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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934 for the fiscal year ended December 31, 2002
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
(State or other jurisdiction of incorporation or organization)
75-1458323
(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-KSB or any amendment to
this Form 10-KSB. |_|
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 24, 2003: $6,768,033
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 24, 2003
------------------- ----------------
Common Stock, $.10 par value 2,131,043
Documents Incorporated By Reference
Selected portions of the Registrant's definitive proxy material for the
2003 annual meeting of shareholders are incorporated by reference into
Part III of the Form 10-KSB.
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
References in this report to "we", "us", "our", and the "Company" mean American
Physicians Service Group, Inc.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
We, through our subsidiaries, provide services that include brokerage and
investment services to individuals and institutions, and management services to
malpractice insurance companies.
We were organized in October 1974 under the laws of the State of Texas. Our
principal executive office is at 1301 Capital of Texas Highway, Suite C-300,
Austin, Texas 78746, and its telephone number is (512) 328-0888.
Financial information about our industry segments is disclosed in Note 16
to our accompanying Consolidated Financial Statements in Appendix A.
OUR FINANCIAL SERVICES
Through our subsidiaries, APS Financial Corporation, or APS Financial, and
APS Asset Management, Inc., or Asset Management, we provide investment and
investment advisory services to institutions and individuals throughout the
United States. Our revenues from this segment were 52% and 57% of our total
revenues in 2002 and 2001, respectively.
APS Financial is a fully licensed broker/dealer that 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, Texas with a branch offices in Houston, Texas and
Redmond, Washington.
APS Financial charges commissions on both exchange and over-the-counter, or
OTC, transactions in accordance with industry practice. When APS Financial
executes OTC transactions as a dealer, it receives, in lieu of commissions,
markups or markdowns.
APS Financial is a member of the National Association of Securities
Dealers, Inc., or NASD, the Securities Investor Protection Corporation, or SIPC,
the Securities Industry Association, and, in addition, is licensed in 44 states
and Washington D.C.
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, or SEC. These rules, which are designed to
measure the financial soundness and liquidity of broker dealers, specify minimum
net capital requirements. Since we (as opposed to APS Financial) are not a
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registered broker dealer, we are not subject to these rules. However, APS
Financial is subject to these rules. Compliance with applicable net capital
requirements could limit APS Financial's operations, such as limiting or
prohibiting trading activities that require the use of significant amounts of
capital. A significant operating loss or an extraordinary charge against net
capital could adversely affect the ability of APS Financial to expand or even
maintain its present levels of business. At February 28, 2003, APS Financial was
in compliance with all applicable net capital requirements.
APS Financial clears its transactions through SWS Securities, Inc., or SWS,
on a fully disclosed basis. SWS also processes orders and floor reports, matches
trades, transmits execution reports to APS Financial and records all data
pertinent to trades. APS Financial pays SWS a fee based on the number and type
of transactions.
Asset Management, a registered investment adviser under the Investment
Advisers Act of 1940, was formed and registered with the SEC in 1998. We formed
Asset Management 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.
OUR INSURANCE SERVICES
APS Insurance Services, Inc., or Insurance Services, is an 80% owned
subsidiary of ours. Insurance Services, through its wholly-owned subsidiaries
APS Facilities Management, Inc., or FMI, and American Physicians Insurance
Agency, Inc., or Agency, provides management and agency services to medical
malpractice insurance companies. Our revenues from this segment contributed 36%
and 32% of our total revenues in 2002 and 2001, respectively.
Substantially all of our revenue from this segment was attributable to FMI
providing management services to American Physicians Insurance Exchange, or
APIE, a reciprocal insurance exchange. A reciprocal insurance exchange is an
organization that sells insurance only to its subscribers, who pay, in addition
to their annual insurance premiums, a contribution to the exchange's surplus.
These 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, which might result in a
curtailment or cessation of operations by APIE, would also adversely affect
FMI's revenue and, accordingly, our revenue. To limit possible underwriting
losses, APIE currently reinsures its risk in excess of $250,000 per medical
incident. APIE offers medical professional liability insurance for physicians in
Texas and Arkansas. FMI's assets are not subject to any insurance claims by
policyholders of APIE.
APIE was organized in 1975, and FMI has been its exclusive manager since its
inception. 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, outside
agent commissions 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
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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 us.
During 1997, FPIC Insurance Group, Inc., or FPIC, purchased a 20% interest
in Insurance Services from us. In conjunction with that purchase, FPIC's
subsidiary, First Professional Insurance Company, Inc., or First Professional,
entered into marketing and reinsurance agreements with Agency and APIE for
business conducted in Texas. Agency has sales, marketing, underwriting and
claims handling authority for First Professional in Texas and receives
commissions for these services. First Professional also entered into a
reinsurance agreement with APIE under which APIE reinsures substantially all of
First Professional's risk in Texas under medical professional liability policies
issued or renewed by First Professional on behalf of Texas health care providers
after March 27, 1997. However, in September 2002, FPIC filed a withdrawal plan
with the Texas Department of Insurance. As a result, no new policies will be
underwritten by FPIC and no existing policies will be renewed beginning January
1, 2003. We anticipate that substantially all of this business will be written
directly through APIE and that there will be no material adverse impact on the
operations of APIE and consequently, on insurance services.
APIE is authorized to do business in the states of Texas and Arkansas.
First Professional is licensed in several states. Both companies specialize in
writing medical professional liability insurance for health care providers. They
write insurance in Texas primarily through purchasing groups and are not subject
to certain rate and policy form regulations issued by the Texas Department of
Insurance. They review applicants for insurance coverage 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.
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 that 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 they are
reported. APIE and First Professional offer only a "claims made" policy in Texas
and Arkansas, but provide for an extended reporting option upon termination.
APIE and FPIC reinsure 100% of all Texas and Arkansas coverage per medical
incident between $250,000 and $1,000,000, primarily through certain domestic and
international insurance companies.
The following table presents selected financial and other data for APIE.
The management agreement with FMI obligates APIE to pay management fees to FMI
based on APIE's earned premiums before payment of reinsurance premiums. The
management fee percentage is 13.5% with the provision that any profits of APIE
will be shared equally with FMI so long as the total payment (fees and profit
sharing) does not exceed a cap based on premium levels. In 2002, 2001, 2000,
1999, and 1998, management fees attributable to profit sharing were $0, $0, $0,
$329,000, and $1,750,000, respectively. While APIE was profitable in 2002 there
was no profit sharing with FMI due to the management agreement requiring that
cumulative prior year losses be applied against future pretax income. Only after
prior year losses are completely offset can FMI then share equally the profits
at APIE.
4
Years Ended December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Unaudited, In thousands, except for number of insureds)
Earned premiums before $46,078
reinsurance premiums $35,866 $29,057 $24,529 $22,931
Total assets 80,721 64,557 66,348 66,377 75,173
Total surplus 12,985 11,475 10,014 13,925 13,592
Management fees (including profit sharing) and
commissions to FMI and Agency (1) 6,221 5,084 4,002 3,645 4,835
Number of insureds 3,181 3,101 3,178 2,882 2,743
(1) Includes commissions of $3,103, $2,886, $1,898, $1,191, and
$835 in 2002, 2001, 2000, 1999 and 1998, respectively, from
First Professional and other carriers directly related to
APIE's controlled business.
CONSULTING SERVICES
Effective November 1, 2002, we completed the sale of APS Consulting to its
management as it was determined that APS Consulting does not fit into our
long-term business plan. See Note 14 in the accompanying consolidated financial
statements for details of this transaction. Before the sale, we provided
environmental consulting and engineering services through APS Consulting, a then
wholly-owned subsidiary of ours. APS Consulting, formally Eco-Systems Inc.,
which we acquired through foreclosure in 1999, 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 were located in Jackson, Mississippi; Mobile, Alabama; and
Houston, Texas.
Because of the wide range of expertise of the APS Consulting consultants,
we served 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. The APS Consulting consultants and
engineers had expertise in environmental engineering, chemical engineering,
hydrogeology, computer-aided drafting and design, civil engineering, geology,
biology and micro biology. Our revenues from the environmental consulting and
engineering services contributed 12% and 11% of our total revenues in 2002 and
2001, respectively.
OUR OTHER INVESTMENTS
At December 31, 2002, we owned less than 5% of the common stock of Prime
Medical Services, Inc., or Prime Medical, having reduced our ownership from 15%
with the sale of 1,591,000 shares during 2002. Prior to that sale we recorded
our pro-rata share of Prime Medical's earnings using the equity method of
accounting. As a result of our reduced ownership, we now account for our
investment as an available-for-sale equity security, with changes in market
value reflected in shareholders' equity as "accumulated other comprehensive
income." Prime Medical is the largest provider of lithotripsy services in the
United States, currently servicing over 375 hospitals and surgery centers in 34
states. Lithotripsy is a non-invasive method of treating kidney stones through
the use of shock waves. Prime is also an international supplier of specialty
vehicles for the transport of high technology medical and
broadcast/communications equipment. As of December 31, 2002 our investments in
Prime Medical Securities in common stock and fixed income securities with an
aggregate fair market value of $7,835,000.
5
The common stock of Prime Medical is quoted on the NASDAQ National Market
under the symbol "PMSI". Prime Medical is a Delaware corporation and is required
to file annual, quarterly and other reports and documents with the SEC. The
summary information in the accompanying consolidated financial statements
regarding Prime Medical 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.
On January 1, 1998, we invested $2,078,000 in convertible preferred
stock of Uncommon Care, Inc. or Uncommon Care. We have also made available to
Uncommon Care three lines of credit totaling $4,850,000. At December 31, 2002, a
total of $4,605,000 was outstanding under these lines. The loans are at
interest rates varying from ten percent to twelve percent, payable quarterly
with various maturities through June 30, 2005, at which time any 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. Two of
Uncommon Care's four directors are directors or officers of ours. For the period
July 1, 2001 through June 30, 2002, we reduced the interest rate charged on our
lines of credit to 4% and allowed Uncommon Care to make interest payments
in-kind (PIK) in the form of Uncommon Care common stock. We discontinued the PIK
agreement after June 30, 2002 and Uncommon Care has been in default on its
payments since. Our options for collecting this debt are restricted by the terms
of a subordination agreement that we entered into with Uncommon Care's senior
lender.
On a fully converted basis, our common and convertible preferred stock
represent approximately a 42% interest in the common equity of Uncommon Care. We
record our investment in and advances to Uncommon Care using the equity method
of accounting. At December 31, 2002 and 2001, the carrying value of this
investment and advances under the lines of credit were reduced to zero.
DISCONTINUED OPERATIONS
In November 2001, we sold all of our condominium space in an office project
located in Austin, Texas to Prime Medical. Approximately 50% of this space was
leased back to us and is utilized by our financial services, insurance services
and corporate segments' operations. Gain on the sale amounted to approximately
$5.1 million, of which approximately $1.9 million was recognized in 2001. Due to
our continuing involvement in the property, we deferred recognizing
approximately $2.4 million of the gain which is being recognized in income
monthly through November 2006. In addition, 15% of the gain ($0.76 million)
related to our 15% ownership in the purchaser, was deferred as we accounted for
Prime Medical using the equity method of accounting as of and for the year ended
December 31, 2001. During 2002, in connection with our reduced investment in
Prime Medical, we recognized a proportionate percentage of the deferred gain, or
about $516,000. In 2001, subsequent to the sale of the condominium space, we
dissolved APS Realty, Inc., or APS Realty, our wholly-owned subsidiary that
formerly owned this office space. Our revenues from APS Realty (not including
the gains from the sales of office space in both years) contributed 4% of our
total revenues in 2001. (See Note 13 to our consolidated financial statements in
Appendix A.)
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
their 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 us. In many instances APS Financial is competing directly with
these organizations. In addition, there is competition for investment funds from
the real estate, insurance, banking and thrift industries.
APIE competes with numerous commercial insurance companies, and
6
increasingly, the Texas Medical Liability Insurance Underwriting Association
(JUA), which is the State sponsored insurer of last resort. As a result of
increasing claim frequency and severity, a number of larger competitors have
withdrawn business or are not writing any new business in the state of Texas.
Premium rates have increased substantially over the last year and this has led
doctor groups to seek tort reform at both the state and federal level. Should
tort reform succeed in the near future, the industry may become more stable and
we could face increasing competition. Currently, APIE faces competition from its
primary competitors, Medical Protective Insurance Company and Texas Medical
Liability Trust. APIE's primary competitors have a greater capacity than APIE.
The primary competitive factor in selling insurance is a combination of price,
terms of policies offered, claims service and other services, and claims
settlement philosophy.
REGULATION
APS Financial and Asset Management are subject to extensive regulation
under both federal and state laws. The SEC is the federal agency charged with
administration of the federal securities and investment advisor laws. Much of
the regulation of broker dealers, however, has been delegated to self-regulatory
organizations, principally the NASD and the national securities exchanges. These
self-regulatory organizations adopt rules (subject to approval by the SEC) which
govern the industry and conduct periodic examinations of member broker/dealers.
APS Financial is also subject to regulation by state and District of Columbia
securities commissions.
