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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
---------------
FORM 10-KSB
MARK ONE:
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
__________ to __________
Commission File Number 0-11453
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AMERICAN PHYSICIANS SERVICE GROUP, INC.
(Name of small business issuer in its charter)
TEXAS 75-1458323
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
1301 CAPITAL OF TEXAS HIGHWAY 78746
AUSTIN, TEXAS (Zip Code)
(Address of principal executive offices)
Issuer's telephone number:
(512) 328-0888
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
None None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $.10 PAR VALUE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form
10-KSB or any amendment to this Form 10-KSB ____
State issuer's revenues for its most recent fiscal year. $20,490,000 for
the fiscal year ended December 31, 1995.
State the aggregate market value of the voting stock held by non-affiliates
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, 1996: $32,017,632
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
NUMBER OF SHARES OUTSTANDING AT
TITLE OF EACH CLASS MARCH 25, 1996
------------------- --------------
Common Stock, $.10 par value 4,002,204
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's definitive proxy material for the 1996
annual meeting of shareholders are incorporated by reference into Part III of
the Form 10-KSB.
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AMERICAN PHYSICIANS SERVICE GROUP, INC.
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
American Physicians Service Group, Inc. (the "Company"), through its
subsidiaries, provides: financial services that include management of
malpractice insurance companies and brokerage and investment services to
individuals and institutions; and computer systems and software packages to
medical clinics, physician-hospital organizations, and medical schools. The
Company also owns space in the office building which serves as its headquarters.
Through its real estate subsidiary it leases space that is surplus to its needs.
The Company owns 3,064,000 shares of common stock of Prime Medical
Services, Inc. ("Prime Medical"), representing at March 15, 1996 approximately
21% of the outstanding shares of common stock of Prime Medical. Three of Prime
Medical's nine directors are members of the Company's board of directors. The
Company records its pro-rata share of Prime Medical's results on the equity
basis. Prime Medical is the third largest operator of lithotripters in the
United States, currently servicing 160 hospitals in 22 states. Lithotripsy is a
non-invasive method of treating kidney stones through the use of shock waves.
The common stock of Prime Medical is traded on the NASDAQ National Market under
the symbol "PMSI." Prime Medical is a Delaware corporation which is required to
file annual, quarterly and other reports and documents with the Securities and
Exchange Commission, which reports and documents contain financial and other
information regarding Prime Medical. The summary information regarding Prime
Medical contained herein is qualified in its entirety by reference to such
reports and documents. Such reports and documents may be examined and copies
may be obtained from the offices of the Securities and Exchange Commission.
Three of the Company's five directors are members of Prime Medical's board of
directors.
The Company was organized in October 1974 under the laws of the State of
Texas. The Company maintains its principal executive office at 1301 Capital of
Texas Highway, Suite C-300, Austin, Texas 78746, and its telephone number is
(512) 328-0888. Unless the context otherwise requires, all references herein to
the "Company" shall mean American Physicians Service Group, Inc. and its
subsidiaries (other than Prime Medical).
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The Company had previously published Spanish language buying guides of
U.S. businesses for distribution in Mexico. This business segment had been
unprofitable for the Company. In 1995 substantially all of the assets of this
business were sold. There was no material financial impact on the Company.
FINANCIAL SERVICES
The Company's financial services consist of management services to a
medical malpractice insurance company by APS Insurance Services, Inc., a wholly-
owned subsidiary of the Company ("Insurance Services"), and brokerage and
investment services to individuals and institutions performed by APS Financial
Corporation, a wholly-owned subsidiary of the Company ("APS Financial").
Management of Medical Malpractice Insurance Company
---------------------------------------------------
Insurance Services, through its wholly-owned subsidiary APS Facilities
Management, Inc. ("FMI"), provides management services to a medical malpractice
insurance company, which is a reciprocal insurance exchange. A reciprocal
insurance exchange is an organization which sells insurance only to its
subscribers, who pay, in addition to their annual insurance premiums, a
contribution to the exchange's surplus. Such exchanges generally have no paid
employees but instead enter into a contract with an "attorney-in-fact," a firm
that provides all management and administrative services for the exchange. As
the attorney-in-fact for American Physicians Insurance Exchange ("APIE"), FMI
receives a percentage of the earned premiums of APIE. The amount of these
premiums can be adversely affected by competition. Substantial underwriting
losses, which might result in a curtailment or cessation of operations by APIE,
would also adversely affect FMI's revenue. To limit possible underwriting
losses, APIE currently reinsures its risk in excess of $250,000 per medical
incident. APIE offers medical professional liability insurance for doctors and
hospitals in Texas, Arkansas and Arizona. FMI's assets are not subject to any
insurance claims by policyholders of APIE.
FMI organized APIE and has been its exclusive manager since its inception
in 1975. The management agreement between FMI and APIE basically provides for
full management by FMI of the affairs of APIE under the direction of APIE's
doctor Board of Directors. Subject to the direction of this Board, FMI sells
and issues policies, investigates, settles and defends claims, and otherwise
manages APIE's affairs. In consideration for performing its services, FMI
receives a percentage fee based on APIE's earned premiums (before payment of
reinsurance premiums). FMI pays all salaries and personnel related expenses,
rent and office operations costs, data processing costs and many other operating
expenses of APIE. APIE is responsible for the payment of all claims, claims
expenses, peer review expenses, directors' fees and expenses, legal, actuarial
and auditing expenses, its taxes and certain other specific expenses. Under the
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agreement, FMI's authority to act as manager of the exchange is automatically
renewed each year unless a majority of the subscribers to APIE terminates this
agreement by reason of an adjudication that FMI has been grossly negligent, has
acted in bad faith or with fraudulent intent or has committed willful
misfeasance in its management activities.
During 1995, approximately 26% of the Company's revenues from continuing
operations and substantially all of FMI's revenues were received pursuant to the
agreement with APIE discussed above. Termination of the agreement with APIE
would have a material adverse effect on the Company.
APIE is a reciprocal insurance exchange authorized to do business in the
states of Texas and Arkansas. APIE is also a surplus lines carrier in Arizona.
APIE specializes in writing medical professional liability insurance for health
care providers and also writes professional liability insurance for hospitals.
The insurance written in Texas is primarily through purchasing groups, which
insurance is not subject to certain rate and policy form regulations issued by
the Texas Department of Insurance. Applicants for insurance coverage are
reviewed based on the nature of their practices, prior claims records and other
underwriting criteria. APIE is the third largest medical professional liability
insurance company in the State of Texas and is one of the largest in the State
of Arkansas. APIE is the only insurance company based in Texas that is wholly-
owned by its subscriber physicians.
Generally, medical professional liability insurance is offered on either a
"claims made" basis or an "occurrence" basis. "Claims made" policies insure
physicians only against claims actually made during the period covered by the
policy. "Occurrence" policies insure physicians against claims based on
occurrences during the policy period regardless of when the claim is actually
made. APIE offers only a "claims made" policy but provides for an extended
reporting option upon termination. APIE reinsures 100% of all coverage per
medical incident between $250,000 and $1,000,000, primarily through Lloyds of
London and certain other domestic and international insurance companies.
The following table presents selected financial and other data for APIE.
APIE has a contract to pay management fees to FMI based on APIE's earned
premiums before reinsurance. The fee percentage is 13.5% with the provision
that any profits of APIE will be shared equally with FMI so long as the total
reimbursement (fees and profit sharing) do not exceed a cap based on premium
levels. No profit sharing fee was received in 1993. In 1995, 1994, 1992, and
1991, management fees attributable to profit sharing were $700,000, $1,107,000,
$1,678,000, and $841,000, respectively.
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<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(thousands, except for number of insureds)
Earned premiums before reinsurance premiums........... $28,026 $27,934 $29,205 $30,261 $ 30,857
Total assets.......................................... 88,008 96,343 94,019 98,302 101,251
Total surplus......................................... 8,046 8,209 9,196 9,315 9,402
Management fees to FMI................................ 4,301 (1) 5,397 (2) 3,790 (3) 4,703 (5) 5,010 (7)
Number of insureds................................... 4,859 5,154 3,575 (4) 3,216 (6) 3,226
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</TABLE>
(1) Gross fee of $4,624 less tax refund of $323 attributable to APIE's
association with FMI.
(2) Gross fee of $5,450 less tax refund of $53 attributable to APIE's
association with FMI.
(3) Gross fee of $3,942 less tax refund of $152 attributable to APIE's
association with FMI.
(4) The decrease in the number of insureds primarily resulted from the
expiration in 1993 of APIE's contract with the University of Arkansas
Medical School.
(5) Gross fee of $5,193 less tax credit of $490 attributable to APIE's
association with FMI.
(6) The decrease was the result of APIE's decision to raise premiums
on certain unprofitable specialties. Included in the totals are
doctors for which APIE provides reinsurance through a relationship
with another malpractice insurance company.
(7) Includes $676 in fees from other carriers directly related to
APIE's controlled business.
Management of Lawyers Professional Liability Company
----------------------------------------------------
Late in 1994 PLE, Inc. ("PLE"), a wholly-owned subsidiary of Insurance
Services, was formed to manage the operations of the newly formed Lawyers
Professional Liability Exchange ("LPLE"). In late 1995, the decision was made
to discontinue the operations of LPLE. Such decision will not have a
significant effect on the ongoing revenues or income of the Company as PLE's
results of operations in 1995 and 1994 were immaterial.
Brokerage and Investment Services
---------------------------------
APS Financial, a fully licensed broker/dealer, provides brokerage and
investment services to individual and institutional clients. APS Financial
provides complete portfolio analysis and management services, primarily in the
fixed-income area, to insurance companies, banks and savings and loan
associations.
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APS Financial's employees have extensive investment expertise and
knowledge. APS Financial is a member of the National Association of Securities
Dealers, Inc. ("NASD") and the Securities Investor Protection Corporation and,
in addition, is licensed in 44 states. Six states and the District of Columbia
were dropped in 1995 as the volume did not justify the licensing fee.
Retail commissions are charged on both exchange and over-the-counter
("OTC") transactions generally in accordance with a schedule which APS Financial
has formulated in accordance with NASD guidelines. When OTC transactions are
executed by APS Financial as a dealer, APS Financial receives, in lieu of
commission, mark-ups or mark-downs.
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. These rules, which are designed to
measure the financial soundness and liquidity of broker-dealers, specify minimum
net capital requirements. Since the Company is not itself a registered broker-
dealer, it is not subject to these rules. However, APS Financial is subject to
these rules. Compliance with applicable net capital rules could limit
operations of APS Financial such as trading activities that require the use of
significant amounts of capital. A significant operating loss or an
extraordinary charge against net capital could adversely affect the ability of
APS Financial to expand or even maintain its present levels of business. At
December 31, 1995, APS Financial was in compliance with all net capital
requirements.
APS Financial clears and executes its transactions through Southwest
Securities, Inc. ("Southwest") on a fully disclosed basis. Southwest also
processes orders and floor reports, matches trades, transmits execution reports
to APS Financial and records all data pertinent to trades. APS Financial pays a
fee based on the number and type of transactions performed by Southwest.
COMPUTER SYSTEMS AND SOFTWARE SALES
APS Systems Inc. ("APS Systems") sells computer systems and software
and has designed the APS Bullet/3000 System specifically for sale to large,
multi-physician medical clinics, medical schools, Physician Hospital
Organizations (PHOs) and other physician networks. The Company also offers
facilities management of the total data processing requirements of these
clinics, schools and networks.
The APS Bullet/3000 System is an extensive practice management system.
The system integrates patient and physician financial, demographic and medical
information into a database that makes information from varied sources available
for on-line inquiry. The system permits users to generate patient scheduling,
patient recalls and to produce a variety of special reports on matters such as
revenues and patient profiles. The system not only produces statements for
direct
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billing to patients, but also prepares forms for filing of insurance claims. A
telecommunication feature developed by APS Systems permits systems users to file
insurance claims through computer link-up directly with the agencies
administering Medicare and Medicaid programs and with Blue Shield and other
insurance companies.
The APS Bullet/3000 System consists of internally developed,
proprietary software. The central processing units and peripherals used in the
systems are provided by Hewlett Packard Company ("HP"). APS Systems resells HP
hardware accompanied by APS Systems' software. While APS Systems provides
support for its software, HP provides hardware maintenance for the HP computers.
In 1993 APS Systems, Inc. announced a strategic business relationship
with AMISYS Managed Care (formerly ADVANTA Systems, Inc.). AMISYS sells
computer systems and software to large managed care organizations (HMOs). In
1994 the companies developed an integration product to link the two systems and
both organizations are joint marketing the products.
The computer industry is characterized by rapid changes in both
hardware and software which require that software programs be continuously
updated, modified, and enhanced in order to stay abreast of state-of-the-art
technology. The products and systems now sold by APS Systems are subject to
technological obsolescence which is characteristic of an industry experiencing
rapidly advancing technology. Based on in-house market research and analysis,
product planning, and customer feedback, APS Systems continuously modifies and
upgrades its software.
The Company believes that APS Systems' software is of a proprietary
nature, but it is possible that users or competitors could copy portions of such
software. In order to protect its software, APS Systems does not sell or
otherwise transfer title to it, but instead licenses its use for a perpetual
period under agreements that restrict its use to a designated site and prohibit
reproduction or disclosure of the software. The Company believes that because
of technological changes in the computer software industry, copyright or patent
protection for its office systems is of lesser significance than factors such as
the skill, knowledge, and experience of APS Systems' personnel and their ability
to develop the software for the systems and to market the systems.
REAL ESTATE
APS Realty, Inc., a wholly-owned subsidiary of the Company ("APS
Realty"), owns condominium space in an office project located in Austin, Texas.
It leases approximately 53% of this space to the Company, its subsidiaries and
Prime Medical. The remainder is leased to unaffiliated parties.
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COMPETITION
APIE competes with numerous insurance companies in Texas and Arkansas,
primarily Medical Protective Insurance Company, St. Paul Fire and Marine
Insurance Company, State Volunteer Mutual Company, Insurance Company of America,
Texas Medical Liability Trust and CNA Insurance Company. Many of these firms
have substantially greater resources than APIE. The primary competitive factor
in selling insurance is a combination of price, terms of the policies offered,
claims and other service and claims settlement philosophy.
APS Financial is also engaged in a highly competitive business. Its
competitors include, with respect to one or more aspects of its business, all of
the member organizations of the New York Stock Exchange and other registered
securities exchanges, all members of the NASD, registered investment advisors,
members of the various commodity exchanges and commercial banks and thrift
institutions. Many of these organizations are national rather than regional
firms and have substantially greater personnel and financial resources than the
Company. Discount brokerage firms oriented to the retail market, including
firms affiliated with commercial banks and thrift institutions, are devoting
substantial funds to advertising and direct solicitation of customers in order
to increase their share of commission dollars and other securities-related
income. In many instances APS Financial is competing directly with such
organizations. In addition, there is competition for investment funds from the
real estate, insurance, banking and thrift industries.
