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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2001
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 (I.R.S. employer Identification No.)
of incorporation or organization)
1301 Capital of Texas Highway, Austin Texas 78746
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 328-0888
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |_|
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
Aggregate Market Value at March 25, 2002: $8,232,968
Indicate the number of shares outstanding of each of the registrant's class of
common stock, as of the latest practicable date.
Number of Shares
Outstanding At
Title of Each Class March 25, 2002
------------------- ----------------
Common Stock, $.10 par value 2,264,231
Documents Incorporated By Reference
Selected portions of the Registrant's definitive proxy material for the 2001
annual meeting of shareholders are incorporated by reference into Part III of
the Form 10-KSB. In addition, Item14(a) of Prime Medical Services, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 2001 is incorporated by
reference.
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
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, management services to
malpractice insurance companies, and environmental consulting and engineering
services.
We were organized in October 1974 under the laws of the State of Texas. Our
principal executive office is at 1301 Capital of Texas Highway, Suite C-300,
Austin, Texas 78746, and its telephone number is (512) 328-0888.
Financial information about our industry segments is disclosed in Note 14
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 57% and 54% of our total
revenues in 2001 and 2000, 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, with a branch office in Houston.
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 45 states.
1
Every registered broker/dealer doing business with the public is subject to
stringent rules with respect to net capital requirements promulgated by the
Securities and Exchange Commission, or SEC. These rules, which are designed to
measure the financial soundness and liquidity of broker dealers, specify minimum
net capital requirements. Since we (as opposed to APS Financial) are not a
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, 2002, APS Financial was
in compliance with all applicable net capital requirements.
APS Financial clears its transactions through SWS Securities, Inc., or SWS,
on a fully disclosed basis. SWS also processes orders and floor reports, matches
trades, transmits execution reports to APS Financial and records all data
pertinent to trades. APS Financial pays SWS a fee based on the number and type
of transactions.
Asset Management, a registered investment adviser under the Investment
Advisers Act of 1940, was formed and registered with the SEC in 1998. We formed
Asset Management to manage fixed income and equity assets for institutional and
individual clients on a fee basis. Asset Management's mission is to provide
clients with investment results within specific client-determined risk
parameters.
OUR INSURANCE SERVICES
APS Insurance Services, Inc., or Insurance Services, is an 80% owned
subsidiary of ours. Insurance Services, through its wholly-owned subsidiaries
APS Facilities Management, Inc., or FMI, and American Physicians Insurance
Agency, Inc., or Agency, provides management and agency services to medical
malpractice insurance companies. Our revenues from this segment contributed 31%
of our total revenues in both 2001 and 2000.
Substantially all of our revenues from this segment was attributable to FMI
providing management services to American Physicians Insurance Exchange, or
APIE, a reciprocal insurance exchange. A reciprocal insurance exchange is an
organization that sells insurance only to its subscribers, who pay, in addition
to their annual insurance premiums, a contribution to the exchange's surplus.
These exchanges generally have no paid employees but instead enter into a
contract with an "attorney-in-fact" that provides all management and
administrative services for the exchange. As the attorney-in-fact for APIE, FMI
receives a percentage of the earned premiums of APIE, as well as a portion of
APIE's profits. The amount of these premiums can be adversely affected by
competition. Substantial underwriting losses, which might result in a
curtailment or cessation of operations by APIE, would also adversely affect
FMI's revenue and, accordingly, our revenue. To limit possible underwriting
losses, APIE currently reinsures its risk in excess of $250,000 per medical
incident. APIE offers medical professional liability insurance for physicians in
Texas and Arkansas. FMI's assets are not subject to any insurance claims by
policyholders of APIE.
2
We organized APIE in 1975, and FMI has been its exclusive manager since its
inception. The management agreement between FMI and APIE basically provides for
full management by FMI of the affairs of APIE under the direction of APIE's
physician board of directors. Subject to the direction of this board, FMI sells
and issues policies, investigates, settles and defends claims, and otherwise
manages APIE's affairs. In consideration for performing its services, FMI
receives a percentage fee based on APIE's earned premiums (before payment of
reinsurance premiums), as well as a portion of APIE's profits. FMI pays salaries
and personnel related expenses, rent and office operations costs, data
processing costs and many other operating expenses of APIE. APIE is responsible
for the payment of all claims, claims expenses, peer review expenses, directors'
fees and expenses, legal, actuarial and auditing expenses, its taxes and certain
other specific expenses. Under the management agreement, FMI's authority to act
as manager of APIE is automatically renewed each year unless a majority of the
subscribers to APIE elect to terminate the management agreement by reason of an
adjudication that FMI has been grossly negligent, has acted in bad faith or with
fraudulent intent or has committed willful misfeasance in its management
activities. Termination of FMI's management agreement with APIE would have a
material adverse effect on us.
During 1997, FPIC Insurance Group, Inc., or FPIC, purchased a 20% interest
in Insurance Services from us. In conjunction with that purchase, FPIC's
subsidiary, First Professional Insurance Company, Inc., or First Professionals,
entered into agreements with Agency and APIE granting Agency the exclusive right
to market First Professionals' policies in Texas. Agency has sales, marketing,
underwriting and claims handling authority for First Professionals in Texas and
receives commissions for these services. First Professionals also entered into a
reinsurance agreement with APIE under which APIE reinsures substantially all of
First Professionals' risk in Texas under medical professional liability policies
issued or renewed by First Professionals on behalf of Texas health care
providers after March 27, 1997.
APIE is authorized to do business in the States of Texas and Arkansas.
First Professionals is licensed in several states. Both companies specialize in
writing medical professional liability insurance for health care providers. They
write insurance in Texas primarily through purchasing groups and are not subject
to certain rate and policy form regulations issued by the Texas Department of
Insurance. They review applicants for insurance coverage based on the nature of
their practices, prior claims records and other underwriting criteria. APIE is
one of the largest medical professional liability insurance companies in the
State of Texas. APIE is the only professional liability insurance company based
in Texas that is wholly-owned by its subscriber physicians.
First Professionals, together with its affiliates, insures over 7,200
physicians nationwide. First Professional is rated A- (Excellent) by AM Best.
Generally, medical professional liability insurance is offered on either a
"claims made" basis or an "occurrence" basis. "Claims made" policies insure
physicians only against claims that occur and that they report during the period
covered by the policy. "Occurrence" policies insure physicians against claims
based on occurrences during the policy period regardless of when they actually
make the claim. APIE and First Professionals offer only a "claims made" policy
in Texas and Arkansas, but provide for an extended reporting option upon
termination. APIE and FPIC reinsure 100% of all Texas and Arkansas coverage per
medical incident between $250,000 and $1,000,000, primarily through certain
domestic and international insurance companies.
3
The following table presents selected financial and other data for APIE.
The management agreement with FMI obligates APIE to pay management fees to FMI
based on APIE's earned premiums before payment of reinsurance premiums. The
management fee percentage is 13.5% with the provision that any profits of APIE
will be shared equally with FMI so long as the total payment (fees and profit
sharing) does not exceed a cap based on premium levels. In 2001, 2000, 1999,
1998, and 1997, management fees attributable to profit sharing were $0, $0,
$329,000, $1,750,000, and $1,961,000, respectively. While APIE was profitable in
2001 there was no profit sharing with FMI due to the management agreement
requiring that cumulative prior year losses be applied against future pretax
income. Only after prior year losses are completely offset can FMI then share
equally the profits at APIE. Consequently, we do not expect to record any profit
sharing in 2002.
Years Ended December 31,
-------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands, except for number of insureds)
Earned premiums before
reinsurance premiums $35,866 $29,057 $24,529 $22,931 $25,899
Total assets 64,557 66,348 66,377 75,173 81,594
Total surplus 11,475 10,014 13,925 13,592 11,854
Management fees (including profit
sharing) and commissions to FMI
and Agency (1) 5,084 4,002 3,645 4,835 5,854
Number of insureds 3,101 3,178 2,882 2,743 2,629
----------------
(1) Includes commissions of $2,886, $1,898, $1,191, $835, and
$1,214 in 2001, 2000, 1999, 1998 and 1997, respectively, from
First Professional and other carriers directly related to
APIE's controlled business.
OUR CONSULTING SERVICES
We provide environmental consulting and engineering services through APS
Consulting, a wholly-owned subsidiary of ours. APS Consulting, which we acquired
through foreclosure in 1999, is an environmental consulting/engineering firm,
comprised of scientists and engineers specializing in remedial investigations,
remediation engineering, air quality, waste water, regulatory compliance, solid
waste engineering, litigation support/expert testimony, environmental resources,
and industrial hygiene and safety. Our APS Consulting offices are located in
Jackson, Mississippi; Mobile, Alabama; and Houston, Texas.
Because of the wide range of expertise of our consultants, we serve
clients in a broad base of industries, including: petrochemicals; agricultural
chemicals; oil exploration, refining and marketing; gas pipelines; pulp and
paper/forest products; manufacturing; waste disposal and management; state and
local government; and law firms. Our consultants and engineers have expertise in
environmental engineering, chemical engineering, hydrogeology, computer-aided
drafting and design, civil engineering, geology, biology and micro biology. Our
revenues from our environmental consulting and engineering services contributed
11% and 13% of our total revenues in 2001 and 2000, respectively.
4
OUR OTHER INVESTMENTS
At December 31, 2001, we owned 2,344,000 shares of common stock of Prime
Medical Services, Inc., or Prime Medical, representing approximately 15% of the
outstanding shares of Prime Medical common stock. Three of Prime Medical's six
directors were members of our four member board of directors during 2001. We
recorded our pro-rata share of Prime Medical's results using the equity method
of accounting. Prime Medical is the largest provider of lithotripsy services in
the United States, currently servicing over 375 hospitals and surgery centers in
34 states. Lithotripsy is a non-invasive method of treating kidney stones
through the use of shock waves. After December 31, 2001, we sold 1,570,000
shares of our Prime Medical common stock bringing our percentage ownership to
slightly less than 5%. In addition, Kenneth S. Shifrin, the Company's Chairman
and CEO, stepped down from day-to-day operations as Executive Chairman of the
Board for Prime Medical but will continue to serve as non-Executive Chairman.
These two subsequent events reduced our influence over the operating and
financing policies of Prime Medical and, consequently, will cause us to no
longer account for our investment in Prime Medical using the equity method
during 2002.
During 1999, Prime Medical entered into the refractive surgery field through two
acquisitions. LASIK refractive surgery, one of the most advanced forms of laser
vision correction, is designed to improve vision and reduce dependence on
glasses and contacts by correcting nearsightedness, farsightedness and
astigmatism. Prime Medical now operates fourteen laser vision correction
facilities, which performed approximately 23,000 procedures during 2001. In
addition, Prime Medical designs and manufactures trailers and coaches for
transporting medical equipment and equipment for the media and broadcast
industry. In February 2002, Prime Medical announced its intention to divest its
LASIK refractive surgery operations in order to focus its resources towards
greater growth opportunities in its manufacturing and lithotripsy segments.
The common stock of Prime Medical is quoted on the NASDAQ National Market under
the symbol "PMSI". Prime Medical is a Delaware corporation and is required to
file annual, quarterly and other reports and documents with the SEC. The summary
information in the accompanying consolidated financial statements regarding
Prime Medical is qualified in its entirety by reference to such reports and
documents. Such reports and documents may be examined and copies may be obtained
from the SEC.
On January 1, 1998, we invested $2,078,000 in convertible preferred stock
of Uncommon Care, Inc. or Uncommon Care. We have also made available to Uncommon
Care three lines of credit totaling $4,850,000. The loans are at interest rates
varying from ten percent to twelve percent, payable quarterly with various
maturities through June 30, 2005, at which time any outstanding principal and
any accrued but unpaid interest are due and payable. Uncommon Care is a
developer and operator of dedicated Alzheimer's care facilities. One of Uncommon
Care's three directors is a director of ours. For the period July 1, 2001
through June 30, 2002, we have agreed to reduce the interest rate charged on our
lines of credit to 4% and to allow Uncommon Care to make interest payments
in-kind in the form of Uncommon Care common stock. Our common and convertible
preferred stock are convertible into approximately a 38% interest in the common
equity of Uncommon Care. We record our investment in and advances to Uncommon
Care using the equity method of accounting.
5
In August 1999 we merged Syntera HealthCare, Inc., a physician practice
management company that we had founded, with FemPartners, Inc. and received
common stock in FemPartners. FemPartners is a privately held single specialty
physicians practice management company. As more fully explained in Management's
Discussion and Analysis and Note 21 to the consolidated financial statements, a
partial sale of this investment in December 2001, at a price significantly below
our carrying value, caused us to review our fair value determination at December
31, 2000 and to restate our 2000 consolidated financial statements to reflect a
$5.1 million impairment charge.
DISCONTINUED OPERATIONS
In November, 2001, we sold all of our remaining condominium space, after sales
of surplus office space in 2000, in an office project located in Austin, Texas
to our affiliate, Prime Medical. Approximately 50% of this space was leased back
to us and is utilized by our investment services, insurance services and
corporate segments' operations. Gain on the sale amounted to approximately $5.1
million, of which $1.9 million was recognized in 2001. Deferred income of
approximately $2.4 million was recorded and will be recognized monthly over the
next five years. In addition, 15% of the gain ($0.76 million) related to our 15%
ownership in the purchaser, was deferred as we accounted for Prime Medical using
the equity method of accounting as of and for the year ended December 31, 2001.
