===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934 for the fiscal year ended December 31, 2004
Transition Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
Commission File Number: 0-11453
AMERICAN PHYSICIANS SERVICE GROUP, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1458323
(State or other jurisdiction of
incorporation or organization) (I.R.S. employer Identification No.)
1301 Capital of Texas Highway,
Suite C-300, Austin Texas 78746
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 328-0888
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2) Yes __ No X
---
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 the last business day of the registrant's most
recently completed second fiscal quarter.
Aggregate Market Value at June 30, 2004: $19,396,226
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 10, 2005
------------------- ----------------
Common Stock, $.10 par value 2,478,667
Documents Incorporated By Reference
Selected portions of the Registrant's definitive proxy material for the
2005 annual meeting of shareholders are incorporated by reference into
Part III of the Form 10-K.
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 10
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 24
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 25
Item 9A. Controls and Procedures 25
Item 9B. Other Information 25
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 26
Item 13. Certain Relationships and Related Transactions 26
Item 14. Principal Accountant Fees and Services 26
PART IV
Item 15. Exhibits and Financial Statement Schedules 26
SIGNATURES 29
EXHIBIT INDEX A-1
EX-21.1 (Subsidiaries of the Registrant)
EX-23.1 (Consents of Experts and Counsel)
EX-31.1 (Certification of Chief Executive Officer)
EX-31.2 (Certification of Chief Financial Officer)
EX-32.1 (Certification of Chief Executive Officer)
EX-32.2 (Certification of Chief Financial Officer)
2
AMERICAN PHYSICIANS SERVICE GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
References in this report to "we", "us", "our", and the "Company" mean American
Physicians Service Group, Inc.
PART I
ITEM 1. BUSINESS
GENERAL
We, through our subsidiaries, provide services that include brokerage and
investment services to individuals and institutions, and management and agency
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 our telephone number is (512) 328-0888. Our website is
www.amph.com. We make available free of charge on our website our Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
any amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after such material is electronically filed with, or furnished to, the
Securities and Exchange Commission ("SEC").
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%, 64% and 59% of our total
revenues in 2004, 2003 and 2002, 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 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
3
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. Because we (as opposed to APS Financial) are not a
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, 2005, APS Financial was
in compliance with all applicable net capital requirements.
APS Financial clears its transactions through Southwest Securities, Inc.,
or Southwest, on a fully disclosed basis. Southwest also processes orders and
floor reports, matches trades, transmits execution reports to APS Financial and
records all data pertinent to trades. APS Financial pays Southwest a fee based
on the number and type of transactions.
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 a wholly-owned
subsidiary of ours. Prior to October 1, 2003, we owned 80% of Insurance
Services. On October 1, 2003 we acquired the remaining 20% minority interest in
Insurance Services for approximately $2.0 million in cash (see Note 14 to our
consolidated financial statements included herein). Insurance Services, through
its wholly-owned subsidiaries APS Facilities Management, Inc., dba APMC
Insurance Services, 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 48%, 36% and 41%
of our total revenues in 2004, 2003 and 2002, 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, wholly-owned by its subscriber
physicians. 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 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, information technology 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
4
of the subscribers to APIE elect to terminate the management agreement by reason
of an adjudication that FMI has been grossly negligent, has acted in bad faith
or with fraudulent intent or has committed willful misfeasance in its management
activities. Termination of FMI's management agreement with APIE would have a
material adverse effect on us.
APIE is authorized to do business in the states of Texas and Arkansas, and
specializes in writing medical professional liability insurance for health care
providers. It writes insurance in Texas primarily through purchasing groups and
is not subject to certain rate and policy form regulations issued by the Texas
Department of Insurance. It reviews 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 offers only a "claims made" policy in Texas and Arkansas, but
provides for an extended reporting option upon termination. APIE reinsures 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 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 2004, 2003, 2002,
2001 and 2000, management fees attributable to profit sharing were $1,929,000,
$722,000, $0, $0 and $0, respectively. While APIE was profitable in 2001 and
2002 there was no profit sharing with FMI due to the management agreement
requiring that 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.
The following table presents selected financial and other data for APIE:
Years Ended December 31,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Unaudited, in thousand, except for number of insureds)
Earned premiums before reinsurance premiums $64,296 $51,904 $46,078 $35,866 $29,057
Total assets 131,152 102,728 80,721 64,557 66,348
Total surplus 21,238 15,783 12,985 11,475 10,014
Management fees (including profit sharing)
and commissions (1) 10,604 7,789 6,221 5,084 4,002
Number of insureds 3,623 3,073 3,181 3,101 3,178
(1) This amount includes management fees and commissions paid to
FMI and Agency in addition to commissions of $1, $513, $3,103,
$2,886 and $1,898 in 2004, 2003, 2002, 2001 and 2000,
respectively, paid to other carriers directly related to
APIE's controlled business.
OUR OTHER INVESTMENTS
At December 31, 2004, we owned less than 2% of the outstanding common stock
of HealthTronics, Inc, or HealthTronics (successor by merger to Prime Medical
Services, Inc.), 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
5
of HealthTronics' 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, net of tax,
reflected in shareholders' equity as "accumulated other comprehensive income."
HealthTronics is the largest provider of lithotripsy services in the United
States, currently servicing approximately 830 hospitals and surgery centers in
47 states. Lithotripsy is a non-invasive method of treating kidney stones
through the use of shock waves. HealthTronics is also an international supplier
of specialty vehicles for the transport of high technology medical,
broadcast/communications and homeland security equipment. At December 31, 2004,
our investments in HealthTronics securities include common stock and fixed
income securities with an aggregate fair market value of $6,844,000 and a cost
basis of approximately $2,788,000. A material decline in the value of this
investment could have a material adverse effect on our financial condition and
results of operations.
The common stock of HealthTronics is quoted on the NASDAQ National Market
under the symbol "HTRN". HealthTronics is a Georgia 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 HealthTronics 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 June 4, 2003 we purchased from Financial Industries Corporation
("FIC")(OTC: FNIN.PK) and foundation 339,879 shares of FIC's common stock as an
investment. Earlier in 2003 we had purchased 45,121 FIC shares in the open
market. The 385,000 shares represent an approximate 4% ownership in FIC. The
aggregate purchase price was approximately $5,647,000, which was all sourced
from our cash reserves. The shares purchased from FIC and the foundation are not
registered, but are subject to a registration rights agreement requiring FIC's
best efforts to register them within one year of the transaction. Due to FIC's
delay in filing its 2003 Form 10-K and its March 31, 2004, June 30, 2004 Forms
10-Q, it has not been able to register these shares and was delisted from the
NASDAQ exchange in July 2004. Subsequently, FIC was delinquent in filing its
September 30, 2004 Form 10-Q.
By September 30, 2004, the value of our investment in FIC had declined
significantly. On October 12, 2004, we determined that this decline in market
price was "other than temporary" as defined in Statements of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities. Consequently, we recorded a pretax charge to earnings of
$2,374,000 in the third quarter 2004. The charge reduced our cost basis in FIC
from $5,647,000, or $14.67 per share, to $3,273,000, or $8.50 per share, which
is equal to the quoted market price of FIC shares on September 30, 2004. By
December 31, 2004, the value of our investment in FIC had declined further. On
December 31, 2004, we determined that this decline in market price should be
considered "other than temporary". Consequently, we recorded a pretax charge to
earnings of $193,000 in the fourth quarter 2004. The charge reduced our cost
basis in FIC from $3,273,000, or $8.50 per share, to $3,080,000, or $8.00 per
share, which is equal to the quoted market price of FIC shares on December 31,
2004.
As discussed in our Forms 10-Q dated June 30 and September 30, 2004, we
believe the decline in the market price of FIC has been brought about by its
failure to file its 2003 Form 10-K and its subsequent de-listing from the NASDAQ
Stock Market. We had expected FIC to bring its filings current and pursue
restoring its exchange listing but these events have not yet occurred. While we
currently continue to have the ability and the intent to hold the stock
indefinitely, we concluded that the additional uncertainty created by the late
filings together with the lack of current financial information dictated that
the decline should be viewed as other than temporary. We will continue the
policy during 2005 of monitoring and evaluating the situation at FIC and further
determining if changes in fair market value of the investment are temporary or
"other than temporary".
As part of our initial acquisition of FIC common stock, we were granted an
option to purchase an additional 323,000 shares of FIC's common stock at $16.42
per share. There is a significant revenue-related performance requirement that
must be met before this option is exercisable. We have assigned no value to this
option.
6
FIC is a Texas 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 FIC is qualified in its
entirety by reference to such reports and documents.) Such reports and
documents, prior to December 31, 2003, may be obtained from the SEC.
DISCONTINUED OPERATIONS
Effective November 1, 2002, we completed the sale of APS Consulting to its
management as we determined the division's operations were not consistent with
our long-term strategic plan. 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%. Our existing contract, which was entered into on October 1, 2002,
states that we will provide administrative support services to APS Consulting
for a period of approximately seven years remains in effect. Our fees that we
will provide 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 the life
of the agreement. Because we were dependent upon the future successful operation
of the division to collect our proceeds from the disposal and because we had a
security interest in the assets of the division, we had retained a sufficient
risk of loss to preclude us from recognizing the divestiture of APS Consulting
under the guidance of FASB Interpretation No 46. Accordingly, we did not
recognize the divestiture of APS Consulting and continued 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 occurred.
Effective November 1, 2003, APS Consulting was able to obtain third party
financing and repay their note payable to us in exchange for our agreeing to
discount the note by $35,000. We provided no guarantees or credit enhancements
in connection with APS Consulting securing this financing. Accordingly, we no
longer have a risk of loss related to these operations and have recognized the
transaction as a divestiture. As a result, we ceased consolidation of APS
Consulting financial statements effective November 1, 2003. In addition, we were
able to recognize a gain of $27,000, net of tax, and administrative support fees
totaling $47,000 in 2004 and $98,000 in 2003.
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 several insurance carriers, including Medical Protective
Insurance Company, Texas Medical Liability Trust, ProAssurance, The Doctors
Company, Advocate MD and the Texas Medical Liability Insurance Underwriting
Association (JUA), which is the State sponsored insurer of last resort. APIE
does not have the capacity to write the volume of business equal to that of the
other major carriers. Great focus has been given to the area of underwriting and
the selection of our insured physicians. With the successful passing of tort
reform in late 2003, there is an increased likelihood of additional companies
re-entering the Texas market. APIE anticipates maintaining its market share
through a combination of unique and tailored coverages, and a continued
commitment to claims, risk management and underwriting services.
7
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.
REVENUES AND INDUSTRY SEGMENTS
The information required by Regulation S-K Items 101(b) and 101(d) related
to financial information about segments and financial information about sales
contained in Note 16 of our consolidated financial statements, which are
included in this Annual Report on Form 10-K.
EMPLOYEES
At March 1, 2005, we employed, on a full time basis, approximately 109
persons, including 56 by Insurance Services, 44 by APS Financial and Asset
Management, and 9 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.
8
Executive Officers
As of March 15, 2005, our executive officers were as follows:
Name Age Position
------ --- --------
Kenneth S. Shifrin 55 Chairman of the Board, President and
Chief Executive Officer
William H. Hayes 57 Senior Vice President -Finance, Secretary,
and Chief Financial Officer
Maury L. Magids 40 Senior Vice President - Insurance
Thomas R. Solimine 46 Controller
Our officers serve until the next annual meeting of our directors and until
their successors are elected and qualified (or until their earlier death,
resignation or removal).
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. Mr.
Shifrin also has been a director of Financial Industries Corporation since June
2003 and was Chairman of the Board of Prime Medical Services, Inc. from October
1989 until November 2004. With the merger of Prime Medical and HealthTronics,
Mr. Shifrin became Vice-chairman of the Board of HealthTronics in November 2004.
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, among 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 death,
resignation or removal. Our board of directors elects our officers in
conjunction with each annual meeting of our shareholders.
AVAILABLE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and other
documents with the SEC under the Securities Exchange Act of 1934 (the "Exchange
Act"). You may read and copy any materials that we file with the SEC at the
SEC's public reference room at 450 Fifth Street, NW, Washington, DC 20549. The
public may obtain information on the operation of the public reference room by
9
calling the SEC at 1-800-SEC-0330. Also, the SEC maintains a website that
contains these SEC filings. You can obtain these filings at the SEC's website at
http://www.sec.gov.
We also make available free of charge on or through our website
(http://www.amph.com) our Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those
reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon
as reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.
ITEM 2. PROPERTIES
We lease approximately 23,000 square feet of office space from
HealthTronics 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 1011
Hwy 6 South, Suite 120, 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
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is currently listed on the NASDAQ Small Cap Market under
the symbol AMPH. The following table sets forth the range of the quarterly high
and low bid prices for the last three fiscal years.
2004 2003
-------------- --------------
High Low High Low
---- ---- ---- ----
First Quarter $14.08 $8.31 $4.29 $3.51
Second Quarter $14.92 $8.51 $5.49 $3.58
Third Quarter $10.24 $8.50 $5.67 $4.51
Fourth Quarter $10.49 $9.51 $10.77 $5.10
10
There were approximately 250 holders of record of our common stock on March
1, 2005.
In 2004, we declared a cash dividend of $.20 per share of common stock
amounting to a total cash outlay of approximately $518,000. Prior to 2004, we
have never declared or paid any cash dividends on our common stock. Our policy
has been to retain our earnings to finance growth and development, and therefore
do not anticipate paying any cash dividends on our common stock in the
foreseeable future. The declaration and payment of any dividends on the Common
Stock would be at the sole discretion of our Board of Directors, subject to our
financial condition, capital requirements, future prospects and other factors
deemed 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, 2004, included herein.
