-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OdIOi18/OKFmj+uYB0JAsZry7ITkjUW48Tzf69cSbXS2R5StXbynbmJTJ+YXqwrb Io+Lqt7HpZbtocm67D2gSw== 0000724024-07-000010.txt : 20070330 0000724024-07-000010.hdr.sgml : 20070330 20070330151816 ACCESSION NUMBER: 0000724024-07-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070330 DATE AS OF CHANGE: 20070330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN PHYSICIANS SERVICE GROUP INC CENTRAL INDEX KEY: 0000724024 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT SERVICES [8741] IRS NUMBER: 751458323 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-31434 FILM NUMBER: 07732321 BUSINESS ADDRESS: STREET 1: 1301 CAPITAL OF TEXAS HWY STREET 2: C-300 CITY: AUSTIN STATE: TX ZIP: 78746 BUSINESS PHONE: 5123280888 MAIL ADDRESS: STREET 1: 1301 CAPITAL OF TEXAS HIGHWAY CITY: AUTIN STATE: TX ZIP: 78746 10-K 1 ascifile.txt ANNUAL REPORT DATED DECEMBER 31, 2007 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K |X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2006 |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 0-11453 AMERICAN PHYSICIANS SERVICE GROUP, INC. (Exact name of registrant as specified in its charter) Texas 75-1458323 (State or other jurisdiction of (I.R.S. employer Identification No.) incorporation or organization) 1301 Capital of Texas Highway, Suite C-300, Austin Texas 78746 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (512) 328-0888 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange None on which registered ------------------- None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.10 par value (Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes |_| No|X| Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes |_| No |X| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer|X| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes |_| No |X| State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. Aggregate Market Value at June 30, 2006: $31,614,017 Indicate the number of shares outstanding of each of the registrant's class of common stock, as of the latest practicable date. Number of Shares Outstanding At Title of Each Class March 1, 2007 ------------------- ------------- Common Stock, $.10 par value 2,815,445 Documents Incorporated By Reference Selected portions of the Registrant's definitive proxy material for the 2006 annual meeting of shareholders are incorporated by reference into Part III of the Form 10-K. TABLE OF CONTENTS PAGE PART I Item 1. Business 3 Item 1A Risk Factors 8 Item 2 Properties 15 Item 3 Legal Proceedi 15 Item 4 Submission of Matters to a Vote of Security Holders 15 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 15 Item 6 Selected Financial Data 18 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 7A Quantitative and Qualitative Disclosures about Market Risk 31 Item 8 Financial Statements and Supplementary Data 32 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 32 Item 9A Controls and Procedures 32 Item 9B Other Information 33 PART III Item 10 Directors and Executive Officers of the Registrant 33 Item 11 Executive Compensation 33 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 33 Item 13 Certain Relationships and Related Transactions 33 Item 14 Principal Accountant Fees and Services 33 PART IV Item 15 Exhibits and Financial Statement Schedules 34 SIGNATURES 36 EXHIBIT INDEX A-1 EX-21.1 (Subsidiaries of the Registrant) EX-23.1 (Consents of Experts and Counsel) EX-31.1 (Certification of Chief Executive Officer) EX-31.2 (Certification of Chief Financial Officer) EX-32.1 (Certification of Chief Executive Officer) EX-32.2 (Certification of Chief Financial Officer) AMERICAN PHYSICIANS SERVICE GROUP, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006 References in this report to "we", "us", "our", and the "Company" mean American Physicians Service Group, Inc. PART I ITEM 1. BUSINESS General We, through our subsidiaries, provide services that include brokerage and investment services to individuals and institutions, and management and agency services to malpractice insurance companies. We were organized in October 1974 under the laws of the State of Texas. Our principal executive office is at 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746, and our telephone number is (512) 328-0888. Our website is www.amph.com. We make available free of charge on our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission, or the SEC. Financial information about our industry segments is disclosed in Note 16 to our accompanying consolidated financial statements in Appendix A hereof. OUR INSURANCE SERVICES APS Insurance Services, Inc., or Insurance Services, is our wholly-owned subsidiary. Prior to October 1, 2003, we owned 80% of Insurance Services. On October 1, 2003, we acquired the remaining 20% minority interest in Insurance Services for approximately $2.0 million in cash (see Note 14 to our consolidated financial statements included herein). Insurance Services, through its wholly-owned subsidiaries APS Facilities Management, Inc., dba APMC Insurance Services, Inc., or FMI, and American Physicians Insurance Agency, Inc., or Agency, provides management and agency services to American Physicians Insurance Exchange, or APIE, a reciprocal insurance exchange. Our revenues from this segment contributed 48%, 46% and 48% of our total revenues in 2006, 2005 and 2004, respectively. Substantially all of our revenue from the insurance services segment was attributable to FMI providing management services to APIE. A reciprocal insurance exchange is an organization that sells insurance only to its subscribers, who may pay, in addition to their annual insurance premiums, a contribution to the exchange's surplus. These exchanges generally have the need for few, if any paid employees and, instead, enter into a contract with an "attorney-in-fact" that provides all management and administrative services for the exchange. As the attorney-in-fact for APIE, FMI receives a percentage of the earned premiums of APIE, as well as a portion of APIE's profits. The amount of these premiums can be adversely affected by competition. Substantial underwriting losses, which might result in a curtailment or cessation of operations by APIE, would also adversely affect FMI's revenue and, accordingly, our revenue. To limit possible underwriting losses, APIE currently reinsures its risk in excess of $250,000 per medical incident. APIE offers medical professional liability insurance for physicians in Texas and Arkansas. FMI's assets are not subject to any insurance claims by policyholders of APIE. FMI has been APIE's exclusive manager since APIE's inception in 1975. The management agreement between FMI and APIE provides for full management by FMI of the 3 affairs of APIE under the direction of APIE's physician board of directors. Subject to the direction of this board, FMI sells and issues policies, investigates, settles and defends claims, and otherwise manages APIE's day to day operations. As described below, in consideration for performing its services, FMI receives a management fee based on APIE's earned premiums (before payment of reinsurance premiums), as well as a portion of APIE's profits. FMI pays salaries and personnel related expenses, rent and office operations costs, information technology costs and many other operating expenses of APIE. APIE is responsible for the payment of all claims, claims expenses, peer review expenses, directors' fees and expenses, legal, actuarial and auditing expenses, its taxes, outside agent commissions and certain other specific expenses. Under the management agreement, FMI's authority to act as manager of APIE is automatically renewed each year unless a majority of the subscribers to APIE elect to terminate the management agreement by reason of an adjudication that FMI has been grossly negligent, has acted in bad faith or with fraudulent intent or has committed willful misfeasance in its management activities. Termination of FMI's management agreement with APIE would have a material adverse effect on us. APIE is authorized to do business in the States of Texas and Arkansas, and specializes in writing medical professional liability insurance for physician groups, individual physicians and other healthcare providers. APIE currently insures approximately 4,700 physicians, dentists and other healthcare providers, the vast majority of which are in Texas. APIE writes insurance in Texas primarily through purchasing groups and is not subject to certain rate and policy form regulations issued by the Texas Department of Insurance. It reviews applicants for insurance coverage based on the nature of their practices, prior claims records and other underwriting criteria. APIE is one of the largest medical professional liability insurance companies in the State of Texas. On June 5, 2006 we announced plans for a strategic merger with APIE. Both our and APIE's boards of directors voted to approve the transaction subject to approval by the Texas Department of Insurance, necessary filings with the SEC and the approval of our shareholders and subscriber-policyholders of APIE. The original purchase price was $33 million, comprised of approximately 1.7 million shares of APS common stock to be issued to the policyholders of APIE and the conversion of approximately $10.4 million of APIE obligations into mandatorily redeemable APS preferred stock. On August 24, 2006, we announced that we agreed to an increase in the purchase price of APIE, which was also approved by APIE. The revised purchase price is $39 million; comprised of approximately 2.0 million shares of APS common stock issued to the policyholders of APIE and the conversion of approximately $10.4 million of APIE obligations into mandatorily redeemable APS preferred stock. The preferred stock has a 3% annual dividend and must be redeemed at the rate of not less than $1 million per year until December 31, 2016 at which time it must have been fully redeemed. At a special meeting of shareholders held March 22, 2007, the shareholders of APS approved the issuance of common and preferred shares of APS for the acquisition of APIE. APIE subscribers also approved the transaction on the same day. The acquisition is set to close effective April 1, 2007. As the acquirer, we will account for this transaction consistent with the Statement of Financial Standards No. 141, "Business Combinations", whereby direct costs of the business combination are capitalized and become part of the total purchase price. Generally, medical professional liability insurance is offered on either a "claims made" basis or an "occurrence" basis. "Claims made" policies insure physicians only against claims that occur and that are reported during the period covered by the policy. "Occurrence" policies insure physicians against claims based on occurrences during the policy period regardless of when they are reported. APIE offers only a "claims made" policy in Texas and Arkansas, but provides for an extended reporting option upon termination of the policy. APIE reinsures 100% of all Texas and Arkansas coverage risk between $250,000 and $1,000,000 per medical incident, primarily through certain domestic and international insurance companies. The management agreement with FMI obligates APIE to pay management fees to FMI based on APIE's earned premiums before payment of reinsurance premiums. The management fee percentage is 13.5% of earned premiums. In addition, any pretax profits of APIE will be shared equally with FMI (profit sharing) so long as the total amount does not exceed 3% of earned premiums. Only after prior year net losses are completely offset can FMI then share equally the profits at APIE. The management agreement with FMI will be terminated upon closing of the merger. 4 The following table presents selected financial and other data for APIE:
Years Ended December 31, 2006 2005 2004 2003 ------- ------ ------- ------- Total revenue $ 77,331 $ 64,866 $ 69,313 $ 56,148 Earned premiums subject to management fees $ 65,180 $ 64,135 $ 64,416 $ 51,816 Total assets $ 176,586 $ 145,128 $ 131,152 $ 102,728 Members' equity $ 206,318 $ 174,833 $ 145,728 $ 123,520 Management fees (including commissions) (1) $ 8,971 $ 9,031 $ 8,675 $ 7,067 Profit sharing $ 1,994 $ 2,007 $ 1,929 $ 722 Number of insureds $ 4,712 $ 3,919 $ 3,623 $ 3,073
(1) This amount includes management fees and commissions paid to FMI and Agency in addition to commissions of $0, $0, $0 and $513 in 2006, 2005, 2004 and 2003, respectively, paid to other carriers directly related to APIE's controlled business. OUR FINANCIAL SERVICES Through our subsidiaries, APS Financial Corporation, or APS Financial, APS Capital Corporation, or APS Capital, and APS Asset Management, Inc., or Asset Management, we provide investment and investment advisory services to institutions and individuals throughout the United States. Our revenues from this segment were 52%, 54% and 52% of our total revenues in 2006, 2005 and 2004, respectively. APS Financial is a fully licensed broker/dealer that provides brokerage and investment services primarily to institutional and high net worth individual clients. APS Financial also provides portfolio accounting, analysis, and other services, to insurance companies and banks. Although these other services account for only a small portion of the revenues of APS Financial, they can be instrumental in maintaining the business of some clients. APS Financial has its main office in Austin, Texas. APS Financial charges commissions on both exchange and over-the-counter, or OTC, transactions in accordance with industry practice. When APS Financial executes OTC transactions as a dealer, it receives, in lieu of commissions, markups or markdowns. APS Financial is a member of the National Association of Securities Dealers, Inc., or NASD, and the Securities Investor Protection Corporation, or SIPC, and, in addition, is licensed in 44 states and the District of Columbia. Every registered broker/dealer doing business with the public is subject to stringent rules with respect to net capital requirements promulgated by the SEC. These rules, which are designed to measure the financial soundness and liquidity of broker/dealers, specify minimum net capital requirements. As a registered broker/dealer, APS Financial is subject to these rules. Compliance with applicable net capital requirements could limit APS Financial's operations, such as limiting or prohibiting trading activities that require the use of significant amounts of capital. A significant operating loss or an extraordinary charge against net capital could adversely affect the ability of APS Financial to expand or even maintain our present levels of business. At December 31, 2006, APS Financial was in compliance with all applicable net capital requirements. APS Financial clears its transactions through Southwest Securities, Inc., or Southwest, on a fully disclosed basis. Southwest also processes orders and floor reports, matches trades, transmits execution reports to APS Financial and records all data pertinent to trades. APS Financial pays Southwest a fee based on the number and type of transactions that Southwest conducts for APS Financial. 5 APS Capital was established in 2005 and is dedicated to the clearing and settlement of trades involving syndicated bank loans, trade claims and distressed private loan portfolios. This company seeks to develop business with clients who trade in the high-yield bond market. In addition to marketing to professional hedge funds and institutional clientele, we also may receive referral leads from our affiliate companies. Asset Management, a registered investment adviser under the Investment Advisers Act of 1940, was formed and registered with the SEC in 1998. We formed Asset Management to manage fixed income and equity assets for institutional and individual clients on a fee basis. Asset Management's mission is to provide clients with investment results within specific client-determined risk parameters. COMPETITION Insurance Services. Substantially all of our revenue from this segment was attributable to FMI providing management services to APIE. Because FMI's management fee is based on the combined earned premiums and profit of APIE, our revenue can be adversely affected by APIE's competition. While there is no direct competition with respect to providing management services to APIE, APIE does compete with several insurance carriers, including Medical Protective Insurance Company, Texas Medical Liability Trust, ProAssurance, The Doctors Company and the Texas Medical Liability Insurance Underwriting Association (JUA). These companies are considered APIE's competitors because they are the companies to whom policyholders who cancel their policies with APIE typically move. APIE competes with these companies on a variety of factors including price, customer service, expertise in claims handling, policy coverage, risk management services and financial strength. In premiums written and asset size, Medical Protective Insurance Company, Texas Medical Liability Trust, ProAssurance and The Doctors Company are significantly larger than APIE. With the successful passing of tort reform legislation in late 2003, additional companies have re-entered the Texas market, resulting in increased competition. Financial Services. APS Financial, APS Capital and Asset Management are engaged in a highly competitive business. Their competitors include, with respect to one or more aspects of their business, all of the member organizations of the New York Stock Exchange and other registered securities exchanges, all members of the NASD, registered investment advisors, members of the various commodity exchanges and commercial banks and thrift institutions. Many of these organizations are national rather than regional firms and have substantially greater personnel and financial resources than us. In many instances APS Financial, APS Capital and Asset Management compete directly with these organizations. In addition, there is competition for investment funds from the real estate, insurance, banking and thrift industries. REGULATION INSURANCE SERVICES. FMI has received certificates of authority from the Texas and Arkansas insurance departments, licensing it on behalf of the subscribers of APIE. APIE, as a reciprocal insurance exchange, 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 our officers, directors, affiliates and subsidiaries. In the case of APIE, these regulations apply to FMI, the attorney-in-fact. Premium rates, advertising, solicitation of insurance, types of insurance issued and general corporate activity are also subject to regulation by the insurance departments of the States of Texas and Arkansas. FINANCIAL SERVICES. APS Financial and Asset Management are subject to extensive regulation under both federal and state laws. The SEC is the federal agency charged with administration of the federal securities and investment advisor laws. Much of the regulation of broker/dealers, however, has been delegated to self-regulatory organizations, principally the NASD and the national securities exchanges. These self-regulatory organizations adopt rules (subject to approval by the SEC) which govern the industry and conduct periodic examinations of member broker/dealers. APS Financial is also subject to regulation by state and District of Columbia securities commissions. 6 The regulations to which APS Financial is subject cover all aspects of the securities business, including sales methods, trade practices among broker/dealers, uses and safekeeping of customers' funds and securities, capital structure of securities firms, record keeping and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and by self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules, may directly affect the method of operation and profitability of APS Financial and, accordingly, us. The SEC, self-regulatory organizations and state securities commissions may conduct administrative proceedings that can result in censure, fine, suspension or expulsion of APS Financial and/or our officers or employees. The principal purpose of regulation and discipline of broker/dealers is the protection of customers and the securities markets, rather than protection of creditors and shareholders of broker/dealers. APS Financial, as a registered broker/dealer and NASD member organization, is required by federal law to belong to the SIPC. When the SIPC fund falls below a certain minimum amount, members are required to pay annual assessments in varying amounts not to exceed 0.5% of their adjusted gross revenues to restore the fund. The SIPC fund provides protection for customer accounts up to $500,000 per customer, with a limitation of $100,000 on claims for cash balances. REVENUES AND INDUSTRY SEGMENTS The information required by Regulation S-K Items 101(b) and 101(d) related to financial information about segments and financial information about sales is contained in Note 16 of our accompanying audited consolidated financial statements included in Appendix A of this Form 10-K. EMPLOYEES As of December 31, 2006, we employed, on a full time basis, approximately 107 persons, including 61 by Insurance Services, 38 by APS Financial and APS Capital, and 8 directly by us. We consider our employee relations to be good. None of our employees are represented by a labor union and we have experienced no work stoppages. Executive Officers As of March 1, 2007, our executive officers were as follows: Name Age Position - -------------- ----- ---------------------- Kenneth S. Shifrin 57 Chairman of the Board, President and Chief Executive Officer William H. Hayes 59 Senior Vice President - Finance, Secretary, and Chief Financial Officer Maury L. Magids 42 Senior Vice President - Insurance Thomas R. Solimine 48 Controller Our officers serve until the next annual meeting of our directors and until their successors are elected and qualified (or until their earlier death, resignation or removal). 7 Mr. Shifrin has been our Chairman of the Board since March 1990. He has been our President and Chief Executive Officer since March 1989 and he was President and Chief Operating Officer from June 1987 to February 1989. He has been a director since February 1987. From February 1985 until June 1987, Mr. Shifrin served as our Senior Vice President - Finance and Treasurer. Mr. Shifrin also has been a director of Financial Industries Corporation since June 2003 and was Chairman of the Board of Prime Medical Services, Inc. from October 1989 until November 2004. With the merger of Prime Medical and HealthTronics, Inc., or Healthtronics, Mr. Shifrin became Vice-chairman of the Board of HealthTronics in November 2004. In 2006, Mr. Shifrin resigned his vice-chairmanship but remains a member of the Board of Directors of HealthTronics. Mr. Shifrin is a member of the World Presidents Organization. Mr. Hayes has been our Senior Vice President - Finance since June 1995. Mr. Hayes was our Vice President from June 1988 to June 1995 and was our Controller from June 1985 to June 1987. He has been our Secretary since February 1987 and our Chief Financial Officer since June 1987. Mr. Hayes is a Certified Public Accountant. Mr. Magids has been our Senior Vice President - Insurance Services since June 2001 and has been President and Chief Operating Officer of FMI since November 1998. Mr. Magids joined us in October 1996. Mr. Magids is a Certified Public Accountant and was with Arthur Andersen LLP from August 1986 until September 1996, most recently as Director of Business Development. Mr. Solimine has been our Controller since June 1994. He has served as Secretary for APS Financial since February 1995. From July 1989 to June 1994, Mr. Solimine served as our Manager of Accounting. There are no family relationships, as defined, among any of our executive officers, and there is no arrangement or understanding between any of our executive officers and any other person pursuant to which he or she was selected as an officer. Each of our executive officers was elected by our board of directors to hold office until the next annual election of officers and until his or her successor is elected and qualified or until his or her earlier death, resignation or removal. Our board of directors elects our officers in conjunction with each annual meeting of our shareholders. AVAILABLE INFORMATION We file annual, quarterly and current reports, proxy statements, and other documents with the SEC under the Exchange Act. You may read and copy any materials that we file with the SEC at the SEC's public reference room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains a website that contains these SEC filings. You can obtain these filings at the SEC's website at http://www.sec.gov. We also make available free of charge on or through our website (http://www.amph.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. ITEM 1A. RISK FACTORS An investment in our common stock involves certain risks. Below are the most significant factors that make an investment in us speculative or risky. You should consider carefully these risks together with all of the other information included in this Form 10-K and the documents that we have incorporated by reference. 8 APPROXIMATELY ONE-HALF OF OUR REVENUE FROM CONTINUING OPERATIONS IS ATTRIBUTABLE TO OUR MANAGEMENT AGREEMENT WITH APIE, PURSUANT TO WHICH WE RECEIVE FEES BASED ON APIE'S SUCCESS AND ARE REQUIRED TO PROVIDE CERTAIN SERVICES AT OUR COST. Substantially all of our revenue from the insurance services segment, representing 48% of total revenue in 2006, was attributable to FMI providing management services to APIE. As the attorney-in-fact for APIE, FMI receives a percentage of the earned premiums of APIE, as well as a portion of APIE's profits. Accordingly, any reduction in premiums written by APIE or profit recorded by APIE would have a proportional negative effect on our revenues and net income. The amount of these premiums can be adversely affected by competition. Substantial underwriting losses, which might result in a curtailment or cessation of operations by APIE, would also adversely affect FMI's revenue and, accordingly, our revenue. The loss or reduction of these management fees could have a material adverse effect on our business, financial condition and results of operations. Pursuant to our management agreement with APIE, FMI is required to perform a number of sales, underwriting and management and administrative services at the direction of the Board of APIE associated with the issuance of insurance policies for APIE to earn FMI's management fee, regardless of the cost to FMI of providing those services. We could lose money or be less profitable if our cost of providing those services increases significantly. OUR SUBSIDIARIES OPERATE IN HIGHLY COMPETITIVE BUSINESSES AGAINST COMPETITORS WITH GREATER FINANCIAL, MARKETING, TECHNOLOGICAL, PERSONNEL AND OTHER RESOURCES. The industries in which we operate are highly competitive. Many of our competitors possess greater financial, marketing, technological and other resources. There can be no assurance that we will be able to continue to compete successfully. APS Financial, Asset Management and APS Capital are engaged in a highly competitive business. Their competitors include, with respect to one or more aspects of their business, all of the member organizations of the New York Stock Exchange and other registered securities exchanges, all members of the NASD, registered investment advisors, members of the various commodity exchanges and commercial banks and thrift institutions. In many instances APS Financial is competing directly with these organizations. In addition, there is competition for investment funds from the real estate, insurance, banking and thrift industries. As stated above, substantially all of our revenue from the insurance services segment was attributable to FMI providing management services to APIE. Because FMI's management fee is based on the earned premiums of APIE and APIE's profits, our revenue can be adversely affected by APIE's competition. APIE competes with several insurance carriers, including Medical Protective Insurance Company, Texas Medical Liability Trust, ProAssurance, The Doctors Company, Advocate MD and the Texas Medical Liability Insurance Underwriting Association (JUA), which is the state-sponsored insurer of last resort. APIE does not have the capacity to write the volume of business equal to that of some of the other major carriers. With the successful passing of tort reform in late 2003, additional companies have re-entered the Texas market, resulting in further increases in competition. AS A HOLDING COMPANY, OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE DEPENDENT ON OUR SUBSIDIARIES. We are principally a holding company with assets consisting primarily of cash and investment securities. Consequently, our ability to pay our operating expenses and to service our indebtedness is dependent upon the earnings of our subsidiaries and our ability to receive funds from such subsidiaries through loans, dividends or otherwise. The subsidiaries are legally distinct entities and have no obligation, contingent or otherwise, to make funds available to us for such obligations. In addition, our subsidiaries' ability to make such payments is subject to applicable state laws, and claims of our subsidiaries' creditors will generally have priority as to the assets of such subsidiaries. Accordingly, there can be no assurance that our subsidiaries will be able to pay funds to us or that such funds, if any, received by us will be sufficient to enable us to meet our obligations. 