The computer-based management systems business is also highly
competitive. APS Systems competes in this business with numerous large and
small competitors. Many of these firms also have substantially greater
resources than the Company. The primary competitive factors in this business
include price, system reliability and maintainability, applications software
features, delivery times and commitment to service and support.
REGULATION
FMI has received certificates of authority from the Texas and Arkansas
insurance departments, licensing it on behalf of the subscribers of APIE. APIE,
as an insurance company, is subject to regulation by the insurance departments
of the States of Texas and Arkansas. These regulations strictly limit all
financial dealings of a reciprocal insurance exchange with its officers,
directors, affiliates and subsidiaries, including FMI. Premium rates,
advertising, solicitation of insurance, types of insurance issued and general
corporate activity are also subject to regulation by various state agencies.
APS Financial is subject to extensive regulation under both federal
and state laws. The Securities and Exchange Commission ("SEC") is the federal
agency charged with administration of the federal securities laws. Much of the
regulation of broker-dealers, however, has been
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delegated to self-regulatory organizations, principally the NASD and the
national securities exchanges. These self-regulatory organizations adopt rules
(subject to approval by the SEC) which govern the industry and conduct periodic
examinations of member broker-dealers. APS Financial is also subject to
regulation by state and District of Columbia securities commissions.
The regulations to which APS Financial is subject cover all aspects of
the securities business, including sales methods, trade practices among broker-
dealers, uses and safekeeping of customers' funds and securities, capital
structure of securities firms, record-keeping and the conduct of directors,
officers and employees. Additional legislation, changes in rules promulgated by
the SEC and by self-regulatory organizations, or changes in the interpretation
or enforcement of existing laws and rules, may directly affect the method of
operation and profitability of APS Financial. The SEC, self-regulatory
organizations and state securities commissions may conduct administrative
proceedings which can result in censure, fine, suspension or expulsion of APS
Financial, its officers or employees. The principal purpose of regulation and
discipline of broker-dealers is the protection of customers and the securities
markets, rather than protection of creditors and shareholders of broker-dealers.
APS Financial, as a registered broker-dealer and NASD member
organization, is required by federal law to belong to the Securities Investor
Protection Corporation ("SIPC"). When the SIPC fund falls below a certain
minimum amount (as it has done in 1993, 1994 and 1995), members are required to
pay annual assessments in varying amounts not to exceed .5% of their adjusted
gross revenues to restore the fund. This assessment amounted to approximately
$7,300 in 1995, $4,600 in 1994 and $3,500 in 1993. 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.
EMPLOYEES
At March 1, 1996, the Company employed, on a full time basis,
approximately 119 persons, including 54 by Insurance Services, 35 by APS
Systems, 20 by APS Financial, and 10 directly by the Company. The Company
considers its employee relations to be good. None of the Company's employees is
represented by a labor union and the Company has experienced no work stoppages.
ITEM 2. PROPERTIES
APS Realty owns approximately 53,000 square feet of condominium space
in an office project. The Company, its subsidiaries and Prime Medical use
approximately 28,000 square feet of this space as their principal executive
offices, and APS Realty leases the remainder to third parties. The area
available for lease to third parties was 100% occupied as of March 25, 1996.
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FMI leases offices for its operations in San Antonio, Texas and APS
Systems leases offices in Little Rock, Arkansas. The aggregate monthly amount of
those leases is approximately $4,500.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions that have
arisen in the ordinary course of business. The Company believes that the
liability provision in its financial statements is sufficient to cover any
unfavorable outcome related to lawsuits in which it is currently named.
Management believes that liabilities, if any, arising from these actions will
not have a significant adverse effect on the financial condition of the Company.
However, due to the uncertain nature of legal proceedings, the actual outcome of
these lawsuits may differ from the liability provision recorded in the Company's
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table represents the high and low prices of the
Company's Common Stock in the over-the-counter market as reported by the
National Association of Securities Dealers, Inc., Automated Quotations System
for the periods indicated. At March 1, 1996, the Company had approximately 500
shareholders of record.
<TABLE>
<CAPTION>
1995 1994
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High Low High Low
--------- -------- ---------- ---------
<S> <C> <C> <C> <C>
First Quarter $ 2 7/8 $ 2 3/8 $ 2 3/8 $ 1 3/4
Second Quarter 3 7/16 2 11/16 2 1/8 1 1/2
Third Quarter 4 1/2 3 2 3/8 1 13/16
Fourth Quarter 9 7/8 4 2 7/8 1 15/16
</TABLE>
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The Company has no present intention of paying any cash dividends on its Common
Stock in the foreseeable future. It is the present policy of the Board of
Directors to retain all earnings to provide funds for the growth of the Company.
The declaration and payment of dividends in the future will be determined by the
Board of Directors based upon the Company's earnings, financial condition,
capital requirements and such other factors as the Board of Directors may deem
relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY
RESULTS OF OPERATIONS
1995 Compared to 1994
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Revenues from continuing operations in 1995 increased 16% compared to 1994.
In 1995, net income increased 61% and fully diluted earnings per share increased
40% compared to 1994. The reasons for these changes are described below.
Financial Services
Financial services revenues were up 20% in 1995 over 1994. The increase
occurred at the broker dealer, where falling interest rates attracted more bond
buyers. The broker dealer also recorded an inventory profit in 1995 compared to
an equivalent loss in 1994.
Results in this segment can vary from year to year. Insurance management
has a provision in its contract whereby it receives a portion of the managed
insurance company's profits. In the six years under the contract, profit-
sharing has ranged from zero to 13% of the segment's revenues. The broker
dealer, primarily a provider of fixed income securities, is subject to general
market conditions as well as interest rates and is in an industry characterized
by high turnover in top producing brokers. 1995's top producer, accounting for
22% of the segments revenue, has left the firm. Management has been successful
in replacing similar performers in the past, but cannot be assured of doing so.
Computer Systems/Software
Revenues declined 12% compared to 1994. The decrease reflects being in a
later stage of the contracts where lower, but higher margin, revenues from
software and installation were being recognized, as opposed to the hardware
revenue being recognized in 1994. All contracts
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were substantially complete at the end of 1995, compared to a backlog of
approximately $1 million at the end of 1994. A lack of new contracts in 1995
reduced the backlog. The Company continues to actively bid on contracts in a
very competitive market, but cannot predict with certainty its success ratio.
Expenses in 1995 decreased by 14% in 1995 compared to 1994. The
significant decrease was in hardware cost of sales, due to the lower volume of
hardware delivered in 1995. Costs of travel and legal were also reduced in
1995. Partially offsetting these reductions was a 20% increase in personnel-
related expenses.
In 1996, the officer in charge of this segment was accused of a felony
unrelated to the business. He has taken a leave from the Company pending the
outcome of the matter. The duration of the leave and impact on the Company are
uncertain. A senior vice president remains in charge of all day-to-day
activities.
Real Estate
Revenue increased 14% over 1994. The increase reflects rising lease rates
in Austin, Texas.
Expenses of the real estate segment increased 13% compared to 1994.
Utility and property tax rate increases along with depreciation on additional
buildouts were the primary factors in the increase.
Investment and Other
Approximately 90% of the increase over 1994 was the result of a favorable
settlement of prior litigation. The remainder of the increase resulted
primarily from higher investable balances in 1995.
General and Administrative Expenses
Approximately 67% of the increase in 1995 resulted from increasing
allowances for certain litigation and business related contingencies (see notes
to consolidated financial statements, Note 9). Performance-based incentive
plans increased in 1995 as a result of the Company's improved income and market
capitalization and accounted for approximately 14% of the increase over 1994.
The reversal in 1994 of certain allowances for litigation, which had been
settled in 1994, also caused expenses to be lower in 1994 compared to 1995.
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Interest Expense decreased 18% due to lower rates on floating rate debt and
to lower debt outstanding.
Affiliates
Earnings from the Company's investment in Prime Medical increased by 59%
compared to 1994. Acquisition of additional lithotripsy operations improved
Prime's profitability in 1995. Prime continues to seek growth through
additional acquisitions.
1994 Compared to 1993
- ---------------------
Revenues from continuing operations in 1994 were approximately 6% greater
than in 1993. Net income increased by 15% compared to 1993 and fully diluted
earnings per share increased 17% compared to 1993. The reasons for these
changes follow.
Financial Services
While financial services revenue was less than one percent lower in 1994 than in
1993, the sources of the revenue changed substantially between the two years.
In 1994, Insurance Services received a portion of APIE's profits, as provided in
its contract. This profit sharing amounted to approximately 10% of the
segment's 1994 revenues. No profit sharing was received in 1993. Broker dealer
revenues were lower in 1994 than in 1993. Both a general downturn in the bond
market, due to rising interest rates, and specific losses on several bond issues
held in inventory negatively affected this primarily fixed income business.
Financial services expenses increased just under 1% from 1993.
Approximately 70% of these expenses consist of payroll and payroll related
costs. Normal salary increases and some change in the mix of employees from
clerical to professional caused such personnel expenses to increase 4.5%. This
increase was partially offset by lower litigation-related expenses due to the
resolution of a major lawsuit.
Computer Systems/Software
Revenues in 1994 increased 29% compared to 1993. The increase was due to
continuation/completion of larger contracts begun in 1993 plus new contracts
received in 1994. The backlog from these contracts at the end of 1994 was
approximately $1 million compared to approximately $2.3 million at the end of
1993. Recurring revenues from facilities management of data center operations
remained at approximately the same level as in 1993.
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Expenses in 1994 also increased 29% compared to 1993. Of the increase,
approximately 35% resulted from increased cost of sales related to the higher
sales volume, 23% was from personnel increases needed to handle the additional
volume and the remainder was due to increases in legal, professional and general
office operating expenses.
Real Estate
Total revenue was approximately the same in 1994 as in 1993. Recurring
revenue from rents was up 16% due to rising rates. Revenue in 1993 had been
increased by the gain on sale of real estate. No such sales occurred in 1994.
Expenses of real estate operation increased 25% when compared to 1993.
Improving property values caused property taxes to increase 38%. Depreciation
and amortization related to tenant buildout and leasing fees was up 26% and
building operating expenses were up 36%, primarily to establish funds for long-
term repairs.
Investments and Other
Investment and other income declined 35%. The decline was due to the
permanent impairment in the value of two bond issues which were being held for
investment purposes.
General and Administrative and Interest Expense
General and administrative expense declined 51%. Actual costs of
operations in 1994 remained approximately the same as in 1993. The reported
decline resulted primarily from the reversal of a previously established
contingency for litigation which was settled in 1994.
Interest Expense increased 7% as a result of the effect that the prime rate
increasing 2.5 points during 1994 had on floating rate debt.
Affiliates
Earnings from the Company's investment in Prime Medical increased by 56%
compared to 1993. Prime continued its profitable transition into a lithotripsy
company. Acquisition of additional lithotripsy operations and the final
disposition of the remaining diagnostic imaging business combined to improve
Prime's profitability in 1994.
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INFLATION
The operations of the Company are not significantly affected by inflation
because, having no manufacturing operations, the Company is not required to make
large investments in fixed assets. However, the rate of inflation will affect
certain of the Company's expenses, such as employee compensation and benefits.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $7,466,000 and $6,086,000 at December 31, 1995 and
1994, respectively. The increase in working capital is primarily the result of
income from operations, reimbursement of expenses from prior litigation and
certain long term notes receivable being collected prior to maturity.
Historically, the Company has maintained a strong working capital position and,
using that base, has been able to satisfy its operational and capital
expenditure requirements with cash generated from its operating and investing
activities. These same sources of funds have also allowed the Company to pursue
investment and expansion opportunities consistent with its growth plans. To
further its ability to meet its liquidity requirements, the Company has
established a $2,000,000 revolving credit commitment at the prime rate with a
bank. As of March 15, 1996, no funds have been advanced under this agreement.
Capital expenditures for equipment were $419,000, $99,000, and $159,000 in
1995, 1994 and 1993, respectively. In addition, the Company improved or
purchased office space in 1995, 1994 and 1993 for $64,000, $86,000 and $114,000,
respectively. The Company expects capital expenditures in 1996 to be within the
range of the prior three years.
The sale of an apartment investment in 1994 for $811,000 was a significant
non-recurring item affecting cash flows.
Management believes that its present cash position together with funds
generated from operations and from available lines of credit will provide
sufficient resources to meet all present and reasonably foreseeable future
capital needs.
ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of ("Statement 121") in March 1995 for
implementation in fiscal years beginning after December 15, 1995. The statement
addresses the impact on an enterprise's financial statements when circumstances
indicate the carrying amount of an asset may not be recoverable. The Company
does not expect adoption of Statement 121 to have a material effect on the
financial statements at adoption.
14
<PAGE>
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123"), in October 1995 for implementation in fiscal years beginning
after December 15, 1995. The Company has not elected early adoption of
Statement 123. Statement 123 becomes effective beginning with the Company's
first quarter of fiscal year 1996 and will not have a material effect on the
Company's financial position or results of operations. Upon adoption of
Statement 123, the Company will continue to measure compensation expense for its
stock-based employee compensation plans using the intrinsic value method
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees and
will provide proforma disclosures of net income and earnings per share as if the
fair value-based method prescribed by Statement 123 had been applied in
measuring compensation expense.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in Appendix A attached
hereto.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share data)
For the Year Ended or At December 31,
---------------------------------------
1995 1994 1993 1992 1991
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Selected Income Statement Data:
Revenues $20,490 17,737 16,720 17,015 16,449
Earnings from continuing operations before
income taxes and accounting changes 3,483 2,218 1,784 544 844
Net earnings $ 2,024 1,254 1,086 445 496
Per Share Amounts - Fully Diluted:
Net earnings $ .49 .35 .30 .11 .11
Fully Diluted Weighted Average
Shares Outstanding 4,163 3,614 3,622 3,926 4,417
Selected Balance Sheet Data:
Total assets $23,740 19,918 18,326 18,024 19,262
Long-term obligations 574 878 1,215 1,639 2,730
Total liabilities 6,146 4,927 4,562 5,488 5,248
Total equity 17,594 14,491 13,688 12,459 13,926
Book value per share $ 4.80 4.47 4.15 3.85 3.17
</TABLE>
15
<PAGE>
Financial information and schedules relating to Prime Medical Services, Inc.
are contained in Item 14(a) of the Annual Report on Form 10-K for the year ended
December 31, 1995 of Prime Medical Services, Inc., which Item 14(a) is
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in the definitive proxy
material of the Company to be filed in connection with its 1996 annual meeting
of shareholders, except for the information regarding executive officers of the
Company which is presented below. The information required by this item
contained in such definitive proxy material is incorporated herein by reference.
As of March 1, 1995, the executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Kenneth S. Shifrin 46 Chairman of the Board, President and
Chief Executive Officer
Jack R. Chandler, M.D. 71 Vice Chairman of the Board
Roger T. Scaggs 56 Senior Vice President - Data
Processing
Samuel R. Granett 50 Senior Vice President - Financial
Services
Duane K. Boyd 51 Senior Vice President - Insurance
William H. Hayes 48 Senior Vice President - Finance and
Secretary
Thomas R. Solimine 37 Controller
</TABLE>
16
<PAGE>
All officers serve until the next annual meeting of directors and
until their successors are elected and qualified.