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 under
outstanding options, options, warrants equity compensation plans.
warrants and rights. and rights. Excluding securities refelcted in
column (a)
------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
------------------------------------------------------------------------------------------------------------------------------------
Equity Compensation
plans approved by 721,000 $6.04 149,000
security holders
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by
security holders none none none
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Total 721,000 $6.04 149,000
------------------------------------------------------------------------------------------------------------------------------------
The following table represents stock repurchases during the fourth quarter
of 2004:
(d) Maximum
Number of
Shares (or
Approximate
Dollar Value)
(c) Total Number of Shares that
of Shares May Yet be
Purchased as Part Purchased Under
Period (a) Total Number (b) Average of Publicly the Plans or
of shares Price Paid Annonuced Plans Programs
Purchased (1) per Share or Programs
------- --------- ---------- ------------ --------------
Oct. 1, 2004-Oct. 31, 2004 4 $ 10.00 4 $1,959,000
Nov. 1, 2004-Nov. 30, 2004 7,900 $ 9.86 7,900 $1,883,000
Dec. 1, 2004-Dec. 31, 2004 14,899 $ 10.20 14,899 $1,733,000
(1) Of the total shares purchased 10,799 were purchased in open market
transactions and 12,004 were purchased in private transactions. Our
share repurchase program was announced August 17, 2004 and authorizes
the purchase of up to $2 million of common stock.
11
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in Item 7 of this Annual Report.
2004 2003 2002 2001 2000
------------- -------------- -------------- ------------ ------------
Selected Income Statement Data:
Revenues $ 32,021 $ 30,449 $ 23,077 $ 20,036 $ 15,370
Income from continuing operations
before interest, income taxes,
minority interests and equity in
loss of unconsolidated affiliates 3,097 4,090 5,554 851 (5,198)
Income from continuing operations 2,152 2,772 3,156 (1,568) (5,451)
Net income $ 2,152 $ 2,799 $ 3,411 $ (578) $ (4,774)
Per Share Amounts:
Basic: Income from continuing
operations $ 0.85 $ 1.26 $ 1.42 $ (0.85) $ (2.19)
Net income 0.85 1.27 1.53 (0.25) (1.92)
Diluted: Income from continuing
operations 0.76 1.13 1.35 (0.85) (2.19)
Net income $ 0.76 $ 1.14 $ 1.45 $ (0.25) $ (1.92)
Diluted weighted average shares
outstanding 2,838 2,449 2,345 2,343 2,490
Cash dividends $ 0.20 -- -- -- --
Selected Balance Sheet Data:
Total assets $ 30,443 $ 25,638 $ 24,981 $ 21,660 $ 24,796
Long-term obligations 1,133 1,576 2,665 4,489 6,783
Total liabilities $ 6,229 $ 6,532 $ 7,455 $ 8,869 $ 11,433
Minority interests 1 - 384 124 111
Total equity $ 24,213 $ 19,106 $ 17,142 $ 12,667 $ 13,252
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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-Q 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
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, and (2) insurance services, including
management and agency services to medical malpractice insurance companies.
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. We recognize commissions revenue,
and the related compensation expense, on a trade date basis.
o ASSET MANAGEMENT. Asset Management manages fixed income and equity
assets for institutional and individual clients on a fee basis. We
recognize fee revenues monthly based on the amount of funds under
management.
INSURANCE SERVICES. Through Insurance Services we provide management and
agency services to medical malpractice insurance companies through the following
subsidiary:
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
13
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. We recognize revenues for the management
fee portion based on a percentage of earned premium on a monthly
basis, and we recognize revenues for the management fee portion
based on profit sharing when it is reasonably certain the managed
company will have an annual profit, generally in the fourth quarter.
FMI's assets are not subject to APIE policyholder claims.
In addition, as of December 31, 2004, we have the following significant
investments accounted for as available-for-sale securities: (1) we own
approximately 555,000 shares of HealthTronics common stock, representing
approximately 2% of its outstanding common stock, (2) we own 385,000 shares of
Financial Industries Corporation, representing approximately 4% of its
outstanding common stock. Our policy is to account for investments as
available-for-sale securities. This requires that we assess fluctuations in fair
value and determine whether these fluctuations are temporary or "other than
temporary" as defined in Statements of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities. Temporary
changes in fair value are recognized as unrealized gains or losses excluded from
earnings and reported as a separate component of stockholder's equity, net of
income taxes. Should a decline in an investment be deemed other than temporary,
as was the case with our investment in FIC during the third and fourth quarters
of 2004, pretax charges to earnings will be taken in the period in which the
impairment is considered to be other than temporary.
We also invested approximately $4,903,000 from surplus cash in low risk
governmental and corporate fixed income securities. These securities are carried
at fair value with unrealized gains and losses, net of taxes, reported in equity
as a component of accumulated other comprehensive income. As above, we would
recognize an impairment charge to earnings in the event a decline in fair value
below the cost basis of one of these investments is determined to be
other-than-temporary.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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 and estimates 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. Revenues related to securities transactions are recognized on
a trade date basis.
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, as defined in the management agreement, 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
14
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
customers' 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 tax
asset would be charged to income in the period the determination was made.
In 2002 we accounted for APS Consulting as a variable interest entity under
the guidance of FIN 46 "Consolidation of Variable Interest Entities". We had not
recognized the divestiture of APS Consulting and continued to consolidate the
division as an entity in which we had a variable interest that would absorb the
majority of the entity's operating losses should they have occurred. Effective
November 1, 2003, APS Consulting paid off the negotiated remainder of the note
due us, allowing us to cease accounting for them as a variable interest entity.
Consequently, we have reclassified the 2002 income statement and balance sheets
to reflect the disposition of APS Consulting as a discontinued operation.
We account for our equity and fixed income securities as
available-for-sale. In the event a decline in fair value of an investment
occurs, management may be required to determine if the decline in market value
is other than temporary. Management's assessments as to the nature of a decline
in fair value are based on the quoted market prices at the end of a period, the
length of time an investment's fair value has been in decline and our ability
and intent to hold the investment. If the fair value is less than the carrying
value and the decline is determined to be other than temporary, an appropriate
write-down is recorded against earnings.
RESULTS OF OPERATIONS
OVERVIEW AND BUSINESS OUTLOOK
In 2004, we saw substantial improvement in operating income from our
insurance services segment compared to 2003. While revenues and operating income
were down in our financial services segment in 2004 compared to 2003, its
financial results still proved to be the second best in its history. As we look
forward to 2005, there are both opportunities and impediments to continued
growth.
APS Financial, the broker/dealer division of our financial services
segment, recorded a solid year in 2004 but fell short of the record year it
enjoyed in both revenues and net profit in 2003. The market for investment grade
fixed income securities was negatively impacted by low treasury rates while a
rich high yield market led to low spreads for non-investment grade securities,
leading to lower demand for both products. Improving upon 2004 will depend upon
a combination of more favorable bond market conditions as well as continued
minimal loss of personnel and growth of clients. Non-variable operating expenses
will certainly be higher in 2005 as a result of Sarbanes-Oxley compliance
requirements despite the recent SEC deferral of SOX 404 reporting for
non-accelerated filers until December 2006.
15
For commission revenue generation, bullish, unstable markets provide us
with the most opportunity. Conversely, stable, bearish markets pose the greatest
difficulty in generating income. Uncertainty in world, political and economic
events can also be an obstacle to revenue generation. Investors may take a wait
and see attitude should uncertainty exist.
Although we have been fortunate in retaining our key salespersons for many
years, a loss of one or more key individuals and/or a loss of one or more key
accounts is possible and could have a material adverse effect upon earnings.
The nature of the broker/dealer business and the current litigious legal
environment in which we operate means that there is always the possibility of
one or more lawsuits being brought against us. Claims against broker/dealers
generally rise in periods of down markets and the more prolonged a downturn,
generally the greater risk of litigation.
APS Insurance Services enjoyed a record year in 2004 in both revenues and
operating income. Total surplus at APIE grew almost 28% in 2004 compared to
2003. If APIE's surplus continues to grow, this would continue to increase the
financial strength of the company and its capacity to write new business and
therefore increase the amount of profit in which we would be able to share. For
2005, we expect non-variable operating expenses to remain consistent, with the
exception of professional fees, which will be much higher as a result of
Sarbanes-Oxley compliance requirements.
The insurance segment is greatly affected by the profitability of the
medical malpractice insurance company that we manage. Significant increases in
claims brought against our insured doctors would negatively affect the
profitability of APIE, and consequently, the amount of profit, if any, we would
be able to share in. This risk has been reduced by lowering the limits of
liability on the physicians APIE insures coupled with providing policies that
cap our overall exposure. Further, there was passage of tort and insurance
reform in the State of Texas in 2003. The new legislation capped non-economic
damages and placed restrictions on mass litigation. As a result of tort reform,
competitors have begun to re-enter the State of Texas, which could result in
pressure to lower rates or a reduction in the number of insurance policies
written by APIE.
2004 COMPARED TO 2003
Revenues from operations increased $1,572,000 (5%) compared to 2003. Our
operating income increased $1,381,000 (35%) to $5,344,000 in 2004 compared to
$3,963,000 in 2003. Our net earnings decreased $647,000 (23%) in 2004 to a total
of $2,152,000 compared to net earnings of $2,799,000 in 2003. Our diluted
earnings per share decreased to $0.76 in 2004 compared to $1.14 in 2003. The
reasons for these changes are described below.
FINANCIAL SERVICES
Our financial services revenues decreased $2,918,000 (15%) in 2004 compared
to 2003. Although commission revenues in 2004 were the second highest in APS
Financial's twenty-three year history, they were down compared to 2003, which
saw record commission revenues at APS Financial. Our broker/dealer derives most
of its revenue from trading in the fixed income market, both in investment and
non-investment grade securities. Revenue from both grade securities was lower.
Investment grade markets are typically linked to treasury rates, which continued
to trade in 2004 at a historically low yield levels. Customers have been
cautious on committing funds, particularly to longer maturing instruments, thus
negatively impacting trading revenues. Also, in 2004 the U.S. high yield markets
were almost universally considered over-valued, trading at historically low
spreads to treasuries. Again, this contributed to a reluctance of our customers
to commit funds, and contributed to lower revenues.
Our financial services expense decreased $2,046,000 (12%) in 2004 compared
to 2003. The primary reason for the current year decrease is a $1,714,000 (15%)
decrease in commission expense resulting from the decrease in commission revenue
at APS Financial mentioned above. In addition, net profits before management
16
incentive costs decreased at APS Financial by $1,284,000 (29%) resulting in a
$530,000 (33%) decrease in the current year formula driven incentive
compensation costs. Partially offsetting these decreases was an increase in
payroll costs of $108,000 (8%) in 2004 resulting from normal annual merit raises
as well as the hiring of two new full-time positions. In addition, there were
relatively minor current year increases in employee benefits, professional fees
and information services.
INSURANCE SERVICES
Our insurance services revenues from our premium-based insurance management
segment, APS Insurance Services, increased $4,490,000 (41%) in 2004 compared to
2003. One of the primary reasons for the current year growth is an increase of
$1,207,000 (167%) in profits shared with APIE. The total amount of profit
sharing recognized in 2004 was $1,929,000, all of which was recognized during
the fourth quarter of 2004, after profit sharing goals were attained. In 2003,
we recognized all of that year's total of $722,000 in profit sharing during the
fourth quarter as well. As the certainty of profits at APIE cannot be fully
known until an end-of-year actuarial analysis by independent actuaries, we
cannot predict what, if any, profits will be available to us until this analysis
is complete. Another main reason for the growth in revenues in 2004 was a
$1,607,000 (23%) increase in management fees resulting from greater insurance
premium volumes. Earned premium increased at APIE by 24% in 2004 compared to
2003 primarily as a result of new business and strong retention of our existing
business in the current year. Lastly, commission income increased $1,435,000
(47%) in 2004 compared to 2003, resulting from approximately $15,040,000 in
additional written premium in the current year. As noted below, commissions paid
to third party independent agents increased by an equivalent amount, resulting
in no impact on net income.
Insurance services expenses at our insurance management subsidiary
increased $1,976,000 (23%) in 2004 compared to 2003. The current year increase
is primarily due to the $1,435,000 (47%) increase in commissions paid to third
party independent agents. In addition, payroll expense increased $208,000 (8%)
and formula driven incentive compensation expense increased $206,000 (39%) in
2004 compared to 2003. Payroll expense was up in the current year due primarily
to normal annual merit raises in addition to personnel additions made in the
latter half of 2003 that were expensed the entire year in 2004. Among the
additions was a high-level management position to help meet our growing
financial reporting requirements. The increase in formula driven incentive
compensation cost was the result of an increase in segment operating profits.
Excluding incentive compensation costs, pre-tax profits at our insurance segment
rose $2,679,000 (95%). Lastly, depreciation and amortization costs were $102,000
(74%) higher in 2004 compared to 2003 as a result of amortizing the non-compete
agreement that was created upon the repurchase of the 20% minority interest in
October, 2003 for a full year compared to only three months in 2003. Partially
offsetting these increases was a $176,000 (79%) decrease in advertising in 2004
compared to 2003, a result of re-branding efforts of the business performed in
2003.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $309,000 (23%) in 2004
compared to 2003. The current year increase was primarily due to higher
incentive compensation expense which was $126,000 (19%) greater in 2004 on
substantially higher operating income in the current year. Other professional
fees were $40,000 (136%) higher in 2004 primarily as a result of fees incurred
in connection with Sarbanes-Oxley internal control procedures. Also, director's
fees increased $59,000 (64%) as a result of a higher fee structure implemented
in 2004 as well as an increased number of board and committee meetings compared
to 2003. Partially offsetting these increases was a decrease in legal fees of
$29,000 (32%) in 2004, the result of non-recurring fees incurred in 2003 in
connection with our investment in Financial Industries Corporation, or FIC.
