-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GsuOYMEKF/zIqAw3bh5Sb/83U1zP7G0QMF6q6PYLHxdyg3sLV052lOk9XqV1yJLb H17uH4gIIgHaFdFYB5Tgzg== 0000930661-01-000671.txt : 20010326 0000930661-01-000671.hdr.sgml : 20010326 ACCESSION NUMBER: 0000930661-01-000671 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20010323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN PHYSICIANS SERVICE GROUP INC CENTRAL INDEX KEY: 0000724024 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT SERVICES [8741] IRS NUMBER: 751458323 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-11453 FILM NUMBER: 1578111 BUSINESS ADDRESS: STREET 1: 1301 CAPITAL OF TEXAS HWY STREET 2: C-300 CITY: AUSTIN STATE: TX ZIP: 78746 BUSINESS PHONE: 5123280888 MAIL ADDRESS: STREET 1: 1301 CAPITAL OF TEXAS HIGHWAY CITY: AUTIN STATE: TX ZIP: 78746 10-K/A 1 0001.txt FORM 10-K/A ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1999 [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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 incorporation or organization) (I.R.S. employer Identification No.) 1301 Capital of Texas Highway, Austin Texas 78746 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 328-0888 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- --------------------------- None None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.10 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 registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. Aggregate Market Value at March 27, 2000: $7,530,176 Indicate the number of shares outstanding of each of the registrant's class of common stock, as of the latest practicable date.
Number of Shares Outstanding At Title of Each Class March 27, 2000 ------------------- ------------------ Common Stock, $.10 par value 2,745,233
Documents Incorporated By Reference Selected portions of the Registrant's definitive proxy material for the 1997 annual meeting of shareholders are incorporated by reference into Part III of the Form 10-K. In addition, Item14(a) of Prime Medical Services, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1999 is incorporated by reference. 1. The undersigned registrant hereby amends its Annual Report on Form 10-K for the calendar year ended December 31, 1999 by replacing the original Annual Report in its entirety with the following: AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES AMENDMENT TO ANNUAL REPORT ON FORM 10-K/A FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 PART I ITEM 1. BUSINESS General American Physicians Service Group, Inc. (the "Company"), through its subsidiaries, provides services that include management services to malpractice insurance companies, and brokerage and investment services to individuals and institutions. In 1999 the Company entered into the environmental consulting and engineering services business. The Company also owns space in the office building, which serves as its headquarters. Through its real estate subsidiary it leases space that is surplus to its needs. The Company was organized in October 1974 under the laws of the State of Texas. The Company maintains its principal executive office at 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746, and its telephone number is (512) 328-0888. Unless the context otherwise requires, all references herein to the "Company" shall mean American Physicians Service Group, Inc. and its subsidiaries. Financial information about the Company's industry segments is disclosed in Note 14 to the accompanying Consolidated Financial Statements in Appendix A. Financial Services APS Investment Services, Inc. ("Investment Services"), is a wholly-owned subsidiary of the Company. Through its subsidiaries, APS Financial Corporation ("APS Financial"), and APS Asset Management, Inc. ("Asset Management"), Investment Services provides investment and investment advisory services to institutions and individuals throughout the United States. Revenues from this segment were 58%, 60% and 44% of Company revenues in 1999, 1998 and 1997, respectively. APS Financial, a fully licensed broker/dealer, provides brokerage and investment services primarily to institutional and high net worth individual clients. APS Financial also provides portfolio accounting, analysis, and other services, to insurance companies, banks, and public funds. APS Financial has its main office in Austin, with a branch office in Houston. APS Financial is a member of the National Association of Securities Dealers, Inc. ("NASD"), the Securities Investor Protection Corporation ("SIPC"), the Securities Industry Association, and, in addition, is licensed in 45 states. 1 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. Every registered broker/dealer doing business with the public is subject to stringent rules with respect to net capital requirements promulgated by the Securities and Exchange Commission (the "SEC"). These rules, which are designed to measure the financial soundness and liquidity of broker dealers, specify minimum net capital requirements. Since the Company is not itself a registered broker dealer, it is not subject to these rules. However, APS Financial is subject to these rules. Compliance with applicable net capital requirements could limit operations of APS Financial such as trading activities that require the use of significant amounts of capital and limit its ability to pay dividends. A significant operating loss or an extraordinary charge against net capital could adversely affect the ability of APS Financial to expand or even maintain its present levels of business. At February 29, 2000, APS Financial was in compliance with all net capital requirements. APS Financial clears its transactions through Southwest Securities, Inc. ("Southwest") on a fully disclosed basis. Southwest also processes orders and floor reports, matches trades, transmits execution reports to APS Financial and records all data pertinent to trades. APS Financial pays Southwest a fee based on the number and type of transactions performed by Southwest. Asset Management, a Registered Investment Adviser, was formed and registered with the Securities and Exchange Commission in 1998. Asset Management was organized to manage fixed income and equity assets for institutional and individual clients on a fee basis. Asset Management's mission is to provide clients with investment results within specific client-determined risk parameters. Insurance Services APS Insurance Services, Inc., ("Insurance Services"), an 80% owned subsidiary of the Company through its wholly-owned subsidiaries APS Facilities Management, Inc. ("FMI") and American Physicians Insurance Agency, Inc. ("Agency"), provides management and agency services to medical malpractice insurance companies. Revenues from this segment contributed 25%, 34% and 48% of Company revenues in 1999, 1998 and 1997, respectively. Substantially all of the revenue was attributable to American Physicians Insurance Exchange ("APIE"), a reciprocal insurance exchange managed by FMI. A reciprocal insurance exchange is an organization which sells insurance only to its subscribers, who pay, in addition to their annual insurance premiums, a contribution to the exchange's surplus. Such exchanges generally have no paid employees but instead enter into a contract with an "attorney-in-fact", that provides all management and administrative services for the exchange. As the attorney-in-fact for APIE, FMI receives a percentage of the earned premiums of APIE, as well as a portion of APIE's profits. The amount of these premiums can be adversely affected by competition. Substantial underwriting losses or investment performance, which might result in a curtailment or cessation of operations by APIE, would also adversely affect FMI's revenue. To limit possible underwriting losses or adverse investment performance, APIE currently reinsures its risk in excess of $250,000 per medical incident. APIE offers medical professional liability insurance for physicians in Texas and Arkansas. FMI's assets are not subject to any insurance claims by policyholders of APIE. 2 FMI organized APIE and has been its exclusive manager since its inception in 1975. The management agreement between FMI and APIE basically provides for full management by FMI of the affairs of APIE under the direction of APIE's physician Board of Directors. Subject to the direction of this Board, FMI sells and issues policies, investigates, settles and defends claims, and otherwise manages APIE's affairs. In consideration for performing its services, FMI receives a percentage fee based on APIE's earned premiums (before payment of reinsurance premiums), as well as a portion of APIE's profits. FMI pays salaries and personnel related expenses, rent and office operations costs, data processing costs and many other operating expenses of APIE. APIE is responsible for the payment of all claims, claims expenses, peer review expenses, directors' fees and expenses, legal, actuarial and auditing expenses, its taxes and certain other specific expenses. Under the management agreement, FMI's authority to act as manager of APIE is automatically renewed each year unless a majority of the subscribers to APIE elect to terminate the management agreement by reason of an adjudication that FMI has been grossly negligent, has acted in bad faith or with fraudulent intent or has committed willful misfeasance in its management activities. Termination of FMI's management agreement with APIE would have a material adverse effect on the Company. During 1997, FPIC Insurance Group, Inc. ("FPIC"), purchased a 20% interest in Insurance Services from the Company. In conjunction with that purchase, FPIC's subsidiary, Florida Physicians Insurance Company, Inc. ("Florida Physicians"), entered into agreements with Agency and APIE granting Agency the exclusive right to market Florida Physician's policies in Texas. Agency has sales, marketing, underwriting and claims handling authority for Florida Physicians in Texas and receives commissions for such services. Florida Physicians also entered into a reinsurance agreement with APIE in which APIE reinsures substantially all of Florida Physicians' risk in Texas under medical professional liability policies issued or renewed by Florida Physicians on behalf of Texas health care providers after March 27, 1997. The Company had also granted FPIC an option, exercisable at any time during 1999, to purchase an additional 35% interest in Insurance Services from the Company. This option has expired. APIE is authorized to do business in the states of Texas and Arkansas. Florida Physicians is a stock company licensed in several states. Both companies specialize in writing medical professional liability insurance for health care providers. The insurance written in Texas is primarily through purchasing groups and is not subject to certain rate and policy form regulations issued by the Texas Department of Insurance. Applicants for insurance coverage are reviewed based on the nature of their practices, prior claims records and other underwriting criteria. APIE is one of the largest medical professional liability insurance companies in the State of Texas. APIE is the only professional liability insurance company based in Texas that is wholly-owned by its subscriber physicians. Florida Physicians, together with its affiliates, insures over 6,800 physicians nationwide. Florida Physicians is rated A- (Excellent) by AM Best. 3 Generally, medical professional liability insurance is offered on either a "claims made" basis or an "occurrence" basis. "Claims made" policies insure physicians only against claims that occur and are reported during the period covered by the policy. "Occurrence" policies insure physicians against claims based on occurrences during the policy period regardless of when the claim is actually made. APIE and Florida Physicians offer only a "claims made" policy in Texas and Arkansas, but provide for an extended reporting option upon termination of coverage. APIE and Florida Physicians reinsure 100% of all Texas and Arkansas coverage per medical incident between $250,000 and the policy limit $1,000,000, primarily through certain domestic and international insurance companies. The following table presents selected financial and other data for APIE. The management agreement with FMI obligates APIE to pay management fees to FMI based on APIE's earned premiums before payment of reinsurance premiums. The fee percentage is 13.5% with the provision that any profits of APIE will be shared equally with FMI so long as the total reimbursement (fees and profit sharing) do not exceed a cap based on premium levels. In 1999, 1998, 1997, 1996, and 1995, management fees attributable to profit sharing were $329,000, $1,750,000, $1,961,000, $1,191,000, and $700,000, respectively. The decrease in 1999 is primarily due to an overall increase in competition in medical professional liability insurance in Texas as well as a continued trend of rising claims against the insureds. (In thousands, except for number of insureds)
Years Ended December 31, ------------------------ 1999 1998 1997 1996 1995 ------- ------- ------- ------- -------- Earned premiums before reinsurance premiums $24,529 $22,931 $25,899 $28,754 $ 30,857 Total assets 66,377 75,173 81,594 90,193 101,251 Total surplus 13,925 13,592 11,854 10,017 9,402 Management fees (including profit sharing) and commissions to FMI and Agency 3,645 (2) 4,835 (2) 5,854 (2) $ 5,281 (2) $ 5,010 (2) Number of insureds 2,882 2,743 2,629 (1) 3,019 3,226
________________ (1) The decrease was the result of APIE's decision to raise premiums at the risk of policy retention on certain unprofitable specialties. Included in the totals are physicians for which APIE provides reinsurance through a relationship with another malpractice insurance company. (2) Includes commissions of $1,191, $835, $1,214, $860, and $676 in 1999, 1998, 1997, 1996 and 1995, respectively, from Florida Physicians and other carriers directly related to APIE's controlled business. 4 Consulting On September 30, 1996, the Company invested $3,300,000 in common stock of Exsorbet Industries, Inc. ("Exsorbet") (NASDAQ:EXSO) with a put option. Exsorbet was a diversified environmental and technical services company. On November 26, 1996, the Company exercised its put in exchange for a $3,300,000 note receivable from Exsorbet. The note was secured by the shares that were subject to the put option plus all the stock and substantially all of the assets of Eco Acquisition, Inc. ("Eco-Systems"), a wholly owned subsidiary of Exsorbet. Subsequently, Exsorbet became known as Consolidated Eco-Systems, Inc. ("Con- Eco"). Prior to the foreclosure discussed below, this note had been restructured in November, 1997 and again in March, 1999. On June 17, 1998 the Company filed suit against Con-Eco, and its directors and officers alleging breach of contract, negligent misrepresentation and conspiracy. In February 1999 the Company settled the litigation related to the directors and officers of Con-Eco. The Company recovered $950,000 for the full release of all claims against the directors of Con-Eco. This payment was applied against the outstanding debt. In April, 1999, the Company's wholly owned subsidiary, APS Consulting ("APS Consulting"), foreclosed on the stock of Eco-Systems. Prior to the foreclosure, the Company had entered into a settlement agreement with Con-Eco to resolve the litigation described above. In connection with this agreement, Con-Eco had the right to purchase back the business of Eco-Systems for a nominal amount if it complied with the following terms: (1) Con-Eco would pay American Physicians $375,000 within 18 months. (2) Con-Eco could not declare bankruptcy during the 18 month period. (3) Con-Eco would pay to American Physicians' 75% of the proceeds from any litigation recovery against an investment banking firm. (4) Con-Eco would pay the balance of the restructured $2.5 million note with interest on the due date of the note. American Physicians' management expected that its ownership of Eco-Systems stock would be temporary based on management's assessment of Con-Eco's net worth, cash flow, and prospects for securing additional financing. Management believed that Con-Eco would meet the revised terms and reacquire the Eco-Systems stock for a nominal payment. Accordingly, the Company did not initially consolidate the operations of APS Consulting. In addition, the Company dismissed its lawsuit against Con-Eco, but retained the right to reinstitute the litigation at a later date. Subsequently, on September 1, 1999, the Company concluded that it was not probable that Con-Eco would exercise its option to reacquire the stock and began consolidating APS Consulting. The acquisition was recorded using the purchase method of accounting. Prior to the foreclosure described above, American Physicians wrote off to bad debt expense a total of $1,293,000 in 1999 related to the restructured Con-Eco note bringing the total write off related to this note since inception to $2,174,000. 