Mr. Shifrin has been Chairman of the Board since March 1990. He has
been President and Chief Executive Officer since March 1989 and was President
and Chief Operating Officer from June 1987 to February 1989. He has been a
Director of the Company since February 1987. From February 1985 until June
1987, Mr. Shifrin served as Senior Vice President - Finance and Treasurer. He
has been Chairman of the Board of Prime Medical since October 1989. Mr. Shifrin
is a Certified Public Accountant and is a member of the Young Presidents
Organization.
Dr. Chandler, a founder of the Company, has been a Director of the
Company since July 1983 and has served as Vice Chairman of the Board since
February 1985. Dr. Chandler was Vice Chairman of APIE from August 1975 to April
1978 and was Chairman of its Board of Directors from April 1978 to April 1985.
Dr. Chandler was a physician in private practice in San Antonio, Texas from 1956
until his retirement in 1985.
Mr. Scaggs has been the Senior Vice President - Data Processing since
June 1988 and President of APS Systems, Inc. since February 1988. He was Senior
Vice President - Corporate Development, from February 1985 to June 1988 and a
director of the Company from March 1984 to October 1987. Mr. Scaggs was with
EDS prior to joining the Company.
Mr. Granett was named Senior Vice President - Financial Services in
1991. He had been Vice President - Financial Services since February 1987. He
has been President of APS Financial since February 1987 and was Chairman and
Chief Executive Officer from September 1989 to February 1995.
Mr. Boyd has been Senior Vice President - Insurance since July 1991
and has also been President and Chief Operating Officer of FMI since July 1991.
Mr. Boyd is a Certified Public Accountant and was with KPMG Peat Marwick from
1974 to June 1991. He was a partner specializing in the insurance industry
prior to joining the Company.
Mr. Hayes has been the Senior Vice President - Finance of the Company
since June 1995. Mr. Hayes was Vice President from June 1988 to June 1995 and
was Controller from June 1985 to June 1988. He has been Secretary of the
Company since February 1987 and Chief Financial Officer since June 1987. Mr.
Hayes is a Certified Public Accountant.
Mr. Solimine has been Controller since June 1994. He has served as
Secretary for APS Financial since February 1995. From July 1989 to June 1994,
Mr. Solimine served as Manager of Accounting for the Company.
17
<PAGE>
There are no family relationships, as defined, between any of the
above executive officers, and there is no arrangement or understanding between
any of the above executive officers and any other person pursuant to which he
was selected as an officer. Each of the above executive officers was elected by
the Board of Directors to hold office until the next annual election of officers
and until his successor is elected and qualified or until his earlier
resignation or removal. The Board of Directors elects the officers in
conjunction with each anual meeting of the stockholders.
In March 1996, Mr. Scaggs was accused of a felony unrelated to the
business. He has taken a leave from the Company pending the outcome of the
matter.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is contained in the definitive
proxy statement of the Company to be filed in connection with its 1996 annual
meeting of shareholders, which information is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the definitive
proxy statement of the Company to be filed in connection with its 1996 annual
meeting of shareholders, which information is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the definitive
proxy statement of the Company to be filed in connection with its 1996 annual
meeting of shareholders, which information is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS (1)
3.1 Restated Articles of Incorporation of the Company, as amended.(7)
3.2 Amended and Restated Bylaws of the Company.(7)
4.1 Specimen of Common Stock Certificate.(2)
*10.1 American Physicians Service Group, Inc. Employees Stock Option
Plan.(2)
18
<PAGE>
*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.(11)
*10.7 Form of Non-Employee Directors Stock Option Agreement.(11)
*10.8 1995 Incentive and Non-Qualified Stock Option Plan of American
Physicians Service Group, Inc.(11)
*10.9 Form of Stock Option Agreement (ISO).(11)
*10.10 Form of Stock Option Agreement (Non-Qualified).(11)
10.11 Management Agreement of Attorney-in-Fact, dated August 13, 1975,
between the Company and American Physicians Insurance
Exchange.(2)
10.12 Rights Agreement dated August 16, 1989 between the Company and
Texas American Bridge Bank N.A., as rights agent, and letter to
the Company stockholders, dated August 16, 1989.(6)
10.13 Stock Purchase Agreement dated October 11, 1989 between the
Company and Texas American Energy Corporation ("TAE"), Standstill
Agreement dated October 11, 1989 among the Company, TAE, Shamrock
Associates and Paul O. Koether, and Agreement dated October 11,
1989 among the Company, Prime Medical and Shamrock Associates.(3)
*10.14 Profit Sharing Plan or Trust, effective December 1, 1984, of the
Company.(4)
*10.15 Employment Agreement dated July 1, 1991, between the Company and
Duane K. Boyd, Jr.(8)
10.16 Loan Agreement dated April 7, 1992, among the Company, APS Realty
and NationsBank of Texas, N.A.(9)
19
<PAGE>
10.17 Promissory Note dated April 7, 1992, executed by APS Realty in
the principal amount of $1,000,000 payable to NationsBank of
Texas, N.A.(9)
10.18 Loan Agreement dated July 30, 1992, among the Company, FMI, APS
Systems, APS Communications and NationsBank of Texas, N.A.(9)
10.19 Master Note dated July 30, 1992, executed by the Company in the
principal amount of $2,000,000 payable to NationsBank of Texas,
N.A.(9)
10.20 Purchase Agreement, dated January 24, 1995, between Hewlett
Packard Company and APS Systems.(10)
11.1 Computation of per share earnings (included in Appendix A).(11)
21.1 List of subsidiaries of the Company.(11)
23.1 Independent Auditors Consent of KPMG Peat Marwick.(11)
________________
(*) Executive Compensation plans and arrangements.
(1) The exhibits listed will be furnished to any security holder upon written
request for such exhibit to W. H. Hayes, American Physicians Service Group,
Inc., 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746. A
reproduction fee of $.20 per page will be charged for documents requested.
Copies of all public filings are also available from the SEC by calling
Disclosure, Inc. at 800-638-8241.
(2) Filed as an Exhibit to the Registration Statement on Form S-1,
Registration No. 2-85321, of the Company, and incorporated herein by reference.
(3) Filed as an Exhibit to the Current Report on Form 8-K of the Company dated
October 20, 1989 and incorporated herein by reference.
(4) 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.
(5) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for
the year ended December 31, 1985 and incorporated herein by reference.
(6) Filed as an Exhibit to the Current Report on Form 8-K of the Company dated
September 5, 1989 and incorporated herein by reference.
20
<PAGE>
(7) 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.
(8) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for
the year ended December 31, 1991 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, 1992 and incorporated herein by reference.
(10) Filed as an Exhibit to the Annual Report on Form 10-KSB of the Company
for the year ended December 31, 1994 and incorporated herein by reference.
(11) Filed herewith.
(b) REPORTS ON FORM 8-K.
No current report on Form 8-k was filed by the Company during the fourth
quarter of 1995.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN PHYSICIANS SERVICE GROUP, INC.
By: /s/ Kenneth S. Shifrin
------------------------------------------------------
Kenneth S. Shifrin, Chairman of the
Board and Chief Executive Officer
Date: March 26, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Kenneth S. Shifrin
------------------------------------------------------
Kenneth S. Shifrin
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: March 26, 1996
By: /s/ W. H. Hayes
------------------------------------------------------
W. H. Hayes
Senior Vice President - Finance, Secretary
and Chief Financial Officer
(Principal Financial Officer)
Date: March 26, 1996
By: /s/ Thomas R. Solimine
------------------------------------------------------
Thomas R. Solimine
Controller
(Principal Accounting Officer)
Date: March 26, 1996
22
<PAGE>
By: /s/ Jack R. Chandler
------------------------------------------------------
Jack R. Chandler, M.D.
Vice Chairman of the Board and
Director
Date: March 26, 1996
By: /s/ Richard J. Clark
------------------------------------------------------
Richard J. Clark, Director
Date: March 26, 1996
By: /s/ Jack Murphy
------------------------------------------------------
Jack Murphy, Director
Date: March 26, 1996
By: /s/ William A. Searles
------------------------------------------------------
William A. Searles, Director
Date: March 26, 1996
23
<PAGE>
APPENDIX A
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report A-2
Financial Statements
Consolidated Statements of Earnings for the years A-3
ended December 31, 1995, 1994 and 1993.
Consolidated Balance Sheets at December 31, 1995 A-5
and December 31, 1994.
Consolidated Statements of Cash Flows for the years A-7
ended December 31, 1995, 1994 and 1993.
Consolidated Statements of Shareholders' Equity A-9
at December 31, 1995, 1994 and 1993.
Notes to Consolidated Financial Statements. A-10
Financial Statement Schedules
Valuation and Qualifying Accounts, Schedule II S-1
</TABLE>
A-1
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
American Physicians Service Group, Inc.:
We have audited the accompanying consolidated financial statements of American
Physicians Service Group, Inc. and subsidiaries ("Company") as listed in the
accompanying index. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Physicians
Service Group, Inc. and subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in notes 1 and 10 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1993 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes.
Austin, Texas
March 8, 1996
A-2
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
(In thousands, except per share data)
Year Ended
December 31,
---------------------------
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Revenues:
Financial services (Note 3) $13,762 11,451 11,503
Computer systems/software 4,738 5,404 4,179
Real estate (Note 6) 668 586 581
Investments and other (Note 2) 1,322 296 457
------- ------ ------
Total revenues 20,490 17,737 16,720
------- ------ ------
Expenses:
Financial services 11,582 10,626 10,619
Computer systems/software 4,262 4,970 3,866
Real estate 510 452 392
General and administrative 2,037 255 517
Interest 124 151 141
------- ------ ------
Total expenses 18,515 16,454 15,535
------- ------ ------
Operating income 1,975 1,283 1,185
Equity in earnings of
unconsolidated affiliate (Note 14) 1,508 950 608
Minority interest in consolidated
earnings -- (15) (9)
------- ------ ------
Earnings from continuing operations before
income taxes and cumulative effect
of change in accounting for income taxes 3,483 2,218 1,784
Income tax expense (Note 10) 1,108 798 611
------- ------ ------
Earnings from continuing operations before
cumulative effect of change in
accounting for income taxes 2,375 1,420 1,173
------- ------ ------
Loss from discontinued operations net of income
tax benefit of $181, $86 and $148 in 1995, 1994
and 1993, respectively (351) (166) (288)
Cumulative effect of change in
accounting for income taxes (Note 10) -- -- 201
------- ------ ------
Net earnings $ 2,024 1,254 1,086
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements
A-3
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------ ------
<S> <C> <C> <C>
Earnings per common share:
Primary:
Earnings from continuing operations before
cumulative effect of change in
accounting for income taxes $ 0.62 0.40 0.32
Discontinued operations $(0.09) (0.05) (0.08)
Cumulative effect of change in
accounting for income taxes $ -- -- 0.06
------ ----- -----
Net earnings $ 0.53 0.35 0.30
====== ===== =====
Fully diluted:
Earnings from continuing operations before
cumulative effect of change in
accounting for income taxes $ 0.57 0.40 0.32
Discontinued operations $(0.08) (0.05) (0.08)
Cumulative effect of change in
accounting for income taxes $ -- -- 0.06
------ ----- -----
Net earnings $ 0.49 0.35 0.30
====== ===== =====
Primary weighted average shares
outstanding 3,843 3,537 3,622
====== ====== ======
Fully diluted weighted average
shares outstanding 4,163 3,614 3,622
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements
A-4
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,798 3,266
Marketable securities (Note 2) 2,004 1,491
Trading account securities 1,014 661
Management fees and other receivables (Note 3) 1,748 2,932
Notes receivable - current (Note 4) 223 325
Receivable from clearing broker 780 491
Net deferred tax asset (Note 10) 159 163
Prepaid expenses and other 312 806
------- ------
Total current assets 13,038 10,135
Notes receivable, less current portion (Note 4) 83 915
Property and equipment, net (Note 6) 2,129 2,025
Investment in Prime Medical (Note 14) 7,412 5,658
Other assets 1,078 1,185
------- ------
Total assets $23,740 19,918
======= ======
</TABLE>
See accompanying notes to consolidated financial statements
A-5
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
------------------
1995 1994
-------- --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term obligations (Note 8) $ 299 327
Accounts payable - trade 353 809
Accrued compensation 861 488
Accrued expenses and other liabilities (Note 7) 3,501 2,168
Income taxes payable 558 257
------- ------
Total current liabilities 5,572 4,049
Long-term obligations (Note 8) 574 878
------- ------
Total liabilities 6,146 4,927
------- ------
Shareholders' equity:
Preferred stock, $1.00 par value, 1,000,000
shares authorized -- --
Common stock, $0.10 par value, 20,000,000 shares
authorized; 3,663,871 issued at 12/31/95
and 3,471,684 at 12/31/94 366 347
Additional paid-in capital 4,530 4,469
Unrealized holding gains -- 44
Retained earnings 12,698 10,674
Reciprocal stockholdings (Note 14) -- (543)
------- ------
Total shareholders' equity 17,594 14,991
------- ------
Commitments and contingencies
(notes 5, 8, 9, 12 and 14)
Total liabilities and shareholders' equity $23,740 19,918
======= ======
</TABLE>
See accompanying notes to consolidated financial statements
A-6
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------------
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 21,068 16,138 17,405
Cash paid to suppliers and employees (17,860) (15,740) (16,143)
Change in trading account securities (353) 475 318
Change in receivable from clearing broker (289) (308) (737)
Interest paid (124) (151) (141)
Income taxes paid (494) (15) (343)
Interest, dividends and other investment
proceeds 1,322 456 136
-------- ------- -------
Net cash from operating activities 3,270 855 495
-------- ------- -------
Cash flows from investing activities:
Payments for purchase of property and
equipment (483) (185) (273)
Proceeds from sale of assets 47 76 119
Proceeds from the sale of discontinued operation 67 -- --
Net decrease (increase) in marketable
securities (530) (1,183) 407
Funds loaned to others -- -- (731)
Collection of notes receivable 1,119 1,863 334
-------- ------- -------
Net cash from (used in) investing
activities 220 571 (144)
-------- ------- -------
Cash flows from financing activities:
Proceeds from long-term obligations -- -- 17
Repayment of long-term obligations (332) (613) (317)
Acquisition of treasury stock (125) -- --
Exercise of stock options 499 -- --
Increase (decreased) in minority interest -- (91) 8
-------- ------- -------
Net cash provided by (used in) financing activities 42 (704) (292)
-------- ------- -------
Net change in cash and cash equivalents 3,532 722 59
Cash and cash equivalents at beginning of year 3,266 2,544 2,485
-------- ------- -------
Cash and cash equivalents at end of year $ 6,798 3,266 2,544
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
A-7
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Consolidated Statements of Cash Flows, continued
(In thousands)
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------------
1995 1994 1993
---------- --------- -----------
<S> <C> <C> <C>
Reconciliation of net earnings to net cash
from operating activities:
Net earnings $ 2,024 1,254 1,086
Adjustments to reconcile net earnings to
net cash from operating activities:
Depreciation and amortization 399 323 484
Writedown of goodwill -- -- 166
Minority interest -- 15 9
Cumulative effect of change in accounting for income taxes -- -- (201)
Loss (gain) on sale or disposition of assets (72) 31 (77)
Recognition of long-term capital loss carryback -- 88 --
Gain on exchange of affiliate stock for note -- -- (21)
Loss on permanent impairment of debt securities -- 160 --
Provision to increase valuation
allowance on marketable securities -- -- (321)
Provision for deferred income tax 27 480 342
Gain on sale of marketable securities (50) (33) --
Undistributed earnings of affiliate (1,508) (950) (608)
Change in income tax payable 301 129 (222)
Change in trading account securities (353) 475 318
Change in receivable from clearing broker (289) (308) (737)
Change in management fees and other receivables 1,183 (1,301) 279
Change in prepaids and other assets 493 (358) (167)
Change in trade accounts payable (456) 11 166
Change in accrued expenses and other liabilities 1,571 839 (1)
-------- ------ -----
Net cash from operating activities $ 3,270 855 495
======== ====== =====
</TABLE>
Summary of non-cash transactions:
During the third quarter, 1995, the investment in the Company by the Company's
affiliate, Prime Medical Services, Inc., became immaterial. Consequently,
Reciprocal Stockholdings fell to zero while the Company's investment in
affiliate increased by $543.