We subsequently dissolved APS Realty, Inc., or APS Realty, our wholly-owned
subsidiary that formerly owned this office space. Our revenues from APS Realty
(not including the gains from the sales of office space in both years)
contributed 4% and 5% of our total revenues in 2001 and 2000, respectively.
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. Discount brokerage firms oriented to the retail market,
including firms affiliated with commercial banks and thrift institutions, are
devoting substantial funds to advertising and direct solicitation of customers
in order to increase their share of commissions and other securities related
income. In many instances APS Financial is competing directly with these
organizations. In addition, there is competition for investment funds from the
real estate, insurance, banking and thrift industries.
APIE competes with numerous insurance companies in Texas and Arkansas, but
primarily Medical Protective Insurance Company, and Texas Medical Liability
Trust. The competitive scene, however, has changed dramatically over the last
year. As a result of the increasing frequency and severity of claims experience,
a number of larger competitors in this market have announced they are
withdrawing or not writing any new business. When competitive forces allow for
higher rates or legislative reforms address tort inadequacies, thereby allowing
for a return of the industry to profitability, competition will increase. Both
of APIE's primary competitors have substantially greater resources than APIE.
The primary competitive factor in selling insurance is a combination of price,
terms of the policies offered, claims service and other services, and claims
settlement philosophy.
6
The environmental services industry is characterized by intense
competition. Many companies of all sizes are engaged in activities similar to
our environmental and consulting and engineering activities and many of our
competitors have substantially greater assets and capital resources. Our
environmental services operations are primarily in the Southeastern United
States, however, we have projects throughout the United States. We seek to
distinguish our services by (i) providing timely, high quality and
cost-effective solutions to the various environmental issues facing our clients,
(ii) maintaining long-term relationships with our clients, and (iii) utilizing
technology to provide state of the art services in accordance with applicable
regulatory standards. There can be no assurance, however, that we can compete
successfully against our competitors, given the size, resources and marketing
capabilities of many of our competitors.
REGULATION
APS Financial and Asset Management are subject to extensive regulation
under both federal and state laws. The SEC is the federal agency charged with
administration of the federal securities and investment advisor laws. Much of
the regulation of broker dealers, however, has been delegated to self-regulatory
organizations, principally the NASD and the national securities exchanges. These
self-regulatory organizations adopt rules (subject to approval by the SEC) which
govern the industry and conduct periodic examinations of member broker/dealers.
APS Financial is also subject to regulation by state and District of Columbia
securities commissions.
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 last assessment was in 1995 and amounted to approximately $7,300.
The SIPC fund provides protection for customer accounts up to $500,000 per
customer, with a limitation of $100,000 on claims for cash balances.
FMI has received certificates of authority from the Texas and Arkansas
insurance departments, licensing it on behalf of the subscribers of APIE. APIE,
as an insurance company, is subject to regulation by the insurance departments
of the States of Texas and Arkansas. These regulations strictly limit all
financial dealings of a reciprocal insurance exchange with its officers,
directors, affiliates and subsidiaries, including FMI. Premium rates,
advertising, solicitation of insurance, types of insurance issued and general
corporate activity are also subject to regulation by various state agencies.
7
Our environmental services are subject to extensive laws and regulations
promulgated by the Federal, state and local governments and regulatory
authorities dealing with the discharge of materials into the environment or
otherwise relating to the protection of the environment. We believe we are in
compliance in all material respects with all such laws and regulations.
EMPLOYEES
At March 1, 2002, we employed, on a full time basis, approximately 124
persons, including 49 by Insurance Services, 40 by APS Financial and Asset
management, 24 by APS Consulting and 11 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.
ITEM 2. PROPERTIES
We lease approximately 23,000 square feet of condominium space from Prime
Medical in an office project at 1301 Capital of Texas Hwy., Suite C-300, Austin,
Texas as our principal executive offices.
We also lease office space for our financial services subsidiary at 2550
Gray Falls Dr, Suite 350, Houston, Texas.
We also lease offices for our environmental services subsidiary at: 439
Katherine Drive, Suite 2A, Jackson, Mississippi; 17171 Park Row, Suite 120,
Houston, Texas; and 384 Fairhope Avenue, Suite 7, Fairhope, Alabama.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting was held June 18, 2001. Proxies were solicited
by our management and shareholders voted and approved the following motions:
ELECTION OF DIRECTORS
BOARD ELECTION
Nominee For Against Abstain
------- --- ------- -------
Brad A. Hummel ** 1,945,278 -- 303,595
Robert L. Myer 1,945,278 -- 303,595
William A. Searles 1,945,278 -- 303,595
Kenneth S. Shifrin 1,945,278 -- 303,595
Marc R. Still 1,945,278 -- 303,595
** Note: Brad Hummel resigned from the board in December, 2001.
8
PROPOSAL TO AMEND THE 1995 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
To approve an amendment to the 1995 Plan to increase the aggregate number
of shares that may be issued thereunder by 200,000, from 1,200,000 to
1,400,000. The numbers of votes for, against and abstain are as follows:
For 1,007,069
Against 693,798
Abstain 2,525
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table represents the high and low prices of our common stock
in the over-the-counter market as reported by the NASD, Automated Quotations
System for years ended December 31, 2001 and 2000. On March 1, 2002, we had
approximately 326 holders of record of our common stock.
2001 2000
------------------------ ---------------------
High Low High Low
---- ---- ---- ----
First Quarter $3.25 $1.75 $4.06 $2.94
Second Quarter $2.94 $1.85 $3.56 $2.25
Third Quarter $3.26 $2.11 $4.00 $2.69
Fourth Quarter $3.75 $2.08 $3.75 $1.00
We have not declared any cash dividends on our common stock during the last
two years and have no present intention of paying any cash dividends in the
foreseeable future. Our policy is to retain all earnings to provide funds for
growth. Whether we decide to declare and pay dividends in the future will be
based upon our earnings, financial condition, capital requirements and such
other factors as we may deem relevant.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE COMPANY
FORWARD-LOOKING STATEMENTS
Our statements contained in this report that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding our expectations, hopes, intentions or strategies regarding
the future. You should not place undue reliance on forward-looking statements.
All forward-looking statements included in this report are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. It is important to note that our actual results
could differ materially from those in the forward-looking statements. In
addition to any risks and uncertainties specifically identified in the text
surrounding the forward-looking statements, you should consult our reports on
Forms 10-QSB and our other filings under the Securities Act of 1933 and the
Securities Exchange Act of 1934, for factors that could cause our actual results
to differ materially from those presented.
The forward-looking statements included herein are necessarily based on
various assumptions and estimates and are inherently subject to various risks
and uncertainties, including risks and uncertainties relating to the possible
invalidity of the underlying assumptions and estimates and possible changes or
developments in social, economic, business, industry, market, legal and
regulatory circumstances and conditions and actions taken or omitted to be taken
by third parties, including customers, suppliers, business partners and
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.
RESTATEMENT
The following discussion and analysis is based upon consolidated financial
statements as of December 31, 2000 and for the year then ended included in this
Form 10-KSB which have been restated to reflect additional impairment of our
investment in FemPartners, Inc. common stock. In our previously reported
consolidated financial statements as of December 31, 2000 and for the year then
ended we recorded an impairment charge of approximately $1.6 million relating to
our investment in FemPartners, Inc., a privately held company, based upon an
internal valuation. In December 2001, following our inability to find a buyer
for this investment and the subsequent sale of approximately 60% of our holdings
in FemPartners at a de minimus amount to a former officer of the Company, we
engaged a valuation consultant to provide an independent valuation of our
holdings in FemPartners at December 31, 2000 and 2001. The results of that
valuation indicated that our sale price in December 2001 approximated fair
market value and that this fair market value had not changed substantially from
December 31, 2000. Consequently, the 2000 consolidated financial statements have
been restated to reflect an additional $5.1 million impairment loss on this
investment based on the results of this valuation.
10
See Note 21 to the consolidated financial statements for a summary of changes
made to the 2000 consolidated financial statements as a result of the
restatement.
GENERAL
We provide (1) financial services, including brokerage and investment
services to individuals and institutions, (2) insurance services, including
management services to malpractice insurance companies, and (3) environmental
consulting and engineering services.
Financial Services. We provide investment and investment advisory services
to institutions and individuals throughout the United States through the
following subsidiaries:
o APS Financial. APS Financial is a fully licensed broker/dealer that
provides brokerage and investment services primarily to institutional
and high net worth individual clients. APS Financial also provides
portfolio accounting, analysis, and other services to insurance
companies, banks and public funds.
o Asset Management. Asset Management manages fixed income and equity
assets for institutional and individual clients on a fee basis.
Insurance Services. Through Insurance Services, of which we own 80%, we
provide management and agency services to medical malpractice insurance
companies through the following subsidiaries:
o FMI. FMI provides management and adminstrative services to APIE, a
regional insurance exchange that sells medical professional liability
insurance only to its physician subscribers, who pay annual insurance
premiums and surplus contributions to APIE. APIE is governed by a
physician board of directors. Pursuant to a management agreement and
the direction of this board, FMI manages and operates APIE, including
performing policy issuance, claims investigation and settlement, and
all other management and operational functions. As a management fee,
FMI receives a percentage of APIE's earned premiums and a portion of
APIE's profit, subject to a cap based on premium levels. FMI's assets
are not subject to APIE policyholder claims.
o Agency. Agency has the exclusive right to market the policies of First
Professional, a medical professional liability insurance company that
is owned by FPIC, which owns the other 20% of Insurance Services, in
the State of Texas. Agency performs the policy issuance and claims
handling functions for First Professional in Texas.
Consulting Services. Through APS Consulting, we provide environmental
consulting and engineering services including services related to remedial
investigations, remediation engineering, air quality, waste water, regulatory
compliance, solid waste engineering, litigation support/expert testimony,
environmental resources, and industrial hygiene and safety.
In addition, as of December 31, 2001, we had the following significant
investments: (1) we owned 2,344,000 shares of Prime Medical common stock,
representing approximately 15% of its outstanding common stock, 1,570,000 shares
of which we sold after December 31, 2001; and
11
(2) we invested approximately $2 million in the convertible preferred stock of
Uncommon Care and extended lines of credit totaling approximately $4.9 million
to Uncommon Care. The net book value of the investment in Uncommon Care was zero
at December 31, 2001 as equity losses in 1999, 2000 and 2001 offset our
investment completely.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an on-going basis, we evaluate our
estimates, including those related to, impairment of assets; bad debts; income
taxes; and contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. We periodically review the carrying value of our assets to
determine if events and circumstances exist indicating that assets might be
impaired. If facts and circumstances support this possibility of impairment, our
management will prepare undiscounted and discounted cash flow projections which
require judgments that are both subjective and complex. Management may also
obtain independent valuations. See Note 21 to the consolidated financial
statements.
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
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.
We are a defendant in lawsuits that arise out of, and are incidental to,
the conduct of our business. Our management uses its judgment, with the aid of
legal counsel, to determine if accruals are necessary as a result of any pending
actions against us.
It was our judgment that the equity method of accounting for our investment
in Prime Medical and Uncommon Care was more appropriate than the cost method,
believing that we had significant influence over the operational and financial
policies of Prime Medical and Uncommon Care. Using the equity method we recorded
our share of Prime Medical's and Uncommon Care's earnings or losses. We would
have recorded no earnings or losses from Prime Medical or Uncommon Care if we
had not utilized the equity method unless an other than temporary decline in
12
fair value was recognized. If through choice or mandate we had used the
alternative accounting treatment, results would have been as follows:
(In thousands)
Year ended December 31,
2001 2000
(Restated)
---- ----
Net loss, as reported $(578) $(4,774)
Effect of alternative treatment for Prime Medical 1,437 (1,018)
Effect of alternative treatment for Uncommon Care 668 1,326
------ -----
Pro Forma net income (loss) $1,527 $(4,466)
======== ========
RESULTS OF OPERATIONS
2001 COMPARED TO 2000
---------------------
Our revenues from continuing operations increased 26% in 2001 compared to
2000. Our net loss decreased 88% from $4,774,000 in 2000 to $578,000 in 2001.
Our diluted loss per share decreased from $(1.92) in 2000 to $(0.25) in 2001.
The reasons for these changes are described below.
FINANCIAL SERVICES
Our financial services revenues increased 31% in 2001 compared to 2000.
The increase resulted from greater commissions earned at APS Financial. The
increase in annual commission income was primarily the result of an expanding
institutional customer base, low broker personnel turnover, and a substantial
rally in the bond markets in 2001 compared to the previous year. Looking back to
the year 2000, the significant decline in technology related equity investments,
combined with large interest rate increases by the Federal Reserve resulted in a
substantial slowdown of financial market activity. Conditions improved
considerably in the U.S. bond markets during 2001 as the Federal Reserve lowered
interest rates to a 40-year low in an effort to stimulate the U.S. economy. With
interest rates falling substantially, bond market activity surged as companies
took advantage of low rates to issue new securities and customers replaced
refunded bonds and re-balanced their portfolios. In addition, the equity markets
began to show some improvement late in 2001 as investors began to anticipate a
recovery in the U.S. economy. Although the tragic events of September 11, 2001
temporarily slowed down financial market activity, trading activity soon resumed
due to rising consumer confidence that was buoyed by success in the war on
terrorism and a steadily improving economy. Going forward, it remains to be seen
what, if any, long-term effect the terrorist attacks, and subsequent war on
terrorism will have on future earnings of APS Financial and, accordingly, us.
13
Our financial services expenses increased 26% in 2001 compared to 2000.
