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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, 1998
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 25, 1999: $12,499,479
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 25, 1999
-------------------- ----------------
Common Stock, $.10 par value 4,153,683
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, 1998 is incorporated by
reference.
============================================================================
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
PART I
ITEM 1. BUSINESS
GENERAL
American Physicians Service Group, Inc. (the "Company"), through its
subsidiaries, provides services that include management services to malpractice
insurance companies, and brokerage and investment services to individuals and
institutions. The Company also owns space in the office building, which serves
as its headquarters. Through its real estate subsidiary it leases space that is
surplus to its needs.
The Company was organized in October 1974 under the laws of the State of
Texas. The Company maintains its principal executive office at 1301 Capital of
Texas Highway, Suite C-300, Austin, Texas 78746, and its telephone number is
(512) 328-0888. Unless the context otherwise requires, all references herein to
the "Company" shall mean American Physicians Service Group, Inc. and its
subsidiaries (other than Prime Medical, Syntera and Uncommon Care).
INVESTMENT SERVICES
APS Investment Services, Inc. ("Investment Services"), is a wholly-owned
subsidiary of the Company. Through its subsidiaries, APS Financial Corporation
("APS Financial"), and APS Asset Management, Inc. (Asset Management"),
Investment Services provides investment and investment advisory services to
institutions and individuals throughout the United States. Revenues from this
segment were 60%, 44% and 32% of Company revenues in 1998, 1997 and 1996,
respectively.
APS Financial, a fully licensed broker/dealer, provides brokerage and
investment services primarily to institutional and high net worth individual
clients. APS Financial also provides portfolio accounting, analysis, and other
services, to insurance companies, banks, and public funds. APS Financial has its
main office in Austin, with a branch office in Houston.
APS Financial is a member of the National Association of Securities
Dealers, Inc. ("NASD"), the Securities Investor Protection Corporation ("SIPC"),
the Securities Industry Association, and, in addition, is licensed in 45 states.
Commissions are charged on both exchange and over-the-counter ("OTC")
transactions in accordance with industry practice. When OTC transactions are
executed by APS Financial as a dealer, APS Financial receives, in lieu of
commissions, markups or markdowns.
1
Every registered broker/dealer doing business with the public is subject to
stringent rules with respect to net capital requirements promulgated by the SEC.
These rules, which are designed to measure the financial soundness and liquidity
of broker dealers, specify minimum net capital requirements. Since the Company
is not itself a registered broker dealer, it is not subject to these rules.
However, APS Financial is subject to these rules. Compliance with applicable net
capital requirements could limit operations of APS Financial such as trading
activities that require the use of significant amounts of capital. A significant
operating loss or an extraordinary charge against net capital could adversely
affect the ability of APS Financial to expand or even maintain its present
levels of business. At February 28, 1999, APS Financial was in compliance with
all net capital requirements.
APS Financial clears its transactions through Southwest Securities, Inc.
("Southwest") on a fully disclosed basis. Southwest also processes orders and
floor reports, matches trades, transmits execution reports to APS Financial and
records all data pertinent to trades. APS Financial pays Southwest a fee based
on the number and type of transactions performed by Southwest.
Asset Management, a Registered Investment Adviser, was formed and
registered with the Securities and Exchange Commission in 1998. Asset Management
was organized to manage fixed income and equity assets for institutional and
individual clients on a fee basis. Asset Management's mission is to provide
clients with investment results within specific client-determined risk
parameters.
INSURANCE SERVICES
APS Insurance Services, Inc., ("Insurance Services"), an 80% owned
subsidiary of the Company through its wholly-owned subsidiaries APS Facilities
Management, Inc. ("FMI") and American Physicians Insurance Agency, Inc.
("Agency"), provides management and agency services to medical malpractice
insurance companies. Revenues from this segment contributed 34%, 48% and 57% of
Company revenues in 1998, 1997 and 1996, respectively. Substantially all of the
revenue was attributable to American Physicians Insurance Exchange ("APIE") 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. Termination of
the agreement with APIE would have a material adverse effect on the Company.
2
FMI organized APIE and has been its exclusive manager since its inception
in 1975. The management agreement between FMI and APIE basically provides for
full management by FMI of the affairs of APIE under the direction of APIE's
physician Board of Directors. Subject to the direction of this Board, FMI sells
and issues policies, investigates, settles and defends claims, and otherwise
manages APIE's affairs. In consideration for performing its services, FMI
receives a percentage fee based on APIE's earned premiums (before payment of
reinsurance premiums), as well as a portion of APIE's 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, 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 for $4,146,000.
APIE is authorized to do business in the states of Texas and Arkansas.
Florida Physicians is a stock company licensed in several states. Both companies
specialize in writing medical professional liability insurance for health care
providers. The insurance written in Texas is primarily through purchasing groups
and is not subject to certain rate and policy form regulations issued by the
Texas Department of Insurance. Applicants for insurance coverage are reviewed
based on the nature of their practices, prior claims records and other
underwriting criteria. APIE is one of the largest medical professional liability
insurance companies in the State of Texas. APIE is the only insurance company
based in Texas that is wholly-owned by its subscriber physicians.
Florida Physicians, together with its affiliates, insures over 6,800
physicians nationwide. Florida Physicians is rated A- (Excellent) by AM Best.
3
Generally, medical professional liability insurance is offered on either a
"claims made" basis or an "occurrence" basis. "Claims made" policies insure
physicians only against claims that occur and are reported during the period
covered by the policy. "Occurrence" policies insure physicians against claims
based on occurrences during the policy period regardless of when the claim is
actually made. APIE and Florida Physicians offer only a "claims made" policy in
Texas and Arkansas, but provide for an extended reporting option upon
termination. 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 reimbursement (fees and profit sharing) do
not exceed a cap based on premium levels. In 1998, 1997, 1996, 1995, and 1994,
management fees attributable to profit sharing were $1,750,000, $1,961,000,
$1,191,000, $700,000, and $1,107,000, respectively.
(In thousands, except for number of insureds)
Years Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Earned premiums before
reinsurance premiums $22,931 $25,899 $28,754 $30,857 $30,261
Total assets 75,173 81,594 90,193 101,251 98,302
Total surplus 13,592 11,854 10,017 9,402 9,315
Management fees (including profit
sharing) and commissions to FMI
and Agency 4,835 (3) 5,854 (3) $5,281 (3) $5,010 (3) $4,703 (1)
Number of insureds 2,743 2,629 (2) 3,019 3,226 3,216 (2)
- - ----------------
(1) Gross fee of $5,193 less tax credit of $490 attributable to
APIE's association with FMI.
(2) The decrease was the result of APIE's decision to raise
premiums and lose members on certain unprofitable specialties.
Included in the totals are doctors for which APIE provides
reinsurance through a relationship with another malpractice
insurance company.
(3) Includes commissions of $835, $1,214, $860 and $676 in 1998,
1997, 1996 and 1995, respectively, from Florida Physicians and
other carriers directly related to APIE's controlled business.
4
REAL ESTATE
APS Realty, Inc., ("APS Realty"), a wholly-owned subsidiary of the Company
owns condominium space in an office project located in Austin, Texas. APS Realty
leases approximately 58% of this space to the Company, its subsidiaries and
affiliates. The remainder is leased to unaffiliated parties.
OTHER INVESTMENTS
The Company owns 3,064,000 shares of common stock of Prime Medical
Services, Inc. ("Prime Medical"), representing at March 15, 1999 approximately
18% of the outstanding shares of common stock of Prime Medical. Two of Prime
Medical's seven directors are members of the Company's four 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 January 1, 1998 the Company invested approximately $2,000,000 in the
Convertible Preferred Stock of Uncommon Care, Inc. ("Uncommon Care"). The
Company also made available to Uncommon Care a $2,400,000 line of credit. The
loan is at ten percent interest, payable quarterly until January 1, 2003, at
which time the outstanding principal and any accrued but unpaid interest are due
and payable. Uncommon Care is a developer and operator of dedicated Alzheimer's
care facilities. The preferred shares owned by the Company are convertible into
approximately a 34% interest in the equity of Uncommon Care. Two of Uncommon
Care's five directors are members of the Company's board of directors. The
Company records its investment at cost.
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. All of Syntera's
directors are officers of the Company. The Company expects its ownership
interest in
5
Syntera (62% as of March 15, 1999) to be reduced to a minority level as Syntera
exchanges its stock for assets of additional physician practices. Due 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.