9 OUR FINANCIAL SERVICES BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION. The securities industry is subject to extensive governmental supervision, regulation and control by the SEC, state securities commissions and self-regulatory organizations, which may conduct administrative proceedings that can result in censure, fine, suspension or expulsion of APS Financial or any of its officers or employees. The NASD regulates our financial services business' marketing activities. The NASD can impose certain penalties for violations of its advertising regulations, including censures or fines, suspension of all advertising, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer or any of its officers or employees. Our ability to comply with all applicable laws and rules is largely dependent on our establishment and maintenance of a system to ensure compliance with these laws and rules, as well as our ability to attract and retain qualified compliance personnel. We could be subject to disciplinary or other actions due to claimed noncompliance in the future, which could have a material adverse effect on our business, financial condition and operating results. There can be no assurance that the federal or state governments or self-regulatory organizations having jurisdiction over our insurance and securities brokerage businesses will not adopt regulations or take other actions, such as the failure to renew or the revocation of required licenses and certifications, that would have a material adverse effect on our business, financial condition and results of operations. In addition, our operations and profitability may be affected by additional legislation, changes in rules promulgated by the SEC, NASD, the Board of Governors of the Federal Reserve System, the various stock exchanges and other self-regulatory organizations, and state securities commissions or changes in the interpretation or enforcement of existing laws or rules. WE ARE RELIANT ON KEY EXECUTIVES, KEY PERSONNEL AND KEY ACCOUNTS. We believe that our success depends on the efforts and abilities of a relatively small group of executive personnel. The loss of services of one or more of these key executives could have a material adverse effect on our business. We do not maintain key man life insurance on any of our key executives. We have entered into an employment agreement with Kenneth S. Shifrin, our Chairman of the Board and Chief Executive Officer that expires on August 1, 2010. We also have employment agreements with William H. Hayes, our Chief Financial Officer, Maury Magids, President of our insurance services subsidiary, and George S. Conwill, President of our investment services subsidiary. All of the latter three contracts expire in 2008. Additionally, although we have been fortunate in retaining our key salespersons for many years, a loss of one or more key salespersons and/or a loss of one or more key accounts is possible and could have a material adverse effect upon earnings. In particular, commissions revenues from a single customer of our broker/dealer subsidiary, APS Financial, represented 44% of total revenues of the subsidiary. The loss of this customer could have a material adverse impact on the operating results of the company. WE ARE EXPOSED TO INTEREST RATE AND INVESTMENT RISK. Changes in interest rates could have an impact at our broker/dealer subsidiary, APS Financial. The general level of interest rates may trend higher or lower in 2007, and this move may impact our level of business in different fixed-income sectors. If a generally improving economy is the impetus behind higher rates, then while our investment grade business may drop off, our high-yield business might improve with improving credit conditions. A volatile interest rate environment in 2007 could also impact our business as this type of market condition can lead to investor uncertainty and their corresponding willingness to commit funds. As we currently have no debt and do not anticipate the need to take on any debt in 2007, interest rate changes will have no impact on our financial position as it pertains to interest expense. As of December 31, 2006, our recorded basis in debt and equity securities was approximately $21 million. A material other than temporary decline in the 10 value of any of these investments could have a material adverse effect on our financial condition and results of operations. A decline in the value of equity securities, evidenced by lower prices traded for the common stock of these companies, might occur for several reasons, including poor financial performance, obsolescence of the service or product provided or any other news deemed to be negative by the investing public. A decline in the value of debt securities might occur for the same reasons above as well as due to an increase in interest rates. The value of the fixed income securities is also subject to interest rate risk. As market interest rates decrease, the portfolio value increases with the opposite holding true in rising interest rate environments. Equity securities are subject to equity price risk, which is defined as the potential for loss in market value due to a decline in equity prices. The value of common stock equity investments is dependent upon the general conditions in the securities markets and the business and financial performance of the individual companies in the portfolio. Values are typically based on future economic prospects as perceived by investors in the equity markets. FAILURE OF THIRD-PARTY VENDORS TO PROVIDE CRITICAL SERVICES COULD HARM OUR BUSINESS. We rely on a number of third parties to assist in the processing of our transactions, including online and internet service providers, back office processing organizations, and market makers. While we have selected these third-party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could have a material adverse effect on our business, financial condition and operating results. WE ARE SUBJECT TO MARKET FORCES BEYOND OUR CONTROL WHICH COULD IMPACT US MORE SEVERELY THAN OUR COMPETITORS. Our securities brokerage business, like other securities firms, is directly affected by economic and political conditions, broad trends in business and finance and changes in volume and price levels of securities transactions. In recent years, the U.S. securities markets have experienced significant volatility. If our trading volume decreases, our revenues decline. Also, when trading volume is low, our profitability is adversely affected because our overhead remains relatively fixed, despite lower compensation costs associated with commission revenues. Severe market fluctuations in the future could have a material adverse effect on our business, financial condition and operating results. Although we have diversified our product and service revenue streams, some of our competitors with more diverse product and service offerings might withstand such a downturn in the securities industry better than we would. OUR CUSTOMERS MAY DEFAULT ON THEIR MARGIN ACCOUNTS, EFFECTIVELY PASSING THEIR LOSSES ON TO US. Our securities brokerage customers sometimes purchase securities on margin through our Capital organization; therefore we are subject to risks inherent in extending credit. This risk is especially great when the market is rapidly declining. In such a decline, the value of the collateral securing the margin loans could fall below the amount of a customer's indebtedness. Specific regulatory guidelines mandate the amount that can be loaned against various security types. APS Financial rigorously adheres to these guidelines and in a number of instances exceeds those requirements. Independent of our review, our corresponding Capital organization independently maintains a credit review of our customer accounts. If customers fail to honor their commitments, the Capital organization would sell the securities held as collateral. If the value of the collateral were insufficient to repay the loan, a loss would occur, which we may be required to fund. Any such losses could have a material adverse effect on our business, financial condition and operating results. APS FINANCIAL MUST MAINTAIN CERTAIN NET CAPITAL REQUIREMENTS THAT COULD SLOW OUR EXPANSION PLANS OR PREVENT PAYMENTS OF DIVIDENDS. The SEC, NASD and various other regulatory agencies have stringent rules with respect to the maintenance of specific levels of net capital by securities broker-dealers. Net capital is the net worth of a broker or dealer (assets minus 11 liabilities), less deductions for certain types of assets. If a firm fails to maintain the required net capital, it may be subject to suspension or revocation of registration by the SEC and suspension or expulsion by the NASD, and could ultimately lead to the firm's liquidation. If such net capital rules are changed or expanded, or if there is an unusually large charge against net capital, operations that require the intensive use of capital would be limited. Such operations may include trading activities and the financing of customer account balances. Also, our ability to pay dividends, repay debt and redeem or purchase shares of our outstanding stock could be severely restricted. 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, which could have a material adverse effect on our business, financial condition and operating results. OUR TRADING SYSTEMS MAY FAIL, RESULTING IN SERVICE INTERRUPTIONS. Our securities brokerage business receives and processes trade orders through internal trading software and touch-tone telephones and depends heavily on the integrity of the electronic systems supporting this type of trading. Heavy stress placed on our systems during peak trading times could cause our systems to operate too slowly or fail. If our systems or any other systems in the trading process slow down significantly or fail even for a short time, our customers would suffer delays in trading, potentially causing substantial losses and possibly subjecting us to claims for such losses or to litigation claiming fraud or negligence. During a systems failure, we may be able to take orders by telephone; however, only associates with securities broker's licenses can accept telephone orders, and an adequate number of associates may not be available to take customer calls in the event of a systems failure. In addition, a hardware or software failure, power or telecommunications interruption or natural disaster could cause a system failure. Any systems failure that interrupts our operations could have a material adverse effect on our business, financial condition and operating results. OUR REVENUES AND OPERATING PERFORMANCE MAY FLUCTUATE WITH INSURANCE BUSINESS CYCLES. Growth in premiums written in the medical professional liability industry have fluctuated significantly over the past 10 years as a result of, among other factors, changing premium rates. The cyclical pattern of such fluctuation has been generally consistent with similar patterns for the broader property and casualty insurance industry, due in part to the participation in the medical professional liability industry of insurers and reinsurers which also participate in many other lines of property and casualty insurance and reinsurance. Historically, the financial performance of the property and casualty insurance industry has tended to fluctuate in cyclical patterns characterized by periods of greater competition in pricing and underwriting terms and conditions, a soft insurance market, followed by period of capital shortage, lesser competition and increasing premium rates, a hard insurance market. For the past two years the professional liability industry has faced a soft insurance market that has generally resulted in lower premium rates. We cannot predict whether, or the extent to which, the recent decrease in premium rates will continue. CHANGES IN THE HEALTH CARE INDUSTRY COULD HAVE A MATERIAL IMPACT ON OUR INSURANCE OPERATIONS. After the merger, our insurance operations will derive substantially all of its medical professional liability insurance premiums from physicians and other individual healthcare providers, physician groups and smaller healthcare facilities. Significant attention has recently been focused on reforming the healthcare industry at both the federal and state levels. In recent years, a number of factors related to the emergence of managed care have negatively impacted or threatened to impact the practice of medicine and economic independence of medical professionals. Medical professionals have found it more difficult to conduct a traditional fee-for-service practice and many have been driven to join or contractually affiliate with provider-supported organizations. Such change and consolidation may result in the elimination of, or a significant decrease in, the role of the physician in the medical professional liability insurance purchasing decision and could reduce APIE's, and after the merger our, medical professional liability premiums as groups of insurance purchasers may be able to retain more risk. 12 BECAUSE OUR BOARD OF DIRECTORS MUST BALANCE FIDUCIARY OBLIGATIONS TO APIE AND TO OUR SHAREHOLDERS, OUR BOARD OF DIRECTORS MAY MAKE DECISIONS THAT ARE NOT SOLELY IN THE INTERESTS OF OUR SHAREHOLDERS. As attorney-in-fact, FMI is contractually required to provide management and administrative services to APIE. In such capacity, FMI also has a fiduciary duty to the policyholders of APIE to protect their interests. Likewise, we have a fiduciary duty to our shareholders. Certain issues arise that may create conflicts of interest between these fiduciary duties. Among such potential conflicts of interest are: o Management must devote attention to the business interests of both APIE and us; o APIE may enter into other transactions and contractual relationships with us and our subsidiaries; and o State regulators could challenge the reasonableness of the transactions between us and APIE because of potential or actual conflicts of interest. As a consequence, our board of directors may make decisions or take actions that are not solely in the interests of our shareholders, although we believe that decisions that strengthen APIE could have a long-term positive effect on us. If, for example, there should be a need to strengthen the surplus of APIE, our board of directors may decide to reduce the management fee rate and/or that a capital contribution should be made by us to APIE in the form of a surplus note or some other form. Under such circumstances, we may be required to provide such capital to APIE at a lower rate of return than would be available with other investments or at no return at all. Payments of interest and repayment of principal on a surplus note are subject to prior approval of the Texas Department of Insurance, which may not approve such payments. We may also find it necessary to fund additional surplus for APIE by issuing additional shares of our capital stock, resulting in dilution of existing shareholders' interest. IF MARKET CONDITIONS CAUSE REINSURANCE TO BE MORE COSTLY OR UNAVAILABLE FOR APIE, OUR MANAGEMENT FEE MAY BE REDUCED. As part of APIE's overall risk management strategy, it currently purchases reinsurance for amounts of risk from $250,000 up to $1,000,000. If APIE is unable to maintain its current reinsurance coverage or to obtain other reinsurance coverage in adequate amounts and at favorable rates, or if APIE is unable to renew its expiring reinsurance coverage or to obtain new reinsurance coverage, APIE may be adversely affected by losses or have to reduce the amount of risk it underwrites, in either case reducing our management fee. ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS, OUR SHAREHOLDER RIGHTS PLAN AND TEXAS LAW COULD PREVENT OR DELAY A CHANGE IN CONTROL. Certain anti-takeover provisions applicable to our governance could prevent or delay an acquisition of our business at a premium price or at all. Some of these provisions are contained in our articles of incorporation as well as in a shareholder rights plan adopted by the Company. Others are contained in the Texas statutory law governing corporations. These provisions may have the effect of delaying, making more difficult or preventing a change in control or acquisition of the Company by means of a tender offer, a proxy contest or otherwise. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of the Company first to negotiate with us. Our articles of incorporation provide that we may not engage in certain business combinations with a corporation, subsidiary of a corporation, person, or other entity which is the beneficial owner, directly or indirectly, of twenty percent or more of our outstanding voting shares unless either certain requirements are first satisfied or the transaction is approved by the affirmative vote of no less than two-thirds of the shares of our common stock present in person or by proxy as a meeting where at least 80% of our common shares are represented (in person or by proxy). 13 Under our shareholder rights plan, each outstanding share of common stock has attached to it one purchase right. Each purchase right entitles its holder to purchase from the Company a unit consisting of one one-thousandth of a share of Series A junior participating preferred stock at a price subject to adjustment. This could prevent or delay a change in control of the Company. Articles 13.01 through 13.08 of the Texas Business Corporations Act provide that a Texas corporation may not engage in certain business combinations, including mergers, consolidations, and asset sales, with a person, or an affiliate or associate of such person, who is an "affiliated shareholder" (generally defined as the holder of twenty percent or more of the corporation's voting shares) for a period of three years from the date such person became an affiliated shareholder unless (i) the business combination or purchase or acquisition of shares made by the affiliate shareholder was approved by the board of directors of the corporation before the affiliated shareholder became an affiliated shareholder; or (ii) the business combination was approved by the affirmative vote of the holders of at least 66 2/3% of the outstanding voting shares of the corporation not beneficially owned by the affiliated shareholder, at a meeting of shareholders called for that purpose (and not by written consent), not less than six months after the affiliated shareholder became an affiliated shareholder. Neither our articles of incorporation nor our bylaws contain any provision expressly providing that we will not be subject to the Texas anti-takeover statute. The Texas anti-takeover statute may have the effect of inhibiting a non-negotiated merger or other business combination involving the Company, even if such event(s) would be beneficial to our shareholders. OUR MANAGEMENT SHAREHOLDERS HAVE SIGNIFICANT CONTROL OF THE COMPANY AND THE ABILITY TO INFLUENCE THE APPROVAL OF MATTERS FOR WHICH SHAREHOLDER VOTING IS INVOLVED. Our executive officers and directors and their affiliates beneficially own approximately 33% of the Company's outstanding common stock, assuming full conversion of all options exercisable within 60 days of March 31, 2007, that they may beneficially own. As a result, our management is able to influence and possibly control the election of our board of directors and the outcome of other corporate actions requiring shareholder approval. THE PASSAGE OF TORT REFORM AND THE SUBSEQUENT REVIEW OF SUCH LAWS BY THE COURTS COULD HAVE A MATERIAL IMPACT ON OUR INSURANCE OPERATIONS. As stated above, substantially all of our revenue from the insurance services segment was attributable to FMI providing management services to APIE. Because FMI's management fee is based on the earned premiums of APIE and APIE's profits, our revenue can be adversely affected by the impact of tort reforms on APIE's business. Tort reforms generally restrict the ability of a plaintiff to recover damages by imposing one or more limitations, including, among other limitations, eliminating certain claims that may be heard in a court, limiting the amount or types of damages, changing statutes of limitation or the period of time to make a claim, and/or limiting venue or court selection. Texas enacted legislation in 2003 specifically directed at medical malpractice liability insurance reform. Among the more significant aspects of the legislation were caps on non-economic damages and caps on non-economic damages against a single institution and against all health-care institutions combined. While the effects of tort reform would appear to be generally beneficial to APIE's business, there can be no assurance that such reforms will be effective or ultimately upheld by the courts in the various states. Further, if tort reforms are effective, the business of providing professional and other liability insurance may become more attractive, thereby causing an increase in competition for APIE and reducing our management fee or insurance services revenues. In addition, there can be no assurance that the benefits of tort reform will not be accompanied by regulatory actions by state insurance authorities that may be detrimental to APIE such as expanded coverage requirements and premium rate limitations or rollbacks. Also, the tort reform legislation, and the caps on non-economic damages, could change as a result of challenges in the courts or by future legislation. 14 ITEM 2. PROPERTIES We lease approximately 23,000 square feet of office space from HealthTronics in an office project at 1301 Capital of Texas Hwy., Suite C-300, Austin, Texas as our principal executive offices. We also lease approximately 1,200 square feet of office space for our insurance services subsidiary at 5401 North Central Expressway, Suite 316, LB #B4, Dallas, Texas. ITEM 3. LEGAL PROCEEDINGS We are involved in various claims and legal actions that have arisen in the ordinary course of our business. We believe that any liabilities arising from these actions will not have a material adverse effect on our financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is currently listed on the NASDAQ Small Cap Market under the symbol "AMPH." The following table sets forth the range of the quarterly high and low bid prices for the last two fiscal years. 2006 2005 --------------------- ------------------------ High Low High Low ---- ---- ---- ---- First Quarter $13.86 $12.15 $13.24 $10.01 Second Quarter $16.25 $13.51 $13.80 $9.25 Third Quarter $18.73 $12.82 $13.30 $11.50 Fourth Quarter $17.50 $14.37 $13.25 $11.37 There were approximately 199 holders of record of our common stock on March 1, 2007. In 2006, 2005 and 2004, we declared cash dividends of $0.30, $0.25 and $0.20, respectively, per share of common stock amounting to total cash outlays of approximately $820,000, $671,000 and $518,000, respectively. Prior to 2004, we had never declared or paid any cash dividends on our common stock. Our policy has been to retain our earnings to finance growth and development. The declaration and payment of any future dividends on our common stock would be at the sole discretion of our Board of Directors, subject to our financial condition, capital requirements, future prospects and other factors deemed relevant. 15 Performance Graph The graph below compares, assuming $100 was invested on December 31, 2001 and assuming the reinvestment of any dividends, our cumulative total shareholder return with the total shareholder returns of all NASDAQ stocks (the "NASDAQ Total") and of all stocks (the "Peer Index") contained in the NASDAQ Financial and Insurance indexes, with each index being given equal weight. The following is a table representation of the performance graph. NASDAQ Total Peer Index APS Group ---------- ----------- ----------- 12/29/01 100.00 100.00 100.00 12/31/02 69.13 102.19 114.84 12/31/03 103.36 133.99 285.67 12/31/04 112.49 158.49 286.22 12/31/05 114.88 167.51 344.59 12-30/06 126.22 191.44 452.70 The following table represents securities authorized for issuance under equity compensation plans, as described in Notes 12 and 13 to the consolidated financial statements included in Appendix A of this Form 10-K.
Equity Compensation Plan Information - ------------------------------------------------------------------------------------------------------------------------------------ Plan Category Number of securities to be Weighted-average exercise Number of securities remaining issued upon exercise of price of outstanding available for future issuance under outstanding options, options, warrants equity compensation plans. warrants and rights. and rights. Excluding securities reflected in column (a) - ------------------------------------------------------------------------------------------------------------------------------------ (a) (b) (c) - ------------------------------------------------------------------------------------------------------------------------------------ Equity Compensation plans approved by 536,000 $9.96 243,000 security holders Note 1 Note 2 - ------------------------------------------------------------------------------------------------------------------------------------ Equity compensation plans not approved by security holders none none none - ------------------------------------------------------------------------------------------------------------------------------------ Total 536,000 $9.96 243,000 - ------------------------------------------------------------------------------------------------------------------------------------
Note 1: Average price is for the 467,000 shares under the Stock Option Plan only, as 69,000 shares in the Deferred Compensation Plan are outright grants. Deferred shares are reflected in the financial statements at the grant date. Note 2: Shares remaining in the Stock Option Plan is 162,000; shares remaining in the Deferred Stock Plan is 81,000. 16 The following table represents stock repurchases during the fourth quarter of 2006:
(d) Maximum Number of Shares (or Approximate Dollar Value) (c) Total Number of Shares that of Shares May Yet be Purchased as Part Purchased Under Period (a) Total Number (b) Average of Publicly the Plans or of shares Price Paid Annonuced Plans Programs Purchased (1) per Share or Programs - ------- --------- ---------- ------------ -------------- Oct. 1, 2006-Oct. 31, 2006 3,087 $ 15.75 3,087 $ 1,731,000 Nov. 1, 2006-Nov. 30, 2006 2,500 $ 15.63 2,500 $ 1,692,000 Dec. 1, 2006-Dec. 31, 2006 3,885 $ 15.93 3,885 $ 1,630,000
(1) Of the total shares purchased, 9,472 were purchased in open market transactions and none were purchased in private transactions. Our original $2,000,000 share repurchase program was announced August 17, 2004 and was increased in $2,000,000 increments on December 12, 2005 and on June 30, 2006. 17 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with our consolidated financial statements and notes thereto included in Appendix A of this Form 10-K and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Item 7 hereof. The data in the following chart may not be comparable as data stated for the year 2006 were impacted by the implementation of FAS 123 (R) while the data in years prior to 2006 were not.
2006 2005 2004 2003 2002 --------------- -------------- --------------- -------------- ------------- Selected Income Statement Data: Revenues $ 32,360 $ 33,973 $ 32,021 $ 30,449 $23,077 Income from continuing operations before interest, income taxes, minority interests and equity in loss of unconsolidated affiliates 4,094 7,812 3,097 4,090 5,554 Income from continuing operations 3,194 5,460 2,152 2,772 3,156 Net income $ 3,194 $ 5,460 $ 2,152 $ 2,799 $ 3,411 Per Share Amounts: Basic: Income from continuing operations $ 1.15 $ 2.03 $ 0.85 $ 1.26 $ 1.42 Net income 1.15 2.03 0.85 1.27 1.53 Diluted: Income from continuing operations 1.09 1.86 0.76 1.13 1.35 Net income $ 1.09 $ 1.86 $ 0.76 $ 1.14 $ 1.45 Diluted weighted average shares outstanding 2,933 2,931 2,838 2,449 2,345 Cash Dividends $ 0.30 $ 0.25 $ 0.20 - - Selected Balance Sheet Data: Total assets $ 36,276 $ 33,505 $ 30,443 $ 25,638 $24,981 Working capital 19,980 15,880 10,673 8,537 5,799 Long-term obligations - - 1,133 1,576 2,665 Total liabilities $ 6,687 $ 5,783 $ 6,229 $ 6,532 $ 7,455 Minority interests 21 15 1 - 384 Total equity $ 29,568 $ 27,707 $ 24,213 $ 19,106 $17,142
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Our statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act, including statements regarding our expectations, hopes, intentions or strategies regarding the future. You should not place undue reliance on forward-looking statements. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results could differ materially from those in the forward-looking statements. The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors and legislative, judicial and other governmental authorities and officials. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Any of these assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. GENERAL We provide insurance services, including management services to APIE, and financial services, including brokerage and investment services to individuals and institutions. INSURANCE SERVICES. We provide management services to APIE through our subsidiary, FMI. FMI provides management and administrative services to APIE, a reciprocal insurance exchange that provides medical professional liability insurance. APIE is governed by a board of directors consisting of, as of December 31, 2006, eight physicians and one non-physician. Pursuant to a management agreement and the direction of this board, FMI manages and operates APIE, including performing policy issuance, claims investigation and settlement, and all other management and operational functions. FMI pays certain salaries and personnel related expenses, rent and office operations costs and information technology costs, as provided in the management agreement. APIE is responsible for the payment of all claims, claims expenses, peer review expenses, directors' fees and expenses, legal, actuarial and auditing expenses, our taxes, outside agent commissions and certain other specific expenses. The management agreement with FMI obligates APIE to pay management fees to FMI based on APIE's earned premiums before payment of reinsurance premiums. The management fee percentage is 13.5% of earned premium. In addition, any pre tax profits of APIE will be shared equally with FMI (profit sharing) so long as the total amount of profit sharing does not exceed 3% of earned premiums. FMI only provides these management services to APIE. Our revenues from this segment were 48%, 46% and 48% of our total revenues in 2006, 2005 and 2004, respectively. We recognize revenues for the management fee portion based on a percentage of earned premiums on a monthly basis. We recognize revenues for the management fee portion based on profit sharing in the fourth quarter, when it is certain that APIE will have an annual profit. FMI's assets are not subject to APIE policyholder claims. 19 FINANCIAL SERVICES. We provide investment and investment advisory services to institutions and individuals throughout the United States through the following subsidiaries: o APS Financial. APS Financial is a fully licensed broker/dealer that provides brokerage and investment services primarily to institutional and high net worth individual clients. APS Financial also provides portfolio accounting, analysis, and other services to insurance companies and banks. We recognize commission's revenue, and the related compensation expense, on a trade date basis. o APS Capital. APS Capital facilitates the clearing and settlement of trades involving syndicated bank loans, trade claims and distressed private loan portfolios. Trade claims are private debt instruments representing a pre-petition claim on a debtor's estate. We recognize commission revenue, and the related compensation expense, when the transaction is complete and fully funded. o Asset Management. Asset Management manages fixed income and equity assets for institutional and o individual clients on a fee basis. We recognize fee revenues monthly based on the amount of funds under management. OTHER INVESTMENTS. In addition, as of December 31, 2006, we own 385,000 shares of FIC, representing approximately 4% of their outstanding common stock. Our policy is to account for investments as available-for-sale securities which requires that we assess fluctuations in fair value and determine whether these fluctuations are temporary or "other than temporary" as defined in Statements of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, as amended. Temporary changes in fair value are recognized as unrealized gains or losses excluded from earnings and reported in equity as a component of accumulated other comprehensive income, net of income taxes. Should a decline in an investment be deemed other than temporary, as was the case with our investment with FIC in 2004, 2005 and 2006, pre-tax charges to earnings will be taken in the period in which the impairment is considered to be other than temporary. As of December 31, 2006, we also had investments totaling $16,636,000 in investment-grade governmental and corporate fixed income securities, which are accounted for as available for sale. These securities are carried at fair value with unrealized gains and losses, net of taxes, reported in equity as a component of accumulated other comprehensive income. As above, we would recognize an impairment charge to earnings in the event a decline in fair value below the cost basis of one of these investments is determined to be other than temporary. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates, including those related to impairment of assets; bad debts; income taxes; and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies and estimates affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. 