17
GAIN ON SALE OF ASSETS
Gain on sale of assets primarily represents the recognition of deferred
income. Approximately $760,000 of the $5,100,000 deferred gain on the sale of
real estate to Prime Medical (its name prior to the merger with HealthTronics,
Inc.) in 2001 was due to our ownership interest in Prime Medical and is
recognized upon the reduction of our ownership percentage in Prime Medical
through the sale of its stock. In 2004, we recognized approximately $56,000 from
the sale of a higher number of shares of Prime Medical common stock versus 2003,
when a gain of $8,000 was recorded.
GAIN ON SALE OF INVESTMENTS
Gain on the sale of investment increased $118,000 (93%) in 2004 compared to
2003 as a result of gains from the sale of a greater number of
available-for-sale equity securities sold in the current year.
LOSS FROM IMPAIRMENT OF INVESTMENT
The current year loss was due to a write-down of our investment in FIC
common stock. During 2004 in accordance with SFAS 115, we determined that the
decline in market value of FIC common stock was other than temporary and we
recorded pretax charges to earnings totaling $2,567,000. These charges reduced
our cost basis in FIC from $5,647,000, or $14.67 per share, to $3,080,000, or
$8.00 per share which is equal to the quoted market price of FIC shares on
December 31, 2004. We believe the decline in the market price of FIC has been
brought about by its failure to file its 2003 Form 10-K and its subsequent
de-listing from the NASDAQ Stock Market. We had expected FIC to bring its
filings current and pursue restoring its exchange listing but these events have
not yet occurred. While we currently continue to have the ability and the intent
to hold the stock indefinitely, we have concluded that the additional
uncertainty created by the late filings together with the lack of current
financial information dictates that the decline should be viewed as other than
temporary.
AFFILIATES EARNINGS (LOSS)
Our equity in the earnings of Prime Medical (its name prior to the merger
with HealthTronics, Inc.) was zero in 2004 as well as in 2003 as we no longer
account for our investment in Prime Medical using the equity method of
accounting, as was the case in the first quarter of 2002 when we recorded
$186,000 in equity earnings. 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, our 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. Mr. Shifrin further reduced his
responsibilities on Prime's Board to Vice-Chairman in 2004; and (2) from January
to March 19, 2002, we sold 1,570,000 shares of Prime Medical common stock
reducing our ownership percentage in 2002 to approximately 5%.
Our equity in earnings of Uncommon Care was zero in 2004, $260,000 in 2003
and a loss of $230,000 in 2002. Because our total investment and advances to
Uncommon Care has been reduced to zero, we suspended recording equity losses, as
required under the equity method. In 2002, we advanced them $230,000 and
recorded a loss for the full amount of the advance. In 2003, after informing
Uncommon Care's management that we would make no further advances, we recorded
equity in earnings of unconsolidated affiliates in the amount of $260,000
related to cash received from Uncommon Care. We expect no further receipts of
cash from Uncommon Care and consequently expect to record no additional income
in the future.
INTEREST INCOME
Our interest income increased $61,000 (20%) in 2004 compared to 2003
primarily as a result of a higher balance of interest-bearing securities held in
2004. At December 31, 2004 we had a balance of $4,903,000 in fixed income
securities versus a balance of $897,000 at December 31, 2003.
18
OTHER INCOME (LOSS)
Our other income increased $53,000 in 2004 as a result of a write-down
taken in 2003 totaling $120,000 on an equity investment. Partially offsetting
this was a decrease of $51,000 in administrative fee income from Eco-Systems in
2004 resulting from their decreased earnings.
MINORITY INTERESTS
Minority interests represents the combination of two outside interests in
our subsidiaries: a twenty percent interest in Insurance Services owned by FPIC
Insurance Group, Inc. and a three percent interest in APS Asset Management or
APSAM, a subsidiary within our financial services segment, owned by key
individuals within APS Asset Management. Minority interests decreased in the
current year due to the repurchase of the 20% minority interest in Insurance
Services from the minority interest holder, FPIC Insurance Group, effective
October 1, 2003. Consequently, only nine months of minority interest was
recorded in 2003 compared to a full year in 2002. During 2004, minority interest
was recorded only at APSAM and amounted to just $1,000.
DISCONTINUED OPERATIONS
Effective November 1, 2003 APS Consulting paid off the negotiated remaining
amount of the note payable to us. Even though we had sold this segment to APS
Consulting's management exactly one year earlier, we continued to consolidate
their revenues, expenses and balance sheet items because we were dependent upon
future successful operations of the division to collect our proceeds from the
disposal and we did not transfer risk of loss to discontinue reporting them on
our consolidated financial statements. With the payoff of the note, we
recognized the divesture and now report APS Consulting as a discontinued
operation. Accordingly, 2002 has been reclassified to remove revenues and
expenses from our consolidated statements of operations and after-tax results of
this former division are now recorded as income from discontinued operations in
2002. For 2003, only the after-tax gain on disposal of the segment is recorded
as earnings from APS Consulting. There was no effect in 2004.
CASH FLOWS
For the year ended December 31, 2004 our cash provided by operations
increased $852,000 (19%) compared to 2003 as a result of the increase in
operating income at our insurance services segment. Cash used in investing
activities increased $1,127,000 (35%) in 2004 compared to 2003 as a result of
proceeds from the sale of available-for-sale equity securities during 2003,
which were much greater than those received in 2004. Cash provided by financing
activities decreased $1,339,000 (153%) in 2004 as a result of fewer options
exercised compared to 2003, a greater number of treasury stock shares purchased
during 2004 and cash dividends paid in 2004.
2003 COMPARED TO 2002
Revenues from operations increased $7,372,000 (32%) compared to 2002. Our
net income from continuing operations decreased $384,000 (12%) to $2,772,000 in
2003 from $3,156,000 in 2002. Our net earnings decreased $612,000 (18%) in 2003
to a total of $2,799,000 compared to net earnings of $3,411,000 in 2002. Our
diluted earnings per share decreased to $1.14 in 2003 compared to $1.45 in 2002.
The reasons for these changes are described below.
FINANCIAL SERVICES
Our financial services revenues increased $6,000,000 (44%) in 2003 compared
to 2002. The increase was due to strong commission revenues at APS Financial.
APS Financial derives most of its revenue from trading in the fixed income
market, both in investment grade and non-investment grade securities. While
revenue from investment grade transactions increased, revenue derived from the
high yield market was particularly strong, as that sector performed particularly
well throughout 2003, as evidenced by various high yield indices rising as much
19
as 29% compared to 2002. Also, we continued to have very low turnover in
personnel, which gives us a better probability of maintaining our customer
accounts.
Our financial services expense increased $4,708,000 (40%) in 2003 compared
to 2002. The primary reason for the 2003 year increases is a $3,808,000 (50%)
increase in commission expense resulting from the increase in commission revenue
at APS Financial mentioned above. In addition, net profits before management
incentive costs increased at APS Financial by $2,053,000 (79%) resulting in a
$762,000 (88%) increase in the current year formula driven management incentive
costs. Payroll related benefit costs were up $144,000 (25%) in 2003 as a result
of a 27% increase in health insurance costs as well as higher payroll taxes as a
result of much higher earnings by commissioned brokers. Partially offsetting
these increases were relatively minor current year decreases in ticket charges,
information services, depreciation and advertising costs.
INSURANCE SERVICES
Our insurance services revenues from our premium-based insurance management
segment, APS Insurance Services, increased $1,372,000 (15%) in 2003 compared to
2002. The primary reason for the 2003 increase was that we recognized profit
sharing with APIE in 2003 for the first time since 1999. The total amount of
profit sharing recognized in 2003 was $722,000, all of which was recognized
during the fourth quarter of 2003, after profit sharing goals were attained. As
the certainty of profits at APIE cannot be fully known until an end-of-year
actuarial analysis by independent actuaries, we cannot predict what, if any,
profits will be available to us until this analysis is complete. Further
contributing to the 2003 increase in revenues was a $644,000 (10%) increase in
management fees resulting from greater insurance premium volumes. The increase
in 2003 premiums was primarily the result of rate increases throughout 2002 and
2003.
Insurance services expenses at the insurance management subsidiary
increased $976,000 (13%) in 2003 compared to 2002. The 2003 increase was
primarily due to a $309,000 (13%) increase in payroll expense, a 201,000 (37%)
increase in overhead allocation charged by the holding company, APS Group, a
$81,000 (15%) increase in management incentive expense, a $73,000 (32%) increase
in employee benefits, and a $130,000 (143%) increase in advertising. The 2003
increase in payroll was due primarily to the result of an industry salary
analysis conducted in the latter half of 2002, which resulted in wages within
certain departments increasing to competitive levels in order to retain
personnel. In addition, two high-level management positions were added in 2003
to expand our business development and to meet growing financial reporting
requirements. The increase in management incentive cost was the result of an
increase in segment operating profits. As was the case with our investment
services segment, employee benefit costs rose in the current year as a result of
an increase in health insurance costs. Lastly, advertising costs were higher in
2003 as a result of re-branding efforts of the business.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased $83,000 (6%) in 2003 compared
to 2002. The primary reason for the current year decrease was a $201,000 (37%)
decrease in overhead allocated to APS Insurance Services. In addition, other
professional fees was $48,000 lower in 2003 as outside consulting fees were
incurred in 2002 to ascertain the value of a certain investment. Partially
offsetting these decreases was a $37,000 (6%) increase in management incentive
expense resulting from substantially higher operating income in the current
year. Legal fees were $143,000 higher in 2003 primarily as a result of fees
incurred in connection with our investment in FIC. Insurance expense was $45,000
(90%) higher in 2003 on increased directors' and officers' liability insurance
premiums. Audit fees were $37,000 (40%) higher in 2003 as a result of new SEC
and accounting regulations implemented during the year.
20
GAIN ON SALE OF ASSETS
Gain on sale of assets primarily represents the recognition of deferred
income. Approximately $760,000 of the $5,100,000 deferred gain on the sale of
real estate to Prime Medical (its title prior to the merger) in 2001 was due to
our ownership interest in Prime Medical and is recognized upon the reduction of
our ownership percentage in HealthTronics through the sale of its stock. In
2002, as a result of selling 1,570,000 shares of Prime Medical common stock, we
recognized a proportionate percentage of the deferred gain, or about $515,000.
During 2003, we sold 24,000 shares of Prime Medical common stock and recognized
a gain of $8,000.
GAIN ON SALE OF INVESTMENTS
Gain on the sale of investments decreased $2,728,000 (96%) in 2003 compared
to 2002. The 2003 decline was due to the sale of significantly less shares of
Prime Medical common stock in 2003 compared to 2002. In 2002, we recorded gains
on the sales of 1,570,000 shares compared to 24,000 shares sold in 2003. Gains
resulting from sales of Prime Medical common stock were $64,000 and $2,855,000
in 2003 and 2002, respectively. As a result of these sales, as of December 31,
2003, we owned approximately 728,000 shares of Prime Medical amounting to an
ownership percentage of approximately 4%. In addition to the sale of Prime
Medical shares we sold a number of fixed income securities in 2003, which
resulted in gains comprising the majority of the remaining income reported.
AFFILIATES EARNINGS (LOSS)
Our equity in the earnings of Prime Medical was zero in 2003 as we no
longer accounted for our investment in Prime Medical using the equity method of
accounting, as was the case in the first quarter of 2002 when we recorded
$186,000 in equity earnings. 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, our 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 approximately 5%.
Our equity in earnings of Uncommon Care increased to $260,000 in 2003
compared to a loss of $230,000 in 2002. Because our total investment and
advances to Uncommon Care has been reduced to zero we suspended recording equity
losses, as required under the equity method. In 2002, we advanced them $230,000
and recorded a loss for the full amount of the advance. In 2003, after informing
Uncommon Care's management that we would make no further advances, we recorded
equity in earnings of unconsolidated affiliates in the amount of $260,000
related to cash received from Uncommon Care. We expect no further receipts of
cash from Uncommon Care and consequently expect to record no additional income
in the future.
INTEREST INCOME
Our interest income decreased $68,000 (18%) in 2003 compared to 2002
primarily as a result of a higher balance of interest-bearing securities held in
2002. In June 2003, we liquidated approximately $4.0 million in interest-bearing
securities in order to secure the funds required to invest in 385,000 shares of
FIC common stock.
OTHER LOSS
Our other loss decreased $120,000 (76%) in 2003 compared to 2002. The
primary reason for the current year decrease in loss was the result of
management fees received in 2003 from our former consulting division, which
totaled $98,000.
21
MINORITY INTERESTS
Minority interests represents the combination of two outside interests in
our subsidiaries: a twenty percent interest in Insurance Services owned by FPIC
Insurance Group, Inc. and a three percent interest in APS Asset Management, a
subsidiary within our financial services segment, owned by key individuals
within APS Asset Management. Minority interests decreased in the current year
due to the repurchase of the 20% minority interest in Insurance Services from
the minority interest holder, FPIC Insurance Group, effective October 1, 2003.
Consequently, only nine months of minority interest was recorded in 2003
compared to a full year in 2002.