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 renegotiations,
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. The Company subsequently
declared Con-Eco in default under the new promissory note and related security
agreements. In March, 1999 the Company entered into a comprehensive
Restructuring Agreement pursuant to which the Company retained its interest in
all of its existing collateral, obtained additional collateral in the form of
stock of two more of Con-Eco's subsidiaries and obtained the highest priority
security interest available in the assets of such subsidiaries as well as the
assets of a third subsidiary. Under the Restructuring Agreement, the Company
agreed to refinance the existing obligations of Con-Eco on more favorable terms
in the future, provided the Company receives certain minimum payments from
Con-Eco or from the operations of a subsidiary of Con-Eco that may be acquired
by the Company through the enforcement of its security interest. Con-Eco also
agreed to make specified minimum payments to the Company upon the favorable
resolution by Con-Eco of certain existing litigation or upon the sale of Con-Eco
or of Con-Eco's or its subsidiaries' assets. The Company has established a
reserve of $392,000 related to the principal amount of the Con-Eco receivable
and has reserved all accrued but unpaid interest related to the note. The
Company may be required to establish additional reserves in the future depending
on the Company's ongoing evaluation of its collateral position and its estimates
of Con-Eco's future cash flows.
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 reflected the expected financial
impact of discontinuing this segment in the 1997 financial statements.
6
COMPETITION
APS Financial and Asset Management are both engaged in a highly competitive
business. Their competitors include, with respect to one or more aspects of
business, all of the member organizations of the New York Stock Exchange and
other registered securities exchanges, all members of the NASD, registered
investment advisors, members of the various commodity exchanges and commercial
banks and thrift institutions. Many of these organizations are national rather
than regional firms and have substantially greater personnel and financial
resources than the Company's. Discount brokerage firms oriented to the retail
market, including firms affiliated with commercial banks and thrift
institutions, are devoting substantial funds to advertising and direct
solicitation of customers in order to increase their share of 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.
APIE competes with numerous insurance companies in Texas and Arkansas,
primarily Medical Protective Insurance Company, St. Paul Fire and Marine
Insurance Company, State Volunteer Mutual Company, Frontier Insurance Group,
Texas Medical Liability Trust, Medical Interinsurance Exchange Group of New
Jersey and PHICO Insurance. Many of these firms have substantially greater
resources than APIE. The primary competitive factor in selling insurance is a
combination of price, terms of the policies offered, claims and other service
and claims settlement philosophy.
REGULATION
APS Financial and Asset Management are subject to extensive regulation
under both federal and state laws. The SEC is the federal agency charged with
administration of the federal securities and investment advisor laws. Much of
the regulation of broker dealers, however, has been delegated to self-regulatory
organizations, principally the NASD and the national securities exchanges. These
self-regulatory organizations adopt rules (subject to approval by the SEC) which
govern the industry and conduct periodic examinations of member broker/dealers.
APS Financial is also subject to regulation by state and District of Columbia
securities commissions.
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.
7
APS Financial, as a registered broker dealer and NASD member organization,
is required by federal law to belong to the SIPC. When the SIPC fund falls below
a certain minimum amount, members are required to pay annual assessments in
varying amounts not to exceed .5% of their adjusted gross revenues to restore
the fund. The last assessment was in 1995 and amounted to approximately $7,300.
The SIPC fund provides protection for customer accounts up to $500,000 per
customer, with a limitation of $100,000 on claims for cash balances.
FMI has received certificates of authority from the Texas and Arkansas
insurance departments, licensing it on behalf of the subscribers of APIE. APIE,
as an insurance company, is subject to regulation by the insurance departments
of the States of Texas and Arkansas. These regulations strictly limit all
financial dealings of a reciprocal insurance exchange with its officers,
directors, affiliates and subsidiaries, including FMI. Premium rates,
advertising, solicitation of insurance, types of insurance issued and general
corporate activity are also subject to regulation by various state agencies.
EMPLOYEES
At March 1, 1999, the Company employed, on a full time basis, approximately
112 persons, including 49 by Insurance Services, 46 by APS Financial, 4 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.
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 affiliates
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 approximately 90% occupied as of March
24, 1999. The lease of the largest third party tenant, (11,000 square feet),
expires in April 1999 and it is unknown how long will be required to re-let the
space.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions that have
arisen in the ordinary course of business. Management believes that any
liabilities arising from these actions will not have a significant adverse
effect on the financial condition of the Company.
8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting was held June 11, 1998. The agenda items were
the election of directors and approval of an amendment to the stock option plan.
Voting results follow:
BOARD ELECTION
Nominee For Against Abstain
------- --- ------- -------
Jack Murphy 3,392,847 301,516 --
Robert L. Myer 3,393,217 301,146 --
William A. Searles 3,393,217 301,146 --
Kenneth S. Shifrin 3,393,217 301,146 --
STOCK OPTION PLAN AMENDMENT
2,122,854 799,372 9,842
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, 1998 and 1997. On March 1, 1999, the Company had
approximately 500 holders of record of its common stock.
1998 1997
------------------ -------------------
High Low High Low
First Quarter $ 7 5/8 $ 6 7/8 $7 5/8 $6 3/8
Second Quarter $ 7 1/2 $ 6 5/8 $6 7/8 $ 4 3/4
Third Quarter $ 7 1/4 $ 4 7/8 $8 7/8 $5 7/8
Fourth Quarter $ 5 1/2 $ 3 1/4 $8 $6
9
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
(In thousands, except per share data)
SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Selected income statement data:
Revenues $16,403 13,065 10,437 16,124 12,333
Earnings from continuing operations before
income taxes and minority interests $2,255 5,984 3,006 3,007 1,784
Net earnings $1,545 2,538 1,924 2,024 1,254
Per share amounts - diluted:
Net earnings $.31 .59 .46 .53 .36
Diluted weighted average shares outstanding 4,692 4,241 4,219 3,798 3,488
Selected balance sheet data:
Total assets $32,914 30,737 24,468 23,740 19,918
Long-term obligations -- -- -- 574 878
Total liabilities $8,259 7,458 4,086 6,146 4,927
Minority interests $53 175 -- -- --
Total equity $24,602 23,104 20,382 17,594 14,991
Book value per share $5.91 5.55 5.03 4.80 4.47
10
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
1998 Compared to 1997
Revenues from continuing operations increased 26% in 1998 compared to 1997.
Net income decreased 39% and diluted earnings per share decreased 48%. The
reasons for these changes are described below.
Investment Services
Investment services' revenues increased 73% in 1998 compared to 1997. The
increase resulted from volatility in world bond markets which caused clients to
realign portfolios. This activity created more transactions and thus more
commissions. Also contributing to the increase was the full development of a
11
second office, which opened in 1997. Revenues at this office increased
approximately 90% over 1997.
Investment services' expenses increased 71% from 1997. 94% of the increase
was at the broker/dealer and was volume-related. The large increase in revenues
resulted in proportionately greater sales commission expense, support personnel
expense, transaction charges and financial information services expense. Lower
legal fees partially offset these increases. Greater profits in 1998 also
increased expenses under the incentive compensation plan. The remainder of the
increase in expenses was the result of starting Asset Management in 1998.
Results in this segment can vary from year to year. The broker/dealer,
primarily a provider of fixed income securities, is subject to general market
conditions as well as interest rates and is in an industry characterized by
competition for top producing brokers. In an effort to add to the segment's
overall profitability, and to add stability from year to year, the Company
entered the asset management business in 1998. As a registered investment
advisor, Asset Management, seeks to manage the portfolios of institutions and
high net worth individuals. Asset management is a competitive business and the
Company cannot say with certainty when or if it will achieve profitability.
Insurance Services
Insurance Service's revenues decreased 10% in 1998 compared to 1997. The
loss of a large client by the managed insurance company caused most of the
variance. The client purchased extended reporting period or "tail" coverage,
which increased premiums in 1997. 1998 was lower by both the standard premium
and the extra tail premium. The Company's premium-based management fee was
proportionately lower. The remainder of the decrease was related to profit
sharing. The insurance management fee contract contains a provision to share in
the profits of the managed insurance exchange. Due to the loss of the client
mentioned above and an overall increase in competition in medical professional
liability insurance in Texas, profits, and consequently, profit sharing, were
lower in 1998.
Insurance Services' expenses increased 8% over 1997. The increase was in
the area of commission expense and was due to the greater utilization of
commissioned outside sales agents, compared to salaried internal personnel in
prior years. Lower salary expense, primarily due to lower incentive payments,
partially offset the increased commissions.
Due to the profit sharing provision in this segment's major contract,
results can vary from year to year. In the last five years under the contract,
profit sharing has ranged from 12% to 31% of the segment's revenues.
Real Estate
Revenue increased 1% compared to 1997. The increase reflects higher lease
rates, partially offset by a higher vacancy rate.
The 5% increase in real estate expenses resulted from increased property
taxes due to higher real estate values.
12
Investment and Other
The decline in investment and other income was primarily due to lower
interest income, a result of available cash being fully invested in new start-up
companies, which yielded no current return.
General and Administrative Expenses
General and administrative expenses increased 37% over 1997. The increases
resulted from recognizing bad debt expense related to the impairment of the
Con-Eco note receivable and from expenses related to guaranteeing an individual
investor's investment return. The Company had agreed to the guaranteed return to
settle a dispute on the customer's account in 1995. The portfolio
under-performed in 1998 and additional funds were contributed by the Company.
Lower management incentive expenses partially offset these increases in 1998.