The increase in transaction activity at APS Financial was primarily responsible
for a 27% increase in sales commission expense, a 7% increase in support
personnel costs and, as a result of higher profits, a 129% increase in incentive
compensation. In addition, legal fees increased 101% in 2001 compared to 2000
primarily as a result of certain investment banking opportunities. Lastly,
internally allocated expenses for computer and information technology support
was up 71% during 2001.
INSURANCE SERVICES
Our insurance services revenues increased 28% in 2001 compared to
2000. The increase in the current year was due primarily to a 27% increase in
total premium written by APIE resulting from premium rate increases and better
than expected retention. Although new business written was down 52% and the
number of doctors insured was down 2%, renewal business written was up 52%. The
high retention rate of business was assisted by the decision of some major
competitors to leave the Texas market during the latter half of 2001.
Our insurance services expenses increased 14% in 2001 compared to 2000.
The increase was primarily due to a 21% increase in commissions paid to sales
agents resulting from the above-mentioned increase in commission revenues
earned. In addition, our personnel costs increased 8% in 2001 primarily due to
merit raises as well as our creation of two new managerial positions. Also, our
advertising costs increased 28% in 2001 due in part to an increase in print ads
published in professional trade magazines. Partially offsetting these increases
was a 16% decrease in our depreciation expense. Depreciation is down due to a
greater amount of our assets becoming fully depreciated during the year than
were purchased.
CONSULTING
Our consulting revenues increased 10% in 2001 compared to 2000 primarily
due to a 13% increase in total billable hours as well as a one-time project
involving wetlands mitigation construction.
Our consulting expenses increased 27% in 2001 compared to 2000. The primary
reason for this increase is a non-recurring charge in the amount of $391,000 to
impair goodwill. An analysis of the expected future cash flows of our consulting
segment asset group resulted in an impairment charge to write off the remaining
unamortized goodwill associated with the consulting segment asset group.
Conditions that led to the impairment include the inability of us to reach
personnel growth projections, uncertainty in retaining a major client and the
economic downturn in the industry segment during the fourth quarter of 2001.
Adding to the increase in expenses was an increase in legal fees of 74% in 2001
compared to 2000 due to fees associated with a lawsuit brought against American
Physicians that was lost in the fourth quarter of 2001. Also, other expenses
increased 75% in 2001 compared to 2000 and represents primarily a portion of the
judgment from the above-mentioned lawsuit that was allocated to APS Consulting.
GENERAL AND ADMINISTRATIVE EXPENSES
Our corporate level general and administrative expenses increased 15% in
2001 compared to 2000. The increase was primarily due to the corporate level
portion of the $520,000 legal settlement mentioned above in the Consulting
section.
14
INVESTMENTS AND INTEREST
Our investment and interest expense decreased 89% in 2001 compared to
2000. Our investment expenses decreased 94% in 2001 due to an impairment loss of
$6.7 million in the fourth quarter of 2000 on our investment in FemPartners. An
impairment loss on this investment was recognized following an analysis by an
independent valuation consultant. Our interest expense increased 12% over 2000
as a result of an increase in our notes payable. In 2001, we drew additional
amounts from our line of credit with Bank of America primarily to fund our
investment in and advances to Uncommon Care and to pay contractual and legal
obligations. These draws resulted in an average balance of $6,006,000 during the
year 2001 compared to an average balance of $4,320,000 during the year 2000.
Partially offsetting this increase in average balance outstanding was an average
interest rate paid during 2001 of 6.89% compared to 8.98% in 2000.
AFFILIATES
We have two affiliates, Prime Medical and Uncommon Care, which we
accounted for using the equity method. Equity earnings in Prime Medical
decreased $3.7 million in 2001 compared to 2000 as a result of a fourth quarter
non-recurring charge at Prime Medical of $24.0 million, net of tax, in mostly
non-cash expenses, which included the impairment of goodwill associated with
acquisitions Prime Medical made in its refractive segment. In addition, Prime
recognized impairment of certain lithotripsy receivables and assets, and
provided for severance of certain contractual obligations to officers. We
recorded our equity method percentage of these Prime Medical charges, which was
approximately 15.0% as of December 31, 2001. Beginning in January, 2002, we will
no longer account for our investment in Prime Medical using the equity method
because: (1) in December 2001, Prime Medical's CEO, Brad Hummel, resigned from
our board of directors; (2) in January 2002, Kenneth S. Shifrin, the Company's
Chairman and CEO, stepped down from day-to-day operations as Executive Chairman
of the Board of Prime Medical, but will continue to serve as non-executive
Chairman; and (3) from January to March 2002, we sold 1,570,000 shares of Prime
Medical reducing our ownership percentage to slightly less than 5%.
We record our investment in Uncommon Care using the equity method. We
recorded losses on this investment in 2001 of approximately $1,012,000 versus
approximately $2,009,000 in 2000. Our 2001 loss was limited to our total
investment in and advances to Uncommon Care. When we reduced our total
investment to zero, as required under the equity method, we ceased recording
monthly equity losses. Had we continued to record losses on our investment,
total equity losses in Uncommon Care in 2001 would have been approximately
$1,400,000.
DISCONTINUED OPERATIONS
In November, 2001 we sold Prime Medical all of the remaining 46,000 square
feet of condominium space we owned in an office project located in Austin, Texas
for approximately $6 million. We then entered into a five year lease with Prime
Medical, for the approximately 23,000 square feet we occupy. The lease is at
prevailing market rates for like-properties in the Austin area. We subsequently
dissolved APS Realty, a wholly-owned subsidiary that formerly owned this office
space and leased space to us, our subsidiaries, affiliates and unaffiliated
parties. Our gain on the sale was approximately $5.1 million, of which $1.9
million was recognized in 2001.
15
We also recorded deferred income of approximately $2.4 million which will be
recognized monthly over the next five years. In addition, 15% of the gain ($0.76
million) related to our 15% ownership in the purchaser, was deferred as we
accounted for Prime Medical using the equity method of accounting as of and for
the year ended December 31, 2001. In 2000, we sold 8,000 square feet of surplus
office space resulting in gains of about $771,000. As a result, our net income
from discontinued operations before tax increased 101% to $2.1 million in 2001
compared to $1.1 million in 2000.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Our net working capital was $3,406,000 and $465,000 at December 31, 2001
and 2000, respectively. The increase in the current year is due primarily to our
receiving $5.9 million in cash proceeds from the sale of our condominium space
in Austin, Texas. The cash received was reduced by our net payments of $3.6
million to pay down our line of credit with Bank of America. In addition, we
paid approximately $1.6 million in 2001 in contractual obligations related to
share exchange agreements with the former shareholders of a previously owned
physician practice subsidiary. Historically, we have maintained a strong working
capital position and, as a result, we have been able to satisfy our operational
and capital expenditure requirements with cash generated from our operating and
investing activities. These same sources of funds have also allowed us to pursue
investment and expansion opportunities consistent with our growth plans. In 2000
and 2001, we supplemented these traditional sources of funds with short-term
bank borrowings. Although it is uncertain if our operating activities will
provide positive cash flow in 2002, we believe that the cash sale after December
31, 2001 of 1,570,000 shares of Prime Medical will enable us to meet our working
capital requirements for the foreseeable future.
LINE OF CREDIT
We had a three year $7,500,000 revolving credit agreement with Bank of
America. Funds advanced under the agreement bear interest at the prime rate less
1/4 %, such interest to be payable quarterly. We pledge shares of Prime Medical
to the bank as funds are advanced under the line. Amounts totaling $2,275,000
and $0 were borrowed under this line of credit as of December 31, 2001 and March
15, 2002, respectively. Due to losses from writedowns of our investments, as
well as significant goodwill impairment by Prime Medical, our total equity was
below the amount needed to comply with our bank covenants at December 31, 2001.
As a result, we repaid all advances on our line of credit and terminated the
line of credit. Consequently, we did not seek a covenant waiver. We also
satisfied all remaining contractual obligations under the merger agreement
between our former physician practice management company and FemPartners, Inc.
With no debt, major obligations satisfied, a forecast of positive cash flow and
sufficient cash on hand, we believe that we can meet foreseeable cash needs
without additional liquidity from a line of credit.
16
CAPITAL EXPENDITURES
Our capital expenditures for equipment were $192,000 and $125,000 in 2001
and 2000, respectively. Our capital expenditures were higher in 2001 due to
purchases necessary to upgrade our network server hardware and software as well
as to upgrade our accounting software. We expect capital expenditures in 2002 to
be slightly less than those of 2001.
COMMITMENTS
We have committed cash outflow related to debt, operating lease
arrangements with a term exceeding one year and other contractual obligations at
December 31, 2001 as follows (in thousands):
Payment Due
Contractual Cash Obligation 2002 2003 2004 2005 2006 Total
-----------------------------------------------------------------------------------------------------------------------
Bank line of credit $ -- $2,275 (1) $ -- $ -- $ -- $2,275
Operating leases 736 740 670 613 460 3,219
Other contractual obligations 510 (1) -- -- -- -- 510
---------------------------------------------------------------------------------
$1,246 $3,015 $670 $613 $460 $6,004
(1) These two obligations were paid in full in 2002.
In addition, we have commitments which could utilize cash resources as follows:
Commitment 2002 2003-2006 Total
--------------------------------------------------------------------------------
Line of credit extended to affiliate $390 $ -- $390
Guarantees 35 -- 35
-------------------------------------
$425 $-- $425
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 sufficient cash flow from operations or that we will
realize anticipated revenue growth and operating improvements, based upon the
current level of our operations and our anticipated revenue growth.
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.
17
ADOPTION OF ACCOUNTING PRONOUNCEMENTS AND PRONOUNCEMENTS NOT YET ADOPTED
The Financial Accounting Standards Board, or FASB, has issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. We implemented this Statement in 2001. This statement
addresses the accounting for derivative instruments, including certain
instruments embedded in other contracts, and for hedging activities. Our
adoption of the statement on January 1, 2001 had no impact on our financial
position or results of operations. We did not have any derivative instruments as
of December 31, 2001 and 2000.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, Business Combinations, and Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that we
use the purchase method of accounting for all business combinations initiated
after June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. Statement 141 also specifies criteria that
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill. Statement 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in accordance
with the provisions of Statement 142. Statement 142 also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment. We adopted the provisions of Statement 141 in 2001 and Statement 142
is required to be adopted effective January 1, 2002. Our adoption of Statement
141 did not have any impact on our consolidated financial statements. As of
December 31, 2001, we had no goodwill or other intangible assets.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Statement 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. Statement 144 requires that one accounting model
be used for long-lived assets to be disposed of by sale and broadens
presentation of discontinued operations to include more disposals. We are
required to adopt Statement 144 effective January 1, 2002. As of the date of
adoption, we do not expect Statement 144 to have a material adverse effect on
our financial position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in Appendix A attached
hereto.
Financial information and schedules relating to Prime Medical are contained
in Item 14(a) of the Annual Report on Form 10-K for the year ended December 31,
2001 of Prime Medical Services, Inc., which Item 14(a) is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
18
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
The information required by this item is contained in our definitive proxy
statement to be filed in connection with our 2002 annual meeting of
shareholders, except for the information regarding our executive officers, which
is presented below. The information required by this item contained in our
definitive proxy statement is incorporated herein by reference.
As of March 15, 2002, our executive officers were as follows:
Name Age Position
---- --- ---------
Kenneth S. Shifrin 52 Chairman of the Board, President
and Chief Executive Officer
William H. Hayes 54 Senior Vice President - Finance
and Secretary
Maury L. Magids 37 Senior Vice President - Insurance
Thomas R. Solimine 43 Controller
Our officers serve until the next annual meeting of our directors and until
their successors are elected and qualified.
Mr. Shifrin has been our Chairman of the Board since March 1990. He has
been our President and Chief Executive Officer since March 1989 and he was
President and Chief Operating Officer from June 1987 to February 1989. He has
been a director of ours since February 1987. From February 1985 until June 1987,
Mr. Shifrin served as our Senior Vice President - Finance and Treasurer. He has
been Chairman of the Board of Prime Medical since October 1989. 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 1988. 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 Anderson 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.
19
There are no family relationships, as defined, between any of our executive
officers, and there is no arrangement or understanding between any of our
executive officers and any other person pursuant to which he or she was selected
as an officer. Each of our executive officers was elected by our board of
directors to hold office until the next annual election of officers and until
his or her successor is elected and qualified or until his or her earlier
resignation or removal. Our board of directors elects our officers in
conjunction with each annual meeting of our shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in our definitive proxy
statement to be filed in connection with our 2002 annual meeting of
shareholders, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is contained in our definitive proxy
statement to be filed in connection with our 2002 annual meeting of
shareholders, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in our definitive proxy
statement to be filed in connection with our 2002 annual meeting of
shareholders, which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The information required by this item is contained in Appendix
A attached hereto.
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or
not required or because the required information is not
material or is presented in the Consolidated Financial
Statements and related notes.
(b) Reports on Form 8-K for the quarter ended December 31, 2001
A Current Report on Form 8-K, filed December 13,
2001, reporting under Item 2 concerning the sale of
the building to Prime Medical and the sale of
FemPartners common stock to a former officer of the
Company. Also reporting under Item 5 concerning a
judgment awarded against us.