5 APS Consulting is an environmental consulting/engineering firm, comprised of scientists and engineers specializing in remedial investigations, remediation engineering, air quality, waste water, regulatory compliance, solid waste engineering, litigation support/expert testimony, environmental resources and industrial hygiene and safety. APS Consulting offices are located in Jackson, Mississippi; Mobile, Alabama; and Houston, Texas. Because of the wide range of expertise of its consultants, APS Consulting serves clients in a broad base of industries, including: petrochemicals; agricultural chemicals; oil exploration, refining and marketing; gas pipelines; pulp and paper/forest products; manufacturing; waste disposal and management; state and local government; and law firms. Its consultants and engineers have expertise in environmental engineering, chemical engineering, hydrogeology, computer-aided drafting and design, civil engineering, geology, biology and micro biology. Revenues from APS Consulting contributed 4% of Company revenues in 1999. As revenues and expenses of APS Consulting were not consolidated into the totals of the Company until September, 1999, this percentage reflects only four months of revenues from APS Consulting. Real Estate APS Realty, Inc., ("APS Realty"), a wholly-owned subsidiary of the Company, owns condominium space in an office project located in Austin, Texas. APS Realty leases approximately 58% of this space to the Company, its subsidiaries and affiliate. The remainder is leased to unaffiliated parties. Revenues from APS Realty contributed 4%, 4% and 5% of Company revenues in 1999, 1998 and 1997, respectively. Other Investments The Company owns 2,344,000 shares of common stock of Prime Medical Services, Inc. ("Prime Medical"), representing at March 15, 2000 approximately 14% of Prime Medical's outstanding shares of common stock. Two of Prime Medical's seven directors are members of the Company's four-member board of directors. In addition, Mr. Hummel, executive vice president and chief operating officer of Prime Medical, is a member of the Company's Board of Directors. The Company records its pro-rata share of Prime Medical's results utilizing the equity method. Prime Medical is the largest provider of lithotripsy services in the United States, currently servicing over 450 hospitals and surgery centers in 34 states. Lithotripsy is a non-invasive method of treating kidney stones through the use of shock waves. During 1999, Prime Medical also entered into the refractive surgery field through two acquisitions. LASIK refractive surgery, one of the most advanced forms of laser vision correction, is designed to improve vision and reduce dependence on glasses and contacts by correcting nearsightedness, farsightedness and astigmatism. The common stock of Prime Medical is traded on the NASDAQ National Market under the symbol "PMSI". Prime Medical is a Delaware corporation which is required to file annual, quarterly and other reports and documents with the Securities and Exchange Commission (the "SEC"), which reports and documents contain financial and other information regarding Prime Medical. The summary information regarding Prime Medical contained herein is qualified in its entirety by reference to such reports and documents. Such reports and documents may be examined and copies may be obtained from the SEC. 6 On January 1, 1998 the Company invested $2,078,000 in the Convertible Preferred Stock of Uncommon Care, Inc. ("Uncommon Care"). The Company has also made available to Uncommon Care three lines of credit totaling $4,850,000. The loans are at interest rates varying from ten percent to twelve percent, payable quarterly until June 30, 2005, at which time the outstanding principal and any accrued but unpaid interest are due and payable. Uncommon Care is a developer and operator of dedicated Alzheimer's care facilities. The preferred shares owned by the Company are convertible into approximately a 34% interest in the equity of Uncommon Care. Three of Uncommon Care's five directors are officers or directors of the Company. The Company had recorded its investment at cost. However, in this amended Annual Report, the Company has restated its consolidated financial statements to reflect its investment in and advances to Uncommon Care on the equity method, effective January 1, 1998. See discussion of restatement in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 19 to the consolidated financial statements. Discontinued Operations In the fourth quarter of 1997, the Company formed APS Practice Management, Inc., later renamed Syntera HealthCare Corporation ("Syntera") with an initial ownership of 85%. Syntera specialized in the management of OB/GYN and related medical practices. In a typical transaction, Syntera acquired the non-medical assets of a physician's practice and signed a long-term management contract with the physician to provide the majority of the non-medical requirements of the practice, such as non-professional personnel, office space, billing and collection, and other day-to-day non-medical operating functions. In turn, Syntera was paid a variable management fee that rewarded the efficient operation and the expansion of the practice. On August 31, 1999 Syntera was acquired by another unaffiliated practice management company, FemPartners, Inc., ("FemPartners") resulting in the Company owning approximately 8% of the total equity of FemPartners, Inc. The Company had accounted for its ownership in Syntera on the equity basis. However, in this amended Annual Report, the Company has restated its financial statements to reflect its investment in Syntera on a consolidated basis effective with the Company's investment in the fourth quarter of 1997. The Company disposed of Syntera in August 1999. The results of operations of Syntera have been reflected in the accompanying consolidated financial statements as discontinued operations. The merger of Syntera and FemPartners was treated as a non-monetary exchange. See discussion of restatement in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 19 to the consolidated financial statements. 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 results of operations of APS Systems have been reflected in the accompanying financial statements as discontinued operations. 7 Competition APS Financial and Asset Management are both engaged in a highly competitive business. Their competitors include, with respect to one or more aspects of business, all of the member organizations of the New York Stock Exchange and other registered securities exchanges, all members of the NASD, registered investment advisors, members of the various commodity exchanges and commercial banks and thrift institutions. Many of these organizations are national rather than regional firms and have substantially greater personnel and financial resources than the Company's. Discount brokerage firms oriented to the retail market, including firms affiliated with commercial banks and thrift institutions, are devoting substantial funds to advertising and direct solicitation of customers in order to increase their share of commissions and other securities related income. In many instances APS Financial is competing directly with such organizations. In addition, there is competition for investment funds from the real estate, insurance, banking and thrift industries. APIE competes with numerous insurance companies in Texas and Arkansas, primarily Medical Protective Insurance Company, St. Paul Fire and Marine Insurance Company, State Volunteer Mutual Company, Frontier Insurance Group, Texas Medical Liability Trust, Medical Interinsurance Exchange Group of New Jersey and PHICO Insurance. Many of these firms have substantially greater resources than APIE. The primary competitive factor in selling insurance is a combination of price, terms of the policies offered, claims service and other services, and claims settlement philosophy. APS Consulting operates in the environmental services industry that is characterized by intense competition. Many companies of all sizes are engaged in activities similar to those of the APS Consulting and many of APS Consulting's competitors have substantially greater assets and capital resources. APS Consulting operates primarily in the Southeastern United States, however, the Company has projects throughout the United States. APS Consulting seeks to distinguish its services by (i) providing timely, high quality and cost- effective solutions to the various environmental issues facing its clients, (ii) maintaining long-term relationships with its clients, and (iii) utilizing technology to provide state of the art services in accordance with applicable regulatory standards. There can be no assurance, however, that APS Consulting can compete successfully against its competitors, given the size, resources and marketing capabilities of many of its competitors. Regulation APS Financial and Asset Management are subject to extensive regulation under both federal and state laws. The SEC is the federal agency charged with administration of the federal securities and investment advisor laws. Much of the regulation of broker/dealers, however, has been delegated to self-regulatory organizations, principally the NASD and the national securities exchanges. These self-regulatory organizations adopt rules (subject to approval by the SEC) which govern the industry and conduct periodic examinations of member broker/dealers. APS Financial is also subject to regulation by state and District of Columbia securities commissions. 8 The regulations to which APS Financial is subject cover all aspects of the securities business, including sales methods, trade practices among broker/dealers, uses and safekeeping of customers' funds and securities, capital structure of securities firms, record keeping and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and by self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules, may directly affect the method of operation and profitability of APS Financial. The SEC, self regulatory organizations and state securities commissions may conduct administrative proceedings which can result in censure, fine, suspension or expulsion of APS Financial, its officers or employees. The principal purpose of regulation and discipline of broker/dealers is the protection of customers and the securities markets, rather than protection of creditors and shareholders of broker/dealers. APS Financial, as a registered broker/dealer and NASD member organization, is required by federal law to belong to the SIPC. When the SIPC fund falls below a certain minimum amount, members are required to pay annual assessments in varying amounts not to exceed .5% of their adjusted gross revenues to restore the fund. The last assessment of APS Financial by the SIPC was in 1995 and amounted to approximately $7,300. The SIPC fund provides protection for customer accounts up to $500,000 per customer, with a limitation of $100,000 on claims for cash balances. FMI has received certificates of authority from the Texas and Arkansas insurance departments, licensing it on behalf of the subscribers of APIE. APIE, as an insurance company, is subject to regulation by the insurance departments of the States of Texas and Arkansas. These regulations strictly limit all financial dealings of a reciprocal insurance exchange with its officers, directors, affiliates and subsidiaries, including FMI. Premium rates, advertising, solicitation of insurance, types of insurance issued and general corporate activity are also subject to regulation by various state agencies. APS Consulting is subject to extensive laws and regulations promulgated by the Federal, state and local governments and regulatory authorities dealing with the discharge of materials into the environment or otherwise relating to the protection of the environment. The Company believes it is in compliance in all material respects with all such laws and regulations. Employees March 1, 2000, the Company employed, on a full time basis, approximately 128 persons, including 48 by Insurance Services, 50 by APS Investment Services, 18 by APS Consulting and 12 directly by the Company. The Company considers its employee relations to be good. None of the Company's employees is represented by a labor union and the Company has experienced no work stoppages. 9 ITEM 2. PROPERTIES APS Realty owns approximately 53,000 square feet of condominium space in an office project in Austin, Texas. The Company, its subsidiaries and affiliate occupy approximately 31,000 square feet of this space as their principal executive offices, and APS Realty leases the remainder to third parties. The area available for lease to third parties is 100% occupied as of March 15, 2000. APS Investment Services also leases office space at 2550 Gray Falls Dr, Suite 350, Houston, Texas. APS Consulting leases offices at: 439 Katherine Drive, Suite 2A, Jackson, Mississippi; 17171 Park Row, Suite 120, Houston, Texas; 384 Fairhope Avenue, Suite 7, Fairhope, Alabama. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various claims and legal actions that have arisen in the ordinary course of business. Management believes that any liabilities arising from these actions will not have a material adverse effect on the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting was held June 8, 1999. The agenda items were the election of directors and approval of an amendment to the stock option plan. Voting results follow: BOARD ELECTION
Nominee For Against Abstain ------- --- ------- ------- Brad A. Hummel 2,755,051 35,491 -- Robert L. Myer 2,755,051 35,491 -- William A. Searles 2,755,051 35,491 -- Kenneth S. Shifrin 2,755,051 35,491 --
10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table represents the high and low prices of the Company's common stock in the over-the-counter market as reported by the National Association of Securities Dealers, Inc., Automated Quotations System for years ended December 31, 1999 and 1998. On March 1, 2000, the Company had approximately 422 holders of record of its common stock.
1999 1998 --------------------- --------------------- High Low High Low ---- --- ---- --- First Quarter $5 1/8 $1 7/8 $7 5/8 $6 7/8 Second Quarter $3 7/8 $2 1/4 $7 1/2 $6 5/8 Third Quarter $5 1/16 $3 7/32 $7 1/4 $4 7/8 Fourth Quarter $7 $3 1/2 $5 1/2 $3 1/4
The Company has not declared any cash dividends on its common stock during the last two years and has no present intention of paying any cash dividends in the foreseeable future. It is the present policy of the Board of Directors to retain all earnings to provide funds for the growth of the Company. The declaration and payment of dividends in the future will be determined by the Board of Directors based upon the Company's earnings, financial condition, capital requirements and such other factors as the Board of Directors may deem relevant. 11 ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share data)
SELECTED FINANCIAL DATA 1999 1998 1997 1996 1995 ---------- ---------- ---------- ------- ------- (Restated) (Restated) (Restated) Selected income statement data: Revenues $18,751 $16,403 $13,065 $10,437 $16,124 Earnings (loss) from continuing operations before income taxes and minority interests (235) 1,764 6,330 3,006 3,007 Earnings (loss) from continuing operations (113) 1,015 3,814 1,948 2,061 Net earnings (loss) (55) 979 2,538 1,924 2,024 Per share amounts: Basic: Earnings (loss) from continuing operations $ (.04) $ .24 $ .93 $ .48 $ .59 Net earnings (loss) (.02) .23 .62 .48 .58 Diluted: Earnings (loss) from continuing operations (.04) .20 .90 .46 .54 Net earnings (loss) (.02) .19 .60 .46 .53 Diluted weighted average shares outstanding 3,168 4,692 4,241 4,219 3,798 Selected balance sheet data: Total assets $29,835 $35,496 $32,652 $24,468 $23,740 Long-term obligations 3,298 -- -- -- 574 Total liabilities 10,875 8,773 7,998 4,086 6,146 Minority interests 48 2,687 1,550 -- -- Total equity 18,912 24,036 23,104 20,382 17,594 Book value per share 7.09 5.78 5.55 5.03 4.80
12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY Forward-Looking Statements The statements contained in this Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, intentions or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Company's actual results could differ materially from those in such forward-looking statements. In addition to any risks and uncertainties specifically identified in the text surrounding such forward-looking statements, the reader should consult the Company's reports on Forms 10-Q and other filings under the Securities Act of 1933 and the Securities Exchange Act of 1934, for factors that could cause actual results to differ materially from those presented. The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors and legislative, judicial and other governmental authorities and officials. Assumptions relating to the foregoing involve judgements with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Any such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Report on Form 10-K will prove to be accurate. Restatement The following discussion and analysis is based upon consolidated financial statements which have been restated to reflect changes in accounting for Syntera and Uncommon Care. In the previously reported consolidated financial statements, the Company had accounted for its ownership of Syntera on the equity method because of management's belief that majority control of Syntera was temporary based on management's initial business plan. This plan anticipated that the Company's ownership would decrease to a minority position as physician practices were acquired over a relatively short period of time. Syntera was not able to acquire the number of practices originally anticipated, accordingly Syntera has been consolidated in these restated consolidated financial statements. The results of operations of Syntera are reflected as loss from discontinued operations as Syntera was acquired by an unrelated company effective August 31, 1999. In addition, in the previously reported consolidated financial statements, the Company had accounted for its ownership of Uncommon Care on the cost basis. The restated consolidated financial statements account for the investment in Uncommon Care on the equity method. The 13 change from the cost to the equity method is based on management's ability to exert significant influence over the operations of Uncommon Care. See Note 19 to the consolidated financial statements for a summary of changes made to the 1999 and 1998 consolidated financial statements as a result of the restatement. Results of Operations 1999 Compared to 1998 - --------------------- Revenues from continuing operations increased 14% in 1999 compared to 1998. Net earnings decreased 106% and diluted earnings per share decreased 110%. The reasons for these changes are described below. Financial Services Financial services revenues increased 9% in 1999 compared to 1998. The increase resulted from greater commissions earned at APS Financial, the broker/dealer division of Investment Services, resulting from greater volatility in world bond markets which caused clients to realign portfolios. This activity created more transactions and thus more commissions. Also contributing to the increase was a greater emphasis on internally generated market research and continued success at recruiting experienced, proven producers. Internal market research contributes to higher commissions by providing additional investment ideas to be marketed by the brokers to a greater number of customers. Finally, inventory losses, which lower revenues, were greater in 1998 than in 1999. Inventory losses were $329,000 in 1998 as compared to inventory gains of $8,000 in 1999. Financial services expenses increased 8% in 1999 compared to 1998. The large increase in transaction activity at APS Financial was primarily responsible for a 2% increase in sales commission expense, a 9% increase in support personnel costs, a 5% increase in transaction charges and a 16% increase in financial information services. Greater profits in 1999 also increased expenses under the incentive compensation plan by 56% over 1998. Personnel costs also increased in 1999 primarily as a result of incurring a full year of personnel costs at APS Asset Management, the portfolio management division of Investment Services. Only six months of personnel costs were incurred in 1998, as the subsidiary was formed in June, 1998. Results in this segment can vary from year to year. The broker/dealer, primarily a provider of fixed income securities, is subject to general market conditions as well as interest rates and is in an industry characterized by competition for top producing brokers. In an effort to add to the segment's overall profitability, and to add stability from year to year, the Company entered the asset management business in 1998. As a registered investment advisor, Asset Management, seeks to manage the portfolios of institutions and high net worth individuals. Asset Management is in a competitive business and was not profitable in 1999, incurring a loss of $169,000. The Company cannot predict when or if it will achieve profitability. 