Interest expense increased from $21,000 in 1997 to $59,000 in 1998. The
increase reflects funds borrowed under the line of credit to fund the Company's
investments Syntera and Uncommon Care.
Affiliates
The Company has two affiliates accounted for on the equity basis, Prime
Medical Services, Inc. and Syntera HealthCare Corporation. Prime's operating
income increased in 1998 but net earnings were reduced by non-recurring
financing and development costs. This resulted in a 23% decrease in equity
earnings compared to 1997. Syntera, which was started in 1997, continued in the
development phase and reported a loss in 1998. The Company's share of Syntera's
loss increased approximately 5% in 1998.
Prime had issued additional shares in 1996 reducing the Company's ownership
from 21% to 16%. In 1998 Prime established a stock repurchase plan and reduced
its shares outstanding, increasing the Company's ownership percentage to
approximately 18%. 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.
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.
INVESTMENT SERVICES
Investment Services' revenues increased 73% in 1997 compared to 1996.
Approximately 71% of the increase was attributable to expanding the
broker/dealer 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.
13
Investment Services' expenses increased 38% 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 SERVICES
Revenues increased 6% as a result of a higher contingent fee, which was
based on improved profits at the managed insurance company.
Expenses decreased 11% from 1996. Decreases in legal and professional fees
and lower allocated corporate overhead were the significant areas of expense
reduction.
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 rental
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 the Con-Eco note receivable being on non-accrual
during all of 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
The 800% increase in expenses was a result of changes in accounting
estimates rather than fundamental changes in 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.
14
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $503,000 and $3,360,000 at December 31, 1998 and
1997, respectively. The decrease in working capital reflects the Company's cash
investment of approximately $2,000,000 in new business opportunities during
1998. Also reducing working capital was the reclassification of short-term notes
receivable to long-term upon the maker's default on the notes. Historically, the
Company has maintained a strong working capital position and, using that base,
has been able to satisfy its operational and capital expenditure requirements
with cash generated from its operating and investing activities. These same
sources of funds have also allowed the Company to pursue investment and
expansion opportunities consistent with its growth plans.
In 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
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 December 31, 1998.
At March 25, 1999 $1,600,000 had been advanced.
Capital expenditures for equipment were $148,000, $312,000, and $123,000,
in 1998, 1997, and 1996, respectively. In addition, the Company improved office
space in 1998 and 1996 for $58,000 and $21,000, respectively. The Company
expects capital expenditures in 1999 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.
15
YEAR 2000 PROJECT
The Company formed a Year 2000 Committee in mid 1998. The Committee was charged
with examining (1) internal hardware and software systems; (2) physical
facilities; and (3) outside suppliers, as these items relate to potential
problems that could be caused by the inability to process dates beyond December
31, 1999.
The Committee divided its task into four parts - assessment, remediation
planning, implementation and testing and contingency planning. Assessment and
remediation planning have been completed for all three phases of the project.
Implementation and testing and contingency planning are discussed below.
Internal hardware and software systems: The Company has completed substantially
all of the needed upgrades to its hardware and software systems. Software
testing is expected to be complete by April 30, 1999 and remaining hardware
purchases are expected to be complete by June 30, 1999.
Physical facilities: The Committee has evaluated its non-computer equipment and
has determined that, except for its telephone system, there are no devices whose
failure would materially affect the ability to carry out the business of the
Company. A compliant telephone system is expected to be installed by June 30,
1999. The outside managers of the Company's office buildings have reported that
all aspects of the physical facilities - elevators, fire and security systems,
etc. are compliant. Their further inquiry of those supplying public utilities
have produced assurances of best efforts but no guarantee of performance.
Outside suppliers: The Company has inquired about the state of Year 2000
readiness of those outside suppliers who were determined to be critical to the
Company's ability to carry out its business. One services supplier has been
identified as being behind in its readiness. The services are not of an
exclusive nature and alternative suppliers are being evaluated. A switch to an
alternative would be made on September 1, 1999 if the current supplier remains
non-compliant.
Contingency planning: The Company cannot be certain that it has identified and
will be successful in bringing into compliance all Year 2000 issues within its
control. It can be even less certain of critical services being supplied by
third parties beyond its control. Upon completion of the testing phase of the
plan, the Company will formalize plans for carrying on its business in the event
of unanticipated Year 2000-related failures. Presently, the Company believes
that the most reasonably likely worst case scenario would be a failure of
relatively short duration of basic third party services such as the power grid.
With such a failure the Company's planning will be directed toward a temporary
suspension of operations followed by plans for resumption and catch up
operations. Due to the magnitude of the uncertainties related to Year 2000
issues, the Company is unable to fully assess the consequences of Year 2000
failures and, consequently, there could be a material adverse effect on the
Company's results of operations, financial position and cash flows.
Year 2000 costs: The Company estimates that total expenditures to address Year
2000 issues will be $350,000, of which approximately 60% will be for capitalized
hardware purchases. The remainder of the expenditures are labor costs.
Approximately 40% of the expenditures have been
16
made to date. Since the Company is in a constant state of upgrading its
technology and since all labor costs involve existing in- house staff, few of
the costs incurred are incremental. Extensive use of in-house MIS personnel for
Year 2000 issues has delayed implementation of other work designed to improve
user productivity and the value of information provided. The Company does not
believe such delays will have a material adverse effect on the results of
operations, financial position, or cash flows.
ITEM 7. (a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has some exposure to cash flow and fair value risk from changes
in interest rates, which may affect its financial position, results of operation
and cash flows. The Company does not use financial instruments for speculative
purposes, but does maintain a trading account inventory to facilitate the
business of its broker/dealer subsidiary. At the end of 1998 the inventory
balance was $535,000. Historically, the Company has turned this inventory
rapidly and has neither significant realized gains nor losses.
The Company has notes receivable, the largest of which is described in Item
1 and is currently in default. The fair value of this defaulted note is
determined by collateral and cash flows of the maker and is influenced little,
if any, by interest rate changes. The other notes receivable are in the form of
lines of credit to related companies and are at fixed 10% rates. Their fair
value will increase and decrease inversely with interest rates.
The Company had no debt at December 31, 1998, but has a $10 million line of
credit with a floating interest rate. For each $1 million that the Company
should borrow in 1999, a 1 1/2 % increase in interest rate would result in a
$15,000 annual increase in interest expense.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in Appendix A attached
hereto.
Financial information and schedules relating to Prime Medical Services,
Inc. are contained in Item 14(a) of the Annual Report on Form 10-K for the year
ended December 31, 1998 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.
17
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 1999 annual meeting
of shareholders, except for the information regarding executive officers of the
Company, which is presented below. The information required by this item
contained in such definitive proxy material is incorporated herein by reference.
As of March 15, 1999, the executive officers of the Company are as follows:
Name Age Position
Kenneth S. Shifrin 49 Chairman of the Board, President and
Chief Executive Officer
Duane K. Boyd, Jr. 54 Senior Vice President - Insurance
William H. Hayes 51 Senior Vice President - Finance and
Secretary
George S. Conwill 42 Vice President - Investment Services
Thomas R. Solimine 40 Controller
All officers serve until the next annual meeting of directors and until
their successors are elected and qualified.
Mr. Shifrin has been Chairman of the Board since March 1990. He has been
President and Chief Executive Officer since March 1989 and was President and
Chief Operating Officer from June 1987 to February 1989. He has been a Director
of the Company since February 1987. From February 1985 until June 1987, Mr.
Shifrin served as Senior Vice President - Finance and Treasurer. He has been
Chairman of the Board of Prime Medical since October 1989. Mr. Shifrin has been
President and a Director of Syntera since October 1997 and has been a member of
the Board of Directors of Uncommon Care since January 1998. 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 has been a Director of Syntera since October 1997 and a Director of
Uncommon Care since January 1998. Mr. Boyd is a Certified Public Accountant and
was with KPMG LLP from 1974 to June 1991. He was a partner specializing in the
insurance industry prior to joining the Company.
18
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. Conwill has been Vice President - Investment Services since June 1998.
He has served as Chief Operating Officer of APS Financial since May 1995, and as
President and Chief Operating Officer since March 1998. In May 1998 he assumed
responsibility as President of APS Investment Services.
Mr. Solimine has been Controller since June 1994. He has served as
Secretary for APS Financial since February 1995. From July 1989 to June 1994,
Mr. Solimine served as Manager of Accounting for the Company.
There are no family relationships, as defined, between any of the above
executive officers, and there is no arrangement or understanding between any of
the above executive officers and any other person pursuant to which he was
selected as an officer. Each of the above executive officers was elected by the
Board of Directors to hold office until the next annual election of officers and
until his successor is elected and qualified or until his earlier resignation or
removal. The Board of Directors elects the officers in conjunction with each
annual meeting of the stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the definitive proxy
statement of the Company to be filed in connection with its 1999 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 1999 annual meeting
of shareholders, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the definitive proxy
statement of the Company to be filed in connection with its 1999 annual meeting
of shareholders, which information is incorporated herein by reference.