DISCONTINUED OPERATIONS
Effective November 1, 2003 APS Consulting paid off the negotiated remaining
amount of the note payable to us. Even though we had sold this segment to APS
Consulting's management exactly one year earlier, we continued to consolidate
their revenues, expenses and balance sheet items because we were dependent upon
future successful operations of the division to collect our proceeds from the
disposal and we did not transfer risk of loss to discontinue reporting them on
our consolidated financial statements. With the payoff of the note we recognized
the divesture and now report APS Consulting as a discontinued operation.
Accordingly, 2002 has been reclassified to remove revenues and expenses from our
consolidated statements of operations and after-tax results of this former
division are now recorded as income from discontinued operations in 2002. For
2003, only the after-tax gain on disposal of the segment is recorded as earnings
from APS Consulting.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Our net working capital was $10,673,000 and $8,537,000 at December 31, 2004
and 2003, respectively. The increase in the current year was due primarily to
cash received from operations. Partially offsetting these increases to working
capital in 2004 was an increase of $296,000 in accrued commissions payable at
our broker/dealer subsidiary resulting from increased commission earned in
December 2004 compared to December 2003. 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. Although there can be no assurance our operating activities will
provide positive cash flow in 2005, we are optimistic that our working capital
requirements will be met for the foreseeable future for the following reasons:
(1) our current cash position is very strong, with a balance of approximately
$9.7 million comprising 32% of our total assets; (2) our investments in
available-for-sale equity and fixed income securities could provide an
additional $14.3 million should the need arise; and (3) we renewed a line of
credit in April 2004 that is described below.
LINE OF CREDIT
During April 2004, we renewed a $3.0 million line of credit that was
originally established in November 2003 with PlainsCapital Bank. The loan calls
for interest payments only to be made on any amount drawn until April 15, 2005,
when the entire amount of the note, principal and interest then remaining
unpaid, shall be due and payable. At December 31, 2004, there were no draws
taken against this line of credit. We are in compliance with the covenants of
the loan agreement, including requirements for a minimum of $5.0 million of
unencumbered liquidity and a minimum 2 to 1 net worth ratio.
CAPITAL EXPENDITURES
Our capital expenditures for equipment were $421,000 and $223,000 in 2004
and 2003, respectively. Our capital expenditures were higher in 2004 due to
purchases necessary to upgrade our reporting software at our insurance services
22
subsidiary. At December 31, 2004, our reporting software upgrade is considered
to be "in progress" with anticipated implementation in phases during 2005 and
2006. As the assets purchased during 2004 have not been placed in service, they
are appropriately not being depreciated. We expect capital expenditures in 2005
to be approximately $495,000, including another $250,000 in improvements to our
business intelligence reporting software. Our 2005 capital expenditure budget is
expected to be funded through cash on hand.
Commitments
There were no participation agreements or purchase commitments at December
31, 2004. We have committed cash outflow related to operating lease arrangements
with a term exceeding one year at December 31, 2004 as follows (in thousands):
Payment Due
Contractual Cash Obligations 2005 2006 2007 2008 2009 Total
---- ---- ---- ---- ---- -----
Operating Leases $845 $551 $32 $19 $5 $1,452
MARGIN LOANS
We extend credit to our customers, which is financed through our clearing
organization, Southwest Securities, Inc. or Southwest, to help facilitate
customer securities transactions. This credit, which earns interest income, is
known as "margin lending". In margin transactions, the client pays a portion of
the purchase price of securities, and we make a loan (financed by our clearing
organization) to the client for the balance, collateralized by the securities
purchased or by other securities owned by the client.
In permitting clients to purchase on margin, we are subject to the risk of
a market decline, which could reduce the value of our collateral below the
client's indebtedness. Agreements with margin account clients permit our
clearing organization to liquidate our clients' securities with or without prior
notice in the event of an insufficient amount of margin collateral. Despite
those agreements, our clearing organization may be unable to liquidate clients'
securities for various reasons including the fact that the pledged securities
may not be actively traded, there is an undue concentration of certain
securities pledged, or a trading halt is issued with regard to pledged
securities. If the value of the collateral were insufficient to repay the margin
loan, a loss would occur, which we may be required to fund. As of December 31,
2004, the total of all customer securities pledges on debit balances held in
margin accounts was approximately $10.5 million while the total value of the
securities within these margin accounts was approximately $80.1 million. We are
also exposed should Southwest be unable to fulfill its obligations for
securities transactions.
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.
23
IMPACT OF NEW ACCOUNTING STANDARDS
As more fully described in Note 1 of Notes to Consolidated Financial
Statements, on July 1, 2005, we are required to adopt several new accounting
standards. For a discussion of the impact of those new accounting standards upon
us, see Note 1 (n).
ITEM 7A. QUANITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We have exposure to changes in interest rates and the market values of our
investments but have no material exposure to fluctuations in foreign currency.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates to both
our investment portfolio and our revenues generated through commissions at our
financial services segment. All of our marketable fixed income securities are
designated as available-for-sale and, accordingly, are presented at fair value
on our balance sheets. Fixed rate securities may have their fair market value
adversely affected due to a rise in interest rates, and we may suffer losses in
principal if forced to sell securities that have declined in market value due to
changes in interest rates.
Changes in interest rates could have an impact at our broker/dealer
subsidiary, APS Financial. The general level of interest rates may trend higher
or lower in 2005, and this move may impact our level of business in different
fixed-income sectors. If a generally improving economy is the impetus behind
higher rates, then while our investment grade business may drop off, our high
yield business might improve with improving credit conditions. A volatile
interest rate environment in 2005 could also impact our business as this type of
market condition can lead to investor uncertainty and their corresponding
willingness to commit funds.
As we currently have no debt and do not anticipate the need to take on any
debt in 2005, interest rate changes will have no impact on our financial
position as it pertains to interest expense.
INVESTMENT RISK
As of December 31, 2004, our recorded basis in debt and equity securities
was approximately $14.3 million. We regularly review the carrying value of our
investments and identify and record losses when events and circumstances
indicate that such declines in the fair value of such assets below our
accounting basis are other-than-temporary. During 2004, the value of one of our
investments, FIC, had declined significantly. On October 12, 2004, we determined
that this decline in market price was "other than temporary" as defined in
Statements of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Consequently, we recorded a
pretax charge to earnings of $2,374,000 in the third quarter of 2004. The charge
reduced our cost basis in FIC from $5,647,000, or $14.67 per share, to
$3,273,000, or $8.50 per share which was equal to the quoted market price of FIC
shares on September 30, 2004. We believe the decline in the market price of FIC
has been brought about by its failure to file its 2003 Form 10-K and its
subsequent de-listing from the NASDAQ Stock Market. We had expected FIC to bring
its filings current and pursue restoring its exchange listing by September 30,
2004. As of February 28, 2005 these events have still not occurred.
Consequently, we have determined that we will continue to write this investment
down to period-end fair market value until such time as FIC brings its public
filings current. Accordingly, during the fourth quarter of 2004, we recorded as
additional pretax charge to earnings of $193,000 which further reduced our basis
in FIC to $3,080,000, or $8.00 per share. While we currently continue to have
the ability and the intent to hold the stock indefinitely, we concluded that the
additional uncertainty created by the late filings together with the lack of
current financial information dictated that these declines should be viewed as
other than temporary. The effect on our financial statements as a result of
these write-downs was to reduce pre-tax income by $2,567,000, decrease
unrealized holding losses in Other Comprehensive Income by $1,694,000 and
decrease deferred tax assets by $873,000. We will continue to closely monitor
FIC's situation.
24
We also have an investment of 555,000 shares of common sock of
HealthTronics, Inc. Although we have an unrealized gain of approximately
$3,149,000 as of December 31, 2004, this investment can also be at risk should
market or economic conditions change for the worse or should adverse situations
occur at HealthTronics, such as a major product line becoming obsolete. The
remainder of our corporate equity and fixed income investments share the same
risks as HealthTronics but our exposure is much lower.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in Appendix A attached
hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain controls and other procedures that are designed to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. In response to recent legislation, we implemented changes to our
disclosure controls and procedures, primarily to formalize and document
procedures already in place, and to establish a disclosure committee consisting
of some of our officers and other management.
As of the end of the period covered by this report, and under the
supervision and with the participation of our management, including our Chief
Executive Officer (principal executive officer) and Chief Financial Officer
(principal financial officer), we evaluated the effectiveness of the design and
operation of these disclosure controls and procedures. Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective.
We do not expect that our disclosure controls and procedures or our other
internal controls can prevent all error and all fraud or that our evaluation of
these controls and procedures can provide absolute assurance that all control
issues and instances of fraud, if any, have been detected. The benefits of
controls and procedures must be considered relative to their costs, and the
design of any system of controls is based in part upon assumptions about the
likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, controls and procedures may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of these and other inherent limitations in controls and
procedures, misstatements or omissions due to error or fraud may occur and not
be detected.
Subsequent to the date of our evaluation described above, we have not made
any significant changes in our internal controls or in other factors that could
significantly affect these controls.
ITEM 9B. OTHER INFORMATION
None.
25
PART III
Certain information required by Part III is omitted from this Form 10-K
because we will file a definitive Proxy Statement pursuant to Regulation 14A, or
Proxy Statement, not later than 120 days after the end of the fiscal year
covered by this Form 10-K, and certain information to be included therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Directors and Executive Officers of the
Registrant".
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Information Regarding Executive Officer
Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Certain Relationships and Related
Transactions."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Corporate Governance - Committees of the
Board of Directors - The Audit Committee."
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Consolidated Financial Statements
The information required by this item is contained in Appendix A
attached hereto.
2. Financial Statement Schedule (Schedule II)
(b) 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)
26
*10.1 1995 Incentive and Non-Qualified Stock Option Plan of American
Physicians Service Group, Inc. (6)
*10.2 Form of Stock Option Agreement (ISO). (6)
*10.3 Form of Stock Option Agreement (Non-Qualified). (6)
10.4 Management Agreement of Attorney-in-Fact, dated August 13, 1975,
between FMI and American Physicians Insurance Exchange. (2)
*10.5 Profit Sharing Plan and Trust, effective December 1, 1984, of the
Company. (3)
*10.6 First Amendment to 1995 Incentive and Non-Qualified Stock Option Plan
of American Physicians Service Group, Inc. Dated December 10, 1997.
*10.7 First Amendment to 1995 Non-Employee Director Stock Option Plan of
American Physicians Service Group, Inc. Dated December 10, 1997. (8)
10.8 Contribution and Stock Purchase Agreement dated January 1, 1998 between
the Company, Additional Purchasers, Barton Acquisition, Inc., Barton
House, Ltd., Barton House at Oakwell Farms, Ltd., Uncommon Care, Inc.,
George R. Bouchard, John Trevey and Uncommon Partners, Ltd. (9)
10.9 Loan Agreement dated January 1, 1998 between the Company and Barton
Acquisition, Inc. (9)
10.10 Promissory Note (Line of Credit) dated January 1, 1998 between the
Company and Barton Acquisition, Inc. in the amount of $2,400,000. (9)
10.11 Security Agreement dated January 1, 1998 between the Company and Barton
Acquisition, Inc. (9)
10.12 Participation Agreement dated march 16, 1998 between the Company and
Additional Purchasers referred to as Participants. (9)
10.13 Convertible Promissory Note dated April 27, 1999 between the Company
and Uncommon Care, Inc. (10)
10.14 Replacement Convertible Promissory Note dated September 30, 1999
between the Company and Uncommon Care, Inc. (10)
10.15 Liquidity Promissory Note dated September 30, 1999 between the Company
and Uncommon Care, Inc. (10)
10.16 Replacement Liquidity Note dated October 15, 1999 between the Company
and Uncommon Care, Inc. (10)
10.17 $1.25 million Promissory Note dated June 1, 2000 between the Company
and Uncommon Care, Inc. (11)
10.18 $1.20 million Promissory Note dated June 1, 2000 between the Company
and Uncommon Care, Inc. (11)
10.19 Agreement dated November 22, 2002 transferring and assigning all
capital stock of Eco-Systems from the Company to the purchaser. (13)
*10.20 Amended 1995 Incentive and Non-Qualified Stock Option Plan (13)
10.21 Executive Employment Agreement between the Company and Kenneth S.
Shifrin. (13)
*10.22 Consulting Agreement between the Company and William A. Searles. (13)
*10.23 Executive Employment Agreement between the Company and William H.
Hayes. (13)
27
10.24 Stock Purchase Agreement dated October 31, 2003 between the Company
and FPIC Insurance Group, Inc. (13)
10.25 Revolving Promissory Note dated April 15, 2004 between the Company and
PlainsCapital Bank. (14)
10.26 Commercial Loan Agreement dated April 15, 2004 between the Company and
PlainsCapital Bank. (14)
21.1 List of subsidiaries of the Company. (14)
23.1 Independent Auditors Consent of BDO Seidman, LLP. (14)
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (14)
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (14)
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (14)
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (14)
(*) 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 Securities and
Exchange 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, and 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-K 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-K of the Company for
the year ended December 31, 1996 and incorporated herein by reference.
28
(8) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for
the year ended December 31, 1997 and incorporated herein by reference.
(9) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for
the year ended December 31, 1998 and incorporated herein by reference.
(10) Filed as an Exhibit to the 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-K of the Company for
the year ended December 31, 2002 and incorporated herein by reference.
(13) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for
the year ended December 31, 2003 and incorporated herein by reference.
(14) Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN PHYSICIANS SERVICE GROUP, INC.