14 Insurance Services Insurance Services' revenues decreased 17% in 1999 compared to 1998. The primary reason for the decrease in 1999 was due to lower profit sharing. The insurance management fee contract between Insurance Services and APIE contains a provision to share in the profits of APIE. Due to an overall increase in competition in medical professional liability insurance in Texas as well as a continued trend of rising claims against the insureds, profits, and consequently, profit sharing, were lower in 1999. Insurance Services' expenses increased 10% in 1999 compared to 1998. The increase was primarily due to commission rates paid to sales agents which were 20% to 25% higher in 1999. In addition, business received through agents increased 18% in 1999 compared to 1998. Lastly, personnel costs increased 7% in 1999, primarily due to normal annual merit raises. Due to the profit sharing provision in Insurance Services most significant contract, results can vary from year to year. In the last five years under the contract, profit sharing has ranged from 7% to 31% of the segment's revenues. Consulting The Company began consolidating the earnings of APS Consulting in September, 1999. No comparison to prior year, therefore, is possible. Revenues of Eco-Systems (now APS Consulting) decreased 28% in 1999 compared to 1998 due primarily to the loss of a major client resulting from the uncertainty that arose with the breakup of Con-Eco. Expenses at Consulting decreased 4% in 1999 primarily as a result of fewer personnel. The uncertainty that arose with the breakup of Con-Eco caused some personnel to seek other employment opportunities. Real Estate Revenue decreased less than 1% compared to 1998. The decrease reflects a higher vacancy rate, partially offset by higher lease rates. The 4% increase in real estate expenses resulted from a 4% increase in property taxes due to higher real estate taxable values and a 177% ($7,000) increase in fees paid for building maintenance. Investment and Other The substantial rise in investment and other income was primarily due to gains from the exchanges of Prime Medical common stock for the Company's common stock. As part of a buy-back strategy, the Company exchanged 720,700 shares of Prime Medical common stock for 1,441,400 shares of the Company's common stock held by two mutual fund companies. The Company's common stock was then retired and gains on the Prime Medical stock totaling $1,635,000 were recorded. The gain was based on the difference between the Company's carrying value of the Prime stock and the market value of Company stock on the date of the transactions. Based on an independent evaluation, the market value of Company stock was discounted 6%, due to the large size of the transaction. 15 General and Administrative Expenses General and administrative expenses increased 87% over 1998. The increases resulted primarily from recognizing $1,293,000 of bad debt expense related to the write-off of the Con-Eco note receivable and from expenses totaling $386,000 related to the merger of Syntera with FemPartners. Partially offsetting these expense increases was lower legal fees in 1999. Legal fees in 1998 totaling $81,000 related to the Uncommon Care preferred stock investment. Interest Interest expense increased 330% over 1998 as a result of an increase in notes payable. Draws taken from the Company's line of credit with Bank of America to fund the Company's investments in Syntera and Uncommon Care resulted in an ending balance of $3,275,000 at December 31, 1999 compared to zero at December 31, 1998. Affiliates The Company has two affiliates accounted for on the equity basis. Prime Medical's operating income increased in 1999 but the Company recognized a smaller percentage (18% in 1998 vs. 14% in 1999) as a result of its exchange of Prime Medical shares to acquire shares of the Company's common stock. Even with this drop in ownership percentage, equity earnings from Prime Medical increased 23% in 1999. The Company, through its status as Prime Medical's largest shareholder and through its representation on Prime Medical's board, continues to have significant influence at Prime Medical and accounts for its investment using the equity method. The Company also reflects its investment in Uncommon Care on the equity method. Losses on this investment recorded by the Company in 1999 totaled approximately $1,914,000 versus approximately $860,000 in 1998. Such losses were expected during Uncommon Care's growth stage. The cost of developing new facilities and the time to bring them to full occupancy will continue to result in losses until the established operating base is large and profitable enough to cover the expenses of new development or until there is a slowdown in development of new facilities. The increased losses in 1999 were attributable to the ramp up of construction at Uncommon Care during 1999. 1998 Compared to 1997 - --------------------- Revenues from continuing operations increased 26% in 1998 compared to 1997. Net earnings decreased 61% and diluted earnings per share decreased 68%. The reasons for these changes are described below. 16 Investment Services Investment Services' revenues increased 73% in 1998 compared to 1997. The increase resulted from volatility in world bond markets which caused clients to realign portfolios. This activity created more transactions and thus more commissions. Also contributing to the increase was the full development of a second office, which opened in 1997. Revenues at this office in 1998 increased approximately 90% over 1997. Investment Services' expenses increased 71% from 1997. 94% of the increase was at APS Financial and was transaction related. The large increase in revenues resulted in a 92% increase in sales commission expense in 1998, a 44% increase in support personnel expense, a 37% increase in transaction charges and an 18% increase in financial information services expense. Greater profits in 1998 resulted in management incentive compensation increasing from $19,000 in 1997 to $351,000 in 1998. The remainder of the increase in expenses was the result of starting Asset Management in 1998. Payroll expenses were $82,000 in 1998 compared to zero in 1997. Partially offsetting these expenses was a 72% decrease in legal fees, the result of fewer suits brought to arbitration. Insurance Services Insurance Services' revenues decreased 10% in 1998 compared to 1997. The loss of one significant client by APIE caused most of the variance. The client purchased extended reporting period or "tail" coverage, which increased premiums in 1997. 1998 revenues were lower by both the standard premium and the extra tail premiums lost in 1997. The Company's premium-based management fee was also proportionately lower. The remainder of the decrease was related to profit sharing. The insurance management fee contract contains a provision to share in the profits of the managed insurance exchange. Due to the loss of the client mentioned above and an overall increase in competition in medical professional liability insurance in Texas, profits, and consequently, profit sharing, were lower in 1998. Insurance Services' expenses increased 8% in 1998 compared to 1997. The increase was primarily due to a 60% increase in commission expense and was due to greater utilization of commissioned outside sales agents, compared to salaried internal personnel in prior years. Partially offsetting this increase was a 21% decrease in salary expense in 1998, primarily due to a 32% decline in management incentive payments. 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 a 28% increase in property taxes due to higher real estate taxable values. 17 Investment and Other The decline in investment and other income was primarily due to lower interest income as a result of available cash being invested in Uncommon Care rather than in investments with a current cash return. General and Administrative Expenses General and administrative expenses increased 37% over 1997. The increases resulted primarily from recognizing $392,000 of bad debt expense related to the impairment of Con-Eco note receivable. Partially offsetting this increase was a $44,000 severance payment in 1997 that did not recur as well as a 15% decrease in management incentive expenses. Interest expense increased from $21,000 in 1997 to $59,000 in 1998. The increase reflects funds borrowed under the line of credit to fund the Company's investments Syntera and Uncommon Care. Affiliates The Company had two affiliates accounted for on the equity basis, Prime Medical and Uncommon Care. Prime Medical's operating income increased in 1998 but net earnings were reduced by non-recurring financing and development costs. This resulted in a 23% decrease in equity earnings compared to 1997. Uncommon Care, which was started in 1998, is in the development phase and reported a loss in 1998 of approximately $860,000. Prime had issued additional shares in 1996 reducing the Company's ownership from 21% to 16%. In 1998 Prime established a stock repurchase plan and reduced its shares outstanding, increasing the Company's ownership percentage to approximately 18%. Liquidity and Capital Resources Net working capital was $1,036,000 and $3,538,000 at December 31, 1999 and 1998, respectively. The decrease in the current year is due primarily to the sale of Syntera for shares of FemPartners in which assets classified as current in 1998, primarily patient receivables ($2,095,000), were replaced with the investment in FemPartners and classified as long-term assets. Historically, the Company has maintained a strong working capital position and, using that base, has been able to satisfy its operational and capital expenditure requirements with cash generated from its operating and investing activities. These same sources of funds have also allowed the Company to pursue investment and expansion opportunities consistent with its growth plans. In 1999, the Company supplemented these traditional sources of funds with short-term bank borrowings. Although it is uncertain that operating activities will provide positive cash flow in the year 2000, the Company has sufficient borrowing capacity as well as ample liquidity in its holdings of Prime Medical shares to meet its working capital requirements for the foreseeable future. 18 In 1998, the Company entered into a three year $10,000,000 revolving credit agreement with NationsBank of Texas, N.A. (subsequently acquired by Bank of America, N.A.). Funds advanced under the agreement bear interest at the prime rate less 1/4%, such interest to be payable quarterly. The Company will pledge shares of Prime Medical to the bank as funds are advanced under the line. In May 1999, as a result of the exchange of Prime Medical shares for common stock of the Company, the revolving credit agreement was amended to lower the total funds available to the Company from $10,000,000 to $7,500,000. Funds totaling $3,275,000 and $2,625,000 had been advanced as of December 31, 1999 and March 15, 2000, respectively. Capital expenditures for equipment were $413,000, $206,000, and $312,000, in 1999, 1998, and 1997, respectively. Capital expenditures were higher in 1999 due to purchases necessary to reach compliance with Year 2000 computer issues as well as to higher expenditures for improved office space and leasing fees. The Company expects capital expenditures in 2000 to be significantly less than 1999. The Company's ability to make scheduled payments of principal of, or to pay the interest on, or to refinance, its indebtedness, or to fund planned capital expenditures will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. Based upon the current level of operations and anticipated revenue growth, management believes that cash flow from operations and available cash, together with available borrowings under its bank line of credit, will be adequate to meet the Company's future liquidity needs for at least the next several years. However, there can be no assurance that the Company's business will generate sufficient cash flow from operations, that anticipated revenue growth and operating improvements will be realized or that future borrowings will be available under the line of credit in an amount sufficient to enable the Company to service its indebtedness or to fund its other liquidity needs. Inflation The operations of the Company are not significantly affected by inflation having no manufacturing operations, the Company is not required to make large investments in fixed assets. However, the rate of inflation will affect certain of the Company's expenses, such as employee compensation and benefits. New Accounting Pronouncements In April 1998, the AICPA issued Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities, which is effective for financial statements for fiscal years beginning after December 15, 1998. The SOP requires costs of start-up activities and organization costs to be expensed as incurred. No start- up costs were incurred by the Company or its affiliate during 1999. The Company does not have any significant capitalized start-up costs that would be required to be expensed in 2000. 19 ITEM 7 (a) Quantitative and Qualitative Disclosures about Market Risk The Company has some exposure to cash flow and fair value risk from changes in interest rates, which may affect its financial position, results of operation and cash flows. The Company does not use financial instruments for speculative purposes, but does maintain a trading account inventory to facilitate the business of its broker/dealer subsidiary. At the end of 1999 the inventory balance was $348,000. Historically, the Company has turned this inventory rapidly and has neither significant realized gains nor losses. The Company has notes receivable, in the form of lines of credit to related companies, which are at fixed rates ranging from 8% to 12%. Their fair value will increase and decrease inversely with interest rates. The Company has debt totaling $3,310,000, most of which was drawn on a $7,500,000 revolving line of credit with a floating interest rate. For each $1 million that the Company should borrow in 2000, a 1% increase in interest rate would result in a $10,000 annual increase in interest expense. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is contained in Appendix A attached hereto. Financial information and schedules relating to Prime Medical Services, Inc. are contained in Item 14(a) of the Annual Report on Form 10-K for the year ended December 31, 1999 of Prime Medical Services, Inc., which Item 14(a) is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is contained in the definitive proxy material of the Company to be filed in connection with its 2000 annual meeting of shareholders, except for the information regarding executive officers of the Company, which is presented below. The information required by this item contained in such definitive proxy material is incorporated herein by reference. As of March 15, 2000, the executive officers of the Company are as follows:
Name Age Position - ---- --- -------- Kenneth S. Shifrin 50 Chairman of the Board, President and Chief Executive Officer Duane K. Boyd, Jr. 55 Senior Vice President - Insurance William H. Hayes 52 Senior Vice President - Finance and Secretary George S. Conwill 43 Vice President - Investment Services Thomas R. Solimine 41 Controller
