1,781
Investment in affiliates (Note 13) 15,611 9,657
Other assets 318 1,226
------ ------
Total assets $29,401 24,468
====== ======
See accompanying notes to consolidated financial statements.
A-5
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED BALANCE SHEETS, continued
(In thousands, except share data)
December 31,
1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term obligations
(Note 6) $ -- 542
Accounts payable - trade 614 382
Payable to clearing broker 441 --
Accrued compensation 446 252
Accrued expenses and other liabilities
(Note 7) 3,573 2,144
Income taxes payable 226 --
----- ------
Total current liabilities 5,300 3,320
Net deferred income tax liability
(Note 9) 822 766
----- ------
Total liabilities 6,122 4,086
------ ------
Minority interest 175 --
Shareholders' equity:
Preferred stock, $1.00 par value,
1,000,000 shares authorized -- --
Common stock, $0.10 par value,
20,000,000 shares authorized; 4,160,861
issued at 12/31/97 and 4,049,195 at
12/31/96 416 405
Additional paid-in capital 5,528 5,366
Unrealized holding losses -- ( 11)
Retained earnings 17,160 14,622
------ ------
Total shareholders' equity 23,104 20,382
------ -------
Commitments and contingencies
(notes 6, 8, 10, 11 and 12)
Total liabilities and shareholders' equity $29,401 24,468
======= ======
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,
--------------------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Cash received from customers $ 13,080 11,123 21,068
Cash paid to suppliers and employees (9,247) (11,064) (17,860)
Change in trading account securities 250 315 ( 353)
Change in receivable from clearing broker (177) 501 ( 289)
Interest paid (21) ( 54) ( 124)
Income taxes paid (772) ( 611) ( 494)
Interest, dividends and other investment proceeds 219 459 1,322
------- -------- -------
Net cash provided by operating activities 3,332 669 3,270
------- -------- -------
Cash flows from investing activities:
Payments for purchase of property and
equipment (312) ( 144) ( 483)
Net decrease (increase) in marketable
securities 5 2,045 ( 530)
Investment in affiliates (5,292) ( 244) --
Proceeds from sale of fixed assets 55 -- 47
Funds loaned to others (834) ( 3,442) --
Proceeds from the sale of discontinued operation -- -- 67
Collection of notes receivable 109 -- 1,119
Proceeds from disolution of entity 1,000 -- --
Proceeds from sale of 20% of subsidiary 2,000 -- --
Other (82) -- --
Net cash provided by (used in) investing ------- -------- ------
activities (3,351) ( 1,785) 220
------- -------- ------
Cash flows from financing activities:
Repayment of long-term obligations (542) ( 163) ( 332)
Acquisition of treasury stock (337) ( 453) ( 125)
Proceeds from exercise of stock options 316 704 499
------- ------- ------
Net cash provided by (used in) financing activities (563) 88 42
------- ------- ------
Net change in cash and cash equivalents (582) ( 1,028) 3,532
Cash and cash equivalents at beginning of period 5,770 6,798 3,266
----- ----- ------
Cash and cash equivalents at end of period 5,188 5,770 6,798
===== ======= ======
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,
---------------------------------------
1997 1996 1995
---- ---- ----
Reconciliation of net earnings to net cash from
operating activities:
Net earnings $ 2,538 1,923 2,024
Adjustments to reconcile net earnings to
net cash from operating activities:
Depreciation and amortization 436 324 399
Minority interest in consolidated earnings 175 -- --
Undistributed earnings of affiliate (2,014) (1,411) (1,508)
Gain on sale or disposition of assets (2,032) -- (72)
(Gain) loss on sale of securities 41 ( 81) ( 50)
Change in federal income tax payable 876 (584) 301
Provision for deferred income tax 56 925 27
Change in trading securities 250 315 (353)
Change in receivable from clearing broker 177 501 (289)
Change in management fees and other receivable ( 26) 17 1,183
Change in prepaids and other current assets ( 191) 24 493
Change in long-term assets -- 265 --
Change in trade payable 90 53 ( 456)
Change in accrued expenses and other liabilities 1,547 (1,602) 1,571
Loss from discontinued operations 1,409 -- --
------- ------ ------
Net cash from operating activities $ 3,332 669 3,270
======== ====== ======
Summary of non-cash transactions:
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.
During 1996, 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 $624.