The Company acquired $294,000 in treasury stock by exchanging $294,000 in Prime
Medical Services, Inc. Common stock during 1995.
The Company sold APS Communications in a non-cash transaction as follows:
<TABLE>
<S> <C>
Note received $ 183
======
Fixed assets sold ( 48)
Deferred income (135)
-----
$ 183
======
</TABLE>
See accompanying notes to consolidated financial statements.
A-8
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1995, 1994 and 1993
(In thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional Unrealized Total
--------------------- paid-in holding Retained Reciprocal shareholders'
Shares Amount capital gains earnings stockholdings equity
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 3,543,364 354 4,725 -- 8,334 ( 954) 12,459
Net earnings 1,086 -- 1,086
Issuance of common stock 18,400 2 37 -- -- -- 39
Shares repurchased &
cancelled (90,075) (9) (294) -- -- -- ( 303)
Pro rata portion of Company
common stock held by
affiliate (Note 14) -- -- -- -- -- 407 407
-----------------------------------------------------------------------------------------
Balance December 31, 1993 3,471,689 347 4,468 -- 9,420 (547) 13,688
Net earnings -- -- -- -- 1,254 -- 1,254
Unrealized gains on
securities -- -- -- 44 -- -- 44
available for sale
Shares repurchased & (5) -- -- -- -- -- --
cancelled
Contributed capital -- -- 1 -- -- -- 1
Pro rata portion of Company
common stock held by
affiliate (Note 14) -- -- -- -- -- 4 4
-----------------------------------------------------------------------------------------
Balance December 31, 1994 3,471,684 $347 4,469 44 10,674 (543) 14,991
Net earnings -- -- -- -- 2,024 -- 2,024
Unrealized loss on
securities -- -- -- (44) -- -- (44)
available for sale
Shares issued (Note 12) 314,333 31 468 -- -- -- 499
Shares repurchased &
cancelled (Note 14) (122,146) (12) (407) -- -- -- (419)
Pro rata portion of Company
common stock held by
affiliate (Note 14) -- -- -- -- -- 543 543
-----------------------------------------------------------------------------------------
Balance December 31, 1995 3,663,871 366 4,530 -- 12,698 -- 17,594
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
A-9
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(1) Summary of Significant Accounting Policies
(a) General
American Physicians Service Group, Inc. through its subsidiaries, provides:
financial services that include management of malpractice insurance
companies and brokerage and investment services to individuals and
institutions; and computer systems and software packages to medical
clinics, medical schools, physician hospital organizations and other
physician networks. The brokerage and computer businesses have clients
nationally. Insurance management is a service provided primarily in Texas,
but is available to clients nationally. American Physicians Service Group,
Inc. also owns space in the office building which serves as its
headquarters. Through its real estate subsidiary it leases space that is
surplus to its needs. During the three years presented in the financial
statements, financial services and computer systems generated approximately
66% and 25%, respectively, of total revenues.
(b) Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of American
Physicians Service Group, Inc. and of subsidiary companies more than 50%
owned ("Company"). Investments in affiliated companies and other entities
in which the Company's investment is for less than 50% of the common shares
outstanding are accounted for by the equity method.
All significant intercompany transactions and balances have been eliminated
from the accompanying consolidated financial statements.
A-10
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, continued
(d) Revenue Recognition
Financial 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. Revenues
related to securities transactions are recognized on a trade date basis.
Revenue from software product sales is recognized on the percentage of
completion method. Revenue from hardware sales is recognized when the
hardware is delivered. Maintenance and service contracts related to
software products are deferred and recognized over the term of the contract
(generally one year) using the straight-line method.
Real estate rental income is recognized monthly based on lease agreements.
Costs of leasehold improvements are capitalized and amortized monthly over
the term of the lease.
Investment revenues are recognized as accrued on highly-rated investments
and as received on lesser grades.
(e) Broker, Dealer and Securities Transactions
Securities transactions are recorded in the accounts on a trade date basis.
(f) Marketable Securities
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities (Statement 115), in May, 1993 for implementation in
fiscal years beginning after December 15, 1993. Statement 115 addresses
the accounting and reporting for investments in debt and equity securities.
Under Statement 115, those investments are to be classified in three
categories and accounted for as follows:
A-11
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, continued
<TABLE>
<CAPTION>
<C> <S>
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
</TABLE>
The Company adopted Statement 115 on January 1, 1994 and has included its
marketable securities in the available for sale category. Because of
previous valuation allowances established to record investment securities
at the lower of aggregate cost or market, implementation of Statement 115
on January 1, 1994 resulted in no significant change to equity.
(g) Property and Equipment
Property and equipment are stated at cost. Equipment under capital lease
is stated at the present value of minimum lease payments at the beginning
of the lease term. Property and equipment and rental property are
depreciated using the straight-line method over the estimated useful lives
of the respective assets (3 to 40 years). Equipment under capital lease is
amortized using the straight-line method over the shorter of the lease
terms or estimated useful lives of the assets (5 years).
(h) Long-Lived Assets
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of ("Statement 121") in
March 1995 for implementation in fiscal years beginning after December 15,
1995. The statement addresses the impact on an enterprise's financial
statements when circumstances indicate the carrying amount of an asset may
not be recoverable. The Company does not expect Statement 121 to have a
material affect on the financial statements at adoption.
A-12
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, continued
(i) Income Taxes
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes and
reported the cumulative effect of that change in the method of accounting
for income taxes in the 1993 consolidated statement of earnings. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
(j) Earnings Per Share
Earnings per share have been computed based on the weighted average number
of shares outstanding and common share equivalents.
(k) Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with
an original maturity of 90 days or less.
(l) Post Retirement/Post Employment Benefits
The Company's employee benefits do not extend beyond an employee's active
employment. Consequently, no accrual for future benefits as prescribed in
Statement of Financial Accounting Standards No. 106 and No. 112 has been
recorded.
(m) Derivative Financial Instruments
The Company has not made use of derivative financial instruments as defined
in the Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 119, Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments.
A-13
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, continued
(n) Notes Receivable
Notes receivable are recorded at cost, less allowances for doubtful
accounts when deemed necessary. The Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan (Statement 114), in May 1993 and the
related Statement of Financial Accounting Standards No. 118 Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures, in
October 1994 for implementation in fiscal years beginning after December
15, 1994. Management, considering current information and events regarding
the borrowers ability to repay their obligations, considers a note to be
impaired when it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the note agreement. When
a loan is considered to be impaired, the amount of the impairment is
measured based on the present value of expected future cash flows
discounted at the note's effective interest rate. Impairment losses are
included in the allowance for doubtful accounts through a charge to bad
debt expense. Cash receipts on impaired notes receivable are applied to
reduce the principal amount of such notes until the principal has been
recovered and are recognized as interest income, thereafter. The adoption
of Statements 114 and 118 by the Company on January 1, 1995 did not have a
material affect on the financial statements.
(o) Stock-Based Compensation
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123"), in October 1995 for implementation in fiscal years
beginning after December 15, 1995. The Company has not elected early
adoption of Statement 123. Statement 123 becomes effective beginning with
the Company's first quarter of fiscal year 1996 and will not have a
material effect on the Company's financial position or results of
operations. Upon adoption of Statement 123, the Company will continue to
measure compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees and will provide proforma
disclosures of net income and earnings per share as if the fair value-based
method prescribed by Statement 123 had been applied in measuring
compensation expense.
A-14
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, continued
(p) Reclassification
Certain reclassifications have been made to amounts presented in previous
years to be consistent with the 1995 presentation.
(2) Marketable Securities
The Company holds various marketable securities as short-term investments.
At December 31, 1995 and 1994, these marketable securities consisted of:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Debt securities, at cost $2,004,000 $1,424,000
Add: adjustment to fair value -- 67,000
---------- ----------
Total marketable securities at
fair value $2,004,000 $1,491,000
========== ==========
</TABLE>
At December 31, 1995, there were no gross unrealized gains. At December 31,
1994, there were gross unrealized gains, net of applicable federal income tax,
of $44,000.
<TABLE>
<CAPTION>
Investment income includes the following:
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
Interest $243,000 68,000 23,000
Realized gains 50,000 42,000 94,000
Realized losses -- (10,000) (275,000)
Permanent impairment of
debt securities -- (160,000) --
Decrease in
valuation allowance -- -- 324,000
-------- -------- ---------
$293,000 (60,000) 166,000
======== ======== =========
</TABLE>
No individual issuer exceeded 10% of stockholder's equity at December 31, 1995.
A-15
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(3) Management Fees and Other Receivables
Management fees and other receivables consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
Management fees receivable $ 342,000 1,131,000
Trade accounts receivable 1,034,000 561,000
Less: allowance for doubtful accounts (132,000) (59,000)
Accrued interest receivable 45,000 57,000
Other receivables 459,000 1,242,000
---------- ---------
$1,748,000 2,932,000
========== =========
</TABLE>
The Company earns management fees by providing for the full management of
American Physicians Insurance Exchange ("APIE") under the direction of APIE's
doctor Board of Directors. Subject to the direction of this Board, FMI sells
and issues policies, investigates, settles and defends claims, and otherwise
manages APIE's affairs. The Company has previously managed other insurance
companies.
The Company earned management fees of $5,288,000, $5,358,000 and $3,958,000 and
received expense reimbursements of $355,000, $247,000 and $255,000 for the years
ended December 31, 1995, 1994 and 1993, respectively, related to these
agreements.
(4) Notes Receivable
Notes receivable consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
---------- ---------
<S> <C> <C>
Regan Publishing Company
The unsecured note bears interest at 7%.
Payments of $50,000 plus interest are
due June 30, 1996, December 31, 1996,
and June 30, 1997, with the balance due
December 31, 1997. $183,000 --
</TABLE>
A-16
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(4) Notes Receivable, continued
<TABLE>
<S> <C> <C>
Whited, Winters, Newton & Clarissimeaux
The note was paid in full when due. -- 35,000
Ron Luke and Associates, Inc.
The note was paid in full in May, 1995. -- 1,000,000
The Billings Clinic
The note is secured by computer equipment
and bears interest at a weighted average
rate of 11.38%. Monthly payments of
principal and interest are due through
December 1996. 123,000 205,000
---------- ---------
306,000 1,240,000
Less current portion 223,000 325,000
---------- ---------
Long term portion $ 83,000 915,000
========== =========
</TABLE>
In connection with the Ron Luke & Associates, Inc. note, the Company received a
warrant to acquire 50% of Ron Luke & Associates, Inc. for $1,000,000 and
received the right to appoint two out of the five directors on Ron Luke &
Associates, Inc.'s board of directors. Such provisions expire in February,
1997. No value has been assigned to the warrant.
(5) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" (Statement 107), requires that the Corporation
disclose estimated fair values for its financial instruments as of December 31,
1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
--------------- ---------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Cash and cash equivalents 6,798 6,798 3,266 3,266
Marketable Securities and Trading
Account Securities 3,018 3,018 2,152 2,152
</TABLE>
A-17
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(5) Fair Value of Financial Instruments, continued
<TABLE>
<CAPTION>
1995 1994
--------------- ---------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Management fees and other
Receivables 1,748 1,748 2,932 2,932
Notes receivable 306 293 1,240 1,240
Receivable from clearing broker 780 780 491 491
Debt 873 873 1,205 1,205
Accounts Payable 353 353 809 809
</TABLE>
Fair value estimates, methods, and assumptions are set forth below for the
Company's financial instruments.
Cash and Cash Equivalents
-------------------------
The carrying amounts for cash and cash equivalents approximate fair value
because they mature in less than 90 days and do not present unanticipated credit
concerns.
Marketable Securities and Trading Account
-----------------------------------------
The fair value of securities owned is estimated based on bid prices published in
financial newspapers or bid quotations received from securities dealers. The
carrying values of marketable securities are adjusted to market since such
securities are in the available for sale category. Trading account securities
are carried at market value.
Management Fees and Other Receivables
- -------------------------------------
The fair value of these receivables approximates the carrying value due to their
short-term nature and historical collectibility.
Notes Receivable
- ----------------
The fair value of notes has been determined using discounted cash flows based on
managements' estimate of current interest rates for notes of similar credit
quality.
A-18
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(5) Fair Value of Financial Instruments, continued
Receivable from Clearing Broker
- -------------------------------
The carrying amounts approximate fair value because the funds can be withdrawn
- ------------------------------------------------------------------------------
on demand and there is no unanticipated credit concern.
- -------------------------------------------------------
Debt
- ----
The fair market value of debt approximates carrying value since it is primarily
floating rate debt based on current market rates.
Accounts Payable
- ----------------
The fair value of the payable approximates carrying value due to the short-term
nature of the obligation.
Limitations
- -----------
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. Fair value
estimates are based on existing on-and-off balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments.
Other significant assets and liabilities that are not considered financial
assets or liabilities include the deferred tax assets, property and equipment,
investment in Prime Medical, other assets, accrued expenses and income tax
payable. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the aforementioned estimates.