20 ASSET IMPAIRMENT We periodically review the carrying value of our assets to determine if events and circumstances exist indicating that assets might be impaired. If facts and circumstances support this possibility of impairment, our management will prepare undiscounted and discounted cash flow projections, which require judgments that are both subjective and complex. Management may also obtain independent valuations. REVENUE RECOGNITION Our insurance service revenues related to management fees are recognized monthly at 13.5% of the earned premiums of the managed company. We also share equally any profit of the managed company, to a maximum of 3% of the earned insurance premiums. Any past losses of the managed company are carried forward and applied against earnings before any profits are shared. We recognize revenues for the management fee portion based on profit sharing in the fourth quarter, when it is certain the managed company will have an annual profit. Our financial services revenues are composed primarily of commissions on securities trades and clearing of trade claims and asset management fees. Revenues related to securities transactions are recognized on a trade date basis. Revenues from the clearing and settlement of trades involving syndicated bank loans, trade claims and distressed private loan portfolios are recognized when the transaction is complete and fully funded. Asset management fees are recognized as a percentage of assets under management during the period based upon the terms of agreements with the applicable customers. ALLOWANCES When necessary, we record an allowance for doubtful accounts based on specifically identified amounts that we believe to be uncollectible. Management analyzes historical collection trends and changes in its customers' payment patterns, customer concentration and credit worthiness when evaluating its allowance for doubtful accounts. If our actual collections experience changes, revisions to our allowance may be required. We have a limited number of customers with individually large amounts due at any given balance sheet date. Any unanticipated change in one of those customers' credit standing or rating could have a material affect on our results of operations in the period in which such changes or events occur. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. 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. When necessary, we record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that it would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period the determination was made. Likewise, should we determine that it would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period the determination was made. We account for our equity and fixed income securities as available for sale. In the event a decline in fair value of an investment occurs, management may be required to determine if the decline in market value is other than temporary. Management's assessments as to the nature of a decline in fair value are based on the quoted market prices at the end of a period, the length of time an investment's fair value has been in decline and our ability and intent to hold the investment. If the fair value is less than the carrying value and the decline is determined to be other than temporary, an appropriate write-down is recorded against earnings. 21 STOCK-BASED COMPENSATION In December 2004, the FASB issued a revision ("SFAS No. 123(R)") to SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), and we were required to adopt SFAS No. 123(R) in the first quarter of 2006. SFAS No. 123(R) supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related interpretations, and requires that all stock-based compensation, including options, be expensed at fair value, as of the grant date, over the vesting period. Companies are required to use an option pricing model (e.g.: Black-Scholes or Binomial) to determine compensation expense, consistent with the model previously used in the already required disclosures of SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. For the year ended December 31, 2006 we calculated stock-based compensation using the intrinsic value method. We estimate the fair value of stock option awards on the date of grant utilizing a modified Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of short-term traded options that have no vesting restrictions and are fully transferable. However, certain assumptions used in the Black-Scholes model, such as expected term, can be adjusted to incorporate the unique characteristics of our stock option awards. Option valuation models require the input of somewhat subjective assumptions including expected stock price volatility and expected term. We believe it is unlikely that materially different estimates for the assumptions used in estimating the fair value of stock option granted would be made based on conditions suggested by actual historical experience and other data available at the time estimates were made. Restricted stock awards are valued at the price of our common stock on the date of grant. The adoption of SFAS No. 123(R) has not had a material effect on our financial position, operations or cash flows. At December 31, 2006, we have a stock-based compensation plan, which is described more fully in Note 13 to our accompanying consolidated financial statements included herein. Prior to January 1, 2006, we accounted for this plan under the recognition and measurement principles of APB No. 25, under which stock-based employee compensation cost was not reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. In accordance with SFAS No. 123, as amended by SFAS No. 148, we provided footnote disclosure of the pro forma stock-based compensation cost, net loss and net loss per share for the years prior to adopting SFAS No. 123 (R), as if the fair-value based method of expense recognition and measurement prescribed by SFAS No. 123 had been applied to all employee options. As a result of adopting SFAS No. 123(R) on January 1, 2006, our pre-tax income for the year ended December 31, 2006 is $225,000 less than it would have been if we had continued to account for stock-based compensation under APB No. 25. Basic and diluted net income per share would be unchanged if we had not adopted SFAS No. 123(R). The adoption of SFAS No. 123(R) had no effect on our cash flows in the year ended December 31, 2006, as stock option expense is a non-cash charge. RESULTS OF OPERATIONS Overview and Business Outlook Insurance Services revenues for the year ended December 31, 2006 were level with revenues recorded for the same period in 2005, a year which enjoyed record revenues. Total member's equity at APIE has grown approximately 57% in 2006 after growing approximately 78% in 2005. Insurance Services revenues are dependent on APIE and if APIE's surplus continues to grow, this would continue to increase the financial strength of the company and our capacity to write new business and therefore increase the amount of profit in which we would be able to share. Insurance Services operating expenses increased over 2005, primarily as a result of anticipated new personnel hires required to support estimated growth in new business and the retention of existing business. Professional fees will be higher in future periods as a result of the decision by the SEC to require micro-cap companies to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Effective as of May 30, 2006, our board of directors approved a merger with APIE. Subsequent to the merger, it is anticipated that the Insurance Services management fee revenues derived from the attorney-in-fact contract with APIE would no longer exist, being replaced by the revenues and expenses of APIE, and revenues from earned premiums and investment income from APIE as well as results from operations would be reported. For the 22 years ended December 31, 2006 and 2005 the management fee revenues reported by Insurance Services was $10,964,000 and $11,045,000, respectively. For the years ended December 31, 2006 and 2005, the total revenues reported by APIE were $77,331,000 and $69,866,000, respectively. Total expenses reported by APIE were $52,909,000 and $56,647,000 for the years ended December 31, 2006 and 2005, respectively. Our insurance segment is greatly affected by the profitability of APIE which we manage through FMI. Significant increases in the frequency and/or severity of claims brought against APIE's insured doctors would negatively affect the profitability of APIE, and consequently, the amount of profit, if any, in which we would be able to share. This risk has been reduced as a result of physicians renewing at lower limits of coverage. Prior to tort reform legislation in 2003, the Texas market place experienced rate increases as a result of unfavorable claims trending. As rates continued to increase, physicians sought lower limits of coverage in order to lower their cost of coverage. The shift to lower limits resulted in lower premiums being by paid to APIE by physician-policyholders. However, the lower premiums paid as a result of this shift were offset by rate increases of approximately 39%, 13% and 1% in 2002, 2003 and 2004, respectively. As a result of increased competition and improved loss ratios, rates have declined 9% and 18% for 2005 and 2006, respectively. In addition, policyholder headcount increased from 2,992 at January 1, 2002 to 4,712 at December 31, 2006, further offsetting this shift to lower policy limits. Total gross premiums and maintenance fees written were $74,833,000 and $79,301,000 for the years ended December 31, 2006 and 2005, respectively. Further, tort and insurance reform passed in the State of Texas in 2003 capped non-economic damages and placed restrictions on mass litigation. As a result of tort reform, competitors have re-entered the State of Texas, which has resulted in increased competition and lowering of rates. APS Financial, the broker/dealer division of our financial services segment, saw growth in our investment banking division in 2006 compared to 2005 while commission revenues from security trading in 2006 lagged behind those recorded in 2005. APS Capital, which represents a new revenue stream, was formed in 2005. APS Capital earns commissions on the trading and clearing of non-security transactions in bank debt and trade claims. The investment banking department was established in 2005 and ramped up in 2006 with the hiring of a dedicated investment banker and staff who were successful in closing several private placement transactions. Commission revenues from both investment and non-investment grade trading were down in 2006 as a result of soft market conditions as well as a partial shift in investment funds of our customer base away from the bond market and towards the higher-yielding revenue streams mentioned above. As a result of difficult market conditions for the trading of investment grade securities, APS Financial consolidated trading into its main office in Austin, Texas and closed its Houston office in the third quarter of 2006. Though the Houston office generated commission revenues of approximately $1.2 million during the first nine months of 2006 and $2.6 million for all of 2005, it had become unprofitable during the past twelve months. For commission revenue generation, bullish, unstable markets provide us with the most opportunity. Conversely, stable, bearish markets pose the greatest difficulty in generating income. Uncertainty in world, political and economic events can also be an obstacle to revenue generation. Investors may take a wait-and-see attitude should uncertainty exist. Although we have been fortunate in retaining our key salespersons, a loss of one or more key individuals and/or a loss of one or more key accounts is possible and could have an adverse effect upon earnings. The nature of the broker/dealer business and the current litigious legal environment in which we operate means that there is always the possibility of one or more lawsuits being brought against us. Claims against broker/dealers generally rise in periods of down markets and the more prolonged a downturn, generally the greater risk of litigation. 23 2006 COMPARED TO 2005 Revenues from operations decreased $1,613,000 (5%) in the year ended December 31, 2006 compared to 2005. Our operating income decreased $991,000 (20%) in 2006 compared to 2005. Our net income decreased $2,266,000 (42%) in 2006 compared to 2005. Lastly, our diluted net income per share decreased $0.77 (41%) in 2006 compared to 2005. The reasons for these changes are described below. INSURANCE SERVICES. Total revenues from our insurance services segment increased $41,000 (0%) for the year ended December 31, 2006 compared to 2005. The current year increase in revenues is mainly attributable to higher pass through commissions which increased by $270,000 (6%) in 2006 as commission rates and premiums written through agents for new business at APIE remained higher in 2006. Third party agents were paid higher effective commission rates as a result of their writing more new business and in order to increase market share. As noted in the following paragraph, commissions paid to third party independent agents increased by an equivalent amount, resulting in no impact on net income. Partially offsetting this increase was a decrease in management fee revenue of $67,000 (1%), the result of lower earned premiums at APIE, our managed medical malpractice insurance company, due to rate decreases implemented in the latter part of 2005. This has resulted in lower written premium of $4.5 million for the year ended December 31, 2006 as compared to 2005. While planned rate decreases have lowered written premium, policyholder retention remains strong at greater than 90% for APIE. In addition, risk management fees decreased $95,000 (47%) for the year ended December 31, 2006 compared to 2005 as a result of fewer renewals requiring these services and the discontinuation of a high risk management program at the end of 2005. This decrease in risk management fees is the result of two key factors: (1) fees are lower due to an improved claims environment following tort reform legislation enacted in 2003, resulting in fewer new business and renewal accounts being placed into the risk management program and thus being required to pay for these services; and (2) risk management services continue to be performed, but due to increased competition we have occasionally provided these services at no charge. Insurance services expenses increased $1,000,000 (10%) for the year ended December 31, 2006 compared to 2005. Payroll expense increased $291,000 (9%) in 2006 compared to 2005 due in part to merit increases, the addition of new managerial positions, additional staff positions for business development and physician services departments and expensing stock options as required by FAS123(R). Options expense totaled $144,000 in 2006, the first year that we expensed stock options. Professional fees increased $165,000 (65%) in 2006 compared to 2005 due primarily to consulting costs incurred in the analysis of new policy and claims software. Pass through commissions expense increased $270,000 (6%) in 2006 compared to 2005 due to the above-mentioned increase in commissions paid to third party independent agents. Lastly, advertising expense increased $65,000 (72%) in 2006 compared to 2005 due to consulting costs associated with increased marketing efforts. FINANCIAL SERVICES. Our financial services revenues decreased $1,654,000 (9%) in 2006 compared to 2005. This decrease was primarily due to lower revenue derived from commissions earned at our broker/dealer, APS Financial. Commission income, mostly generated from transactions in the investment grade and non-investment grade fixed income market, were down $5,400,000 (33%) in 2006 compared to 2005. Going into 2006, the Federal Reserve had raised short-term rates 17 times for a total of 425 basis points since mid 2004, and then held rates steady throughout 2006. The resulting flat to inverted yield curve, in conjunction with lack of volatility throughout the year, resulted in generally less customer activity and trading volumes in investment grade bonds. As a result of these depressed trading conditions, APS Financial shut down its Houston branch office in the third quarter of 2006 and consolidated its trading and sales activities in its Austin office. Regarding its non-investment grade trading, APS Financial has also realized lower trading volumes in the high yield market, due to narrow interest rate spreads. The narrow spreads resulted from a corporate market experiencing historically low default rates and lower volatility. Offsetting somewhat the lower level of securities trading revenues were revenues earned from our investment banking and distressed debt/trade claim trading operations, which contributed an aggregate increase of $3,800,000 (201%) in 2006 compared to 2005. 24 Financial services expenses decreased $1,117,000 (7%) in 2006 compared to 2005. Reflecting the above-mentioned lower commission revenue, commission expense, which includes commissions from secondary market trading, as well as placement fees for investment banking and referral fees for bank debt trading, were down $1,512,000 (14%) in 2006 compared to 2005. Partially offsetting this decrease in 2006 expenses was an increase in payroll which was up $195,000 (11%) in 2006 due largely to the hiring of additional personnel in the investment banking and bank debt trading areas as the firm continued to ramp up these business efforts. Also adding to the payroll variance was an increase in the sum total of performance related forgivable loans granted to a high-producing broker and which are expensed upon his continued employment with us. In addition, options expense totaled $36,000 in 2006, the first year that we expensed stock options. GENERAL AND ADMINISTRATIVE EXPENSE. Our general and administrative expenses decreased $609,000 (22%) in 2006 compared to 2005. The current year decrease is primarily due to lower incentive compensation expense. Incentive compensation, a formula driven expense calculated in part on net earnings, decreased $442,000 (42%) due to much lower investment gains in 2006 compared to 2005. In addition, salaries expense was $84,000 (11%) lower in 2006 as a result of a severance payment in 2005 to a former employee who has since been retained as a tax consultant. Legal and professional fees declined in 2006 by $128,000 (46%) as costs associated with internal controls disclosures and procedures under the Sarbanes-Oxley Act of 2002, or SOX 404, compliance were minimal in 2006 compared to 2005 when we were ramping up our compliance efforts. With the uncertainty as to what, if any, relief was to be granted to non-accelerated filers like us, we slowed our expenditures in an attempt to control SOX 404 compliance costs. In particular, we did not retain the outside SOX 404 consultants we employed during 2005 and have concentrated instead on internal compliance efforts. Our SOX compliance costs in 2007 can be expected to increase over 2006 as we will hire a director of internal audit to complete the task. Partially offsetting these decreases was stock option expense of $45,000 in 2006, the first year that such expenses were charged. GAIN ON SALE OF ASSETS. In 2006, we recognized $422,000 of deferred gain related to the November 2001 sale and subsequent leaseback of real estate to Prime Medical (now called HealthTronics, Inc.). Due to our continuing involvement in the property, we deferred recognizing approximately $2,400,000 of the approximately $5,100,000 gain and recognized it in earnings, as a reduction of rent expense, monthly through September 2006. As of September 30, 2006 no more of these deferred gains remain to be recognized. In addition, 15% of the gain ($760,000) related to our then 15% ownership in the purchaser, was deferred. As our ownership percentage in HealthTronics declines through our sales of HealthTronics common stock, we recognize these gains proportionately to the reduction of our interest in HealthTronics. In 2006, we recognized approximately $29,000 of these deferred gains as a result of HealthTronics common stock sold in the year. As of December 31, 2006, there remained a balance of approximately $17,000 to be recognized in future periods. GAIN ON INVESTMENTS. Gains on investments decreased $2,901,000 (92%) in 2006 compared to 2005 due to the sale of a much larger number of available-for-sale equity securities in 2005 compared to sales in 2006. Sales of these securities are down in 2006 as a result of fewer shares held by us and a decline in their market price. Partially decreasing the 2005 gain was a write-off of a note that we deemed unlikely to collect. All of the remaining balance on the note, a total of $160,000, was written off in 2005. In late 2006, we unexpectedly began receiving payments on the note, totaling $85,000, which were recorded as a gain from investments. LOSS ON IMPAIRMENT OF INVESTMENT. The losses recorded in 2005 represent write-downs of investments in an equity security and in a bond held for investment after determining that market declines in the value of these securities should be considered "other than temporary". The equity investment referred to is the shares of common stock we own in Financial Industries Corporation, or FIC. We record pretax charges to earnings should the common stock price of the security on the last day of each interim or annual period fall below the adjusted cost basis of our investment in FIC. In 2005, that charge totaled $136,000, lowering our cost basis in FIC to $7.65 at December 31, 2005. The remainder of the loss taken in 2005 was due to a market decline in a fixed income security that has since been sold. FIC common stock traded at $7.60 at December 31, 2006 which necessitated taking an additional charge to earnings in 2006 totaling $19,000. We will continue to monitor and evaluate the situation at Financial Industries. 25 INTEREST INCOME. Our interest income increased $328,000 (56%) in 2006, compared to 2005. The current year increase was due to higher interest rates as well as a much higher balance of interest-bearing fixed income securities. At December 31, 2006 there was a balance in investment securities held of $16.7 million compared to a balance of $13.2 million held at December 31, 2005. OTHER INCOME. Our other income decreased $75,000 (60%) in 2006 compared to 2005. The decrease in 2006 is primarily due to inventory losses on securities held at APS Financial totaling $40,000 in 2006 compared to inventory gains of $26,000 in 2005. CASH FLOWS. Our cash flows provided from operations increased $1,047,000 (56%) in 2006 compared to 2005. The primary cause of the increase in cash from operating activities in 2006 concerns the timing of our receipt of profit sharing from APIE for the two comparative periods. In 2005 we received roughly half of the 2004 profit sharing in December, 2004 and the other half in early 2005 equaling approximately $1,000,000. By contrast, we received all of the 2005 profit sharing in early 2006, totaling approximately $2,000,000. Our cash flows used in investing activities decreased $674,000 (17%) in 2006 primarily as a result of lower net funds loaned to others relative to collections received. In addition, capital expenditures were lower in 2006 as greater software upgrades were required in 2005. Our cash used in financing activities increased $268,000 (20%) in 2006 primarily as a result of a $674,000 increase in the purchase of our common stock compared to 2005 as well as a $140,000 increase in dividends paid. Partially offsetting this was cash provided from excess tax benefits from stock-based compensation ($604,000). 2005 COMPARED TO 2004 Revenues from operations increased $1,952,000 (6%) in 2005 compared to 2004. Our operating income decreased $499,000 (9%) to $4,845,000 compared to $5,344,000 in 2004. Our net earnings increased $3,308,000 (154%) in 2005 to a total of $5,460,000 compared to net earnings of $2,152,000 in 2004. Our diluted earnings per share increased to $1.86 in 2005 compared to $0.76 in 2004. The reasons for these changes are described below. INSURANCE SERVICES. Insurance services revenues increased $198,000 (1%) in 2005 compared to 2004. The primary reason for the 2005 increase was a $364,000 (4%) increase in management fees, the result of greater insurance premium volumes. Earned premium increased at APIE by 4% in 2005 compared to 2004 primarily as a result of new business, which saw an 8% net increase in the number of insured professionals, and because of strong retention of our existing business in 2005. In addition, profit shared with APIE grew $78,000 (4%) to $2,007,000 in 2005 from $1,929,000 in 2004. Consistent with our revenue recognition policy, this revenue was not recognized until the fourth quarter of the year after profit-sharing goals were attained. We cannot accurately predict what, if any, profit will be available to us until the completion of an end-of-year actuarial analysis by independent actuaries. Partially offsetting these increases was an $118,000 (37%) decrease in risk management fee income in 2005 compared to 2004, the result of a lower number of physicians utilizing this service. This decrease in risk management fees is the result of two key factors. First, fees are lower due to an improved claims environment following tort reform legislation enacted in 2003, resulting in fewer new business and renewal accounts being placed into the risk management program and thus being required to pay for these services. Second, risk management services continue to be performed but due to increased competition, we have occasionally provided these services at no charge. Also, pass through commissions earned by third-party agents decreased $106,000 (2%) in 2005 to $4,376,000 compared to $4,482,000 in 2004, the result of a 6% decline in written premiums in 2005. Written premiums are down in 2005 compared to 2004 as a result of lower new business written during the year along with an average decrease in premium rates of 8.8%. As noted below, commissions paid to third-party independent agents decreased by an equivalent amount, resulting in no impact on net earnings. 26 Insurance services expenses increased $294,000 (3%) in 2005 compared to 2004. The primary reasons for the 2005 increase were higher payroll and higher professional fees. Payroll increased $185,000 (6%) in 2005 as a result of normal merit raises as well as the addition of two new managerial positions. Professional fees increased $175,000 (253%) in 2005 compared to 2004 primarily as a result of fees paid in association with Sarbanes-Oxley Act compliance requirements. In addition, depreciation increased $61,000 (25%) in 2005 compared to 2004 due to a significant increase in capital purchases made during 2005, which were necessary to upgrade management information and reporting capabilities. Partially offsetting these increases was a $106,000 (2%) decrease in commissions paid to third party independent agents, as noted above. FINANCIAL SERVICES. Financial services revenues increased $1,754,000 (11%) in 2005 compared to 2004. The increase was mostly due to contributions from our investment banking and bank debt trading businesses, which were up a combined $1,709,000 from last year. Of this increase, bank debt trading generated revenues of $1,166,000 in 2005, our first year of operations, with minimal start-up costs. This increase, combined with commission revenue from secondary market securities trading, which was up slightly from 2004, made 2005 APS Financial's second best year in terms of total revenues in our twenty-four year history. Our broker/dealer business derives most of our revenue from trading in the secondary fixed income market, both in investment and non-investment grade securities. Commission revenue from our investment grade market segment was lower, due to the Federal Reserve raising short-term rates. The short end of the treasury yield curve, in step with Federal Reserve tightening, traded to higher yields, while the longer end of the curve hovered near historically low levels, creating a flat to slightly inverted yield curve in 2005. This created an investment environment where customers continued to be cautious to commit funds in 2005, particularly to longer maturing instruments, thus negatively impacting trading revenues. The decline in our investment grade business was offset by increased activity in the high-yield markets. In 2005, the U.S. high-yield markets, which were generally considered rich the previous year, began to correct with some volatility, increasing our trading revenues from this market segment. Financial services expense increased $1,725,000 (12%) in 2005 compared to 2004. Commission expense, which includes commissions from secondary market trading, as well as placement fees for investment banking and referral fees for bank debt trading, was up $1,159,000 (12%) as a result of the above-mentioned increase in commission revenue. Payroll was up $430,000 (31%) in part due to the hiring of additional personnel in the investment banking and bank debt trading areas as the firm ramped up these business efforts, and due to an increase in performance related forgivable loans. Legal and professional expenses increased $195,000 (115%) from the previous year, principally due to expenses associated with our efforts to comply with the provisions of the Sarbanes-Oxley Act of 2002. Partially offsetting these increases was a decrease in incentive compensation expense of $143,000 (13%) in 2005 compared to 2004 as a result of higher minimum performance thresholds placed upon management in 2005. GENERAL AND ADMINISTRATIVE EXPENSES. General and Administrative expenses increased $510,000 (23%) in 2005 compared to 2004. The 2005 increase was due primarily to a $269,000 (34%) increase in incentive compensation expense in 2005 resulting from additional contractual bonuses that will be paid on the greater gains from the sale of a higher number of shares of HealthTronics common stock completed in 2005. In addition, salaries expense increased $148,000 (23%) in 2005 partially due to a severance payment to a former officer, Duane Boyd, who has since been retained as a tax consultant coupled with an addition in salaries at the executive level in an effort to remain competitive in the marketplace. Professional fees increased $59,000 (85%) in 2005 compared to 2004 as a result of fees paid in association with Sarbanes-Oxley Act compliance requirements. Partially offsetting these increases was a 2005 decrease in legal fees of $39,000 (64%), the result of lower need for outside legal consulting in 2005 as well as fees paid in 2004 in association with a Form S-3 filing that were not applicable in 2005. GAIN ON SALE OF ASSETS. Gain on sale of assets primarily represents the recognition of deferred income. During 2005, we recognized approximately $513,000 of deferred gain related to the November 2001 sale and subsequent leaseback of real estate to Prime Medical (their name prior to the merger with HealthTronics). During 2005, we also recognized $133,000 of the deferred gains related to our then 15% ownership in HealthTronics. The increase in 2005 is the result of an increased number of HealthTronics common stock shares sold compared to 2004. 