The regulations to which APS Financial is subject cover all aspects of the
securities business, including sales methods, trade practices among broker
dealers, uses and safekeeping of customers' funds and securities, capital
structure of securities firms, record keeping and the conduct of directors,
officers and employees. Additional legislation, changes in rules promulgated by
the SEC and by self regulatory organizations, or changes in the interpretation
or enforcement of existing laws and rules, may directly affect the method of
operation and profitability of APS Financial and, accordingly, us. 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 SIPC fund provides protection for customer accounts up to $500,000
per customer, with a limitation of $100,000 on claims for cash balances.
FMI has received certificates of authority from the Texas and Arkansas
insurance departments, licensing it on behalf of the subscribers of APIE. APIE,
as an insurance company, is subject to regulation by the insurance departments
of the States of Texas and Arkansas. These regulations strictly limit all
financial dealings of a reciprocal insurance exchange with its officers,
directors, affiliates and subsidiaries, including FMI. Premium rates,
advertising, solicitation of insurance, types of insurance issued and general
corporate activity are also subject to regulation by various state agencies.
EMPLOYEES
At March 1, 2003, we employed, on a full time basis, approximately 107
persons, including 53 by Insurance Services, 44 by APS Financial and Asset
management, and 10 directly by us. We consider our employee relations to be
good. None of our employees are represented by a labor union and we have
experienced no work stoppages.
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ITEM 2. DESCRIPTION OF PROPERTY
We lease approximately 23,000 square feet of condominium space from Prime
Medical in an office project at 1301 Capital of Texas Hwy., Suite C-300, Austin,
Texas as our principal executive offices.
We also lease office space for our financial services subsidiary at 2550
Gray Falls Dr, Suite 350, Houston, Texas, and 7981 168th Ave, N.E. Suite 108,
Redmond, Washington.
We also lease office space for our insurance services subsidiary at 5401
North Central Expressway, Suite 316, LB #B4, Dallas, Texas.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various claims and legal actions that have arisen in the
ordinary course of our business. We believe that any liabilities arising from
these actions will not have a material adverse effect on our financial condition
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table represents the high and low prices of our common stock
in the over-the-counter market as reported by the NASD, Automated Quotations
System for years ended December 31, 2002 and 2001. On March 1, 2003, we had
approximately 316 holders of record of our common stock.
2002 2001
------------------------- ------------------------
High Low High Low
----- ----- ----- -----
First Quarter $4.90 $2.64 $3.25 $1.75
Second Quarter $4.67 $3.49 $2.94 $1.85
Third Quarter $4.90 $3.58 $3.26 $2.11
Fourth Quarter $4.57 $3.51 $3.75 $2.08
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We have not declared any cash dividends on our common stock during the last
two years and have no present intention of paying any cash dividends in the
foreseeable future. Our policy is to retain all earnings to provide funds for
growth. Whether we decide to declare and pay dividends in the future will be
based upon our earnings, financial condition, capital requirements and such
other factors as we may deem relevant.
The following table represents securities authorized for issuance under
equity compensation plans, as described in Note 12 to the consolidated financial
statements at December 31, 2002.
----------------------------------------------------------------------------------------------------------------------------
Equity Compensation Plan Information
----------------------------------------------------------------------------------------------------------------------------
----------------------------- ---------------------------- ---------------------------- ------------------------------------
Plan Category Number of securities to be Weighted-average exercise Number of securities remaining,
issued upon exercise of price of outstanding available for future issuance
outstanding options, options, warrants and under equity compensation plans
warrants and rights. rights. (excluding securities reflected in
column (a)
----------------------------- ---------------------------- ---------------------------- ------------------------------------
----------------------------- ---------------------------- ---------------------------- ------------------------------------
(a) (b) (c)
----------------------------- ---------------------------- ---------------------------- ------------------------------------
----------------------------- ---------------------------- ---------------------------- ------------------------------------
Equity compensation plans
approved by security holders
939,000 $3.51 648,000
----------------------------- ---------------------------- ---------------------------- ------------------------------------
----------------------------- ---------------------------- ---------------------------- ------------------------------------
Equity compensation plans
not approved by security
holders none none none
----------------------------- ---------------------------- ---------------------------- ------------------------------------
----------------------------- ---------------------------- ---------------------------- ------------------------------------
Total 939,000 $3.51 648,000
----------------------------- ---------------------------- ---------------------------- ------------------------------------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
Our statements contained in this report 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 our expectations, hopes, intentions or strategies regarding
the future. You should not place undue reliance on forward-looking statements.
All forward-looking statements included in this report are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. It is important to note that our actual results
could differ materially from those in the forward-looking statements. In
addition to any risks and uncertainties specifically identified in the text
surrounding the forward-looking statements, you should consult our reports on
Forms 10-QSB and our other filings under the Securities Act of 1933 and the
Securities Exchange Act of 1934, for factors that could cause our 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
9
competitors and legislative, judicial and other governmental authorities and
officials. Assumptions relating to the foregoing involve judgments 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 our control. Any of these assumptions
could be inaccurate and, therefore, there can be no assurance that the
forward-looking statements included in this report will prove to be accurate.
GENERAL
We provide (1) financial services, including brokerage and investment
services to individuals and institutions, (2) insurance services, including
management services to malpractice insurance companies, and (3) provided
environmental consulting and engineering services through October 31, 2002.
FINANCIAL SERVICES. We provide investment and investment advisory services
to institutions and individuals throughout the United States through the
following subsidiaries:
o APS Financial. APS Financial is a fully licensed broker/dealer that
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.
o Asset Management. Asset Management manages fixed income and equity
assets for institutional and individual clients on a fee basis.
INSURANCE SERVICES. Through Insurance Services, of which we own 80%, we
provide management and agency services to medical malpractice insurance
companies through the following subsidiaries:
o FMI. FMI provides management and administrative services to APIE, a
regional insurance exchange that sells medical professional liability
insurance only to its physician subscribers, who pay annual insurance
premiums and surplus contributions to APIE. APIE is governed by a
physician board of directors. Pursuant to a management agreement and
the direction of this board, FMI manages and operates APIE, including
performing policy issuance, claims investigation and settlement, and
all other management and operational functions. As a management fee,
FMI receives a percentage of APIE's earned premiums and a portion of
APIE's profit, subject to a cap based on premium levels. FMI's assets
are not subject to APIE policyholder claims.
o Agency. Agency has the exclusive right to market the policies of First
Professional in Texas. First Professional is a medical professional
liability insurance company that is owned by FPIC, which owns the other
20% of Insurance Services. In September 2002, FPIC filed a withdrawal
plan with the Texas Department of Insurance. As a result, no new
policies will be underwritten by FPIC and no existing policies will be
renewed beginning January 1, 2003. Agency performed the policy issuance
and claims handling functions for First Professional in Texas.
CONSULTING SERVICES. Effective November 1, 2002, we completed the sale of
APS Consulting to its management. APS Consulting had been acquired in a
foreclosure proceeding related to loans we had made in 1996 and does not fit
into our long-term business plan. Prior to the sale, we provided environmental
consulting and engineering services including services related to remedial
investigations, remediation engineering, air quality, waste water, regulatory
compliance, solid waste engineering, litigation support/expert testimony,
environmental resources, and industrial hygiene and safety through APS
Consulting. (See Note 14 to the consolidated financial statements for
description of accounting treatment for this transaction.)
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In addition, as of December 31, 2002, we have the following significant
investments: (1) we own approximately 753,000 shares of Prime Medical common
stock, representing slightly less than 5% of its outstanding common stock, and
(2) we invested approximately $2 million in the convertible preferred stock of
Uncommon Care and extended lines of credit totaling approximately $4.9 million
to Uncommon Care. The net book value of the investment in Uncommon Care was zero
at December 31, 2002 as equity losses in 2000, 2001 and 2002 completely offset
our investment and advances under the lines of credit.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an on-going basis, we evaluate our
estimates, including those related to, impairment of assets; bad debts; income
taxes; and contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. We periodically review the carrying value of our assets to
determine if events and circumstances exist indicating that assets might be
impaired. If facts and circumstances support this possibility of impairment, our
management will prepare undiscounted and discounted cash flow projections which
require judgments that are both subjective and complex. Management may also
obtain independent valuations.
Our financial services revenues are composed primarily of commissions on
securities trades and asset management fees. Revenues related to securities
transactions are recognized on a trade date basis. Asset management fees are
recognized as a percentage of assets under management during the period based
upon the terms of agreements with the applicable customers.
Our insurance services revenues are primarily related to management fees based
on the earned premiums of the managed company and include a profit sharing
component related to the managed company's annual earnings. Management fees are
recorded, based upon the terms of the management agreement, in the period the
related premiums are earned by the managed company. The managed company
recognizes premiums as earned ratably over the terms of the related policy. The
profit sharing component is recognized when it is reasonably certain the managed
company will have an annual profit, and, typically, has been recognized during
the fourth quarter.
When necessary, we record an allowance for doubtful accounts based on
specifically identified amounts that we believe to be uncollectible. If our
actual collections experience changes, revisions to our allowance may be
required. We have a limited number of customers with individually large amounts
due at any given balance sheet date. Any unanticipated change in one of those
customer's credit could have a material affect on our results of operations in
the period in which such changes or events occur. After all attempts to collect
a receivable have failed, the receivable is written off against the
allowance.When necessary, we record a valuation allowance to reduce our deferred
tax assets to the amount that is more likely than not to be realized. While we
have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in the
event we were to determine that we would be able to realize our deferred tax
assets in the future in excess of its net recorded amount, an adjustment to the
deferred tax asset would increase income in the period the determination was
made. Likewise, should we determine that we would not be able to realize all or
part of our net deferred tax asset in the future, an adjustment to the deferred
11
tax asset would be charged to income in the period the determination was made.
During 2001, it was our judgment that the equity method of accounting for our
investment in Prime Medical and Uncommon Care was more appropriate than the cost
method, on the basis that even though we held less than a 20% equity interest in
Prime Medical, we had significant influence over the operational and financial
policies of Prime Medical and Uncommon Care. Using the equity method we recorded
our share of Prime Medical's and Uncommon Care's earnings or losses. As
described earlier in the "Our other investments" section of this Form 10-KSB,
during the first quarter of 2002 our sales of shares of Prime Medical common
stock reduced our ownership to less than 5% of their total shares outstanding.
Consequently, we stopped accounting for our investment in Prime Medical using
the equity method and changed to the cost method. Unrealized gains/losses
related to our investment in Prime Medical are recorded in equity as other
comprehensive income, net of taxes.
In November 2002, we sold our consulting division, APS Consulting, to its
management for a de minimus amount of cash and a $250,000 seven year term note.
Additionally, we retained a security interest in the assets of the division,
agreed to provide continuing financial support to the division under a $450,000
line of credit and continue to perform, for a fee, certain administrative
services for the division. We determined that, under the terms of the
transaction, we were dependent upon the future successful operation of the
division to collect the term note receivable accepted as consideration for the
sale. We further determined that we had a risk of loss in the division's assets
in which we retained a security interest and, through our administrative
services arrangement, maintained continuing involvement with the division.
We have accounted for the division as variable interest entity under the
guidance of FIN 46 "Consolidation of Variable Interest Entities." Consistent
with the guidance under FIN 46, we have not recognized the divestiture of APS
Consulting and continue to consolidate the division as an entity in which we
have a variable interest that will absorb the majority of the entity's operating
losses if they occur.
Accordingly, the assets and liabilities are included in our consolidated balance
sheet as of December 31, 2002. The balance sheet below summarizes the assets and
liabilities of APS Consulting that are included in our consolidated balance
sheet at December 31, 2002:
2002
--------
Assets
Cash $347,000
Accounts Receivable, net 409,000
Prepaid Expenses 22,000
-------
Total Current Assets 778,000
Property and Equipment 45,000
-------
Total Assets $823,000
========
12
Liabilities
Accounts Payable $445,000
Accrued Expenses 74,000
---------
Total Current Liabilites 519,000
Notes Payable 248,000
Deferred Income 74,000
---------
Total Liabilites $841,000
=========
Total Liabilities in excess of Assets $ 18,000
=========
The revenues and expenses of APS Consulting from January 1, 2002 through the
date of sale, November 1, 2002, have been included in our consolidated financial
statements for the year ended December 31, 2002. In addition, we continue to
recognize APS Consulting's revenues and expenses subsequent to the sale. If,
subsequent to the sale, APS Consulting reports operating losses, we record such
losses in our statement of operations. If APS Consulting reports net earnings,
we reduce our interest in such earnings to zero by increasing the minority
interest presented in our statement of operations. The statement of operations
below summarizes the results of APS Consulting that are included in our
consolidated statement of operations for the year ended December 31, 2002:
Pre- Post-
Transaction Transaction Total
----------- ----------- ---------
Consulting Revenue $2,790,000 $506,000 $3,296.000
Consulting Expenses 2,403,000 506,000 2,909,000
--------- ------- ---------
Operating Income 387,000 -- 387,000
========= ======= =========
Had we recognized the transaction as a divestiture, these assets and liabilities
would not be included in our consolidated balance sheet as of December 31, 2002
and administrative fees received would have been recognized currently in
earnings. The gain associated with the transaction would not have been material
to our consolidated statement of operations for the year ended December 31,
2002.
RESULTS OF OPERATIONS
2002 Compared to 2001
Our revenues increased 15% in 2002 compared to 2001. Our net earnings
increased $3,989,000 in 2002 to a total of $3,411,000 compared to a net loss of
$(578,000) in 2001. Our diluted earnings per share increased to $1.45 in 2002
from a net loss of $(0.25) per share in 2001. The reasons for these changes are
described below.