During the third quarter, 1995, the investment in the Company by the Company's
affiliate, Prime Medical Services, Inc., became immaterial. Consequently,
Reciprocal Stockholdings fell to zero while the Company's investment in
affiliate increased by $543.
The Company acquired $294,000 in treasury stock by exchanging $294,000 in Prime
Medical Services, Inc. Common stock during 1995.
In 1995, the Company sold APS Communications in a non-cash transaction as
follows:
Note received $ 183
======
Fixed assets sold ( 48)
Deferred income (135)
$ (183)
See accompanying notes to consolidated financial statements.
A-8
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1997,
1996 and 1995
(In thousands, except share data)
Additional Unrealized Total
Common Stock paid-in holding Retained Reciprocal shareholders'
Shares Amount capital gains earnings stockholdings equity
-------------- --------- ------------- ------------- ----------- -------------- -------------
Balance January 1, 1995 3,471,684 $347 4,469 44 10,647 (543) 14,991
Net earnings -- -- -- -- 2,024 -- 2,024
Unrealized gains on securities
available for sale, net of tax -- -- -- (44) -- -- (44)
Shares issued (Note 11) 314,333 31 468 -- -- -- 499
Shares repurchased &
cancelled (Note 13) (122,146) (12) (407) -- -- -- (419)
Pro rata portion of Company
common stock held by
affiliate (Note 13) -- -- -- -- -- 543 543
-------------- --------- ------------- ------------- ----------- -------------- -------------
Balance December 31, 1995 3,663,871 366 4,530 -- 12,698 -- 17,594
Net earnings -- -- -- -- 1,924 -- 1,924
Unrealized loss on securities
available for sale, net of tax -- -- -- (11) -- -- (11)
Shares issued (Note 11) 450,000 45 659 -- -- -- 704
Shares repurchased &
cancelled (64,676) (6) (447) -- -- -- (453)
Income tax benefit of non-
qualified option exercises -- -- 624 -- -- -- 624
-------------- --------- ------------- ------------- ----------- -------------- -------------
Balance December 31, 1996 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
============== ========== ============= ============= =========== ============== =============
See accompanying notes to consolidated financial statements.
A-9
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies
(a) General
American Physicians Service Group, Inc. through its
subsidiaries, provides financial services that include
management of malpractice insurance companies and brokerage
and investment services to individuals and institutions. The
brokerage 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 approximately 89% of total revenues. The
Company entered the physician practice management business in
the fourth quarter of 1997. Operations for 1997 are not
significant.
(b) Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles required 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.
All significant intercompany transactions and balances have
been eliminated from the accompanying consolidated financial
statements.
(d) Revenue Recognition
Financial 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
A-10
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(1) Summary of Significant Accounting Policies, continued
company will have an annual profit. Revenues related to
securities transactions are recognized on a trade date basis.
Real estate rental income is recognized monthly based on lease
agreements. 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) Broker, Dealer and Securities Transactions
Securities transactions are recorded in the accounts on a
trade date basis.
(f) 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
The Company has included its marketable securities in the
available for sale category.
(g) 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).
(h) 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
A-11
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(1) Summary of Significant Accounting Policies, continued
asset.
(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 reflects dilution from all
contingently issuable shares, including options.
(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. Cash receipts on impaired notes
receivable are applied to reduce the principal amount of such
notes until the principal has been recovered and are
recognized as interest income, thereafter.
A-12
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(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 1997 presentation.
(2) Marketable Securities
The Company holds various marketable securities as short-term
investments. At December 31, 1997 and 1996, these marketable
securities consisted of:
December 31,
1997 1996
------- -------
Equity securities, at cost $ -- 45,000
Debt securities, at cost -- --
-------- --------
Less: adjustment to fair value $ -- ( 16,000)
-------- --------
Total marketable securities at
fair value $ -- 29,000
======== ========
At December 31, 1996 there were $16,000 in gross unrealized losses.
There were no unrealized gains or losses at December 31, 1997 or 1995.
Investment income includes the following:
1997 1996 1995
--------- ---------- --------
Interest $ 219,000 367,000 243,000
Realized gains -- 81,000 50,000
Realized losses ( 41,000) -- --
--------- ---------- --------
$ 178,000 448,000 293,000
========= ======== ========
A-13
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(2) Marketable Securities, continued
No individual issuer exceeded 10% of shareholders' equity at December
31, 1997 or 1996.