All officers serve until the next annual meeting of directors and until their successors are elected and qualified. Mr. Shifrin has been Chairman of the Board since March 1990. He has been President and Chief Executive Officer since March 1989 and was President and Chief Operating Officer from June 1987 to February 1989. He has been a Director of the Company since February 1987. From February 1985 until June 1987, Mr. Shifrin served as Senior Vice President - Finance and Treasurer. He has been Chairman of the Board of Prime Medical since October 1989. Mr. Shifrin has been a member of the Board of Directors of Uncommon Care since January 1998. Mr. Shifrin became a member of the Board of Directors of EarthSports.com in January, 2000 and is a member of the World Presidents Organization. Mr. Boyd has been Senior Vice President - Insurance since July 1991 and has also been President and Chief Operating Officer of FMI since July 1991. Mr. Boyd has been a Director of Uncommon Care since January 1998 and a Director of Grand Adventures Tour and Travel Publishing Corp. since July 1998. Mr. Boyd is a Certified Public Accountant and was with KPMG, LLP from 1974 until June 1991. He was a partner specializing in the insurance industry prior to joining the Company. 21 Mr. Hayes has been Senior Vice President - Finance since June 1995. Mr. Hayes was Vice President from June 1988 to June 1995 and was Controller from June 1985 to June 1988. He has been Secretary of the Company since February 1987 and Chief Financial Officer since June 1987. Mr. Hayes is a Certified Public Accountant. Mr. Conwill has been Vice President - Investment Services since June 1998. He has served as Chief Operating Officer of APS Financial since May 1995, and as President and Chief Operating Officer since March 1998. In May 1998 he assumed responsibility as President of APS Investment Services. Mr. Solimine has been Controller since June 1994. He has served as Secretary for APS Financial since February 1995. From July 1989 to June 1994, Mr. Solimine served as Manager of Accounting for the Company. There are no family relationships, as defined, between any of the above executive officers, and there is no arrangement or understanding between any of the above executive officers and any other person pursuant to which he was selected as an officer. Each of the above executive officers was elected by the Board of Directors to hold office until the next annual election of officers and until his successor is elected and qualified or until his earlier resignation or removal. The Board of Directors elects the officers in conjunction with each annual meeting of the stockholders. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is contained in the definitive proxy statement of the Company to be filed in connection with its 2000 annual meeting of shareholders, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is contained in the definitive proxy statement of the Company to be filed in connection with its 2000 annual meeting of shareholders, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is contained in the definitive proxy statement of the Company to be filed in connection with its 2000 annual meeting of shareholders, which information is incorporated herein by reference. 22 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The information required by this item is contained in Appendix A attached hereto. 2. Financial Statement Schedules All schedules are omitted because they are not applicable or not required or because the required information is not material or is presented in the Consolidated Financial Statements and related notes. (a) Reports on Form 8-K (c) Exhibits (1) 3.1 Restated Articles of Incorporation of the Company, as amended. (5) 3.2 Amended and Restated Bylaws of the Company. (5) 4.1 Specimen of Common Stock Certificate. (2) 4.2 Rights Agreement, dated as of August 15, 1999, between American Physicians Service Group, Inc. and American Stock Transfer & Trust Company which includes the form of Statement of Resolutions setting forth the terms of the Junior Participating Preferred Stock, Series A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C. (10) *10.1 American Physicians Service Group, Inc. Employees Stock Option Plan. (2) *10.2 Form of Employees Incentive Stock Option Agreement. (2) *10.3 Form of Employees Non-Qualified Stock Option Agreement. (2) *10.4 American Physicians Service Group, Inc. Directors Stock Option Plan. (2) *10.5 Form of Directors Stock Option Agreement. (2) *10.6 1995 Non-Employee Directors Stock Option Plan of American Physicians Service Group, Inc. (6) *10.7 Form of Non-Employee Directors Stock Option Agreement. (6) 23 *10.8 1995 Incentive and Non-Qualified Stock Option Plan of American Physicians Service Group, Inc. (6) *10.9 Form of Stock Option Agreement (ISO). (6) *10.10 Form of Stock Option Agreement (Non-Qualified). (6) 10.11 Management Agreement of Attorney-in-Fact, dated August 13, 1975, between FMI and American Physicians Insurance Exchange. (2) *10.14 Profit Sharing Plan and Trust, effective December 1, 1984, of the Company. (3) 10.17 Stock Purchase Agreement dated September 30, 1996 between the Company and Exsorbet Industries, Inc. (7) 10.18 Stock Put Agreement dated September 30, 1996 between the Company and Exsorbet Industries, Inc. (7) 10.19 Shareholder Rights Agreement dated September 30, 1996 between the Company and Exsorbet Industries, Inc. (7) 10.20 Warrant dated September 30, 1996 for shares of common stock issued to the Company by Exsorbet Industries, Inc. (7) 10.21 Contingent Warrant Agreement dated September 30, 1996 for shares of common stock issued to the Company by Exsorbet Industries, Inc. (7) 10.22 Option Agreements dated September 30, 1996 for shares of Exsorbet common stock issued to the Company by officers and directors of Exsorbet Industries, Inc. (7) 10.23 Agreement dated September 30, 1996 with Exsorbet Industries, Inc. related to options issued by officers and directors of Exsorbet Industries. (7) 10.24 Guaranty Agreements dated September 30, 1996 between the Company and subsidiaries of Exsorbet Industries, Inc. (7) 10.25 Promissory Note dated November 26, 1996 executed by Exsorbet Industries, Inc. and payable to the Company in the amount of $3,300,000. (7) 24 10.26 Stock Purchase Agreement dated October 1, 1997 between the Company, APS Practice Management, Inc., Michael Beck, John Hedrick, and et al. (8) 10.27 Bylaws of APS Practice Management, Inc. (8) 10.28 Amended and Restated Articles of Incorporation APS Practice Management, Inc. (8) 10.29 APS Practice Management, Inc., Certificate of Designation of Rights and Preferences Series A Serial Founder's Common Stock dated September 30, 1997. (8) 10.30 Resolutions to organizational matters concerning Syntera, Inc. dated October 1, 1997. (8) 10.31 Master Refinancing Agreement dated November 6, 1997 between the Company and Consolidated Eco-Systems, Inc. (8) 10.32 Promissory Note dated November 6, 1997 executed by Consolidated Eco-Systems, Inc. and payable to the Company in the amount of $3,788,580. (8) 10.33 Assignment and Security Agreement dated November 6, 1997 between the Company and Consolidated Eco-Systems, Inc. (8) 10.34 Security Agreement dated November 6, 1997 between the Company and Consolidated Eco-Systems, Inc. (8) 10.35 Share Exchange Agreements dated October 31, 1997 between the Company and Devin Garza, M.D., Robert Casanova, M.D. and Shelley Nielsen, M.D. (8) *10.36 First Amendment to 1995 Incentive and Non-Qualified Stock Option Plan of American Physicians Service Group, Inc. dated December 10, 1997. (8) *10.37 First Amendment to 1995 Non-Employee Director Stock Option Plan of American Physicians Service Group, Inc. dated December 10, 1997. (8) 10.38 Share Exchange Agreement dated February 16, 1998 between the Company and Michael T. Breen, M.D. (9) 10.39 Share Exchange Agreement dated April 1, 1998 between the Company and Antonio Cavazos, Jr., M.D. (9) 25 10.40 Share Exchange Agreement dated April 1, 1998 between the Company and Antonio Cavazos, III, M.D. (9) 10.41 Share Exchange Agreement dated May 18, 1998 between the Company and Jonathan B. Buten, M.D. (9) 10.42 Share Exchange Agreement dated June 30, 1998 between the Company and Gary R. Jones, M.D. (9) 10.43 Share Exchange Agreement dated July 31, 1998 between the Company and Joe R. Childress, M.D. (9) 10.44 Share Exchange Agreement dated August 1, 1998 between the Company and M. Reza Jafarnia, M.D. (9) 10.45 Share Exchange Agreement dated September 15, 1998 between the Company and Donald Columbus, M.D. (9) 10.46 Share Exchange Agreement dated December 31, 1998 between the Company and David L. Berry, M.D. (9) 10.47 Contribution and Stock Purchase Agreement dated January 1, 1998 between the Company, Additional Purchasers, Barton Acquisition, Inc., Barton House, Ltd., Barton House at Oakwell Farms, Ltd., Uncommon Care, Inc., George R. Bouchard, John Trevey, and Uncommon Partners, Ltd. (9) 10.48 Stock Transfer Restriction and Shareholders Agreement dated January 1, 1998 between the Company, Additional Purchasers, Barton Acquisition, Inc., Barton House, Ltd., Barton House at Oakwell Farms, Ltd., Uncommon Care, Inc., George R. Bouchard, John Trevey, and Uncommon Partners, Ltd. (9) 10.49 Loan Agreement dated January 1, 1998 between the Company and Barton Acquisition, Inc. (9) 10.50 Promissory Note (Line of Credit) dated January 1, 1998 between the Company and Barton Acquisition, Inc. in the amount of $2,400,000. (9) 10.51 Security Agreement dated January 1, 1998 between the Company and Barton Acquisition, Inc. (9) 26 10.52 Participation Agreement dated March 16, 1998 between the Company and Additional Purchasers referred to as Participants. (9) 10.53 Revolving Credit Loan Agreement dated February 10, 1998 between the Company and NationsBank of Texas, N.A. in an amount not to exceed $10,000,000. (9) 10.54 Revolving Credit Note dated February 10, 1998 between the Company and NationsBank of Texas, N.A. in the amount of $10,000,000. (9) 10.55 Pledge Agreement dated February 10, 1998 between the Company and NationsBank of Texas, N.A. (9) 10.56 Continuing and Unconditional Guaranty dated February 10, 1998 between the Company and NationsBank of Texas, N.A. (9) 10.57 Restructuring Agreement dated March 25, 1999 between the Company and Consolidated Eco-Systems, Inc., and all of the wholly or partially owned subsidiaries of Consolidated Eco- Systems, Inc., (except for 7-7, Inc.). (9) 10.58 Assignment and Security Agreement dated March 25, 1999 between the Company and Consolidated Eco-Systems, Inc. (9) 10.59 Security Agreement dated March 25, 1999 between the Company and Consolidated Eco-Systems, Inc. (9) 10.60 Security Agreement dated March 25, 1999 between the Company and Eco-Acquisition, Inc. (9) 10.61 Security Agreement dated March 25, 1999 between the Company and Exsorbet Technical Services, Inc. (9) 10.62 Security Agreement dated March 25, 1999 between the Company and KR Industrial Service of Alabama, Inc. (9) 10.63 Agreement of Plan of Merger dated August 31, 1999 between FemPartners, Inc. and Syntera HealthCare Corporation. 27 10.64 Share Exchange Agreement dated August 31, 1999 between the Company and David L. Berry, M.D. 10.65 Share Exchange Agreement dated August 31, 1999 between the Company and Michael T. Breen, M.D. 10.66 Share Exchange Agreement dated August 31, 1999 between the Company and Jonathan B. Buten, M.D. 10.67 Share Exchange Agreement dated August 31, 1999 between the Company and Robert Casanova, M.D. 10.68 Share Exchange Agreement dated August 31, 1999 between the Company and Antonio Cavazos, III, M.D. 10.69 Share Exchange Agreement dated August 31, 1999 between the Company and Joe R. Childress, M.D. 10.70 Share Exchange Agreement dated August 31, 1999 between the Company and Donald Columbus, M.D. 10.71 Share Exchange Agreement dated August 31, 1999 between the Company and Devin Garza, M.D. 10.72 Share Exchange Agreement dated August 31, 1999 between the Company and M. Reza Jafarnia, M.D. 10.73 Share Exchange Agreement dated August 31, 1999 between the Company and Gary L. Jones, M.D. 10.74 Share Exchange Agreement dated August 31, 1999 between the Company and Shelley Nielson, M.D. 10.75 Share Exchange Agreement dated August 31, 1999 between the Company and Lawrence M. Slocki, M.D. 10.76 Loan Agreement dated June 16, 1999 between APS Consulting, Inc. and APSC, Inc. 10.77 Promissory Note dated June 16, 1999 between APS Consulting, Inc. and APSC, Inc. 10.78 Security Agreement dated June 16, 1999 between APS Consulting, Inc. and APSC, Inc. 28 10.79 Subordination Agreement dated June 16, 1999 between the Company and APSC, Inc. 10.80 Convertible Promissory Note dated April 27, 1999 between the Company and Uncommon Care, Inc. 10.81 Replacement Convertible Promissory Note dated September 30, 1999 between the Company and Uncommon Care, Inc. 10.82 Liquidity Promissory Note dated September 30, 1999 between the Company and Uncommon Care, Inc. 10.83 Replacement Liquidity Note dated October 15, 1999 between the Company and Uncommon Care, Inc. 10.84 Co-Sale Rights Agreement dated August 31, 1999 between the Company and FemPartners, Inc. 10.85 Replacement Promissory Note dated August 31, 1999 between the Company and FemPartners, Inc. 10.86 Guaranty Agreement dated August 31, 1999 between the Company and FemPartners, Inc. 21.1 List of subsidiaries of the Company. 23.1 Independent Auditors Consent of KPMG, LLP. (*) Executive Compensation plans and arrangements. _________________ (1) The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, files reports, proxy statements and other information with the Commission. Reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. 29 Such reports, proxy statements and other information concerning the Company are also available for inspection at the offices of The NASDAQ National Market, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006. The Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at "http://www.sec.gov" and makes available the same documents through Disclosure, Inc. at 800-638-8241. (2) Filed as an Exhibit to the Registration Statement on Form S-1, Registration No. 2-85321, of the Company, and incorporated herein by reference. (3) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1984 and incorporated herein by reference. (4) Filed as an Exhibit to the Current Report on Form 8-K of the Company dated September 5, 1989 and incorporated herein by reference. (5) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1990 and incorporated herein by reference. (6) Filed as an Exhibit to the Annual Report on Form 10-KSB of the Company for the year ended December 31, 1995 and incorporated herein by reference. (7) Filed as an Exhibit to the Annual Report on Form 10-KSB of the Company for the year ended December 31, 1996 and incorporated herein by reference. (8) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and incorporated herein by reference. (9) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1998 and incorporated herein by reference. (10) Filed as an Exhibit to the Current Report on Form 8-K of the Company dated September 22, 1999 and incorporated by reference herein. (11) Filed herewith. 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN PHYSICIANS SERVICE GROUP, INC. By: /s/ Kenneth S. Shifrin --------------------------------- Kenneth S. Shifrin, Chairman of the Board and Chief Executive Officer Date: March 23, 2001 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 23, 2001 By: /s/ W. H. Hayes -------------------------------- W. H. Hayes Senior Vice President - Finance, Secretary and Chief Financial Officer (Principal Financial Officer) Date: March 23, 2001 By: /s/ Thomas R. Solimine -------------------------------- Thomas R. Solimine Controller (Principal Accounting Officer) Date: March 23, 2001 By: /s/ Robert L. Myer -------------------------------- Robert L. Myer, Director Date: March 23, 2001 By: /s/ William A. Searles -------------------------------- William A. Searles, Director Date: March 23, 2001 By: /s/ Brad A. Hummel -------------------------------- Brad A. Hummel, Director Date: March 23, 2001 31 APPENDIX A INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------
Page Independent Auditors' Report A-2 Financial Statements Consolidated Statements of Operations for the years ended December 31, 1999, 1998, and 1997 A-3 Consolidated Balance Sheets at December 31, 1999 and December 31, 1998 A-5 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 A-7 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 A-9 Notes to Consolidated Financial Statements A-10
A-1 Independent Auditors' Report ---------------------------- The Board of Directors and Shareholders American Physicians Service Group, Inc.: We have audited the accompanying consolidated financial statements of American Physicians Service Group, Inc. and subsidiaries ("Company") as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Physicians Service Group, Inc. and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. As discussed in note 19 to the consolidated financial statements, the accompanying consolidated financial statements as of December 31, 1999 and 1998 and for the years then ended, have been restated to reflect the Company's change in accounting for two investments. The Company changed its method of accounting for one investment from the equity method to the consolidated method of accounting. In addition, the Company changed its method of accounting for one investment from the cost method to the equity method of accounting. /s/ KPMG, LLP ------------------- Austin, Texas March 28, 2000 A-2 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Year Ended December 31, 1999 1998 1997 (Restated) (Restated) (Restated) ---------- ---------- ---------- Revenues: Financial services $10,835 $ 9,914 $ 5,726 Insurance services (Note 2) 4,683 5,655 6,287 Consulting 768 -- -- Real estate (Note 5) 710 713 704 Investments and other 1,755 121 348 ---------- ---------- ---------- Total revenues 18,751 16,403 13,065 Expenses: Financial services 9,764 9,039 5,299 Insurance services 4,558 4,129 3,819 Consulting 712 -- -- Real estate 548 527 503 General and administrative (Note 18) 3,470 1,851 1,352 Interest 254 59 21 ---------- ---------- ---------- Total expenses 19,306 15,605 10,994 ---------- ---------- ---------- Operating income (loss) (555) 798 2,071 Equity in earnings of unconsolidated affiliates (Note 13) 320 966 2,360 Gain on sale of portion of subsidiary -- -- 1,899 ---------- ---------- ---------- Earnings (loss) from continuing operations before income taxes and minority interest (235) 1,764 6,330 Income tax expense (benefit) (Note 9) (117) 571 2,341 Minority interest 5 (178) (175) ---------- ---------- ---------- Earnings (loss) from continuing operations (113) 1,015 3,814 Discontinued operations: (Note 12) Profit/(loss) from discontinued operations net of income tax expense/(benefit) of $30, ($19) and ($27) in 1999, 1998 and 1997, respectively 58 (36) (440) ---------- ---------- ---------- Loss on disposal of computer software segment, net of income tax benefit of $431 in 1997 -- -- (836) Net gain / (loss) from discontinued operations 58 (36) (1,276) ---------- ---------- ---------- Net earnings (loss) $ (55) $ 979 $ 2,538 ========== ========== ==========
See accompanying notes to consolidated financial statements A-3 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS, continued (In thousands, except per share data)