20
(c) Exhibits (1)
3.1 Restated Articles of Incorporation of the Company, as amended. (5)
3.2 Amended and Restated Bylaws of the Company.(5)
4.1 Specimen of Common Stock Certificate. (2)
4.2 Rights Agreement, dated as of August 15, 2000, between American Physicians
Service Group, Inc. and American Stock Transfer & Trust Company which
includes the form of Statement of Resolutions setting forth the terms of
the Junior Participating Preferred Stock, Series A, the form of Rights
Certificate as Exhibit B and the Summary of Rights to Purchase Preferred
Shares as Exhibit C. (10)
*10.1 American Physicians Service Group, Inc. Employees Stock Option Plan. (2)
*10.2 Form of Employees Incentive Stock Option Agreement. (2)
*10.3 Form of Employees Non-Qualified Stock Option Agreement. (2)
*10.4 American Physicians Service Group, Inc. Directors Stock Option Plan. (2)
*10.5 Form of Directors Stock Option Agreement. (2)
*10.6 1995 Non-Employee Directors Stock Option Plan of American Physicians
Service Group, Inc. (6)
*10.7 Form of Non-Employee Directors Stock Option Agreement. (6)
*10.8 1995 Incentive and Non-Qualified Stock Option Plan of American Physicians
Service Group, Inc. (6)
*10.9 Form of Stock Option Agreement (ISO). (6)
*10.10 Form of Stock Option Agreement (Non-Qualified). (6)
10.11 Management Agreement of Attorney-in-Fact, dated August 13, 1975,
between FMI and American Physicians Insurance Exchange. (2)
*10.14 Profit Sharing Plan and Trust, effective December 1, 1984, of the
Company. (3)
10.17 Stock Purchase Agreement dated September 30, 1996 between the Company and
Exsorbet Industries, Inc. (7)
10.18 Stock Put Agreement dated September 30, 1996 between the Company and
Exsorbet Industries, Inc. (7)
10.19 Shareholder Rights Agreement dated September 30, 1996 between the Company
and Exsorbet Industries, Inc. (7)
10.20 Warrant dated September 30, 1996 for shares of common stock issued to the
Company by Exsorbet Industries, Inc. (7)
10.21 Contingent Warrant Agreement dated September 30, 1996 for shares of common
stock issued to the Company by Exsorbet Industries, Inc. (7)
21
10.22 Option Agreements dated September 30, 1996 for shares of Exsorbet common
stock issued to the Company by officers and directors of Exsorbet
Industries, Inc. (7)
10.23 Agreement dated September 30, 1996 with Exsorbet Industries, Inc. related
to options issued by officers and directors of Exsorbet Industries. (7)
10.24 Guaranty Agreements dated September 30, 1996 between the Company and
subsidiaries of Exsorbet Industries, Inc. (7)
10.25 Promissory Note dated November 26, 1996 executed by Exsorbet Industries,
Inc. and payable to the Company in the amount of $3,300,000. (7)
10.26 Stock Purchase Agreement dated October 1, 1997 between the Company, APS
Practice Management, Inc., Michael Beck, John Hedrick, and et al. (8)
10.27 Bylaws of APS Practice Management, Inc., (8)
10.28 Amended and Restated Articles of Incorporation APS Practice Management,
Inc., (8)
10.29 APS Practice Management, Inc., Certificate of Designation of Rights and
Preferences Series A Serial Founder's Common Stock dated September 30,
1997. (8)
10.30 Resolutions to organizational matters concerning Syntera, Inc. dated
October 1, 1997. (8)
10.31 Master Refinancing Agreement dated November 6, 1997 between the Company
and Consolidated Eco-Systems, Inc. (8)
10.32 Promissory Note dated November 6, 1997 executed by Consolidated
Eco-Systems, Inc. and payable to the Company in the amount of $3,788,580.
(8)
10.33 Assignment and Security Agreement dated November 6, 1997 between the
Company and Consolidated Eco-Systems, Inc. (8)
10.34 Security Agreement dated November 6, 1997 between the Company and
Consolidated Eco-Systems, Inc. (8)
10.35 Share Exchange Agreements dated October 31, 1997 between the Company and
Devin Garza, M.D., Robert Casanova, M.D. and Shelley Nielsen, M.D. (8)
*10.36 First Amendment to 1995 Incentive and Non- Qualified Stock Option Plan of
American Physicians Service Group, Inc. Dated December 10, 1997. (8)
*10.37 First Amendment to 1995 Non-Employee Director Stock Option Plan of
American Physicians Service Group, Inc. Dated December 10, 1997. (8)
10.38 Share Exchange Agreement dated February 16, 1998 between the Company
and Michael T. Breen, M.D. (9)
10.39 Share Exchange Agreement dated April 1, 1998 between the Company and
Antonio Cavazos, Jr., M.D. (9)
10.40 Share Exchange Agreement dated April 1, 1998 between the Company and
Antonio Cavazos, III, M.D. (9)
22
10.41 Share Exchange Agreement dated May 18, 1998 between the Company and
Jonathan B. Buten, M.D. (9)
10.42 Share Exchange Agreement dated June 30, 1998 between the Company and
Gary R. Jones, M.D. (9)
10.43 Share Exchange Agreement dated July 31, 1998 between the Company and
Joe R. Childress, M.D. (9)
10.44 Share Exchange Agreement dated August 1, 1998 between the Company and
M. Reza Jafarnia, M.D. (9)
10.45 Share Exchange Agreement dated September 15, 1998 between the Company
and Donald Columbus, M.D. (9)
10.46 Share Exchange Agreement dated December 31, 1998 between the Company
and David L. Berry, M.D. (9)
10.47 Contribution and Stock Purchase Agreement dated January 1, 1998 between
the Company, Additional Purchasers, Barton Acquisition, Inc., Barton
House, Ltd., Barton House at Oakwell Farms, Ltd., Uncommon Care, Inc.,
George R. Bouchard, John Trevey, and Uncommon Partners, Ltd. (9)
10.48 Stock Transfer Restriction and Shareholders Agreement dated January 1,
1998 between the Company, Additional Purchasers, Barton Acquisition,
Inc., Barton House, Ltd., Barton House at Oakwell Farms, Ltd.,Uncommon
Care, Inc., George R. Bouchard, John Trevey, and Uncommon Partners,
Ltd. (9)
10.49 Loan Agreement dated January 1, 1998 between the Company and Barton
Acquisition, Inc. (9)
10.50 Promissory Note (Line of Credit) dated January 1, 1998 between the
Company and Barton Acquisition, Inc. in the amount of $2,400,000. (9)
10.51 Security Agreement dated January 1, 1998 between the Company and Barton
Acquisition, Inc. (9)
10.52 Participation Agreement dated March 16, 1998 between the Company and
Additional Purchasers referred to as Participants. (9)
10.53 Revolving Credit Loan Agreement dated February 10, 1998 between the
Company and NationsBank of Texas, N.A. in an amount not to exceed
$10,000,000. (9)
10.54 Revolving Credit Note dated February 10, 1998 between the Company and
NationsBank of Texas, N.A. in the amount of $10,000,000. (9)
10.55 Pledge Agreement dated February 10, 1998 between the Company and
NationsBank of Texas, N.A. (9)
10.56 Continuing and Unconditional Guaranty dated February 10, 1998 between
the Company and NationsBank of Texas, N.A. (9)
10.57 Restructuring Agreement dated March 25, 1999 between the Company and
Consolidated Eco-Systems, Inc., and all of the wholly or partially
owned subsidiaries of Consolidated Eco-Systems, Inc. (except for 7-7,
Inc.). (9)
23
10.58 Assignment and Security Agreement dated March 25, 1999 between the
Company and Consolidated Eco-Systems, Inc. (9)
10.59 Security Agreement dated March 25, 1999 between the Company and
Consolidated Eco-Systems, Inc. (9)
10.60 Security Agreement dated March 25, 1999 between the Company and
Eco-Acquisition, Inc. (9)
10.61 Security Agreement dated March 25, 1999 between the Company and
Exsorbet Technical Services, Inc. (9)
10.62 Security Agreement dated March 25, 1999 between the Company and KR
Industrial Service of Alabama, Inc. (9)
10.63 Agreement of Plan of Merger dated August 31, 1999 between FemPartners,
Inc. and Syntera HealthCare Corporation. (10)
10.64 Share Exchange Agreement dated August 31, 1999 between the Company and
David L. Berry, M.D. (10)
10.65 Share Exchange Agreement dated August 31, 1999 between the Company and
Michael T. Breen, M.D. (10)
10.66 Share Exchange Agreement dated August 31, 1999 between the Company and
Jonathan B. Buten, M.D. (10)
10.67 Share Exchange Agreement dated August 31, 1999 between the Company and
Robert Casanova, M.D. (10)
10.68 Share Exchange Agreement dated August 31, 1999 between the Company and
Antonio Cavazos, III, M.D. (10)
10.69 Share Exchange Agreement dated August 31, 1999 between the Company and
Joe R. Childress, M.D. (10)
10.70 Share Exchange Agreement dated August 31, 1999 between the Company and
Donald Columbus, M.D. (10)
10.71 Share Exchange Agreement dated August 31, 1999 between the Company and
Devin Garza, M.D. (10)
10.72 Share Exchange Agreement dated August 31, 1999 between the Company and
M. Reza Jafarnia, M.D. (10)
10.73 Share Exchange Agreement dated August 31, 1999 between the Company and
Gary L. Jones, M.D. (10)
10.74 Share Exchange Agreement dated August 31, 1999 between the Company and
Shelley Nielson, M.D. (10)
10.75 Share Exchange Agreement dated August 31, 1999 between the Company and
Lawrence M. Slocki, M.D. (10)
24
10.76 Loan Agreement dated June 16, 1999 between APS Consulting, Inc. and
APSC, Inc. (10)
10.77 Promissory Note dated June 16, 1999 between APS Consulting, Inc. and
APSC, Inc. (10)
10.78 Security Agreement dated June 16, 1999 between APS Consulting, Inc. and
APSC, Inc. (10)
10.79 Subordination Agreement dated June 16, 1999 between the Company and
APSC, Inc. (10)
10.80 Convertible Promissory Note dated April 27, 1999 between the Company
and Uncommon Care, Inc. (10)
10.81 Replacement Convertible Promissory Note dated September 30, 1999
between the Company and Uncommon Care, Inc. (10)
10.82 Liquidity Promissory Note dated September 30, 1999 between the Company
and Uncommon Care, Inc. (10)
10.83 Replacement Liquidity Note dated October 15, 1999 between the Company
and Uncommon Care, Inc. (10)
10.84 Co-Sale Rights Agreement dated August 31, 1999 between the Company and
FemPartners, Inc. (10)
10.85 Replacement Promissory Note dated August 31, 1999 between the Company
and FemPartners, Inc. (10)
10.86 Guaranty Agreement dated August 31, 1999 between the Company and
FemPartners, Inc. (10)
10.87 Amendment to Certificate of Incorporation dated August 29, 2000 of
APSC, Inc. (11)
10.88 Amended Loan Agreement dated June 28, 2000 between APS Consulting and
APSC, Inc. (11)
10.89 Amended Promissory Note dated June 28, 2000 between APS Consulting and
APSC, Inc. (11)
10.90 Amended Promissory Note dated June 28, 2000 between APS Consulting and
APSC, Inc. (11)
10.91 APSC, Inc. Stock Plan. (11)
10.92 APS Asset Management Debt to equity Conversion Agreement dated June 30,
2000. (11)
10.93 Amendment to Revolving Credit Loan Agreement with Bank of America dated
April 26, 2000. (11)
10.94 2nd Amendment to Revolving Credit Loan Agreement with Bank of America
dated February 9, 2001. (11)
10.95 Management Services Agreement dated January 1, 2000 between the Company
and APS Consulting. (11)
25
10.96 Tax Sharing Agreement dated January 1, 2000 between the Company and APS
Consulting. (11)
10.97 Settlement Agreement and Release dated January 5, 2000 between APS
Consulting and M. J. Blankenship Woodcock. (11)
10.98 Professional Services Contract dated April 10, 2000 between APIA and
White Lion Internet Agency. (11)
10.99 $1.25 million 364-Day Revolving Promissory Note dated February 9, 2001
between the Company and Bank of America. (11)
10.100 $1.25 million Promissory Note dated June 1, 2000 between the Company
and Uncommon Care, Inc. (11)
10.101 $1.20 million Promissory Note dated June 1, 2000 between the Company
and Uncommon Care, Inc. (11)
21.1 List of subsidiaries of the Company. (12)
23.1 Independent Auditors Consent of KPMG LLP. (12)
99.1 The financial statements of Prime Medical Services, Inc. included in
item 8 on the Annual Report on Form 10-K of Prime Medical Services,
Inc. for the year ended December 31, 2001. (12)
(*) Executive Compensation plans and arrangements.
-----------------
(1) The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files
reports, proxy statements and other information with the Commission.
Reports, proxy statements and other information filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at Seven World Trade Center, 13th Floor, New
York, New York 10048 and CitiCorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained
by mail from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Such reports,
proxy statements and other information concerning the Company are also
available for inspection at the offices of The NASDAQ National Market,
Reports Section, 1735 K Street, N.W., Washington, D.C. 20006. The
Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that
file electronically with the Commission at http://www.sec.gov and makes
available the same documents through Disclosure, Inc. at 800-638-8241.
(2) Filed as an Exhibit to the Registration Statement on Form S-1,
Registration No. 2-85321, of the Company, and incorporated herein by
reference.
26
(3) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1984 and incorporated herein by
reference.
(4) Filed as an Exhibit to the Current Report on Form 8-K of the Company
dated September 5, 1989 and incorporated herein by reference.
(5) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1990 and incorporated herein by
reference.