FINANCIAL SERVICES
Our financial services revenues increased 4% in 2002 compared to 2001. The
increase resulted from greater commissions earned at APS Financial, the
broker/dealer division of our financial services segment. The increase in annual
commission income was primarily the result of an expanding institutional
13
customer base, a doubling of the number of employed fixed income research
analysts and a healthier bond market. Generally, the bond market, from which APS
Financial derives 95% of its revenue, gained strength during the latter half of
2002, offering positive returns to our customers versus those obtained in
equities. In 2002 interest rates remained near historic lows. Lower interest
rates resulted in higher bond prices, which created opportunities for gains and
increases in trading volume. Just as the latter part of 2001 was negatively
affected by the events of September 11, the bond market in 2002 was not without
some significant obstacles to growth. Corporate accounting scandals and the
related large stock market losses that threatened consumer confidence and
spending earlier in the year appear to have subsided. However, market concerns
over the strength of a US economy as well as uncertainty caused by potential
military conflicts remained impediments to market recovery. With persistent
uncertainty as to how these events would transpire, many investors have held
back on long term commitments in the financial markets, preferring to stay short
and liquid. Going forward, it remains to be seen what effect these events will
have on the future earnings of APS Financial and, accordingly, us.
Our financial services expenses increased 3% in 2002 compared to 2001. The
increase in transaction activity at APS Financial was responsible for a 7%
increase in sales commission expense, an 8% increase in information support
services and a 3% increase in transactions fees charged by our outside clearing
firm. Lastly, internally allocated expenses for computer and information
technology support was up 20% during 2002. Partially offsetting these increases
was a 17% decrease in legal fees resulting from fewer investment banking and
other acquisition activities in 2002 than in 2001. Also, rent expense decreased
48% percent in 2002 compared to 2001 as a result of the amortization of deferred
gains from our sale leaseback transaction being treated as a reduction to rent
expense.
INSURANCE SERVICES
Our insurance services revenues increased 30% in 2002 compared to 2001.
The increase was due to a 28% increase in total premium earned by the insurance
company that we manage, APIE. This increase in total written premium was the
result of several contributing factors: premium rate increases that averaged
approximately 35% in 2002; a 57% increase in new business written; a 3% increase
in total doctors insured; and a 15% increase in the rate of renewal of existing
insureds. We attribute the higher retention rate of business in 2002 to the exit
of some of our major competitors from the Texas market during the latter half of
2001.
Our insurance services expenses increased 19% in 2002 compared to 2001.
The increase was primarily due to a 27% increase in commissions paid to sales
agents resulting from the above-mentioned increase in commission revenues
earned. In addition, personnel costs increased 15% in 2002 primarily due to a
53% increase in management incentive costs resulting from increased before-tax
profits of 53%. Lastly, advertising was 89% higher in 2002 resulting in part
from re-branding efforts as a result of FPIC withdrawing from the Texas market.
Partially offsetting this increase was an 85% decrease in rent expense in 2002
compared to 2001 as a result of the amortization of deferred gains from our sale
leaseback transaction being treated as a reduction to rent expense.
CONSULTING
Our consulting revenues increased 25% in 2002 compared to 2001 and our
consulting expenses decreased 5% in 2002 compared to 2001. Billable hours
increased during 2002 resulting from an increased workload performed for our
largest client and new business involving wetlands mitigation construction and
remedial investigation projects. As described in Note 14 to our consolidated
financial statements, we completed the sale of APS Consulting to its management
effective November 1, 2002.
14
GENERAL AND ADMINISTRATIVE EXPENSES
Our corporate level general and administrative expenses increased 12% in
2002 compared to 2001. The increase was primarily due to a $531,000 (590%)
increase in management incentive compensation. This formula driven expense was
up this year as a result of the increase in consolidated earnings brought about
in large part by the profits on the sales of Prime Medical common stock
described below in the "Gain on Sale of Investments" section. Partially
offsetting these increases was a 74% decrease in legal fees attributable to
decreased material litigation expenses in 2002 in comparison to 2001. In
addition, we recognized zero lawsuit settlement charges in 2002, compared to
$343,000 in lawsuit settlement charges that we expensed in 2001. Lastly, rent
expense decreased 87% in 2002 compared to 2001 as a result of the amortization
of deferred gains from our sale leaseback transaction being treated as a
reduction to rent expense.
GAIN ON SALE OF ASSETS
Our gain on the sale of assets represents the recognition of deferred gains
attributable to the November 2001 sale of real estate. Since the sale of the
real estate was to Prime Medical, our then 15% owned affiliate, we had deferred
$760,000 of the $5,100,000 gain. During 2002 we reduced our investment in Prime
Medical and subsequently recognized a proportionate percentage of this deferred
gain, or about $515,000.
GAIN ON SALE OF INVESTMENTS
Our gain on sale of investments of $2,855,000 represents gains from the
sale of 1,591,000 shares of Prime Medical common stock. As of December, 31, 2002
we continue to own approximately 753,000 shares of Prime Medical amounting to an
ownership percentage of less than 5%.
AFFILIATES EARNINGS (LOSS)
Our equity in the earnings of Prime Medical increased $2,365,000 to
$186,000 in 2002 compared to 2001. In 2001 we recorded our then 15% equity
ownership of a $24.0 million, net of tax, non-recurring charge at Prime Medical.
Equity earnings in Prime Medical during 2002 totaled $186,000 before changing
our method of accounting for Prime Medical from the equity method to the cost
method As of March 19, 2002, we ceased accounting for our investment in Prime
Medical using the equity method of accounting because (1) on January 1, 2002,
Kenneth S. Shifrin, the Company's Chairman and CEO, stepped down from day-to-day
operations as Executive Chairman of the Board of Prime Medical, but continued to
serve as non-executive Chairman; and (2) from January to March 19, 2002, we sold
1,570,000 shares of Prime Medical reducing our ownership percentage to slightly
less than 5%.
In 2001, as a result of our 15% equity ownership and other facts that
evidenced our significant influence over Prime, we recorded our percentage share
of Prime's loss under the equity method of accounting. In 2001, Prime reported a
net loss of $14.5 million, including a $24.0 million, net of tax, non-recurring
charge related to a significant goodwill impairment resulting in our recognizing
$2.2 million as our percentage of Prime's net loss.
Our equity in losses of Uncommon Care decreased $782,000 (77%) from
$1,012,000 to $230,000, in 2002 compared to 2001 primarily as a result of our
limiting our losses in Uncommon Care to our total investment and advances to
Uncommon Care. Our investment in and advances to Uncommon Care were reduced to
zero during 2001. Once we reduced our total investment to zero, as required
under the equity method, we ceased recording equity losses. Until such time as
15
Uncommon Care becomes profitable and future equity in these profits fully
offsets our prior period cumulative equity losses, future advances to Uncommon
Care that exceed amounts repaid will result in a loss when advanced. Advances to
Uncommon Care totaling $230,000 in February 2002 account for the loss recorded
during the first quarter 2002. Repayments by Uncommon Care totaling $85,000 were
received in the third quarter of 2002 and were recorded as deferred income.
Future advances will not affect net income until such time as they exceed the
amount repaid.
At December 31, 2002, Uncommon Care was not in compliance with its loan
covenants. Uncommon Care's lender has several options ranging from renegotiating
new loan terms to seizing its collateral, thus forcing Uncommon Care in
bankruptcy. It is unknown as of the date of this report what action the lender
may take.
INTEREST INCOME
Our interest income increased 61% in 2002 compared to 2001 primarily as a
result of interest earned on a much higher balance of short and long term
securities. Cash, cash equivalents, trading account securities and fixed income
securities totaled approximately $11,112,000 in 2002 compared to a total of
$4,000,000 in 2001.
DISCONTINUED OPERATIONS
In November, 2001, we sold all of our condominium space in an office
project located in Austin, Texas to Prime Medical. Approximately 50% of this
space was leased back to us and is utilized by our financial services, insurance
services and corporate segments' operations. Gain on the sale amounted to
approximately $5.1 million, of which approximately $1.9 million was recognized
in 2001. Due to our continuing involvement in the property, we deferred
recognizing approximately $2.4 million of the gain which is being recognized in
earnings, as a reduction of rent, monthly through November 2006. In addition,
15% of the gain ($0.76 million) related to our 15% ownership in the purchaser,
was deferred as we accounted for Prime Medical using the equity method of
accounting as of and for the year ended December 31, 2001. During 2002, in
connection with our reduced investment in Prime Medical, we recognized a
proportionate percentage of the deferred gain, or about $515,000. In 2001,
subsequent to the sale of the condominium space, we dissolved APS Realty, Inc.,
or APS Realty, our wholly-owned subsidiary that formerly owned this office
space. Our revenues from APS Realty (not including the gains from the sales of
office space in both years) contributed 4% of our total revenues in 2001.
(See Note 13 to our consolidated financial statements in Appendix A.)
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Our net working capital was $6,067,000 and $3,444,000 at December 31, 2002
and 2001, respectively. The increase in the current year is due primarily to the
sale of 1,591,000 shares of Prime Medical common stock which added approximately
$10,719,000 in cash. Partially offsetting this increase to working capital was
$2,275,000 used to pay off a note payable, payments totaling $3,298,000 in
estimated 2002 federal income taxes, and the purchase of $3,273,000 in
non-current available for sale securities. Historically, we have maintained a
strong working capital position and, as a result, we have been able to satisfy
our operational and capital expenditure requirements with cash generated from
our operating and investing activities. These same sources of funds have also
allowed us to pursue investment and expansion opportunities consistent with our
growth plans. In 2001 we supplemented these traditional sources of funds with
16
short-term bank borrowings. Although there can be no assurance our operating
activities will provide positive cash flow in 2003, we believe that our current
cash position along with our investments in available for sale equity and fixed
income securities will enable us to meet our working capital requirements for
the foreseeable future.
LINE OF CREDIT
We had a three year $7,500,000 revolving credit agreement with Bank of
America. Funds advanced under the agreement bore interest at the prime rate less
25 basis points payable quarterly. We pledged shares of Prime Medical to the
bank as funds were advanced under the line. Amounts totaling $2,275,000 and zero
were borrowed under this line of credit as of December 31, 2001 and December 31,
2002, respectively. Due to losses from write downs of our investments, as well
as our proportionate loss in a significant goodwill impairment by Prime Medical,
our total equity was below the amount needed to comply with our bank covenants
at December 31, 2001. In February 2002, we repaid all advances on our line of
credit and terminated the line of credit. We also satisfied all remaining
contractual obligations under the merger agreement between our former physician
practice management company and FemPartners, Inc. With no debt, major
obligations satisfied, a forecast of positive cash flow and sufficient cash on
hand, we believe that we can meet foreseeable cash needs without additional
liquidity from a line of credit.
CAPITAL EXPENDITURES
Our capital expenditures for equipment were $154,000 and $192,000 in 2002
and 2001, respectively. Our capital expenditures were higher in 2001 due to
purchases necessary to upgrade our network server hardware and software as well
as to upgrade our accounting software. We expect capital expenditures in 2003 to
approximate those in 2002.
COMMITMENTS
We have committed cash outflow related to operating lease arrangements with
a term exceeding one year and other contractual obligations at December 31, 2002
as follows (in thousands):
Payment Due
Contractual Cash Obligation 2003 2004 2005 2006 2007 Total
--------------------------------------------------------------------------------------------------------------------
Operating leases $950 $825 $687 $487 $8 $2,957
==== ==== ==== ==== == ======
As part of the sales agreement with the management of APS Consulting, we
have agreed to make loans of up to $700,000 to APS Consulting. These loans are
collateralized by the trade accounts receivables of APS Consulting which are
less than 90 days old. Further, after May 31, 2003, APS Consulting may borrow a
more limited amount equal to a maximum of 85% of their less than 90 days old
trade receivables plus half of their cash on-hand. Interest charged is at the
rate of prime plus 3% and the term of this agreement is seven years, expiring
November 22, 2009, unless otherwise agreed through early termination or the
termination to the management services agreement between us and APS Consulting.
As this line of credit agreement is fully collateralized by the cash and trade
receivables of APS Consulting, we believe our exposure to any future bad debt
losses is minimal and further believe that any cash loaned will not have a
material impact upon our working capital. A total of $248,000 had been advanced
under this loan agreement as of December 31, 2002.
17
Our ability to make scheduled payments or to fund planned capital
expenditures will depend on our future performance, which, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. There can be no assurance that
our business will generate cash flow from operations or that we will realize
anticipated revenue growth and operating improvements sufficient to make
scheduled payments and fund planned future capital expenditures.
INFLATION
Our operations are not significantly affected by inflation because, having
no manufacturing operations, we are not required to make large investments in
fixed assets. However, the rate of inflation will affect certain of our
expenses, such as employee compensation and benefits.
IMPACT OF NEW ACCOUNTING STANDARDS
As more fully described in Note 1 of Notes to Consolidated Financial
Statements, on January 1, 2003, the Corporation is required to adopt several new
accounting standards. For a discussion of the impact of those new accounting
standards upon the Corporation, see Note 1 (m).