19
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. (5)
3.2 Amended and Restated Bylaws of the Company. (5)
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. (6)
*10.7 Form of Non-Employee Directors Stock Option
Agreement. (6)
*10.8 1995 Incentive and Non-Qualified Stock Option Plan
of American Physicians Service Group, Inc. (6)
*10.9 Form of Stock Option Agreement (ISO). (6)
20
*10.10 Form of Stock Option Agreement (Non-Qualified). (6)
10.11 Management Agreement of Attorney-in-Fact,
dated August 13, 1975, between FMI and
American Physicians Insurance Exchange. (2)
10.12 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. (4)
*10.14 Profit Sharing Plan or Trust, effective December 1,
1984, of the Company. (3)
10.17 Stock Purchase Agreement dated September 30, 1996
between the Company and Exsorbet Industries, Inc.
(7)
10.18 Stock Put Agreement dated September 30, 1996
between the Company and Exsorbet Industries, Inc.
(7)
10.19 Shareholder Rights Agreement dated September 30,
1996 between the Company and Exsorbet Industries,
Inc. (7)
10.20 Warrant dated September 30, 1996 for shares of
common stock issued to the Company by Exsorbet
Industries, Inc. (7)
10.21 Contingent Warrant Agreement dated September 30,
1996 for shares of common stock issued to the
Company by Exsorbet Industries, Inc. (7)
10.22 Option Agreements dated September 30, 1996 for
shares of Exsorbet common stock issued to the
Company by officers and directors of Exsorbet
Industries, Inc. (7)
10.23 Agreement dated September 30, 1996 with Exsorbet
Industries, Inc. related to options issued by
officers and directors of Exsorbet. (7)
10.24 Guaranty Agreements dated September 30, 1996
between the Company and subsidiaries of
Exsorbet Industries, Inc. (7)
10.25 Promissory Note dated November 26, 1996 executed by
Exsorbet Industries, Inc. and payable to the
Company in the amount of $3,300,000. (7)
10.26 Stock Purchase Agreement dated October 1, 1997
between the Company, APS Practice Management,
Inc., Michael Beck, John Hendrick, and et al. (8)
21
10.27 Bylaws of APS Practice Management, Inc., (8)
10.28 Amended and Restated Articles of Incorporation APS
Practice Management, Inc., (8)
10.29 APS Practice Management, Inc., Certificate of
Designation of Rights and Preferences Series A
Serial Founder's Common Stock dated September 30,
1997. (8)
10.30 Resolutions to organizational matters concerning
Syntera, Inc. dated October 1, 1997. (8)
10.31 Master Refinancing Agreement dated November 6,
1997 between the Company and Consolidated
Eco-Systems, Inc. (8)
10.32 Promissory Note dated November 6, 1997 executed by
Consolidated Eco-Systems, Inc. and payable to
the Company in the amount of $3,788,580. (8)
10.33 Assignment and Security Agreement dated November
6, 1997 between the Company and Consolidated
Eco-Systems, Inc. (8)
10.34 Security Agreement dated November 6, 1997 between
the Company and Consolidated Eco-Systems, Inc.
(8)
10.35 Share Exchange Agreements dated October 31, 1997
between the Company and Devin Garza, M.D., Robert
Casanova, M.D. and Shelley Nielsen, M.D. (8)
*10.36 First Amendment to 1995 Incentive and Non-Qualified
Stock Option Plan of American Physicians Service
Group, Inc. Dated December 10, 1997. (8)
*10.37 First Amendment to 1995 Non-Employee Director
Stock Option Plan of American Physicians Service
Group, Inc. Dated December 10, 1997. (8)
10.38 Share Exchange Agreement dated February 16, 1998
between the Company and Michael T. Breen, M.D. (9)
10.39 Share Exchange Agreement dated April 1, 1998
between the Company and Antonio Cavazos, Jr., M.D.
(9)
10.40 Share Exchange Agreement dated April 1, 1998
between the Company and Antonio Cavazos, III, M.D.
(9)
22
10.41 Share Exchange Agreement dated May 18, 1998 between
the Company and Jonathan B. Buten, M.D. (9)
10.42 Share Exchange Agreement dated June 30, 1998
between the Company and Gary R. Jones, M.D. (9)
10.43 Share Exchange Agreement dated July 31, 1998
between the Company and Joe R. Childress, M.D. (9)
10.44 Share Exchange Agreement dated August 1, 1998
between the Company and M. Reza Jafarnia, M.D. (9)
10.45 Share Exchange Agreement dated September 15, 1998
between the Company and Donald Columbus, M.D. (9)
10.46 Share Exchange Agreement dated December 31, 1998
between the Company and David L. Berry, M.D. (9)
10.47 Contribution and Stock Purchase Agreement
dated January 1, 1998 between the Company,
Additional Purchasers, Barton Acquisition,
Inc., Barton House, Ltd., Barton House at
Oakwell Farms, Ltd., Uncommon Care, Inc.,
George R. Bouchard, John Trevey, and
Uncommon Partners, Ltd. (9)
10.48 Stock Transfer Restriction and Shareholders
Agreement dated January 1, 1998 between the
Company, Additional Purchasers, Barton
Acquisition, Inc., Barton House, Ltd.,
Barton House at Oakwell Farms, Ltd.,
Uncommon Care, Inc., George R. Bouchard,
John Trevey, and Uncommon Partners, Ltd. (9)
10.49 Loan Agreement dated January 1, 1998 between the
Company and Barton Acquisition, Inc. (9)
10.50 Promissory Note (Line of Credit) dated January 1,
1998 between the Company and Barton Acquisition,
Inc. in the amount of $2,400,000. (9)
10.51 Security Agreement dated January 1, 1998 between
the Company and Barton Acquisition, Inc. (9)
10.52 Participation Agreement dated March 16, 1998
between the Company and Additional Purchasers
referred to as Participants. (9)
23
10.53 Revolving Credit Loan Agreement dated February 10,
1998 between the Company and NationsBank of Texas,
N.A. in an amount not to exceed $10,000,000. (9)
10.54 Revolving Credit Note dated February 10, 1998
between the Company and NationsBank of Texas, N.A.
in the amount of $10,000,000. (9)
10.55 Pledge Agreement dated February 10, 1998 between
the Company and NationsBank of Texas, N.A. (9)
10.56 Continuing and Unconditional Guaranty dated
February 10, 1998 between the Company and
NationsBank of Texas, N.A. (9)
10.57 Restructuring Agreement dated March 25, 1998
between the Company and Consolidated
Eco-Systems, Inc., and all of the wholly or
partially owned subsidiaries of Consolidated
Eco-Systems, Inc. (except for 7-7, Inc.).
(9)
10.58 Assignment and security Agreement dated March 25,
1998 between the Company and Consolidated Eco-
Systems, Inc. (9)
10.59 Security Agreement dated March 25, 1998 between the
Company and Consolidated Eco-Systems, Inc. (9)
10.60 Security Agreement dated March 25, 1998 between the
Company and Eco-Acquisition, Inc. (9)
10.61 Security Agreement dated March 25, 1998 between the
Company and Exsorbet Technical Services, Inc. (9)
10.62 Security Agreement dated March 25, 1998 between the
Company and KR Industrial Service of Alabama, Inc.
(9)
21.1 List of subsidiaries of the Company. (9)
23.1.1 Independent Auditors Consent of KPMG LLP. (9)
27.1 Financial Data Schedule (EDGAR filing).
(*) Executive Compensation plans and arrangements.
- - -----------------
24
(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.
(3) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1984 and incorporated herein by
reference.
(4) Filed as an Exhibit to the Current Report on Form 8-K of the Company
dated September 5, 1989 and incorporated herein by reference.
(5) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1990 and incorporated herein by
reference.
(6) Filed as an Exhibit to the Annual Report on Form 10-KSB of the Company
for the year ended December 31, 1995 and incorporated herein by
reference.
(7) Filed as an Exhibit to the Annual Report on Form 10-KSB of the Company
for the year ended December 31, 1996 and incorporated herein by
reference.
(8) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1997 and incorporated herein by
reference.
(9) Filed herewith.