27 GAIN ON INVESTMENTS. Gain on investments increased $2,915,000 (1,190%) in 2005 compared to 2004. The 2005 increase is primarily due to gains on the sale of a greater number of shares of HealthTronics common stock compared to 2004. In addition, we recorded income of $225,000 from an investment in a private company that was sold during 2005 and in which we had a zero basis. Partially offsetting these gains was a write-off totaling $160,000 from an investment loan that was given earlier in 2005. Information provided by the third party loan obligor at the time of the loan was proven to be less than complete and it was determined in September 2005, after the loan was several months in default, that it is unlikely that we will recover any of the remaining debt owed it. As such, the balance of the loan was written off. LOSS ON IMPAIRMENT OF INVESTMENTS. The 2005 loss was due to a write-down of our investment in FIC common stock coupled with an impairment of our investment in Toys R Us bonds. The loss in 2004 represents an impairment in the value of our investment in FIC common stock. During 2004, the value of our investment in FIC had declined significantly. In October 2004, we determined that this decline in market price should be considered "other than temporary" as defined in Statements of Financial Accounting Standards (SFAS) No.115, Accounting for Certain Investments in Debt and Equity Securities , as amended. Consequently, we recorded pre-tax charges to earnings totaling $2,567,000 in 2004. These charges reduced our cost basis in FIC common stock from $5,647,000, or $14.67 per share, to $3,080,000, or $8.00 per share which was equal to the quoted market price of FIC shares on December 31, 2004. During 2005, we took additional pre-tax charges to earnings totaling $135,000, further reducing our cost basis in FIC to $2,945,000, or $7.65 per share. While we continue to have the ability and the intent to hold the stock indefinitely, we concluded that the additional uncertainty created by FIC's late filings, together with the lack of our current financial information, dictated that the 2004 and 2005 declines should be viewed as other than temporary. In July 2005, FIC was able to file their 2003 Form 10-K but has yet to file any 2004 or 2005 Forms 10-Q or 10-K and thus continues to be de-listed on the NASDAQ Stock Market. In April 2004, we purchased $300,000 of Toys R Us bonds. In March 2005, Toys R Us announced a plan of merger with another toy company and a planned leveraged buyout, which precipitated a drop in the price of the bonds. An independent analysis indicated that the new debt to be issued in connection with the leveraged buyout will put the existing bonds in a subordinated position. Since these bonds have a 2018 maturity, we believe that the impairment is "other than temporary" during our shorter than expected holding period. Consequently, we recognized a charge against pre-tax earnings of $57,000 using the quoted price of the bonds as of June 30, 2005. By December 2005, the value of the bonds had declined further and, based in part upon weak earnings reports, we determined that an additional impairment charge of $24,000 was necessary using the quoted price of the bonds as of December 31, 2005. We will continue to monitor and evaluate the situations at both FIC and Toys R Us and further determine if changes in fair market value of these investments are temporary or "other than temporary." GAIN ON THE EXTINGUISHMENT OF DEBT. During 2005 and 2004, we recorded $24,000 and $75,000, respectively, as gains on extinguishment of debt. The 2004 amount represents that amount of liability that was released by participants in a loan to a former affiliate. Due to poor operating results, the affiliate was in default and not making scheduled payments under the loan agreement with us in which the participations had been sold. As a result, the loan participants released us from any obligations under the participation agreements. In September 2005, we determined there is a remote possibility that the final obligation, totaling $24,000, will be required to be paid under the terms of the participation agreement and as a result, we reversed it and recognized a gain in the same amount. INTEREST INCOME. Our interest income increased $222,000 (61%) in 2005 compared to 2004 primarily as a result of a higher balance of interest-bearing securities held in 2005 as well as to higher average interest rates. At December 31, 2005, we held a balance of $13,246,000 in fixed income securities versus a balance of $4,903,000 at December 31, 2004. The increase in 2005 was primarily attributable to cash received upon the sale of equity securities. 28 OTHER INCOME (LOSS). Our other income increased $109,000 (727%) in 2005 compared to 2004. The increase in 2005 was due to net gains in inventory held briefly at APS Financial in 2005 totaling $26,000 versus net inventory losses of $30,000 in 2004. In addition, we received $103,000 in administrative fee income from Eco-Systems in 2005 versus $47,000 in 2004 resulting from their increase in earnings in 2005. MINORITY INTERESTS. For the years 2005 and 2004, minority interests represents a 3% interest in Asset Management, a subsidiary within our financial services segment, owned by key individuals within Asset Management. Minority interests increased in 2005 due to a prior period adjustment resulting from our acquisition of a former 2% minority interest shareholder. CASH FLOWS. Our cash flows provided from operations decreased $3,593,000 (66%) in 2005 compared to 2004 due in part to a timing difference in the receipt of profit sharing earned for these two years. We received $1,050,000 in 2004 from APIE in profit sharing for the year 2004, while receiving the remainder in early 2005. By comparison, all of the 2005 profit sharing was received in January 2006. Whether or not we receive any cash from APIE for profit sharing in the year it was earned is simply a timing issue. In addition, we paid nearly $1,500,000 more in federal income taxes in 2005 than in 2004, the result of taxes owed on much larger gains on investments. These gains in 2005 were the result of a decision to liquidate our investment in HealthTronics common stock, resulting in a 74% decrease in the number of shares of common stock owned which created gains of approximately $3,000,000. Our cash flows used in investing activities decreased $354,000 (8%) in 2005 as a result of lower capital expenditures as well as increased net receipt of loans over the amount funded. Our cash used in financing activities increased $887,000 (192%) in 2005 primarily as a result of a $1,000,000 increase in the purchase of our treasury stock compared to 2004. Partially offsetting this was a $278,000 increase in cash received from the exercise of stock options. LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL Our net working capital was $19,247,000 and $15,880,000 at December 31, 2006 and 2005, respectively. The increase in the current year was due primarily to the purchase of short-term fixed income securities through the sale of long-term equity securities. In addition, we received $2,911,000 in cash from operations. Historically, we have maintained a strong working capital position and, as a result, we have been able to satisfy our operational and capital expenditure requirements with cash generated from our operating and investing activities. These same sources of funds have also allowed us to pursue investment and expansion opportunities consistent with our growth plans. Although there can be no assurance our operating activities will provide positive cash flow in 2006, we are optimistic that our working capital requirements will be met for the foreseeable future for the following reasons: (1) our current cash position is very strong, with a balance of approximately $4.2 million comprising 12% of our total assets; (2) our investments in available-for-sale equity and fixed income securities could provide an additional $21 million should the need arise; and (3) we renewed a line of credit in April 2006 that is described below. LINE OF CREDIT In April 2006, we renewed a $3.0 million line of credit that was originally established in November 2003 with PlainsCapital Bank. The loan calls for interest payments only to be made on any amount drawn until April 15, 2007, when the entire amount of the note, principal and interest then remaining unpaid, shall be due and payable. At December 31, 2006, there were no draws taken against this line of credit. We are in compliance with the covenants of the loan agreement, including requirements for a minimum of $5.0 million of unencumbered liquidity and a minimum 2 to 1 net worth ratio. 29 CAPITAL EXPENDITURES Our capital expenditures for property and equipment were $166,000 and $307,000 in 2006 and 2005, respectively. We expect capital expenditures in 2007 to be approximately $1,400,000, all of which is expected to be funded through cash on hand. The expected increase in 2007 is due primarily to the purchase and implementation of new insurance services information systems technology. Expenditures capitalized on the merger between us and APIE totaled $733,000 at December 31, 2006. These capitalized merger costs are grouped in our consolidated balance sheet as a long-term line item entitled "Other assets". COMMITMENTS There were no participation agreements or purchase commitments at December 31, 2006. We have committed cash outflow related to operating lease arrangements with terms exceeding one year at December 31, 2006, as follows (in thousands): Payment Due Contractual Cash Obligation 2007 2008 2009 2010 2011 Total - -------------------------------------------------------------------------------- Operating Leases $770 $687 $664 $643 $663 $3,427 MARGIN LOANS We extend credit to our customers, which is financed through our clearing organization, Southwest Securities, Inc. or Southwest, to help facilitate customer securities transactions. This credit, which earns interest income, is known as "margin lending." In margin transactions, the client pays a portion of the purchase price of securities, and we make a loan (financed by our clearing organization) to the client for the balance, collateralized by the securities purchased or by other securities owned by the client. In permitting clients to purchase on margin, we are subject to the risk of a market decline, which could reduce the value of our collateral below the client's indebtedness. Agreements with margin account clients permit our clearing organization to liquidate our clients' securities with or without prior notice in the event of an insufficient amount of margin collateral. Despite those agreements, our clearing organization may be unable to liquidate clients' securities for various reasons including the fact that the pledged securities may not be actively traded, there is an undue concentration of certain securities pledged or a trading halt is issued with regard to pledged securities. If the value of the collateral were insufficient to repay the margin loan, a loss would occur, which we may be required to fund. As of December 31, 2006, the total of all customer securities pledges on debit balances held in margin accounts was approximately $7.9 million while the total value of the securities within these margin accounts was approximately $20.0 million. We are also exposed should Southwest be unable to fulfill its obligations for securities transactions. Our ability to make scheduled payments or to fund planned capital expenditures will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. There can be no assurance that our business will generate cash flow from operations or that we will realize anticipated revenue growth and operating improvements sufficient to make scheduled payments and fund planned future capital expenditures. INFLATION Our operations are not significantly affected by inflation because we are not required to make large investments in fixed assets. However, the rate of inflation will affect certain of our expenses, such as employee compensation and benefits. 30 OFF BALANCE SHEET ARRANGEMENTS None IMPACT OF NEW ACCOUNTING STANDARDS As more fully described in Note 1 of Notes to consolidated financial statements we adopted several new accounting standards. For a discussion of the impact of those new accounting standards upon us, see Note 1 (n). ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We have exposure to changes in interest rates and the market values of our investments but have no material exposure to fluctuations in foreign currency. INTEREST RATE RISK Our exposure to market risk for changes in interest rates relates to both our investment portfolio and our revenues generated through commissions at our financial services segment. A one percent change in interest rates on our cash and fixed income securities balance as of December 31, 2006 totaling approximately $21 million would result in a change of $210,000 annually in interest income. All of our marketable fixed income securities are designated as available-for-sale and, accordingly, are presented at fair value on our balance sheets. Fixed rate securities may have their fair market value adversely affected due to a rise in interest rates, and we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. Changes in interest rates could have an impact at our broker/dealer subsidiary, APS Financial. The general level of interest rates may trend higher or lower in 2007, and this move may impact our level of business in different fixed-income sectors. If a generally improving economy is the impetus behind higher rates, then while our investment grade business may drop off, our high-yield business might improve with improving credit conditions. A volatile interest rate environment in 2007 could also impact our business as this type of market condition can lead to investor uncertainty and their corresponding willingness to commit funds. As we currently have no debt and do not anticipate the need to take on any debt in 2007, interest rate changes will have no impact on our financial position as it pertains to interest expense. INVESTMENT RISK As of December 31, 2006, our recorded basis in debt and equity securities was approximately $21 million. We regularly review the carrying value of our investments and identify and record losses when events and circumstances indicate that such declines in the fair value of such assets below our accounting basis are other than temporary. During 2004, the value of one of our investments, FIC, had declined significantly. In October 2004, we determined that this decline in market price should be considered "other than temporary" as defined in Statements of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, as amended. Consequently, we recorded pre-tax charges to earnings totaling $2,567,000 in 2004. These charges reduced our cost basis in FIC from $5,647,000, or $14.67 per share, to $3,080,000, or $8.00 per share which was equal to the quoted market price of FIC shares on December 31, 2004. During 2005 and 2006, we took additional pre-tax charges to earnings totaling $135,000 and $19,000, respectively, further reducing our cost basis in FIC to $2,926,000, or $7.60 per share. While we currently continue to have the ability and the intent to hold the stock indefinitely, we concluded that the additional uncertainty created by FIC's late filings, together with the lack of its current financial information, dictated that the 2004 through 2006 declines should be viewed as other than temporary. In October 2006, FIC was able to file its 2004 Form 10-K and in January 2007 they filed their 2005 Form 10-K. FIC has still yet to file its 2006 Forms 10-Q and thus continues to be de-listed on the NASDAQ Stock Market. 31 The effect on our financial statements as a result of these write-downs was as follows: 2006 2005 2004 ---- ---- ---- Reduction in Pre-tax Earnings $ 19,000 $ 135,000 $ 2,567,000 Reduction in Other Comprehensive Income $ 13,000 $ 89,000 $ 1,694,000 Reduction in Deferred Tax Assets $ 6,000 $ 46,000 $ 873,000 We will continue to monitor and evaluate the situation at FIC and further determine if changes in fair market value of the investment are temporary or "other than temporary." We have other corporate equity and fixed income investments but our exposure to loss in them is much lower than the risk associated with our FIC investment. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is contained in Appendix A attached hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES We maintain controls and other procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. In response to recent legislation, we implemented changes to our disclosure controls and procedures, primarily to formalize and document procedures already in place, and to establish a disclosure committee consisting of some of our officers and other management. As of the end of the period covered by this report, and under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), we evaluated the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) of the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. We do not expect that our disclosure controls and procedures or our other internal controls can prevent all error and all fraud or that our evaluation of these controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The benefits of controls and procedures must be considered relative to their costs, and the design of any system of controls is based in part upon assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls and procedures may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these and other inherent limitations in controls and procedures, misstatements or omissions due to error or fraud may occur and not be detected. 32 During the last fiscal quarter of 2006, we have not made any changes in our internal controls or in other factors that could have materially affected, or is reasonably likely to materially affect, internal controls over our financial reporting. ITEM 9B. OTHER INFORMATION None. PART III Certain information required by Part III is omitted from this Form 10-K because we will file a definitive Proxy Statement pursuant to Regulation 14A, or Proxy Statement, not later than 120 days after the end of the fiscal year covered by this Form 10-K, and certain information to be included therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated by reference to the Proxy Statement under the heading "Directors and Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the Proxy Statement under the heading "Information Regarding Executive Officer Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the Proxy Statement under the heading "Certain Relationships and Related Transactions." ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item is incorporated by reference to the Proxy Statement under the heading "Corporate Governance - Committees of the Board of Directors - The Audit Committee." 33 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. Consolidated Financial Statements The required information is contained in Appendix A attached hereto. 2. Financial Statement Schedule (Schedule II) 3. Exhibits 3.1 Merger Agreement and Plan of Merger, dated June 5, 2006, among American Physicians Service Group, Inc., APSG ACQCO, Inc., and American Physicians Insurance Exchange, as amended. (15) 3.2 Restated Articles of Incorporation of American Physicians Service Group, Inc., as amended (4) 3.3 Amended and Restated Bylaws of American Physicians Service Group, Inc. (17) 4.1 Specimen of Common Stock Certificate of American Physicians Service Group, Inc. (2) 4.2 Rights Agreement, dated as of August 15, 1999, between American Physicians Service Group, Inc. and American Stock Transfer & Trust Company, which includes the form of Statement of Resolutions setting forth the terms of the Junior Participating Preferred Stock, Series A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C.(8) * 10.1 1995 Incentive and Non-Qualified Stock Option Plan of American Physicians Service Group, Inc. (5) * 10.2 Form of Stock Option Agreement (ISO). (5) * 10.3 Form of Stock Option Agreement (Non-Qualified). (5) 10.4 Management Agreement of Attorney-in-Fact, dated August 13, 1975, between FMI and American Physicians Insurance Exchange. (2) * 10.5 Profit Sharing Plan and Trust, effective December 1, 1984, of American Physicians Service Group, Inc. (3) * 10.6 First Amendment to 1995 Incentive and Non-Qualified Stock Option Plan of American Physicians Service Group, Inc. Dated December 10, 1997. (6) * 10.7 First Amendment to 1995 Non-Employee Director Stock Option Plan of American Physicians Service Group, Inc. Dated December 10, 1997.(6) * 10.8 2005 Incentive and Non-Qualified Stock Option Plan. (14) * 10.9 Deferred Compensation Master Plan. (14) 10.10 Agreement dated November 1, 2002 transferring and assigning all capital stock of Eco-Systems from American Physicians Service Group, Inc. to the purchaser. (11) * 10.11 Amended 1995 Incentive and Non-Qualified Stock Option Plan. (11) 10.12 Executive Employment Agreement between American Physicians Service Group, Inc. and Kenneth S. Shifrin. (11) * 10.13 Consulting Agreement between American Physicians Service Group, Inc. and William A. Searles. (11) * 10.14 Executive Employment Agreement between American Physicians Service Group, Inc. and William H. Hayes. (11) * 10.15 Executive Employment Agreement between American Physicians Service Group, Inc. and Maury L. Magids. (17) 34 10.16 Stock Purchase Agreement dated October 1, 2003 between American Physicians Service Group, Inc. and FPIC Insurance Group, Inc. (12) 10.17 Revolving Promissory Note dated April 15, 2004 between American Physicians Service Group, Inc. and PlainsCapital Bank. (13) 10.18 Commercial Loan Agreement dated April 15, 2004 between American Physicians Service Group, Inc. and PlainsCapital Bank. (13) 10.19 Managing General Agency Agreement between American Physicians Insurance Agency, Inc. and American Physicians Insurance Exchange, effective as of May 29, 1996. (16) 10.20 Management Agreement of Attorney-in-Fact for American Physicians Insurance Exchange, effective as of October 1, 1975. (16) 21.1 List of subsidiaries of American Physicians Service Group, Inc.(17) 23.1 Independent Registered Public Accountants Consent of BDO Seidman, LLP. (17) 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (17) 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (17) 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (17) 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (17) (*) Executive Compensation plans and arrangements. (1) The Company is subject to the informational requirements of the Exchange Act and, in accordance therewith, files reports, proxy statements and other information with the SEC. Reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained by mail from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such reports, proxy statements and other information concerning the Company are also available for inspection at the offices of The NASDAQ National Market, Reports Section and 1735 K STREET, N.W., WASHINGTON, D.C. 20006. The SEC maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC at http://www.sec.gov and makes available the same documents through Disclosure, Inc. at 800-638-8241 (2) Filed as an Exhibit to the Registration Statement on Form S-1, Registration No. 2-85321, of the Company, and incorporated herein by reference. (3) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1984 and incorporated herein by reference. (4) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1990 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, 1995 and incorporated herein by reference. (6) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and incorporated herein by reference. (7) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1998 and incorporated herein by reference. 35 (8) Filed as an Exhibit to the Current Report on Form 8-K of the Company dated September 22, 1999 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, 1999 and incorporated herein by reference. (10) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 2000 and incorporated herein by reference. (11) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 and incorporated herein by reference. (12) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 2003 and incorporated herein by reference. (13) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 2004. (14) Filed as an Exhibit to the Current Report on Form 8-K of the Company dated June 17, 2005. (15) Filed as an Exhibit to the Current Report on Form 8-K of the Company dated August 25, 2006 and incorporated herein by reference (16) Filed as an Exhibit to the Registration Statement on Form S-4/A, Registration No. 333-137012, of the Company, filed January 26, 2007 and incorporated herein by reference. (17) Filed herewith. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN PHYSICIANS SERVICE GROUP, INC. By: /s/ Kenneth S. Shifrin ------------------------ Kenneth S. Shifrin, Chairman of the Board and Chief Executive Officer Date: March 30, 2007 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 30, 2007 36 By: /s/ W. H. Hayes ---------------------- W. H. Hayes Senior Vice President - Finance, Secretary and Chief Financial Officer Date: March 30, 2007 By: /s/ Thomas R. Solimine ------------------------- Thomas R. Solimine Controller (Principal Accounting Officer) Date: March 30, 2007 By: /s/ Lew N. Little, Jr. --------------------- Lew N. Little, Jr., Director Date: March 30, 2007 By: /s/ Jackie Majors ------------------------ Jackie Majors, Director Date: March 30, 2007 By: /s/ William A. Searles -------------------------- William A. Searles, Director Date: March 30, 2007 By: /s/ Cheryl Williams --------------------------- Cheryl Williams, Director Date: March 30, 2007 37 APPENDIX A INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE Report of Independent Registered Public Accounting Firm A-2 Consolidated Financial Statements Consolidated Statements of Income for the Years A-3 ended December 31, 2006, 2005 and 2004 Consolidated Balance Sheets as of December 31, 2006 A-5 and December 31, 2005 Consolidated Statements of Cash Flows for the Years A-7 ended December 31, 2006, 2005 and 2004 Consolidated Statements of Shareholders' Equity and A-9 Comprehensive Income for the Years ended December 31, 2006, 2005 and 2004 Notes to Consolidated Financial Statements A-11 A-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders American Physicians Services Group, Inc. Austin, Texas We have audited the accompanying consolidated balance sheets of American Physicians Services Group, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders' equity and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2006. We have also audited the schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements and schedule 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 Services Group, Inc. at December 31, 2006 and 2005, and the results of its operations and its cash flows for the each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein. As discussed in Note 13 to the consolidated financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (R), Share Based Payment. BDO Seidman, LLP Houston, Texas March 26, 2007 A-2 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands)
Year Ended December 31, 2006 2005 2004 ------------ -------------- -------------- Revenues: Insurance services $ 15,555 $ 15,514 $ 15,316 Financial services 16,805 18,459 16,705 -------- --------- --------- Total revenues 32,360 33,973 32,021 -------- --------- --------- Expenses (Income): Insurance services 11,262 10,262 9,968 Financial services 15,145 16,263 14,538 General and administrative 2,128 2,737 2,227 Gain on sale of assets (29) (134) (56) -------- --------- --------- Total expenses, net 28,506 29,128 26,677 -------- --------- --------- Operating income 3,854 4,845 5,344 Gain on investments (Note 6) 259 3,160 245 Loss on impairment of investments (Note 6) (19) (217) (2,567) Gain on extinguishment of debt -- 24 75 -------- --------- --------- Income from operations before interest, income taxes, minority interests and equity in earnings of unconsolidated affiliates 4,094 7,812 3,097 Interest income 915 587 365 Other income 49 124 15 Interest expense 19 10 7 Income tax expense (Note 11) 1,839 3,039 1,317 Minority interests 6 14 1 ------- -------- --------- Net income $ 3,194 $ 5,460 $ 2,152 ======== ======== =========
See accompanying notes to condensed consolidated financial statements. A-3 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME, continued (In thousands, except per share amounts) Year Ended December 31, 2006 2005 2004 ------ ------ ------ Net income per common share: Basic: Net income $ 1.15 $ 2.03 $ 0.85 ====== ====== ====== Diluted: Net income $ 1.09 $ 1.86 $ 0.76 ====== ====== ====== Basic weighted average shares outstanding 2,774 2,688 2,545 ====== ====== ====== Diluted weighted average shares outstanding 2,933 2,931 2,838 ====== ====== ====== The accompanying notes are an integral part of these consolidated financial statements. A-4 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, 2006 2005 ------------- ------------- ASSETS Current Assets: Cash and cash equivalents $ 4,242 $ 6,231 Cash - restricted (Note 2) 1,880 449 Trade receivables, net 1 42 Notes receivable (Note 4) 817 599 Management fees and other receivables 2,932 3,192 Deposit with clearing organization 501 501 Investment in available-for-sale fixed income securities - current 14,746 9,662 Deferred income taxes 129 355 Prepaid expenses and other 686 632 ---------- --------- Total current assets 25,934 21,663 Notes receivable, less current portion (Note 4) -- 326 Property and equipment, net (Note 7) 556 687 Investment in available-for-sale securities: Equity 4,403 5,017 Fixed Income 1,890 3,584 Deferred income taxes 1,192 686 Goodwill 1,247 1,247 Other assets 1,054 295 ---------- --------- Total assets $36,276 $33,505 ========== =========
The accompanying notes are an integral part of these consolidated financial statements. A-5 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED BALANCE SHEETS, continued (In thousands, except share data)
December 31, 2006 2005 ------------- ------------- LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,228 $ 736 Accrued incentive compensation 2,279 2,595 Accrued expenses and other liabilities (Note 8) 1,920 1,912 Federal income tax payable 136 71 Deferred gain - current 124 469 --------- --------- Total current liabilities 6,687 5,783 --------- --------- Total liabilities 6,687 5,783 --------- --------- Minority interests 21 15 Commitments and contingencies (Note 10) Shareholders' Equity: Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued or outstanding -- -- Common stock, $0.10 par value, shares authorized 20,000,000; 2,817,746 and 2,784,120 issued and outstanding at 12/31/06 and 12/31/05, respectively (Note 18) 282 278 Additional paid-in capital 7,944 8,204 Retained earnings 21,111 18,737 Accumulated other comprehensive income, net of taxes 231 488 --------- --------- Total shareholders' equity 29,568 27,707 --------- --------- Total liabilities, minority interest and shareholders' equity $36,276 $33,505 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. A-6 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, 2006 2005 2004 ------------ ------------ ------------ Cash flows from operating activities: Net Income $ 3,194 $ 5,460 $ 2,152 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 421 364 304 Amortization of loans and other 330 297 39 Common stock awarded 316 159 231 Minority interest in consolidated subsidiaries 6 14 1 Gain on sale of assets (29) (134) (56) Deferred gain on sale of building (422) (513) (488) Gain on investments (259) (3,160) (245) Impairment of investment 19 217 2,567 Excess tax benefits from stock-based compensation -- 708 589 Deferred income tax (280) (577) 744 Stock options expensed 226 -- -- Changes in operating assets and liabilities: Trade receivables 41 (23) (179) Trading account securities -- -- 67 Income tax payable 65 (28) 1,602 Receivable from clearing organization -- 159 -- Deferred compensation 195 150 -- Management fees & other receivables 260 (1,377) (746) Prepaid expenses & other assets (952) (81) (74) Deferred income 106 -- -- Trade payables 61 21 66 Accrued expenses & other liabilities (387) 208 (1,117) -------- -------- -------- Net cash provided by operating activities 2,911 1,864 5,457 -------- -------- -------- Cash flows from investing activities: Capital expenditures (166) (307) (421) Proceeds from the sale of available-for-sale equity and fixed income securities 11,669 8,503 1,116 Purchase of available-for-sale equity securities (14,563) (11,688) (4,405) Funds loaned to others (264) (810) (620) Collection of notes receivable 42 346 20 -------- -------- -------- Net cash used in investing activities (3,282) (3,956) (4,310) -------- -------- -------- Cash flows from financing activities: Exercise of stock options 986 1,036 758 Purchase and cancellation of treasury stock (2,388) (1,715) (703) Excess tax benefits from stock-based compensation 604 -- -- Dividends paid (820) (671) (518) -------- -------- -------- Net cash used in financing activities (1,618) (1,350) (463) -------- -------- -------- Net change in cash and cash equivalents (1,989) (3,442) 684 Cash and cash equivalents at beginning of period 6,231 9,673 8,989 -------- -------- -------- Cash and cash equivalents at end of period $ 4,242 $ 6,231 $ 9,673 ======== ======== ========