(6) Filed as an Exhibit to the Annual Report on Form 10-KSB of the Company
for the year ended December 31, 1995 and incorporated herein by
reference.
(7) Filed as an Exhibit to the Annual Report on Form 10-KSB of the Company
for the year ended December 31, 1996 and incorporated herein by
reference.
(8) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1997 and incorporated herein by
reference.
(9) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1998 and incorporated herein by
reference.
(10) Filed as an Exhibit to the 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 herewith.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN PHYSICIANS SERVICE GROUP, INC.
By: /s/ Kenneth S. Shifrin
---------------------------
Kenneth S. Shifrin, Chairman of the
Board and Chief Executive Officer
Date: April 15, 2002
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: April 15, 2002
By: /s/ W. H. Hayes
------------------------------------------------------
W. H. Hayes
Senior Vice President - Finance, Secretary
and Chief Financial Officer
(Principal Financial Officer)
Date: April 15, 2002
28
By: /s/ Thomas R. Solimine
------------------------------------------------------
Thomas R. Solimine
Controller
(Principal Accounting Officer)
Date: April 15, 2002
By: /s/ Robert L. Myer
----------------------------------------------------------
Robert L. Myer, Director
Date: April 15, 2002
By: /s/ William A. Searles
------------------------------------------------------
William A. Searles, Director
Date: April 15, 2002
By: /s/ Marc R Still
---------------------------------------------
Marc R. Still, Director
Date: April 15, 2002
29
APPENDIX A
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report A-2
Financial Statements
Consolidated Statements of Operations for the years
ended December 31, 2001 and 2000 A-3
Consolidated Balance Sheets as of December 31, 2001
and December 31, 2000 A-5
Consolidated Statements of Cash Flows for the years
ended December 31, 2001 and 2000 A-7
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2001 and 2000 A-9
Notes to Consolidated Financial Statements A-10
30
Independent Auditors' Report
-----------------------------
The Board of Directors and Shareholders
American Physicians Service Group, Inc.:
We have audited the consolidated financial statements of American
Physicians Service Group, Inc. and subsidiaries ("Company") as listed
in the accompanying index. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
American Physicians Service Group, Inc. and subsidiaries as of December
31, 2001 and 2000, and the results of their operations and their cash
flows for each of the years in the two-year period ended December 31,
2001 in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 21 to the consolidated financial statements, the
accompanying financial statments as of December 31, 2000 and for the
year then ended have been restated.
/s/ KPMG, LLP
-------------------
Austin, Texas
April 15, 2002
A-2
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
----------------------------------
2001 2000
(Restated)
--------------- ---------------
Revenues:
Financial services $13,094 $9,962
Insurance services 7,289 5,692
Consulting 2,642 2,395
Investments and other 95 298
--------------- ---------------
Total revenues 23,120 18,347
Expenses:
Financial services 11,518 9,147
Insurance services 5,918 5,197
Consulting 3,062 2,404
General and administrative 1,749 1,524
Investments and interest (Notes 16 and 21) 465 7,718
--------------- ---------------
Total expenses 22,712 25,990
--------------- ---------------
Operating profit (loss) (Note 21) 408 (7,643)
Equity in loss of unconsolidated
affiliates (Note 13) (3,191) (467)
--------------- ---------------
Loss from continuing operations
before income taxes and minority
interests (2,783) (8,110)
Income tax benefit (Note 9) (952) (2,692)
Minority interests 157 42
--------------- ---------------
Loss from continuing operations (Note 21) (1,988) (5,460)
Discontinued operations: (Note 12)
Profit from discontinued operations net of
income tax expense of $72 and $354
in 2001 and 2000, respectively 138 686
Gain on disposal of discontinued segment,
net of income tax expense of $655 in 2001 1,272 --
--------------- ---------------
Net loss (Note 21) $ (578) $(4,774)
=============== ===============
See accompanying notes to consolidated financial statements
A-3
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS, continued
(In thousands, except per share data)
Year Ended December 31,
-------------------------------
2001 2000
(Restated)
------------- ------------
Loss per common share: (Note 15 and 21)
Basic:
Loss from continuing operations $ (0.85) $ (2.19)
Discontinued operations 0.60 0.28
------------- ------------
Net loss $ (0.25) $ (1.92)
============= ============
Diluted:
Loss from continuing operations $ (0.85) $ (2.19)
Discontinued operations 0.60 0.28
------------- ------------
Net loss $ (0.25) $ (1.92)
============= ============
Basic weighted average shares outstanding 2,343 2,490
============= ============
Diluted weighted average shares outstanding 2,343 2,490
============= ============
A-4
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
---------------------------------
2001 2000
(Restated)
-------- ----------
ASSETS
Current assets:
Cash and cash investments $3,851 $2,988
Trading account securities 149 241
Notes receivable - current (Note 3) 573 282
Management fees and other
receivables (Note 2) 1,087 682
Deposit with clearing organization 499 495
Receivable from clearing organization 69 185
Net deferred income tax asset (Note 9) 282 --
Income tax receivable 167 502
Prepaid expenses and other (Note 6) 1,147 331
-------- ---------
Total current assets (Note 21) 7,824 5,706
Notes receivable, net - less current
portion (Note 3) 999 1,363
Property and equipment (Note 5) 415 1,422
Investment in affiliate (Note 13) 11,459 14,374
Other investments (Notes 16 and 21) 68 182
Net deferred income tax asset -
non-current 1,453 1,101
Goodwill (Note 18) -- 443
Other assets 201 205
------- ---------
Total Assets (Note 21) $22,419 $24,796
======= =========
See accompanying notes to consolidated financial statements
A-5
AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
(In thousands, except share data)
December 31,
-------------------------------
2001 2000
(Restated)
------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $1,044 $1,033
Payable to clearing organization 254 470
Net deferred income tax liability
(Note 9) -- 122
Deferred income - current (Note 12) 537 414
Accrued compensation 1,246 719
Accrued expenses and other
liabilities (Note 6) 1,337 2,483
------- -------
Total current liabilities 4,418 5,241
Payable under loan participation
agreements (Note 13) 259 259
Deferred income - non-current (Note 12) 2,676 45
Notes payable - long term (Note 7) 2,275 5,888
------- -------
Total liabilities (Note 21) 9,628 11,433
Minority interest 124 111
Shareholders' Equity:
Preferred stock, $1.00 par value, 1,000,000
shares authorized -- --
Common stock, $0.10 par value, shares authorized
20,000,000; 2,745,231 issued in 2001 and
2,745,233 issued in 2000 and 2,359,231
outstanding in 2001 and 2,359,233 outstanding
in 2000 275 275
Additional paid-in capital 5,539 5,539
Retained earnings (Note 21) 8,310 8,888
Accumulated other comprehensive loss (39) (32)
Treasury stock, at cost, 386,000 shares in
2001 00 (1,418) (1,418)
-------- --------
Total shareholders' equity (Note 21) 12,667 13,252
Total Liabilities and Shareholders' Equity $22,419 $24,796
======== ========
See accompanying notes to consolidated financial statements
A-6
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
2001 2000
(Restated)
------- --------
Cash flows from operating activities:
Cash received from customers $22,792 $19,482
Cash paid to suppliers and employees (23,165) (20,225)
Change in trading account securities 83 203
Change in deposit with and receivable from
clearing organization (104) 355
Interest paid (456) (408)
Income taxes (paid) refunded (45) 122
Interest and other investment proceeds 54 409
------- -------
Net cash used in operating activities (841) (62)
Cash flows from investing activities:
Proceeds from the sale of property and
equipment 6,075 953
Payments for purchase of property and equipment (192) (125)
Investment in and advances to affiliates, net (485) (845)
Other investments 38 (856)
Funds loaned to others (318) (259)
Collection of notes receivable 282 73
Other 57 115
------- -------
Net cash provided by (used in) investing
activities 5,457 (944)
Cash flows from financing activities:
Proceeds from notes payable 1,715 3,560
Payment of notes payable (5,328) (982)
Purchase/retire treasury stock -- (914)
Sale of treasury stock -- 55
Distribution to minority interest (140) --
------- -------
Net cash provided by (used in) financing
activities (3,753) 1,719
Net change in cash and cash investments $863 $713
------- -------
Cash and cash investments at beginning of year 2,988 2,275
------- -------
Cash and cash investments at end of year $3,851 $2,988
======= =======
See accompanying notes to consolidated financial statements
A-7
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In thousands, except summary information)
Year Ended December 31,
2001 2000
(Restated)
------- --------
Reconciliation of net loss to net cash used
in operating activities:
Net loss $(578) $(4,774)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 312 373
Forgiveness of debt 213 201
Impairment of goodwill 391 --
Minority interest in consolidated earnings 157 42
Undistributed loss of affiliates 3,399 467
Gain on sale of property (1,932) (758)
Realized (gain) loss on other investments (30) 6,750
Provision for deferred taxes (756) (2,045)
Change in trading account securities 83 203
Change in management fees & other receivables (458) 722
Change in deposit with and receivable/payable
from/to clearing organization (104) 355
Change in federal income tax receivable 335 (285)
Change in prepaid expenses & other current assets (816) (52)
Change in other non-current assets -- 14
Change in trade payables 4 (209)
Change in deferred income (447) (70)
Change in accrued expenses & other liabilities (614) (996)
------- -------
Net cash used in operating activities $(841) $(62)
======= =======
Summary of non-cash transactions:
During 2001, we sold all of the remaining 45,000 square feet of condominium
space we owned in an office project located in Austin, Texas. In connection
with the sale, we deferred $3.2 million of the gain recorded on the sale.
(Note 12)
During 2000, we recorded a liability of $2.25 million to complete the
remaining expected exchanges of FemPartners shares subsequent to December
31, 2000. In addition, we recorded an impairment charge of $6.7 million to
our investment in FemPartners during 2000. The investment in FemPartners
is accounted for in "Other Investments" in the accompanying consolidated
balance sheets. (Notes 8,16 and 21)
In association with the working capital agreement established between us
and FemPartners as part of the merger of Syntera with FemPartners in 1999,
it was agreed that Syntera would have working capital of an agreed upon
amount measured at December 31, 2000. The working capital we recorded as of
December 31, 2000 was $623,000. We and FemPartners agreed to the final
amount of and settled the working capital liability in 2001 which resulted
in a non-cash adjustment to increase the note receivable from FemPartners
by the amount of $46,000. See accompanying notes to consolidated financial
statements.
A-8
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 2001 and 2000
(In thousands)
Accumulated
Common Additional Retained Other Total
Stock Paid-In Earnings Comprehensive Comprehensive Treasury Shareholders'
(Note 17) Capital (Note 21) Income (Loss) Loss Stock Equity
--------- ---------- --------- --------------- ------------ ---------- -------------
Balance December 31, 1999 278 5,549 13,644 -- (559) 18,912
Comprehensive income:
Net loss (Restated)(Note 21) -- -- (4,774) (4,774) -- -- (4,774)
Other comprehensive loss
Unrealized loss on securities net -- -- -- (32) (32) -- (32)
of tax of $17 -------
-- -- $(4,806) -- -- --
--------
Comprehensive loss (Restated)
Treasury stock purchases -- -- -- -- (914) (914)
Treasury stock sales -- -- -- -- 55 55
Dissolution of Subsidiary (3) (10) 17 -- -- 4
--------- ---------- --------- ------------- ------------ ---------- -----------
--------- ---------- --------- ------------- ------------ ---------- -----------
Balance December 31, 2000 (Restated) $ 275 $ 5,539 $ 8,888 $ (32) $ (1,418) $ 13,252
--------- ---------- --------- ------------- ------------ ---------- -----------
Comprehensive income:
Net loss -- -- (578) (578) (578)
Other comprehensive loss
Unrealized loss on securities net -- -- -- (7) (7) -- (7)
of tax of $2 -------
-- -- -- $ (585) -- -- --
-------
Comprehensive loss
-------- ---------- --------- --------------- ------------ ---------- -----------
Balance December 31, 2001 $ 275 $ 5,539 $ 8,310 $ (39) $ (1,418) $ 12,667
======== ========== ========= =============== ============ ========== ===========
See accompanying notes to consolidated financial statements.
A-9
AMERICAN PHYSICIANS SERVICE GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
(1) Summary of Significant Accounting Policies
(a) General
The consolidated financial statements for 2000 have been restated. See
Note 21 for additional information. We, through our subsidiaries,
provide financial services that include brokerage and asset management
services to individuals and institutions, insurance services that
consist of management services for malpractice insurance companies, and
environmental consulting services that include air, water and solid
waste engineering, litigation support and regulatory compliance. The
financial services business has clients nationally. Insurance
management is a service provided primarily in Texas, but is available
to clients nationally. Consulting is a service provided primarily in
the Southeastern United States, but is available to clients nationally.
During the two years presented in the financial statements, financial
services generated 56% of total revenues and insurance services
generated 31%.
We have two affiliates; Prime Medical Services, Inc., ("Prime Medical")
of which we own approximately 15% at December 31, 2001, and Uncommon
Care, Inc. ("Uncommon Care") of which we own common stock and
convertible preferred stock equivalent to a 38% ownership on a fully
converted basis. Prime Medical is the country's largest provider of
lithotripsy (non-invasive kidney stone fracturing) services. In
addition, Prime Medical operates 14 refractive surgery centers
performing 23,000 LASIK procedures on an annualized basis, and is also
involved in the manufacturing of mobile medical and specialty equipment
units. Uncommon Care develops and operates Alzheimer's care facilities.
(b) Estimates
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 does not have
the ability to exercise significant influence over operating and
financial policies, are accounted for using the cost method.