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in Appendix A attached
hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 8, 2002, we dismissed KPMG LLP as our independent public
accountants and engaged BDO Seidman, LLP as our new independent public
accountants. Our board of directors approved the decision to change accountants.
During 2000 and 2001 and through the subsequent interim period ended July
8, 2002, we had no disagreements with KPMG LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of KPMG LLP,
would have caused it to make reference to the subject matter of the disagreement
in connection with its reports.
The audit report of KPMG LLP on our consolidated financial statements as of
and for the years ended December 31, 2000 and 2001 did not contain any adverse
opinion or disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope, or accounting principles.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
The information required by this item is contained in our definitive proxy
statement to be filed in connection with our 2003 annual meeting of
shareholders, except for the information regarding our executive officers, which
is presented below. The information required by this item contained in our
definitive proxy statement is incorporated herein by reference.
18
As of March 15, 2003, our executive officers were as follows:
Name Age Position
Kenneth S. Shifrin 53 Chairman of the Board, President and
Chief Executive Officer
William H. Hayes 55 Senior Vice President -Finance,
Secretary, Chief Financial Officer
Maury L. Magids 38 Senior Vice President - Insurance
Thomas R. Solimine 44 Controller
Our officers serve until the next annual meeting of our directors and until
their successors are elected and qualified.
Mr. Shifrin has been our Chairman of the Board since March 1990. He has
been our President and Chief Executive Officer since March 1989 and he was
President and Chief Operating Officer from June 1987 to February 1989. He has
been a director of ours since February 1987. From February 1985 until June 1987,
Mr. Shifrin served as our Senior Vice President - Finance and Treasurer. He was
Chairman of the Board of Prime Medical from October 1989 until his resignation
on January 1, 2002. Mr. Shifrin is a member of the World Presidents
Organization.
Mr. Hayes has been our Senior Vice President - Finance since June 1995. Mr.
Hayes was our Vice President from June 1988 to June 1995 and was our Controller
from June 1985 to June 1987. He has been our Secretary since February 1987 and
our Chief Financial Officer since June 1987. Mr. Hayes is a Certified Public
Accountant.
Mr. Magids has been our Senior Vice President - Insurance Services since
June 2001 and has been President and Chief Operating Officer of FMI since
November 1998. Mr. Magids joined us in October 1996. Mr. Magids is a Certified
Public Accountant and was with Arthur Andersen LLP from August 1986 until
September 1996, most recently as Director of Business Development.
Mr. Solimine has been our 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 our Manager of Accounting.
There are no family relationships, as defined, between any of our executive
officers, and there is no arrangement or understanding between any of our
executive officers and any other person pursuant to which he or she was selected
as an officer. Each of our executive officers was elected by our board of
directors to hold office until the next annual election of officers and until
his or her successor is elected and qualified or until his or her earlier
resignation or removal. Our board of directors elects our officers in
conjunction with each annual meeting of our shareholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is contained in our definitive
proxy statement to be filed in connection with our 2003 annual meeting of
shareholders, which information is incorporated herein by reference.
19
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is contained in our definitive proxy
statement to be filed in connection with our 2003 annual meeting of
shareholders, which information is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in our definitive proxy
statement to be filed in connection with our 2003 annual meeting of
shareholders, which information is incorporated herein by reference.
ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The information required by this item is contained in Appendix
A attached hereto.
(b) Reports on Form 8-K for the quarter ended December 31, 2002
(none)
(c) Exhibits (1)
3.1 Restated Articles of Incorporation of the Company, as amended. (5)
3.2 Amended and Restated Bylaws of the Company.(5)
4.1 Specimen of Common Stock Certificate. (2)
4.2 Rights Agreement, dated as of August 15, 2000, 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)
*10.8 1995 Incentive and Non-Qualified Stock Option Plan of American Physicians
Service Group, Inc. (6)
20
*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)
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)
21
10.29 APS Practice Management, Inc., Certificate of Designation of Rights and
Preferences Series A Serial Founder's Common Stock dated September 30,
1997. (8)
10.30 Resolutions to organizational matters concerning Syntera, Inc. dated
October 1, 1997. (8)
10.31 Master Refinancing Agreement dated November 6, 1997 between the Company
and Consolidated Eco-Systems, Inc. (8)
10.32 Promissory Note dated November 6, 1997 executed by Consolidated
Eco-Systems, Inc. and payable to the Company in the amount of $3,788,580.
(8)
10.33 Assignment and Security Agreement dated November 6, 1997 between the
Company and Consolidated Eco-Systems, Inc. (8)
10.34 Security Agreement dated November 6, 1997 between the Company and
Consolidated Eco-Systems, Inc. (8)
10.35 Share Exchange Agreements dated October 31, 1997 between the Company and
Devin Garza, M.D., Robert Casanova, M.D. and Shelley Nielsen, M.D. (8)
*10.36 First Amendment to 1995 Incentive and Non- Qualified Stock Option Plan of
American Physicians Service Group, Inc. Dated December 10, 1997. (8)
*10.37 First Amendment to 1995 Non-Employee Director Stock Option Plan of
American Physicians Service Group, Inc. Dated December 10, 1997. (8)
10.38 Share Exchange Agreement dated February 16, 1998 between the Company
and Michael T. Breen, M.D. (9)
10.39 Share Exchange Agreement dated April 1, 1998 between the Company and
Antonio Cavazos, Jr., M.D. (9)
10.40 Share Exchange Agreement dated April 1, 1998 between the Company and
Antonio Cavazos, III, M.D. (9)
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)
22
10.48 Stock Transfer Restriction and Shareholders Agreement dated January 1,
1998 between the Company, Additional Purchasers, Barton Acquisition,
Inc., Barton House, Ltd., Barton House at Oakwell Farms, Ltd.,Uncommon
Care, Inc., George R. Bouchard, John Trevey, and Uncommon Partners,
Ltd. (9)
10.49 Loan Agreement dated January 1, 1998 between the Company and Barton
Acquisition, Inc. (9)
10.50 Promissory Note (Line of Credit) dated January 1, 1998 between the
Company and Barton Acquisition, Inc. in the amount of $2,400,000. (9)
10.51 Security Agreement dated January 1, 1998 between the Company and Barton
Acquisition, Inc. (9)
10.52 Participation Agreement dated March 16, 1998 between the Company and
Additional Purchasers referred to as Participants. (9)
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. (10)
10.64 Share Exchange Agreement dated August 31, 1999 between the Company and
David L. Berry, M.D. (10)
10.65 Share Exchange Agreement dated August 31, 1999 between the Company and
Michael T. Breen, M.D. (10)
10.66 Share Exchange Agreement dated August 31, 1999 between the Company and
Jonathan B. Buten, M.D. (10)
23
10.67 Share Exchange Agreement dated August 31, 1999 between the Company and
Robert Casanova, M.D. (10)
10.68 Share Exchange Agreement dated August 31, 1999 between the Company and
Antonio Cavazos, III, M.D. (10)
10.69 Share Exchange Agreement dated August 31, 1999 between the Company and
Joe R. Childress, M.D. (10)
10.70 Share Exchange Agreement dated August 31, 1999 between the Company and
Donald Columbus, M.D. (10)
10.71 Share Exchange Agreement dated August 31, 1999 between the Company and
Devin Garza, M.D. (10)
10.72 Share Exchange Agreement dated August 31, 1999 between the Company and
M. Reza Jafarnia, M.D. (10)
10.73 Share Exchange Agreement dated August 31, 1999 between the Company and
Gary L. Jones, M.D. (10)
10.74 Share Exchange Agreement dated August 31, 1999 between the Company and
Shelley Nielson, M.D. (10)
10.75 Share Exchange Agreement dated August 31, 1999 between the Company and
Lawrence M. Slocki, M.D. (10)
10.76 Loan Agreement dated June 16, 1999 between APS Consulting, Inc. and
APSC, Inc. (10)
10.77 Promissory Note dated June 16, 1999 between APS Consulting, Inc. and
APSC, Inc. (10)
10.78 Security Agreement dated June 16, 1999 between APS Consulting, Inc. and
APSC, Inc. (10)
10.79 Subordination Agreement dated June 16, 1999 between the Company and
APSC, Inc. (10)
10.80 Convertible Promissory Note dated April 27, 1999 between the Company
and Uncommon Care, Inc. (10)
10.81 Replacement Convertible Promissory Note dated September 30, 1999
between the Company and Uncommon Care, Inc. (10)
10.82 Liquidity Promissory Note dated September 30, 1999 between the Company
and Uncommon Care, Inc. (10)
10.83 Replacement Liquidity Note dated October 15, 1999 between the Company
and Uncommon Care, Inc. (10)
10.84 Co-Sale Rights Agreement dated August 31, 1999 between the Company and
FemPartners, Inc. (10)
10.85 Replacement Promissory Note dated August 31, 1999 between the Company
and FemPartners, Inc. (10)
10.86 Guaranty Agreement dated August 31, 1999 between the Company and
FemPartners, Inc. (10)
24
10.87 Amendment to Certificate of Incorporation dated August 29, 2000 of
APSC, Inc. (11)
10.88 Amended Loan Agreement dated June 28, 2000 between APS Consulting and
APSC, Inc. (11)
10.89 Amended Promissory Note dated June 28, 2000 between APS Consulting and
APSC, Inc. (11)
10.90 Amended Promissory Note dated June 28, 2000 between APS Consulting and
APSC, Inc. (11)
10.91 APSC, Inc. Stock Plan. (11)
10.92 APS Asset Management Debt to equity Conversion Agreement dated June 30,
2000. (11)
10.93 Amendment to Revolving Credit Loan Agreement with Bank of America dated
April 26, 2000. (11)
10.94 2nd Amendment to Revolving Credit Loan Agreement with Bank of America
dated February 9, 2001. (11)
10.95 Management Services Agreement dated January 1, 2000 between the Company
and APS Consulting. (11)
10.96 Tax Sharing Agreement dated January 1, 2000 between the Company and APS
Consulting. (11)
10.97 Settlement Agreement and Release dated January 5, 2000 between APS
Consulting and M. J. Blankenship Woodcock. (11)
10.98 Professional Services Contract dated April 10, 2000 between APIA and
White Lion Internet Agency. (11)
10.99 $1.25 million 364-Day Revolving Promissory Note dated February 9, 2001
between the Company and Bank of America. (11)
10.100 $1.25 million Promissory Note dated June 1, 2000 between the Company
and Uncommon Care, Inc. (11)
10.101 $1.20 million Promissory Note dated June 1, 2000 between the Company
and Uncommon Care, Inc. (11)
10.102 Agreement dated November 22, 2002 transferring and assigning all
capital stock of Eco-Systems from the Company to the purchaser. (13)
*10.103 Amended 1995 Incentive and Non-Qualified Stock Option Plan (13)
*10.104 Executive Employment Agreement between the Company and Kenneth S.
Shifrin. (13)
*10.105 Consulting Agreement between the Company and William A. Searles (13)
*10.106 Executive Employment Agreement between the Company and William H.
Hayes. (13)
21.1 List of subsidiaries of the Company. (13)
25
23.1 Independent Auditors Consent of KPMG LLP. (13)
23.2 Independent Auditors Consent of BDO Seidman, LLP. (13)
99.1 Certification of Chief Executive Officer. (13)
99.2 Certification of Chief Financial Officer. (13)
(*) Executive Compensation plans and arrangements.
-----------------
(1) The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports,
proxy statements and other information with the Commission. Reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and
CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material can be obtained by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Such reports, proxy statements and other information
concerning the Company are also available for inspection at the offices of The
NASDAQ National Market, Reports Section, 1735 K Street, N.W., Washington, D.C.
20006. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at http://www.sec.gov and makes available the
same documents through Disclosure, Inc. at 800-638-8241.
(2) Filed as an Exhibit to the Registration Statement on Form S-1,
Registration No. 2-85321, of the Company, and incorporated herein by
reference.
(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.
26
(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 Annual Report on Form 10-K of the Company
for the year ended December 31, 1999 and incorporated herein by
reference.
(11) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 2000 and incorporated herein by
reference.
(12) Filed as an Exhibit to the Annual Report on Form 10-KSB of the Company
for the year ended December 31, 2001 and incorporated herein by
reference.
(13) Filed herewith.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days before the filing date of this report on Form 10-KSB, under the
supervision and with the participation of our management, including our Chief
Executive Officer (our principal executive officer) and our Chief Financial
Officer (our principal financial officer), we evaluated the effectiveness of our
disclosure controls and procedures (as defined under Rule 13a-14(c) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on this
evaluation, our Chief Executive Officer and our Chief Financial Officer
concluded that our disclosure controls and procedures are effective to ensure
that information we are required to disclose in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms.
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of such
evaluation.