A-7 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, continued (in thousands)
December 31, 2006 2005 2004 -------------- ----------------- ------------ Supplemental information: Cash paid for taxes, net of refunds $ 1,168 $ 2,606 $ (523) Cash paid for interest 19 10 7
The accompanying notes are an integral part of these consolidated financial statements. A-8 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (In thousands, except per share amounts)
Accumulated Additional Other Total Common Paid-In Retained Comprehensive Comprehensive Treasury Shareholders' Stock Capital Earnings Income Income (loss) Stock Equity ------------------------------------------------------------------------------------------------ Balance December 31, 2003 $245 $6,918 $12,314 $ -- ($371) $ -- $19,106 Comprehensive income: Net income -- -- 2,152 2,152 -- -- 2,152 Other comprehensive income, net of tax: Unrealized gain on securities, net of reclassification adjustment (Note 21) -- -- -- 2,452 2,452 -- 2,452 Comprehensive income -- -- -- 4,604 -- -- -- Treasury stock purchases -- -- -- -- -- (703) (703) Retired treasury stock (7) (696) -- -- -- 703 -- Stock options exercised 25 733 -- -- -- -- 758 Tax benefit from exercise of stock options -- 589 -- -- -- -- 589 Dividend paid (per share - $0.20) -- -- (518) -- -- -- (518) Deferred stock grants 2 229 -- -- -- -- 231 Forgiveness of Uncommon Care Debt -- 146 -- -- -- -- 146 ------------------------------------------------------------------------------------------------ Balance December 31, 2004 $265 $7,919 $13,948 $ -- $2,081 $ -- $24,213 ================================================================================================ Other comprehensive income, net of tax: -- -- 5,460 5,460 -- -- 5,460 Unrealized gain on securities, net of reclassification adjustment (Note 21) -- -- -- (1,593) (1,593) -- (1,593) Comprehensive income -- -- -- 3,867 -- -- -- Treasury stock purchases -- -- -- -- -- (1,715) (1,715) Stock options exercised 25 1,011 -- -- -- -- 1,036 Tax benefit from exercise of stock options -- 708 -- -- -- -- 708 Dividend paid (per share - $0.25) -- -- (671) -- -- -- (671) Cancelled treasury stock (14) (1,701) -- -- 1,715 -- Forgiveness of Uncommon Care debt -- (40) -- -- -- -- (40) Deferred stock grants 1 158 -- -- -- -- 159 Deferred Compensation 1 149 -- -- -- -- 150 ------------------------------------------------------------------------------------------------ Balance December 31, 2005 $278 $8,204 $18,737 -- $488 -- $27,707 ================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. A-9 AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (In thousands, except per share amounts)
Accumulated Additional Other Total Common Paid-In Retained Comprehensive Comprehensive Treasury Shareholders' Stock Capital Earnings Income Income (loss) Stock Equity ------------------------------------------------------------------------------------------------ Balance December 31, 2005 $278 $8,204 $18,737 $ -- $488 $ -- $27,707 ------------------------------------------------------------------------------------------------ Comprehensive income: Net income -- -- 3,194 3,194 -- -- 3,194 Other comprehensive income, net of tax: Unrealized gain on securities, -- -- -- (257) (257) -- (257) net of reclassification -- -- -- 2,937 -- -- -- adjustment (Note 21) -- -- -- -- -- (2,388) (2,388) Stock options expensed -- 226 -- -- -- -- 226 Stock options exercised 18 968 -- -- -- -- 986 Tax benefit from exercise of stock options -- 604 -- -- -- -- 604 Dividend paid (per share - $0.30) -- -- (820) -- -- -- (820) Cancelled treasury stock (16) (2,372) -- -- -- 2,388 -- Deferred stock grants 2 314 -- -- -- -- 316 ------------------------------------------------------------------------------------------------ Balance December 31, 2006 $282 $7,944 $21,111 -- $231 -- $29,568 ================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. A-10 AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006, 2005 and 2004 (1) Summary of Significant Accounting Policies (a) General We, through our subsidiaries, provide financial services that include brokerage and asset management services to individuals and institutions, and insurance services that consist of management services for a medical malpractice insurance company. The financial services business has clients nationally. Insurance management is a service provided primarily in Texas, but is available to clients nationally. During the three years presented in the consolidated financial statements, financial services generated 52%, 54% and 52% of total revenues and insurance services generated 48%, 46% and 48% in 2006, 2005 and 2004, respectively. (b) Management's Estimates and Assumptions The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) Principles of Consolidation The consolidated financial statements include our accounts and the accounts of our subsidiary companies more than 50% owned. Investments in affiliated companies and other entities, in which our investment is less than 50% of the common shares outstanding and where we exert significant influence over operating and financial policies, are accounted for using the equity method. Investments in other entities in which our investment is less than 20%, and in which we do not have the ability to exercise significant influence over operating and financial policies, are accounted for using the cost method. In the event that we retain sufficient risk of loss in a disposed subsidiary to preclude us from recognizing the transaction as a divestiture, we would continue to consolidate the subsidiary as an entity in which we have a variable interest under the guidance of Financial Accounting Standards Board Interpretation No. 46 Revised, Consolidation of Variable Interest Entities, or FIN 46R. All significant intercompany transactions and balances have been eliminated from the accompanying consolidated financial statements. (d) Revenue Recognition Our investment services revenues related to securities transactions are recognized on a trade date basis. Asset management revenues are recognized monthly based on the amount of funds under management. Our insurance services revenues related to management fees are recognized monthly as a percentage of the earned insurance premiums of the managed company. The profit sharing component of the management services agreement is recognized when it is reasonably certain that the managed company will have an annual profit, generally in the fourth quarter of each year. A-11 (1) Summary of Significant Accounting Policies, continued (e) Marketable Securities Our investments in debt and equity securities are classified in three categories and accounted for as follows: Classification Accounting ---------------- ---------------------- Held-to-maturity Amortized cost Trading securities Fair value, unrealized gains and losses included in earnings Available-for-sale Fair value, unrealized gains and losses excluded from earnings and reported in equity as a component of accumulated other comprehensive income, net of applicable income taxes. Realized gains and losses are included in earnings. We have included our marketable securities, held as inventory at our broker/dealer, in the trading securities category. We have included investments in marketable securities not held as inventory at our broker/dealer in the available-for-sale securities category. We account for our equity and fixed income securities as available-for-sale. In the event a decline in fair value of an investment occurs, management may be required to determine if the decline in market value is other than temporary. Management's assessments as to the nature of a decline in fair value are based on the quoted market prices at the end of a period, the length of time an investment's fair value has been in decline and our ability and intent to hold the investment. If the fair value is less than the carrying value and the decline is determined to be other than temporary, an appropriate write-down is recorded against earnings. (f) Property and Equipment Property and equipment is stated at cost net of accumulated depreciation and amortization. Property and equipment is depreciated using the straight-line method over the estimated useful lives of the respective assets (3 to 5 years). Leasehold improvements are amortized using the straight-line method over the life of the lease or their expected useful life, whichever is shorter. (g) Long-Lived Assets Long-lived assets, principally property and equipment, are reviewed for impairment annually at year-end or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. A-12 (1) Summary of Significant Accounting Policies, continued If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized if there is a difference between the fair value and carrying value of the asset. Current management analysis indicates that there is no impairment of long-lived assets. Investments are evaluated for impairment in the event of a material change in the underlying business. Such evaluation takes into consideration our intent and time frame to hold or to dispose of the investment and takes into consideration available information, including recent transactions in the stock, expected changes in the operations or cash flows of the investee, or a combination of these and other factors. Management's evaluation of our investments resulted in impairment charges in 2006, 2005 and 2004, as described in Note 6 to these consolidated financial statements. (h) Goodwill and Other Intangible Assets Goodwill represents the excess of cost over the fair value of net assets acquired. We account for goodwill and other intangible assets according to the Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", which addresses financial accounting and reporting matters for acquired goodwill and other intangible assets. Under the provision of SFAS No. 142, goodwill is not amortized, but is evaluated annually for impairment or more frequently if circumstances indicate that impairment may exist. The goodwill valuation is largely influenced by projected future cash flows and, therefore, is significantly impacted by estimates and judgments. We amortize other identifiable intangible assets on a straight-line basis over the periods expected to be benefited. The components of these other intangible assets, recorded in Other Assets in the accompanying consolidated balance sheets, consist primarily of a non-compete agreement. (i) Allowance for Doubtful Accounts When applicable, we record an allowance for doubtful accounts based on specifically identified amounts that we believe to be uncollectible. Management analyzes historical collection trends and changes in its customers' payment patterns, customer concentration and credit worthiness when evaluating its allowance for doubtful accounts. If our actual collections experience changes, revisions to our allowance may be required. We have a limited number of customers with individually large amounts due at any given balance sheet date. Any unanticipated change in one of those customers' credit standing or rating could have a material affect on our results of operations in the period in which such changes or events occur. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. (j) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in A-13 (1) Summary of Significant Accounting Policies, continued the period that includes the enactment date. A valuation allowance is provided for deferred tax assets to the extent realization is not judged to be more likely than not. (k) Cash and Cash Equivalents Cash and cash equivalents include cash and highly liquid investments with a maturity date at purchase of 90 days or less. We deposit our cash and cash equivalents with high credit quality institutions. Periodically such balances may exceed applicable FDIC insurance limits. Management has assessed the financial condition of these institutions and believes the possibility of credit loss is minimal. (l) Notes Receivable Notes receivable are recorded at cost, less allowances for doubtful accounts when deemed necessary. Management, considering current information and events regarding the borrowers' ability to repay their obligations, considers a note to be impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the note agreement. When a loan receivable is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the note's effective interest rate. Impairment losses are included in the allowance for doubtful accounts through a charge to bad debt expense. The present value of the impaired loan will change with the passage of time and may change because of revised estimates of cash flows or timing of cash flows. Such value changes are reported as bad debt expense in the same manner in which impairment initially was recognized. No interest income is accrued on impaired loans. Cash receipts on impaired loans are recorded as reductions of the principal amount. (m) Stock-Based Compensation At December 31, 2006, we have stock-based employee compensation plans, which are described more fully in Notes 12 and 13. On January 1, 2006 we adopted SFAS No. 123(R), Share-Based Payment, a revision of the earlier SFAS 123, Accounting for Stock-Based Compensation. SFAS 123 (R) had concluded that services received from employees in exchange for stock-based compensation results in a cost to the employer that must be recognized in the financial statements at fair value. For the year ended December 31, 2006 we calculated stock-based compensation using the intrinsic value method. We estimate the fair value of stock option awards on the date of grant utilizing a modified Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of short-term traded options that have no vesting restrictions and are fully transferable. However, certain assumptions used in the Black-Scholes model, such as expected term, can be adjusted to incorporate the unique characteristics of our stock option awards. Option valuation models require the input of t somewhat subjective assumptions including expected stock price volatility and expected term. We believe it is unlikely that materially different estimates for the assumptions used in estimating the fair value of stock option granted would be made based on conditions suggested by actual historical experience and other data available at the time estimates were made. Restricted stock awards are valued at the price of our common stock on the date of grant. We have elected the modified prospective transition method as permitted by SFAS No, 123(R) and accordingly prior periods have not been restated to reflect the impact of SFAS No. 123(R). SFAS No. 123(R) requires that stock-based compensation be recorded for all new and unvested stock options expected to vest as the requisite service is rendered beginning January 1, 2006. Stock-based A-14 (1) Summary of Significant Accounting Policies, continued compensation expense for awards granted on or before December 31, 2005, but unvested as of that date, is based on the grant date fair value as determined under the pro forma provisions of SFAS No. 123. Prior to the adoption of SFAS No. 123(R) on January 1, 2006, we accounted for stock options under the disclosure-only provision of SFAS No. 123, but applied APB Option No. 25, "Accounting for Stock Issued to Employees", in accounting for our stock option plans. No compensation expense was recognized for the years ended December 31, 2005 and 2004 under the provisions of APB No. 25. If we had elected to recognize compensation expense for options granted based on their fair values at the grant dates, consistent with Statement 123, net income and earnings per share would have changed to the pro forma amounts indicated below:
Year Ended December 31 2005 2004 ---- ---- Net income as reported $ 5,460,000 $ 2,152,000 Deduct: Total additional stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (421,000) (550,000) ------- ------- Pro forma net income $ 5,039,000 $ 1,602,000 ========= ========= Net income per share Basic - as reported $ 2.03 $ 0.85 ==== ==== Basic - pro forma $ 1.87 $ 0.63 ==== ==== Diluted - as reported $ 1.86 $ 0.76 ==== ==== Diluted - pro forma $ 1.72 $ 0.56 ==== ====
The stock-based employee compensation expense above was determined using the Black Scholes option-pricing model with the following assumptions: 2005 2004 ------------ ------------ Risk-free interest rate 4.33% 3.03% Expected holding period 3.6 years 3.8 years Expected volatility .363 .429 Expected dividend yield 2.15% -0- For the year ended December 31, 2006 we recorded compensation cost related to stock options of $225,000 and a related reduction in income taxes of $77,000. The compensation cost is the total fair value, at date of grant, of shares that vested during the year. A-15 (1) Summary of Significant Accounting Policies, continued The effect of adopting SFAS No 123(R) on selected reported items is as follows: 2006 ------------------------------- Impact of As Reported SFAS No. 123R ----------- ------------- Income before income taxes $ 5,033,000 $ 225,000 Net income 3,194,000 148,000 Basic earnings per share 1.15 .05 Diluted earnings per share 1.09 .05 Cash flows used in financing activities $ 1,618,000 $ 604,000 (n) Recently Issued Accounting Pronouncements In February, 2006 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards, or SFAS, No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140. SFAS 155 becomes effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. This Statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. We do not expect the adoption of this standard to have a material effect on our financial position, results of operations or cash flows. In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. This interpretation is effective for fiscal years beginning after December 15, 2006. We have not yet determined the impact this interpretation will have on our results from operations or financial position. In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards, or SFAS No. 157, "Accounting for Fair Value Measurements", effective for fiscal years beginning after November 15, 2007. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. A-16 (1) Summary of Significant Accounting Policies, continued Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. We do not expect the adoption of this standard to have a material effect on our financial position, results of operations or cash flows. (o) Reclassification Certain reclassifications have been made to amounts presented in 2005 and 2004 to be consistent with the 2006 presentation. (2) Cash - Restricted Restricted cash represents cash deposits advanced from customers for trade claim transactions that do not close by the end of the period. It occurs when a customer remits payment for a transaction by check instead of via wire transfer. As checks of this size normally take several business days to clear, we ask our customers to pay in advance for transactions expected to close in the near future. At the time of receipt, Cash - Restricted and Accounts Payable are increased for an equal amount as no part of this cash is ours until the transaction closes. (3) Management Fees and Other Receivables Management fees and other receivables consist of the following: December 31, 2006 2005 Management fees receivable $ 2,672,000 $2 ,723,000 Accrued interest receivable 197,000 125,000 Other receivables 63,000 344,000 ---------- ---------- $ 2,932,000 $3 ,192,000 We earn management fees by providing management services to American Physicians Insurance Exchange ("APIE") under the direction of APIE's Board of Directors. APIE is a reciprocal insurance exchange, which is wholly-owned by its subscriber physicians. Subject to the direction of APIE's Board, and subject to a management services agreement, APS Facilities Management, Inc., or FMI, sells and issues medical insurance policies, investigates, settles and defends claims, and otherwise manages APIE's day to day operations. The management agreement with FMI obligates APIE to pay management fees to FMI based on a percentage of APIE's earned premiums before payment of reinsurance premiums. In addition, the management agreement provides that any profits, as defined, of APIE will be shared equally with FMI (profit sharing) so long as the total amount does not exceed 3% of earned premiums. Management fees attributable to profit sharing were $1,994,000, $2,007,000, and $1,929,000 for the years ended December 31, 2006, 2005 and 2004, respectively. We earned total management fees and other related income of A-18 (3) Management Fees and Other Receivables, continued $15,555,000, $15,514,000 and $15,316,000, including expense reimbursements, principally for our independent agents' commissions, of $4,646,000, $4,376,000 and $4,482,000, for the years ended December 31, 2006, 2005 and 2004, respectively, related to these agreements. The summarized financial information for APIE as of and for the year ended December 31, 2006, 2005 and 2004 is as follows:
2006 2005 2004 (unaudited) (unaudited) (unaudited) ------------- ------------- -------------- Invested assets $139,625,000 $113,233,000 $97,874,000 Other assets 65,765,000 61,600,000 47,854,000 ------------ ------------ ------------ Total Assets $205,390,000 $174,833,000 $145,728,000 ============ ============ ============ Liabilities $170,494,000 $155,591,000 $133,827,000 Members' equity 34,896,000 19,242,000 11,901,000 ------------ ------------ ------------ Total liablilities and surplus $205,390,000 $174,833,000 $145,728,000 ============ ============ ============ Total revenue $77,331,000 $69,866,000 $69,313,000 ============ ============ ============ Net income $15,929,000 $ 9,031,000 $ 5,815,000 ============ ============ ============
Other receivables in 2006 2005 and 2004 are primarily from our brokerage and investment advisory services and are principally comprised of commissions earned by our brokers for trades in the last week of December 2006, 2005 and 2004. (4) Notes Receivable Notes receivable consist of the following:
December 31, 2006 2005 FEMPARTNERS, INC. (Formerly due from Syntera HealthCare Corporation) Originally due September 1, 2004, the note has been amended three times since December 2003. Each amendment has extended the note and modified the payment terms. The current amendment calls for payments of interest plus principal of $10,000, quarterly, through 2007. The note is scheduled to be repaid in full in 2007 in three quarterly payments. The note contains an acceleration clause in the event that FemPartners conducts an initial public offering or other public sale. $350,000 $390,000
A-18 (4) Notes Receivable, continued
ALIANZA Alianza identifies under-payments from insurance companies to medical providers and recovers the additional amounts. Alianza is expected to make loan payments totaling of $132,000 by May 31, 2007. The remaining $185,000 is to be paid from a guaranteed final payment at the conclusion of an arbitration hearing to be held no later than August 31, 2007. 317,000 301,000 EMPLOYEES Forgivable loans receivable are periodically made to non-officer employees (brokers of APS Financial), primarily as employment retention inducements. Employee notes receivable at December 31, 2006 consisted of two notes of $119,000 and $25,000, which are being amortized as earned monthly through December 2007 and June 2007, respectively, provided the employees remain with us; and notes totaling $14,000 due currently. The total amount amortized is charged to salaries expense in the period in which the loan was amortized. Forgivable loans receivable at December 31, 2005 consisted of three notes of $73,000, $86,000, and $75,000, which are being amortized as earned through May 2006, December 2006, and June 2007, respectively, provided the employees remain with us; and a note for $8,000 due currently. 158,000 242,000 ------- ------- 825,000 933,000 Less current portion and allowance for doubtful accounts of $8,000 and $8,000 in 2006 and 2005, respectively. (825,000) (607,000) --------- --------- Long term portion $0 $326,000 == ========
(5) Fair Value of Financial Instruments For financial instruments the estimated fair value equals the carrying value as presented in the consolidated balance sheets. Fair value estimates, methods and assumptions are set forth below for our financial instruments. Notes Receivable The fair value of notes has been determined using discounted cash flows based on our management's estimate of current interest rates for notes of similar credit quality. The carrying value of notes receivable approximates their fair value. Management Fees and Other Receivables Management fees are billed to APIE who pays in full within two weeks of notice. Through the course of our management relationship with APIE there has never been any write-offs of balances owed or other collection issues. As such, management has determined that there is no need for a reserve against the receivable balance. Therefore, the carrying value and the fair value of the receivable are the same. A-19 (5) Fair Value of Financial Instruments, continued Deposit with Capital Organization The carrying amounts approximate fair value because the funds can be withdrawn on demand and there is no unanticipated credit concern. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the aforementioned estimates. (6) Marketable Securities The following table summarizes by major security type the cost, fair market value, and unrealized gains and losses of the investments that we have classified as available-for-sale:
Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------------------------------------- December 31, 2006 Governmental obligations $ 15,934,000 $ 11,000 $ (19,000) $ 15,926,000 Corporate obligations 682,000 28,000 -- 710,000 Equity securities 4,073,000 330,000 -- 4,403,000 ---------- ------- ------- ---------- Total $ 20,689,000 $ 369,000 $ (19,000) $ 21,039,000 ========== ======= ======= ========== December 31, 2005 Governmental obligations $ 12,418,000 $ 12,000 $ (60,000) $ 12,370,000 Corporate obligations 888,000 1,000 (13,000) 876,000 Equity securities 4,217,000 800,000 -- 5,017,000 ---------- -------- ------- ----------- Total $ 17,523,000 $ 813,000 $ (73,000) $ 18,263,000 ========== ======== ======= ===========
Amounts reflected in the table above include equity securities of HealthTronics with a fair value of $348,000 and $1,095,000 at December 31, 2006 and 2005, respectively. At December 31, 2006 and 2005, amounts also include equity securities of Financial Industries Corporation ("FIC") with a fair value of $2,926,000 and $3,196,000, respectively. A-20 (6) Marketable Securities, continued Maturities of fixed income securities were as follows at December 31, 2006: Fair Cost Value ------------ ------------ Due within one year $ 14,762,000 $ 14,746,000 Due after one year 1,854,000 1,890,000 ----------- ---------- Total $ 16,616,000 $ 16,636,000 ========== ========== HealthTronics is the largest provider of lithotripsy (a non-invasive method of treating kidney stones) services in the United States and is an international supplier of specialty vehicles for the transport of high technology medical, broadcast/communications and homeland security equipment. Through selling of shares since our initial investment of 3,540,000 shares in 1989, our holdings of common stock at December 31, 2006 stood at 52,000 or less than 1% of the common stock outstanding. We account for HealthTronics as an available-for-sale equity security and record changes in its value, net of tax, in our balance sheet as part of "accumulated other comprehensive income." Financial Industries Corporation ("FIC") is a holding company primarily engaged in the life insurance business through ownership of several life insurance companies. In June 2003, we purchased from FIC and the Roy F. and Joann Mitte Foundation, 339,879 shares of FIC's common stock as an investment. Earlier in 2003 we had purchased 45,121 FIC shares in the open market. The 385,000 shares represented an approximate cost of $5,647,000, which was all sourced from our cash reserves. During 2004, the value of our investment in FIC had declined significantly. In October 2004, we determined that this decline in market price was "other than temporary" as defined in Statements of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, as amended. Consequently, we recorded pretax charges to earnings totaling $2,567,000 in 2004. These charges reduced our cost basis in FIC from $5,647,000, or $14.67 per share, to $3,080,000, or $8.00 per share which was equal to the quoted market price of FIC shares on December 31, 2004. During 2005 and 2006, we took additional pretax charges to earnings totaling $135,000 and $19,000, respectively, further reducing our cost basis in FIC to $2,926,000, or $7.60 per share. While we currently continue to have the ability and the intent to hold the stock indefinitely, we concluded that the additional uncertainty created by FIC's late filings, together with the lack of its current financial information, dictated that the declines should be viewed as other than temporary. Although FIC has now filed its 2004 and 2005 Forms10-K it is still delinquent in filing its 2006 Forms 10-Q and thus continues to be de-listed on the NASDAQ Stock Market. We will continue to monitor and evaluate the situation at FIC and further determine if changes in fair market value of the investment are temporary or "other than temporary" The following table summarizes our recognized gains and losses on investments. Costs on assets sold were determined on the basis of specific identification. A-21 (6) Marketable Securities, continued
Year ended December 31, ------------------------------------------------------------------------- 2006 2005 2004 ------- ------- -------- Proceeds from sales $ 11,669,000 $ 8,503,000 $ 1,116,000 Gain on investments, net 259,000 3,160,000 245,000 Loss on impairment of investments (19,000) (217,000) (2,567,000) ---------- ---------- ---------- Net gains (losses) $ 240,000 $ 2,943,000 $ (2,322,000) ========== ========== ===========