A-19
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(6) Property and equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1994
---------- ---------
<S> <C> <C>
Office condominium $1,896,000 1,831,000
Furniture and equipment 3,422,000 3,065,000
---------- ---------
5,318,000 4,896,000
Accumulated depreciation and
amortization 3,189,000 2,871,000
---------- ---------
$2,129,000 2,025,000
========== =========
</TABLE>
The Company owns approximately 53,000 square feet in the condominium building in
which its principal offices are located. The Company, its subsidiaries and
affiliates occupy approximately 28,000 square feet and the remainder is leased
to third parties. Rental income received from third parties during the years
ended December 31, 1995, 1994 and 1993 totaled approximately $382,000, $308,000
and $260,000, respectively. Future minimum lease payments to be received under
the terms of the office condominium leases are as follows: 1996 - $337,000;
1997 - $275,000; 1998 - $208,000; 1999 - $59,000 and none thereafter.
Included in furniture and equipment at December 31, 1995 and 1994 are computers
and equipment under capital lease of approximately $191,000. Accumulated
amortization on this equipment under capital lease was $139,000 and $101,000 at
December 31, 1995 and 1994, respectively.
(7) Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consists of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Taxes payable - other $ 150,000 36,000
Commissions payable 38,000 110,000
Deferred income 434,000 685,000
Health insurance and other claims
payable 73,000 104,000
Contractual/legal claims 2,360,000 836,000
</TABLE>
A-20
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(7) Accrued Expenses and Other Liabilities, continued
<TABLE>
<S> <C> <C>
Vacation payable 127,000 137,000
Funds held for others 51,000 48,000
Interest payable 5,000 5,000
Other 263,000 207,000
---------- ---------
$3,501,000 2,168,000
========== =========
</TABLE>
(8) Long-term Obligations
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Capital leases $ 280,000 297,000
Less amounts representing interest (12,000) (32,000)
---------- ---------
Present value of net
minimum payments 168,000 265,000
Notes payable secured by office buildings 642,000 742,000
Other 63,000 198,000
---------- ---------
Total long term obligations 873,000 1,205,000
Less current portion 299,000 327,000
---------- ---------
Long-term portion $ 574,000 878,000
========== =========
</TABLE>
Capital leases are at a weighted average interest rate of 9.09% and are payable
monthly through April 1997. Notes payable secured by office buildings are at
the prime rate of interest and are payable monthly, in installments of
approximately $13,000, through April 1997 at which time the balance of $517,000
is due.
Long-term obligations are repayable by the Company in approximate annual
installments as follows: 1996, $299,000 and 1997, $574,000.
The Company has a $2,000,000 revolving credit commitment with a bank through
July 1996 at the prime rate. The agreement requires the maintenance of certain
financial ratios and contains other restrictive covenants. No funds had been
advanced under the line of credit as of December 31, 1995.
A-21
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(9) Commitments and Contingencies
The Company has guaranteed the future yield of a customer's investment portfolio
beginning in January 1995 for up to a five and one-half year period. Management
believes that the Company's financial statements adequately provide for any loss
that might occur under this agreement; however, as defined in AICPA Statement of
Position 94-6, it is reasonably possible that the Company's estimate of loss
could change over the remaining term of the agreement. Management is unable to
determine the range of potential adjustment since it is based on securities
markets, which are beyond its ability to control.
Rent expense under all operating leases for the years ended December 31, 1995,
1994 and 1993 was $103,000, $127,000 and $108,000, respectively. Future minimum
payments for leases which extend for more than one year are not significant at
December 31, 1995.
The Company is involved in various claims and legal actions that have arisen in
the ordinary course of business. The Company believes that the liability
provision in its financial statements is sufficient to cover any unfavorable
outcome related to lawsuits in which it is currently named. Management believes
that liabilities, if any, arising from these actions will not have a significant
adverse effect on the financial condition of the Company. However, due to the
uncertain nature of legal proceedings, the actual outcome of these lawsuits may
differ from the liability provision recorded in the Company's financial
statements.
(10) Income Taxes
As discussed in Note 1, the Company adopted Statement 109 as of January 1, 1993.
The cumulative effect of this change in accounting for income taxes of $201,000
was determined as of January 1, 1993 and was reported separately in the
consolidated statement of earnings for the year ended December 31, 1993.
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Federal
Current $795,000 109,000 105,000
Deferred 27,000 480,000 342,000
State - current 105,000 123,000 16,000
-------- ------- -------
$927,000 712,000 463,000
======== ======= =======
</TABLE>
A-22
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(10) Income Taxes, continued
A reconciliation of expected income tax expense (computed by applying the United
States statutory income tax rate of 34% to earnings before income taxes) to
total income tax expense in the accompanying consolidated statements of earnings
follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------------
1995 1994 1993
----------- ----------- --------
<S> <C> <C> <C>
Expected federal income tax
expense $1,003,000 668,000 458,000
Deduction allowed for tax purposes
for non-qualified stock options exercised (128,000) -- --
State taxes 105,000 123,000 16,000
Other, net (53,000) (79,000) (11,000)
---------- ------- -------
$ 927,000 712,000 463,000
========== ======= =======
</TABLE>
Deferred tax assets are primarily the result of temporary differences related to
accounting for reserves for losses, amounts expensed for financial purposes not
deductible for tax purposes, fixed assets (primarily differences in methods of
depreciation) and investments (primarily related to valuation allowances) for
tax and book purposes.
The tax effect of temporary differences that gives rise to significant portions
of deferred tax assets and deferred tax liabilities at December 31, 1995 and
1994 are presented below:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax assets:
Marketable securities write downs not taken
for tax purposes $ 46,000 $ 72,000
Accrued expenses 993,000 490,000
Writedown of Paid Dental Administrators, Inc.
to net realizable value -- 118,000
Accounts receivable, principally due
to allowance for doubtful accounts 77,000 54,000
Deferred income for books not for tax 129,000 --
Other 7,000 13,000
----------- ---------
Total gross deferred tax assets 1,252,000 747,000
----------- ---------
</TABLE>
A-23
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(10) Income Taxes, continued
<TABLE>
<S> <C> <C>
Deferred tax liabilities:
Investment in Prime Medical Services, Inc.
due to use of equity method for books (1,033,000) (494,000)
Unrealized gains on investments available
for sale -- (23,000)
Capitalized expenses, principally due to
deductibility for tax purposes (60,000) (67,000)
---------- ---------
Total gross deferred tax liabilities (1,093,000) (584,000)
----------- ---------
Net deferred tax asset $ 159,000 $ 163,000
=========== =========
</TABLE>
The Company has not recorded a valuation allowance against the deferred tax
asset as management believes it is more likely than not that the Company will
fully realize the asset in the form of future tax deductions since the temporary
differences will reverse in the near future. These deductions would be
available to carryback to prior years, if necessary.
(11) Employee Benefit Plans
The Company has an employee benefit plan qualifying under Section 401(k) of the
Internal Revenue Code for all eligible employees. Employees become eligible
upon meeting certain service and age requirements. Employees may defer up to
15% (not to exceed $9,240 in 1995) of their annual compensation under the plan.
The Company, at its discretion, may contribute up to 200% of the employees'
deferred amount. For the years ended December 31, 1995, 1994 and 1993,
contributions by the Company aggregated $100,000, $105,000, and $87,000,
respectively.
(12) Stock Options and Stock Grants
The Company has an employee stock option plan for key employees which provides
for the issuance of up to 700,000 shares of common stock. The Company also has
a stock option plan for directors which provides for issuance of up to 700,000
shares of common stock. Options granted under the plans could be qualified
incentive stock options or non-qualified options through July 17, 1993. After
that date only non-qualified options may be granted.
A-24
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(12) Stock Options and Stock Grants, continued
In 1995 the Board of Directors adopted two new plans. A non-employee directors
plan provides for the issuance of up to 200,000 shares of common stock to non-
employee directors who serve on the Option Committee. The other plan is for
directors and key employees and provides for the issuance of up to 800,000
shares of common stock. Both plans are subject to approval by shareholders at
the Company's 1996 Annual Meeting.
The exercise price for each non-qualified option share is determined by the
Option Committee of the Board of Directors. The exercise price of a qualified
incentive stock option had to be at least 100% of the fair market value of such
shares on the date of grant of the option.
Option transactions are shown below:
<TABLE>
<CAPTION>
Number of Shares 1995 1994 1993
- ---------------- ------- ------- -------
<S> <C> <C> <C>
Balance at January 1 921,000 926,000 930,000
Options granted 235,000 70,000 30,000
Options exercised:
Number 314,000 -- --
Average price 1.59 -- --
Options forfeited 5,000 75,000 34,000
At December 31:
Balance of Options outstanding 837,000 921,000 926,000
Average price 2.18 1.57 1.68
Options exercisable 550,000 813,000 818,000
Shares available for grant 249,000 479,000 474,000
</TABLE>
At December 31, 1995 the 837,000 outstanding options consisted of 159,000
incentive options and 678,000 non-qualified options and ranged in price from
$1.375 to $9.625 per share.
In 1993 the Company issued 18,000 shares of common stock as compensation to an
officer of the Company.
A-25
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(13) Discontinued Operations
On October 23, 1995 the Company sold substantially all of the assets of APS
Communications Corporation, a publisher of Spanish language directories of U. S.
businesses. The Company received cash, a note (see note 4) and had certain
liabilities assumed by the purchaser. The gain on the sale, to be recognized on
the installment basis through 1997, will not be material to the Company's
operations. Historical results from the operation are presented in the
Consolidated Statements of Earnings as "Loss from discontinued operations."
(14) Investment in Prime Medical
On October 12, 1989, the Company purchased for cash 3,540,000 shares (42%) of
the common stock of Prime Medical. Members of the Company's Board currently
serve as three of the nine directors of Prime Medical. Prime Medical provides
non-medical management services to lithotripsy centers. In conjunction with the
acquisition of additional lithotripsy operations in June 1992 and October 1993,
the outstanding shares of Prime Medical increased. These increases plus the sale
of Prime Medical shares owned by the Company under an option agreement reduced
the Company's ownership to 21% of the outstanding common stock of Prime Medical.
The Company's investment in Prime Medical is accounted for on the equity method.
The 3,064,000 shares of Prime Medical common stock held by the Company had a
market value of $27,576,000 (carrying amount of $7,412,000) at December 31, 1995
based on the market closing price of $9.00 per share.
At December 31, 1995 and 1994, the Company's retained earnings included
undistributed earnings, net of deferred tax, of Prime Medical totaling
$1,890,000 and $895,000, respectively.
The condensed balance sheet and statement of operations for Prime Medical
follow:
Condensed balance sheet at December 31, 1995 and 1994
-----------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
------------ ----------
<S> <C> <C>
Current assets $10,938,000 8,753,000
Long-term assets 66,627,000 45,108,000
----------- ----------
Total assets 77,565,000 53,861,000
=========== ==========
</TABLE>
A-26
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(14) Investment in Prime Medical, continued
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current liabilities 11,055,000 6,528,000
Long-term liabilities 23,760,000 12,912,000
Shareholders equity 42,750,000 34,421,000
----------- ----------
Total liabilities and equity $77,565,000 53,861,000
=========== ==========
Condensed statement of operations for the years ended
December 31, 1995 and 1994
1995 1994
----------- ----------
Total revenue $23,195,000 24,768,000
=========== ==========
Net income $ 7,204,000 4,504,000
=========== ==========
</TABLE>
Prime Medical was the holder of 772,000 shares ($2,395,000 at cost) at December
31, 1994 of the Company's common stock. During 1995 Prime divested itself of
substantially all of these shares. The Company recorded its pro rata portion,
$543,000 (23%) at December 31, 1994 of this stock as reciprocal stockholdings.
The Company exchanged 575,000 shares of Prime stock for notes payable from Prime
amounting to $593,750, one half in April 1993 and the other half in July 1995.
The gain resulting from the difference between the market value of the Prime
stock and the Company's carrying basis of the stock was not significant. The
Company subsequently exchanged the notes for 87,000 shares in 1995 and 90,000
shares in 1993 of its own common stock (at current market value at exchange
date) which was owned by Prime.
(15) Segment Information
The Company's financial services segment includes financial management for an
insurance company that provides insurance coverage to doctors and hospitals, and
brokerage and investment services to individuals and institutions.
A-27
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(15) Segment Information, continued
The computer systems/software segment consists of computer hardware and software
marketed to university medical schools and to clinics.
Real Estate income is derived from the leasing of office space.
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>
Operating Revenues:
Financial services $13,762,000 11,451,000 11,503,000
Computer systems/software vvvvv 4,738,000 5,404,000 4,179,000
Real estate 668,000 586,000 581,000
----------- ---------- ----------
$19,168,000 17,441,000 16,263,000
=========== ========== ==========
Operating Profit:
Financial services $ 2,118,000 731,000 797,000
Computer Systems/Software 476,000 434,000 313,000
Real estate 96,000 77,000 135,000
----------- ---------- ----------
2,690,000 1,242,000 1,245,000
----------- ---------- ----------
Corporate investment and other income 1,322,000 296,000 457,000
Corporate expenses (2,037,000) (255,000) (517,000)
Minority interest -- (15,000) (9,000)
Equity in earnings of Prime Medical 1,508,000 950,000 608,000
----------- ---------- ----------
Earnings from continuing operations
before income taxes and cumulative
effects of change in accounting for
income taxes 3,483,000 2,218,000 1,784,000
Income tax expense (benefit) 1,108,000 798,000 611,000
----------- ---------- ----------
</TABLE>
A-28
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(15) Segment Information, continued
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Earnings from continuing operations
before cumulative effects of change
in accounting for income taxes 2,375,000 1,420,000 1,173,000
----------- ---------- ----------
Loss from discontinued operations,
net of income tax benefit (351,000) (166,000) (288,000)
----------- ---------- ----------
Cumulative effect of change in
accounting for income taxes -- -- 201,000
----------- ---------- ----------
Net earnings $ 2,024,000 1,254,000 1,086,000
=========== ========== ==========
Identifiable assets:
Financial services $11,816,000 10,161,000 8,371,000
Computer systems/software 1,732,000 1,426,000 1,680,000
Real estate 1,578,000 1,640,000 1,659,000
Corporate 8,614,000 6,094,000 6,193,000
Discontinued Operations -- 597,000 423,000
----------- ---------- ----------
$23,740,000 19,918,000 18,326,000
=========== ========== ==========
Capital expenditures:
Financial service $ 262,000 31,000 25,000
Computer systems/software 80,000 48,000 95,000
Real estate 64,000 86,000 114,000
Corporate 73,000 12,000 36,000
Discontinued operations 4,000 8,000 3,000
----------- ---------- ----------
$ 483,000 185,000 273,000
=========== ========== ==========
Depreciation/amortization expenses:
Financial services $ 164,000 106,000 135,000
Computer systems/software 94,000 48,000 57,000
Real estate 126,000 113,000 90,000
Corporate 9,000 2,000 22,000
Discontinued operations 6,000 8,000 59,000
----------- ---------- ----------
$ 399,000 277,000 363,000
=========== ========== ==========
</TABLE>
A-29
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Notes To Consolidated Financial Statements, Continued
(15) Segment Information, continued
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Revenues attributable to customers
generating greater than 10% of the
revenues of each segment:
Financial services
Company A 36% 45% 34%
Company B 10% -- 14%
Company C -- 12% --
Company D 11% -- --
---- ---- ----
57% 57% 48%
==== ==== ====
Computer systems/software
Company E 34% 28% 37%
Company F -- -- 19%
Company G -- -- 15%
Company H 13% 11% 13%
Company I 18% 29% 11%
---- ---- ----
65% 68% 95%
==== ==== ====
</TABLE>
At December 31, 1995 the Company had long-term contracts with companies A and E
and was therefore not vulnerable to the risk of a near-term severe impact from a
reasonably possible loss of the revenue. Companies B, D, H, and I did not have
contracts with the Company and the loss of their business, if not replaced by
other clients, would materially impact the Company's operations.