27
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 31, 2003
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 31, 2003
By: /s/ W. H. Hayes
-----------------------------------
W. H. Hayes
Senior Vice President - Finance, Secretary
and Chief Financial Officer
(Principal Financial Officer)
Date: March 31, 2003
By: /s/ Thomas R. Solimine
-----------------------------------
Thomas R. Solimine
Controller
(Principal Accounting Officer)
28
Date: March 31, 2003
By: /s/ Robert L. Myer
------------------------------------
Robert L. Myer, Director
Date: March 31, 2003
By: /s/ William A. Searles
------------------------------------
William A. Searles, Director
Date: March 31, 2003
By: /s/ Brad A. Hummel
------------------------------------
Brad A. Hummel, Director
Date: March 31, 2003
By: /s/ Jackie Majors
-----------------------------------
Jackie Majors, Director
Date: March 31, 2003
29
CERTIFICATION
I, Kenneth S. Shifrin, Chairman of the Board and Chief Executive Officer
of American Physicians Service Group, Inc., certify that:
1. I have reviewed this annual report on Form 10-KSB of American
Physicians Service Group, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and I have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent valuation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003 By: /s/ Kenneth S. Shifrin
----------------------
Kenneth S. Shifrin
Chairman of the Board and Chief
Executive Officer
30
CERTIFICATION
I, W.H. Hayes, Senior Vice President- Finance, Secretary and Chief
Financial Officer of American Physicians Service Group, Inc., certify
that:
1. I have reviewed this annual report on Form 10-KSB of American
Physicians Service Group, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and I have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 31, 2003 By: /s/ W. H. Hayes
--------------------
W. H. Hayes
Senior Vice President-Finance,
Secretary and Chief Financial Officer
31
APPENDIX A
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Reports A-2
Consolidated Financial Statements
Consolidated Statements of Operations for the years
ended December 31, 2002 and 2001 A-4
Consolidated Balance Sheets as of December 31, 2002
and December 31, 2001 A-6
Consolidated Statements of Cash Flows for the years
ended December 31, 2002 and 2001 A-8
Consolidated Statements of Shareholders' Equity and Comprehensive
Income (Loss) for the years ended December 31, 2002 and 2001 A-10
Notes to Consolidated Financial Statements A-11
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American Physicians Service Group, Inc.
Austin, Texas
We have audited the accompanying consolidated balance sheet of American
Physicians Service Group, Inc. (the Company) as of December 31, 2002 and the
related consolidated statements of operations, shareholders' equity and
comprehensive income (loss), and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides 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. at December 31, 2002, and the results of its operations and
its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
Houston, Texas
March 21, 2003
/s/ BDO Seidman, LLP
---------------------
A-2
INDEPENDENT AUDITORS' REPORT
The Board Directors and Stockholders
American Physicians Service Group, Inc.
Austin, Texas
We have audited the consolidated balance sheet of American Physicians Service
Group, Inc. (the "Company") and subsidiaries as of December 31, 2001 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year ended December 31, 2001. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial condition of American Physicians
Service Group, Inc. and subsidiaries at December 31, 2001 and the results of
their operations and cash flows for the year ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
Austin, Texas
April 15, 2002
/s/ KPMG LLP
--------------------
A-3
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
2002 2001
---- ----
Revenues:
Financial services $13,625 $13,094
Insurance services 9,455 7,263
Consulting (Note 14) 3,296 2,642
Other 16 --
-------- --------
Total revenues 26,392 22,999
------- -------
Expenses:
Financial services 11,876 11,518
Insurance services 7,066 5,918
Consulting 2,909 3,062
General and administrative 1,951 1,749
Gain on sale of assets (Note 13) (515) --
-------- --------
Total expenses 23,287 22,247
------- --------
Operating income 3,105 752
Gain on sale of investments 2,855 --
----- --------
Earning (loss) from continuing operations before interest, income
taxes, minority interests and equity in loss of unconsolidated
ffiliates 5,960 752
Interest income 195 121
Interest expense 24 465
Income tax expense (benefit) (Note 10) 2,415 (952)
Minority interests 261 157
Equity in loss of unconsolidated affiliates (Note 15) (44) (3,191)
--------- -------
Earnings (loss) from continuing operations 3,411 (1,988)
Discontinued operations: (Note 13)
Earnings from discontinued operations, net of income tax expense of
$72 in2001 -- 138
Gain on disposal of discontinued segment, net of income tax expense
of $655 in 2001 -- 1,272
-------- ---------
Net earnings (loss) $ 3,411 $ (578)
========= =========
See accompanying notes to consolidated financial statements.
A-4
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS, continued
(In thousands, except per share data)
(In thousands, except per share data)
Year Ended December 31,
2002 2001
---- ----
Earnings (loss) per common share: (Note 17)
Basic:
Earnings (loss) from continuing operations $1.53 $(0.85)
Discontinued operations -- 0.60
----- ------
Net earnings (loss) $1.53 $(0.25)
===== ======
Diluted:
Earnings (loss) from continuing operations $1.45 $(0.85)
Discontinued operations -- 0.60
----- -----
Net earnings (loss) $1.45 $(0.25)
====== ======
Basic weighted average shares outstanding 2,227 2,343
====== ======
Diluted weighted average shares outstanding 2,345 2,343
====== ======
See accompanying notes to consolidated financial statements.
A-5
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
--------------------------------
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents $6,691 $3,851
Trading account securities 133 149
Accounts receivable, net 460 603
Notes receivable, current portion (Note 3) 571 573
Management fees and other receivables (Note 2) 763 484
Deposit with clearing organization 500 499
Receivable from clearing organization 70 69
Investment in available-for-sale fixed income
securities - current (Note 5) 1,015 --
Net deferred income tax asset (Note10) -- 282
Income tax receivable 491 167
Prepaid expenses and other 673 1,147
------ -----
Total current assets 11,367 7,824
Notes receivable, less current portion (Note 3) 374 999
Property and equipment (Note 6) 374 415
Investment in available-for-sale equity securities (Note 5) 6,996 --
Investment in available-for-sale fixed income securities -
non-current (Note 5) 3,273 --
Investment in affiliates (Note 15) -- 10,700
Other investments (Note 18) -- 68
Net deferred income taxes (Note 10) 2,399 1,453
Other assets 198 201
------ ------
Total Assets $24,981 $21,660
======= =======
See accompanying notes to consolidated financial statements.
A-6
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED BALANCE SHEETS, continued
(In thousands, except share data)
December 31,
2002 2001
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $738 $511
Payable to clearing organization 70 254
Accrued incentive compensation 1,804 1,246
Accrued expenses and other liabilities (Note 7) 1,227 1,870
Deferred gain - current portion 487 499
Deferred tax liability (Note10) 974 --
------- ------
Total current liabilities 5,300 4,380
Payable under loan participation agreements 259 259
Deferred gain - non-current portion 1,887 1,955
Notes payable - long term (Note 8) -- 2,275
------ ------
Total liabilities 7,446 8,869
Minority interest 393 124
------- ------
Shareholders' Equity:
Preferred stock, $1.00 par value, 1,000,000 shares authorized -- --
Common stock, $0.10 par value, shares authorized 20,000,000; 2,133,843 issued
at 12/31/02 and 2,745,231 issued at 12/31/01 and
2,133,843 outstanding at 12/31/02 and 2,359,231 at 12/31/01 213 275
Additional paid-in capital 5,584 5,539
Retained earnings 9,515 8,310
Accumulated other comprehensive income (loss), net of taxes 1,830 (39)
Treasury stock, at cost, zero shares at 12/31/02 and 386,000 shares at 12/31/01 -- (1,418)
------- ------
Total shareholders' equity 17,142 12,667
------- ------
Total Liabilities and Shareholders' Equity $24,981 $21,660
======= =========
See accompanying notes to consolidated financial statements.
A-7
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
Year Ended December 31,
2002 2001
----- -----
Cash flows from operating activities:
Cash received from customers $26,233 $22,792
Cash paid to suppliers and employees (23,238) (23,165)
Change in trading account securities 16 83
Change in balance with clearing organization (186) (104)
Interest paid (24) (456)
Income taxes paid (3,298) (45)
Interest, dividends and other investment income 195 54
------ ------
Net cash used in operating activities (302) (841)
Cash flows from investing activities:
Capital expenditures (154) (192)
Proceeds from the sale of property and equipment -- 6,075
Proceeds from the sale of an investment 10,719 --
Purchase of available-for-sale securities (4,683) --
Investment in and advances to affiliates (230) (485)
Other investments -- 38
Funds loaned to others (155) (318)
Collection of notes receivable 725 282
Other -- 57
-------- -------
Net cash provided by investing activities 6,222 5,457
Cash flows from financing activities:
Proceeds from borrowings -- 1,715
Payment of long term debt (2,275) (5,328)
Purchase of treasury stock (850) --
Exercise of stock options 45 --
Distribution to minority interest -- (140)
-------- -------
Net cash used in financing activities (3,080) (3,753)
Net change in cash and cash investments $2,840 $863
Cash and cash investments at beginning of period 3,851 2,988
-------- -------
Cash and cash investments at end of period $6,691 $3,851
======== =======
See accompanying notes to consolidated financial statements.
A-8
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(in thousands, except summary information)
Year Ended December 31,
2002 2001
---- ----
Reconciliation of net earnings (loss) to net cash used in operating activities:
Net earnings (loss) $3,411 $(578)
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 188 312
Forgiveness of debt and other 164 213
Minority interest in consolidated earnings 261 157
Impairment of goodwill -- 391
Undistributed loss of affiliates 44 3,399
Gain on sale of assets (1,003) (1,932)
Gain on sale of investment (2,855) (30)
Change in income tax receivable (324) 335
Provision for deferred taxes (486) (756)
Provision for bad debt 200 --
Change in trading account securities 16 83
Change in balance with clearing organization (186) (104)
Change in management fees & other receivables (279) (458)
Change in trade receivables 16 --
Change in prepaid expenses & other assets 474 (816)
Change in trade accounts payable 227 4
Change in deferred income (85) (447)
Change in accrued expenses & other liabilities (85) (614)
------- -------
Net cash used in operating activities $(302) $(841)
======= =======
Summary of non-cash transactions:
During 2001, we sold all of the remaining 45,000 square feet of condominium
space we owned in an office project located in Austin, Texas. In connection
with the sale, we deferred $3.2 million of the gain recorded on the sale.
(Note 13)
During 2002 we agreed to modify the terms of the foregoing notes. For the period
July 1, 2001 through June 30, 2002 the interest rate was changed to 4% and
payments were paid in-kind (PIK) in the form of Uncommon Care common stock at
$0.57 per share. Additionally, the PIK stock may be repurchased by Uncommon
Care through June 30, 2004 at a price of $.64 per share. We agreed to these
modified terms to improve Uncommon Care's liquidity and to assist it in
complying with the terms of its bank covenants. PIK payments during 2002 and
2001 increased our ownership in Uncommon Care from 34% to 42% on a fully
converted basis.
See accompanying notes to consolidated financial statements.
A-9
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
For the years ended December 31, 2002 and 2001
(In thousands)
Accumulated
Common Additional Other Total
Stock Paid-In Retained Comprehensive Comprehensive Treasury Shareholders'
(Note 19) Capital Earnings Income (Loss) Income Stock Equity
---------- ---------- ---------- --------------- ------------ ----------- -------------
---------- ---------- ---------- --------------- ------------ ----------- -------------
Balance December 31, 2000: $275 $5,539 $8,888 -- $(32) $(1,418) $13,252
Comprehensive income:
Net loss -- -- (578) $(578) -- -- (578)
Other comprehensive loss
Unrealized loss on securities,
net of tax of $2 -- -- -- (7) (7) -- (7)
Comprehensive loss -- -- -- $(585) -- -- --
------
---------- ---------- ---------- --------------- ------------ ----------- -------------
---------- ---------- ---------- --------------- ------------ ----------- -------------
Balance December 31, 2001 $275 $5,539 $8,310 $(39) $(1,418) $12,667
---------- ---------- ---------- --------------- ------------ ----------- -------------
---------- ---------- ---------- --------------- ------------ ----------- -------------
Comprehensive income:
Net income $ -- $ -- $3,411 $3,411 $ -- $ -- $3,411
Other comprehensive income:
Unrealized gain on securities, -- -- -- 1,869 1,869 -- 1,869
net of tax of $963 ------
Comprehensive income -- -- -- $5,280 -- -- --
------
Stock Options Exercised 1 45 -- -- -- 45
Treasury stock purchases -- -- -- -- (850) (850)
Retired Treasury Stock (62) -- (2,206) -- 2,268 --
---------- ---------- ---------- --------------- ------------ ----------- ------------
---------- ---------- ---------- --------------- ------------ ----------- ------------
Balance December 31, 2002 $ 213 $ 5,584 $ 9,515 $ 1,830 -- $ 17,142
========== ========== ========== =============== ============ =========== ============
See accompanying notes to consolidated financial statements.
A-10
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
(1) Summary of Significant Accounting Policies
(a) General
We, through our subsidiaries, provide financial services that include
brokerage and asset management services to individuals and
institutions, insurance services that consist of management services
for a malpractice insurance company, and until November 1, 2002,
provided environmental consulting services that included air, water and
solid waste engineering, litigation support and regulatory compliance.
The financial services business has clients nationally. Insurance
management is a service provided primarily in Texas, but is available
to clients nationally. During the two years presented in the financial
statements, financial services generated 52% and 57% of total revenues
and insurance services generated 36% and 32% in 2002 and 2001,
respectively.
We have an affiliate, Uncommon Care, Inc. ("Uncommon Care") of which we
own common stock and convertible preferred stock equivalent to a 42%
ownership on a fully converted basis. Uncommon care is a developer and
operator of Alzheimers care centers.