(3) Management Fees and Other Receivables
Management fees and other receivables consist of the following:
December 31,
1997 1996
---- ----
Management fees receivable $ 3,000 256,000
Trade accounts receivable 200,000 16,000
Less: allowance for doubtful accounts (25,000) --
Accrued interest receivable 10,000 12,000
Other receivables 627,000 228,000
------- -------
$815,000 512,000
======== =======
The Company earns management fees by providing for the full management
of American Physicians Insurance Exchange ("APIE") under the direction
of APIE's doctor 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 of $6,287,000, $5,942,000 and
$5,660,000 and received expense reimbursements of $664,000, $346,000
and $355,000 for the years ended December 31, 1997, 1996 and 1995,
respectively, related to these agreements.
A-14
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(4) Notes Receivable
Notes receivable consists of the following:
December 31,
1997 1996
----- -----
Reagan Publishing Company
This unsecured note had an original
rate of 7% and a maturity of December 31,
1997. During 1997, the terms were renegotiated
with a payment schedule based on the sales
volume of the borrower, with certain annual
minimums. The note bears interest at the
prime rate (8.5% at December 31, 1997). $176,000 183,000
Consolidated Eco-Systems, Inc.
This note is secured by 1,200,000 shares
of Consolidated Eco-Systems, Inc. common
stock and stock and certain assets of Con-Eco
subsidiaries. The note bears interest at 15%.
Principal payments are monthly through
October 1, 1999 at which time all remaining
principal and accrued interest are due. 3,788,000 3,300,000
Uncommon Care, Inc.
This note is secured by land located in
Fort Bend County, Texas. The note bears
interest at 10% and is due January 31, 1998. 300,000 --
Employees
Four employees have loans from the Company
as employment inducements.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. 528,000 143,000
---------- ---------
4,792,000 3,626,000
Less allowance for doubtful accounts (653,000) --
---------- ---------
4,139,000 3,626,000
Less current portion 1,157,000 3,447,000
--------- ---------
Long term portion $2,982,000 179,000
========== ==========
A-15
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(4) Notes Receivable, continued
The Company's note receivable from Consolidated Eco-Systems, Inc. (formerly
Exsorbet Industries, Inc.) ("Con-Eco") (NASDAQ:EXSO), a diversified
environmental and technical services company, is in excess of 10% of
stockholder's equity at December 31, 1997 and represents a concentration of
credit risk. Con-Eco's common stock sales price was $0.115 per share on the
basis of the average high and low sales price of the stock on March 17, 1998.
The Company renegotiated the debt with Con-Eco in November 1997. In connection
with the renegotiation, the Company extended the debt for two years and rolled
all accrued interest into the note, resulting in a total note for $3,788,000. No
interest income has been recognized by the Company. Con-Eco provided additional
collateral to the Company in the form of stock of two additional subsidiaries,
and a second lien on all assets of one of these subsidiaries. Payments under the
new note were scheduled to begin on January 1, but were delayed until March 1998
with the Company's consent. It is anticipated that Con-Eco will be required to
sell certain assets in order to meet its obligations to the Company. However,
the Company believes its collateral position is more than sufficient to ensure
ultimate repayment of the debt.
(5) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" (Statement 107), requires that the Company
disclose estimated fair values for its financial instruments as of December 31,
1997 and 1996:
1997 1996
--------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and cash equivalents $5,188 5,188 5,770 5,770
Marketable securities and trading
account securities 449 449 728 728
Management fees and other
receivables 815 815 512 512
Notes receivable 4,139 4,119 3,626 3,594
Receivable from clearing broker 543 543 279 279
Debt -- -- 542 542
Accounts payable 614 614 382 382
Fair value estimates, methods, and assumptions are set forth below for
the Company's financial instruments.
A-16
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes to Consolidated Financial Statements, Continued
(5) Fair Value of Financial Instruments, continued
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.
Marketable Securities and Trading Account
The fair value of securities owned is estimated based on bid prices
published in financial newspapers or bid quotations received from
securities dealers. The carrying values of marketable securities are
adjusted to market since such securities are in the available for sale
category.
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.
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.
Debt
The fair market value of debt approximates carrying value since it is
primarily floating rate debt based on current market rates.
Accounts Payable
The fair value of the payable approximates carrying value due to the
short-term nature of the obligation.
A-17
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(5) Fair Value of Financial Instruments, continued
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.