A-10
(1) Summary of Significant Accounting Policies, continued
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 premiums of the
managed company. The profit sharing component of these fees is
recognized when it is reasonably certain that the managed company will
have an annual profit, generally in the fourth quarter of each year.
Our expense reimbursements are recorded as a reduction in expenses.
Our consulting revenues result from the work of scientists and
engineers in the areas of remedial investigations, remediation
engineering, air and water quality analysis, regulatory compliance,
solid waste engineering, litigation support/expert testimony and
industrial hygiene and safety. Substantially all of the projects in
these areas are undertaken on a time and expenses basis. Our clients
are billed, and revenue is recognized, monthly based on hours worked
and expenses incurred toward completing the assignments.
(e) Marketable Securities
Our investments in debt and equity securities are classified in three
categories and accounted for as follows:
Classification Accounting
-------------- ----------
Held to maturity Amortized cost
Trading securities Fair value, unrealized gains and losses
included in earnings
Available for sale Fair value, unrealized gains and losses
excluded from earnings and reported as a
separate component of stockholders'
equity, net of applicable income taxes
We have included our marketable securities, held as inventory at our
broker/dealer, in the trading securities category.
(1) Summary of Significant Accounting Policies, continued
(f) Property and Equipment
A-11
Property and equipment are stated at cost. Property and equipment are
depreciated using the straight-line method over the estimated useful
lives of the respective assets (3 to 5 years).
(g) Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows
is less than the carrying amount of the asset, a loss is recognized if
there is a difference between the fair value and carrying value of the
asset.
Investments in the common stock of companies not accounted for using
the equity method and for which there is no readily determinable fair
value will be evaluated for impairment in the event of a material
change in the underlying business. Such evaluation takes into
consideration our intent and time frame to hold or to dispose of the
investment and takes into consideration available information,
including recent transactions in the stock, expected changes in the
operations or cash flows of the investee, or a combination of these and
other factors.
(h) Goodwill
Goodwill represents the excess of consideration paid over the net
assets acquired in purchase business combinations. It is amortized
using the straight-line method over a period of ten years. Goodwill is
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. If the sum of
the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized based on the difference
between the fair value and carrying value.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
(j) Cash and Cash Investments
Cash and cash investments include cash and highly liquid investments
with a maturity date at purchase of 90 days or less.
(1) Summary of Significant Accounting Policies, continued
(k) Notes Receivable
A-12
Notes receivable are recorded at cost, less allowances for doubtful
accounts when deemed necessary. Management, considering current
information and events regarding the borrowers ability to repay their
obligations, considers a note to be impaired when it is probable that
we will be unable to collect all amounts due according to the
contractual terms of the note agreement. When a loan is considered to
be impaired, the amount of the impairment is measured based on the
present value of expected future cash flows discounted at the note's
effective interest rate. Impairment losses are included in the
allowance for doubtful accounts through a charge to bad debt expense.
The present value of the impaired loan will change with the passage of
time and may change because of revised estimates of cash flows or
timing of cash flows. Such value changes shall be reported as bad debt
expense in the same manner in which impairment initially was recognized
or as a reduction in the amount of bad debt expense that would be
reported. No interest income is accrued on impaired loans. Cash
receipts on impaired loans are recorded as reductions of the principal
amount.
(l) Stock-Based Compensation
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.
(m) Reclassification
Certain reclassifications have been made to amounts presented in 2000
to be consistent with the 2001 presentation.
(2) Management Fees and Other Receivables
Management fees and other receivables consist of the following:
December 31,
2001 2000
---- ----
Management fees receivable $30,000 $3,000
Trade accounts receivable 725,000 637,000
Less: allowance for doubtful accounts (40,000) (56,000)
Accrued interest receivable 4,000 57,000
Other receivables 368,000 41,000
------- ------
$1,087,000 $682,000
========= ========
We earn management fees by providing management services to American
Physicians Insurance Exchange ("APIE") under the direction of APIE's
Board of Directors. Subject to the direction of this Board, FMI sells
and issues policies, investigates, settles and defends claims, and
otherwise manages APIE's affairs. We earned management fees and other
related income of $7,289,000 and $5,692,000 and received expense
reimbursements of $2,570,000 and $1,997,000 for the years ended
December 31, 2001 and 2000, respectively, related to these agreements.
A-13
(2) Management Fees and Other Receivables, continued
Trade accounts receivable are recorded at APS Consulting for services
performed which are billed on a monthly basis.
Other receivables is primarily comprised of a non-interest bearing
advance to APIE in 2001 which was subsequently collected in March 2002.
(3) Notes Receivable
Notes receivable consist of the following:
December 31,
2001 2000
---- ----
FEMPARTNERS, INC. (FORMERLY DUE FROM SYNTERA HEALTHCARE CORPORATION)
Promissory note, bears interest at 8%. Payments were interest only, paid
quarterly through November 30, 2001. Quarterly combined principal and interest
payments began December 1, 2001 and continue through September 1, 2004, at which
time the total outstanding balance is due. The maturity date of this note can be
accelerated if FemPartners conducts an initial public offering or other public
sale of its common stock. If such occurs, the note shall mature and become due
and payable the latter of September 1, 2002 or the 5th business day after the
date of such initial public offering or other public sale. $1,304,000 $1,377,000
Unsecured term note, principal and interest, at 8%, payable monthly until
maturity on March 31, 2004. 115,000 182,000
EMPLOYEES
Loans are periodically made to employees, primarily as employment inducements.
Employee notes receivable at December 31, 2001 consisted of three notes totaling
$100,000 which were repaid in full in February 2002 and two loans totaling
$53,000 to a key employee for advanced education fees. The 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. 153,000 119,000
------- -------
1,572,000 1,678,000
Less allowance for doubtful accounts -- (33,000)
-------- ---------
1,572,000 1,645,000
Less current portion 573,000 282,000
------- -----------
Long term portion $999,000 $1,363,000
======== ===========
A-14
(3) Notes Receivable, continued
A reconciliation of the allowance for impairment of all notes receivable
follows:
Year Ended December 31,
2001 2000
---- ----
Balance at the beginning of the period $ 33,000 $ 311,000
Amounts charged off (33,000) (285,000)
Additional provision -- 7,000
-------- ----------
Balance at the end of period $ -- $ 33,000
========= ==========
(4) Fair Value of Financial Instruments
For financial instruments the estimated fair value equals the carrying
value as presented in the consolidated balance sheets. Fair value
estimates, methods, and assumptions are set forth below for our
financial instruments.
CASH AND CASH INVESTMENTS
The carrying amounts for cash and cash investments approximate fair
value because they mature in less than 90 days and do not present
unanticipated credit concerns.
TRADING ACCOUNT SECURITIES
The fair value of securities owned are reported at fair value. In the
absence of any available market quotation, securities held by us are
valued at estimated fair value as determined by management.
In addition to receiving commission revenue for acting as the placement
agent for private offerings, APS Financial received over the past three
years warrants to purchase a total of 600,373 shares of restricted
common capital stock of four companies. The warrants expire in 2004
through 2006 and have no value at December 31, 2001. None of the
warrants have been exercised as of December 31, 2001.
MANAGEMENT FEES AND OTHER RECEIVABLES
The fair value of these receivables approximates the carrying value due
to their short-term nature and historical collectibility.
A-15
(4) Fair Value of Financial Instruments, continued
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.
RECEIVABLE FROM CLEARING ORGANIZATION
The carrying amounts approximate fair value because the funds can be
withdrawn on demand and there is no unanticipated credit concern.
OTHER INVESTMENTS
The fair value has been determined using a third party valuation.
ACCOUNTS PAYABLE
The fair value of the payable approximates carrying value due to the
short-term nature of the obligation.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. Fair value estimates are based on existing on-and-off
balance sheet financial instruments without attempting to estimate the
value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. In addition,
the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates
and have not been considered in the aforementioned estimates.
(5) Property and Equipment
Property and equipment consists of the following:
December 31,
---------------------------------
2001 2000
--------- -------
Office condominium $ -- $1,340,000
Furniture and equipment 2,221,000 2,041,000
--------- ---------
2,221,000 3,381,000
Accumulated depreciation and
amortization 1,806,000 1,959,000
--------- ---------
$ 415,000 $1,422,000
========= =========
During 2001, we sold all of our approximately 46,000 square feet in the
condominium building in which our principal offices are located to our
affiliate, Prime Medical. The Company, our subsidiaries and affiliates
occupied approximately 36,720 square feet and the remainder was leased
to third parties. Rental income received from third parties
A-16
(5) Property and Equipment, continued
during the years ended December 31, 2001 and 2000 totaled approximately
$179,000 and $273,000, respectively. Gain on the sale amounted to
approximately $5.1 million, of which $1.9 million was recognized in
2001. Deferred income of approximately $2.4 million was recorded and
will be recognized monthly over the next five years. In addition, 15%
of the gain ($0.76 million) related to our 15% ownership in the
purchaser, was deferred as we accounted for Prime Medical using the
equity method of accounting as of and for the year ended December 31,
2001. Approximately 50% of the space sold was leased back to us and is
utilized by our investment services, insurance services and general and
administrative segments' operations.
(6) Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consists of the following as of
December 31,:
2001 2000
------- -------
Taxes payable $ 61,000 $ 71,000
Contractual/legal claims 1,031,000 2,264,000
Vacation payable 140,000 133,000
Funds held for others -- 15,000
Other 105,000 --
--------- ----------
$1,337,000 $2,483,000
========== ==========
Contractual/legal claims as of December 31, 2001 includes an accrual of
$520,000 related to the settlement of a legal judgment against us that
was paid in January 2002. Prior to the negotiated settlement of the
judgment, we were required to put up a cash bond in the amount of the
original judgment in the amount of $762,000. This amount is reflected
in the line item "Prepaid expenses and other" in the accompanying
consolidated balance sheets. The difference between the cash bond and
the settlement amount was reimbursed to us in February 2002.
(7) Notes Payable
We had a $7,500,000 line of credit with Bank of America, N. A. We had
pledged shares of Prime Medical to the bank as funds are advanced under
the line. Funds advanced under the agreement were $2,275,000 at
December 31, 2001. Funds advanced under the agreement bore interest at
the prime rate less 1/4 %. The average interest rate on amounts
outstanding under this agreement for the year ended December 31, 2001
was 6.89%. Interest expense incurred during the years ended December
31, 2001 and 2000 related to the line of credit was approximately
$388,000 and $401,000, respectively. The unused portion of the line
carries a 1/4 % commitment fee. All interest is to be paid quarterly.
Prior to maturity in February 2001, this note was extended to February
2003. Any outstanding principal is to be paid at maturity in February
2003.
In order to receive advances under the $7,500,000 line of credit, we
must maintain certain levels of liquidity and net worth. In addition,
the market value of the collateral
A-17
(7) Notes Payable, continued
must exceed a certain multiple of the funds advanced under the line of
credit and there must be no occurrence which would have a material
adverse effect on our ability to meet its obligations to the bank. As
of December 31, 2001, we were out of compliance with the minimum
shareholders' equity requirements and do not have a waiver. All amounts
payable under the line of credit were repaid in February 2002. We
terminated the line of credit during 2002.
We entered into a $1,250,000 364-Day Revolving Promissory Note
agreement with Bank of America, N.A. on February 9, 2001. We placed as
collateral real estate owned by APS Realty, Inc. There are no funds
advanced under this agreement at December 31, 2001. Funds advanced
under this agreement bore interest at the prime rate plus 1/4%.
Interest expense incurred during the year ended December 31, 2001
related to the Promissory Note was approximately $48,000. All interest
was paid quarterly. The initial maturity date was February 8, 2002.
However, upon the sale of real estate owned by APS Realty, Inc. the
balance of the note plus interest became due. Therefore, this Revolving
Note terminated and was paid in full on November 26, 2001.
(8) Commitments and Contingencies
Under agreements with former doctor shareholders of Syntera, our
practice management company that was merged with FemPartners, we agreed
to exchange their shares in Syntera for the common stock of American
Physicians, or cash, if the Syntera shares did not become publicly
traded. Through December 31, 2001 we paid approximately $2,488,000 in
cash related to these agreements and have recorded a liability of
$510,000 as of December 31, 2001 to complete the remaining exchanges.
We satisfied this final liability under the agreements using cash in
March 2002.
Rent expense under all operating leases for the years ended December
31, 2001 and 2000 was $246,000 and $160,000, respectively. Future
minimum payments for leases that extend for more than one year were
$736,000; $740,000; $670,000; $613,000 and $460,000 for 2002, 2003,
2004, 2005 and 2006, respectively.
We have extended various lines of credit to Uncommon Care. See Note 13
to these consolidated financial statements.
We have guaranteed a loan in the maximum amount of $70,000 for a
director, William Searles. The guarantee is collateralized by Mr.
Searles' options to purchase American Physicians and Prime Medical
shares as well as Mr. Searles' common stock interest in Uncommon Care.
At December 31, 2001 the loan was in the amount of $35,000. The loan
was paid in full subsequent to year end.
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 financial condition.