(b) Management's Estimates and Assumptions
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 consolidated 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 our accounts and the
accounts of our subsidiary companies more than 50% owned. Investments
in affiliated companies and other entities, in which our investment is
less than 50% of the common shares outstanding and where we exert
significant influence over operating and financial policies, are
accounted for using the equity method. Investments in other entities in
which our investment is less than 20%, and in which we do not have the
ability to exercise significant influence over operating and financial
policies, are accounted for using the cost method.
We also consolidate our interest in APS Consulting ("APS Consulting")
as it is accounted for as a variable interest entity in which we are
the primary beneficiary. (See Note 13).
We own 80% of our insurance services segment. We record minority
interest to reflect the 20% of it's net income or loss attributable to
the minority shareholder.
All significant inter-company transactions and balances have been
eliminated from the accompanying consolidated financial statements.
(d) Revenue Recognition
Our 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.
A-11
Our insurance services revenues related to management fees are
recognized monthly as a percentage of the earned insurance premiums of
the managed company. The profit sharing component of the management
services agreement is recognized when it is reasonably certain that the
managed company will have an annual profit, generally in the fourth
quarter of each year.
Our consulting revenues resulted 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. Our clients
were billed, and revenue was recognized, monthly based on hours worked
and expenses incurred toward completing the assignments. Effective
November 1, 2002, we completed the sale of our consulting segment to
its management as it was determined that it did not fit in our
long-term business plan (see Note 14 for description of the accounting
treatment of this transaction.)
(e) Marketable Securities
Our 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
We have included our marketable securities, held as inventory at our
broker/dealer, in the trading securities category. We have included
investments in marketable securities not held as inventory at our
broker/dealer in the available-for-sale securities category.
(f) Property and Equipment
Property and equipment is stated at cost. Property and equipment is
depreciated using the straight-line method over the estimated useful
lives of the respective assets (3 to 5 years). Leasehold improvements
are depreciated using the straight-line method over the life of the
lease.
(g) Long-Lived Assets
Long-lived assets, principally property and equipment, 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.
A-12
Investments are evaluated for impairment in the event of a material
change in the underlying business. Such evaluation takes into
consideration our 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) Allowance for Doubtful Accounts
We recorded an allowance for doubtful accounts based on specifically
identified amounts that we believe to be uncollectible. If our actual
collections experience changes, revisions to our allowance may be
required. We have a limited number of customers with individually large
amounts due at any given balance sheet date. Any unanticipated change
in one of those customer's credit could have a material affect on our
results of operations in the period in which such changes or events
occur. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method.
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.
A valuation allowance is provided for deferred tax assets to the extent
realization is not judged to be more likely than not.
(j) Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
with a maturity date at purchase of 90 days or less. We deposit our
cash and cash equivalents with high credit quality institutions.
Periodically such balances may exceed applicable FDIC insurance limits.
Management has assessed the financial condition of these institutions
and believes the possibility of credit loss is minimal.
(k) Notes Receivable
Notes receivable are recorded at cost, less allowances for doubtful
accounts when deemed necessary. Management, considering current
information and events regarding the borrowers ability to repay their
obligations, considers a note to be impaired when it is probable that
we 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
A-13
reported. No interest income is accrued on impaired loans. Cash
receipts on impaired loans are recorded as reductions of the principal
amount.
(l) Stock-Based Compensation
As described in Note 11, we have elected to follow the accounting
provisions of Accounting Principles Board Opinion (APBO) No. 25,
Accounting for Stock Issued to Employees, for stock-based compensation
and to furnish the pro forma disclosures required under SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure.
(m) Recently Issued Accounting Pronouncements
Recently Issued Accounting Pronouncements
In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the Company to record the fair value
of an asset retirement obligation as a liability in the period in which
it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction,
development, and/or normal use of the assets. The Company also records
a corresponding asset that is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be adjusted at the end of each period
to reflect the passage of time and changes in the estimated future cash
flows underlying the obligation. The Company is required to adopt SFAS
No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not
expected to have a material effect on our consolidated financial
statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145 amends existing guidance on
reporting gains and losses on the extinguishment of debt to prohibit
the classification of the gain or loss as extraordinary, as the use of
such extinguishments have become part of the risk management strategy
of many companies. SFAS No. 145 also amends SFAS No. 13 to require
sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions
of the Statement related to the rescission of Statement No. 4 is
applied in fiscal years beginning after May 15, 2002. Earlier
application of these provisions is encouraged. The provisions of the
Statement related to Statement No. 13 were effective for transactions
occurring after May 15, 2002, with early application encouraged. The
adoption of SFAS No. 145 is not expected to have a material effect on
our consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force
(EITF)Issue 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. The
provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early
application encouraged. The adoption of SFAS No. 146 is not expected to
have a material effect on our consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of
FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual
A-14
financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value
of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation are applicable to guarantees issued or
modified after December 31, 2002 and are not expected to have a
material effect on our consolidated financial statements. The
disclosure requirements are effective for financial statements of
interim and annual periods ending after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of
FASB Statement No. 123. This Statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement No. 123 to
require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the
notes to these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to a variable interests in variable
interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31,
2003. We have voluntarily elected early adoption of Interpretation No.
46. The effect of the application of this Interpretation is described
in Note 14 to these consolidated financial statements.
(n) Reclassification
Certain reclassifications have been made to amounts presented in 2001
to be consistent with the 2002 presentation.
(2) Management Fees and Other Receivables
Management fees and other receivables consist of the following:
December 31,
2002 2001
---- ----
Management fees receivable $382,000 $30,000
Accrued interest receivable 91,000 4,000
Other receivables 290,000 450,000
------- -------
$763,000 $484,000
======== ========
We earn 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, and subject
to a management services agreement , FMI sells and issues policies,
investigates,
A-15
settles and defends claims, and otherwise manages APIE's affairs. We
earned management fees and other related income of $9,455,000 and
$7,263,000, including expense reimbursements, principally for our
independent agents' commissions, of $3,368,000 and $2,570,000 for the
years ended December 31, 2002 and 2001, respectively, related to these
agreements.
The summarized financial information for APIE as of and for the year
ended December 31, 2002 and 2001 is as follows:
2002 2001
(unaudited)
----------- -----------
Current assets $67,129,000 $56,020,000
Long-term assets 13,592,000 8,537,000
---------- ----------
Total assets 80,721,000 64,557,000
========== ==========
Current liabilites 67,736,000 53,082,000
Surplus 12,985,000 11,475,000
---------- ----------
Total liabilities and surplus 80,721,000 64,557,000
========== ==========
Total revenue 29,556,000 35,892,000
Income from continuing operations 1,031,000 1,283,000
Net income 1,503,000 1,385,000
Trade accounts receivable are recorded at APS Consulting for services
performed which are billed on a monthly basis.
Other receivables in 2001 are primarily comprised of a non-interest
bearing advance to APIE which was subsequently collected in March 2002.
A-16
(3) Notes Receivable
Notes receivable consist of the following:
December 31,
2002 2001
---- ----
FemPartners, Inc. (Formerly due from Syntera HealthCare Corporation)
Promissory note, bears interest at 8%. Payments were interest only, paid
quarterly through November 30, 2001. Quarterly combined principal and interest
payments began 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 on the 5th business day after the date of such initial public
offering or other public sale. $902,000 $1,304,000
Unsecured term note, principal and interest, at 8%, payable monthly until
maturity on March 31, 2004. 63,000 115,000
Employees
Loans are periodically made to employees, primarily as employment retention
inducements. Employee notes receivable at December 31, 2002 consisted of a note
totaling $4,000 which will be amortized through 2004, provided the employee
remains with us and two loans totaling $40,000 to a key employee for advanced
education fees. The latter two notes are forgivable in the amount of
approximately $13,000 on each January 1st that the employee is employed by the
Company beginning in 2001 and continuing through 2005. They are due within 90
days should the employee terminate employment.
Employee notes receivable at December 31, 2001 consisted of three notes totaling
$100,000 which were repaid in full in February 2002 and two loans totaling
$53,000 to a key employee for advanced education fees. The same terms apply as
described above. 44,000 153,000
------ --------
1,009,000 1,572,000
Less current portion and allowance for doubtful accounts of $64,000 in 2002 (635,000) (573,000)
-------- --------
Long term portion $374,000 $999,000
======== ========
(4) Fair Value of Financial Instruments
For financial instruments the estimated fair value equals the carrying
value as presented in the consolidated balance sheets. Fair value
estimates, methods, and assumptions are set forth below for our
financial instruments.
A-17
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 trading account securities owned are reported at fair value. In the
absence of any available market quotation, securities held by us are
valued at estimated fair value as determined by management.
In addition to receiving commission revenue for acting as the placement
agent for private offerings, APS Financial received over the past three
years warrants to purchase a total of 652,351 shares of restricted
common capital stock of four companies. The warrants expire in 2004
through 2007 and had no value at December 31, 2002. None of the
warrants have been exercised as of December 31, 2002.
AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities owned are reported at fair value.
ACCOUNTS RECEIVABLE
The fair value of these receivables approximates the carrying value due
to their short-term nature and historical collectibility
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 our management's estimate of current interest rates for notes
of similar credit quality.
DEPOSIT WITH CLEARING ORGANIZATION
The carrying amounts approximate fair value because the funds can be
withdrawn on demand and there is no unanticipated credit concern.
OTHER INVESTMENTS
The fair value has been determined using a third party valuation.
ACCOUNTS PAYABLE
The fair value of the payable approximates carrying value due to the
short-term nature of the obligation.
A-18
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 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. 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) Marketable Securities
At December 31, 2002, we have classified certain investments as
available-for-sale. The cost, gross unrealized gains and losses, and
fair value of these securities by major security type at December 31,
2002 was as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------- ----------------- ---------------- -----------------
--------------------- ----------------- ---------------- -----------------
U.S. government agencies $ 2,846,000 $ 60,000 $ -- $2,906,000
Corporate obligations 1,379,000 19,000 (16,000) 1,382,000
Equity securities 4,287,000 2,762,000 (53,000) 6,996,000
--------- --------- -------- ---------
Total $8,512,000 $2,841,000 $(69,000) $11,284,000
========== ========== ========= ===========
Maturities of fixed income securities were as follows at December 31,
2002:
Fair
Cost Value
--------------------- -----------------------
Due within one year $1,009,000 $1,015,000
Due after one year 3,216,000 3,273,000
--------- ---------
Total $4,225,000 $4,288,000
========== ==========
Amounts reflected in the tables above include equity securities of
Prime Medical with a fair value of $6,525,000 and corporate
obligations of Prime Medical with a fair value of $860,000.
(6) Property and Equipment
Property and equipment consists of the following:
December 31,
------------------------------
2002 2001
---- ----
Equipment $1,150,000 $1,076,000
Furniture 642,000 630,000
Software 319,000 281,000
Leasehold improvements 240,000 234,000
----------- -----------
$2,351,000 $2,221,000
Accumulated depreciation and amortization (1,977,000) (1,806,000)
----------- -----------
$374,000 $ 415,000
=========== ===========
A-19
(7) Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consists of the following as of
December 31,:
2002 2001
---- ----
Commissions payable $ 798,000 $ 533,000
Taxes payable 93,000 61,000
Contractual/legal claims -- 1,031,000
Vacation payable 154,000 140,000
Other 182,000 105,000
-------- --------
$1,227,000 $1,870,000
========== ==========
Contractual/legal claims as of December 31, 2001 includes an accrual of
$520,000 related to the settlement of a legal judgment against us that
was paid in January 2002. Prior to the negotiated settlement of the
judgment, we were required to put up a cash bond in the amount of the
original judgment in the amount of $762,000. As of December 31, 2001,
this amount was reflected in the line item "Prepaid expenses and other"
in the accompanying consolidated balance sheet. The difference between
the cash bond and the settlement amount was reimbursed to us in
February 2002. Also in 2001, we recorded a liability of $511,000 for
agreements with former doctor shareholders of Syntera, a practice
management company we owned that was merged with FemPartners. Under the
agreement, we agreed to exchange their shares in Syntera for the common
stock of American Physicians, or cash, if the Syntera shares did not
become publicly traded. In 2002 we paid cash to settle this liability,
thus satisfying all obligations.
(8) Notes Payable
We had a $7,500,000 line of credit with Bank of America, N. A. We had
pledged substantially all of the assets of our subsidiaries as well as
shares of Prime Medical to the bank as funds were advanced under the
line. Funds advanced under the agreement were $2,275,000 at December
31, 2001. Funds advanced under the agreement bore interest at the prime
rate less 25 basis points. Interest expense incurred during the years
ended December 31, 2002 and 2001 related to the line of credit was
approximately $8,000 and $388,000 respectively. All amounts payable
under the line of credit were due February 2003 but were repaid in
February 2002. We terminated the line of credit during 2002.
(9) Commitments and Contingencies
Expenses under all operating leases for the years ended December 31,
2002 and 2001 were $1,077,000 and $534,000, respectively. Future
minimum payments for leases that extend for more than one year through
2007 were $950,000; $825,000; $687,000; $487,000 and $8,000 for 2003,
2004, 2005, 2006 and 2007, respectively.
We have extended various lines of credit to Uncommon Care. See Note 15
to these consolidated financial statements.
We have extended a line of credit to APS Consulting. See Note 14 to
these consolidated financial statements.
A-20
We are 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 our consolidated financial condition or results of
operations.