(6) Property and Equipment
Property and equipment consists of the following:
December 31,
1997 1996
---- ----
Office condominium $1,847,000 1,870,000
Furniture and equipment 3,758,000 2,386,000
---------- ---------
5,605,000 4,256,000
Accumulated depreciation and
amortization 3,775,000 2,475,000
---------- ---------
$1,830,000 1,781,000
The Company owns approximately 53,000 square feet in the condominium
building in which its principal offices are located. The Company, its
subsidiaries and affiliates 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, 1997, 1996 and 1995
totaled approximately $385,000, $379,000 and $348,000, respectively.
Future minimum lease payments to be received under the terms of the
office condominium leases are as follows: 1998 - $314,000; 1999 -
$59,000 and none thereafter.
At December 31, 1996 the office building was security for a short term
note payable in the amount of $542,000 due April 1997 with interest at
the prime rate. The note was paid in full in January 1997.
A-18
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(7) Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consists of the following:
1997 1996
---- ----
APS Systems disposition costs
(discontinued operations) $1,138,000 --
Taxes payable - other 96,000 74,000
Commissions payable 287,000 18,000
Deferred income 280,000 339,000
Health insurance and other claims
payable 59,000 87,000
Contractual/legal claims 1,461,000 1,352,000
Vacation payable 102,000 77,000
Funds held for others 58,000 63,000
Other 92,000 134,000
---------- ----------
$3,573,000 2,144,000
(8) Commitments and Contingencies
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 has guaranteed a loan in the amount of $85,000 for one of
its directors. The guarantee is collateralized by securities the
Company believes sufficient to cover its potential liability.
Rent expense under all operating leases for the years ended December
31, 1997, 1996 and 1995 was $89,000, $51,000 and $103,000,
respectively. Future minimum payments for leases which extend for more
than one year were $134,000 at December 31, 1997.
The Company is involved in various claims and legal actions that have
arisen in the ordinary course of business. The Company believes that
the liability provision in its financial statements
A-19
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
is sufficient to cover any unfavorable outcome related to lawsuits in which it
is currently named. Management believes that additional liabilities, if any,
arising from these actions will not have a significant adverse effect on the
financial condition of the Company. However, due to the uncertain nature of
legal proceedings, the actual outcome of these lawsuits may differ from the
liability provision recorded in the Company's financial statements.
(9) Income Taxes
Income tax expense (benefit) consists of the following:
Year Ended
December 31,
1997 1996 1995
----- ----- ----
Continuing Operations
Federal
Current $1,394,000 47,000 795,000
Deferred 777,000 938,000 46,000
State 170,000 73,000 105,000
Discontinued Operation (479,000) (13,000) (19,000)
--------- -------- --------
$1,862,000 1,045,000 927,000
========= ========= =======
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 income tax expense in the accompanying
consolidated statements of earnings follows:
Year Ended
December 31,
1997 1996 1995
----- ----- -----
Expected federal income tax
expense $ 1,556,000 972,000 1,003,000
State taxes 170,000 73,000 105,000
Other, net 136,000 -- (181,000)
---------- -------- ---------
$1,862,000 1,045,000 927,000
========== ========= ========
Deferred tax assets are primarily the result of temporary differences
related to accounting for reserves for losses, amounts expensed for
financial purposes not deductible currently for tax purposes, fixed
assets (primarily differences in methods of depreciation) and
investments (primarily related to valuation allowances) for tax and
book purposes.
The tax effect of temporary differences that gives rise to significant
portions of deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below:
A-20
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(9) Income Taxes, continued
1997 1996
----- -----
Deferred tax assets:
Net operating loss carryforwards $ 188,000 --
Marketable securities write downs
not taken for tax purposes -- 13,000
Accrued expenses 1,015,000 676,000
Accounts receivable, principally due
to allowance for doubtful accounts 79,000 60,000
Deferred income 228,000 30,000
Other 71,000 19,000
--------- --------
Total gross deferred tax assets 1,581,000 798,000
Less valuation allowance (188,000) --
--------- --------
Net deferred tax assets 1,393,000 798,000
--------- --------
Deferred tax liabilities:
Investment in Prime Medical Services, Inc.
due to use of equity method for books (2,158,000) (1,512,000)
Capitalized expenses, principally due to
deductibility for tax purposes ( 57,000) ( 52,000)
---------- ----------
Total gross deferred tax liabilities ( 2,215,000) (1,564,000)
---------- ----------
Net deferred tax liability ($ 822,000) ( 766,000)
========== ==========
The valuation allowance for deferred tax assets as of January 1, 1997
was $0. The net change in the total valuation allowance for the years
ended December 31, 1997 and 1996 was an increase of $188,000 and $0,
respectively. The Company believes that the valuation allowance at
December 31, 1997 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, 1997, net operating loss carryforwards available to
reduce future taxable income amounted to approximately $554,000 and
expire from years 2011 to 2012.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets
are deductible, management believes it is more likely
A-21
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
than not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at December 31,
1997.