By: /s/ Kenneth S. Shifrin
------------------------
Kenneth S. Shifrin, Chairman of the Board
and Chief Executive Officer
Date: March 29, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By: /s/ Kenneth S. Shifrin
------------------------------------------------------
Kenneth S. Shifrin
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: March 29, 2005
29
By: /s/ W. H. Hayes
------------------------------------------------------
W. H. Hayes
Senior Vice President - Finance, Secretary
and Chief Financial Officer
(Principal Financial Officer)
Date: March 29, 2005
By: /s/ Thomas R. Solimine
------------------------------------------------------
Thomas R. Solimine
Controller
(Principal Accounting Officer)
Date: March 29, 2005
By: /s/ Jackie Majors
Jackie Majors, Director
Date: March 29, 2005
By: /s/ Robert L. Myer
----------------------------------------------------------
Robert L. Myer, Director
Date: March 29, 2005
By: /s/ William A. Searles
------------------------------------------------------
William A. Searles, Director
Date: March 29, 2005
By: /s/ Cheryl Williams
Cheryl Williams, Director
Date: March 29, 2005
30
APPENDIX A
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm A-2
Consolidated Financial Statements
Consolidated Statements of Operations for the Years
ended December 31, 2004, 2003 and 2002 A-3
Consolidated Balance Sheets as of December 31, 2004
and December 31, 2003 A-5
Consolidated Statements of Cash Flows for the Years
ended December 31, 2004, 2003 and 2002 A-7
Consolidated Statements of Shareholders' Equity and Comprehensive
Income (Loss) for the Years ended December 31, 2004, 2003 and 2002 A-8
Notes to Consolidated Financial Statements A-9
A-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
American Physicians Services Group, Inc.
Austin, Texas
We have audited the accompanying consolidated balance sheets of American
Physicians Services Group, Inc. as of December 31, 2004 and 2003, and the
related consolidated statements of income, stockholders' equity and
comprehensive income (loss), and cash flows for each of the three years in the
period ended December 31, 2004. We have also audited the schedule listed in Item
15. These financial statements and the schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. According, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Physicians
Services Group, Inc. at December 31, 2004 and 2003, and the results of its
operations and its cash flows for the each of the three years in the period
ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth herein.
BDO Seidman, LLP
Houston, Texas
March 4, 2005
A-2
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
2004 2003 2002
------------- -------------- ------------
Revenues:
Financial services $16,705 $19,623 $13,623
Insurance services 15,316 10,826 9,454
------------- -------------- ------------
Total revenues 32,021 30,449 23,077
Expenses:
Financial services 14,538 16,584 11,876
Insurance services 10,558 8,582 7,606
General and administrative 1,637 1,328 1,411
Gain on sale of assets (56) (8) (515)
------------- -------------- ------------
Total expenses 26,677 26,486 20,378
------------- -------------- ------------
Operating income 5,344 3,963 2,699
Gain on sale of investments (Note 5) 245 127 2,855
Loss from impairment of investment (Note 5) (2,567) -- --
Gain on extinguishment of debt 75 -- --
------------- -------------- ------------
Income from continuing operations before interest,
income taxes, minority interests and equity in loss
of unconsolidated affiliates 3,097 4,090 5,554
Interest income 365 304 372
Other income (loss) 15 (38) (158)
Interest expense 7 7 24
Income tax expense (Note 10) 1,317 1,640 2,283
Minority interests 1 197 261
Equity in earnings (loss) of unconsolidated affiliates (Note 15) -- 260 (44)
------------- -------------- ------------
Income from continuing operations 2,152 2,772 3,156
Discontinued operations (Note 13):
Income from discontinued operations, net of income tax
expense of $132 in 2002 -- -- 255
Gain on disposal of discontinued segment
net of income tax expense of $14 in 2003 -- 27 --
------------- -------------- ------------
Net income $ 2,152 $ 2,799 $ 3,411
============= ============== ============
The accompanying notes are an integrated part of these consolidated financial
statements.
A-3
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS, continued
(In thousands, except per share amounts)
Year Ended December 31,
December 31,
---------------- --------------- ------------
2004 2003 2002
---------------- --------------- ------------
Net income per common share:
Basic:
Income from continuing operations $ 0.85 $ 1.26 $ 1.42
Discontinued operations -- 0.01 0.11
-------- -------- --------
Net income $ 0.85 $ 1.27 $ 1.53
======= ======= =======
Diluted:
Income from continuing operations $ 0.76 $ 1.13 $ 1.35
Discontinued operations -- 0.01 0.11
-------- -------- -------
Net income $ 0.76 $ 1.14 $ 1.45
======= ======= =======
Basic weighted average shares
outstanding 2,545 2,207 2,227
====== ====== =====
Diluted weighted average shares
outstanding 2,838 2,449 2,345
====== ====== =====
The accompanying notes are an integrated part of these consolidated financial
statements.
A-4
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
2004 2003
-------- -------
ASSETS
Current Assets:
Cash and cash equivalents $9,673 $8,989
Trading account securities -- 67
Trade receivables, net 19 --
Management fees and other receivables 1,815 1,079
Notes receivable - current (Note 3) 777 16
Deposit with clearing organization 660 500
Receivable from clearing organization -- 67
Investment in available-for-sale fixed
income securities - current 1,983 --
Net deferred income taxes 124 532
Income tax receivable 76 1,678
Prepaid expenses and other current assets 642 565
--------- --------
Total current assets 15,769 13,493
Notes receivable, less current portion 141 436
Property and equipment, net (Note 6) 619 378
Investment in available-for-sale securities:
Equity (Note 5) 9,417 8,729
Fixed income 2,920 897
Goodwill 1,247 1,257
Other assets 330 448
---------- --------
Total Assets $30,443 $25,638
========== ========
The accompanying notes are an integrated part of these consolidated financial
statements.
A-5
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED BALANCE SHEETS, continued
(In thousands, except share data)
December 31,
2004 2003
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $266 $201
Payable to clearing broker -- 67
Accrued incentive compensation 2,500 2,716
Accrued expenses and other liabilities (Note 7) 1,842 1,485
Deferred gain - current 488 487
------- -------
Total current liabilities 5,096 4,956
Payable under loan participation agreements 24 259
Deferred income tax liability 482 146
Deferred gain - non-current 627 1,171
------- -------
Total liabilities 6,229 6,532
Minority interests 1 --
Shareholders' Equity:
Preferred stock, $1.00 par value, 1,000,000
shares authorized, none issued or outstanding -- --
Common stock, $0.10 par value, shares authorized 20,000,000;
2,624,372 and 2,454,667 issued and outstanding
at 12/31/04 and 12/31/03, respectively 265 245
Additional paid-in capital 7,919 6,918
Retained earnings 13,948 12,314
Accumulated other comprehensive income (loss), net of taxes 2,081 (371)
-------- --------
Total shareholders' equity 24,213 19,106
-------- --------
Total Liabilities and Shareholders' Equity $30,443 $25,638
======== ========
The accompanying notes are an integrated part of these consolidated financial
statements.
A-6
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Year Ended December 31
2004 2003 2002
--------- --------- --------
Cash flows from operating activities
Net Income $ 2,152 $ 2,799 $ 3,411
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 304 206 188
Extinguishment of debt and other 39 164 164
Common stock awarded 231 -- --
Minority interest in consolidated earnings 1 197 261
Undistributed (earnings) loss of affiliates -- (260) 44
Loss (gain) on sale of assets (56) 19 (515)
Deferred gain on sale of building (488) (488) (488)
Tax benefit from exercise of stock options 589 -- --
Impairment of investment 2,567 -- --
Gain on sale of investments (245) (127) (2,855)
Provision for bad debt 20 (58) 200
Changes in operating assets and liabilities:
Trade and other receivables (179) (325) (170)
Trading account securities 67 66 16
Income tax receivable 1,602 (996) (324)
Deferred income tax 744 2,511 (486)
Management fees & other receivables (746) (316) (279)
Prepaid expenses & other assets (74) 207 474
Deferred income -- (122) (85)
Trade accounts payable 66 (138) 227
Accrued expenses & other liabilities (1,137) 1,266 (85)
------- -------- -------
Net cash provided by (used in) operating activities 5,457 4,605 (302)
Cash flows from investing activities:
Capital expenditures (421) (319) (154)
Proceeds from the sale of available-for-sale equity
and fixed income securities 1,116 4,118 10,719
Purchase of available-for-sale equity securities (4,405) (5,697) (4,683)
Purchase of minority interest -- (2,050) --
Receipts from (advances to) affiliate -- 175 (230)
Funds loaned to others (620) (155) (155)
Collection of notes receivable 20 745 725
------- -------- --------
Net cash (used in) provided by investing activities (4,310) (3,183) 6,222
Cash flows from financing activities:
Payment of long-term debt -- -- (2,275)
Exercise of stock options 758 1,351 45
Purchase and cancellation of treasury stock (703) (285) (850)
Dividends paid (518) -- --
Distribution to minority interest -- (190) --
------- -------- --------
Net cash provided by (used in) financing activities (463) 876 (3,080)
Net change in cash and cash equivalents $ 684 $ 2,298 $ 2,840
Cash and cash equivalents at beginning of year 8,989 6,691 3,851
------- -------- --------
Cash and cash equivalents at end of year $ 9,673 $ 8,989 $ 6,691
======== ========= ========
The accompanying notes are an integrated part of these consolidated financial
statements.
A-7
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands)
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Comprehensive Treasury Shareholders'
Stock Capital Earnings Income Income (loss) Stock Equity
------------------------------------------------------------------------------------------------
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,
net of tax:
Unrealized gain on securities,
net of reclassification
adjustment (Note 21) -- -- -- 1,869 1,869 -- 1,869
Comprehensive income -- -- -- 5,280 -- -- --
Treasury stock purchases -- -- -- -- -- (850) (850)
Retired treasury stock (62) (2,206) -- -- 2,268 --
Stock options exercised -- 45 -- -- -- -- 45
------------------------------------------------------------------------------------------------
Balance December 31, 2002 $213 $5,584 $9,515 $ -- $1,830 $ -- $17,142
================================================================================================
Comprehensive income:
Net income -- -- 2,799 2,799 -- -- 2,799
Other comprehensive income,
net of tax:
Unrealized loss on securities,
net of reclassification
adjustment (Note 21) -- -- -- (2,201) (2,201) -- (2,201)
Comprehensive income -- -- -- 598 -- -- --
Treasury stock purchases -- -- -- -- -- (284) (284)
Retired treasury stock (6) (279) -- -- -- 284 --
Stock options exercised 38 1,313 -- -- -- -- 1,351
Tax benefit from exercise of
stock options -- 300 -- -- -- -- 300
------------------------------------------------------------------------------------------------
Balance December 31, 2003 $245 $6,918 $12,314 $ -- ($371) $ -- $19,106
================================================================================================
The accompanying notes are an integrated part of these consolidated financial
statements.
A-8
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
continued
(In thousands)
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Comprehensive Treasury Shareholders'
Stock Capital Earnings Income Income (loss) Stock Equity
-----------------------------------------------------------------------------------------------
Balance December 31, 2003 $ 245 $ 6,918 $ 12,314 $ -- $ (371) $ -- $19,106
-----------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 2,152 2,152 -- -- 2,152
Other comprehensive income,
net of tax:
Unrealized gain on securities,
net of reclassification
adjustment (Note 21) -- -- -- 2,452 2,452 -- 2,452
Comprehensive income -- -- -- 4,604 -- -- --
Treasury stock purchases -- -- -- -- -- (703) (703)
Retired treasury stock (7) (696) -- -- -- 703 --
Stock options exercised 25 733 -- -- -- -- 758
Tax benefit from exercise
of stock options -- 589 -- -- -- -- 589
Dividend paid (per share - $0.20) -- -- (518) -- -- -- (518)
Stock awarded 2 229 -- -- -- -- 231
Forgiveness of Uncommon Care Debt -- 146 -- -- -- -- 146
----------------------------------------------------------------------------------------------
Balance December 31, 2004 $265 $7,919 $13,948 $ -- $2,081 $ -- $24,213
==============================================================================================
The accompanying notes are an integrated part of these consolidated financial
statements.
A-9
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(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, and insurance services that consist of management
services for a malpractice insurance company. The financial services
business has clients nationally. Insurance management is a service
provided primarily in Texas, but is available to clients nationally.
During the three years presented in the financial statements, financial
services generated 52%, 64% and 59% of total revenues and insurance
services generated 48%, 36% and 41% in 2004, 2003 and 2002,
respectively.
(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. In the event that we
retain sufficient risk of loss in a disposed subsidiary to preclude us
from recognizing the transaction as a divestiture, we would continue to
consolidate the subsidiary as an entity in which we have a variable
interest under the guidance of FIN 46R.
We own 100% of our insurance services segment after repurchasing the
20% formerly owned by Florida Physicians Insurance Group, Inc.
("FPIC"), on September 30, 2003 (see Note 14). Before this date, we
recorded minority interest to reflect the 20% of its net income or loss
attributable to the minority shareholder.
All significant intercompany 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.
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.
A-10
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(1) Summary of Significant Accounting Policies, continued
(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.
Realized gains and losses are included in
earnings.
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.
We account for our equity and fixed income securities as
available-for-sale. In the event a decline in fair value of an
investment occurs, management may be required to determine if the
decline in market value is other than temporary. Management's
assessments as to the nature of a decline in fair value are based on
the quoted market prices at the end of a period, the length of time an
investment's fair value has been in decline and our ability and intent
to hold the investment. If the fair value is less than the carrying
value and the decline is determined to be other than temporary, an
appropriate write-down is recorded against earnings.
(f) Property and Equipment
Property and equipment is stated at cost net of accumulated
depreciation. 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 or their expected
useful life, whichever is shorter.