A-18
(9) Income Taxes
We file a consolidated tax return. Income tax expense (benefit)
consists of the following:
Year Ended December 31,
---------------------------------
2001 2000
---- ----
(Restated)
Continuing Operations
Federal
Current $(694,000) $(680,000)
Deferred (330,000) (2,064,000)
State 72,000 52,000
Discontinued Operations 727,000 354,000
--------- -------
$(225,000) $(2,338,000)
========== ===========
A reconciliation of expected income tax expense (benefit) (computed by
applying the United States statutory income tax rate of 34% to earnings
(loss) from continuing operations before income taxes to tax benefit in
the accompanying consolidated statements of operations follows:
Year Ended December 31,
-----------------------------------
2001 2000
---- ----
(Restated)
Expected federal income tax
benefit fromoperations $(1,001,000) $(2,771,000)
State taxes 48,000 34,000
Other, net 1,000 45,000
---------- -----------
$ (952,000) $(2,692,000)
The tax effect of temporary differences that gives rise to significant
portions of deferred tax assets and deferred tax liabilities at
December 31, 2001 and 2000 are presented below:
Year Ended December 31,
-----------------------------
2001 2000
---- ----
(Restated)
Deferred tax assets:
Net operating loss carryforwards $110,000 $110,000
Accrued expenses 227,000 50,000
Accounts receivable, principally due
to allowance for doubtful accounts 16,000 28,000
Market value allowance -- 17,000
Other investments 919,000 2,801,000
Difference in basis of investment
in subsidiary 51,000 --
Sales/Leaseback deferred income 1,073,000 --
Other 33,000 --
--------- ---------
A-19
Total gross deferred tax assets 2,429,000 3,006,000
Less valuation allowance (110,000) (110,000)
--------- ---------
Deferred tax assets-net of valuation
allowance 2,319,000 2,896,000
--------- ---------
Deferred tax liabilities:
Investment in equity investments due
to use of equitymethod for financial
reporting (528,000) (1,684,000)
Deferred income for tax purposes (26,000) (26,000)
Difference in basis of investment in
subsidiary -- (163,000)
Capitalized expenses, principally due to
deductibility for tax purposes (32,000) (44,000)
-------- ----------
Total gross deferred tax liabilities (586,000) (1,917,000)
-------- ----------
Net deferred tax asset $ 1,733,000 $ 979,000
========== ==========
The net change in the total valuation allowance for the year ended
December 31, 2000 was a decrease of $62,000. In assessing the
realizability of deferred tax assets, management considers whether it
is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income
over the periods which the deferred tax assets are deductible,
management believes it is more likely than not that we will realize the
benefits of these deductible differences net of the existing valuation
allowance at December 31, 2001.
(10) 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. Employees
may defer up to 15% (not to exceed $10,500 in 2001) of their annual
compensation under the plan. We may, at our discretion, contribute up
to 200% of the employees' deferred amount. For the years ended December
31, 2001 and 2000, our contributions aggregated $88,000 and $122,000,
respectively.
(11) 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.
A-20
(11) Stock Options, continued
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 and 2001, provides for the issuance of up
to 1,400,000 shares of common stock to our directors and our key
employees.
The exercise price for each non-qualified option share is determined by
the Compensation Committee of the Board of Directors ("the Committee").
The exercise price of a qualified incentive stock option has to be at
least 100% of the fair market value of such shares on the date of grant
of the option. Under the Plans, option grants are limited to a maximum
of ten-year terms; however, the Committee has issued all currently
outstanding grants with five-year terms. The Committee also determines
vesting for each option grant and substantially all outstanding options
vest in three approximately equal annual installments beginning one
year from the date of grant.
We have adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("Statement 123"), but apply Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
for our stock option plans. No compensation expense from stock-based
compensation awards was recognized in 2001 or 2000. If we had elected
to recognize compensation expense for options granted based on the fair
value at the grant dates, consistent with Statement 123, net income and
earnings per share would have changed to the pro forma amounts
indicated below:
Year Ended December 31,
--------------------------------
2001 2000
----- -----
(Restated)
Net loss as reported $ (578,000) $ (4,774,000)
Pro forma net loss (804,000) (5,192,000)
Pro forma loss per share
- basic (0.34) (2.09)
- diluted (0.34) (2.09)
The fair value of the options used to compute the pro forma amounts is
estimated using the Black Scholes option-pricing model with the
following assumptions:
2001 2000
---- ----
Risk-free interest rate 4.45% 6.00%
Expected holding period 3.90 years 3.90 years
Expected volatility .798 .653
Expected dividend yield -0- -0-
A-21
(11) 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, 2001 and
2000.
Year Ended December 31,
---------------------------------------------------
2001 2000
--------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- ---------- ---------- ----------
Balance at January 1 1,151,000 $5.04 1,282,000 $6.09
Options granted 134,000 2.25 240,000 2.14
Options forfeited/expired 497,000 6.70 371,000 6.78
Balance at December 31 788,000 3.45 1,151,000 5.04
======= ==== ========= ====
Options exercisable 455,000 4.19 719,000 $5.77
======= ==== ========= =====
The weighted average fair value of Company stock options, calculated
using the Black Scholes option pricing model, granted during the years
ended December 31, 2001 and 2000 is $1.36 and $1.15 per option,
respectively.
The following table summarizes the Company's options outstanding and
exercisable options at December 31, 2001:
Stock Options Stock Options
Outstanding Exercisable
------------------------------------------------ ------------------------------------
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
--------------- ------ ---- ----- ------ -----
$1.50 to $3.50 339,000 4.1 years $ 2.05 73,000 $ 2.07
$3.51 to $5.50 380,000 2.3 years $ 4.07 313,000 $ 4.08
$5.51 to $7.88 69,000 0.9 years $ 6.93 69,000 $ 6.93
------- -------
Total 788,000 455,000
======= =======
(12) Discontinued Operations
Summary operating data for APS Realty is as follows:
Year Ended December 31,
-----------------------
2001 2000
---- ----
Rent Revenues $677 $784
Expenses (467) (515)
Gain on building sale 1,927 771
----- -----
Net Income $ 2,137 $ 1,040
===== =====
A-22
(12) Discontinued Operations, continued
In November, 2001 we sold all of the remaining 45,000 square feet of
condominium space we owned in an office project located in Austin,
Texas to our affiliate, Prime Medical. In conjunction with the sale we
leased back approximately 23,000 square feet that housed our operations
prior to the sale. Our wholly-owned subsidiary, APS Realty, which
formerly owned this office space and leased space to us, our
subsidiaries, affiliates and unaffiliated parties, was subsequently
dissolved. As a result there are no corresponding assets or liabilities
related to discontinued operations as of December 31, 2001. Gain on the
sale amounted to approximately $5.1 million, of which $1.9 million was
recognized in 2001. Deferred income of approximately $2.4 million was
recorded and will be recognized monthly over the next five years. In
addition, 15% of the gain ($0.76 million) related to our 15% ownership
in the purchaser, was deferred as we accounted for Prime Medical using
the equity method of accounting as of and for the year ended December
31, 2001. A gain on sale to an unrelated party was also recognized in
2000 in the amount of $771,000.
(13) Investment in Affiliates
On October 12, 1989, we purchased 3,540,000 shares (42%) of the common
stock of Prime Medical. Prime Medical provides non-medical management
services to lithotripsy centers, operates refractive surgery centers
and manufactures mobile medical specialty units. In conjunction with
the acquisition of additional lithotripsy operations in June 1992,
October 1993, and May 1996, the outstanding shares of Prime Medical
increased. These increases, the sale of Prime Medical shares owned by
us under an option agreement, the repurchase by Prime Medical of its
own shares, and the exchange of Prime Medical shares for our common
stock, in the aggregate, have reduced our ownership to approximately
15% of the outstanding common stock of Prime Medical at December 31,
2001.
During 2001 and 2000, our investment in Prime Medical was accounted for
using the equity method as we continued to exercise significant
influence over operating and financial policies, primarily through the
board of directors and senior officers. Three of Prime Medical's six
member board were also members of our board during 2001. Mr. Kenneth S.
Shifrin is CEO of the Company and chairman of the board of both
companies as of and for the year ended December 31, 2001. Mr. Searles
is a director of both companies. We continued to be Prime Medical's
largest shareholder in 2001. The 2,343,803 shares of Prime Medical
common stock held by us had an approximate market value of $11,349,000
(carrying amount of approximately $11,459,000) at December 31, 2001
based on the market closing price of $4.84 per share. As mentioned
previously in this report, we will no longer account for our investment
in Prime Medical using the equity method because: (1) in December 2001,
Prime Medical's CEO, Brad Hummel, resigned from our board of directors;
(2)in January 2002, Kenneth S. Shifrin, the Company's Chairman and CEO,
stepped down from day-to-day operations as Executive Chairman of the
Board of Prime Medical, but will continue to serve as non-executive
Chairman; and (3) from January to March 2002, we sold 1,570,000 shares
of Prime Medical reducing our ownership percentage to slightly less
than 5%.
A-23
(13) Investment in Affiliates, continued
The condensed balance sheets and statements of operations for Prime
Medical follows (in thousands):
Condensed balance sheets at December 31, 2001 and 2000:
------------------------------------------------------
2001 2000
---- ----
Current assets $58,955 $61,271
Long-term assets 192,828 214,947
------- -------
Total assets $ 251,783 $ 276,218
========= =========
Current liabilities $28,350 $23,154
Long-term liabilities 137,957 153,273
Shareholders' equity 85,476 99,791
------- ------
Total liabilities and equity $ 251,783 $ 276,218
======== ========
Condensed statements of operations for the years ended
December 31, 2001 and 2000
-------------------------------------------------------
2001 2000
---- ----
Total revenue $ 154,868 $ 130,695
========= ========
Net income (loss) $ (14,465) $ 10,657
========= ========
On January 1, 1998 we invested approximately $2,078,000 in the
convertible preferred stock of Uncommon Care and have extended three
lines of credit totaling $4,850,000. Uncommon Care is a developer and
operator of dedicated Alzheimer's care facilities. The preferred shares
we own are convertible into approximately a 34% common stock interest
in the equity of Uncommon Care on a fully converted basis. In 2001 we
received common shares amounting to an additional 4% common stock
interest as payment in kind for interest on our lines of credit. Our
investment entitles us to vote in certain instances and to
elect one of the three members of the board of directors of Uncommon
Care. In addition, pursuant to a shareholders agreement between
Uncommon Care and its shareholders, one of the directors elected by the
holders of the preferred stock must consent to Uncommon Care's taking
certain important corporate actions specified in the shareholders
agreement. The lines of credit extended to Uncommon Care was their sole
source of liquidity during 2001. The combination of board
representation, percentage ownership and financial backing gives us
significant influence over the operating and financing policies of
Uncommon Care. As a result, we account for this investment on the
equity method.
We have extended three lines of credit to Uncommon Care. Amounts
outstanding under these lines of credit at December 31, 2001 and 2000
are as follows (in thousands):
A-24
(13) Investment in Affiliates, continued
2001 2000
---- ----
Revolving Line of Credit: This note is unsecured with a maximum of $1,200,000. The note
is interest only at 10%, payable semi-annually. The note matured September 30, 2001, but
was extended until April 30, 2003. Maturity may be accelerated if the borrower obtains
specific levels of equity financing. The borrower may at that time pay off the loan in
full or convert it into non-voting preferred stock of the borrower. In the event of
non-payment at maturity, the lender may elect to convert the outstanding balance into
capital stock of the borrower. $810 $325
Revolving Line of Credit: This note is unsecured with a maximum of $1,250,000. The note
is interest only at 12%, payable semi-annually. The note matured April 30, 2000, but was
extended until April 30, 2003. Maturity may be accelerated if the borrower obtains
specific levels of equity financing. The borrower may at that time pay off the loan in
full or convert it into non-voting preferred stock of the borrower. In the event of
non-payment at maturity, the lender may elect to convert the outstanding balance into $1,250 $1,250
capital stock of the borrower.
Revolving Line of Credit: This note is secured by substantially all of the assets of
Uncommon Care and is subordinated to bank loans for various real estate purchases. The
maximum allowed on this note is $2,400,000. This note is interest only at 10%, payable
quarterly. Any outstanding principal is due June 30, 2005. $2,400 $2,400
During 2001 we agreed to modify the terms of the foregoing notes. For
the period July 1, 2001 through June 30, 2002 the interest rate is to
be 4% and payments are to be paid in-kind (PIK) in the form of Uncommon
Care common stock at $0.57 per share. Additionally, the PIK stock may
be repurchased by Uncommon Care through June 30, 2004 at a price of
$.64 per share. We agreed to these modified terms to improve Uncommon
Care's liquidity and to assist it in complying with the terms of its
bank covenants. PIK payments during 2001 increased our ownership in
Uncommon Care from 34% to 38% on a fully converted basis.
Various officers and directors of the company participated in the
$2,400,000 line of credit to Uncommon Care. For financial purposes this
participation has been treated as a secured borrowing. In the
aggregate, these officers and directors contributed approximately
$259,000 to fund a 10.8% interest in the loan. They participate in the
loan under the same terms as the Company.
We have applied the guidance of EITF 99-10, specifically the percentage
of ownership method, in applying the equity method to its investment in
Uncommon Care. Uncommon Care's common stock equity had been eliminated
by losses prior to our investment and, accordingly, we have recognized
100% of the losses of Uncommon Care based on our ownership of 100% of
Uncommon Care's preferred stock equity and subordinated debt with
Uncommon Care. During 2001 our total basis in investment and advances
to Uncommon Care was reduced to zero.