(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 $9,500 in
1997) 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, 1997, 1996 and 1995,
contributions by the Company aggregated $92,000, $104,000, and
$100,000, 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 Incentive Plan provides for the issuance of
up to 800,000 shares of common stock to directors and key employees.
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 had 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
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 1997, 1996 or 1995. 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,
1997 1996 1995
----- ----- -----
Pro forma net income $1,989,000 1,634,000 1,991,000
A-22
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes to Consolidated Financial Statements, Continued
(11) Stock Options, continued
Pro forma earnings per share - basic $0.48 0.41 0.57
- diluted $0.46 0.39 0.52
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:
1997 1996 1995
---- ---- ----
Risk-free interest rate 6.16% 6.06% 6.41%
Expected holding period 3.90 years 3.75 years 3.75 years
Expected volatility .480 .692 .590
Expected dividend yield -0- -0- -0-
Statement 123 calls for a prospective application of compensation
relating to the grant of stock options and, consequently pro-forma
financial information may not be indicative of future amounts until the
new rules are applied to all outstanding nonvested awards.
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, 1997, 1996 and 1995. Remaining options outstanding
from the Company's previous 1983 plans are included.
Year ended December 31
-----------------------------------------------------------------------------
1997 1996 1995
--------------------- ----------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Balance at January 1 651,000 $5.64 837,000 $2.18 921,000 $1.57
Options granted 293,000 9.32 295,000 9.32 235,000 3.82
Options exercised 165,000 1.92 450,000 1.56 314,000 1.59
Options forfeited/expired 5,000 7.13 31,000 6.16 5,000 2.45
------- ----- ------- ------ -------- ------
Balance at December 31 774,000 6.60 651,000 5.64 837,000 2.18
======= ====== ======= ===== ======= ------
Options exercisable 244,000 $5.84 258,000 $2.22 550,000 $1.48
======= ===== ======= ===== ======= =====
The weighted average fair value of Company stock options, calculated
using the Black Scholes option pricing model, granted during the years
ended December 31, 1997, 1996 and 1995 is $2.68, $5.15 and $1.75 per
option, respectively.
A-23
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(11) Stock Options, continued
The following table summarizes the Company's options outstanding and
exercisable options at December 31, 1997:
Stock Options Stock Options
Outstanding Exercisable
-------------------------------------------- -----------------------------
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
------ --------- -------- ------- ---------
$2.25 to $5.00 185,000 2.2 years 3.09 142,000 3.01
$5.01 to $7.75 356,000 4.3 years 6.19 26,000 6.73
$7.76 to $10.50 233,000 3.5 years 10.00 76,000 10.05
------- --------- ----- ------- -----
Total 774,000 244,000
======= =======
(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 existing clients through the terms of their contracts. The
Company has assumed that all clients will have migrated to other
software products by the end of 1999 and has reflected the expected
financial impact of discontinuing this segment on that date in the
current financial statements. The measurement date for determining
expected losses from the disposal was May 15, 1997.
Net assets/(liabilities) of the discontinued computer systems and
software segment as of December 31, 1997 consisted of the following:
Cash and cash investments $ 25,000
Trade accounts receivable 174,000
Other receivables 2,000
Prepaid and other current assets 61,000
Fixed assets, net of depreciation 93,000
Intercompany receivables 769,000
Trade accounts payable (5,000)
Accrued expenses (1,195,000)
-----------
Net liabilities ($ 76,000)
===========
A-24
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(12) Discontinued Operations, continued
On October 23, 1995 the Company sold substantially all of the assets of
APS Communications Corporation, a publisher of Spanish language
directories of U. S. businesses. The Company received cash, a note
(see Note 4) and had certain liabilities assumed by the purchaser. The
gain on the sale, to be recognized on the installment basis as note
payments are received, will not be material to the Company's
operations. No gain has been recognized through 1997. Historical
results from the operation are presented in the Consolidated
Statements of Earnings as "Loss from discontinued operations."