(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
A-11
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(1) Summary of Significant Accounting Policies, continued
expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized if there is a difference
between the fair value and carrying value of the asset.
Investments 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. Management's evaluation of our investments resulted in
no impairment to these investments.
(h) Goodwill and Other Intangible Assets
Goodwill represents the excess of cost over the fair value of net
assets acquired. We account for goodwill and other intangible assets
according to the Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets", which addresses
financial accounting and reporting matters for acquired goodwill and
other intangible assets. Under the provision of SFAS No. 142, goodwill
is not amortized, but is evaluated annually for impairment or more
frequently if circumstances indicate that impairment may exist. The
goodwill valuation is largely influenced by projected future cash flows
and, therefore, is significantly impacted by estimates and judgments.
We amortize other identifiable intangible assets on a straight-line
basis over the periods expected to be benefited. The components of
these other intangible assets, recorded in Other Assets in the
accompanying consolidated balance sheets, consist primarily of a
non-compete agreement.
(i) Allowance for Doubtful Accounts
When applicable, 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 customers' 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.
(j) 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.
A-12
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(1) Summary of Significant Accounting Policies, continued
(k) 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.
(l) Notes Receivable
Notes receivable are recorded at cost, less allowances for doubtful
accounts when deemed necessary. Management, considering current
information and events regarding the borrowers' ability to repay their
obligations, considers a note to be impaired when it is probable that
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 are reported as bad debt
expense in the same manner in which impairment initially was
recognized. No interest income is accrued on impaired loans. Cash
receipts on impaired loans are recorded as reductions of the principal
amount.
(m) Stock-Based Compensation
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 2003 we purchased 15,000 unexpired
options from a grantee and in 2002 we purchased 89,000 unexpired
options from four grantees. These purchases in effect modified the
terms of the options and, accordingly, we recognized $34,000 and
$156,000 of compensation expense in 2003 and 2002, respectively, as
required for a modification of terms under FIN 44. No other
compensation expense from stock-based compensation awards was
recognized in 2004, 2003 and 2002. If we had elected to recognize
compensation expense for options granted based on their fair values at
the grant dates, consistent with Statement 123, net income and earnings
per share would have changed to the pro forma amounts indicated below:
A-13
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(1) Summary of Significant Accounting Policies, continued
Year Ended December 31,
---------------------------------------------------------------
2004 2003 2002
---- ---- ----
Net income, as reported $ 2,152,000 $ 2,799,000 $ 3,411,000
Add: Stock-based employee compensation expense
included in net income, net of tax -- 22,000 103,000
Deduct: Total stock-based employee compensation
expense determined under the fair value based
method for all awards, net of related tax effects (550,000) (241,000) (222,000)
--------- --------- ---------
Pro forma net income $ 1,602,000 $ 2,580,000 $ 3,292,000
=========== ============ ===========
Net income per share
Basic - as reported $0.85 $1.27 $1.53
===== ===== =====
Basic - pro forma $0.63 $1.17 $1.48
===== ===== =====
Diluted - as reported $0.76 $1.14 $1.45
===== ===== =====
Diluted - pro forma $0.56 $1.05 $1.40
===== ===== =====
The stock-based employee compensation expense above was determined using the
Black Scholes option- pricing model with the following assumptions:
2004 2003 2002
---- ---- ----
Risk-free interest rate 3.03% 2.44% 3.40%
Expected holding period 3.8 years 3.8 years 3.7 years
Expected volatility .429 .407 .477
Expected dividend yield -0- -0- -0-
(n) Recently Issued Accounting Pronouncements
In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary
Assets, an amendment of APB No. 29, Accounting for Nonmonetary
Transactions. SFAS 153 requires exchanges of productive assets to be
accounted for at fair value, rather than at carryover basis, unless (1)
neither the asset received nor the asset surrendered has a fair value
that is determinable within reasonable limits or (2) the transactions
lack commercial substance. SFAS 153 is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005.
The Company does not expect the adoption of this standard to have a
material effect on its financial position, results of operations or
cash flows.
In December 2003, the Financial Accounting Standards Board published
FIN No. 46-R, "Consolidation of Variable Interest Entities (revised
December 2003)," superseding FIN 46, and exempting certain entities
from the provisions of FIN 46. Generally, application of FIN 46-R is
required in financial statements of public entities that have interests
in structures commonly referred to as special-purpose entities for
periods ending after December 15, 2003, and for other types of VIEs for
periods ending after March 15, 2004. We
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(1) Summary of Significant Accounting Policies, continued
currently do not consolidate any variable interest entities therefore
the adoption of this standard did not have a material effect on our
financial position, results of operations or cash flows.
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards, or SFAS, No. 123 (revised
2004), "Share-Based Payment". Statement 123(R) will provide investors
and other users of financial statements with more complete and neutral
financial information by requiring that the compensation cost relating
to share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the
equity or liability instruments used. Statement 123(R) covers a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. Statement 123(R) replaces
FASB Statement No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. Statement 123, as originally issued in 1995, established as
preferable a fair-value-based method of accounting for share-based
payment transactions with employees. However, that Statement permitted
entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net
income would have been had the preferable fair-value-based method been
used. Public entities (other than those filing as small business
issuers) will be required to apply Statement 123(R) as of the first
interim or annual reporting period that begins after June 15, 2005. We
are currently evaluating the effect of adoption of SFAS 123(R) will
have on our overall results of operations and financial position.
(o) Reclassification
Certain reclassifications have been made to amounts presented in 2003
and 2002 to be consistent with the 2004 presentation.
(2) Management Fees and Other Receivables
Management fees and other receivables consist of the following:
December 31,
2004 2003
----- -----
Management fees receivable $1,661,000 $ 739,000
Accrued interest receivable 67,000 22,000
Other receivables 87,000 318,000
---------- ---------
$1,815,000 $1,079,000
========== ==========
We earn management fees by providing management services to American
Physicians Insurance Exchange ("APIE") under the direction of APIE's
Board of Directors. APIE is a reciprocal insurance exchange, which is
wholly-owned by its subscriber physicians. Subject to the direction of
APIE's Board, and subject to a management services agreement, FMI sells
and issues medical insurance policies, investigates, settles and
defends claims, and otherwise manages APIE's affairs. The management
agreement with FMI obligates APIE to pay management fees to FMI based
on a percentage of APIE's earned premiums before
A-15
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(2) Management Fees and Other Receivables, continued
payment of reinsurance premiums. In addition, the management agreement
provides that any profits, as defined, 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. Management fees attributable
to profit sharing were $1,929,000, $722,000 and $0 for the years ended
December 31, 2004, 2003 and 2002. We earned total management fees and
other related income of $15,316,000, $10,826,000 and $9,455,000,
including expense reimbursements, principally for our independent
agents' commissions, of $4,482,000, $3,373,000 and $3,368,000 for the
years ended December 31, 2004, 2003 and 2002, respectively, related to
these agreements.
The summarized financial information for APIE as of and for the year
ended December 31, 2004, 2003 and 2002 is as follows:
2004 2003 2002
---- ---- ----
(unaudited) (unaudited) (unaudited)
------------ ------------ ------------
Invested assets $ 106,958,000 $ 86,547,000 $ 67,293,000
Other assets 24,194,000 16,181,000 13,428,000
----------- ----------- ----------
Total Assets $ 131,152,000 $ 102,728,000 $ 80,721,000
============== ============== ============
Current liabilities $ 109,914,000 $ 86,945,000 $ 67,736,000
Surplus 21,238,000 15,783,000 12,985,000
----------- ----------- ----------
Total liablilities and surplus $ 131,152,000 $ 102,728,000 $ 80,721,000
============== ============== ============
Total revenue $ 69,099,000 $ 56,009,000 $ 41,078,000
Net income $ 4,296,000 $ 1,299,000 $ 1,503,000
Other receivables in 2004 and 2003 are primarily from our brokerage and
investment advisory services and are principally comprised of
commissions earned by our brokers for trades in the last week of
December 2004 and 2003.
A-16
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(3) Notes Receivable
Notes receivable consist of the following:
December 31,
2004 2003
---- ----
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 were to continue
through September 1, 2004, at which time the total outstanding balance
was due. In December 2003 we agreed to extend the maturity one year
interest only at 8%. The remaining principal and interest payments are
due March 1, June 1, and September 1, 2005. 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.
$420,000 $420,000
Atlast Financial Services, LLC
Unsecured term note, principal and interest, at 8% payable monthly
until maturity on October 15, 2005.
235,000 - 0 -
Employees
Loans are periodically made to non-officer employees, primarily as
employment retention inducements. Employee notes receivable at December
31, 2004 consisted of two notes of $2,000 and $248,000, which are being
amortized through October 31, 2005 and June 30, 2006, respectively,
provided the employees remain with us; a note for $14,000 due
currently; and two loans totaling $13,000 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, 2003 consisted of a note
totaling $6,000 which is being amortized through 2004, provided the
employee remains with us and two loans totaling $26,000 to a key
employee for advanced education fees. The same terms apply as described
above.
277,000 32,000
------- ------
932,000 452,000
Less current portion and allowance for doubtful accounts of $14,000 and
$0, in 2004 and 2003, respectively. (791,000) (16,000)
--------- ----------
Long term portion $141,000 $436,000
======== ========
A-17
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(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.
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.
AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities owned are reported at fair value, based
upon quoted market prices.
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. The carrying value of notes receivable
approximates their fair value.
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.
ACCOUNTS PAYABLE
The fair value of the payable approximates carrying value due to the
short-term nature of the obligation.
A-18
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(4) Fair Value of Financial Instruments, continued
LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. Fair value estimates are based on existing 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
The following table summarizes by major security type the cost, fair
market value, and unrealized gains and losses of the investments that
we have classified as available-for-sale:
Gross Gross
Unrealize Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------------------
December 31, 2004
Governmental obligations $ 3,492,000 $ -- $ (26,000) $ 3,466,000
Corporate obligations 1,406,000 51,000 (20,000) 1,437,000
Equity securities 6,268,000 3,149,000 -- 9,417,000
---------- ---------- --------- -----------
Total $11,166,000 $3,200,000 $ (46,000) $14,320,000
============ =========== ========== ===========
December 31, 2003
Corporate obligations $ 884,000 $ 13,000 $ -- $ 897,000
Equity securities 9,306,000 -- (577,000) 8,729,000
---------- -------- --------- ---------
Total $10,190,000 $ 13,000 $ (577,000) $9,626,000
============ ========= =========== ==========
(1) Unrealized losses in 2004 and 2003 were in a loss position for less
than one year.
Maturities of fixed income securities were as follows at December
31, 2004:
A-19
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(5) Marketable Securities, continued
Fair
Cost Value
---------- ----------
Due within one year $1,993,000 $1,983,000
Due after one year 2,905,000 2,920,000
--------- ---------
Total $4,898,000 $4,903,000
========== ==========
Amounts reflected in the tables above include equity securities of
HealthTronics with a fair value of $5,900,000 and $3,416,000 and
corporate obligations of HealthTronics with a fair value of $944,000
and $897,000 at December 31, 2004 and 2003, respectively. At December
31, 2004 and 2003, amounts also include equity securities of Financial
Industries Corporation ("FIC") with a fair value of $3,080,000 and
$5,313,000, respectively.
HealthTronics 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, broadcast/communications and homeland security
equipment. Through selling of shares since our initial investment of
3,540,000 shares in 1989, our holdings of common stock at December 31,
2004 stood at 555,000, or approximately 2% of the common stock
outstanding. We account for HealthTronics as an available-for-sale
equity security and record changes in its value, net of tax, in our
balance sheet as part of "accumulated other comprehensive income".
On June 4, 2003 we purchased from Financial Industries Corporation
("FIC")(OTC: FNIN.PK) and a foundation 339,879 shares of FIC's common
stock as an investment. Earlier in 2003 we had purchased 45,121 FIC
shares in the open market. The 385,000 shares represent an approximate
4% ownership in FIC. The aggregate purchase price was approximately
$5,647,000, which was all sourced from our cash reserves. The shares
purchased from FIC and the foundation are not registered, but are
subject to a registration rights agreement requiring FIC's best efforts
to register them within one year of the transaction. Due to FIC's delay
in filing its 2003 Form 10-K and its March 31, 2004, June 30, 2004
Forms 10-Q, it has not been able to register these shares and was
delisted from the NASDAQ exchange in July 2004. Subsequently, FIC was
delinquent in filing its September 30, 2004 Form 10-Q.
By September 30, 2004, the value of our investment in FIC had declined
significantly. On October 12, 2004, we determined that this decline in
market price was "other than temporary" as defined in Statements of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Consequently, we recorded a
pretax charge to earnings of $2,374,000 in the third quarter 2004. The
charge reduced our cost basis in FIC from $5,647,000, or $14.67 per
share, to $3,273,000, or $8.50 per share, which is equal to the quoted
market price of FIC shares on September 30, 2004. By December 31, 2004,
the value of our investment in FIC had declined further. On December
31, 2004, we determined that this decline in market price was "other
than temporary". Consequently, we recorded a pretax charge to earnings
of $193,000 in the fourth quarter 2004. The charge reduced our cost
basis in FIC from $3,273,000, or $8.50 per share, to $3,080,000, or
$8.00 per share, which is equal to the quoted market price of FIC
shares on December 31, 2004.