25
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 26, 1999
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 26, 1999
By: /s/ W. H. Hayes
W. H. Hayes
Senior Vice President - Finance, Secretary
and Chief Financial Officer
(Principal Financial Officer)
Date: March 26, 1999
26
By: /s/ Thomas R. Solimine
Thomas R. Solimine
Controller
(Principal Accounting Officer)
Date: March 26, 1999
By: /s/ Robert L. Myer
Robert L. Myer, Director
Date: March 26, 1999
By: /s/ William A. Searles
William A. Searles, Director
Date: March 26, 1999
27
APPENDIX A
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report A-2
Financial Statements
Consolidated Statements of Earnings for the years
ended December 31, 1998, 1997, and 1996 A-3
Consolidated Balance Sheets at December 31, 1998
and December 31, 1997 A-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 A-7
Consolidated Statements of Shareholders' Equity
at December 31, 1998, 1997 and 1996 A-9
Notes to Consolidated Financial Statement 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, 1998 and 1997, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
--------------------------
Austin, Texas
March 9, 1999
A-2
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended
December 31,
1998 1997 1996
---- ---- ----
Revenues:
Investment services $9,914 5,726 3,302
Insurance services (Note 2) 5,655 6,287 5,942
Real estate (Note 5) 713 704 717
Investments and other 121 348 476
-------- ------- -------
Total revenues 16,403 13,065 10,437
------- ------- -------
Expenses:
Investment services 9,039 5,299 3,828
Insurance services 4,129 3,819 4,289
Real estate 527 503 521
General and administrative 1,851 1,352 150
Interest 59 21 54
------ ------ -------
Total expenses 15,605 10,994 8,842
------ ------ -------
Operating income 798 2,071 1,595
Equity in earnings of
unconsolidated affiliates (Note 13) 1,457 2,014 1,411
Gain on sale of interest in subsidiary -- 1,899 --
------ ------- -------
Earnings from continuing operations before
income taxes and minority interests 2,255 5,984 3,006
Income tax expense (Note 9) 863 2,341 1,058
Minority interests (178) (175) --
------- -------- --------
Earnings from continuing operations 1,214 3,468 1,948
------ ------ ------
Discontinued operations:
Profit/(loss) from discontinued operations net of
income tax expense/(benefit) of $171, (48)
and ($19) in 1998, 1997 and 1996, respectively 331 (94) (24)
Estimated loss on disposal of discontinued segment,
net of income tax benefit of $431 in 1997 -- (836) --
------ -------- --------
Net gain/(loss) from discontinued operations 331 (930) (24)
------- --------- --------
Net earnings $1,545 2,538 1,924
====== ======= =======
See accompanying notes to consolidated financial statements.
A-3
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS, continued
(In thousands, except per share amounts)
Year Ended
December 31,
-------------------------------------
1998 1997 1996
---- ---- ------
Earnings per common share:
Basic:
Earnings from continuing operations $0.29 0.84 0.48
Discontinued operations 0.08 (0.22) --
------ ----- ------
Net earnings $0.37 0.62 0.48
====== ===== ======
Diluted:
Earnings from continuing operations $0.24 0.81 0.46
Discontinued operations 0.07 (0.22) --
----- ----- ------
Net earnings $0.31 0.59 0.46
===== ===== ======
Basic weighted average shares
outstanding 4,163 4,106 4,025
===== ====== =======
Diluted weighted average
shares outstanding 4,692 4,241 4,219
===== ====== =======
See accompanying notes to consolidated financial statements.
A-4
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Year Ended
December 31,
-------------------------
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $3,214 5,188
Trading account securities 535 449
Management fees and other receivables
(Note 2) 968 815
Notes receivable, net - current (Note 3) 196 1,157
Receivable from clearing broker 1,036 543
Prepaid expenses and other 339 508
Deferred income tax asset 1,279 1,336
----- ------
Total current assets 7,567 9,996
Notes receivable, net less current portion
(Note 3) 4,287 2,982
Property and equipment, net (Note 5) 1,653 1,830
Investment in affiliates (Note 13) 17,063 15,611
Preerred stock investment 2,078 --
Other assets 266 318
------ ------
Total assets $32,914 30,737
====== ======
See accompanying notes to consolidated financial statements.
A-5
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
(In thousands, except share data)
Year Ended
December 31,
----------------------
1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade 910 901
Payable to clearing broker 487 441
Income taxes payable 292 226
Accrued compensation 823 446
Accrued expenses and other liabilities
(Note 6) 3,273 3,286
----- ------
Total current liabilities 5,785 5,300
Deferred income tax liability
(Note 9) 2,474 2,158
----- ------
Total liabilities 8,259 7,458
------ ------
Minority interest 53 175
Shareholders' equity:
Preferred stock, $1.00 par value,
1,000,000 shares authorized -- --
Common stock, $0.10 par value,
20,000,000 shares authorized; 4,160,083
issued at 12/31/98 and 4,160,861 at
12/31/97 416 416
Additional paid-in capital 5,481 5,528
Retained earnings 18,705 17,160
------ ------
Total shareholders' equity 24,602 23,104
------ -------
Commitments and contingencies
(notes 5, 7, 8, 10, 11, 12)
Total liabilities and shareholders' equity $32,914 30,737
======= ======
See accompanying notes to consolidated financial statements.
A-6
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Twelve Months Ended
December 31,
--------------------------------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Cash received from customers $ 16,017 13,080 11,123
Cash paid to suppliers and employees (14,390) (9,247) (11,064)
Change in trading account securities (86) 250 315
Change in receivable from clearing broker (447) (177) 501
Interest paid (59) ( 21) ( 54)
Income taxes paid (439) ( 772) ( 611)
Interest, dividends and other investment proceeds 234 219 459
------- -------- -------
Net cash provided by operating activities 830 3,332 669
------- -------- -------
Cash flows from investing activities:
Proceeds from the sale of property and
equipment 13 55 --
Payments for purchase of property and
equipment (206) ( 312) ( 144)
Net decrease in marketable securities -- 5 2,045
Proceeds from equity owners in investment 259 -- --
Investment in preferred stock (2,073) (5,292) (244)
Proceeds from sale of insurance exchange -- 1,000 --
Proceeds from sale of 20& of Insurance Services -- 2,000 --
Funds loaned to others (3,020) ( 834) (3,442)
Collection of notes receivable 2,085 109 --
Discontinued operations 502 -- --
Other -- (82) --
------- -------- ------
Net cash used in investing activities (2,440) ( 3,351) (1,785)
------- -------- ------
Cash flows from financing activities:
Repayment of long-term obligations -- ( 542) ( 163)
Proceeds from long-term obligations 8 -- --
Purchase/retire treasury stock (147) ( 337) ( 453)
Exercise of stock options 75 316 704
Distributions to minority interest (300) -- --
------- ------- ------
Net cash used in financing activities (364) (563) 88
------- ------- ------
Net change in cash and cash equivalents (1,974) ( 582) (1,028)
Cash and cash equivalents at beginning of period 5,188 5,770 6,798
----- ----- ------
Cash and cash equivalents at end of period 3,214 5,188 5,770
===== ======= ======
See accompanying notes to consolidated financial statements.
A-7
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In thousands)
Twelve Months Ended
December 31,
---------------------------------------
1998 1997 1996
---- ---- ----
Reconciliation of net earnings to net cash from
operating activities:
Net earnings $ 1,545 2,538 1,924
Adjustments to reconcile net earnings to
net cash from operating activities:
Depreciation and amortization 618 436 324
(Earnings)/loss from discontinued operations (502) 200 --
Loss on disposal of discontinued operations -- 1,209 --
Minority interest in consolidated earnings 178 175 --
Undistributed earnings of affiliate (1,457) (2,014) (1,411)
Provision for bad debts 361 -- --
Gain on sale of fixed assets (1) -- --
Gain on sale or disposition of assets -- (2,032) --
(Gain) loss on sale of securities -- 41 (82)
Change in federal income tax payable 66 876 (584)
Provision for deferred taxes 373 56 925
Change in trading securities (86) 250 315
Change in receivable from clearing broker (447) 177 501
Change in management fees and other receivable (153) (26) 17
Change in prepaids and other current assets 169 (191) 24
Change in long term assets 52 -- 265
Change in trade payable 9 90 53
Change in accrued expenses and other liabilities 105 1,547 (1,602)
------- ------ ------
Net cash from operating activities $ 830 3,332 669
======= ====== ======
Summary of non-cash transactions:
During 1998, non-qualified employee stock options were exercised which resulted
in a reduction of income tax payable and a corresponding addition to
paid-in-capital of $25.
During 1997, non-qualified employee stock options were exercised which resulted
in a reduction of income tax payable and a corresponding addition to
paid-in-capital of $194.
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.
See accompanying notes to consolidated financial statements
A-8
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1998,
1997 and 1996
(In thousands, except share data)
Additional Unrealized Total
Common Stock Paid-in Holding Retained Shareholders'
Shares Amount Capital Gains Earnings Equity
-------------- --------- ------------- ------------- ----------- --------------
Balance January 1, 1996 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 gain on securities
available for sale, net of tax -- -- -- 11 -- 11
Shares issued (Note 11) 164,666 16 300 -- -- 316
Shares repurchased &
cancelled (53,000) (5) (332) -- -- (337)
Income tax benefit of non-
qualified option exercises -- -- 194 -- -- 194
-------------- --------- ------------- ------------- ----------- --------------
Balance December 31, 1997 4,160,861 416 5,528 -- 17,160 23,104
Net earnings -- -- -- -- 1,545 1,545
Shares issued (Note 11) 25,833 3 72 -- -- 75
Shares repurchased &
cancelled (26,611) (3) (144) -- -- (147)
Income tax benefit of non-
qualified option exercises -- -- 25 -- -- 25
-------------- ---------- ------------- ------------- ----------- --------------
Balance December 31, 1998 4,160,083 $416 5,481 -- 18,705 24,602
============== ========== ============= ============= =========== ==============
See accompanying notes to consolidated financial statements.