We guaranteed a loan in the maximum amount of $70,000 for a director,
William Searles. The guarantee was collateralized by Mr. Searles'
options to purchase American Physicians and Prime Medical shares as
well as Mr. Searles' common stock interest in Uncommon Care. At
December 31, 2001 the loan was in the amount of $35,000. The loan was
paid in full subsequent to year end. Following the passage of the
Sarbanes/Oxley Act in July, 2002, all officers and directors were
informed that loans, advances or guarantees would no longer be
permitted.
(10) Income Taxes
Income tax expense (benefit) consists of the following:
Year Ended December 31,
---------------------------
2002 2001
---- ----
Continuing Operations
Federal
Current $2,471,000 $(694,000)
Deferred (151,000) (330,000)
State-Current 95,000 72,000
----------- ----------
Total from Continuing Operations 2,415,000 (952,000)
Discontinued Operations -- 727,000
----------- ----------
$2,415,000 $(225,000)
=========== ==========
A reconciliation of expected income tax expense (benefit) computed by
applying the United States federal statutory income tax rate of 34% to
earnings (loss) from continuing operations before income taxes to tax
expense (benefit) from continuing operations in the accompanying
consolidated statements of operations follows:
Year Ended December 31,
---------------------------
2002 2001
---- ----
Expected federal income tax expense
(benefit) from continuing operations $1,981,000 $(1,001,000)
State taxes 63,000 48,000
Goodwill adjustment 214,000 --
Minority interest 89,000 --
Other, net 68,000 1,000
--------- -----------
$2,415,000 $ (952,000)
========== ===========
A-21
The tax effect of temporary differences that gives rise to significant
portions of deferred tax assets and deferred tax liabilities at
December 31, 2002 and 2001 are presented below:
Year Ended December 31,
-----------------------------------------------
2002 2001
---- ----
Deferred tax assets:
Net operating loss carryforwards $ -- $ 110,000
Accrued expenses 101,000 227,000
Allowance for doubtful accounts 68,000 16,000
Investment in available-for-sale securities and equity
investees 1,444,000 --
Other investments 51,000 919,000
Sales/Leaseback deferred income 732,000 1,073,000
Other 3,000 84,000
---------- ----------
Total gross deferred tax assets 2,399,000 2,429,000
Less valuation allowance -- (110,000)
---------- ----------
Deferred tax assets-net of valuation allowance 2,399,000 2,319,000
--------- ----------
Deferred tax liabilities:
Investment in equity investments due to use of equity method
for financialreporting -- (528,000)
Market value allowance on investments (943,000) --
Deferred income for tax purposes -- (26,000)
Capitalized expenses, principally due to deductibility for tax
purposes (31,000) (32,000)
-------- ---------
Total gross deferred tax liabilities (974,000) (586,000)
--------- ---------
Net deferred tax asset $1,425,000 $1,733,000
========== ==========
The net change in the total valuation allowance for the year ended
December 31, 2002 was a decrease of $110,000. In assessing the
realizability of deferred tax assets, management considers whether it
is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate 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 we will realize the
benefits of these deductible differences at December 31, 2002.
(11) Employee Benefit Plans
We have 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. Employee
deferrals may not exceed $11,000 in 2002 unless participant is over age
50, in which case the maximum deferral is $12,000. We may, at our
discretion, contribute up to 200% of the employees' deferred amount.
A-22
For the years ended December 31, 2002 and 2001, our contributions
aggregated $135,000 and $88,000, respectively.
(12) Stock Options
We have 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 170,000
shares will not be granted. The Incentive Plan, as amended with
shareholder approval in 1998, 2001, and 2002 provides for the issuance
of up to 1,600,000 shares of common stock to our directors and key
employees. A total of 952,000 of these options have been granted as of
December 31, 2002.
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 substantially all outstanding options
vest in two or three approximately equal annual installments beginning
one year from the date of grant.
We have adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("Statement 123"), but apply Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
for our stock option plans. In 2002 we purchased 89,000 unexpired
options from four grantees. These purchases modified the terms of the
options and we recognized $156,000 of compensation expense, as a
result. Except as previously noted, no compensation expense from
stock-based compensation awards was recognized in 2002 or 2001. If we
had elected to recognize compensation expense for 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,
------------------------------------------------
2002 2001
Net income (loss) as reported $3,411,000 $ (578,000)
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effects (222,000) (226,000)
---------- ---------
Pro forma net income (loss) $3,189,000 $(804,000)
========== =========
Income (loss) per share
Basic - as reported $1.53 $(0.25)
===== =======
Basic - pro forma $1.43 $(0.34)
===== =======
Diluted - as reported $1.45 $(0.25)
===== =======
Diluted - pro forma $1.36 $(0.34)
===== =======
A-23
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:
2002 2001
----- -----
Risk-free interest rate 3.4% 4.45%
Expected holding period 3.7 years 3.90 years
Expected volatility .477 .798
Expected dividend yield -0- -0-
Presented below is a summary of the stock options held by our employees
and our directors and the related transactions for the years ended
December 31, 2002 and 2001.
Year Ended December 31,
------------------------------------------------------------------
2002 2001
---------------------- --------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- --------- ---------- ----------
Balance at January 1 788,000 $3.45 1,151,000 $5.04
Options granted 305,000 3.72 134,000 2.25
Options exercised (13,000) 1.69 -- --
Options repurchased (89,000) 2.38 -- --
Options forfeited/expired (52,000) 6.26 (497,000) 6.70
-------- ---------
Balance at December 31 939,000 3.51 788,000 3.45
======= ---- ======= ====
Options exercisable 500,000 3.78 455,000 4.19
======= ==== ======= ====
The weighted average fair value (the theoretical option value
calculated using the Black Scholes option pricing model) of Company
stock options granted during the years ended December 31, 2002 and 2001
is $1.46 and $1.36 per option, respectively. In this case, as of
December 31, 2002, weighted average price per share of Company stock
options ($5.18) less the weighted average exercise price of options
granted ($3.72) equals the weighted average fair value of options
granted ($1.46).
The following table summarizes the Company's options outstanding and
exercisable options at December 31, 2002:
Stock Options Stock Options
Outstanding Exercisable
------------------------------------------------ ------------------------------------
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
--------------- ------ ---- ----- ------ -----
$1.50 to $3.50 237,000 3.1 years $1.94 101,000 $1.80
$3.51 to $5.50 675,000 2.5 years $3.91 372,000 $4.08
$5.51 to $7.25 27,000 0.3 years $7.18 27,000 $7.18
------- -------
Total 939,000 500,000
======= =======
A-24
(13) Discontinued Operations
Summary operating data for APS Realty is as follows:
Year Ended December 31,
2002 2001
----- ----
Rent revenues -- $ 677
Expenses -- 467
Gain on building sale -- 1,927
----- -------
Income before taxes -- $2,137
Income tax expense 727
----- -------
Net Income -- $1,410
===== =======
In November, 2001 we sold all of the remaining 46,000 square feet of
condominium space we owned in an office project located in Austin,
Texas to our former affiliate, Prime Medical. In conjunction with the
sale we leased back approximately 23,000 square feet that housed our
operations prior to the sale. Our wholly-owned subsidiary, APS Realty,
which formerly owned this office space and leased space to us, our
subsidiaries, affiliates and unaffiliated parties, was subsequently
dissolved. As a result there are no corresponding assets or liabilities
related to discontinued operations as of December 31, 2001. Gain on the
sale amounted to approximately $5.1 million, of which $1.9 million was
recognized in 2001 and the balance of the gain was deferred. Deferred
income of approximately $2.4 million related to our continuing
involvement in 50% of the usable space was recorded and is being
recognized monthly over the five year lease term through November 2006.
Income recognition related to this deferral was $488,000 in 2002 and
$41,000 in 2001. In addition, 15% of the gain ($0.76 million) related
to our 15% ownership in the purchaser, was deferred as we accounted for
Prime Medical using the equity method of accounting through the year
ended December 31, 2001. During 2002 we reduced our investment in Prime
Medical and subsequently recognized a proportionate percentage of the
deferred gain, or about $515,000. Recognition of the deferred gain is
recorded as a reduction of rent expense in operating expenses in the
accompanying financial statements.
(14) Sale of APS Consulting
Effective November 1, 2002, we completed the sale of APS Consulting to
its management. We sold all of our APS Consulting shares for a de
minimus amount of cash plus a $250,000 seven year term note at the
prime rate plus 3%. The note is secured by the assets of APS
Consulting. Our existing contract to provide administrative support
services to APS Consulting for a period of approximately seven years
remains in effect. Fees under this contract are dependent on APS
Consulting's pre-tax earnings but may not be less than $200,000 or more
than $518,000 over its remaining term.
In addition, we extended a line of credit to APS Consulting of up to
$450,000. This line is at the prime rate plus 3% and is collateralized
by the accounts receivable and cash of APS Consulting. Advances under
the line are dependent upon meeting borrowing base requirements.
Under the terms of the sale agreement, we are dependent upon the future
successful operation of the division to collect our proceeds from the
disposal. Additionally, as we have a security interest in the assets of
the division, we have retained a risk of loss on the division's assets
and, under the terms of our notes with the division, we have the
ability to veto certain transactions, including significant asset
disposals.
A-25
Consistent with the guidance under FIN 46, we have not recognized the
divestiture of APS Consulting and continue to consolidate the division
as an entity in which we have a variable interest that will absorb the
majority of the entity's operating losses if they occur.
Accordingly, the assets and liabilities are included in our
consolidated balance sheet as of December 31, 2002. The balance sheet
below summarizes the assets and liabilities of APS Consulting that are
included in our consolidated balance sheet at December 31, 2002:
2002
-------
Assets
Cash $347,000
Accounts Receivable, net 409,000
Prepaid Expenses 22,000
------
Total Current Assets 778,000
Property and Equipment 45,000
------
Total Assets $823,000
========
Liabilities
Accounts Payable $445,000
Accrued Expenses 74,000
--------
Total Current Liabilites 519,000
Notes Payable 248,000
Deferred Income 74,000
--------
Total Liabilites $841,000
========
Total Liabilities in excess of Assets $ 18,000
=========
The revenues and expenses of APS Consulting from January 1, 2002
through the date of sale, November 1, 2002, have been included in our
consolidated financial statements for the year ended December 31, 2002.
In addition, we continue to recognize APS Consulting's revenues and
expenses subsequent to the sale. If, subsequent to the sale, APS
Consulting reports operating losses, we record such losses
in our statement of operations. If APS Consulting reports net earnings,
we reduce our interest in such earnings to zero by increasing the
minority interest presented in our statement of operations. The
statement of operations below summarizes the results of APS Consulting
that are included in our consolidated statement of operations for the
year ended December 31, 2002:
A-26
Pre- Post-
Transaction Transaction Total
----------- ----------- -----------
Consulting Revenue $2,790,000 $506,000 $3,296.000
Consulting Expenses 2,403,000 506,000 2,909,000
--------- ------- ---------
Operating Income $ 387,000 $ -- $ 387,000
========= ========= =========
Creditors of APS Consulting have no recourse to the general credit of
the Company or its other consolidated subsidiaries.
(15) Investment in Unconsolidated Affiliates
As of December 31, 2002 and 2001, respectively, our investment in
unconsolidated affiliates consisted of the following:
December 31,
2002 2001
------ --------
Prime Medical Services, Inc. $ -- $ 10,700,000
Uncommon Care $ -- $ --
------ -----------
$ -- $ 10,700,000
For the year ended December 31, 2002 and 2001, respectively, our equity
in the loss of unconsolidated affiliates consisted of the following:
December 31,
2002 2001
------- --------
Prime Medical Services, Inc. $ 186,000 $(2,179,000)
Uncommon Care $(230,000) $(1,012,000)
---------- -----------
$ (44,000) $(3,191,000)
A-27
On October 12, 1989, we purchased 3,540,000 shares (42%) of the common
stock of Prime Medical. Prime Medical is the largest provider of
lithotripsy (a non-invasive method of treating kidney stones) services
in the United States and is an international supplier of specialty
vehicles for the transport of high technology medical and
broadcast/communications equipment. In the ensuing years, the sale of
stock, stock exchanges and stock issuances reduced our ownership and at
December 31, 2001 our holdings stood at 2,344,000 shares or
approximately 15% of the common stock.
During this period we accounted for our investment using the equity
method, as we exercised significant influence over operating and
financial policies. In the first quarter of 2002, with the sale of
Prime Medical shares reducing our ownership to less than 5%, and our
chairman and CEO reducing his responsibilities on Prime's Board, we
began to account for our Prime Medical investment as an
available-for-sale equity security. In connection with the sales of
primes shares during the year, we recognized a gain of $2,855,000. The
gain is classified as "Gain on Sale of Investments" in the accompanying
consolidated financial statements. Changes in market value of our Prime
Medical shares are included in shareholders equity as "accumulated
other comprehensive income".
Prime is an SEC registrant and additional information on the company
can be found on the SEC's web site at www.sec.gov.