A-20
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(5) Marketable Securities, continued
As discussed in our Forms 10-Q dated June 30 and September 30, 2004, we
believe the decline in the market price of FIC has been brought about
by its failure to file its 2003 Form 10-K and its subsequent de-listing
from the NASDAQ Stock Market. We had expected FIC to bring its filings
current and pursue restoring its exchange listing but these events have
not yet occurred. While we currently continue to have the ability and
the intent to hold the stock indefinitely, we concluded that the
additional uncertainty created by the late filings together with the
lack of current financial information dictated that the decline should
be viewed as other than temporary. We will continue the policy during
2005 of monitoring and evaluating the situation at FIC and further
determining if changes in fair market value of the investment are
temporary or "other than temporary".
The following table summarizes our recognized gains and losses on
investments. Costs on assets sold were determined on the basis of
specific identification.
Year ended December 31,
2004 2003 2002
---- ---- ----
Proceeds from sales $1,116,000 $4,080,000 $10,731,000
Gains 245,000 197,000 2,855,000
Losses** (2,567,000) (70,000) --
---------- -------- ----------
Net gains (losses) $(2,322,000) 127,000 $2,855,000
========== ======== ==========
** Note: The loss in 2004 resulted from other than temporary impairment
charges to income and were not the result of the sale of a security at
a loss.
(6) Property and Equipment
Property and equipment consists of the following:
December 31,
------------------------------------------
2004 2003
---- ----
Equipment $ 1,150,000 $ 1,059,000
Furniture 628,000 624,000
Software 643,000 323,000
Leasehold improvements 332,000 332,000
-------- -------
$ 2,753,000 $ 2,338,000
Accumulated depreciation $ (2,134,000) $ (1,960,000)
============ ============
$ 619,000 $ 378,000
========== =========
A-21
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(6) Property and Equipment, continued
Property and equipment are stated at cost. Depreciation expense of
$181,000, $173,000 and $166,000 in 2004, 2003 and 2002, respectively,
is computed principally on the straight-line method over the estimated
useful lives of the assets. The useful lives for equipment ranges from
three to five years, furniture ranges from five to seven years,
software is depreciated over three years, and leasehold improvements
are depreciated over the life of the lease or their expected useful
life, whichever is shorter.
(7) Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following as of
December 31:
2004 2003
---- ----
Commissions payable $ 1,260,000 $ 964,000
Taxes payable 205,000 116,000
401(k) plan matching 169,000 121,000
Vacation payable 153,000 158,000
Other 55,000 126,000
------- -------
$ 1,842,000 $ 1,485,000
=========== ==========
(8) Deferred Gain
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, HealthTronics. In conjunction with the
sale we leased back approximately 23,000 square feet that housed our
operations prior to the sale. Gain on the sale amounted to
approximately $5.1 million, of which $1.9 million was recognized in
2001 and the balance of gain was deferred. Deferred income of
approximately $2.4 million related to our continuing involvement in 50%
of the useable 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 2004, 2003 and 2002. In
addition, 15% of the gain ($0.76 million) related to our then 15%
ownership in the purchaser was deferred as we accounted for
HealthTronics using the equity method of accounting through the year
ended December 31, 2001. During 2004, 2003 and 2002 we reduced our
investment in HealthTronics and subsequently recognized a proportionate
percentage of the deferred gain, amounting to $56,000, $8,000 and
$515,000 in 2004, 2003, and 2002, respectively. Recognition of the
deferred gain is recorded as a reduction of rent expense in operating
expenses in the accompanying financial statements.
(9) Commitments and Contingencies
Rental expenses under all operating leases were $1,098,000, $997,000
and $1,077,000, for the years ended December 31, 2004, 2003 and 2002,
respectively. Future minimum payments for leases that extend for more
than one year through 2009 were $845,000; $551,000; $32,000; $19,000,
$5,000 for 2005, 2006, 2007, 2008 and 2009, respectively.
A-22
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(9) Commitments and Contingencies, continued
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.
(10) Income Taxes
Income tax expense consists of the following:
Year Ended December 31,
2004 2003 2002
---- ---- ----
Continuing Operations:
Federal
Current $ 1,049,000 $ (978,000) $ 2,339,000
Tax benefit of stock options 589,000 -- --
Deferred (505,000) 2,511,000 (151,000)
State-Current 184,000 107,000 95,000
------------ ------------ -----------
Total from Continuing Operations 1,317,000 1,640,000 2,283,000
Discontinued Operations -- 14,000 132,000
------------ ------------ -----------
$1,317,000 $1,654,000 $2,415,000
============ ============ ===========
A reconciliation of expected income tax expense computed by applying
the United States federal statutory income tax rate of 34% to earnings
from continuing operations before income taxes to tax expense from
continuing operations in the accompanying consolidated statements of
operations follows:
Year Ended December 31,
2004 2003 2002
---- ---- ----
Expected federal income tax expense from
continuing operations $ 1,179,000 $ 1,500,000 $ 1,849,000
State taxes 121,000 72,000 63,000
Goodwill adjustment -- -- 214,000
Minority interest -- 67,000 89,000
Other, net 17,000 1,000 68,000
------- ------ ------
$ 1,317,000 $ 1,640,000 $ 2,283,000
=========== ============ ===========
A-23
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(10) Income Taxes, continued
The tax effect of temporary differences that gives rise to significant
portions of deferred tax assets and deferred tax liabilities at
December 31, 2004 and 2003 are presented below:
Year Ended December 31,
-------------------------------------
2004 2003
---- ----
Current deferred tax assets (liabilities):
Market value allowance on investments $ -- $ 191,000
Accrued expenses 113,000 357,000
Allowance for doubtful accounts 11,000 6,000
Capitalized expenses, principally due to deductibility
for tax purposes -- (22,000)
---------- -----------
Total current deferred tax asset 124,000 532,000
========== ===========
Non-current deferred tax assets (liabilities):
Write-off of investment in excess of tax loss 873,000 --
Other investments 8,000 126,000
Sales/Leaseback deferred income 378,000 564,000
Investment in available-for-sale securities (677,000) (889,000)
Market value allowance on investments (1,072,000) --
Other 136,000 53,000
Tax depreciation in excess of book (128,000) --
----------- -----------
Total non-current net deferred tax liability (482,000) (146,000)
=========== ===========
Net deferred tax asset (liability) $ (358,000) $ 386,000
=========== ===========
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 that 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, 2004.
A-24
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 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 $13,000 in 2004 unless participant is over age
50, in which case the maximum deferral is $16,000. We may, at our
discretion, contribute up to 200% of the employees' deferred amount.
For the years ended December 31, 2004, 2003 and 2002 our contributions
aggregated $170,000, $176,000 and $135,000, respectively.
In December 2004, the Board of Directors approved the "American
Physicians Service Group, Inc. Affiliate Group Deferred Compensation
Master Plan" ("Deferred Compensation Plan"), a non-qualified
compensation plan designed to give us more flexibility in compensating
key employees and directors through ownership of our common stock.
Final adoption of the Deferred Compensation Plan is dependent on
shareholder approval at the 2005 Annual Meeting. Under the Deferred
Compensation Plan we may elect to defer a portion of an employee's
incentive compensation or director's board compensation in the form of
a deferred stock grant. Shares become eligible for withdrawal with the
passage of time and participants may withdraw eligible shares upon
attaining the age of sixty or upon leaving our service. Plan
participants may withdraw all shares granted to them ratably over four
years, provided they have entered into a non-competition agreement with
us. We plan for this to be an unfunded plan. Shares to be withdrawn
will be purchased in the open market or issued from the authorized
shares. We are currently evaluating the impact of SFAS 123R on our
deferred compensation plan.
(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 1,451,000 of these options have been granted as
of December 31, 2004, 721,000 of which remain unexercised of which
389,000 are exercisable.
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
A-25
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(12) Stock Options, continued
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, 2004 and 2003.
Year Ended December 31,
-----------------------------------------------------------------------------------------------
2004 2003 2002
---------------------------- ---------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------- ------------- ------------ ----------- -----------
Balance at January 1 815,000 $4.49 939,000 $3.51 788,000 $3.45
Options granted 146,000 9.93 330,000 6.46 305,000 3.72
Options exercised (240,000) 3.16 (378,000) 3.57 (13,000) 1.69
Options repurchased -- -- (15,000) 4.29 (89,000) 2.38
Options forfeited/expired -- -- (61,000) 5.73 (52,000) 6.26
----------- ----- --------- ----- ------- -----
Balance at December 31 721,000 $6.04 815,000 $4.49 939,000 $3.51
=========== ===== ========= ===== ======= =====
Options exercisable 389,000 $5.80 289,000 $3.01 500,000 $3.78
=========== ===== ========= ===== ======= =====
The weighted average fair value (the theoretical option value calculated
using the Black Scholes option pricing model) of Company stock options
granted is $3.58, $2.20 and $1.46 per option during the years ended
December 31, 2004, 2003 and 2002, respectively. In this case, as of
December 31, 2004, the weighted average theoretical option value per
share of Company stock options ($13.51) less the weighted average
exercise price of options granted ($9.93) equals the weighted average
fair value of options granted ($3.58).
The following table summarizes the Company's options outstanding and
exercisable options at December 31, 2004:
Stock Options Outstanding Stock Options Exercisable
------------------------------------------- ----------------------------
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
--------------- --------- ----------- ---------- --------- ----------
$1.69 to $4.50 425,000 2.3 years $3.61 239,000 $3.33
$4.51 to $10.12 296,000 4.3 years $9.51 150,000 $9.73
-------- --------
Total 721,000 389,000
======== =======
(13) Discontinued Operations
Effective November 1, 2002, we completed the sale of APS Consulting to
its management as we determined the division's operations were not
consistent with our long-term strategic plan. 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%. Our existing contract,
which was entered into October 1, 2002, provides administrative
support services to APS Consulting for a period of approximately seven
years, and
A-26
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(13) Discontinued Operations, continued
remained 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 the life of the agreement. Because we were
dependent upon the future successful operation of the division to
collect our proceeds from the disposal and because we had a security
interest in the assets of the division, we had retained a sufficient
risk of loss to preclude us from recognizing the divestiture of APS
Consulting under the guidance of FASB Interpretation No 46.
Accordingly, we did not recognize the divestiture of APS Consulting
and continued 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 occurred.
Effective November 1, 2003, APS Consulting was able to obtain third
party financing and repay their note payable to us in exchange for our
agreeing to discount the note by $35,000. We provided no guarantees or
credit enhancements in connection with APS Consulting securing this
financing. Accordingly, we no longer have a risk of loss related to
these operations and have recognized the transaction as a divestiture.
As a result, we ceased consolidation of APS Consulting financial
statements effective November 1, 2003. In addition, we were able to
recognize a gain of $27,000, net of tax, and administrative support
fees totaling $84,000 for the period from November 1, 2002 through
October 31, 2003 that had previously been eliminated as intercompany
revenues.
The accompanying financial statements reflect the financial position,
results of operations and cash flows of APS Consulting as discontinued
operations.
A summary of results of operations related to discontinued operations
for the years ended December 31, 2004, 2003 and 2002 is as follows:
2004 2003 2002
---- ---- ----
Consulting Revenue -- -- $3,296,000
Consulting Expenses -- -- 2,909,000
----- ----- ---------
Net Income -- -- $ 387,000
===== ===== =========
(14) Repurchase of Minority Interest
On October 1, 2003 we purchased for $2,050,000 cash the 20% interest in
APS Insurances Services, Inc., which was owned by FPIC Insurance Group,
Inc. ("FPIC"). We believe the acquisition will provide us more control
over operating decisions and will improve our earnings and return on
capital with minimal risk. As a result of this transaction, we now own
a 100% interest in APS Insurance Services. Prior to our repurchase of
the minority interest, we consolidated the assets, liabilities and
operations of APS Insurance Services and recorded 20% of its after tax
net income as minority interest. As a part of the purchase agreement we
maintained an agreement with FPIC that limits them from competing with
us in Texas through February 2007. The Company has assigned a value of
$410,000 to this non-compete agreement based on a determination by an
outside consulting firm. The agreement is being amortized on the
straight-line method through its expiration in 2007.
The total cost of the acquisition was $2,050,000 and was allocated to
the 20% interest acquired in APS Insurance Services based on the fair
values of its net assets on the date of acquisition, in accordance with
the purchase method of accounting for business combinations.
A-27
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(14) Repurchase of Minority Interest, continued
A summary of the purchase price allocation for this transaction is as
follows:
Purchase price of 20% interest $ 2,050,000
Basis of recorded minority interest (393,000)
Allocated to non-competition agreement (410,000)
---------
Excess of purchase price over
assets acquired (goodwill) $ 1,247,000
===========
The net carrying value of goodwill as of December 31, 2004 is comprised
of the following
Balance December 31, 2002
Additions $1,257,000
Deletions --
---------
Balance December 31, 2003 1,257,000
Additions --
Valuation Adjustment (10,000)
---------
Balance December 31, 2004 $1,247,000
==========
Other intangible assets as of December 31, 2004, subject to
amortization expense, contains the following:
Gross Carrying Accumulated
For the year ended December 31, 2004 Amount Amortization Net
------------------------------------
------------ ------------ -------------
Non-compete $ 410,000 $ 149,000 $ 261,000
Managing general agent license 160,000 34,000 126,000
------------ ------------ -------------
Total 570,000 183,000 387,000
============ ============ =============
For the year ended December 31, 2003
Non-compete $ 400,000 $ 29,000 $ 371,000
Managing general agent license 160,000 30,000 130,000
------------ ------------ -------------
Total 560,000 59,000 501,000
============ ============ =============
A-28
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(14) Repurchase of Minority Interest, continued
As of December 31, 2004, the net carrying value of the non-compete
agreement was $261,000, net of $149,000 accumulated amortization
recognized since 2003.