A-9
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
(a) General
American Physicians Service Group, Inc. through its subsidiaries,
provides financial services that include brokerage and asset management
services to individuals and institutions, and insurance services that
consist of management services for malpractice insurance companies. The
financial services business has clients nationally. Insurance
management is a service provided primarily in Texas, but is available
to clients nationally. American Physicians Service Group, Inc. also
owns space in the office building which serves as its headquarters.
Through its real estate subsidiary it leases space that is surplus to
its needs. During the three years presented in the financial
statements, financial services generated 47% of total revenues and
insurance services generated 45%.
American Physicians Services Group, Inc. has two affiliates; Prime
Medical Services, Inc., of which it owns approximately 18%, and Syntera
HealthCare Corporation, of which it owns approximately 62%. Prime
Medical is the country's largest provider of lithotripsy (non-invasive
kidney stone fracturing) services and Syntera is a physician practice
management company. The Company also has a preferred stock investment
in a company which develops and operates Alzheimer's care facilities.
(b) Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of American
Physicians Service Group, Inc. and of subsidiary companies more than
50% owned ("Company"), except for its investment in Syntera. Syntera is
accounted for using the equity method, as the operating plan for
Syntera will result in the Company diluting its ownership to a non
controlling position as additional physician practices are acquired.
Investments in affiliated companies and other entities in which the
Company's investment is less than 50% of the common
A-10
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies, continued
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
Investment services revenues related to securities transactions are
recognized on a trade date basis.
Insurance services revenues related to management fees are recognized
monthly as a percentage of the earned premiums of the managed company.
The profit sharing component of these fees is recognized when it is
reasonably certain that the managed company will have an annual profit,
generally in the fourth quarter of each year.
Real estate rental income is recognized monthly over the term of the
lease. Costs of leasehold improvements are capitalized and amortized
monthly over the term of the lease.
Investment revenues are recognized as accrued on highly rated
investments and as received on lesser grades.
(e) Marketable Securities
The Company's investments in debt and equity securities are classified
in three categories and accounted for as follows:
Classification Accounting
-------------- ------------------------
Held to maturity Amortized cost
Trading securities Fair value, unrealized gains
and losses included in
earnings
Available for sale Fair value,
unrealized gains and
losses excluded from
earnings and reported as
a separate component of
stockholders' equity, net
of applicable income
taxes
A-11
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies, continued
The Company has included its marketable securities, held as inventory
at its broker/dealer, in the trading securities category.
(f) Property and Equipment
Property and equipment are stated at cost. Property and equipment and
rental property are depreciated using the straight-line method over the
estimated useful lives of the respective assets (3 to 40 years).
(g) Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows
is less than the carrying amount of the asset, a loss is recognized if
there is a difference between the fair value and carrying value of the
asset.
(h) 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.
(i) Earnings Per Share
Basic earnings per share is based on the weighted average shares
outstanding without any diluted effects considered. Diluted earnings
per share reflect dilution from all contingently issuable shares,
including options.
(j) Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
with an original maturity of 90 days or less.
A-12
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies, continued
(k) Notes Receivable
Notes receivable are recorded at cost, less allowances for doubtful
accounts when deemed necessary. Management, considering current
information and events regarding the borrowers ability to repay their
obligations, considers a note to be impaired when it is probable that
the Company will be unable to collect all amounts due according to the
contractual terms of the note agreement. When a loan is considered to
be impaired, the amount of the impairment is measured based on the
present value of expected future cash flows discounted at the note's
effective interest rate. Impairment losses are included in the
allowance for doubtful accounts through a charge to bad debt expense.
The present value of the impaired loan will change with the passage of
time and may change because of revised estimates of cash flows or
timing of cash flows. Such value changes shall be reported as bad debt
expense in the same manner in which impairment initially was recognized
or as a reduction in the amount of bad debt expense that would be
reported.
(l) 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.
(m) Reclassification
Certain reclassifications have been made to amounts presented in
previous years to be consistent with the 1998 presentation.
(n) Other Comprehensive Income
For the three years ended December 31, 1998, the Company has not had
any significant other comprehensive income
A-13
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(2) Management Fees and Other Receivables
Management fees and other receivables consist of the following:
December 31,
1998 1997
-------- -------
Management fees receivable $501,000 3,000
Trade accounts receivable 173,000 200,000
Less: allowance for doubtful accounts
(8,000) (25,000)
Accrued interest receivable 21,000 10,000
Other receivables 281,000 627,000
------- -------
$968,000 815,000
======== =======
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 and other related income of
$5,655,000, $6,287,000 and $5,942,000 and received expense
reimbursements of $1,420,000, $664,000 and $346,000 for the years ended
December 31, 1998, 1997 and 1996, respectively, related to these
agreements.
A-14
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(3) Notes Receivable
Notes receivable consist of the following:
December 31,
1998 1997
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, and interest at
the prime rate. The borrower defaulted in 1998 and the Company is in litigation
to
collect amounts owed. $156,000 176,000
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%. The Company declared the note in default in 1998 and
entered into a Restructuring Agreement in March 1999. Under the agreement the
Company obtained additional collateral and agreed to refinance the note on more
favorable terms in the future, provided that certain minimum payments are
received.
3,709,000 3,788,000
Uncommon Care, Inc.
Term Note: This note was secured by land located in Fort Bend County, Texas. The
note carried a 10% interest rate and was paid in full on January 31, 1998.
Revolving Line of Credit: This note is secured by substantially all of the assets -- 300,000
of Uncommon Care and is subordinated to bank loans for various real estate
purchases. The note is interest only at 10%, payable quarterly. Any outstanding
principal is due June 30, 2005. 745,000 --
Syntera HealthCare Corporation
This unsecured revolving line of credit bears interest at 10%. Payments are
interest only, paid quarterly through November 1, 2001, at which time the
outstanding principal balance is due. 580,000 --
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. 437,000 528,000
------- -------
5,627,000 4,792,000
Less allowance for doubtful accounts (1,144,000) (653,000)
----------- ---------
4,483,000 4,139,000
Less current portion 196,000 1,157,00
---------- ---------
Long term portion $4,287,000 2,982,000
========== =========
A-15
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(3) 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, 1998 and represents a
concentration of credit risk. No interest income has been recognized by
the Company.
Following a renegotiation of the debt in November 1997, Con-Eco
defaulted on the note. Con-Eco's stock was delisted during 1998 and has
negligible value. The Company considers the loan to be impaired and has
recorded the loan as follows:
December 31,
1998 1997
---- ----
Recorded loan amount $3,709,000 3,788,000
Less allowance for impairment 880,000 488,000
---------- ---------
$2,829,000 3,300,000
========== =========
A reconciliation of the allowance for impairment follows:
Year Ended December 31,
1998 1997
------- ----------
Balance at beginning of the period 653,000 --
Additions charged to operations (100,000) (76,000)
Deductions charged to allowance 591,000 729,000
------- ----------
Balance at end of period $1,144,000 653,000
========== ==========
(4) Fair Value of Financial Instruments
Statements of Financial Accounting Standards No. 107, "Disclosures
About Fair Value of Financial Instruments" (Statement 107), requires
that the Company disclose estimated fair values for its financial
instruments as of December 31, 1998 and 1997.
For financial instruments the fair value equals the carrying value as
presented in the consolidated balance sheets. Fair value estimates,
methods, and assumptions are set forth below for the Company's
financial instruments.
A-16
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(4) 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.
Trading Account Securities
The fair value of securities owned is estimated based on bid prices
published in financial newspapers or bid quotations received from
securities dealers. Trading account securities are carried at market
value.
Management Fees and Other Receivables
The fair value of these receivables approximates the carrying value due
to their short-term nature and historical collectibility.
Notes Receivable
The fair value of notes has been determined using discounted cash flows
based on management's estimate of current interest rates for notes of
similar credit quality. On notes determined to be impaired, the notes
have been discounted based on the original interest rate of the note.
Receivable from Clearing Broker
The carrying amounts approximate fair value because the funds can be
withdrawn on demand and there is no unanticipated credit concern.
Preferred Stock Investment
The fair value has been determined using discounted cash flows based on
estimates of future earnings.
Accounts Payable
The fair value of the payable approximates carrying value due to the
short-term nature of the obligation.
A-17
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(4) 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.
(5) Property and Equipment
Property and equipment consists of the following:
December 31,
------------------------------------------
1998 1997
----------------- ----------------
Office condominium $1,796,000 1,847,000
Furniture and equipment 3,173,000 3,758,000
--------- ---------
4,969,000 5,605,000
Accumulated depreciation
and amortization 3,316,000 3,775,000
--------- ---------
$1,653,000 1,830,000
========== =========
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, 1998, 1997 and 1996
totaled approximately $355,000, $385,000 and $379,000 respectively.