(7) Property and Equipment Property and equipment consists of the following: December 31, ------------------------------------- 2006 2005 ---------- --------- Equipment $ 952,000 $1,289,000 Furniture 543,000 647,000 Software 825,000 783,000 Leasehold improvements 231,000 332,000 --------- --------- 2,551,000 3,051,000 Accumulated depreciation and amortization (1,995,000) (2,364,000) --------- --------- $ 556,000 $ 687,000 ========= ========= Property and equipment are stated at cost. Depreciation and amortization expense of $297,000, $239,000 and $181,000 in 2006, 2005 and 2004, respectively, is computed principally on the straight-line method over the estimated useful lives of the assets. The useful lives for equipment ranges from three to five years, furniture ranges from five to seven years, software is depreciated over three years, and leasehold improvements are amortized over the life of the lease or their expected useful life, whichever is shorter. (8) Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consist of the following as of December 31: 2006 2005 ------------- ------------- Commissions payable $ 1,239,000 $ 1,258,000 Taxes payable 161,000 219,000 401(k) plan matching 213,000 208,000 Vacation payable 170,000 161,000 Other 137,000 66,000 --------- --------- $ 1,920,000 $ 1,912,000 ========= ========= A-22 (9) Deferred Gain In November 2001 we sold all of the remaining 46,000 square feet of condominium space we owned in an office project located in Austin, Texas to our former affiliate, HealthTronics. In conjunction with the sale we leased back approximately 23,000 square feet that housed our operations prior to the sale. Gain on the sale amounted to approximately $5.1 million, of which $1.9 million was recognized in 2001 and the balance of gain was deferred. Deferred income of approximately $2.4 million related to our continuing involvement in 50% of the useable space was recorded and was recognized monthly over the five-year lease term that ended in September 2006. Income recognition related to this deferral was $422,000 in 2006, $513,000 in 2005 and $488,000 in 2004. In addition, 15% of the gain ($0.76 million) related to our then 15% ownership in the purchaser was deferred as we accounted for HealthTronics using the equity method of accounting through the year ended December 31, 2001. We reduced our investment in HealthTronics and subsequently recognized a proportionate percentage of the deferred gain, amounting to $30,000, $134,000 and $56,000 in 2006, 2005 and 2004, respectively. Recognition of the deferred gains were recorded as a reduction of rent expense in operating expenses in the accompanying consolidated financial statements. (10) Commitments and Contingencies Rental expenses under all operating leases were $1,416,000, $1,133,000, and $1,098,000, for the years ended December 31, 2006, 2005 and 2004, respectively. Future minimum payments for leases that extend for more than one year through 2011 were $770,000; $687,000; $664,000; $643,000, and $662,000 for 2007, 2008, 2009, 2010 and 2011, respectively. We are involved in various claims and legal actions that have arisen in the ordinary course of business. Management believes that any liabilities arising from these actions will not have a significant adverse effect on our consolidated financial condition or results of operations or cash flows. (11) Income Taxes Income tax expense consists of the following:
Year Ended December 31, ----------------------------------------------------------------------- 2006 2005 2004 --------- -------- ---------- Operations: Federal Current $ 1,186,000 $ 2,577,000 $ 1,049,000 Tax benefit of stock options 604,000 708,000 589,000 Deferred (99,000) (446,000) (505,000) State-Current 148,000 200,000 184,000 ---------- ----------- ---------- Total from Operations $ 1,839,000 $ 3,039,000 $ 1,317,000 =========== =========== ===========
A reconciliation of expected income tax expense computed by applying the United States federal statutory income tax rate of 34% to earnings from continuing operations before income taxes to tax expense from operations in the accompanying consolidated statements of income follows: A-23
Year Ended December 31, --------------------------------------------------------------------- 2006 2005 2004 --------- --------- ---------- Expected federal income tax expense from operations $ 1,712,000 $ 2,889,000 $ 1,179,000 State taxes 98,000 132,000 121,000 Other, net 29,000 18,000 17,000 --------- --------- ---------- $ 1,839,000 $ 3,039,000 $ 1,317,000 ========= ========= ========== Effective tax rate 37% 36% 38%
The tax effect of temporary differences that gives rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2006 and 2005 are presented below:
Year Ended December 31, ------------------------------------------- 2006 2005 ------------ ------------ Current deferred tax assets: Accrued expenses $ 110,000 $ 334,000 Allowance for doubtful accounts 19,000 21,000 --------- -------- Total current deferred tax asset 129,000 355,000 ========= ======== Non-current deferred tax assets (liabilities): Write-off of investment in excess of tax loss 925,000 946,000 Deferred compensation and stock options 380,000 -- Sales/Leaseback deferred income 6,000 159,000 Investment in available-for-sale securities (64,000) (175,000) Market value allowance on investments (119,000) (251,000) Other 198,000 168,000 Tax depreciation in excess of book (134,000) (161,000) ---------- -------- Total non-current net deferred tax asset 1,192,000 686,000 ========== ========= Net deferred tax asset $1,321,000 $1,041,000 ========== =========
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods that the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences at December 31, 2006. A-24 (12) Employee Benefit Plans We have an employee benefit plan qualifying under Section 401(k) of the Internal Revenue Code for all eligible employees. Employees become eligible upon meeting certain service and age requirements. Employee deferrals may not exceed $15,000 in 2006 unless participant is over age 50, in which case the maximum deferral is $20,000. We may, at our discretion, contribute up to 200% of the employees' deferred amount. For the years ended December 31, 2006, 2005 and 2004 our contributions aggregated $213,000, $208,000 and $170,000, respectively. In December 2004, the Board of Directors approved the "American Physicians Service Group, Inc. Affiliate Group Deferred Compensation Master Plan" ("Deferred Compensation Plan"), a non-qualified compensation plan designed to give us more flexibility in compensating key employees and directors through ownership of our common stock. The adoption of the Deferred Compensation Plan was approved by our shareholders at the 2005 Annual Meeting. Under the Deferred Compensation Plan we may elect to defer a portion of an employee's incentive compensation or director's board compensation in the form of a deferred stock grant. Shares become eligible for withdrawal with the passage of time and participants may withdraw eligible shares upon attaining the age of sixty or upon leaving our service. Plan participants may withdraw all shares granted to them ratably over four years, provided they have entered into a non-competition agreement with us. We plan for this to be an unfunded plan. Shares to be withdrawn will be purchased in the open market or issued from the authorized shares. In 2006, a total of 13,500 shares were awarded, for which we recorded an expense of $215,000. Of the 150,000 shares authorized under the Deferred Compensation Plan, 69,000 shares have been granted and 81,000 shares remain available for grant. Shares granted are included in shares outstanding and are a component of basic shares outstanding in calculating earnings per share. (13) Stock Options We have adopted, with shareholder approval, the "2005 Incentive and Non-Qualified Stock Option Plan" ("Incentive Plan"). The Incentive Plan provides for the issuance of options to purchase up to 350,000 shares of common stock to our directors and key employees. A total of 188,000 of these options have been granted as of December 31, 2006 and 162,000 are available for grants. Of those granted, 6,000 shares have been exercised, 132,000 options are exercisable and 50,000 are not yet exercisable. The previous plan, "1995 Incentive and Non-Qualified Stock Option Plan", provided for the issuance of 1,600,000 shares of common stock to our directors and key employees. All of the approved options have been granted as of December 31, 2006, 1,157,000 shares have been exercised, 267,000 shares are exercisable, 17,000 are not yet exercisable and 159,000 options have been cancelled. Upon the exercise of an option we issue the shares from our authorized, but un-issued shares. The exercise price for each non-qualified option share is determined by the Compensation Committee of the Board of Directors ("the Committee"). The exercise price of a qualified incentive stock option has to be at least 100% of the fair market value of such shares on the date of grant of the option. Under the Plans, option grants are limited to a maximum of ten-year terms; however, the Committee has issued all currently outstanding grants with five-year terms. The Committee also determines vesting for each option grant and traditionally has had options vest in three approximately equal annual installments beginning one year from the date of grant. During the year ended December 31, 2006, 180,000 options were exercised with an intrinsic value of $1,797,000. We received proceeds of $986,000 from the exercise of these options and received a federal A-25 (13) Stock Options, continued income tax reduction of $604,000. The total fair value of shares vesting during the year ended December 31, 2006, was $225,000. As of December 31, 2006, there was $189,000 of unrecognized compensation cost related to non-vested shares under the Incentive Plan, which is expected to be recognized over a weighted-average period of 1.9 years. Prior to the adoption of SFAS No. 123(R) on January 1, 2006, we accounted for stock options under the disclosure-only provision of SFAS No. 123, but applied APB Option No. 25, "Accounting for Stock Issued to Employees", in accounting for our stock option plans. No compensation expense was recognized for the years ended December 31, 2005 and 2004 under the provisions of APB No. 25. If we had elected to recognize compensation expense for options granted based on their fair values at the grant dates, consistent with Statement 123, net income and earnings per share would have changed to the pro forma amounts indicated below.
Year Ended December 31 ------------------------------------ 2005 2004 ---- ---- Net income as reported $ 5,460,000 $ 2,152,000 Deduct: Total additional stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (421,000) (550,000) -------- ------- Pro forma net income $ 5,039,000 $ 1,602,000 ========= ========= Net income per share Basic - as reported $ 2.03 $ 0.85 ==== ==== Basic - pro forma $ 1.87 $ 0.63 ==== ==== Diluted - as reported $ 1.86 $ 0.76 ==== ==== Diluted - pro forma $ 1.72 $ 0.56 ==== ====
The stock-based employee compensation expense above was determined using the Black Scholes option-pricing model with the following assumptions: 2005 2004 ------------ ------------ Risk-free interest rate 4.33% 3.03% Expected holding period 3.6 years 3.8 years Expected volatility .363 .429 Expected dividend yield 2.15% -0- For the year ended December 31, 2006 we recorded compensation cost related to stock options of $225,000 and a related reduction in income taxes of $77,000. The compensation cost is the total fair value, at date of grant, of shares that vested during the year. A-26 (13) Stock Options, continued The effect of adopting SFAS No 123(R) on selected reported items is as follows: 2006 ------------------------------- Impact of As Reported SFAS No 123(R) ------------ ------------- Income before income taxes $ 5,033,000 $ 225,000 Net income 3,194,000 148,000 Basic earnings per share 1.15 .05 Diluted earnings per share 1.09 .05 Cash flows used in financing activities $ 1,618,000 $ 604,000 Presented below is a summary of the stock options held by our employees and our directors and the related transactions for the year ended December 31, 2006.
Years Ended December 31, ----------------------------- ------------------------------ -------------------------------- 2006 2005 2004 ----------------------------- ------------------------------ -------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ------------ ------ ------------ ------- ------------ Balance at January 1 573,000 $ 7.92 721,000 $ 6.04 815,000 $ 4.49 Options granted 75,000 14.85 113,000 11.60 146,000 9.93 Options exercised (180,000) 5.49 (251,000) 4.13 (240,000) 3.16 Options forfeited/expired (1,000) 9.60 (10,000) 9.10 -- -- --------- ------- -------- ------ ------- ------ Balance at December 31 467,000 $ 9.96 573,000 $ 7.92 721,000 $ 6.04 ========= ======= ======== ====== ======= ====== Options exercisable 399,000 $ 9.32 483,000 $ 7.96 389,000 $ 5.80 ========= ======= ======== ====== ======= ======
Weighted Average Remaining Contractual Term Aggregate (yrs) Intrinsic Value(1) ---------- ----------------- Balance at 12-31-2004 3.1 $ 3,136,000 ========== ========= Exercisable at 12-31-2004 3.0 $ 1,786,000 ========== ========= Balance at 12-31-2005 3.0 $ 2,510,000 ========== ========= Exercisable at 12-31-2005 3.0 $ 2,960,000 ========== ========= Balance at 12-31-2006 2.8 $ 2,817,000 ========== ========= Exercisable at 12-31-2006 2.6 $ 2,664,000 ========== ========= (1) Based on the $16.00, $12.30 and $10.39 closing price of our stock on December 31, 2006, 2005 and 2004, respectively. A-27 (13) Stock Options, continued The weighted average grant-date fair value of Company stock options granted is $4.06 per option for the year ended December 31, 2006. The fair value of the options was calculated using the Black-Scholes-Merton option pricing model with the following assumptions: Year Ended December 31, 2006 ---------------------------------- Range Weighted Average --------- ---------------- Expected volatility 33.8%-35.4% 34.5% Expected dividend yield 1.85%-2.11% 1.96% Expected option term 3.7 years 3.7 years Risk-free rate of return 4.47%-4.72% 4.59% Expected annual forfeiture rate 0-4% 2.53% The expected volatility assumptions we used are based on the historical volatility of our common stock over the most recent period commensurate with the estimated expected life of our stock options, such estimated life being based on the historical experience of our stock option exercises. The risk-free rate of return is based, at the date of grant, on the yield of U.S. Treasury securities maturing within the expected life of the option. (14) Repurchase of Minority Interest On October 1, 2003 we purchased for $2,050,000 cash the 20% interest in APS Insurances Services, Inc., which was owned by FPIC Insurance Group, Inc. ("FPIC"). We believe the acquisition provided us more control over operating decisions and improved our earnings and return on capital with minimal risk. As a result of this transaction, we now own a 100% interest in APS Insurance Services. Prior to our repurchase of the minority interest, we consolidated the assets, liabilities and operations of APS Insurance Services and recorded 20% of its after tax net income as minority interest. As a part of the purchase agreement we maintained an agreement with FPIC that limits them from competing with us in Texas through February 2007. The Company has assigned a value of $410,000 to this non-compete agreement based on a determination by an outside consulting firm. The agreement is being amortized on the straight-line method through its expiration in February, 2007. The total cost of the acquisition was $2,050,000 and was allocated to the 20% interest acquired in APS Insurance Services based on the fair values of its net assets on the date of acquisition, in accordance with the purchase method of accounting for business combinations. A-28 (14) Repurchase of Minority Interest, continued A summary of the purchase price allocation for this transaction is as follows: Purchase price of 20% interest $ 2,050,000 Basis of recorded minority interest (393,000) Allocated to non-competition agreement (410,000) ----------- Excess of purchase price over assets acquired (goodwill) $ 1,247,000 ========== Other intangible assets as of December 31, 2006 and 2005, subject to amortization expense, contains the following:
Gross Carrying Accumulated Amount Amortization Net -------------------- ------------------ ----------------- For the year ended December 31, 2006 - ------------------------------------- Non-compete $ 410,000 $ 390,000 $ 20,000 Managing general agent license 160,000 42,000 118,000 --------- ---------- ---------- Total $ 570,000 $ 432,000 $ 138,000 ========= ========== =========== For the year ended December 31, 2005 Amount Amortization Net - ------------------------------------- -------------------- ------------------ ----------------- Non-compete $ 410,000 $ 270,000 $ 140,000 Managing general agent license 160,000 38,000 122,000 ---------- ---------- ---------- Total $ 570,000 $ 308,000 $ 262,000 ========== ========== ===========
We assume no residual value and estimate annual amortization expense over the remaining life of the non-compete agreement and managing general agent license to be as follows: Year Amount -------- ------- Non-compete agreement 2007 $ 20,000 Managing general agent license 2007 $ 4,000 A-29 (15) Investment in Unconsolidated Affiliates We recorded $0 and $24,000 in 2006 and 2005, respectively, as gain on forgiveness of debt. The 2005 gain represents that amount of liability that was released in the respective periods by participants in our loan to a former affiliate, net of any interest due them for prior period payments made by that affiliate. Due to poor operating results, Uncommon Care was in default and not making scheduled payments under its loan agreement with us in which the participations had been sold. As a result, the loan participants released us from any obligations under the participation agreements. The $24,000 recorded in 2005 represents the final loan obligation to be released. No gains, therefore, were recorded in 2006. (16) Segment Information Our segments are distinct by type of service provided. Each segment has its own management team and separate financial reporting. Our Chief Executive Officer allocates resources and provides overall management based on the segments' financial results. Our insurance services segment includes financial management for an insurance company that provides professional liability insurance to doctors. Our financial services segment includes brokerage and asset management services to individuals and institutions. Corporate is the parent company and derives its income from interest, investments and dividends paid by the other segments. A-30 (16) Segment Information, continued
2006 2005 2004 ---------- ---------- ---------- Operating Revenues Insurance services $ 15,555,000 $ 15,514,000 $ 15,316,000 Financial services 16,805,000 18,459,000 16,705,000 Intercompany dividends 4,438,000 1,600,000 4,760,000 ----------- ----------- ----------- $ 36,798,000 $ 35,573,000 $ 36,781,000 =========== =========== =========== Reconciliation to Consolidated Statements of Operations: Total segment revenues 36,798,000 35,573,000 36,781,000 Less: intercompany dividends (4,438,000) (1,600,000) (4,760,000) ---------- ---------- ---------- Total Revenues $ 32,360,000 $ 33,973,000 $ 32,021,000 ========== ========== =========== Operating Income (Loss): Insurance services 4,293,000 5,252,000 5,348,000 Financial services 1,660,000 2,196,000 2,167,000 Other 2,339,000 (1,003,000) 2,589,000 --------- ---------- ----------- $ 8,292,000 $ 6,445,000 $ 10,104,000 ========= ========== =========== Reconciliation to Consolidated Statements of Operations: Total segment operating profit $ 8,292,000 $ 6,445,000 $ 10,104,000 Less: intercompany dividends (4,438,000) (1,600,000) (4,760,000) --------- --------- ---------- Operating income 3,854,000 4,845,000 5,344,000 Gain (loss) on investments, net 240,000 2,943,000 (2,322,000) Gain on extinguishment of debt -- 24,000 75,000 --------- --------- ---------- Income from operations before interest, income taxes, minority interests and equity in gain and loss of unconsolidated affiliates 4,094,000 7,812,000 3,097,000 Interest income 915,000 587,000 365,000 Other income 49,000 124,000 15,000 Interest expense 19,000 10,000 7,000 Income tax expense 1,839,000 3,039,000 1,317,000 Minority interests 6,000 14,000 1,000 --------- ---------- ---------- Net income $ 3,194,000 $ 5,460,000 $ 2,152,000 ========= ========== ==========
A-31 (16) Segment Information, continued
2006 2005 2004 ---------- ----------- ----------- Identifiable assets: Insurance services; Intangible assets $ 1,267,000 $ 1,387,000 $ 1,507,000 Other 4,358,000 5,033,000 4,526,000 Financial services 7,027,000 6,061,000 5,106,000 Corporate: Investment in available for sale securities 21,039,000 18,263,000 14,320,000 Other 2,585,000 2,761,000 4,984,000 ---------- ----------- ----------- $ 36,276,000 $ 33,505,000 $ 30,443,000 ========== =========== =========== Capital expenditures: Insurance Services $ 84,000 $ 187,000 $ 362,000 Financial Services 40,000 47,000 10,000 Corporate 42,000 73,000 49,000 ---------- ----------- ----------- $ 166,000 $ 307,000 $ 421,000 ========== =========== =========== Depreciation/amortization expenses: Insurance Services $ 325,000 $ 274,000 $ 217,000 Financial Services 28,000 28,000 27,000 Corporate 68,000 62,000 60,000 ---------- ----------- ----------- $ 421,000 $ 364,000 $ 304,000 ========== =========== ===========
During the years ended December 31, 2006, 2005 and 2004 a single customer represented 48% ($15,555,000), 46% ($15,514,000) and 48% ($15,316,000) of our consolidated revenues. At December 31, 2006, 2005, and 2004 we had long-term contracts with that customer and were therefore not vulnerable to the risk of a near-term severe impact from a reasonably possible loss of the revenue. However, should that customer default or be unable to satisfy its contractual obligations, there would be a material adverse effect on our financial condition and results of operations. Operating income (loss) is operating revenues less related expenses and is all derived from domestic operations. Identifiable assets are those assets that are used in the operations of each business segment (after elimination of investments in other segments). Corporate assets consist primarily of cash and cash equivalents, notes receivable, investments in available-for-sale securities, investments in affiliates and intangible assets. A-32 (17) Net Income Per Share Basic income per share are based on the weighted average shares outstanding without any dilutive effects considered. Diluted earnings per share reflects dilution from all contingently issuable shares, including options. A reconciliation of income and average shares outstanding used in the calculation of basic and diluted earnings per share from continuing and discontinued operations follows:
For the Year Ended December 31, 2006 --------------------------------------------------------- Income Shares Per-Share (Numerator) (Denonminator) Amount -------------- ------------ ----------- Income from operations $ 3,194,000 Basic EPS: Income available to common stockholders 3,194,000 2,774,000 $1.15 Effect of dilutive securities -- 159,000 ==== --------- --------- Diluted EPS: Income available to common stockholders $ 3,194,000 2,933,000 $1.09 ========= ========= ==== For the Year Ended December 31, 2005 ---------------------------------------------------------- Income Shares Per-Share (Numerator) (Denonminator) Amount -------------- ------------ ----------- Income from operations $ 5,460,000 Basic EPS: Income available to common stockholders 5,460,000 2,688,000 $2.03 Effect of dilutive securities -- 243,000 ==== -------- --------- Diluted EPS: Income available to common stockholders $ 5,460,000 2,931,000 $1.86 ========= ========= ==== For the Year Ended December 31, 2004 ----------------------------------------------------------- Income Shares Per-Share (Numerator) (Denonminator) Amount -------------- ------------ ----------- Income from operations $ 2,152,000 Basic EPS: Income available to common stockholders 2,152,000 2,545,000 $0.85 Effect of dilutive securities -- 293,000 ==== --------- --------- Diluted EPS: Income available to common stockholders $ 2,152,000 2,838,000 $0.76 ========= ========= ====
A-33 (18) Shareholders' Equity The following table presents changes in shares outstanding for the period from December 31, 2004 to December 31, 2006:
Common Shares Treasury Outstanding Stock ------------- ------------ Balance December 31, 2003 2,454,667 Options excercised 240,200 -- Treasury stock purchases -- 70,495 Treasury stock retirements (70,495) (70,495) ----------- ----------- Balance December 31, 2004 2,624,372 -- =========== =========== Options excercised 251,000 -- Deferred compensation 47,855 -- Treasury stock purchases -- 139,107 Treasury stock retirements (139,107) (139,107) ----------- ------------ Balance December 31, 2005 2,784,120 -- =========== ============ Options excercised 180,000 -- Deferred Compensation 21,108 -- Treasury stock purchases -- 167,482 Treasury stock retirements (167,482) (167,482) ----------- ------------ Balance December 31, 2006 2,817,746 -- =========== ============
(19) Supplemental Consolidated Quarterly Financial Data (Unaudited) Quarter to quarter comparisons of results of operations have been and may be materially impacted by bond market conditions and whether or not there are profits at the medical malpractice insurance company which we manage and whose profits we share. We believe that the historical pattern of quarterly sales and income as a percentage of the annual total may not be indicative of the pattern in future years. The following tables set forth selected quarterly consolidated financial information for the years ended December 31, 2006, 2005 and 2004: A-34 (19) Supplemental Consolidated Quarterly Financial Data (Unaudited), continued
(In thousands, except per share data) First Second Third Fourth Quarter Quarter Quarter Quarter 2006 --------- -------- --------- ---------- Revenues $ 7,233 $ 7,975 $ 6,769 $ 10,383 Net Income 562 598 409 1,625 Basic net income per share: $ 0.20 $ 0.22 $ 0.15 $ 0.58 Diluted income per share: $ 0.19 $ 0.21 $ 0.14 $ 0.56 2005 Revenues $ 6,662 $ 7,033 $ 9,182 $ 11,096 Net Income 853 1,367 1,395 1,845 Basic net income per share: $ 0.32 $ 0.51 $ 0.52 $ 0.67 Diluted income per share: $ 0.30 $ 0.48 $ 0.48 $ 0.64 2004 Revenues $ 7,290 $ 7,295 $ 7,593 $ 9,843 Net Income 694 689 (834) 1,603 Basic net income per share: $ 0.28 $ 0.28 $ (0.32) $ 0.62 Diluted income per share: $ 0.25 $ 0.25 $ (0.32) $ 0.58
Results for the fourth quarter of 2006, 2005 and 2004 include profit sharing with APIE totaling $1,994,000, $2,007,000 and $1,929,000, respectively. (20) Concentration of credit risk Marketable securities As of December 31, 2006 we owned marketable securities of FIC with a combined fair market value of $2,926,000, or approximately 9% of our total assets. An event having a material adverse effect on FIC, and resulting in a devaluation of their securities, could also have a material adverse effect on our results of operations. Geographic concentration of insurance services Most of the managed insurance company's business is concentrated in Texas. Regulatory or judicial actions in that state that affected rates, competition or tort law could have a significant impact on the insurance company's business. Consequently, our insurance management business, which is based on the premiums and profitability of the managed company, could be adversely affected. A-35 (20) Concentration of credit risk, continued Financial market concentration of investment services Investment Services derives most of its revenue through commissions earned on the trading of fixed-income securities. Should conditions reduce the market's demand for fixed-income products, and should Investment Services be unable to shift it emphasis to other financial products, it could have a material adverse impact on our financial condition and results of operations. (21) Other Comprehensive Income The following chart discloses the reclassification adjustments for gains and losses included in net income during the years ended December 31:
Tax Before-Tax (Expense) Net-of-Tax Amount or Benefit Amount ---------- --------- ---------- 2006 Unrealized holding losses arising during the period $ (257) $ 87 $ (170) =========== ========== ========== Reclassification adjustment for gains included in net income (132) 45 (87) ----------- ---------- ---------- Net unrealized losses on securities $ (389) $ 132 $ (257) =========== ========== ========== 2005 Unrealized holding gains arising during the period $ 254 $ (87) $ 167 =========== ========== ========== Reclassification adjustment for gains included in net income (2,667) 907 (1,760) ----------- ---------- ---------- Net unrealized losses on securities $(2,413) $ 820 $(1,593) =========== ========== ========== 2004 Unrealized holding gains arising during the period $ 1,393 $ (474) $ 919 =========== ========== ========== Reclassification adjustment for losses included in net income 2,322 (789) 1,533 ----------- ---------- ---------- Net unrealized gains on securities $ 3,715 $ (1,263) $ 2,452 =========== ========== ==========
A-36 (22) Plans for a Strategic Merger On June 5, 2006 we announced plans for a strategic merger with APIE. Both our and APIE's boards of directors voted to approve the transaction subject to approval by the Texas Department of Insurance, necessary filings with the SEC and the approval of our shareholders and subscriber-policyholders of APIE. The original purchase price was $33 million, comprised of approximately 1.7 million shares of APS common stock to be issued to the policyholders of APIE and the conversion of approximately $10.4 million of APIE obligations into mandatorily redeemable APS preferred stock. On August 24, 2006, we announced that we agreed to an increase in the purchase price of APIE, which was also approved by APIE. The revised purchase price is $39 million; comprised of approximately 2.0 million shares of APS common stock issued to the policyholders of a APIE and the conversion of approximately $10.4 million of APIE obligations into mandatorily redeemable APS preferred stock. The preferred stock has a 3% annual dividend and must be redeemed at the rate of not less than $1 million per year until December 31, 2016 at which time it must have been fully redeemed. At a special meeting of shareholders held March 22, 2007, the shareholders of APS approved the issuance of common and preferred shares of APS for the acquisition of APIE. APIE subscribers also approved the transaction on the same day. The acquisition is set to close effective April 1, 2007. As the acquirer, we will account for this transaction consistent with the Statement of Financial Standards No. 141, "Business Combinations", whereby direct costs of the business combination are capitalized and become part of the total purchase price. (23) Line of Credit In April 2006, we renewed a $3.0 million line of credit that was originally established in November 2003 with PlainsCapital Bank. The loan calls for interest payments only to be made on any amount drawn until April 15, 2007, when the entire amount of the note, principal and interest then remaining unpaid, shall be due and payable. At December 31, 2006, there were no draws taken against this line of credit. We are in compliance with the covenants of the loan agreement, including requirements for a minimum of $5.0 million of unencumbered liquidity and a minimum 2 to 1 net worth ratio. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS American Physicians Service Group, Inc. and Subsidiaries Years Ended December 31, 2006, 2005 and 2004 (in thousands)
Balance at Balance Beginning Costs and at End of Year Expenses Deductions of Year ------------------------------------------------------------ Allowance for Doubtful Accounts 2006 $ 19 $ - $ 11 $ 8 ============== ============= ============== ============= 2005 $ 14 $ 16 $ 11 $ 19 ============== ============= ============== ============= 2004 $ - $ 47 $ 33 $ 14 ============== ============= ============== =============
A-37 EX-3.(I) 2 bylaws.htm EXH. 3.3 AMENDED BYLAWS