(13) Investment in Affiliates
On October 12, 1989, the Company purchased for cash 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
eight directors of Prime Medical. 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 plus the sale of Prime Medical shares owned by the
Company under an option agreement reduced the Company's ownership to
16% of the outstanding common stock of Prime Medical. The Company's
investment in Prime Medical is accounted for using the equity method.
The 3,064,000 shares of Prime Medical common stock held by the Company
had an approximate market value of $42,328,000 (carrying amount of
$11,266,000) at December 31, 1997 based on the market closing price of
$13.8125 per share.
At December 31, 1997 and 1996, the Company's retained earnings included
undistributed earnings, net of deferred tax, of Prime Medical totaling
$4,379,000 and $2,821,000, respectively.
The condensed balance sheet and statement of operations for Prime
Medical follow:
CONDENSED BALANCE SHEET AT DECEMBER 31, 1997 AND 1996
1997 1996
---- ----
Current assets $ 47,542,000 40,073,000
Long-term assets 178,284,000 157,680,000
----------- -----------
Total assets $225,826,000 197,753,000
============ ===========
Current liabilities $ 37,383,000 31,555,000
Long-term liabilities 96,379,000 89,771,000
Shareholders' equity 92,064,000 76,427,000
---------- -----------
Total liabilities and equity $225,826,000 197,753,000
============ ===========
A-25
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(13) Investment in Affiliates, continued
CONDENSED STATEMENT OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
1997 1996
---- ----
Total revenue $ 95,979,000 72,404,000
============ ==========
Net income $ 14,856,000 8,961,000
============ ==========
The Company exchanged 575,000 shares of Prime stock for notes payable
from Prime amounting to $593,750, one half in April 1993 and the other
half in July 1995. The gain resulting from the difference between the
market value of the Prime stock and the Company's carrying basis of the
stock was not significant. The Company subsequently exchanged the notes
for 87,000 shares in 1995 and 90,000 shares in 1993 of its own common
stock (at current market value at exchange date) which was owned by
Prime.
On October 1, 1997, the Company formed Syntera HealthCare Corporation
("Syntera") with an initial ownership of 85%. Syntera specializes in
the management of OB/GYN and related medical practices. In a typical
transaction, Syntera acquires the non-medical assets of a physician's
practice, signs a long-term management contract with the physician to
provide all of the non-medical requirements of the practice, including
personnel, office space, billing and collection, and other day-to-day
operating functions. In turn, Syntera is paid a variable management fee
that rewards the efficient operation and the expansion of the practice.
The Company expects to reduce its ownership (currently 74%) to a
minority level as it exchanges stock for practice assets. Due to the
short time frame anticipated for this change in ownership to occur, the
Company has accounted for its ownership on the equity basis in 1997.
The condensed balance sheet and statement of operations for Syntera
follows:
Condensed balance sheet at December 31, 1997
Current assets $4,563,000
Long-term assets 1,664,000
----------
Total assets $6,227,000
==========
Current liabilities $ 505,000
Long-term liabilities --
Shareholders' equity 5,722,000
----------
Total liabilities and equity $6,227,000
==========
A-26
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(13) Investment in Affiliates, continued
Condensed statement of operations for the year ended December 31, 1997
Total revenue $ 297,000
=========
Net loss $ 460,000
=========
(14) Segment Information
The Company's financial services segment includes financial management
for an insurance company that provides insurance coverage to doctors
and hospitals, and brokerage and investment services to individuals and
institutions.
Real Estate income is derived from the leasing of office space.