Future minimum lease payments to be received under the terms of the
office condominium leases are as follows: 1999 - $206,000, 2000 -
$114,000; 2001 - $92,000; 2002 - $44,000; and 2003 - $33,000.
A-18
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(6) Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consists of the following:
1998 1997
------------- --------------
APS Systems disposition costs
(discontinued operations)
$1,026,000 1,138,000
Taxes payable - other 115,000 96,000
Deferred income 740,000 280,000
Health insurance and other claims
payable -- 59,000
Contractual/legal claims 1,096,000 1,461,000
Vacation payable 134,000 102,000
Funds held for others 20,000 58,000
Other 142,000 92,000
------- ------
$3,273,000 3,286,000
========== =========
(7) Notes Payable
The Company has established a $10,000,000 line of credit with
NationsBank of Texas, N. A. The Company will pledge shares of Prime
Medical to the bank as funds are advanced under the line. No funds had
been advanced at December 31, 1998. Funds advanced under the agreement
will bear interest at the prime rate less 1/4 %. The unused portion of
the line carries a 1/4 % commitment fee. All interest is to be paid
quarterly. Any outstanding principal is to be paid at maturity in
February 2001.
In order to receive advances under the line, the Company must maintain
certain levels of liquidity and net worth. In addition, the market
value of the collateral must exceed a certain multiple of the funds
advanced under the line and there must be no occurrence which would
have a material adverse effect on the Company's ability to meet its
obligations to the bank.
A-19
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(8) Commitments and Contingencies
The Company has extended a line of credit to Syntera HealthCare
Corporation to a maximum amount of $3,000,000. The note is interest
only at 10%, payable quarterly. The note matures November 1, 2001, at
which time all principal and accrued but unpaid interest are due.
Advances under the line are subject to Syntera meeting certain
qualifications at the date of each advance request.
The Company has extended a line of credit to Uncommon Care, Inc. to a
maximum amount of $2,400,000. The note is interest only at 10%, payable
quarterly. The note matures June 30, 2005, at which time all principal
and accrued but unpaid interest are due. Advances under the line are
subject to Uncommon Care meeting certain qualifications at the date of
each advance request.
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, 1998, 1997 and 1996 was $44,000, $89,000 and $51,000 respectively.
Future minimum payments for leases which extend for more than one year
were $96,000 at December 31, 1998.
The Company is involved in various claims and legal actions that have
arisen in the ordinary course of business. Management believes that any
liabilities arising from these actions will not have a significant
adverse effect on the financial condition of the Company.
A-20
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(9) Income Taxes
Income tax expense (benefit) consists of the following:
Year Ended
December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
Continuing Operations
Federal
Current $332,000 1,394,000 47,000
Deferred 399,000 777,000 938,000
State 132,000 170,000 73,000
Discontinued Operations 171,000 (479,000) (13,000)
------- --------- -------
$1,034,000 1,862,000 1,045,000
========== ========= =========
A reconciliation of expected income tax expense (computed by applying
the United States statutory income tax rate of 34% to earnings before
income taxes) to total tax expense in the accompanying consolidated
statements of earnings follows:
Year Ended
December 31,
--------------------------------------------
1998 1997 1996
---- ---- ----
Expected federal income tax
expense
$877,000 1,556,000 972,000
State taxes 132,000 170,000 73,000
Other, net 25,000 136,000 --
-------- --------- -------
$1,034,000 1,862,000 1,045,000
========== ========= =========
The tax effect of temporary differences that gives rise to significant
portions of deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are presented below:
A-21
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Year Ended
December 31,
----------------------------
(9) Income Taxes, continued
1998 1997
---- ----
Deferred tax assets:
Net operating loss carryforwards $186,000 188,000
Accrued expenses 774,000 1,015,000
Accounts receivable, principally due to
allowance for doubtful accounts 94,000 79,000
Deferred income 378,000 228,000
Market value allowance 17,000 --
Other 48,000 71,000
------- ---------
Total gross deferred tax assets 1,497,000 1,581,000
Less valuation allowance (186,000) (188,000)
--------- ---------
Net deferred tax assets 1,311,000 1,393,000
--------- ---------
Deferred tax liabilities:
Investment in Prime Medical Services, Inc.
due to use of equity method for books (2,474,000) (2,158,000)
Capitalized expenses, principally due to
deductibility for tax purposes (32,000) (57,000)
-------- --------
Total gross deferred tax liabilities (2,506,000) (2,215,000)
----------- -----------
Net deferred tax liability $(1,195,000) (822,000)
=========== =========
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, 1998 and 1997 was a (decrease)/increase of ($2,000)
and $188,000, respectively. The Company believes that the valuation
allowance at December 31, 1998 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, 1998, net operating loss carryforwards available to
reduce future taxable income amounted to approximately $548,000 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 than not the
Company will realize the benefits of these deductible differences, net
of the existing valuation allowances at December 31, 1998.
A-22
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(10) Employee Benefit Plans
The Company has an employee benefit plan qualifying under Section
401(k) of the Internal Revenue Code for all eligible employees.
Employees become eligible upon meeting certain service and age
requirements. Employees may defer up to 15% (not to exceed $10,000 in
1998) 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, 1998, 1997 and 1996,
contributions by the Company aggregated, $126,000, $92,000 and
$104,000, respectively.
(11) Stock Options
The Company has adopted, with shareholder approval, the "1995
Non-Employee Directors Stock Option Plan" ("Directors Plan") and the
"1995 Incentive and Non-Qualified Stock Option Plan" ("Incentive
Plan"). The Directors Plan provides for the issuance of up to 200,000
shares of common stock to non-employee directors who serve on the
Compensation Committee. The Directors Plan is inactive and it is
assumed the remaining 50,000 shares will not be issued. The Incentive
Plan, as amended with shareholder approval in 1998, provides for the
issuance of up to 1,200,000 share of common stock to directors and key
employees.
The exercise price for each non-qualified option share is determined by
the Compensation Committee of the Board of Directors ("the Committee").
The exercise price of a qualified incentive stock option has to be at
least 100% of the fair market value of such shares on the date of grant
of the option. Under the Plans, option grants are limited to a maximum
of ten-year terms; however, the Committee has issued all currently
outstanding grants with five-year terms. The Committee also determines
vesting for each option grant and all outstanding options vest in three
approximately equal annual installments beginning one year from the
date of grant.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("Statement 123"), but applies Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
for its stock option plans. No cost from stock-based compensation
awards was recognized in 1998, 1997 or 1996. 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:
A-23
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS December 31, 1998, 1997 and 1996
(11) Stock Options, continued
Year Ended December 31,
-----------------------------------
1998 1997 1996
---- ---- ----
Pro forma net income $810,000 1,989,000 1,634,000
Pro forma earnings per share-basic 0.19 0.48 0.41
- diluted 0.16 0.46 0.39
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:
1998 1997 1996
---- ---- ----
Risk-free interest rate 5.21% 6.16% 6.06%
Expected holding period 3.90 years 3.90 years 3.75 years
Expected volatility .401 .480 .692
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 non-vested 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, 1998, 1997 and 1996. Remaining options outstanding
from the Company's previous 1983 plans are included.
Year Ended December 31,
--------------------------------------------------------------------------------
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Balance at January 1 774,000 $6.60 651,000 $5.64 837,000 $2.18
Options granted 597,000 5.92 293,000 9.32 295,000 9.32
Options exercised 26,000 2.90 165,000 1.92 450,000 1.56
Options forfeited/expired -- -- 5,000 7.13 31,000 6.16
Balance at December 31 1,345,000 6.36 774,000 6.60 651,000 5.64
========= ==== ======= ==== ======= ====
Options exercisable 460,000 $6.44 244,000 $5.84 258,000 $2.22
======= ===== ======= ===== ======= =====
A-24
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS December 31, 1998, 1997 and 1996
(11) Stock Options, continued
The weighted average fair value of Company stock options, calculated
using the Black Scholes option pricing model, granted during the years
ended December 31, 1998, 1997 and 1996 is $2.33, $2.68 and $5.15 per
option, respectively.
The following table summarizes the Company's options outstanding and
exercisable options at December 31, 1998:
Stock Options Stock Options Exercisable
Outstanding
-------------------------------------------- -----------------------------
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
$2.25 to $5.00 390,000 3.4 years $3.65 159,000 $3.12
$5.01 to $7.75 722,000 3.8 years $6.65 149,000 $6.95
$7.76 to $10.50 233,000 2.5 years $10.00 152,000 $10.05
--------- -------
Total 1,345,000 460,000
========= =======
(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 originally assumed that all clients would have migrated to
other software products by the end of 1999 and reflected the expected
financial impact of discontinuing this segment on that date in the 1997
financial statements. The measurement date for determining expected
losses from the disposal was May 15, 1997. Termination of support for
one client, whose contract runs until 2002, may now extend past
December 31, 1999. Consequently, the Company has adjusted its loss
allowance and believes that such allowance is adequate to cover
potential future obligations.