Operating profit is operating revenues less related expenses and is all derived
from domestic operations. Identifiable assets are those assets that are used in
the operations of each business segment (after elimination of investments in
other segments). Corporate assets consist primarily of cash and cash
investments, marketable securities and notes receivable.
A-30
<PAGE>
SCHEDULE II
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Valuation and Qualifying Accounts
Three years ended December 31, 1995
<TABLE>
<CAPTION>
Additions
---------------------
Balance at Charged to Charged Balance at
beginning costs and to other Bad debts end
Description of period expenses accounts written off of period
- ----------- --------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Trade accounts receivable--
allowance for doubtful
accounts:
Year ended December 31, 1995 $ 59,000 $ 82,000 $ -- $ 13,000 $128,000
========= ========== ======== =========== =========
Year ended December 31, 1994 $233,000 $(56,000) $ -- $118,000 $ 59,000
========= ========== ======== =========== =========
Year ended December 31, 1993 $290,000 $189,000 $ -- $246,000 $233,000
========= ========== ======== =========== =========
</TABLE>
S-1
<PAGE>
EXHIBIT 10.6
1995 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
OF
AMERICAN PHYSICIANS SERVICE GROUP, INC.
A Texas Corporation
I. Purpose of Plan
The 1995 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN (the "Plan") is intended
to promote the interests of American Physicians Service Group, Inc., a Texas
corporation (the "Company"), and its stockholders by helping to award and retain
highly-qualified independent directors, and allowing them to develop a sense of
proprietorship and personal involvement in the development and financial success
of the Company. Accordingly, the Company shall grant to directors of the
Company who are not employees of the Company or any of its subsidiaries ("Non-
Employee Directors") the option ("Option") to purchase shares of the common
stock, $0.10 par value per share, of the Company ("Common Stock"), as
hereinafter set forth. Options granted under this Plan shall be options which
do not constitute incentive stock options, within the meaning of section 422(b)
of the Internal Revenue Code of 1986, as amended (the "Code").
II. Grant of Options
Options may be granted only to individuals who are Non-Employee Directors
of the Company and who are members of the Committee under the Company's
Incentive Stock Option Plan (the "Committee"). On the date on which a Non-
Employee Director is first elected or appointed as a member of the Committee, he
or she (the "Optionee") shall be granted an Option to purchase 30,000 shares of
Common Stock. For purposes of this Article II, each Non-Employee Director who
is also a member of the Committee in office on the effective date of this Plan
shall be deemed to have been first elected at such date.
If, as of any date that this Plan is in effect, there are not sufficient
shares of Common Stock available under the Plan to allow for the grant to each
Non-Employee Director of an option for the number of shares provided herein,
this Plan shall terminate as provided in Article X hereof. All Options granted
under this Plan shall be at the option price set forth in Article V hereof and
shall be subject to adjustment as provided in Article VII hereof.
1
<PAGE>
III. Shares Subject to Plan
The aggregate number of shares of Common Stock that may be issued pursuant
to Options granted under this Plan shall not exceed 200,000 shares of Common
Stock (subject to adjustment as provided in Article VII). Such shares may
consist of authorized but unissued shares of Common Stock or previously issued
shares of Common Stock reacquired by the Company. Any of such shares which
remain unissued and which are not subject to outstanding Options at the
termination of this Plan shall cease to be subject to this Plan, but, until
termination of this Plan, the Company shall at all times make available a
sufficient number of shares to meet the requirements of this Plan. Should any
Option hereunder expire or terminate prior to its exercise in full, the shares
of Common Stock theretofore subject to such Option may again be subject to an
Option granted under this Plan to the extent permitted under Rule 16b-3. The
aggregate number of shares which may be issued under this Plan shall be subject
to adjustment as provided in Article VII hereof. Exercise of an Option in any
manner shall result in a decrease in the number of shares of Common Stock which
may thereafter be available, both for purposes of the Plan and for sale to any
one individual, by the number of shares as to which the Option is exercised.
IV. Option Agreements
Each Option shall be evidenced by a written agreement in the form attached
hereto as Exhibit A.
V. Option Price
The purchase price for a share of Common Stock issued under each Option
granted pursuant to this Plan shall be the fair market value for the Common
Stock at the time the Option is granted. For all purposes under the Plan, the
fair market value of a share of Common Stock on a particular date shall be equal
to the average of the high and low sales prices of the Common Stock (i) reported
by the National Market System of NASDAQ on that date or (ii) if the Common Stock
is listed on a national stock exchange, reported on the stock exchange composite
tape on that date; or, in either case, if no prices are reported on that date,
on the last preceding date on which such prices of the Common Stock are so
reported. If the Common Stock is traded over the counter at the time a
determination of its fair market value is required to be made hereunder, its
fair market value shall be deemed to be equal to the average between the
reported high and low or closing bid and ask prices of the Common Stock on the
most recent date on which the Common Stock was publicly traded. In the event
the Common Stock is not publicly traded at the time a determination of its value
is required to be made hereunder, the determination of its fair market value
shall be made by the Committee in such manner as it deems appropriate.
2
<PAGE>
VI. Options Nontransferable
Each Option and all rights granted thereunder shall not be transferable
other than by will or the laws of descent and distribution, and shall be
exercisable during the Optionee's lifetime only by the Optionee or the
Optionee's guardian or legal representative; provided, however, that on and
after the date the Corporation elects to have this Plan governed under the
amendments to Rule 16b-3 effective on or after May 1, 1991, this Plan shall be
deemed to be amended to limit the transferability of Options, including any
exceptions thereto, to the same extent provided by Rule 16b-3 as so amended.
VII. Recapitalization of Reorganization
In the event of a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, an appropriate and
proportionate adjustment shall be made in the number of shares of Common Stock
for which Options may be granted pursuant to Article III hereof. A
corresponding change shall be made to the number and kind of shares, and the
exercise price per share, of unexercised Options.
VIII. Merger, Consolidation or Dissolution of Corporation
Following the merger of one or more corporations into the Corporation, or
any consolidation of the Corporation and one or more corporations in which the
Corporation is the surviving corporation, the exercise of Options under this
Plan shall apply to the shares of the surviving corporation.
Not withstanding any other provision of this Plan, all Options under this
plan shall terminate on the dissolution or liquidation of the Corporation, or on
any merger or consolidation in which the Corporation is not the surviving
corporation.
IX. Term of Plan
This Plan shall be effective on approval by the shareholders of the
Corporation in the manner required by Rule 16b-3. Except with respect to
Options then outstanding, if not sooner terminated under the provisions of
Article VIII or Article X, the Plan shall terminate upon and no further Options
shall be granted as of the date the remaining number of shares of Common Stock
which may be issued under the Plan pursuant to Article IV is not sufficient to
cover the Options required to be granted under Article III.
3
<PAGE>
X. Amendment and Termination of Plan
The Board in its discretion may terminate this Plan at any time with
respect to any shares of Common Stock for which Options have not theretofore
been granted. The Board shall have the right to alter or amend this Plan or any
part hereof from time to time; provided, that this Plan shall not be amended
more than once every six months, other than to comport with changes in the Code,
the Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder; and provided, further, that no change in any Option heretofore
granted may be made which would impair the rights of an Optionee without the
consent of such Optionee; and provided, further, that the Board may not make any
alteration or amendment which would materially increase the benefits accruing to
participants under this Plan, increase the aggregate number of shares which may
be issued pursuant to the provisions of this Plan, change the class of
individuals eligible to receive Options under this Plan or extend the term of
this Plan, without the approval of the Stockholders of the Company.
XI. Compliance with Section 16
It is intended that this Plan and any grant of an Option made to a person
subject to Section 16 of the Securities Exchange Act of 1934, as amended ( the
"1934 Act") meet all of the requirements of Rule 16b-3, as currently in effect
or as hereinafter modified or amended ("Rule 16b-3"), promulgated under the 1934
Act. If any provision of this Plan or any such Option would disqualify this
Plan or such Option under, or would otherwise not comply with, Rule 16b-3, such
provision or Option shall be construed or deemed amended to conform to
Rule 16b-3.
By: __________________________________
Chairman & Chief Executive Officer
4
<PAGE>
EXHIBIT 10.7
NON-EMPLOYEE DIRECTORS'
-----------------------
STOCK OPTION AGREEMENT
----------------------
THIS STOCK OPTION AGREEMENT (the "Agreement") is made effective as of
----
, by and between American Physicians Service Group, Inc. a Texas
- --------
corporation (the "Company"), and ("Director").
-----------
To carry out the purposes of the 1995 NON-EMPLOYEE DIRECTORS' STOCK OPTION
PLAN (the "Plan"), a copy of which is attached hereto as Exhibit A, by affording
Director the opportunity to purchase shares of common stock, par value $0.10 per
share, of the Company ("Common Stock"), and in consideration of the mutual
agreements and other matters set forth herein and in the Plan, the Company and
Director hereby agree as follows:
1. Grant of Option. The Company hereby grants Director the right, privilege
----------------
and option (the "Option") to purchase shares of Common Stock ("Option
------
Shares") at the purchase price of $ per share (the "Option Price"), in the
----
manner and subject to the conditions hereinafter provided. This Option shall
not be treated as an incentive stock option within the meaning of section 422(b)
of the Internal Revenue Code of 1986, as amended.
2. Time and Exercise of Option. Subject to the limitations contained herein,
----------------------------
the aforesaid Option may be exercised at any time, and from time to time, in
whole or in part, during the period ending five (5) years from the date of this
agreement or until the termination thereof as provided in Section 4 below.
3. Method of Exercise. The Option shall be exercised by written notice
-------------------
directed to the Company, at the Company's principal place of business, addressed
to the attention of its President, specifying the number of shares of Common
Stock purchased and accompanied by payment of the option price in a form
suitable to the Company. With the consent of the Option Committee, such payment
may be in the form of shares of Company stock owned by the Optionee immediately
prior to the exercise of the Option.
(a) This option is exercisable with respect to the shares in cumulative annual
installments as indicated below:
<TABLE>
<CAPTION>
Date Number of Shares
---- ----------------
<S> <C>
1
</TABLE>
<PAGE>
(b) The Company shall make immediate delivery of such shares, provided that if
any law or regulation requires the Company to take any action with respect to
the shares specified in such notice before the issuance thereof, then the date
of delivery of such shares shall be extended for the period necessary to take
such action.
(c) The Option may be exercised within the above limitations and subject to the
limitations contained within this section, as to any part or all of the shares
covered thereby; provided, however, that the Option may not be exercised as to
less than 1,000 shares at any one time (or the remaining shares then purchasable
under the Option, if less than 1,000 shares).
4. Termination of Option. Except as herein otherwise stated, the Option, to
----------------------
the extent not heretofore exercised, shall terminate upon the first to occur of
the following dates:
(a) The expiration of the option priced as set out in item #2 of this
agreement.
(b) If Director's membership on the Board of Directors of the Company (the
"Board") terminates for cause or voluntarily by Director not at the request of
the Board, this Option may be exercised by Director at any time during the
period of three months following such termination, or by Director's estate (or
the person who acquires this option by will or the laws of descent and
distribution or otherwise by reason of the death of Director) during a period
of one year following Director's death if Director dies during such three-month
period, but in each case only as the number of shares Director was entitled to
purchase hereunder upon exercise of this Option as of the date Director's
membership on the Board so terminates. For purposes of this Agreement, "cause"
shall mean Director's gross negligence or willful misconduct in performance of
his duties as a director, or Director's final conviction of a felony or of a
misdemeanor involving moral turpitude.
(c) If Director's membership on the Board terminates by reason of disability,
this Option may be exercised in full by Director (or Director's guardian or
legal representative or Director's estate or the person who acquires this Option
by will or the laws of descent and distribution or otherwise by reason of the
death of Director) at any time during the period of one year following such
termination.
(d) If Director dies while a member of the Board, Director's estate, or the
person who acquires this Option by will or the laws of descent and distribution
or otherwise by reason of the death of Director, may exercise this Option in
full at any time during the period of one year following the date of Director's
death.
(e) If Director's membership on the Board terminates for any reason other than
as described in (a), (b) or (c) above, this Option may be exercised in full by
Director at any time during the period of three months following such
termination, or by Director's estate ( or the person who acquires this Option by
will or the laws of descent and distribution or otherwise by reason of
the death of Director) during a period of one year following Director's death
if Director dies during
2
<PAGE>
such three-month period.
This Option shall not be exercisable in any event after the expiration of ten
years from the date of grant hereof. The purchase price of shares as to which
this Option is exercised shall be paid in full at the time of exercise (A) in
cash (including check, bank draft or money order payable to the order of the
Company), (B) by delivering to the Company shares of Common Stock having a fair
market value equal to the purchase price, or (C) any combination of cash or
Common Stock. No fraction of a share of Common Stock shall be issued by the
Company upon exercise of an Option or accepted by the Company in payment of the
purchase price thereof; rather, Director shall provide cash payment for such
amount as is necessary to effect the issuance and acceptance of only whole
shares of Stock. Unless and until a certificate or certificates representing
such shares shall have been issued by the Company to Director, Director (or the
person permitted to exercise this Option in the event of Director's death) shall
not be or have any of the rights or privileges of a shareholder of the Company
with respect to shares acquirable upon an exercise of this Option.
5. Withholding of Tax. To the extent that the exercise of this Option or the
-------------------
disposition of shares of Common Stock acquired by exercise of this Option
results in compensation income to Director for federal or state income tax
purposes, Director shall deliver to the Company at the time of such exercise or
disposition such amount of money or shares of Common Stock as the company may
require to meet its obligation under applicable tax laws or regulations, and, if
Director fails to do so, the Company is authorized to withhold from any cash or
Common Stock remuneration then or thereafter payable to Director any tax
required to be withheld by reason of such resulting compensation income. Upon
an exercise of this Option, the Company is further authorized in its discretion
to satisfy any such withholding requirement out of any cash or shares of Common
Stock distributable to Director upon such exercise.