Year Ended December 31, 1999 1998 1997 (Restated) (Restated) (Restated) ---------- ---------- ---------- Earnings per common share: (Note 15) Basic: Earnings (loss) from continuing operations $(0.04) $ 0.24 $ 0.93 Discontinued operations 0.02 (0.01) (0.31) ---------- ---------- ---------- Net earnings (loss) $(0.02) $ 0.23 $ 0.62 ========== ========== ========== Diluted: Earnings (loss) from continuing operations $(0.04) $ 0.20 $ 0.90 Discontinued operations 0.02 (0.01) (0.30) ---------- ---------- ---------- Net earnings (loss) $(0.02) $ 0.19 $ 0.60 ========== ========== ========== Basic weighted average shares outstanding 3,142 4,163 4,106 ========== ========== ========== Diluted weighted average shares outstanding 3,168 4,692 4,241 ========== ========== ==========
See accompanying notes to consolidated financial statements A-4 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except share data)
December 31, ---------------------------------------- 1999 1998 (Restated) (Restated) ---------- ---------- ASSETS Current Assets: Cash and cash investments $ 2,275 $ 3,214 Cash - restricted (Note 16) 376 -- Trading account securities 348 641 Patient receivables -- 2,095 Management fees and other receivables (Note 2) 1,344 1,126 Notes receivable, net - current (Note 3) 270 196 Deposit with clearing broker 1,042 1,036 Receivable from clearing broker 147 106 Prepaid expenses and other 279 436 Income taxes receivable 200 -- Deferred income tax asset (Note 9) 633 1,279 ---------- ---------- Total current assets 6,914 10,129 Notes receivable, net - less current portion (Note 3) 2,066 2,962 Property and equipment (Note 5) 1,820 2,267 Investment in and advances to affiliates (Note 13) 14,274 15,054 Other investments (Note 17) 3,969 -- Management service contracts -- 4,557 Goodwill (Note 18) 573 -- Other assets 219 527 ---------- ---------- Total Assets $29,835 $35,496 ========== ==========
See accompanying notes to consolidated financial statements A-5 AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, continued (In thousands, except share data)
December 31, 1999 1998 (Restated) (Restated) ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ 1,242 $ 1,333 Payable to clearing broker 624 593 Notes payable - short term (Note 7) 12 -- Payable under loan participation agreements (Note 13) 259 259 Income taxes payable -- 292 Accrued incentive compensation 818 823 Accrued expenses and other liabilities (Note 6) 2,923 3,291 ---------- ---------- Total current liabilities 5,878 6,591 Net deferred income tax liability (Note 9) 1,699 2,182 Notes payable - long term (Note 7) 3,298 -- ---------- ---------- Total liabilities 10,875 8,773 Minority interest 48 2,687 Shareholders' Equity: Preferred stock, $1.00 par value, 1,000,000 shares authorized -- -- Common stock, $0.10 par value, 20,000,000; issued 2,667,233 at 12/31/99 and 4,160,083 at 12/31/98 278 416 Additional paid-in capital 5,549 5,481 Retained earnings 13,644 18,139 Less: Common stock of parent company held by subsidiary (559) -- ---------- ---------- Total shareholders' equity 18,912 24,036 ---------- ---------- Commitments and contingencies (Notes 5, 7, 8, 10, 11, 12, 16) Total Liabilities and Shareholders' Equity $29,835 $35,496 ========== ==========
See accompanying notes to consolidated financial statements A-6 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31, 1999 1998 1997 (Restated) (Restated) (Restated) ---------- ---------- ---------- Cash flows from operating activities: Cash received from customers $ 17,205 $ 16,017 $13,080 Cash paid to suppliers and employees (16,770) (14,390) (9,247) Change in trading account securities 6 (86) 250 Change in receivable from clearing broker 16 (447) (177) Interest paid (254) (59) (21) Income taxes paid (385) (439) (772) Interest and other investment proceeds 484 234 219 ---------- ---------- ---------- Net cash provided by operating activities 302 830 3,332 Cash flows from investing activities: Proceeds from the sale of property and equipment -- 13 55 Payments for purchase of property and equipment (413) (206) (312) Net decrease in marketable securities (100) -- 5 Proceeds from equity owners investment -- 259 -- Investment in and advances to affiliates (4,467) (3,408) (605) Proceeds from sale of insurance exchange -- -- 1,000 Proceeds from sale of 20% of Insurance Services -- -- 2,000 Proceeds received in acquisition 75 -- -- Proceeds from prior year disposition 40 -- -- Funds loaned to others -- -- (834) Collection of notes receivable 963 400 109 Discontinued Operations (578) (3,699) (486) Other (59) -- (82) ---------- ---------- ---------- Net cash used in investing activities (4,539) (6,641) 850 Cash flows from financing activities: Repayment of long term obligations -- -- (542) Proceeds from long-term obligations 3,825 8 -- Payment of long-term debt (577) -- -- Purchase/retire treasury stock (25) (147) (337) Exercise of stock options 75 75 316 Distribution to minority interest -- (300) -- Net cash (used in)/provided by financing activities 3,298 (364) (563) Net change in cash and cash equivalents ($939) ($6,175) $ 3,619 ---------- ---------- ---------- Cash and cash equivalents at beginning of period 3,214 9,389 5,770 ---------- ---------- ---------- Cash and cash equivalents at end of period $ 2,275 $3,214 $ 9,389 ========== ========== ==========
See accompanying notes to consolidated financial statements A-7 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, continued (In thousands)
Year Ended December 31, 1999 1998 1997 (Restated) (Restated) (Restated) ---------- ---------- ---------- Reconciliation of net earnings to net cash from operating activities: Net earnings $ (55) $ 979 $ 2,538 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 733 618 436 (Earnings)/loss from discontinued operations (211) (135) 546 Loss on disposal of discontinued operations -- -- 1,209 Minority interest in consolidated earnings/(loss) (5) 178 175 Undistributed earnings of affiliate (149) (966) (2,360) Provision for bad debts 2,023 361 -- Gain on exchange of stock (1,635) -- -- Stock warrants received (45) -- -- Gain on sale of fixed assets -- (1) -- Gain on sale or disposition of assets -- -- (2,032) Loss on sale of securities -- -- 41 Change in federal income tax payable (492) 66 876 Provision for deferred taxes 88 81 56 Change in trading securities 6 (86) 250 Change in receivable from clearing broker 16 (447) 177 Change in management fees & other receivables 209 (153) (26) Change in prepaids & other current assets 96 169 (191) Change in long term assets -- 52 -- Change in trade payables 91 9 90 Change in loan participations -- 259 -- Change in accrued expenses & other liabilities (368) (154) 1,547 ---------- ---------- ---------- Net cash from operating activities $ 302 $ 830 $ 3,332 ========== ========== ==========
Summary of non-cash transactions: During 1999, the Company acquired 100% of the outstanding stock of Eco-Systems, Inc. in a non-cash foreclosure transaction. The acquired assets and liabilities were as follows: Current assets increased by $ 588,000 Non-current assets increased by 149,000 Goodwill increased by 573,000 Current liabilities increased by 239,000 Non-current liabilities increased by 120,000 During 1999, the Company exchanged 721,000 shares of the Prime Medical stock, which it owned, for 1,441,000 shares of its own stock. The Company recognized a gain of $1,635,000 based on the difference between its carrying value of the Prime shares and the market value of its own shares on the exchange dates. Based on an independent evaluation, the Company shares were discounted by 6% due to the size of the transaction. The Company subsequently retired its own shares received in the exchange. During 1999, non-qualified employee stock options were exercised which resulted in a reduction of income tax payable and a corresponding addition to paid-in- capital of $20. During 1998, non-qualified employee stock options were exercised which resulted in a reduction of income tax payable and a corresponding addition to paid-in- capital of $25. During 1997, non-qualified employee stock options were exercised which resulted in a reduction of income tax payable and a corresponding addition to paid-in- capital of $194. See accompanying notes to consolidated financial statements. A-8 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended December 31, 1999, 1998, and 1997 (In thousands, except share data)
Common Stock Additional Unrealized of Parent Total Common Stock Paid-In Holding Company Held Retained Shareholders Shares Amount Capital Gains By Subsidiary Earnings Equity -------------------------------------------------------------------------------------- Balance January 1, 1997 4,049,195 $405 5,366 (11) -- 14,622 20,382 Net earnings -- -- -- -- -- 2,538 2,538 Unrealized loss on securities available for sale, net of tax -- -- -- 11 -- -- 11 Shares issued (Note 11) 164,666 16 300 -- -- -- 316 Shares repurchased & cancelled (53,000) (5) (332) -- -- -- (337) Income tax benefit of non-qualified option exercises -- -- 194 -- -- -- 194 -------------------------------------------------------------------------------------- Balance December 31, 1997 4,160,861 416 5,528 -- -- 17,160 23,104 Net earnings (restated) -- -- -- -- -- 979 979 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 (restated) 4,160,083 416 5,481 -- -- 18,139 24,036 Net earnings (restated) -- -- -- -- -- (55) (55) Shares issued (Note 11) 32,950 3 72 -- -- -- 75 Shares repurchased & cancelled (1,447,800) (141) (24) -- -- (4,716) (4,881) Reclassification to common stock of parent company held by subsidiary (restated) (78,000) -- -- -- (559) 276 (283) Income tax benefit of non-qualified option exercises -- -- 20 -- -- -- 20 -------------------------------------------------------------------------------------- Balance December 31,1999 (restated) 2,667,233 $278 5,549 -- (559) 13,644 18,912 ======================================================================================
See accompanying notes to consolidated financial statements. A-9 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (1) Summary of Significant Accounting Policies (a) General These consolidated financial statements have been restated. See footnote 19 for additional information. 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. Through a subsidiary, Syntera HealthCare Corporation ("Syntera"), the Company also provided medical practice management services to various OB/GYN practices in Texas. Syntera was sold on August 31, 1999. 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 55% of total revenues and insurance services generated 34%. American Physicians Services Group, Inc. has two affiliates; Prime Medical Services, Inc., of which it owns approximately 14%, and Uncommon Care, Inc. ("Uncommon Care") of which it owns convertible preferred stock equivalent to a 34% ownership on a fully converted basis. Prime Medical is the country's largest provider of lithotripsy (non-invasive kidney stone fracturing) services. Uncommon Care develops and operates Alzheimers' care facilities. (b) Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) Principles of Consolidation The consolidated financial statements include the accounts of American Physicians Service Group, Inc. and of subsidiary companies more than 50% owned ("Company"). Investments in affiliated companies and other entities in which the Company's investment is less than 50% of the common shares outstanding and where the Company exerts significant influence are accounted for by the equity method. Investments in other entities in which the Company's investment is less than 20%, and in which it does not have the ability to exercise significant influence over operating and financial policies, are accounted for by the cost method. All significant intercompany transactions and balances have been eliminated from the accompanying consolidated financial statements. A-10 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (1) Summary of Significant Accounting Policies, continued (d) Revenue Recognition Investment services revenues related to securities transactions are recognized on a trade date basis. Asset management revenues are recognized monthly based on the amount of funds under management. 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. Expense reimbursements are recorded as a reduction in expenses. Consulting revenues result from the work of scientists and engineers in the areas of remedial investigations, remediation engineering, air and water quality analysis, regulatory compliance, solid waste engineering, litigation support/ expert testimony and industrial hygiene and safety. Substantially all of the projects in these areas are undertaken on a time and expenses basis. Clients are billed, and revenue is recognized, monthly based on hours worked and expenses incurred toward completing the assignments. 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. Physician practice management revenue consists of management fees which are contractually agreed upon and are paid monthly. Investment revenues are recognized as accrued on highly rated investments and as received on lesser grades. (e) Marketable Securities The Company's investments in debt and equity securities are classified in three categories and accounted for as follows: Classification Accounting -------------- ---------- Held to maturity Amortized cost Trading securities Fair value, unrealized gains and losses included in earnings Available for sale Fair value, unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of applicable income taxes A-11 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (1) Summary of Significant Accounting Policies, continued The Company has included its marketable securities, held as inventory at its broker/dealer, in the trading securities category. (f) Property and Equipment Property and equipment are stated at cost. Property and equipment and rental property are depreciated using the straight-line method over the estimated useful lives of the respective assets (3 to 40 years). (g) Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized if there is a difference between the fair value and carrying value of the asset. Investments in the common stock of companies not accounted for using the equity method and for which there is no readily determinable fair value will be evaluated for impairment in the event of a material change in the underlying business. Such evaluation takes into consideration the Company's intent and time frame to hold or to dispose of the investment and takes into consideration available information, including recent transactions in the stock, expected changes in the operations or cash flows of the investee, or a combination of these and other factors. (h) Goodwill Goodwill represents the excess of consideration paid over the net assets acquired in purchase business combinations. It is amortized using the straight-line method over a period of ten years. (i) Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (j) Earnings Per Share Basic earnings per share is based on the weighted average shares outstanding without any diluted effects considered. Diluted earnings per share reflect dilution from all contingently issuable shares, including options. A-12 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (1) Summary of Significant Accounting Policies, continued (k) Cash and Cash Equivalents Cash and cash equivalents include cash and highly liquid investments with an original maturity of 90 days or less. (l) Notes Receivable Notes receivable are recorded at cost, less allowances for doubtful accounts when deemed necessary. Management, considering current information and events regarding the borrowers ability to repay their obligations, considers a note to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the note agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the note's effective interest rate. Impairment losses are included in the allowance for doubtful accounts through a charge to bad debt expense. The present value of the impaired loan will change with the passage of time and may change because of revised estimates of cash flows or timing of cash flows. Such value changes shall be reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that would be reported. No interest income is accrued on impaired loans. Cash receipts on impaired loans are recorded as reductions of the principal amount. (m) Stock-Based Compensation The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"), but applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its stock option plans. (n) Reclassification Certain reclassifications have been made to amounts presented in previous years to be consistent with the 1999 presentation. (o) Other Comprehensive Income For the three years ended December 31, 1999, the Company did not have any significant other comprehensive income. A-13 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (2) Management Fees and Other Receivables Management fees and other receivables consist of the following:
December 31, 1999 1998 ---- ---- Management fees receivable $304,000 $501,000 Trade accounts receivable 778,000 173,000 Less: allowance for doubtful accounts (20,000) (8,000) Accrued interest receivable 162,000 21,000 Other receivables, physician practice management -- 158,000 Other receivables 120,000 281,000 ---------- ---------- $1,344,000 $1,126,000 ========== ==========
The Company earns management fees by providing management services to American Physicians Insurance Exchange ("APIE") under the direction of APIE's Board of Directors. Subject to the direction of this Board, FMI sells and issues policies, investigates, settles and defends claims, and otherwise manages APIE's affairs. The Company has previously managed other insurance companies. The Company earned management fees and other related income of $4,683,000, $5,655,000 and $6,287,000 and received expense reimbursements of $1,454,000, $1,420,000 and $664,000 for the years ended December 31, 1999, 1998 and 1997, respectively, related to these agreements. A-14 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (3) Notes Receivable Notes receivable consist of the following:
December 31, ------------ 1999 1998 ---- ---- Reagan Publishing Company This unsecured note had an original rate of 7% and a maturity of December 31, 1997. The borrower defaulted in 1998 and the Company litigated. The Company collected $41,000 as payment in full during 1999. -- $ 156,000 Consolidated Eco-Systems, Inc. This note originated on November 26, 1996 in the amount of $3,300,000. The Company declared the note in default in 1998 and negotiated multiple restructuring agreements thereafter. In 1999, the Company foreclosed 100% of the assets of Eco-Systems (See note 18). -- 3,709,000 FemPartners, Inc. (Formerly Syntera HealthCare Corporation) Upon the merger of Syntera HealthCare Corporation with FemPartners, APS restructured the line of credit, which now bears interest at 8%. Payments are interest only, paid quarterly through November 30, 2001. Quarterly combined principal and interest payments begin December 1, 2001 and continue through September 1, 2004, at which time the total outstanding balance is due. The maturity date of this note can be accelerated if FemPartners conducts an initial public offering or other public sale of its common stock. If such occurs, the note shall mature and become due and payable the latter of September 1, 2002 or the 5th business day after the date of such initial public offering or other public sale. 2,193,000 -- Employees Three employees have loans from the Company as employment inducements, totaling $200,000. The notes are non-interest bearing and are being forgiven and amortized monthly over three to four year periods. The notes are due and payable should the employees terminate employment. A fourth employee note in the amount of $50,000 was issued in December 1999 and paid in full on March 2, 2000. In addition, loans totaling $86,000 were granted to a key employee for advanced education fees. $20,000 is due June 30, 2000 while an additional $32,850 payment is due at June 30, 2003 and 2004, respectively. The latter two notes are forgivable in the amount of approximately $14,000 on each December 31st that the employee is employed by the Company beginning in 2000 and continuing through 2004. 336,000 437,000 ---------- ----------- 2,529,000 4,302,000 Less allowance for doubtful accounts (193,000) (1,144,000) ---------- ----------- 2,336,000 3,158,000 Less current portion 270,000 196,000 ---------- ----------- Long term portion $2,066,000 $ 2,962,000 ========== ===========
A-15 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (3) Notes Receivable, continued On September 30, 1996, the Company invested $3,300,000 in common stock of Exsorbet Industries, Inc. ("Exsorbet") (NASDAQ:EXSO) with a put option. Exsorbet was a diversified environmental and technical services company. On November 26, 1996, the Company exercised its put in exchange for a $3,300,000 note receivable from Exsorbet. The note was secured by the shares that were subject to the put option plus all the stock and substantially all of the assets of Eco Acquisition, Inc. ("Eco-Systems"), a wholly owned subsidiary of Exsorbet. Subsequently, Exsorbet became known as Consolidated Eco-Systems, Inc. ("Con-Eco"). Prior to the foreclosure discussed below, this note had been restructured in November, 1997 and again in March, 1999. On June 17, 1998 the Company filed suit against Con-Eco, and its directors and officers alleging breach of contract, negligent misrepresentation and conspiracy. In February 1999 the Company settled the litigation related to the directors and officers of Con-Eco. The Company recovered $950,000 for the full release of all claims against the directors of Con-Eco. This payment was applied against the outstanding debt. In April, 1999, the Company's wholly owned subsidiary, APS Consulting ("APS Consulting"), foreclosed on the stock of Eco-Systems. Prior to the foreclosure, the Company had entered into a settlement agreement with Con- Eco to resolve the litigation described above. In connection with this agreement, Con-Eco had the right to purchase back the business of Eco- Systems for a nominal amount if it complied with the following terms: (1) Con-Eco would pay American Physicians $375,000 within 18 months. (2) Con-Eco could not declare bankruptcy during the 18 month period. (3) Con-Eco would pay to American Physicians' 75% of the proceeds from any litigation recovery against an investment banking firm. (4) Con-Eco would pay the balance of the restructured $2.5 million note with interest on the due date of the note. American Physicians' management expected that its ownership of Eco-Systems stock would be temporary based on management's assessment of Con-Eco's net worth, cash flow, and prospects for securing additional financing. Management believed that Con-Eco would meet the revised terms and reacquire the Eco-Systems stock for a nominal payment. Accordingly, the Company did not initially consolidate the operations of APS Consulting. In addition, the Company dismissed its lawsuit against Con-Eco, but retained the right to reinstitute the litigation at a later date. Subsequently, on September 1, 1999, the Company concluded that it was not probable that Con-Eco would exercise its option to reacquire the stock and began consolidating APS Consulting (see Note 18). The acquisition was recorded using the purchase method of accounting. Prior to the foreclosure described above, American Physicians wrote off to bad debt expense a total of $1,293,000 in 1999 related to the restructured Con-Eco note bringing the total write off related to this note since inception to $2,174,000. A-16 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (3) Notes Receivable, continued At December 31, 1998, the Company's note receivable from Consolidated Eco- Systems, Inc. was in excess of 10% of stockholder's equity and represented a concentration of credit risk. No interest income had been recognized by the Company as of December 31, 1998. Following a renegotiation of the debt in November 1997, Con-Eco defaulted on the note and the Company took a $488,000 charge to earnings. Con-Eco's stock was delisted during 1998 and the Company considered the loan to be impaired. At December 31, 1998 this note totaled $3,709,000 with a valuation allowance allocated to this note of $880,000 and at December 31, 1997 it totaled $3,788,000 with a valuation allowance of $488,000. A reconciliation of the allowance for impairment of all notes receivable follows:
Year Ended December 31, 1999 1998 1997 C> Balance at the beginning of the period $ 1,144,000 $ 653,000 $ -- Amounts charged off (2,437,000) (100,000) (76,000) Additional provision 1,486,000 591,000 729,000 ----------- ---------- -------- Balance at the end of period $ 193,000 $1,144,000 $653,000 =========== ========== ========
A-17 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (4) Fair Value of Financial Instruments Statements of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" (Statement 107), requires that the Company disclose estimated fair values for its financial instruments as of December 31, 1999 and 1998. For financial instruments the fair value equals the carrying value as presented in the consolidated balance sheets. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments. Cash and Cash Equivalents ------------------------- The carrying amounts for cash and cash equivalents approximate fair value because they mature in less than 90 days and do not present unanticipated credit concerns. Trading Account Securities -------------------------- The fair value of securities owned is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. Trading account securities are carried at market value. Management Fees and Other Receivables ------------------------------------- The fair value of these receivables approximates the carrying value due to their short-term nature and historical collectibility. Notes Receivable ---------------- The fair value of notes has been determined using discounted cash flows based on management's estimate of current interest rates for notes of similar credit quality. On notes determined to be impaired, the notes have been discounted based on the original interest rate of the note. Receivable from Clearing Broker ------------------------------- The carrying amounts approximate fair value because the funds can be withdrawn on demand and there is no unanticipated credit concern. A-18 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (4) Fair Value of Financial Instruments, continued Other Investments The fair value has been determined using discounted cash flows based on estimates of future earnings. Accounts Payable ---------------- The fair value of the payable approximates carrying value due to the short- term nature of the obligation. Limitations ----------- Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include the deferred tax assets, property and equipment, investment in affiliates, other assets, accrued expenses and income tax payable. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the aforementioned estimates. (5) Property and Equipment Property and equipment consists of the following:
December 31, ------------------------------------- 1999 1998 ---------- ---------- Office condominium $1,574,000 $1,796,000 Furniture and equipment 2,582,000 3,801,000 ---------- ---------- 4,156,000 5,597,000 Accumulated depreciation and amortization 2,336,000 3,330,000 ---------- ---------- $1,820,000 $2,267,000 ========== ==========
A-19 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (5) Property and Equipment, continued The Company owns approximately 53,000 square feet in the condominium building in which its principal offices are located. The Company, its subsidiaries and affiliate occupy approximately 31,000 square feet and the remainder is leased to third parties. Rental income received from third parties during the years ended December 31, 1999, 1998 and 1997 totaled approximately $255,000, $355,000 and $385,000 respectively. Future minimum lease payments to be received under the terms of the office condominium leases are as follows: 2000 - $369,000; 2001 -$327,000; 2002 - $238,000; 2003 - $153,000; and 2004 - $78,000. (6) Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consists of the following:
1999 1998 ----------- ----------- APS Systems disposition costs (discontinued operations) $ 10,000 $ 1,026,000 Taxes payable - other 160,000 115,000 Deferred income 528,000 740,000 Contractual/legal claims 1,409,000 1,085,000 Vacation payable 116,000 134,000 Funds held for others 402,000 20,000 Physician practice management -- 171,000 Other 298,000 -- ----------- ----------- $ 2,923,000 $ 3,291,000 =========== ===========
(7) Notes Payable The Company has a $7,500,000 line of credit with Bank of America, N. A. The Company has pledged shares of Prime Medical to the bank as funds are advanced under the line. Funds advanced under the agreement were $3,275,000 at December 31, 1999. Funds advanced under the agreement will bear interest at the prime rate less 1/4%. The unused portion of the line carries a 1/4% commitment fee. All interest is to be paid quarterly. Any outstanding principal is to be paid at maturity in February 2001. In order to receive advances under the line, the Company must maintain certain levels of liquidity and net worth. In addition, the market value of the collateral must exceed a certain multiple of the funds advanced under the line and there must be no occurrence which would have a material adverse effect on the Company's ability to meet its obligations to the bank. As of December 31, 1999, the Company is in compliance with all covenants of its loan agreements. A-20 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (8) Commitments and Contingencies In connection with the development of Syntera HealthCare Corporation, the Company entered into Share Exchange Agreements ("Agreements") with the physician shareholders of Syntera. The Agreements provide that the Syntera shareholders may, at their option, exchange their shares for a fixed dollar amount of the Company's common stock in the event that the Syntera shares are not publicly traded by certain dates. The Company has the option of purchasing any or all of the shares at the weighted average dollar amount of $5.26 per share rather than exchanging for its common stock. As a result of Syntera's merger with FemPartners, Inc. in 1999, the Syntera shares were converted to FemPartners shares, with such shares retaining all of the conversion features. These shares begin to become eligible to exchange in the first quarter of 2000 and continue to become eligible into the first quarter of 2002. Most of the agreements were modified at the time of merger to also allow cash or the Company's shares of Prime to be used in the exchange, at the Company's option. The Company does not presently intend to exchange any shares of Prime Medical. The exchanges, whether for cash, or the shares of American Physicians will increase the Company's investment in FemPartners by the amount of the cash or the fair value of the stock consideration, as indicated by NASDAQ Stock Market prices on the exchange dates. Exchanges for the common stock of American Physicians will be accounted for as a re-issuance of treasury stock. Should all eligible FemPartners shares (248,000) be presented for exchange and the Company elected to purchase the shares for cash, the amount would be approximately $3,900,000. If the Company elected to issue its common shares, the quantity would be determined by the market price of its shares at the time of the exchange. For example, at the closing price at December 31, 1999 ($3.688) approximately 1,100,000 shares would be issued in the exchange. Since it is unknown how many, if any, of the shares will be presented for exchange or what the value of privately-held FemPartners shares will be in the future, the Company has made no provision related to potential exchanges in its financial statements. The Company will record the effect, if any, of share exchanges in the quarter in which it is notified by FemPartners shareholders of their intent to exchange. The Company has extended three lines of credit to Uncommon Care, Inc. The first is to a maximum amount of $2,400,000. The note is interest only at 10%, payable quarterly. The note matures June 30, 2005, at which time all principal and accrued but unpaid interest are due. The second is to a maximum of $1,250,000 with interest at 12%, payable semi-annually. The note matures April 30, 2000, but may be extended until November 30, 2001. The maturity may be accelerated by Uncommon Care securing certain equity capital. The third is to a maximum of $1,200,000 with interest at 10%, payable semi-annually. The note matures the earlier of September 30, 2001, or upon Uncommon Care securing certain equity capital. Advances under the lines are subject to Uncommon Care meeting certain qualifications at the date of each advance request. A-21 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (8) Commitments and Contingencies, continued The Company has guaranteed the future yield of a customer's investment portfolio beginning in January 1995 for up to a five and one-half year period. In 1995, the Company established a liability and charged to expense $1,200,000 for potential losses resulting from this guarantee. This allowance was adjusted to $1,040,000 in 1996, $1,084,000 in 1998, and $1,000,000 in 1999 as the expected value of the portfolio changed. The initial expense and subsequent adjustments were estimated at each reporting period by comparing the current market value of the portfolio, the expected yield over the remaining time, and the known required value at the settlement date. Management believes that the Company's financial statements adequately provide for any loss that might occur under this agreement; however, as defined in AICPA Statement of Position 94-6, it is reasonably possible that the Company's estimate of loss could change over the remaining term of the agreement. Management is unable to determine the range of potential adjustment since it is based on securities markets, which are beyond its ability to control. The Company had guaranteed a loan in the amount of $85,000 for one of its directors at December 31, 1999. The guarantee was collateralized by securities the Company believed sufficient to cover its potential liability. The loan was paid in full and the Company was released from its guarantee on March 5, 2000. Rent expense under all operating leases for the years ended December 31, 1999, 1998 and 1997 was $84,000, $44,000 and $89,000 respectively. Future minimum payments for leases which extend for more than one year were $334,000 at December 31, 1999. The Company is involved in various claims and legal actions that have arisen in the ordinary course of business. Management believes that any liabilities arising from these actions will not have a significant adverse effect on the financial condition of the Company. (9) Income Taxes Income tax expense (benefit) consists of the following:
Year Ended December 31, ------------------------------------------------------ 1999 1998 1997 ---- ---- ---- Continuing Operations Federal Current $(245,000) $332,000 $1,394,000 Deferred 88,000 107,000 777,000 State 40,000 132,000 170,000 Discontinued Operations 153,000 171,000 (479,000) --------- -------- ---------- $ 36,000 $742,000 $1,862,000 ========= ======== ==========
A reconciliation of expected income tax expense (computed by applying the United States statutory income tax rate of 34% to earnings before income taxes) to total tax expense in the accompanying consolidated statements of earnings follows: A-22 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (9) Income Taxes, continued
Year Ended December 31, -------------------------------------------------- 1999 1998 1997 ---- ---- ---- Expected federal income tax expense (benefit) $ (6,000) $585,000 $1,556,000 State taxes 40,000 132,000 170,000 Other, net 2,000 25,000 136,000 --------- -------- ---------- $ 36,000 $742,000 $1,862,000 ========= ======== ==========
The tax effect of temporary differences that gives rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 are presented below:
Year Ended December 31, ---------------------------- 1999 1998 ---- ---- Deferred tax assets: Net operating loss carryforwards $ 172,000 $ 186,000 Accrued expenses 537,000 774,000 Accounts receivable, principally due to allowance for doubtful accounts 96,000 94,000 Deferred income (26,000) 378,000 Market value allowance 2,000 17,000 Investment in Uncommon Care due to use of equity method for financial reporting 1,031,000 292,000 Other 56,000 48,000 ------------ ------------ Total gross deferred tax assets 1,868,000 1,789,000 Less valuation allowance (172,000) (186,000) ------------ ------------ Net deferred tax assets 1,696,000 1,603,000 ------------ ------------ Deferred tax liabilities: Investment in Prime Medical Services, Inc. due to use of equity method for financial reporting (2,730,000) (2,474,000) Capitalized expenses, principally due to deductibility for tax purposes (32,000) (32,000) ------------ ------------ Total gross deferred tax liabilities (2,762,000) (2,506,000) ------------ ------------ Net deferred tax liability $ (1,066,000) $ (903,000) ============ ============
A-23 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (9) Income Taxes, continued The net change in the total valuation allowance for the years ended December 31, 1999 and 1998 was a decrease of $14,000 and $2,000, respectively. The management believes that the valuation allowance at December 31, 1999 is necessary due to uncertainties regarding the use of the net operating loss carryforwards from separate return years of a subsidiary acquired in 1997. At December 31, 1999, net operating loss carryforwards available to reduce future taxable income amounted to approximately $505,000 and expire in 2011 and 2012. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asses will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. 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 that the Company will realize the benefits of these deductible differences net of existing valuation allowances at December 31, 1999 and 1998. (10) Employee Benefit Plans The Company has an employee benefit plan qualifying under Section 401(k) of the Internal Revenue Code for all eligible employees. Employees become eligible upon meeting certain service and age requirements. Employees may defer up to 15% (not to exceed $10,000 in 1999) of their annual compensation under the plan. The Company, at its discretion, may contribute up to 200% of the employees' deferred amount. For the years ended December 31, 1999, 1998 and 1997, contributions by the Company aggregated, $121,000, $126,000 and $92,000, respectively. (11) Stock Options The Company has adopted, with shareholder approval, the "1995 Non-Employee Directors Stock Option Plan" ("Directors Plan") and the "1995 Incentive and Non-Qualified Stock Option Plan" ("Incentive Plan"). The Directors Plan provides for the issuance of up to 200,000 shares of common stock to non-employee directors who serve on the Compensation Committee. The Directors Plan is inactive and it is assumed the remaining 50,000 shares will not be granted. The Incentive Plan, as amended with shareholder approval in 1998, provides for the issuance of up to 1,200,000 share of common stock to directors and key employees. A-24 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (11) Stock Options, continued The exercise price for each non-qualified option share is determined by the Compensation Committee of the Board of Directors ("the Committee"). The exercise price of a qualified incentive stock option has to be at least 100% of the fair market value of such shares on the date of grant of the option. Under the Plans, option grants are limited to a maximum of ten-year terms; however, the Committee has issued all currently outstanding grants with five-year terms. The Committee also determines vesting for each option grant and all outstanding options vest in three approximately equal annual installments beginning one year from the date of grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"), but applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its stock option plans. No cost from stock-based compensation awards was recognized in 1999, 1998 or 1997. If the Company had elected to recognize compensation cost of options granted based on the fair value at the grant dates, consistent with Statement 123, net income and earnings per share would have changed to the pro forma amounts indicated below:
Year Ended December 31, ------------------------------------------------------ 1999 1998 1997 ---------------- ------------ ------------ Pro forma net earnings (loss) $(609,000) $244,000 $1,989,000 Pro forma earnings (loss) per share - basic (0.19) 0.06 0.48 - diluted (0.19) 0.04 0.46
The fair value of the options used to compute the pro forma amounts is estimated using the Black Scholes option-pricing model with the following assumptions:
1999 1998 1997 ------ ------ ----- Risk-free interest rate 5.60% 5.21% 6.16% Expected holding period 3.90 years 3.90 years 3.90 years Expected volatility .689 .401 .480 Expected dividend yield -0- -0- -0-
Presented below is a summary of the stock options held by the Company's employees and directors and the related transactions for the years ended December 31, 1999, 1998 and 1997. Remaining options outstanding from the Company's previous 1983 plans are included. A-25 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (11) Stock Options, continued
Year Ended December 31, ------------------------------------------------------------------------------------------ 1999 1998 1997 ------------------------------ ----------------------- ----------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Balance at January 1 1,345,000 6.36 774,000 $6.60 651,000 $5.64 Options granted 215,000 4.01 597,000 5.92 293,000 9.32 Options exercised 33,000 2.28 26,000 2.90 165,000 1.92 Options forfeited/expired 245,000 6.30 -- -- 5,000 7.13 Balance at December 31 1,282,000 6.09 1,345,000 6.36 774,000 6.60 ========= ==== ========= ===== ======= ===== Options exercisable 668,000 6.72 460,000 $6.44 244,000 $5.84 ========= ==== ========= ===== ======= =====
The weighted average fair value of Company stock options, calculated using the Black Scholes option pricing model, granted during the years ended December 31, 1999, 1998 and 1997 is $2.23, $2.33 and $2.68 per option, respectively. The following table summarizes the Company's options outstanding and exercisable options at December 31, 1999:
Stock Options Stock Options Exercisable Outstanding -------------------------------------------------------------------------------------- Average Weighted Weighted Remaining Average Average Range of Contractual Exercise Exercise Exercise Prices Shares Life Price Shares Price --------------- ---------- ------------ -------- ----------- -------- $3.25 to $5.00 487,000 3.7 years $ 3.93 170,000 $ 3.76 $5.01 to $7.75 617,000 2.8 years $ 6.71 322,000 $ 6.57 $7.76 to $10.50 178,000 1.5 years $ 9.85 176,000 $ 9.87 --------- ------- Total 1,282,000 668,000 ========= =======
(12) Discontinued Operations The Company, through its majority owned subsidiary, Syntera, had previously managed medical practices. The Company initially invested in Syntera in late 1997. Syntera was acquired by FemPartners in August 1999 and the results of operations have been restated to reflect the operations of Syntera as discontinued operations in the accompanying consolidated financial statements. A-26 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (12) Discontinued Operations, continued Assets and liabilities of the discontinued medical practice management segment as of December 31, 1998 are reflected on a consolidated basis in the accompanying consolidated balance sheet and are summarized as follows (in thousands): Patient receivables $ 2,095 Other receivables 158 Prepaid and other current assets 97 Fixed assets, net of depreciation 614 Management service contracts 4,557 Other assets 261 Trade accounts payable (423) Accrued expenses (171) Minority interest (2,634) --------- Net assets $ 4,554 ========= Summary operating data for Syntera is as follows:
Year Ended December 31, ------------------------------------------------------ 1999 1998 1997 ------------ -------- ---------- Medical Practice Management Revenues $3,481 $2,962 $189 Medical Practice Management Expenses (3,824) (3,581) (697) Other Income 14 82 48 Minority Interest 92 170 114 Net Loss (237) (367) (346)
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. A-27 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (12) Discontinued Operations, continued The Company originally assumed that all clients would have migrated to other software products by the end of 1999 and reflected the expected financial impact of discontinuing this segment on that date in the 1997 financial statements. The measurement date for determining expected losses from the disposal was May 15, 1997. Support for all clients was terminated as of December 31, 1999 including two clients whose original support contracts extended beyond 1999. These clients have successfully migrated to other software platforms and have signed documents releasing the Company of any support obligations beyond December 31, 1999. Net assets/(liabilities) of the discontinued computer systems and software segment as of December 31, 1999 consisted of the following: Cash and cash investments $ 31,000 Trade accounts receivable 9,000 Intercompany receivables 1,000 Accrued expenses (16,000) --------- Net assets $ 25,000 ========= Summary operating data for the year ended December 31, 1999 is as follows (in thousands): Total revenue $ 266 Cost of sales (12) Other operating expenses (296) (Allowance) reversal of allowance for future client support 492 Income taxes (153) -------- Net income $ 297 ======== (13) Investment in Affiliates On October 12, 1989, the Company purchased 3,540,000 shares (42%) of the common stock of Prime Medical Services, Inc. ("Prime Medical"). Members of the Company's Board currently serve as two of the seven directors of Prime Medical, and Mr. Hummel, executive vice president and chief operating officer of Prime Medical, is a member of the Company's Board of Directors. Prime Medical provides non-medical management services to lithotripsy centers. In conjunction with the acquisition of additional lithotripsy operations in June 1992, October 1993, and May 1996, the outstanding shares of Prime Medical increased. These increases, the sale of Prime Medical shares owned by the Company under an option agreement, the repurchase by Prime Medical of its own shares, and the exchange of Prime Medical shares for common stock of the Company, in the aggregate, have reduced the Company's ownership to 14% of the outstanding common stock of Prime Medical. A-28 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (13) Investment in Affiliates, continued The Company's investment in Prime Medical is accounted for using the equity method, as the Company continues to exercise significant influence over operating and financial policies, primarily through the Board of Directors and senior officers. Two of Prime Medical's seven member board are also members of American Physicians' board. Mr. Shifrin is CEO of American Physicians and chairman of the board of both companies. Mr. Hummel is a director of American Physicians and is CEO and President of Prime Medical. Mr. Searles is a director of both companies. American Physicians continues to be Prime's largest shareholder. According to information in Prime's most recent Proxy statement, American Physicians and its two directors who are also Prime directors have 18.5% beneficial ownership in Prime. The 2,344,000 shares of Prime Medical common stock held by the Company had an approximate market value of $21,387,000 (carrying amount of $12,096,000) at December 31, 1999 based on the market closing price of $9.125 per share. At December 31, 1999 and 1998, the Company's retained earnings included undistributed earnings, net of deferred tax, of Prime Medical totaling $7,058,000 and $5,583,000, respectively. The condensed balance sheet and statement of operations for Prime Medical follows (in thousands): Condensed balance sheet at December 31, 1999 and 1998: ------------------------------------------------------
1999 1998 ---- ---- Current assets $ 58,012 $ 70,006 Long-term assets 188,815 171,320 -------- -------- Total assets 246,827 241,326 ======== ======== Current liabilities $20,493 $28,465 Long-term liabilities 129,651 123,111 Shareholders' equity 96,683 89,750 -------- -------- Total liabilities and equity $246,827 $241,326 ======== ========
Condensed statement of operations for the years ended December 31, ------------------------------------------------------------------ 1999 and 1998 -------------
1999 1998 ---- ---- Total revenue $112,174 $104,636 ======== ======== Net income $ 15,039 $ 10,794 ======== ========
A-29 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (13) Investment in Affiliates, continued On January 1, 1998 the Company invested approximately $2,078,000 in the Convertible Preferred Stock of Uncommon Care. Uncommon Care is a developer and operator of dedicated Alzheimer's care facilities. The preferred shares owned by the Company are convertible into approximately a 34% common stock interest in the equity of Uncommon Care on a fully converted basis. The Company's investment entitles it to vote in certain instances and to elect two of the five members of the board of directors of Uncommon Care. In addition, pursuant to a shareholders agreement between Uncommon Care and its shareholders, one of the directors elected by the holders of the preferred stock must consent to Uncommon Care's taking certain important corporate actions specified in the shareholders agreement. As a result, APSG accounts for this investment on the equity method. See discussion of restatement in Note 19. The Company has applied the guidance of EITF 99-10, specifically the percentage of ownership method, in applying the equity method to its investment in Uncommon Care. Uncommon Care's common stock equity had been reduced to zero prior to the Company's investment and, accordingly, the Company has recognized 100% of the losses of Uncommon Care based on its ownership of 100% of Uncommon Care's preferred stock equity. At December 31, 1999 and 1998, the Company's consolidated retained earnings included losses of Uncommon Care totaling $1,742,000 and $566,000 respectively. The condensed balance sheets and statements of operations for Uncommon Care follows (in thousands): Condensed balance sheets at December 31, 1999 and 1998: -------------------------------------------------------
1999 1998 ---- ---- Current assets $ 142 $ 103 Long-term assets 13,859 7,831 ------- ------ Total assets $14,001 $7,934 ======= ====== Current liabilities 1,130 789 Long-term liabilities 13,189 6,026 Shareholders' equity (deficit) (318) 1,119 ------- ------ Total liabilities and equity $14,001 $7,934 ======= ======
A-30 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (13) Investment in Affiliates, continued Condensed statements of operations for the years ended December 31, 1999 and 1998 follow (in thousands):
1999 1998 ---- ---- Total revenue $ 2,743 $1,478 ======= ====== Net loss $(2,173) $ (858) ======= ======
The Company has extended three lines of credit to Uncommon Care, Inc. The first is to a maximum amount of $2,400,000. The note is interest only at 10%, payable quarterly. The note matures June 30, 2005, at which time all principal and accrued but unpaid interest are due. The second is to a maximum of $1,250,000 with interest at 12%, payable semi-annually. The note matures April 30, 2000, but may be extended until November 30, 2001. The maturity may be accelerated by Uncommon Care securing certain equity capital. The third is to a maximum of $1,200,000 with interest at 10%, payable semi-annually. The note matures the earlier of September 30, 2001, or upon Uncommon Care securing certain equity capital. Advances under the lines are subject to Uncommon Care meeting certain qualifications at the date of each advance request. Amounts outstanding under these lines of credit and December 31, 1999 and 1998 are as follows (in thousands):
1999 1998 ---- ---- Revolving Line of Credit: This note is unsecured with a maximum of $1,250,000. The note is interest only at 12%, payable semi-annually. The note matures April 30, 2000, but may be extended until November 30, 2001. Maturity may be accelerated if the borrower obtains specific levels of equity financing. The borrower may at that time pay off the loan in full or convert it into non-voting preferred stock of the borrower. 730 -- Revolving Line of Credit: This note is secured by substantially all of the assets of Uncommon Care and is subordinated to bank loans for various real estate purchases. The maximum allowed on this note is $2,400,000. This note is interest only at 10%, payable quarterly. Any outstanding principal is due June 30, 2005. 2,141 745
Various officers and directors of the Company participated in the $2,400,000 line of credit to Uncommon Care. For financial purposes this participation has been treated as a secured borrowing. In the aggregate these officers and directors contributed approximately $259,000 to fund a 10.8% interest in the loan. They participated in the loan under the same terms as the Company. (14) Segment Information The Company's segments are distinct by type of service provided. Each segment has its own management team and separate financial reporting. The Company's Chief Executive Officer allocates resources and provides overall management based on the segments' financial results. The financial services segment includes brokerage and asset management services to individuals and institutions. A-31 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (14) Segment Information, continued The insurance services segment includes financial management for an insurance company that provides professional liability insurance to doctors. The consulting segment includes environmental consulting and engineering services to private and public institutions. Real Estate income is derived from the leasing of office space. Corporate is the parent company and derives its income from interest and investments. Discontinued operations include medical software sales and medical practice management.