AMENDED AND RESTATED BYLAWS

OF

AMERICAN PHYSICIANS SERVICE GROUP, INC.

A Texas Corporation

 

(Adopted February 28, 2007)

 

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TABLE OF CONTENTS

Page

 

 

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4.08 Minutes

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5.01 Notice

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6.02 Removal

14

 

 

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8.02 Seal

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AMENDED AND RESTATED BYLAWS

OF

AMERICAN PHYSICIANS SERVICE GROUP, INC.

A Texas corporation

PREAMBLE

These bylaws are subject to, and governed by, the Texas Business Corporation Act and the articles of incorporation of American Physicians Service Group, Inc. (the “Corporation”). In the event of a direct conflict between the provisions of these bylaws and the mandatory provisions of the Texas Business Corporation Act or the provisions of the articles of incorporation of the Corporation, such provisions of the Texas Business Corporation Act or the articles of incorporation of the Corporation, as the case may be, will be controlling.

• OFFICES

1.01 Registered Office and Agent. The registered office and registered agent of the Corporation shall be as designated from time to time by the appropriate filing by the Corporation in the office of the Secretary of State of Texas.

1.02 Other Offices. The corporation may also have offices at such other places, both within and without the State of Texas, as the board of directors may from time to time determine or the business of the Corporation may require.

• SHAREHOLDERS

2.01 Annual Meetings. An annual meeting of shareholders of the Corporation shall be held during each calendar year on such date and at such time as shall be designated from time to time, by the board of directors and stated in the notice of the meeting. At such meeting, the shareholders shall elect directors and transact such other business as may properly be brought before the meeting.

2.02 Special Meetings. Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, a special meeting of the shareholders may be called at any time only by the chairman of the board, the president, or a majority of the entire board of directors. Only such business shall be transacted at a special meeting as is specified in the notice of any special meeting.

2.03 Place of Meetings. The annual meeting of shareholders may be held at any place within or without the State of Texas as may be designated by the board of directors. Special meetings of shareholders may be held at any place within or without the State of Texas as may be designated by the person or persons calling such special meeting as provided in Section 2.02. If no place for a meeting is designated, it shall be held at the registered office of the Corporation.

 

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2.04 Notice. Written or printed notice stating the place, day, and time of each meeting of shareholders, and, in case of a special meeting, the purpose or purposes for which the meeting is called shall be delivered not less than ten nor more than 60 days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the board, the president, the secretary, or the person calling the meeting, to each shareholder of record entitled to vote at such meeting.

2.05 Voting List. At least ten days before each meeting of shareholders, the secretary shall prepare a complete list of shareholders entitled to vote at such meeting, arranged in alphabetical order, including the address of each shareholder and the number of voting shares held by each shareholder. For a period of ten days prior to such meeting, such list shall be kept on file at the registered office of the Corporation and shall be subject to inspection by any shareholder during usual business hours. Such list shall be produced at such meeting, and at all times during such meeting shall be subject to inspection by any shareholder. The original stock transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such list or stock transfer books.

2.06 Voting of Shares. Treasury shares, shares of the Corporation’s own stock owned by another corporation the majority of the voting stock of which is owned or controlled by the Corporation, and shares of the Corporation’s own stock held by the Corporation in a fiduciary capacity shall not be shares entitled to vote or to be counted in determining the total number of outstanding shares. Shares held by an administrator, executor, guardian, or conservator may be voted by him, either in person or by proxy, without transfer of such shares into his name so long as such shares form a part of the estate and are in the possession of the estate being served by him. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, only after the shares have been transferred into his name as trustee. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without transfer of such shares into his name if authority to do so is contained in the court order by which such receiver was appointed. Shares standing in the name of another domestic or foreign corporation of any type or kind may be voted by such officer, agent, or proxy as the bylaws of such corporation may provide or, in the absence of such provision, as the board of directors of such corporation may determine. A shareholder whose shares are pledged shall be entitled to vote such shares until they have been transferred into the name of the pledgee, and thereafter, the pledgee shall be entitled to vote such shares.

2.07 Quorum. The holders of a majority of the outstanding shares entitled to vote, present in person or represented by proxy, shall constitute a quorum at any meeting of shareholders, except as otherwise provided by law, the articles of incorporation, or these bylaws. If a quorum shall not be present or represented at any meeting of shareholders, a majority of the shareholders entitled to vote at the meeting, who are present in person or represented by proxy, may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At any reconvening of an adjourned meeting at which a quorum shall be present or represented any business may be transacted which could have been transacted at the original meeting, if a quorum had been present or represented. For purposes of determining the presence or absence of a quorum under this Section 2.07, abstentions and broker non-votes (as such terms are defined in Section 2.08) shall be treated as shares present and entitled to vote.

 

 

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2.08 Majority Vote; Withdrawal of Quorum. Subject to the rights of the holders of one or more series of preferred shares of the Corporation, voting separately by class or series, to elect directors pursuant to the terms of one or more series of such preferred shares, the election of directors shall be determined by a plurality of the votes cast by the shareholders entitled to vote thereon and represented in person or by proxy at the meeting at which a quorum is present. All other matters shall be determined by the affirmative vote of a majority of the votes that were voted for or against the matter cast by the shareholders entitled to vote thereon and represented in person or by proxy at the meeting at which a quorum is present, unless the matter is one on which, by express provision of law, the articles of incorporation, or these bylaws, a different vote is required, in which event such express provision shall govern and control the decision of such matter. Abstentions and broker non-votes shall not be counted as a vote for or against such matter (even though such shares are considered present and entitled to vote for purposes of determining a quorum pursuant to Section 2.07). The term “abstentions” shall refer to shares which are not voted “for” or “against” a particular question by a holder or holders present in person or by proxy at a meeting and entitled to vote such shares on such question. The term “broker non-vote” shall refer to shares held by brokers or nominees as to which instructions have not been received from the beneficial owners or persons entitled to vote and that the broker or nominee does not have discretionary power to vote on the particular question on which the vote is being counted. The shareholders present at a duly convened meeting may continue to transact business until adjournment, notwithstanding any withdrawal of shareholders which may leave less than a quorum remaining.