A-25
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS December 31, 1998, 1997 and 1996
(12) Discontinued Operations, continued
Net assets/(liabilities) of the discontinued computer systems and
software segment as of December 31, 1998 consisted of the following:
Cash and cash investments $31,000
Trade accounts receivable 126,000
Other receivables 14,000
Prepaid and other current assets 13,000
Fixed assets, net of depreciation 22,000
Intercompany receivables 1,118,000
Trade accounts payable (3,000)
Accrued expenses (1,066,000)
-----------
Net assets $255,000
========
Summary operating data for the year ended December 31, 1998 is as
follows:
Total revenue $2,039,000
Cost of sales (310,000)
Other operating expenses (1,038,000)
Allowance for future client support (189,000)
Income taxes (171,000)
--------
Net income $331,000
========
(13) Investments 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
seven 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, the sale of Prime Medical shares owned by the Company
under an option agreement, and the repurchase by Prime Medical of its
own shares, in the aggregate, have reduced the Company's ownership to
18% 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 $22,409,000 (carrying amount of
$13,089,000) at December 31, 1998 based on the market closing price of
$7.3125 per share.
A-26
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS December 31, 1998, 1997 and 1996
(13) Investments in Affiliates, continued
At December 31, 1998 and 1997, the Company's retained earnings included
undistributed earnings, net of deferred tax, of Prime Medical totaling
$5,583,000 and $4,379,000, respectively.
The condensed balance sheet and statement of operations for Prime
Medical follows:
Condensed balance sheet at December 31, 1998 and 1997
1998 1997
---- ----
Current assets $70,006,000 47,542,000
Long-term assets 171,320,000 178,284,000
----------- -----------
Total assets $241,326,000 225,826,000
============ ===========
Current liabilities $28,465,000 37,383,000
Long-term liabilities 123,111,000 96,379,000
Shareholders' equity 89,750,000 92,064,000
---------- ----------
Total liabilities and equity $241,326,000 225,826,000
============ ===========
Condensed statement of operations
for the years ended December 31, 1998
and 1997
1998 1997
---- ----
Total revenue $104,636,000 95,979,000
============ ==========
Net income $10,794,000 14,856,000
=========== ==========
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 62%) 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 1998 and
1997.
A-27
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS December 31, 1998, 1997 and 1996
(13) Investments in Affiliates, continued
The condensed balance sheet and statement of operations for Syntera
follows:
Condensed balance sheet at December 31, 1998 and 1997
1998 1997
---- ----
Current assets $2,350,000 4,563,000
Long-term assets 5,431,000 1,664,000
--------- ---------
Total assets $7,781,000 6,227,000
========== =========
Current liabilities $593,000 $505,000
Long-term liabilities 580,000 --
Shareholders' equity 6,608,000 5,722,000
--------- ---------
Total liabilities and equity $7,781,000 6,227,000
========== =========
Condensed statement of operations for
the years ended December 31, 1998
and 1997
1998 1997
---- ----
Total revenue $4,640,000 297,000
========== =======
Net loss $537,000 460,000
======== =======
(14) Segment Information
The Company's segments are distinct by type of service provided. Each
segment has its own management team and separate financial reporting.
The Company's Chief Executive Officer allocates resources and provides
overall management based on the segments' financial results.
The Company's investment services segment includes brokerage and asset
management services to individuals and institutions.
The insurance services segment includes financial management for an
insurance company that provides professional liability insurance to
doctors.
Real Estate income is derived from the leasing of office space.
Corporate is the parent company and derives its income from interest
and investments.
Discontinued operations include medical software sales.
A-28
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS December 31, 1998, 1997 and 1996
(14) Segment Information, continued
1998 1997 1996
---- ---- ----
Operating Revenues:
Investment services $9,914,000 5,726,000 3,302,000
Insurance services 5,655,000 6,287,000 5,942,000
Real estate 865,000 867,000 828,000
Corporate 1,721,000 982,000 2,376,000
--------- ------- ---------
$18,155,000 13,862,000 12,448,000
=========== ========== ==========
Reconciliation to Consolidated
Statement of Earnings:
Total segment revenues 18,155,000 13,862,000 12,448,000
Less: intercompany profits (152,000) (163,000) (111,000)
intercompany dividends (1,600,000) (634,000) (1,900,000)
---------- --------- -----------
Total Revenues $16,403,000 13,065,000 10,437.000
=========== ========== ==========
Operating Profit (Loss):
Investment services $810,000 372,000 (559,000)
Insurance services 1,437,000 2,385,000 1,591,000
Real estate 338,000 362,000 258,000
Corporate (189,000) (389,000) 2,214,000
--------- --------- ---------
$2,398,000 2,930,000 3,504,000
========= ========= =========
Reconciliation to Consolidated
Statement of Earnings:
Total segment operating profits 2,398,000 2,730,000 3,504,000
Less: intercompany dividends (1,600,000) (634,000) (1,900,000)
other -- (25,000) (10,000)
---------- ---------- ---------
Operating Income $798,000 2,091,000 1,595,000
Equity in earnings of affiliates 1,457,000 2,014,000 1,411,000
Gain on sale of interest
in subsidiary -- 1,899,000 --
--------- --------- ---------
Earnings from continuing operations
before income taxes and minority
interests
2,255,000 5,984,000 3,006,000
Income tax expense 863,000 2,341,000 1,058,000
Minority interests (178,000) (175,000) --
--------- --------- --------
Earnings from continuing
operations 1,214,000 3,468,000 1,948,000
--------- --------- ---------
Net profit(loss) from discontinued
operations, net of income tax 331,000 (930,000) (24,000)
------- --------- --------
A-29
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS December 31, 1998, 1997 and 1996
(14) Segment Information, continued
1998 1997 1996
---- ---- ----
Net earnings $1,545,000 2,538,000 1,924,000
========== ========= =========
Identifiable assets:
Investment Services $3,752,000 2,346,000 1,618,000
Insurance Services 1,640,000 2,585,000 1,144,000
Real Estate 1,324,000 1,283,000 1,476,000
Corporate:
Investment in equity
method investees 17,064,000 15,606,000 8,905,000
Other 8,928,000 8,561,000 12,071,000
Discontinued Operations 206,000 356,000 --
------- ------- ----------
$32,914,000 30,737,000 25,214,000
========== ========== ==========
Capital expenditures:
Investment Services $55,000 154,000 33,000
Insurance Services 44,000 33,000 55,000
Real Estate 58,000 -- 21,000
Corporate 49,000 26,000 17,000
Discontinued Operations -- 99,000 18,000
-------- ------ ------
$206,000 312,000 144,000
======== ======= =======
Depreciation/amortization
expenses:
Investment Services $279,000 118,000 33,000
Insurance Services 90,000 90,000 125,000
Real Estate 107,000 110,000 129,000
Corporate 78,000 62,000 13,000
Discontinued Operations 64,000 56,000 24,000
------ ------ ------
$618,000 436,000 324,000
======== ======= =======
Revenues attributable to customers
generating greater than 10% of the
consolidated revenues of the Company:
Insurance services
Company A 3,970,000 4,659,000 4,412,000
========= ========= =========
A-30
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS December 31, 1998, 1997 and 1996
(14) Segment Information, continued
At December 31, 1998 the Company had long-term contracts with company A
and was therefore not vulnerable to the risk of a near-term severe
impact from a reasonably possible loss of the revenue.
Operating profit is operating revenues less related expenses and is all
derived from domestic operations. Identifiable assets are those assets
that are used in the operations of each business segment (after
elimination of investments in other segments). Corporate assets consist
primarily of cash and cash investments, notes receivable and
investments in affiliates and preferred stock.
(15) Earning Per Share
Basic earnings per share are based on the weighted average shares
outstanding without any dilutive effects considered. Diluted earnings
per share reflects dilution from all contingently issuable shares,
including options and convertible debt. A reconciliation of income and
average shares outstanding used in the calculation of basic and diluted
earnings per share from continuing operations follows:
For the Year Ended December 31, 1998
--------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ----------- --------
Earnings from continuing
operations $1,214,000
Basic EPS
Income available to common
stockholders 1,214,000 4,163,000 $.29
====
Effect of Dilutive Securities
Options -- 74,000
Contingently issuable shares (76,000) 456,000
-------- -------
Diluted EPS
Income available to common
stockholders and assumed
conversions $1,138,000 4,692,000 $.24
========== ========= ====
A-31
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS December 31, 1998, 1997 and 1996
(15) Earning Per Share, continued
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
========== ========= ====
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 $1,948,000 4,219,000 $.46
========== ========= ====
A-32
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS December 31, 1998, 1997 and 1996
(15) Earning Per Share, continued
At December 31, 1998 the Company's affiliate, Syntera, had issued
620,000 shares which are convertible into 724,000 of the Company's
common shares in the event that the Syntera shares are not publicly
tradable after a future date. Such conversion rights are in varying
amounts beginning in October 1999 and extending through January 2002.
Unexercised employee stock options to purchase 295,000, 295,000 and 244,000
shares of the Company's common stock as of December 31, 1998, 1997 and 1996,
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.
A-33