6. Reclassification, Consolidation or Merger. If all or any portion of the
------------------------------------------
Option shall be exercised subsequent to any share dividend, split-up,
recapitalization, merger, consolidation, combination or exchange of shares,
separation, reorganization or liquidation occurring after the date hereof, as a
result of which shares of any class of the capital stock of the Company shall be
issued in respect of the then issued and outstanding Common Stock, or Common
Stock shall be changed into the same or a different number of shares of the same
or another class or classes of the capital stock of the Company, the person or
persons so exercising the Option shall receive, for the aggregate price paid
upon such exercise, the aggregate number and class of shares of the capital
stock of the Company which, if Common Stock (as authorized at the date hereof)
had been purchased immediately prior to such event at the price per share set
forth in Section 1 hereof, such person or persons would be holding at the time
of such exercise; provided, however, that no fractional share shall be issued
upon any such exercise, and the aggregate price paid shall be appropriately
reduced on account of any fractional shares not issued. No adjustment shall be
made in the minimum number of shares which may be purchased at any one time, as
fixed by Subsection 3(c) hereof.
3
<PAGE>
7. Rights Prior to Exercise of Option. This Option is not transferable by
-----------------------------------
Director, except in the event of his/her death as provided in Subsection 4(c)
above, and during his/her lifetime is exercisable only by him/her. Director
shall have no rights as a shareholder with respect to the Option Shares until
payment of the Option Price and delivery to him/her of such shares as herein
provided.
8. Status of Stock. The Company intends to register for issuance under the
----------------
Securities Act of 1933, as amended (the "Act"), the shares of Common Stock
acquirable upon exercise of this Option, and to keep such registration effective
throughout the period this Option is exercisable. In the absence of such
effective registration or an available exemption from registration under the
Act, issuance of shares of Common Stock acquirable upon exercise of this Option
will be delayed until registration of such shares is effective or an exemption
from registration under the Act is available. The Company intends to use all
reasonable efforts to ensure that no such delay will occur. In the event
exemption from registration under the Act is available upon an exercise of this
Option, Director (or the person permitted to exercise this Option in the event
of Director's death or incapacity), if requested by the Company to do so, will
execute and deliver to the Company in writing an agreement containing such
provisions as the Company may require to assure compliance with applicable
securities laws.
Director agrees that the shares of Common Stock which Director may acquire by
exercising this Option will not be sold or otherwise disposed of in any manner
which would constitute a violation of any applicable federal or state securities
laws. Director also agrees (i) that the certificates representing the shares of
Common Stock purchased under this Option may bear such legend or legends as the
Company deems appropriate in order to assure compliance with applicable
securities laws, (ii) that the Company may refuse to register the transfer of
the shares of Common Stock purchased under this Option on the stock transfer
records of the Company if such proposed transfer would in the opinion of counsel
satisfactory to the Company constitute a violation of any applicable securities
law and (iii) that the Company may give related instructions to its transfer
agent if any, to stop registration of the transfer of the shares of Common Stock
purchased under this Option.
9. Modification and Waiver. Except for the Plan, this Agreement constitutes
------------------------
the entire agreement between the parties pertaining to the subject matter
contained in it and supersedes all prior and contemporaneous agreements,
representations and understandings of the parties. No supplement, modification
or amendment of this Agreement shall be binding unless executed in writing by
the party to be charged therewith. No waiver of any of the provisions of this
Agreement shall be deemed, or shall constitute a waiver of any other provision,
whether or not similar, nor shall any waiver constitute a continuing waiver.
10. Applicable Law and Venue. This Agreement has been executed by the Company
-------------------------
at, and shall be deemed to be performable in, Travis County, Texas. For these
and other reasons, the parties agree that this Agreement shall be governed by
and construed in accordance with the laws of the State of Texas.
4
<PAGE>
11. Jurisdiction. The parties agree that the courts of the State of Texas,.
-------------
and any courts whose jurisdiction is derivative on the jurisdiction of the
courts of the State of Texas, shall have exclusive personal jurisdiction over
all parties to this Agreement.
12. Headings. The subject headings of the sections of this Agreement are
---------
included for purposes of convenience only, and shall not affect the construction
or interpretation of any of its provisions.
13. Counterparts. This Agreement may be executed simultaneously in one or more
-------------
identical counterparts, each of which for all purposes shall be deemed an
original, and all of which shall constitute, collectively, one instrument; but
in making proof of this Agreement, it shall not be necessary to produce or
account for more than one executed counterpart.
IN WITNESS WHEREOF, the parties to this Agreement have duly executed it on the
dates indicated below, to be effective, however, as of the date first
hereinabove written.
AMERICAN PHYSICIANS SERVICE
GROUP, INC.
Date: ____________________________ By: __________________________
Kenneth S. Shifrin
Chairman of the Board
OPTIONEE
Date: ____________________________ By: __________________________
Name
__________________________
Address
__________________________
Address
__________________________
Social Security Number
5
<PAGE>
EXHIBIT 10.8
1995 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
OF
AMERICAN PHYSICIANS SERVICE GROUP, INC.
A Texas Corporation
I. Purpose of Plan
The purpose of this 1995 Incentive Stock Option Plan (this "Plan") is to
strengthen American Physicians Service Group, Inc. a Texas corporation (the
"Corporation"), and its subsidiaries, by providing stock options as a means to
attract, retain and motivate corporate personnel.
II. Administration
This Plan shall be administered by a committee (the "Committee") composed
of members selected by, and serving at the pleasure of, the Board of Directors
of the Company (the "Board"). The Committee shall be constituted so as to
permit the Plan to comply with Rule 16b-3, as currently in effect or as
hereinafter modified or amended ("Rule 16b-3"), promulgated under the Securities
Exchange Act of 1934, as amended (the "1934 Act"). Consistent with Rule 16b-3
each committee member shall be a disinterested person, i.e., a person who has
not been granted any equity security pursuant to a plan of the corporation or
any of its affiliates during the one year prior to his becoming a committee
member or during the period he serves as a committee member. The Committee
shall have the sole authority to select the persons entitled to receive Options
(as defined below) from among those eligible hereunder (the "Optionees") and to
establish the number of shares that may be issued under each Option to such
persons; provided, however, that, notwithstanding any provision in this Plan to
the contrary, the maximum number of shares of common stock, $.10 par value per
share of the Company (the "Common Stock") that may be subject to Options granted
under the Plan to an individual Optionee during any calendar year may not exceed
150,000 (subject to adjustment in the same manner as provided in Article IX
hereof to prevent dilution.) The limitation set forth in the preceding sentence
shall be applied in a manner which will permit compensation generated under the
Plan to constitute "performance-based" compensation for purposes of section
162(m) of the Internal Revenue Code of 1986, as amended ( the "Code"),
including, without limitation, counting against such maximum number of shares,
to the extent required under section 162(m) of the Code and applicable
interpretive authority thereunder, any shares subject to Options that are
cancelled or repriced. The Committee shall have the power to make all
determinations necessary for the administration of the Plan, subject to the
restrictions on committee power set forth in Texas law.
1
<PAGE>
III. Grant of Options
The Corporation is authorized to grant incentive stock options ("Incentive
Stock Options") as defined in section 422 of the Code and options that are not
intended to be Incentive Stock Options (hereafter "Non-Qualified Stock Options"
and, together with Incentive Stock Options, the "Options"). Any Option granted
under this Plan shall be granted within 10 years form the date this Plan is
adopted, or the date this Plan is approved by the stockholders pursuant to
Article X, whichever is earlier. No option granted under this Plan shall be
exercisable by its terms after the expiration of 10 years from the grant of the
Option. Options may be granted only to individuals, (a) who are employees
(including officers and directors who are also employees) of the Company or any
parent or subsidiary corporation (as defined in section 424 of the Code) of the
Company or (b) who are directors of the Company who are not members of the
Committee, at the time the Option is granted. Options may be granted to the
same individual on more than one occasion.
Incentive Stock Options may not be granted to persons who own stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Corporation, or of its parent or subsidiary, if any,
within the meaning of section 422(b)(6) of the Code, unless (i) at the time such
Option is granted the option price is at least 110% of the fair market value of
the Common Stock subject to such Option and (ii) such Option by its terms is not
exercisable after the expiration of five years from the date of the grant.
To the extent that the aggregate fair market value of Common Stock (as
determined in good faith by the Committee at the time the Incentive Stock Option
is granted), with respect to which Incentive Stock Options are exercisable for
the first time by an individual during any calendar year (under all incentive
stock option plans of the Corporation and any parent or subsidiary corporation)
exceeds $100,000, such excess Incentive Stock Options shall be treated as Non-
Qualified Stock Options. The Committee shall determine, in accordance with
applicable provisions of the Code, Treasury Regulations and other administrative
pronouncements which of an Optionee's Incentive Stock Options will not
constitute Incentive Stock Options because of such limitation and shall notify
the Optionee of such determination as soon as practicable after such
determination.
IV. Stock Subject to Plan
The aggregate number of shares of Common Stock that may be issued pursuant
to Options granted under this Plan shall not exceed 800,000 shares of Common
Stock (subject to adjustment as provided in article VIII). Such shares may
consist of authorized but unissued shares of Common Stock or previously issued
shares of Common stock reacquired by the Company. Any of such shares which
remain unissued and which are not subject to outstanding Options at the
termination of this Plan shall cease to be subject to this Plan, but, until
termination of this Plan, the Company shall at all times make available a
sufficient number of shares to meet the requirements of this Plan. Should any
Option hereunder expire or terminate prior to its exercise in full, the shares
of Common Stock theretofore subject to such Option may again be subject to an
Option granted under this Plan to the extent permitted under Rule 16b-3. The
aggregate number of shares which may be issued under this
2
<PAGE>
Plan shall be subject to adjustment as provided in Article VIII hereof. Exercise
of an Option in any manner shall result in a decrease in the number of shares of
Common Stock which may thereafter be available, both for purposes of the Plan
and for sale to any one individual, by the number of shares as to which the
Option is exercised. Separate stock certificates shall be issued by the Company
for those shares acquired pursuant to the exercise of an Incentive Stock Option
and for those shares acquired pursuant to the exercise of any Non-Qualified
Stock Options.
V. Option Agreements
Each Option shall be evidenced by a written agreement between the Company
and the Optionee ("Option Agreement") which shall contain such terms and
conditions as the Committee deems necessary, including, without limitation,
terms and conditions relating to the termination of Options. The terms and
conditions of the respective Option Agreements need not be identical. Moreover,
an Option Agreement may provide for the payment of the option price, in whole or
in part, by the delivery of a number of shares of Common Stock (plus cash if
necessary) having a fair market value equal to such option price.
VI. Option Price
The purchase price for a share of Common Stock subject to an Incentive
Stock Option granted pursuant to this Plan shall not be less than the fair
market value of the Common Stock subject to such Incentive Stock Option at the
time such Option is granted. The purchase price for a share of the Common
Stock subject to a Non-Qualifying Stock Option granted pursuant to this Plan
shall be not less than 100% of the fair market value of the Common Stock subject
to such Non-Qualifying Stock Option on the date such Option is granted.
For all purposes under the Plan, the fair market value of a share of Common
Stock on a particular date shall be equal to the average of the high and low
sales prices of the Common Stock (i) reported by the National Market System of
NASDAQ on that date or (ii) if the Common Stock is listed on a national stock
exchange, reported on the stock exchange composite tape on that date; or, in
either case, if no prices are reported on that date, on the last preceding date
on which such prices of the Common Stock are so reported. If the Common Stock
is traded over the counter at the time a determination of its fair market value
is required to be made hereunder, its fair market value shall be deemed to be
equal to the average between the reported high and low or closing bid and ask
prices of the Common Stock on the most recent date on which the Common Stock was
publicly traded. In the event the Common Stock is not publicly traded at the
time a determination of its value is required to be made hereunder, the
determination of its fair market value shall be made by the Committee in such
manner as it deems appropriate.
3
<PAGE>
VII. Options Nontransferable
Each Option and all rights granted thereunder shall not be transferable
other than by will or the laws of descent and distribution, and shall be
exercisable during the Optionee's lifetime only by the Optionee or the
Optionee's guardian or legal representative; provided, however, that on and
after the date the Corporation elects to have this Plan governed under the
amendments to Rule 16b-3 effective on or after May 1, 1991, this Plan shall be
deemed to be amended to limit the transferability of Options, including any
exceptions thereto, to the same extent provided by Rule 16b-3 as so amended.
VIII. Recapitalization of Reorganization
In the event of a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, an appropriate and
proportionate adjustment shall be made in the number of shares of Common Stock
for which Options may be granted pursuant to Article Iv hereof. A corresponding
change shall be made to the number and kind of shares, and the exercise price
per share, of unexercised Options.
IX. Merger, Consolidation or Dissolution of Corporation
Following the merger of one or more corporations into the Corporation, or
any consolidation of the Corporation and one or more corporations in which the
Corporation is the surviving corporation, the exercise of Options under this
Plan shall apply to the shares of the surviving corporation.
Not withstanding any other provision of this Plan, all Options under this
plan shall terminate on the dissolution or liquidation of the Corporation, or on
any merger or consolidation in which the Corporation is not the surviving
corporation.
X. Effective Date of Plan
This Plan shall be effective on approval by the outstanding shares or
unanimous written consent of the stockholders of the Corporation in the manner
required by Rule 16b-3.
XI. Amendment of Termination of Plan
The Board in its discretion may terminate this Plan at any time with
respect to any shares of Common Stock for which Options have not theretofore
been granted. The Board shall have the right to alter or amend this Plan or any
part hereof from time to time; provided, that no change in any Option heretofore
granted may be made which would impair the rights of the Optionee without the
consent of such Optionee; and provided, further, that (i) the Board may not make
any alteration or amendment which would decrease any authority granted to the
Committee hereunder in contravention of Rule 16b-3 and (ii) the Board may not
make any alteration or amendment which would materially
4
<PAGE>
increase the benefits accruing to participants under the Plan, increase the
aggregate number of shares which may be issued pursuant to the provisions of the
Plan, change the class of individuals eligible to receive Options under the Plan
or extend the term of the Plan, without the approval of the Stockholders of the
Company.
XII. Compliance with Section 16
With respect to persons subject to Section 16 of the 1934 Act, transactions
under this Plan are intended to comply with all applicable conditions of Rule
16b-3 or its successors under the 1934 Act. To the extent any provision of the
Plan or action by the Committee fails to so comply, it shall be deemed null and
void, to the extent permitted by law and deemed advisable by the Committee.
By:
-----------------------------------------
Kenneth S. Shifrin, Chairman of the Board
5
<PAGE>
EXHIBIT 10.9
STOCK OPTION AGREEMENT (ISO)
----------------------------
THIS STOCK OPTION AGREEMENT (the "Agreement") is made effective as of
__________________, by and between American Physicians Service Group, Inc., (the
"Company"), and ___________________ (the "Employee").
Whereas Employee is a valued and trusted employee of the Company, and the
Company considers it desirable and in its best interests that Employee be given
an inducement to acquire a further proprietary interest in the Company and an
added incentive to advance the interests of the Company by possessing an option
to purchase shares of the Company's common stock, par value $0.01 (the "Common
Stock"), in accordance with the Amended and Restated Incentive Stock Option Plan
of the Company (the "Plan").