1997 1996 1995
---- ---- ----
Operating Revenues:
Financial services $12,013,000 9,244,000 14,134,000
Real estate 704,000 717,000 668,000
---------- --------- ----------
$12,717,000 9,961,000 14,802,000
=========== ========= ==========
Operating Profit (Loss):
Financial services $2,877,000 1,122,000 2,118,000
Real estate 198,000 147,000 96,000
--------- --------- -----------
3,075,000 1,269,000 2,214,000
--------- --------- -----------
Corporate investment and other
income 348,000 476,000 1,322,000
Corporate expenses (1,352,000) (150,000) (2,037,000)
Equity in earnings of affiliates 2,014,000 1,411,000 1,508,000
Gain on sale of interest in
subsidiary 1,899,000 -- --
--------- ---------- ---------
Earnings from continuing operations
before income taxes and minority
interests 5,984,000 3,006,000 3,007,000
Income tax expense 2,341,000 1,058,000 946,000
--------- --------- ---------
Minority interests (175,000) -- --
--------- --------- ---------
Earnings from continuing
operations 3,468,000 1,948,000 2,061,000
--------- --------- ---------
A-27
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1997 1996 1995
---- ---- ----
Net loss from discontinued
operations, net of income
tax benefit (930,000) (24,000) ( 37,000)
-------- ------- --------
Net earnings $ 2,538,000 1,924,000 2,024,000
=========== ========== =========
Identifiable assets:
Financial services $20,984,000 11,667,000 11,816,000
Real estate 1,283,000 1,476,000 1,578,000
Corporate 6,778,000 11,325,000 8,614,000
Discontinued Operations 356,000 -- 1,732,000
---------- ---------- ---------
$29,401,000 24,468,000 23,740,000
=========== ========== ==========
Capital expenditures:
Financial service $ 187,000 88,000 262,000
Real estate -- 21,000 64,000
Corporate 26,000 17,000 73,000
Discontinued operations 99,000 18,000 84,000
-------- ------- -------
$ 312,000 144,000 483,000
======== ======= =======
Depreciation/amortization
expenses:
Financial services $ 150,000 164,000 164,000
Real estate 110,000 129,000 126,000
Corporate 62,000 13,000 9,000
Discontinued operations 56,000 24,000 100,000
------- ------- -------
$ 378,000 330,000 399,000
======= ======= =======
Revenues attributable to customers generating greater than 10% of the
revenues of each segment:
Financial services
Company A 49% 61% 35%
Company B -- -- 10%
Company C -- -- 11%
------ ----- ----
49% 61% 57%
=== === ===
At December 31, 1997 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.
A-28
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(14) Segment Information, continued
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, marketable securities and notes
receivable.
(15) Earnings per Share
Statement of Financial Accounting Standards No. 128, "Earnings per
Share", specifies new measurement, presentation and disclosure
requirements for earnings per share and is required to be applied
retroactively upon initial adoption. The Company has adopted SFAS No.
128 effective with the release of December 31, 1997 earnings data, and
accordingly, has restatated herein all previously reported earnings per
share data. Basic earnings per share is based on the weighted average
shares outstanding without any dilutive effects considered. Diluted
earnings per share reflects dilution from all contingently issuable
shares, including options and covertible debt. A reconciliation of
income and average shares outstanding used in the calculation of basic
and diluted earnings per share from continuing operations follows:
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
========== ========= ===
A-29
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(15) Earnings per Share, continued
For the Year Ended December 31, 1996
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ----------- ---------
Earnings from continuing
operations $1,948,000
Basic EPS
Income available to common
stockholders 1,948,000 4,025,000 $.48
===
Effect of Dilutive Securities
Options -- 194,000
--------- --------
Diluted EPS
Income available to common
stockholders and assumed
conversions $1,948,000 4,219,000 $.46
========== ========== ====
For the Year Ended December 31, 1995
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Earnings from continuing
operations $2,061,000
Basic EPS
Income available to common
stockholders 2,061,000 3,480,000 $.59
====
Effect of Dilutive Securities
Options -- 318,000
--------- ---------
Diluted EPS
Income available to common
stockholders $2,061,000 3,798,000 $.54
========= ========= ====
At December 31, 1997 the Company's affiliate Syntera had issued 166,000
shares which are convertible into 122,000 of the Company's common
shares in the event that the Syntera shares are not publicly- tradeable
by May 1, 1999.
A-30
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(15) Earnings per Share, continued
Unexercised employee stock options to purchase 304,500, 282,000 and
10,000 shares of the Company's common stock as of December 31, 1997,
1996 and 1995, 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) Subsequent Events
On March 20, 1998 the Company purchased non-voting convertible
preferred stock of Uncommon Care, Inc. ("Uncommon Care"). Uncommon Care
is a developer and operator of dedicated Alzheimer's care facilities.
The shares, purchased for approximately $2,000,000, are convertible
into approximately 34% of Uncommon Care's equity. The Company has also
agreed to provide a line of credit to Uncommon Care in the amount of
$2,400,000. The loan will bear interest at 10%, payable quarterly, and
is due in March 2003.
A-31