The condensed balance sheet and statement of operations for Prime
Medical follows (unaudited, in thousands):
Condensed balance sheet at December 31, 2001:
2001
------------
Current assets $ 59,213
Long-term assets 192,828
---------
Total assets $252,041
=========
Current liabilities $ 28,350
Long-term liabilities 138,215
Shareholders' equity 85,476
---------
Total liabilities and equity $ 252,041
==========
Condensed statement of operations for the years ended December 31, 2001:
2001
----------
Total revenue $ 154,868
==========
Net income (loss) $ (14,465)
==========
A-28
On January 1, 1998 we invested approximately $2,078,000 in the
convertible preferred stock of Uncommon Care and have extended three
lines of credit totaling $4,850,000. At December 31, 2002, a total of
$4,605,000 was drawn upon these lines. Uncommon Care is a developer and
operator of dedicated Alzheimer's care facilities. The preferred shares
we own are convertible into approximately a 29% common stock interest
in the equity of Uncommon Care on a fully converted basis. In 2002 and
2001 we received common shares amounting to an additional 13% common
stock interest as payment in kind for interest on our lines of credit.
Our investment entitles us to vote in certain instances and to elect
one of the four 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.
The lines of credit extended to Uncommon Care was their sole source of
liquidity during 2002. We believe our 42% ownership creates significant
influence over Uncommon Care and accordingly we apply the equity method
in accounting.
Amounts outstanding under lines of credit extended to Uncommon Care at
December 31, 2002 and 2001 are as follows (in thousands):
2002 2001
----- -----
Revolving Line of Credit: This note is unsecured with a maximum of $1,200,000. The note
is interest only at 10%, payable semi-annually. The note matured September 30, 2001, but
was extended until April 30, 2003. 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. In the event of
non-payment at maturity, the lender may elect to convert the outstanding balance into
capital stock of the borrower. $955 $810
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 matured April 30, 2000, but was
extended until April 30, 2003. 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. In the event of
non-payment at maturity, the lender may elect to convert the outstanding balance into $1,250 $1,250
capital stock of the borrower.
Revolving Line of Credit: This note is secured by substantially all of the assets of
borrower 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. $2,400 $2,400
During 2002 we agreed to modify the terms of the foregoing notes. For
the period July 1, 2001 through June 30, 2002 the interest rate was
changed to 4% and payments were paid in-kind (PIK) in the form of
Uncommon Care common stock at $0.57 per share. Additionally, the PIK
stock may be repurchased by Uncommon Care through June 30, 2004 at a
price of $.64 per share. We agreed to these modified terms to improve
Uncommon Care's liquidity and to assist it in complying with the terms
of its bank covenants. PIK payments during 2002 and 2001 increased our
ownership in Uncommon Care from 34% to 42% on a fully converted basis.
A-29
Following the expiration of the PIK agreement Uncommon Care did not
resume paying interest to us and is in default on the three notes. Our
options for collecting this debt are restricted by the terms of a
subordination agreement entered into with Uncommon Care's senior
leader.
Some of our officers and directors 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 participate in the loan under the same
terms as the Company.
We have applied the guidance of EITF 99-10, specifically the
percentage of ownership method, in applying the quity method to our
investment in Uncommon Care. Uncommon Care's common stock equity had
been eliminated by losses prior to our investment and, accordingly, we
have recognized 100% of the losses of Uncommon Care, to the extent of
our investment, based on our ownership of 100% of Uncommon Care's
preferred stock equity and subordinated debt with Uncommon Care. During
2001 our total bases in investment and advances to Uncommon Care was
reduced to zero.
During 2002 we expensed the $230,000 which we advanced under the lines
of credit. As this advance represented a funding of Uncommon Care's
prior losses, the amount was expensed when advanced and is included in
the equity in loss related to this affiliate. Repayments on the line of
credit during 2002 were $85,000 and were recorded as deferred income.
At December 31, 2002, Uncommon Care was not in compliance with its
senior loan covenants. Uncommon Care's senior lender has several
options ranging from renegotiating new loan terms to seizing its
collateral, thus forcing Uncommon Care in bankruptcy. It is unknown as
of the date of this report what action the lender may take.
The condensed balance sheet and statement of operations for Uncommon
Care follows (unaudited, in thousands):
Condensed balance sheet at December 31, 2001:
2001
----------
Current assets
$148
Long-term assets 14,544
------
Total assets $14,692
=======
Current liabilities $ 1,051
Long-term liabilities 18,502
Shareholders' deficit (4,861)
--------
Total liabilities and equity $14,692
========
Condensed statement of operations for the years ended December 31, 2001:
2001
----------
Total revenue $ 6,550
=======
Net loss $(1,440)
=========
A-30
(16) Segment Information
Our segments are distinct by type of service provided. Each segment has
its own management team and separate financial reporting. Our Chief
Executive Officer allocates resources and provides overall management
based on the segments' financial results.
Our financial services segment includes brokerage and asset management
services to individuals and institutions.
Our insurance services segment includes financial management for an
insurance company that provides professional liability insurance to
doctors.
Our consulting segment includes environmental consulting and
engineering services to private and public institutions.
Corporate is the parent company and derives its income from interest
and investments.
Income from the discontinued real estate segment was derived from the
leasing of and sale of office space.
2002 2001
---- ----
Operating Revenues:
Financial services $13,625,000 $13,094,000
Insurance services 9,455,000 7,263,000
Consulting 3,296,000 2,642,000
Other 1,081,000 3,992,000
--------- ---------
$27,457,000 $26,991,000
Reconciliation to Consolidated Statements of Operations:
Total segment revenues $27,457,000 $26,991,000
Less: intercompany dividends (1,024,000) (3,951,000)
intercompany interest (41,000) (41,000)
---------- ----------
Total Revenues $26,392,000 $22,999,000
=========== ===========
Operating Income (Loss):
Financial services $1,749,000 $1,576,000
Insurance services 2,389,000 1,345,000
Consulting 387,000 (379,000)
Corporate 2,202,000
--------- ----------
(355,000)
$4,170,000 $4,744,000
Reconciliation to Consolidated Statements of Operations:
Total segment operating profit $4,170,000 $4,744,000
Intercompany interest (41,000) (41,000)
Less: intercompany dividends (1,024,000) (3,951,000)
---------- -----------
Operating income $3,105,000 $752,000
Gain on sale of investments 2,855,000 --
--------- -----------
Profit (loss)from continuing operations before interest, income taxes,
minority interests and equity in loss of unconsolidated affiliates 5,960,000 752,000
Interest Income 195,000 121,000
Interest expense 24,000 465,000
Income tax expense (benefit) 2,415,000 (952,000)
Minority interests 261,000 157,000
Equity in loss of affiliates (44,000) (3,191,000)
--------- ---------
Profit(loss) from continuing operations 3,411,000 (1,988,000)
Net profit from discontinued operations, net of income tax -- 1,410,000
---------- -----------
Net earnings (loss) $3,411,000 $ (578,000)
========== ============
A-31
2002 2001
---- ----
Identifiable assets:
Financial Services $3,727,000 $3,540,000
Insurance Services 2,882,000 1,620,000
Consulting 823,000 738,000
Corporate:
Investment in and advances to equity method investees -- 10,700,000
Investment in available for sale securities 11,284,000 --
Other 6,265,000 5,062,000
--------- ---------
$24,981,000 $21,660,000
========== ==========
Capital expenditures:
Financial Services $24,000 $43,000
Insurance Services 78,000 48,000
Consulting 15,000 20,000
Corporate 37,000 81,000
------ ------
$154,000 $192,000
======== ========
Depreciation/amortization expenses:
Financial Services $42,000 $45,000
Insurance Services 55,000 57,000
Consulting 18,000 75,000
Corporate 73,000 68,000
Discontinued Operations -- 67,000
--------- --------
$188,000 $312,000
========= ========
Revenues attributable to customers generating greater than 10% of the
consolidated revenues of the Company:
Insurance services
Company A $3,320,000 Less than 10%
At December 31, 2002 we had long-term contracts with company A and were
therefore not vulnerable to the risk of a near-term severe impact from
a reasonably possible loss of the revenue. However, should Company A
default or be unable to satisfy its contractual obligations, there
would be a material adverse effect on our financial condition and
results of operations.
Operating profit (loss) 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 equivalents, notes receivable, investments
in available-for-sale securities and investments in affiliates.
A-32
(17) 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. A reconciliation of income and average shares
outstanding used in the calculation of basic and diluted earnings per
share from continuing and discontinued operations follows:
For the Year Ended December 31, 2002
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ -----------
Earnings from continuing operations $3,411,000
Discontinued operations, net of tax --
Basic EPS:
Earnings available to common stockholders 3,411,000 2,227,000 $1.53
=====
Effect of dilutive securities 118,000
--------- ---------
Diluted EPS:
Earnings available to common stockholders 3,411,000 2,345,000 $1.45
========= ========= =====
For the Year Ended December 31, 2001
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ ----------
Loss from continuing operations $(1,988,000)
Discontinued operations, net of tax 1,410,000
Basic EPS:
Loss available to common stockholders (578,000) 2,343,000 $(0.25)
=======
Effect of dilutive securities -- --
--------- -----------
Diluted EPS:
Loss available to common stockholders $ (578,000) 2,343,000 $(0.25)
========= ========== =======
Unexercised employee stock options to purchase 432,000 and 788,000
shares of our common stock for the years ended December 31, 2002 and
2001, respectively, were not included in the computations of diluted
EPS because their effect would be antidilutive.
A-33
(18) Other Investments
Other investments consisted of an investment in FemPartners, Inc.
totaling $68,000 at December 31, 2001. This investment was marketed
extensively in 2002 and was sold for the best offer, $8,000, to a
former officer.
(19) Shareholders' Equity
The following table presents changes in shares outstanding for the
period from December 31, 2000 to December 31, 2002:
Common
Shares Treasury
Outstanding Stock
------------ ------------
Balance December 31, 2000 2,745,231 386,000
Treasury stock purchases and
retirement -- --
----------- -----------
Balance December 31, 2001 2,745,231 386,000
Options Exercised 13,000 --
Treasury stock purchases -- 238,388
Treasury stock retirements (624,388) (624,388)
----------- -----------
Balance December 31, 2002 2,133,843 --
=========== ===========
(20) Goodwill
We recorded goodwill in connection with our acquisition of
Eco-Systems, in 1999. During 2001, we recognized $51,000 in
amortization expense related to the goodwill. In accordance with FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of, we assessed the goodwill
for impairment in 2001. As of December 31, 2001, the review indicated
that the goodwill was impaired and an impairment charge of $391,000
was recorded to write off the remaining unamortized amount. No
goodwill was recorded as of December 31, 2001 and 2002.
(21) Quarterly Results (Unaudited)
Quarter to quarter comparisons of results of operations have been and
may be materially impacted by bond market conditions and whether or
not there are profits at the medical malpractice insurance company
which we manage and whose profits we share. We believe that the
historical pattern of quarterly sales and income as a percentage of
the annual total may not be indicative of the pattern in future years.
The following tables set forth selected quarterly consolidated
statements of operations information for the years ended December 31,
2002 and 2001:
A-34
(In thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
2002 ------- ------- ------- -------
Revenues $5,939 $6,353 $7,241 $ 6,859
Net earnings 2,602 449 296 64
Basic earnings per share:
Net earnings $1.12 $0.20 $0.13 $ 0.03
Diluted earnings per share:
Net earnings $1.07 $0.19 $0.13 $ 0.03
2001
Revenues $5,588 $5,995 $6,268 $ 5,148
Earnings (loss) from continuing operations 84 251 82 (2,405)
Discontinued operations, net of taxes 41 34 35 1,300
Net earnings (loss) $125 $285 $117 $(1,105)
Basic earnings (loss) per share:
From continuing operations $0.04 $0.11 $0.03 $(1.03)
Discontinued operations, net of taxes 0.02 0.01 0.01 0.55
Net earnings (loss) $0.05 $0.12 $0.05 $(0.47)
Diluted earnings (loss) per share:
From continuing operations $0.03 $0.09 $0.03 $(1.03)
Discontinued operations, net of taxes 0.01 0.01 0.01 0.55
Net earnings (loss) $0.05 $0.10 $0.04 $(0.47)
Results for the first quarter of 2002 include gains on the sale of
1,570,000 shares of Prime Medical common stock totaling $2,802,000
pre-tax. In connection with these sales, we also recognized a portion
of the $760,000 gain on sale of real estate related to our 15% interest
in Prime. Such gains recognized in the first quarter were approximately
$500,000. Results for the fourth quarter of 2002 include an adjustment
A-35
increasing federal income tax expense by $214,000. This adjustment
represents a one-time tax adjustment relating to APS Consulting.
(22) Concentration of credit risk
Marketable securities
As of December 31, 2002 we owned marketable securities of Prime Medical
with a fair market value of $7,385,000, or approximately 30% of our
total assets. An event having a material adverse effect on Prime
Medical and resulting in a devaluation of their securities would also
have a material adverse effect on our financial condition and results
of operations.
Geographic concentration of insurance services
Most of the managed insurance company's business is concentrated in
Texas. Regulatory or judicial actions in that state that affected
rates, competition, or tort law could have a significant impact on the
insurance company's business. Consequently, our insurance management
business, which is based on the premiums and profitability of the
managed company, could be adversely affected.
Financial market concentration of investment services
Investment Services derives most of its revenue through commissions
earned on the trading of fixed-income securities. Should conditions
reduce the market's demand for fixed-income products, and should
Investment Services be unable to shift it emphasis to other financial
products, it could have a material adverse impact on our financial
condition and results of operations.