A-25
(13) Investment in Affiliates, continued
The condensed balance sheets and statements of operations for Uncommon Care
follows (in thousands):
Condensed balance sheets at December 31, 2001 and 2000:
------------------------------------------------------
2001 2000
---- ----
Current assets $ 148 $ 174
Long-term assets 14,544 15,336
------ ------
Total assets $ 14,692 $ 15,510
======== ========
Current liabilities $ 1,051 $ 922
Long-term liabilities 18,502 18,114
Shareholders' deficit (4,861) (3,526)
--------- -------
Total liabilities and equity $14,692 $15,510
======= =======
Condensed statements of operations for the years ended
December 31, 2001 and 2000
------------------------------------------------------
2001 2000
---- ----
Total revenue $ 6,550 $ 4,222
======= =======
Net loss $(1,440) $(2,286)
======= =======
(14) Segment Information
Our segments are distinct by type of service provided. Each segment has
its own management team and separate financial reporting. Our Chief
Executive Officer allocates resources and provides overall management
based on the segments' financial results.
Our financial services segment includes brokerage and asset management
services to individuals and institutions.
Our insurance services segment includes financial management for an
insurance company that provides professional liability insurance to
doctors.
Our consulting segment includes environmental consulting and
engineering services to private and public institutions.
Corporate is the parent company and derives its income from interest
and investments.
Income from the discontinued real estate segment was derived from the
leasing of and sale of office space.
2001 2000
(Restated)
---- --------
Operating Revenues:
Financial services $13,094,000 $9,962,000
Insurance services 7,289,000 5,692,000
Consulting 2,642,000 2,395,000
Corporate 4,046,000 2,813,000
---------- ---------
$27,071,000 $20,862,000
=========== ===========
A-26
(14) Segment Information, continued
2001 2000
(Restated)
----- --------
Reconciliation to Consolidated Statements
of Operations:
Total segment revenues $27,071,000 $20,862,000
Less: intercompany dividends (3,951,000) (2,515,000)
----------- -----------
Total Revenues $23,120,000 $18,347,000
=========== ===========
Operating Profit (Loss):
Financial services $1,571,000 $812,000
Insurance services 1,371,000 495,000
Consulting (462,000) (13,000)
Corporate 1,879,000 (6,422,000)
----------- -----------
$4,359,000 $(5,128,000)
=========== ===========
Reconciliation to Consolidated Statements
of Operations:
Total segment operating loss 4,359,000 (5,128,000)
Less: intercompany dividends (3,951,000) (2,515,000)
----------- -----------
Operating loss $408,000 $(7,643,000)
Equity in loss of affiliates (3,191,000) (467,000)
Loss from continuing operations before
income taxes and minority interests (2,783,000) (8,110,000)
Income tax benefit (952,000) (2,692,000)
Minority interests 157,000 42,000
--------- -----------
Loss from continuing operations (1,988,000) (5,460,000)
Net profit from discontinued operations,
net of income tax 1,410,000 686,000
--------- ----------
Net loss $ (578,000) $ (4,774,000)
Identifiable assets:
Financial Services $3,540,000 $2,859,000
Insurance Services 1,620,000 1,428,000
Consulting 738,000 1,039,000
Corporate:
Investment in and advances to equity
method investees 11,459,000 14,374,000
Other 5,062,000 3,351,000
Discontinued Operations -- 1,745,000
---------- -----------
$22,419,000 $24,796,000
Capital expenditures:
Financial Services $43,000 $23,000
Insurance Services 48,000 57,000
Consulting 20,000 3,000
Corporate 81,000 30,000
Discontinued Operations -- 12,000
--------- -----------
$192,000 $125,000
A-27
(14) Segment Information, continued
2001 2000
(Restated)
---- --------
Depreciation/amortization expenses:
Financial Services $ 45,000 $ 66,000
Insurance Services 57,000 70,000
Consulting 75,000 79,000
Corporate 68,000 74,000
Discontinued Operations 67,000 84,000
------ ------
$312,000 $373,000
Revenues attributable to customers generating greater than 10% of the
consolidated revenues of the Company:
Insurance services
Company A $2,198,000 $2,103,000
At December 31, 2001 we had long-term contracts with company A and were
therefore not vulnerable to the risk of a near-term severe impact from
a reasonably possible loss of the revenue.
Operating profit (loss) is operating revenues less related expenses and
is all derived from domestic operations. Identifiable assets are those
assets that are used in the operations of each business segment (after
elimination of investments in other segments). Corporate assets consist
primarily of cash and cash investments, notes receivable and
investments in affiliates and preferred stock.
(15) Earnings Per Share
Basic earnings per share are based on the weighted average shares
outstanding without any dilutive effects considered. Diluted earnings
per share reflects dilution from all contingently issuable shares,
including options and convertible debt. A reconciliation of income and
average shares outstanding used in the calculation of basic and diluted
earnings per share from continuing and discontinued operations follows:
A-28
For the Year Ended December 31, 2001
-------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Loss from continuing operations $(1,988,000)
Discontinued operations, net
of tax 1,410,000
Basic EPS
Loss available to common
stockholders (578,000) 2,343,000 $(0.25)
======
Effect of Dilutive Securities -- --
---------- ---------
Diluted EPS
Loss available to common stockholders
and assumed conversions $(578,000) 2,343,000 $(0.25)
========= ========= ======
For the Year Ended December 31, 2000 (Restated)
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Loss from continuing operations $(5,460,000)
Discontinued operations, net
of tax 686,000
Basic EPS
Loss available to common
stockholders (4,774,000) 2,490,000 $(1.92)
=======
Effect of Dilutive Securities -- --
---------- ---------
Diluted EPS
Loss available to common stockholders
and assumed conversions $ (4,774,000) 2,490,000 $(1.92)
============ ========= =======
A-29
(15) Earnings Per Share, continued
Unexercised employee stock options to purchase 788,000 and 1,147,000
shares of our common stock as of December 31, 2001 and 2000,
respectively, and treasury shares of 386,000 as of December 31, 2001
and 2000, which were designated for possible use in the Share Exchange
Agreements described in Note 8, were not included in the computations
of diluted EPS. These were not included because the options' exercise
prices were greater than the average market price of our common stock
during the respective periods or because the effect of including the
contingently issuable options would decrease the loss per share for the
respective periods.
(16) Other Investments
Other investments consists of an investment in FemPartners, Inc.
totaling $68,000 and $182,000 at December 31, 2001 and 2000,
respectively. The investment in FemPartners as of December 31, 2000
reflects the effect of the restatement discussed in Note 21.
In December 2001 we sold approximately 60% of our investment in
FemPartners to a former officer for $37,500.
Under agreements with former doctor shareholders of Syntera, our
practice management company that was merged with FemPartners, we agreed
to exchange their shares in Syntera for the common stock of American
Physicians, or cash, if the Syntera shares did not become publicly
traded. Through December 31, 2001 we paid approximately $2,488,000 in
cash related to these agreements and recorded a liability of $510,000
to complete the remaining exchanges. We satisfied this final liability
under the agreements for cash in March 2002.
(17) Shareholders' Equity
The following table presents changes in shares outstanding for the
period from December 31, 1999 to December 31, 2001:
Shares
Outstanding
----------------
Balance December 31, 1999 2,667,233
Treasury stock purchases (327,000)
Treasury stock sales 19,000
----------------
Balance December 31, 2000 2,359,233
Treasury stock purchases and retirement (2)
----------------
Balance December 31, 2001 2,359,231
================
A-30
(18) Goodwill
In connection with our acquisition of Eco-Systems, a wholly owned subsidiary, in
1999, we recorded goodwill with an unamortized balance of $443,000 as of
December 31, 2000. During 2001, we recognized $51,000 in amortization expense
related to the goodwill. In accordance with FASB Statement No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, we assessed the goodwill for impairment in 2001. As of December 31, 2001,
the review indicated that the goodwill was impaired and an impairment charge of
$391,000 was recorded to write off the remaining unamortized amount.
(19) Quarterly Results (Unaudited)
Quarter to quarter comparisons of results of operations have been and may be
materially impacted by bond market conditions, whether or not there are profits
at the medical malpractice insurance company which we manage and whose profits
we share, and by demand for environmental consulting services. We believe that
the historical pattern of quarterly sales and income as a percentage of the
annual total may not be indicative of the pattern in future years. The following
tables set forth selected quarterly consolidated statements of operations
information for the years ended December 31, 2001 and 2000:
(In thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- --------
2001
Revenues $5,588 $5,995 $6,268 $5,269
Earnings (loss) from continuing operations 84 251 82 (2,405)
Discontinued operations, net of taxes 41 34 35 1,300
Net earnings (loss) 125 285 117 (1,105)
Basic earnings (loss) per share:
From continuing operations $0.04 $0.11 $0.03 $(1.03)
Discontinued operations, net of taxes 0.02 0.01 0.01 0.55
Net earnings (loss) $0.05 $0.12 $0.05 $(0.47)
Diluted earnings (loss) per share:
From continuing operations $0.03 $0.09 $0.03 $(1.03)
Discontinued operations, net of taxes 0.01 0.01 0.01 0.55
Net earnings (loss) $0.05 $0.10 $0.04 $(0.47)
A-31
First Second Third Fourth
Quarter Quarter Quarter Quarter
(Restated)
(Note 21)
------- ------- ------- --------
2000
Revenues $6,289 $3,168 $4,630 $4,260
Earnings (loss) from continuing operations 129 (264) (124) (5,201)
Discontinued operations, net of taxes 49 563 39 35
Net earnings (loss) 178 299 (85) (5,166)
Basic earnings (loss) per share:
From continuing operations $0.05 $(0.10) $(0.05) $(2.09)
Discontinued operations, net of taxes 0.02 0.22 0.01 0.01
Net earnings (loss) $0.07 $0.11 $(0.03) $(2.07)
Diluted earnings (loss) per share:
From continuing operations $0.05 $(0.10) $(0.05) $(2.09)
Discontinued operations, net of taxes 0.02 0.21 0.01 0.01
Net earnings (loss) $0.07 $0.11 $(0.03) $(2.07)
Results for the fourth quarter of 2001 include our equity percentage of the non-
recurring charges at Prime Medical totaling $3.6 million and a goodwill
impairment at our environmental consulting subsidiary totaling $392,000.
Partially offsetting these charges was a $1.9 million gain on the sale of rental
property. Results for the fourth quarter of 2000 (as restated) include an
impairment charge of $6.7 million to our investment in FemPartners. See Note 21
for additional information. Also $560,000 was charged to operations from certain
working capital reserve requirements in our merger agreement with FemPartners.
Note: All the items mentioned in this paragraph are stated on a pre-tax basis
whereas the table shows results net of tax.
A-32
(20) Subsequent Events (Unaudited)
In February, 2002, we purchased all of the 111,000 shares of American Physicians
Service Group (AMPH) common stock held by our affiliate, Prime Medical. Of this,
16,000 shares were contributed to our 401(k) plan as a matching contribution.
The remaining 95,000 shares were recorded as Treasury Stock with the effect of
reducing the total number of shares outstanding from 2,359,231 at December 31,
2001 to 2,264,231 at February 28, 2002.
In February and March, 2002 we sold a total of 1,570,000 shares of Prime Medical
common stock which resulted in lowering our percentage ownership of Prime
Medical from approximately 15% to slightly less than 5%.
(21) Restatement
The accompanying consolidated financial statements as of December 31, 2000
and for the year then ended, have been restated to reflect an additional
impairment of our investment in FemPartners, Inc. common stock.
In our previously reported consolidated financial statements as of December 31,
2000 and for the year then ended we recorded an impairment charge of
approximately $1.6 million relating to our investment in FemPartners, Inc., a
privately held company, based upon an internal valuation. In December 2001,
following our inability to find a buyer for this investment and the subsequent
sale of approximately 60% of our holdings in FemPartners at a de minimus amount
to a former officer of the Company, we engaged a valuation consultant to provide
an independent valuation of our holdings in FemPartners at December 31, 2000 and
2001. The results of that valuation indicated that our sale price in December
2001 approximated fair market value and that this fair market value had not
changed substantially from December 31, 2000. Consequently, the 2000
consolidated financial statements have been restated to reflect an additional
$5.1 million impairment loss on this investment based on the results of this
valuation.
A summary of the effects of these restatements on the accompanying consolidated
financial statements and unaudited financial information for the fourth quarter
of 2000 is as follows:
(In thousands)
December 31, 2000
-------------------
As Previously
Reported As Restated
------------- --------------
Assets $ 29,426 $ 24,796
Liabilities 12,692 11,433
Minority Interest 111 111
Shareholders' equity 16,623 13,252
A-33
For the Three Months
Ended For the Year Ended
December 31, 2000 December 31, 2000
---------------------------------- --------------------------------------
(Unaudited)
As Previously As Previously
Reported As Restated Reported As Restated
------------- ------------- ------------- --------------
Revenues $4,260 $4,260 $18,347 $18,347
Operating loss (2,354) (7,462) (2,535) (7,643)
Equity in loss of unconsolidated
affiliates (378) (378) (467) (467)
Loss from continuing operations (1,829) (5,201) (2,088) (5,460)
Net profit from discontinued
operations 35 35 686 686
-------- -------- ------- -------
Net loss $(1,794) $(5,166) $(1,402) $(4,774)
======== ======== ======= =======
Loss per common share:
Basic:
Continuing operations $(0.73) $(2.09) $(0.84) $(2.19)
Discontinued operations 0.01 0.01 0.28 0.28
------- ------- ------- -------
Net loss $(0.72) $(2.07) $(0.56) $(1.92)
======= ======= ======= =======
Diluted:
Continuing operations $(0.73) $(2.09) $(0.84) $(2.19)
Discontinued operations 0.01 0.01 0.28 0.28
------- ------- ------- -------
Net loss $(0.72) $(2.07) $(0.56) $(1.92)
======= ======= ======= =======
A-34