1999 1998 1997 ---- ---- ---- Operating Revenues: Financial services $10,835,000 $ 9,914,000 $ 5,726,000 Insurance services 4,683,000 5,655,000 6,287,000 Consulting 768,000 -- -- Real estate 853,000 865,000 867,000 Corporate 4,475,000 1,721,000 982,000 ----------- ----------- ----------- $21,614,000 $18,155,000 $13,862,000 =========== =========== =========== Reconciliation to Consolidated Statement of Earnings: Total segment revenues $21,614,000 $18,155,000 $13,862,000 Less: intercompany profits (143,000) (152,000) (163,000) intercompany dividends (2,720,000) (1,600,000) (634,000) ----------- ----------- ----------- Total Revenues $18,751,000 $16,403,000 $13,065,000 =========== =========== =========== Operating Profit (Loss): Financial services $ 998,000 $ 810,000 $ 372,000 Insurance services 40,000 1,437,000 2,385,000 Consulting 58,000 -- -- Real estate 305,000 338,000 362,000 Corporate 764,000 (187,000) (389,000) ----------- ----------- ----------- $ 2,165,000 $ 2,398,000 $ 2,730,000 =========== =========== =========== Reconciliation to Consolidated Statement of Earnings: Total segment operating profits 2,165,000 2,398,000 2,730,000 Less: intercompany dividends (2,720,000) (1,600,000) (634,000) other -- -- (25,000) ----------- ----------- ----------- Operating Income (loss) $ (555,000) $ 798,000 $ 2,071,000
A-32 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (14) Segment Information, continued
1999 1998 1997 ---- ---- ---- Equity in earnings of affiliates 320,000 966,000 2,360,000 Gain on sale of interest in subsidiary -- -- 1,899,000 ----------- ----------- ----------- Earnings (loss) from continuing operations before income taxes and minority interests (235,000) 1,764,000 6,330,000 Income tax expense (117,000) 571,000 2,341,000 Minority interests 5,000 (178,000) (175,000) ----------- ----------- ----------- Earnings (loss) from continuing operations (113,000) 1,015,000 3,814,000 ----------- ----------- ----------- Net profit (loss) from discontinued operations, net of income tax 58,000 (36,000) (1,276,000) ----------- ----------- ----------- Net earnings (loss) $ (55,000) $ 979,000 $ 2,538,000 =========== =========== =========== Identifiable assets: Financial Services $ 4,424,000 $ 3,964,000 $ 2,346,000 Insurance Services 1,281,000 1,640,000 2,585,000 Consulting 1,155,000 -- -- Real Estate 1,286,000 1,324,000 1,283,000 Corporate: Investment in and advances to equity method investees 14,015,000 15,054,000 11,265,000 Other 7,602,000 5,526,000 8,556,000 Discontinued Operations 72,000 7,988,000 6,617,000 ----------- ----------- ----------- $29,835,000 $35,496,000 $32,652,000 =========== =========== =========== Capital expenditures: Financial Services $ 47,000 $ 55,000 $ 154,000 Insurance Services 44,000 44,000 33,000 Consulting -- -- -- Real Estate 129,000 58,000 -- Corporate 193,000 49,000 26,000 Discontinued Operations -- -- 99,000 ----------- ----------- ----------- $ 413,000 $ 206,000 $ 312,000 =========== =========== ===========
A-33 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (14) Segment Information, continued
1999 1998 1997 ---- ---- ---- Depreciation/amortization expenses: Financial Services $413,000 $279,000 $118,000 Insurance Services 94,000 90,000 90,000 Consulting 31,000 -- -- Real Estate 103,000 107,000 110,000 Corporate 74,000 78,000 62,000 Discontinued Operations 18,000 64,000 56,000 -------- -------- -------- $733,000 $618,000 $436,000 ======== ======== ========
Revenues attributable to customers generating greater than 10% of the consolidated revenues of the Company: Insurance services Company A $2,454,000 $3,970,000 $4,659,000
At December 31, 1999 the Company had long-term contracts with company A and was therefore not vulnerable to the risk of a near-term severe impact from a reasonably possible loss of the revenue. Operating profit is operating revenues less related expenses and is all derived from domestic operations. Identifiable assets are those assets that are used in the operations of each business segment (after elimination of investments in other segments). Corporate assets consist primarily of cash and cash investments, notes receivable and investments in affiliates and preferred stock. (15) Earnings Per Share Basic earnings per share are based on the weighted average shares outstanding without any dilutive effects considered. Diluted earnings per share reflects dilution from all contingently issuable shares, including options and convertible debt. A reconciliation of income and average shares outstanding used in the calculation of basic and diluted earnings per share from continuing operations follows: A-34 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (15) Earnings Per Share, continued
For the Year Ended December 31, 1999 ------------------------------------ Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ Earnings (loss) from continuing operations $ (113,000) Basic EPS Earnings (loss) available to common stockholders (113,000) 3,142,000 $(.04) ===== Effect of Dilutive Securities Options -- 26,000 ---------- --------- Diluted EPS Earnings (loss) available to common stockholders and assumed conversions $ (113,000) 3,168,000 $(.04) ========== ========= ===== For the Year Ended December 31, 1998 ------------------------------------ Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ Earnings from continuing operations $ 1,015,000 Basic EPS Earnings available to common stockholders 1,015,000 4,163,000 $ .24 ===== Effect of Dilutive Securities Options -- 74,000 Contingently issuable shares (76,000) 455,000 ----------- --------- Diluted EPS Earnings available to common stockholders and assumed conversions $ 939,000 4,692,000 $ .20 =========== ========= =====
A-35 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (15) Earning Per Share, continued
For the Year Ended December 31, 1997 ------------------------------------ Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ Earnings from continuing operations $3,814,000 Basic EPS Earnings available to common stockholders 3,814,000 4,106,000 $.93 ==== Effect of Dilutive Securities Options -- 114,000 Contingently issuable shares (18,000) 21,000 ---------- --------- Diluted EPS Earnings available to common stockholders and assumed conversions $3,796,000 4,241,000 $.90 ========== ========= ====
Unexercised employee stock options to purchase 815,000, 295,000 and 295,000 shares of the Company's common stock as of December 31, 1999, 1998 and 1997, respectively, were not included in the computations of diluted EPS because the options' exercise prices were greater than the average market price of the Company's common stock during the respective periods. (16) Cash - Restricted APS Financial acted as the placement agent for a private offering of 500,000 shares of preferred stock for one of its customers during 1999. The customer acted as its own underwriter and APS Financial placed the securities on a best effort basis. The private offering closed December 15, 1999. In association with this transaction, APS Financial acted in a trustee capacity and established an escrow fund that was used to account for funds received from participating investors. These funds were subsequently disbursed to the customer based on the satisfaction of certain criteria. As of December 31, 1999, there was $3,494 maintained in the escrow fund related to interest earnings on escrow fund balances that are payable to the customer. In addition to establishing the escrow fund, the customer was required to deposit a specified amount with APS Financial as part of the private offering agreement. As of December 31, 1999, APS Financial was holding $372,922 as a deposit for the customer. A-36 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (17) Other Investments Other investments consists of the following investments: 1999 ---------- Investment in FemPartners, Inc. 3,824,000 Investment in Probex 100,000 Stock warrants in Probex 45,000 ---------- Total $3,969,000 ========== Under the merger agreement with FemPartners, the Company may receive additional FemPartners shares if certain earnings targets are met and if there are no undisclosed liabilities. The Company does not believe that it will receive the shares related to the earnings targets. In the event that any contingent shares are received in the future, the Company does not plan to increase its carrying basis of the FemPartners stock due to the lack of reliable market information on this non-traded private stock. In addition to acting as the placing agent for the private offering as described in Note 16, APS Financial purchased 10,000 shares which has been recorded as a preferred stock investment with a cost basis of $100,000 at December 31, 1999. In addition to receiving commission revenue for acting as the placement agent for the private offering, APS Financial received warrants to purchase 251,325 shares of restricted common capital stock exercisable at a price of $1.875 per share of common stock. The warrants expire on December 15, 2004 and have been recorded at a fair value of $45,000 at December 31, 1999. None of the warrants have been exercised as of December 31, 1999. (18) Acquisition Through Foreclosure Effective September 1, 1999 the Company began consolidating Eco-Systems as a wholly-owned subsidiary. The Company's basis in its investment, represents the remainder of the note due from Eco-Systems, which had been adjusted to its net present value of approximately $630,000 as of April, 1999. As discussed in note 3, Eco-Systems was acquired through foreclosure in April, 1999, however, the Company did not consolidate Eco-Systems for the period April through August, 1999 because it believed that control would be temporary. The Company has accounted for the transaction using the purchase method of accounting. Goodwill is amortized using the straight line method of amortization over a period of ten years. At December 31, 1999, the Company has amortized a total of $20,000. A-37 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTEES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 Unaudited proforma combined income data for the years ended December 31, 1999 and 1998 of the Company, assuming the purchase was effective January 1, 1998 is as follows ($ in thousands, except per share data): 1999 1998 ---- ---- Total revenues $ 20,434 $ 19,819 Total expenses 19,426 17,895 -------- -------- Net income $ (289) $ 1,358 ======== ======== Diluted earnings per share $ (.09) $ .29 ======== ======== (19) Restatement The accompanying consolidated financial statements have been restated to reflect changes in accounting for Syntera and Uncommon Care. In the previously reported consolidated financial statements as of December 31, 1999 and 1998 and for the periods then ended, the Company had accounted for its ownership of Syntera on the equity method because of management's belief that majority control of Syntera was temporary based on management's initial business plan. This plan anticipated that the Company's ownership would decrease to a minority position as physician practices were acquired over a relatively short period of time. Syntera was not able to acquire the number of practices originally anticipated, accordingly Syntera has been consolidated in these restated consolidated financial statements. Syntera's business was distinct from other services offered by the Company and it had separate management that reported directly to the Company's CEO; accordingly, the results of operations of Syntera are reflected as loss from discontinued operations as Syntera was acquired by an unrelated company effective August 31, 1999. The Company's previously filed consolidated financial statements should have reflected Syntera as a discontinued operation beginning in late 1998 when management decided to dispose of the segment. In addition, in the previously reported consolidated financial statements as of December 31, 1999 and 1998 and for the periods then ended, the Company had accounted for its ownership of Uncommon Care on the cost basis. The restated consolidated financial statements account for the investment in Uncommon Care on the equity method. The change from the cost to the equity method is based on management's ability to exert significant influence over the operations of Uncommon Care. A-38 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 A summary of the effects of these restatements on the accompanying consolidated financial statements is as follows (in thousands):
December 31, 1999 December 31, 1998 ----------------- ----------------- As Previously As Previously ------------- ------------- Reported As Restated Reported As Restated -------- ----------- -------- ----------- Assets $32,924 $29,835 $33,126 $35,496 Liabilities 11,647 10,875 8,471 8,773 Minority interest 48 48 53 2,687 Shareholders' equity 21,229 18,912 24,602 24,036 Year Ended Year Ended ---------- ---------- December 31, 1999 December 31, 1998 ----------------- ----------------- As Previously As Previously ------------- ------------- Reported As Restated Reported As Restated -------- ----------- -------- ----------- Revenue $19,115 $18,751 $16,403 $16,403 Operating income (loss) (384) (555) 798 798 Equity in earnings of unconsolidated affiliates 2,116 320 1,457 966 Earnings (loss) from continuing operations 1,116 (113) 1,214 1,015 Net gain (loss) from discontinued operations 297 58 331 (36) Net earnings (loss) 1,413 (55) 1,545 979 Earnings (loss) per common share: Basic: Continuing Operations $ 0.36 $ (0.04) $ 0.29 $ 0.24 Discontinued Operations $ 0.09 $ 0.02 $ 0.08 $ (0.01) Net Earnings $ 0.45 $ (0.02) $ 0.37 $ 0.23 Diluted: Continuing Operations Discontinued Operations $ 0.35 $ (0.04) $ 0.24 $ 0.20 Net Earnings $ 0.09 $ 0.02 $ 0.07 $ (0.01) $ 0.45 $ (0.02) $ 0.31 $ 0.19
A-39 AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES NOTEES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (19) Restatement (continued) Year Ended December 31, 1997 ---------------------------- As Previously ------------- Reported As Restated -------- ----------- Revenue $13,065 $13,065 Operating income 2,071 2,071 Equity in earnings of unconsolidated 2,014 2,360 affiliates Earnings from continuing operations 3,468 3,814 Net loss from discontinued operations (930) (1,276) Net earnings 2,538 2,538 Earnings (loss) per common share: Basic: Continuing Operations $ 0.84 $ 0.93 Discontinued Operations $ (0.22) $ (0.31) Net Earnings $ 0.62 $ 0.62 Diluted: Continuing Operations $ 0.81 $ 0.90 Discontinued Operations $ (0.22) $ (0.30) Net Earnings $ 0.59 $ 0.60 A-40 -----END PRIVACY-ENHANCED MESSAGE-----