NOW, THEREFORE, in consideration of the premises, it is agreed by and
between the parties as follows:
1. Grant of Incentive Stock Option. The Company hereby grants to Employee the
--------------------------------
right, privilege and option (the "Option") to purchase _____________ shares
of Common Stock (the "Option Shares") at the purchase price of $______ per
share (the "Option Price"), as in Incentive Stock Option ("ISO"), in the
manner and subject to the conditions hereinafter provided.
2. Time of Exercise of Option. Subject to the limitations contained herein,
---------------------------
the aforesaid option may be exercised at any time, and from time to time,
in whole or in part, during the period five (5) years from the date of this
agreement or until the termination thereof as provided in Section 4 below.
3. Method of Exercise. The Option shall be exercised by written notice
-------------------
directed to the Board of Directors of the Company, at the Company's
principal place of business, specifying the number of shares of Common
Stock purchased and accompanied by payment of the option price in a form
suitable to the Company. With the consent of the Option Committee, such
payment may be in the form of shares of Company stock owned by the Optionee
immediately prior to the exercise of the Option.
(a) This option is exercisable with respect to the shares in cumulative
annual installments as indicated below:
Date Number of Shares
---- ----------------
1
<PAGE>
(b) The Company shall make immediate delivery of such shares, provided
that if any law or regulation requires the Company to take any action with
respect to the shares specified in such notice before the issuance thereof,
then the date of delivery of such shares shall be extended for the period
necessary to take such action.
(c) The Option may be exercised within the above limitations and subject
to the limitations contained within this section, as to any part of all of
the shares covered thereby.
4. Termination of Option. Except as herein otherwise stated, the Option to
----------------------
the extent not heretofore exercised shall terminate upon the first to occur
of the following dates:
(a) The expiration of the option period as set out in Section 2 above.
(b) The expiration of three (3) months after the date on which an
Employee's employment by the Company is terminated for any reason other
than death or permanent and total disability;
(c) The expiration of twelve (12) months after the date on which
Employee's employment by the Company is terminated by reason of Employee's
permanent and total disability;
(d) In the event of Employee's death while in the employ of the Company,
his/her executors or administrators may exercise, within twelve (12) months
following the date of death, the Option as to any of the Option Shares not
theretofore exercised during the lifetime of Employee; or
(e) The expiration of ten (10) years following the grant of this Option,
commencing the effective date set forth above.
5. Reclassification, Consolidation or Merger. If all or any portion of the
------------------------------------------
Option shall be exercised subsequent to any share dividend, split-up,
recapitalization, merger, consolidation, combination or exchange of shares,
separation, reorganization or liquidation occurring after the date hereof,
as a result of which shares of any class of the capital stock of the
Company shall be issued in respect of the then issued and outstanding
Common Stock, or Common Stock shall be changed into the same or a different
number of shares of the same or another class or classes of the capital
stock of the Company, the person or persons so exercising the Option shall
receive, for the aggregate price paid upon such exercise, the aggregate
number and class of shares of the capital stock of the Company which, if
Common Stock (as authorized at the date hereof) had been purchased
immediately prior to such event at the price per share set forth in Section
1 hereof, such person or persons would be holding at the time of such
exercise; provided, however, that no fractional share shall be issued upon
any such exercise, and the aggregate price paid shall be appropriately
reduced on account of any fractional share not issued. No adjustment shall
be made in the minimum number of shares which may be purchased at any
2
<PAGE>
one time, as fixed by subsection 3(c) hereof.
6. Withholding of Tax. To the extent that the exercise of this Option or the
-------------------
disposition of shares of Common Stock acquired by exercise of this Option
results in compensation income to Employee for federal or state income tax
purpose, Employee shall deliver to the Company at the time of such exercise
or disposition such amount of money or shares of Common Stock as the
Company may require to meet its obligation under applicable tax laws or
regulations, and, if Employee fails to do so, the Company is authorized to
withhold from any cash or Common Stock remuneration then or thereafter
payable to Employee any tax required to be withheld by reason of such
resulting compensation income. Upon an exercise of this Option, the
Company is further authorized in its discretion to satisfy any such
withholding requirement out of any cash or shares of Common Stock
distributable to Employee upon such exercise.
7. Rights Prior to Exercise of Option. This Option is not transferable by
-----------------------------------
Employee, except in the event of his/her death as provided in Subsection
4(c) above, and during his/her lifetime is exercisable only by him/her.
Employee shall have no rights as a shareholder with respect to the Option
Shares until payment of the Option Price and delivery to him of such shares
as herein provided.
8. Modification and Waiver. Except for the Plan, this Agreement constitutes
------------------------
the entire Agreement between the parties pertaining to the subject matter
contained in it and supersedes all prior and contemporaneous agreements,
representations and understandings of the parties. No supplement,
modification or amendment of this Agreement shall be binding unless
executed in writing by the party to be charged therewith. No waiver of any
of the provisions of this Agreement shall be deemed, or shall constitute a
continuing waiver.
9. Applicable Law and Venue. This Agreement has been executed by the Company
-------------------------
at, and shall be deemed to be performable in, Travis County, Texas. For
these and other reasons, the parties agree that this Agreement shall be
governed by and construed in accordance with the laws of the State of
Texas.
10. Jurisdiction. The parties agree that the courts of the State of Texas, and
-------------
any courts whose jurisdiction is derivative on the jurisdiction of the
courts of the State of Texas, shall have exclusive personal jurisdiction
over all parties to this Agreement.
11. Headings. The subject headings of the sections of this Agreement are
---------
included for purposes of convenience only, and shall not affect the
construction or interpretation of any of its provisions.
12. Counterparts. This Agreement may be executed simultaneously in one or more
-------------
identical counterparts, each of which for all purposes shall be deemed an
original, and all of which
3
<PAGE>
shall constitute, collectively, one instrument; but in making proof of this
Agreement, it shall not be necessary to produce or account for more than
one executed counterpart.
IN WITNESS WHEREOF, the parties to this Agreement have duly executed it on
the dates indicated below, to be effective, however, as of the date first
hereinabove written.
Date: __________________________ By: _____________________________
Kenneth S. Shifrin, Chairman of
the Board
Employee:
Date: _________________________ By: ____________________________
Name
____________________________
Address
____________________________
Address
____________________________
Social Security Number
4
<PAGE>
EXHIBIT 10.10
STOCK OPTION AGREEMENT (NON-QUALIFIED)
--------------------------------------
This STOCK OPTION AGREEMENT (the "Agreement") is made effective as of
__________________, by and between American Physicians Service Group, Inc., (the
"Company"), and ___________________ (the "Optionee").
Whereas Optionee is a valuable and trusted employee and or director of the
Company, and the Company considers it desirable and in its best interests that
Optionee be given an inducement to acquire a further proprietary interest in the
Company and an added incentive to advance the interests of the Company by
possessing an option to purchase shares of the Company's common stock, par value
$0.01 (the "Common Stock"), in accordance with the Amended and Restated
Incentive Stock Option Plan of the Company (the "Plan").
NOW, THEREFORE, in consideration of the premises, it is agreed by and
between the parties as follows:
1. Grant of Non-Qualified Stock Option. The Company hereby grants to Optionee
------------------------------------
the right, privilege and option (the "Option") to purchase _____________
shares of Common Stock (the "Option Shares") at the purchase price of
$______ per share (the "Option Price"), as a Non-Qualified Stock Option,
in the manner and subject to the conditions hereinafter provided.
2. Time of Exercise of Option. Subject to the limitations contained herein,
---------------------------
the aforesaid option may be exercised at any time, and from time to time,
in whole or in part, during the period ending five (5) years from the date
of this agreement or until the termination thereof as provided in Section 4
below.
3. Method of Exercise. The Option shall be exercised by written notice
-------------------
directed to the Board of Directors of the Company, at the Company's
principal place of business, specifying the number of shares of Common
Stock purchased and accompanied by payment of the option price in a form
suitable to the Company. With the consent of the Option Committee, such
payment may be in the form of shares of Company stock owned by the Optionee
immediately prior to the exercise of the Option.
(a) This option is exercisable with respect to the shares in cumulative
annual installments as indicated below:
Date Number of Shares
---- ----------------
1
<PAGE>
(b) The Company shall make immediate delivery of such shares, provided
that if any law or regulation requires the Company to take any action with
respect to the shares specified in such notice before the issuance thereof,
then the date of delivery of such shares shall be extended for the period
necessary to take such action.
(c) The Option may be exercised within the above limitations and subject
to the limitations contained within this section, as to any part of all of
the shares covered thereby.
4. Termination of Option. Except as herein otherwise stated, the Option to
----------------------
the extent not heretofore exercised shall terminate upon the first to occur
of the following dates:
(a) The expiration of the option period as set out in Section 2 above.
(b) The expiration of three (3) months after the date on which an
Optionee's employment by the Company or director relationship with the
Company is terminated for any reason other than death or permanent and
total disability;
(c) The expiration of twelve (12) months after the date on which
Optionee's employment by the Company or director relationship with the
Company is terminated by reason of Optionee's permanent and total
disability;
(d) In the event of Optionee's death while serving as director of, or in
the employ of, the Company, his/her executors or administrators may
exercise, within twelve (12) months following the date of death, the Option
as to any of the Option Shares not theretofore exercised during the
lifetime of Optionee; or
(e) The expiration of ten (10) years following the grant of this Option,
commencing the effective date set forth above.
5. Reclassification, Consolidation or Merger. If all or any portion of the
------------------------------------------
Option shall be exercised subsequent to any share dividend, split-up,
recapitalization, merger, consolidation, combination or exchange of shares,
separation, reorganization or liquidation occurring after the date hereof,
as a result of which shares of any class of the capital stock of the
Company shall be issued in respect of the then issued and outstanding
Common Stock, or Common Stock shall be changed into the same or a different
number of shares of the same or another class or classes of the capital
stock of the Company, the person or persons so exercising the Option shall
receive, for the aggregate price paid upon such exercise, the aggregate
number and class of shares of the capital stock of the Company which, if
Common Stock (as authorized at the date hereof) had been purchased
immediately prior to such event at the price per share set forth in Section
1 hereof, such person or persons would be holding at the time of such
exercise; provided, however, that no fractional share shall be issued upon
any such exercise, and the aggregate price paid shall be appropriately
reduced on account of any fractional share not issued. No
2
<PAGE>
adjustment shall be made in the minimum number of shares which may be
purchased at any one time, as fixed by subsection 3(c) hereof.
6. Withholding of Tax. To the extent that the exercise of this Option or the
-------------------
disposition of shares of Common Stock acquired by exercise of this Option
results in compensation income to Optionee for federal or state income tax
purpose, Optionee shall deliver to the Company at the time of such exercise
or disposition such amount of money or shares of Common Stock as the
Company may require to meet its obligation under applicable tax laws or
regulations, and, if Optionee fails to do so, the Company is authorized to
withhold from any cash or Common Stock remuneration then or thereafter
payable to Optionee any tax required to be withheld by reason of such
resulting compensation income. Upon an exercise of this Option, the
Company is further authorized in its discretion to satisfy any such
withholding requirement out of any cash or shares of Common Stock
distributable to Optionee upon such exercise.
7. Rights Prior to Exercise of Option. This Option is not transferable by
-----------------------------------
Optionee, except in the event of his/her death as provided in Subsection
4(c) above, and during his/her lifetime is exercisable only by him/her.
Optionee shall have no rights as a shareholder with respect to the Option
Shares until payment of the Option Price and delivery to him of such shares
as herein provided.
8. Modification and Waiver. Except for the Plan, this Agreement constitutes
------------------------
the entire Agreement between the parties pertaining to the subject matter
contained in it and supersedes all prior and contemporaneous agreements,
representations and understandings of the parties. No supplement,
modification or amendment of this Agreement shall be binding unless
executed in writing by the party to be charged therewith. No waiver of any
of the provisions of this Agreement shall be deemed, or shall constitute a
continuing waiver.
9. Applicable Law and Venue. This Agreement has been executed by the Company
-------------------------
at, and shall be deemed to be performable in, Travis County, Texas. For
these and other reasons, the parties agree that this Agreement shall be
governed by and construed in accordance with the laws of the State of
Texas.
10. Jurisdiction. The parties agree that the courts of the State of Texas, and
-------------
any courts whose jurisdiction is derivative on the jurisdiction of the
courts of the State of Texas, shall have exclusive personal jurisdiction
over all parties to this Agreement.
11. Headings. The subject headings of the sections of this Agreement are
---------
included for purposes of convenience only, and shall not affect the
construction or interpretation of any of its provisions.
3
<PAGE>
12. Counterparts. This Agreement may be executed simultaneously in one or more
-------------
identical counterparts, each of which for all purposes shall be deemed an
original, and all of which shall constitute, collectively, one instrument;
but in making proof of this Agreement, it shall not be necessary to produce
or account for more than one executed counterpart.
IN WITNESS WHEREOF, the parties to this Agreement have duly executed it on
the dates indicated below, to be effective, however, as of the date first
hereinabove written.
Date: __________________________ By: _____________________________
Kenneth S. Shifrin, Chairman of
the Board
Optionee:
Date: _________________________ By: ____________________________
Name
____________________________
Address
____________________________
Address
____________________________
Social Security Number
4
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF AMERICAN PHYSICIANS SERVICE GROUP, INC.
AS OF MARCH 25, 1996
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
<S> <C>
APS Communications Corporation Texas
APS Facilities Management, Inc. Texas
APS Financial Corporation Colorado
APS Insurance Services, Inc. Delaware
APS Realty, Inc. Texas
APS Systems, Inc. Delaware
PLE Management, Inc. Texas
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to incorporation by reference in the registration statements (No. 33-
66308) on Form S-8 and (No. 33-62213) on Form S-3 of American Physicians Service
Group, Inc. of our report dated March 8, 1996, relating to the consolidated
balance sheets of American Physicians Service Group, Inc. and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of earnings,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1995, and the related financial statement schedule,
which report appears in the Annual Report on Form 10-KSB of American Physicians
Service Group, Inc. for the year ended December 31, 1995. Our report refers to
the change in the method of accounting for income taxes in 1993 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes".
By: /s/ KPMG Peat Marwick LLP
---------------------
Austin, Texas
March 26, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 6,798
<SECURITIES> 2,004
<RECEIVABLES> 1,880
<ALLOWANCES> 132
<INVENTORY> 1,014
<CURRENT-ASSETS> 13,038
<PP&E> 5,318
<DEPRECIATION> 3,189
<TOTAL-ASSETS> 23,740
<CURRENT-LIABILITIES> 5,572
<BONDS> 574
0
0
<COMMON> 366
<OTHER-SE> 17,228
<TOTAL-LIABILITY-AND-EQUITY> 23,740
<SALES> 0
<TOTAL-REVENUES> 20,490
<CGS> 0
<TOTAL-COSTS> 18,391
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 82
<INTEREST-EXPENSE> 124
<INCOME-PRETAX> 3,483
<INCOME-TAX> 1,108
<INCOME-CONTINUING> 2,375
<DISCONTINUED> (351)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,024
<EPS-PRIMARY> .53
<EPS-DILUTED> .49
</TABLE>