We assume no residual value and estimate annual amortization expense
over the remaining life of the agreement to be as follows:
Year Amount
----- ----------
2005 $120,000
2006 120,000
2007 21,000
The unaudited pro forma income statement data below show the impact of
the repurchase as if it had happened prior to the reporting periods:
2003 2002
------------- -------------
Revenue:
As reported $ 30,449,000 $ 23,077,000
Pro forma $ 30,449,000 $ 23,077,000
Net earnings as reported $2,799,000 $3,411,000
Add: Minority Interest attributable
to APS Insurance Services,
net of income taxes $ 197,000 $ 268,000
---------- ---------
Pro forma net earnings $ 2,996,000 $ 3,679,000
============ ===========
Earnings per share:
Basic - as reported $1.27 $1.53
====== =====
Basic - pro forma $1.36 $1.65
====== =====
Diluted - as reported $1.14 $1.45
====== =====
Diluted - pro forma $1.22 $1.57
====== =====
A-29
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(15) Investment in Unconsolidated Affiliates
For the year ended December 31, 2004, 2003 and 2002, respectively, our
equity in the earnings (loss) of unconsolidated affiliates consisted of
the following:
December 31,
------------------------------------
2004 2003 2002
---- ---- ----
Prime Medical Services, Inc. $ -- $ -- $186,000
Uncommon Care -- 260,000 (230,000)
---- ------- -------
Earnings (loss) $ -- $260,000 $(44,000)
==== ======= =======
On October 12, 1989, we purchased 3,540,000 shares (42%) of the common
stock of Prime Medical. In the ensuing years, the sale of stock, stock
exchanges and stock issuances reduced our ownership and at December 31,
2004 our holdings stood at 555,000 or approximately 2% of the common
stock outstanding.
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 discontinued the use
of the equity method and began to account for our Prime Medical
investment as an available-for-sale equity security. Prior to
discontinuing equity method accounting on March 1, 2002 we recorded
equity in Prime Medical's earnings of $186,000. In connection with the
sales of Prime Medical (or HealthTronics as of 2004) shares during the
year, we recognized gains of $245,000 in 2004, $64,000 in 2003 and
$2,855,000 in 2002. The gains are classified as "Gain on Sale of
Investments" in the accompanying consolidated financial statements.
Changes in market value of our HealthTronics shares are included in
shareholders equity as "accumulated other comprehensive income".
HealthTronics is an SEC registrant and additional information on the
company can be found on the SEC's web site at www.sec.gov.
On January 1, 1998 we invested approximately $2,078,000 in the
convertible preferred stock of Uncommon Care, Inc. and extended notes
totaling $4,430,000. Uncommon Care is a developer and operator of
Alzheimer's care facilities. We accounted for Uncommon Care using the
equity method.
Recording our share of Uncommon Care's accumulated losses had reduced
the carrying value of our investment and our notes to zero by December
31, 2002. Following Uncommon Care's payment default to its senior
lender in 2003 we sold our interest for a de minimus amount and wrote
off the notes.
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.
During 2004, loan participants whose interests totaled $235,000
released the Company from all liability under the participation
agreements. Of the total, $146,000 was related to affiliates of the
Company and was recorded as an addition to Additional Paid-In Capital.
The remaining $89,000 was related to non-affiliates and was recorded as
Other Income.
A-30
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(15) Investment in Unconsolidated Affiliates, continued
During 2003 we decided not to extend any future cash advances to
Uncommon Care. Consequently, we took into income cash payments
previously received from Uncommon Care. Total cash receipts recorded as
equity in earnings of unconsolidated affiliates was $260,000 in 2003.
During 2002 we expensed the $230,000 that 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 to
offset possible future advances.
(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.
Corporate is the parent company and derives its income from interest,
investments and dividends paid by the other segments.
Income from the discontinued consulting segment was derived from
operations in 2002 and from gains on disposal in 2003.
A-31
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(16) Segment Information, continued
2004 2003 2002
---- ---- ----
Operating Revenues
Financial services $ 16,705,000 $ 19,623,000 $ 13,623,000
Insurance services 15,316,000 10,826,000 9,454,000
Other 4,760,000 2,567,000 1,024,000
---------- ---------- ----------
$ 36,781,000 $ 33,016,000 $ 24,101,000
============ ============= ============
Reconciliation to Consolidated Statements of Operations:
Total segment revenues 36,781,000 33,016,000 24,101,000
Less: intercompany dividends (4,760,000) (2,567,000) (1,024,000)
----------- ----------- -----------
Total Revenues $ 32,021,000 $ 30,449,000 $ 23,077,000
============ ============= ============
Operating Income (Loss):
Financial services 2,167,000 3,039,000 $ 1,747,000
Insurance services 4,758,000 2,244,000 $ 1,848,000
Other 3,179,000 1,247,000 128,000
---------- --------- ----------
$ 10,104,000 $ 6,530,000 $ 3,723,000
============ ============ ===========
Reconciliation to Consolidated Statements of Operations:
Total segment operating profit $ 10,104,000 $ 6,530,000 $ 3,723,000
Less: intercompany dividends (4,760,000) (2,567,000) (1,024,000)
----------- ----------- -----------
Operating income 5,344,000 3,963,000 2,699,000
Gain (loss) on investments (2,322,000) 127,000 2,855,000
Gain on extinguishment of debt 75,000 -- --
-------- --------- ---------
Income from continuing operations before interest, income
taxes, minority interests and equity in gain and loss of
unconsolidated affiliates 3,097,000 4,090,000 5,554,000
Interest income 365,000 304,000 372,000
Other income 15,000 (38,000) (158,000)
Interest expense 7,000 7,000 24,000
Income tax expense 1,317,000 1,640,000 2,283,000
Minority interests 1,000 197,000 261,000
Equity in profit (loss) of affiliates -- 260,000 (44,000)
-------- -------- --------
Income from continuing operations 2,152,000 2,772,000 3,156,000
Net income from discontinued operations,
net of income tax -- -- 255,000
Gain on disposal of discontinued operations,
net of income tax -- 27,000 --
---------- ---------- ----------
Net income $ 2,152,000 $ 2,799,000 $ 3,411,000
=========== =========== ===========
A-32
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
2004 2003 2002
---- ---- ----
IDENTIFIABLE ASSETS:
Financial services $ 5,106,000 $ 4,970,000 $ 3,727,000
Insurance services:
Intangible assets 1,507,000 1,627,000 --
Other 4,526,000 3,965,000 2,882,000
Corporate:
Investment in available for sale securities 14,320,000 9,626,000 11,284,000
Other 4,984,000 5,450,000 6,265,000
---------- ---------- ----------
$ 30,443,000 $ 25,638,000 $ 24,158,000
============ ============ ============
CAPITAL EXPENDITURES:
Financial services $ 10,000 $ 32,000 $ 24,000
Insurance Services 362,000 160,000 78,000
Corporate 49,000 31,000 37,000
Discontinued Operations -- 96,000 15,000
------- ------- -------
$ 421,000 $ 319,000 $ 154,000
========== ========== =========
DEPRECIATION/AMORTIZATION EXPENSES:
Financial services $ 27,000 $ 31,000 $ 42,000
Insurance Services 217,000 110,000 55,000
Corporate 60,000 65,000 73,000
Discontinued Operations -- -- 18,000
-------- -------- -------
$ 304,000 $ 206,000 $ 188,000
========== ========== =========
During the years ended December 31, 2004, 2003 and 2002, a single
customer represented 48% ($15,316,000), 36% ($10,826,000) and 41%
($9,454,000) of our consolidated revenues.
At December 31, 2004, 2003 and 2002 we had long-term contracts with
that customer and were therefore not vulnerable to the risk of a
near-term severe impact from a reasonably possible loss of the revenue.
However, should that customer 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 income (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, investments in affiliates and
intangible assets.
A-33
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(17) Net Income Per Share
Basic income 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, 2004
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ----------- ----------
Income from continuing operations $ 2,152,000
Basic EPS:
Income available to common stockholders 2,152,000 2,545,000 $0.85
=====
Effect of dilutive securities -- 293,000
------------ ----------
Diluted EPS:
Income available to common stockholders $ 2,152,000 2,838,000 $0.76
============ ========== =====
For the Year Ended December 31, 2003
---------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ ----------
Income from continuing operations $ 2,772,000
Discontinued operations, net of tax 27,000
Basic EPS:
Income available to common stockholders 2,799,000 2,207,000 $1.27
=====
Effect of dilutive securities -- 242,000
------------ ----------
Diluted EPS:
Income available to common stockholders $ 2,799,000 2,449,000 $1.14
============ ========== =====
For the Year Ended December 31, 2002
--------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------- ----------- ----------
Income from continuing operations $ 3,156,000
Discontinued operations, net of tax 255,000
Basic EPS:
Income available to common stockholders 3,411,000 2,227,000 $1.53
=====
Effect of dilutive securities -- 118,000
------------ ----------
Diluted EPS:
Income available to common stockholders $ 3,411,000 2,345,000 $1.45
============ ========== =====
A-34
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(17) Net Income Per Share, continued
Unexercised employee stock options to purchase 23,250, 191,250 and
432,000 shares of our common stock for the years ended December 31,
2004, 2003 and 2002, respectively, were not included in the
computations of diluted EPS because their effect would be antidilutive.
(18) Shareholders' Equity
The following table presents changes in shares outstanding for the
period from December 31, 2002 to December 31, 2004:
Common
Shares Treasury
Outstanding Stock
------------- -------------
Balance December 31, 2001 2,745,231 386,000
Options excercised 13,000 --
Treasury stock purchases -- 238,388
Treasury stock retirements (624,388) (624,388)
------------ -----------
Balance December 31, 2002 2,133,843 --
============ ===========
Options excercised 377,800 --
Treasury stock purchases -- 56,976
Treasury stock retirements (56,976) (56,976)
------------ -----------
Balance December 31, 2003 2,454,667 --
============ ===========
Options excercised 240,200 --
Treasury stock purchases -- 70,495
Treasury stock retirements (70,495) (70,495)
----------- -----------
Balance December 31, 2004 2,624,372 --
=========== ===========
(19) Supplemental Consolidated Quarterly Financial Data (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
financial information for the years ended December 31, 2004, 2003 and
2002:
A-35
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(In thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
2004
-----
Revenues $ 7,290 $ 7,295 $ 7,593 $ 9,843
Net Income 694 689 (834) 1,603
Basic net income per share: $ 0.28 $ 0.28 $ (0.32) $ 0.62
Diluted income per share: $ 0.25 $ 0.25 $ (0.32) $ 0.58
2003
-----
Revenues $ 6,591 $ 6,969 $ 9,049 $ 7,840
Income from continuing operations 552 684 729 807
Discontinued operations, net of taxes -- -- -- 27
Net income 552 684 729 834
Basic net income per share:
From continuing operations $ 0.26 $ 0.32 $ 0.34 $ 0.34
Discontinued operations, net of taxes -- -- -- 0.01
Net income $ 0.26 $ 0.32 $ 0.34 $ 0.35
Diluted income per share:
From continuing operations $ 0.25 $ 0.30 $ 0.31 $ 0.30
Discontinued operations, net of taxes -- -- -- 0.01
Net income $ 0.25 $ 0.30 $ 0.31 $ 0.31
Results for the fourth quarter of 2004 and 2003 include profit sharing
with APIE totaling $1,929,000 and $722,000, respectively.
Certain amounts previously classified as general and administrative
expenses have been classified as cost of revenues at Insurance
Services in the consolidated statements of income for the years ended
2004 and 2003. For the year ended 2004, the amount of
reclassifications in the quarters is $146,000, $176,000 and $167,000
for the quarter ended September 30, June 30 and March 31,
respectively. For the year ended 2003, the amount of reclassifications
in the quarters is $126,000, $126,000 and $131,000 for the quarter
ended September 30, June 30 and March 31, respectively.
A-36
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(20) Concentration of credit risk
Marketable securities
As of December 31, 2004 we owned marketable securities of HealthTronics
and Financial Industries Corporation with a combined fair market value
of $9,924,000, or approximately 33% of our total assets. An event
having a material adverse effect on HealthTronics and/or Financial
Industries, 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.
A-37
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(21) Other Comprehensive Income
The following chart discloses the reclassification adjustments for
gains and losses included in net income during the years ended December
31:
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
----------- ------------ ------------
2004
----
Unrealized holding gains
arising during the period $1,393 ($474) $919
Reclassification adjustment for losses
included in net income 2,322 (789) 1,533
-------- --------- --------
Net unrealized gains on securities $3,715 ($1,263) $2,452
======== ========== ========
2003
----
Unrealized holding losses
arising during the period ($3,246) $1,104 ($2,142)
Reclassification adjustment for gains
included in net income (89) 30 (59)
--------- --------- ---------
Net unrealized losses on securities ($3,335) $1,134 ($2,201)
========= ========= =========
2002
----
Unrealized holding gains
arising during the period $6,585 ($2,820) $3,765
Reclassification adjustment for gains
included in net income (2,873) 977 (1,896)
-------- --------- ---------
Net unrealized gains on securities $3,712 ($1,843) $1,869
======== ========= =========
A-38
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
American Physicians Service Group, Inc. and Subsidiaries
Years Ended December 31, 2004, 2003 and 2002
(in thousands)
Balance at Balance
Beginning Costs and at End
of Year Expenses Deductions of Year
------------------------------------------------------------
Allowance for Doubtful Accounts
2004 $ - $ 47 $ 33 $ 14
============== ============= ============== =============
2003 $ 64 $ 15 $ 79 $ -
============== ============= ============== =============
2002 $ - $ 86 $ 22 $ 64
============== ============= ============== =============