2.09 Method of Voting; Proxies. Every shareholder of record shall be entitled at every meeting of shareholders to one vote on each matter submitted to a vote, for every share standing in his name on the original stock transfer books of the Corporation except to the extent that the voting rights of the shares of any class or classes are limited or denied by the articles of incorporation. Such books shall be prima facie evidence as to the identity of shareholders entitled to vote. At any meeting of shareholders, every shareholder having the right to vote may vote either in person or by a proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. Each such proxy shall be filed with the secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after 11 months from the date of its execution, unless otherwise provided in the proxy. If no date is stated on a proxy, such proxy shall be presumed to have been executed on the date of the meeting at which it is to be voted. Each proxy shall be revocable, unless expressly provided therein to be irrevocable, or unless otherwise made irrevocable by law. Each shareholder entitled to vote at any meeting of shareholders may authorize not in excess of two persons to act for such shareholder by a proxy signed by such shareholder or such shareholder’s attorney-in-fact. Any such proxy shall be delivered to the secretary of such meeting at or prior to the time designated for holding such meeting, but in any event not later than the time designated in the order of business for so delivering such proxies.

2.10 Closing of Transfer Books; Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any reconvening thereof or entitled to receive payment of any dividend or in order to make a determination of shareholders for any other proper purpose, the board of directors may provide that the stock transfer books of the Corporation shall be closed for a stated period but not to exceed in any event 60 days. If the stock transfer books are closed for the purpose of determining shareholders

 

 

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entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten days immediately preceding such meeting. In lieu of closing the stock transfer books, the board of directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than 60 days and, in case of a meeting of shareholders, not less than ten days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the stock transfer books are not closed and if no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders or entitled to receive payment of a dividend, the date on which the notice of the meeting is mailed or the date on which the resolution of the board of directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders.

2.11 Order of Business. At each meeting of the shareholders, the chairman of the board, or in the absence of the chairman of the board, the president, shall act as chairman. The order of business at each such meeting shall be as determined by the chairman of the meeting. The chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof, and the opening and closing of the voting polls.

No business may be transacted at an annual meeting of shareholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the board of directors (or any duly authorized committee thereof) or (c) otherwise properly brought before the annual meeting by any shareholder of the Corporation pursuant to Section 2.12 or 3.13 (i) who is a shareholder of record on the date of the giving of the notice provided for in Section 2.12 or 3.13, as the case may be and on the record date for the determination of shareholders entitled to vote at such annual meeting and who is otherwise entitled to vote at the meeting and (ii) who complies with the notice procedures set forth in Section 2.12 or 3.13, as the case may be.

2.12 Shareholder Proposals. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, such shareholder must have given timely notice thereof in proper written form to the secretary of the Corporation. A shareholder’s notice shall be timely if delivered to, or mailed to and received by, the secretary of the Corporation at the Corporation’s principal executive office not less than 120 days nor more than 150 days prior to the anniversary date of the immediately preceding annual meeting (the “Anniversary Date”); PROVIDED, HOWEVER, that in the event the annual meeting is scheduled to be held on a date that is not within 30 days before or 60 days after the Anniversary Date, a shareholder’s notice shall be timely if delivered to, or mailed to and received by, the secretary of the Corporation at the Corporation’s principal executive office not later than the close of business on the 10th day following the day on which Public Announcement of the date of such annual meeting is first made by the Corporation. For the purposes of this Section 2.12, a “Public Announcement” shall mean: (i) disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service, (ii) a report or other

 

 

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document filed publicly with the Securities and Exchange Commission (including without limitation a Form 8-K) or (iii) a letter or report sent to shareholders of record of the Corporation at the time of the mailing of such letter or report.

A shareholder’s notice to the secretary of the Corporation shall set forth as to each matter proposed to be brought before an annual meeting: (i) a brief description of the business the shareholder desires to bring before such annual meeting and the reasons for conducting such business at such annual meeting, (ii) the name and address, as they appear on the stock transfer books of the Corporation, of the shareholder proposing such business, (iii) the class and number of shares of the capital stock of the Corporation beneficially owned by the shareholder proposing such business, (iv) the names and addresses of the beneficial owners, if any, of any capital stock of the Corporation registered in such shareholder’s name on such books, and the class and number of shares of the capital stock of the Corporation beneficially owned by such beneficial owners, (v) a description of all arrangements or understandings between such shareholder and any other person or persons (including their names) in connection with the proposal of such business by such shareholder and any material interest of such shareholder in such business, (vi) a representation that such shareholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting, and (vii) any material interest of the shareholder proposing to bring such business before such meeting (or any other shareholders known to be supporting such proposal) in such proposal.

If the secretary of the Corporation determines that any shareholder proposal was not made in a timely fashion in accordance with the provisions of this Section 2.12 or that the information provided in a shareholder’s notice does not satisfy the information requirements of this Section 2.12 in any material respect, such proposal shall not be presented for action at the annual meeting in question. If the secretary of the Corporation does not make a determination as to the validity of any shareholder proposal in the manner set forth above, the chairman of the annual meeting shall determine whether the shareholder proposal was made in accordance with the terms of this Section 2.12. If the chairman of the annual meeting determines that any shareholder proposal was not made in a timely fashion in accordance with the provisions of this Section 2.12 or that the information provided in a shareholder’s notice does not satisfy the information requirements of this Section 2.12 in any material respect, such proposal shall not be presented for action at the annual meeting in question. If the secretary of the Corporation or the chairman of the annual meeting determines that a shareholder proposal was made in accordance with the requirements of this Section 2.12, the chairman of the annual meeting shall so declare at the annual meeting.

Notwithstanding the foregoing provisions of this Section 2.12, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations thereunder with respect to the matters set forth in this Section 2.12, and nothing in this Section 2.12 shall be deemed to affect any rights of shareholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act.

 

 

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• DIRECTORS

3.01 Management. The business and affairs of the Corporation shall be managed by the board of directors, subject to the restrictions imposed by law, the articles of incorporation, or these bylaws.

3.02 Number; Election; Term; Qualification. The first board of directors shall consist of the number of directors named in the articles of incorporation. Thereafter, the number of directors which shall constitute the entire board of directors shall be determined from time to time exclusively by resolution of the board of directors adopted by the affirmative votes of a majority of the members of the entire board, but shall never be less than one. At each annual meeting of shareholders, directors shall be elected to hold office until the next annual meeting of shareholders and until their successors are elected and qualified. No director need be a shareholder, a resident of the State of Texas, or a citizen of the United States.

3.03 Decrease in Number. No decrease in the number of directors constituting the entire board of directors shall have the effect of shortening the term of any incumbent director.

3.04 Removal. At any meeting of shareholders called expressly for that purpose, any director or the entire board of directors may be removed, but only for cause, by a vote of the holders of a majority of the shares then entitled to vote on the election of directors. For purposes of this Section, “cause” shall mean the willful and continuous failure of a director to substantially perform such director’s duties to the Corporation (other than any such failure resulting from incapacity due to physical or mental illness) or the willful engaging by a director in gross misconduct materially and demonstrably injurious to the Corporation.

3.05 Vacancies and Newly-Created Directorships.

(a) Vacancies. Any vacancy occurring in the board of directors may be filled in accordance with Section 3.05(c) or may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the board of directors. A director elected to fill a vacancy will be elected for the unexpired term of his or her predecessor in office.

(b) Newly-Created Directorships. A directorship to be filled by reason of an increase in the number of directors may be filled in accordance with Section 3.05(c) or may be filled by the board of directors for a term of office continuing only until the next election of one or more directors by the shareholders; provided that the board of directors may not fill more than three such directorships during the period between any two successive annual meetings of shareholders.

(c) Election by Shareholders. Any vacancy occurring in the board of directors or any directorship to be filled by reason of an increase in the number of directors may be filled, unless previously filled in accordance with Section 3.05(a) or Section 3.05(b), by election at an annual or special meeting of shareholders called for that purpose.

3.06 First Meeting. Each newly elected board of directors may hold its first meeting for the purpose of organization and the transaction of business, if a quorum is present, immediately

 

 

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after and at the same place as the annual meeting of shareholders, and notice of such meeting shall not be necessary.

3.07 Regular Meetings. Regular meetings of the board of directors may be held without notice at such times and places as may be designated from time to time by resolution of the board of directors and communicated to all directors.

3.08 Special Meetings. A special meeting of the board of directors shall be held whenever called by any director at such time and place as such director shall designate in the notice of such special meeting. The director calling any special meeting shall cause notice of such special meeting to be given to each director at least 24 hours before such special meeting. Neither the business to be transacted at, nor the purpose of, any special meeting of the board of directors need be specified in the notice or waiver of notice of any special meeting.

3.09 Quorum; Majority Vote. At all meetings of the board of directors, a majority of the directors, fixed in the manner provided in these bylaws, shall constitute a quorum for the transaction of business. If a quorum is not present at a meeting, a majority of the directors present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present. The vote of a majority of the directors present at a meeting at which a quorum is in attendance shall be the act of the board of directors, unless the vote of a different number is required by the articles of incorporation or these bylaws.

3.10 Procedure; Minutes. At meetings of the board of directors, business shall be transacted in such order as the board of directors may determine from time to time. The board of directors shall appoint at each meeting a person to preside at the meeting and a person to act as secretary of the meeting. The secretary of the meeting shall prepare minutes of the meeting which shall be delivered to the secretary of the Corporation for placement in the minute books of the Corporation.

3.11 Presumption of Assent. A director of the Corporation who is present at any meeting of the board of directors at which action on any matter is taken shall be presumed to have assented to the action unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward any dissent by certified or registered mail to the secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.

3.12 Compensation. Directors, in their capacity as directors, may receive, by resolution of the board of directors, a fixed sum and expenses of attendance, if any, for attending meetings of the board of directors or a stated salary. No director shall be precluded from serving the Corporation in any other capacity or receiving compensation therefor.

3.13 Notification of Nominations. Nominations of persons for election to the board of directors may be made by the board of directors (or a committee thereof) or by any shareholder of the Corporation entitled to vote for the election of directors. Any shareholder of the Corporation entitled to vote for the election of directors at a meeting may nominate persons for election as directors only if written notice is timely made by such shareholder to the secretary of

 

 

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the Corporation of such shareholder’s intent to make such a nomination. A shareholder’s notice shall be timely if delivered to, or mailed to and received by, the secretary of the Corporation at the Corporation’s principal executive offices (a) in the case of an annual meeting, not less than 120 days nor more than 150 days prior to the anniversary date of the immediately preceding annual meeting of shareholders; PROVIDED, HOWEVER, that in the event that the annual meeting is called for a date that is not within 30 days before or 60 days after such anniversary date, notice by the shareholder in order to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or Public Announcement of the date of the annual meeting was made, whichever first occurs; and (b) in the case of a special meeting of shareholders called for the purpose of electing directors, not later than the close of business on the 10th day following the day on which such notice of the date of the special meeting was mailed or Public Announcement of the date of the special meeting was made, whichever first occurs.

A shareholder’s notice to the Corporation shall set forth as to each person whom the shareholder proposes to nominate for election or re-election as a director: (1) the name, age, business address and residence address of such person; (2) the principal occupation or employment of such person; (3) the class and number of shares of the capital stock of the Corporation which are beneficially owned by such person on the date of such shareholder notice; and (4) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. A shareholder’s notice to the secretary of the Corporation shall further set forth as to the shareholder giving such notice: (1) the name and address, as they appear on the stock transfer books of the Corporation, of such shareholder and of the beneficial owners (if any) of the capital stock of the Corporation registered in such shareholder’s name and the name and address of other shareholders known by such shareholder to be supporting such nominee(s); (2) the class and number of shares of the capital stock of the Corporation which are held of record, beneficially owned or represented by proxy by such shareholder and by any other shareholders known by such shareholder to be supporting such nominee(s) on the record date for the annual meeting in question (if such date shall then have been made publicly available) and on the date of such shareholder’s notice; (3) a description of all arrangements or understandings between such shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such shareholder and (4) any other information relating to such shareholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected.

If the secretary of the Corporation determines that any shareholder nomination was not made in accordance with the terms of this Section 3.13 or that the information provided in a shareholder’s notice does not satisfy the informational requirements of this Section 3.13 in any material respect, then such nomination shall not be considered at the annual meeting in question. If the secretary of the Corporation does not make a determination as to whether a nomination was made in accordance with the provisions of this Section 3.13, then the chairman of the annual

 

 

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meeting shall determine whether a nomination was made in accordance with such provisions. If the chairman of the annual meeting determines that any shareholder nomination was not made in accordance with the terms of this Section 3.13 or that the information provided in a shareholder’s notice does not satisfy the informational requirements of this Section 3.13 in any material respect, then such nomination shall not be considered at the annual meeting in question. If the secretary of the Corporation or the chairman of the annual meeting determines that a nomination was made in accordance with the terms of this Section 3.13, the chairman of the annual meeting shall so declare at the annual meeting.

Notwithstanding anything to the contrary in the second paragraph of this Section 3.13, in the event that the number of directors to be elected to the board of directors is increased and there is no Public Announcement by the Corporation naming all of the nominees for director or specifying the size of the increased board of directors at least 90 days prior to the Anniversary Date, a shareholder’s notice required by this Section 3.13 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if such notice shall be delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the 10th day following the day on which such Public Announcement is first made by the Corporation.

No person shall be elected by the shareholders as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 3.13.

• COMMITTEES

4.01 Designation. The board of directors may, by resolution adopted by a majority of the entire board of directors, designate executive and other committees.

4.02 Number; Qualification; Term. Each committee shall consist of one or more directors appointed by resolution adopted by a majority of the entire board of directors. The number of committee members may be increased or decreased from time to time by resolution adopted by a majority of the entire board of directors. Each committee member shall serve as such until the expiration of his term as a director or his earlier resignation, unless sooner removed as a committee member or as a director.

4.03 Authority. The executive committee, unless expressly restricted in the resolution adopted by a majority of the entire board of directors establishing the executive committee, shall have and may exercise all of the authority of the board of directors in the management of the business and affairs of the Corporation. Each other committee, to the extent expressly provided for in the resolution adopted by a majority of the entire board of directors establishing such committee, shall have and may exercise all of the authority of the board of directors in the management of the business and affairs of the Corporation. Each other committee, to the extent expressly provided for in the resolution adopted by a majority of the entire board of directors establishing such committee, shall have and may exercise all of the authority of the board of directors in the management of the business and affairs of the Corporation. However, no committee shall have the authority of the board of directors in reference to:

 

(a)

amending the articles of incorporation;

 

 

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(b)

approving a plan of merger or consolidation;

 

(c)

recommending to the shareholders the sale, lease, or exchange of all or substantially all of the property and assets of the Corporation otherwise than in the usual and regular course of its business;

 

(d)

recommending to the shareholders a voluntary dissolution of the Corporation or a revocation thereof;

 

(e)

amending, altering, or repealing these bylaws or adopting new bylaws;

 

(f)

filling vacancies in or removing members of the board of directors or of any committee;

 

(g)

electing or removing officers or committee members;

 

(h)

fixing the compensation of any committee member; and

 

(i)

altering or repealing any resolution of the board of directors which by its terms provides that it shall not be amendable or repealable.

In the resolution adopted by a majority of the entire board of directors establishing an executive or other committee, the board of directors may expressly authorize such committee to declare dividends or to authorize the issuance of shares of the Corporation.

4.04 Committee Changes. The board of directors shall have the power at any time to fill vacancies in, to change the membership of, and to discharge any committee. However, a committee member may be removed by the board of directors, only if, in the judgment of the board of directors, the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed.

4.05 Regular Meetings. Regular meetings of any committee may be held without notice at such times and places as may be designated from time to time by resolution of the committee and communicated to all committee members.

4.06 Special Meetings. A special meeting of any committee may be held whenever called by any committee member at such time and place as such committee member shall designate in the notice of such special meeting. The committee member calling any special meeting shall cause notice of such special meeting to be given to each committee member at least 12 hours before such special meeting. Neither the business to be transacted at, nor the purpose of, any special meeting of any committee need be specified in the notice or waiver of notice of any special meeting.

4.07 Quorum; Majority Vote. At all meetings of any committee, a majority of the number of committee members designated by the board of directors shall constitute a quorum for the transaction of business. If a quorum is not present at a meeting of any committee, a majority of the committee members present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present. The vote of a majority of

 

 

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the committee members present at any meeting at which a quorum is in attendance shall be the act of a committee, unless the vote of a different number is required by the articles of incorporation or these bylaws.

4.08 Minutes. Each committee shall cause minutes of its proceedings to be prepared and shall report the same to the board of directors upon the request of the board of directors. The minutes of the proceedings of each committee shall be delivered to the secretary of the Corporation for placement in the minute books of the Corporation.

4.09 Compensation. Committee members may, by resolution of the board of directors, be allowed a fixed sum and expenses of attendance, if any, for attending any committee meetings or a stated salary.

4.10 Responsibility. The designation of any committee and the delegation of authority to it shall not operate to relieve the board of directors or any director of any responsibility imposed upon it or such director by law.

• GENERAL PROVISIONS RELATING TO MEETINGS

5.01 Notice. Whenever by law, the articles of incorporation, or these bylaws, notice is required to be given to any shareholder, director, or committee member and no provision is made as to how such notice shall be given, it shall be construed to mean that notice may be given either (a) in person, (b) in writing, by mail, (c) except in the case of a shareholder, by telegram, telex, cable, telecopy, or similar means, or (d) by any other method permitted by law. Any notice required or permitted to be given hereunder (other than personal notice) shall be addressed to such shareholder, director, or committee member at his address as it appears on the books of the Corporation or, in the case of a shareholder, on the stock transfer records of the Corporation or at such other place as such shareholder, director, or committee member is known to be at the time notice is mailed or transmitted. Any notice required or permitted to be given by mail shall be deemed to be delivered and given at the time when the same is deposited in the United States mail, postage prepaid. Any notice required or permitted to be given by telegram, telex, cable, telecopy, or similar means shall be deemed to be delivered and given at the time transmitted.

5.02 Waiver of Notice. Whenever by law, the articles of incorporation, or these bylaws, any notice is required to be given to any shareholder, director, or committee member of the Corporation a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time notice should have been given, shall be equivalent to the giving of such notice. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.

5.03 Telephone and Similar Meetings. Shareholders, directors, or committee members may participate in and hold a meeting by means of a conference telephone or similar communications equipment by means of which persons participating in the meeting can hear each other. Participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.

 

 

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5.04 Action Without Meeting. Any action which may be taken, or is required by law, the articles of incorporation, or these bylaws to be taken, at a meeting of shareholders, directors, or committee members may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders, directors, or committee members, as the case may be, entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect, as of the date stated therein, as a unanimous vote of such shareholders, directors, or committee members, as the case may be, and may be stated as such in any document filed with the Secretary of State of Texas or in any certificate or other document delivered to any person. The consent may be in one or more counterparts so long as each shareholder, director, or committee member signs one of the counterparts. The signed consent shall be placed in the minute books of the Corporation.

• OFFICERS AND OTHER AGENTS

6.01 Number; Titles; Election; Term. The Corporation shall have a president, one or more vice presidents (and, in the case of each vice president, with such descriptive title, if any, as the board of directors shall determine), a secretary, a treasurer, and such other officers and agents as the board of directors may deem desirable. The board of directors shall elect a president, vice president, treasurer, and secretary at its first meeting at which a quorum shall be present after the annual meeting of shareholders or whenever a vacancy exists. The board of directors then, or from time to time, may also elect or appoint one or more other officers or agents as it shall deem advisable. Each officer and agent shall hold office until his successor has been elected or appointed and qualified, or, if earlier, at his death, resignation, or removal. Any two or more offices may be held by the same person. No officer or agent need be a shareholder, a director, a resident of the State of Texas, or a citizen of the United States.

6.02 Removal. Any officer or agent elected or appointed by the board of directors may be removed by the board of directors, whenever, in the judgment of the board of directors, the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights.

6.03 Vacancies. Any vacancy occurring in any office of the Corporation (by death, resignation, removal, or otherwise) may be filled by the board of directors.

6.04 Authority. Officers shall have such authority and perform such duties in the management of the Corporation as are provided in these bylaws or as may be determined by resolution of the board of directors not inconsistent with these bylaws.

6.05 Compensation. The compensation, if any, of officers shall be fixed, increased, or decreased from time to time by the chairman of the board; provided, that the board of directors may by resolution withdraw the authority of the chairman of the board to fix, increase, or decrease officers compensation and retain such authority for itself or delegate such authority to any other officer or officers of the Corporation.

6.06 Chairman of the Board. The chairman of the board, if a person is elected to such office by the board of directors, shall be the chief executive officer of the Corporation and,

 

 

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subject to the supervision of the board of directors, shall have general management of the business and property of the Corporation in the ordinary course of its business with all such powers with respect to such business and property as may be reasonably incident to such responsibilities, including; but not limited to, the power to employ, discharge, or suspend employees or agents of the Corporation, to fix the compensation of officers (unless such power has been withdrawn by resolution of the board of directors), to fix the compensation of employees and agents, and to suspend, with or without cause, any officer of the Corporation pending final action by the board of directors with respect to continued suspension, removal, or reinstatement of such officer. The chairman of the board shall see that all orders and resolutions of the board are carried into effect and shall perform such other duties and have such other authority and powers as the board of directors may from time to time prescribe.

6.07 President. The president shall be the chief operating and administrative officer of the Corporation and, subject to the supervision of the board of directors and the chairman of the board, shall have charge of the actual day to day operations and management of the Corporation and its property with all such powers with respect to such operations and management as may be reasonably incident to such responsibilities. If the board of directors has not elected a person to the office of chairman of the board, the president shall exercise all of the powers and discharge all of the duties of the chairman of the board. As between the Corporation and third parties, any action taken by the president in the performance of the duties of the chairman of the board shall be conclusive evidence that there is no chairman of the board.

6.08 Vice Presidents. Each vice president shall have such powers and duties as may be prescribed from time to time by the board of directors or as may be delegated from time to time by the president and (in the order as designated by the board of directors, or in the absence of such designation, as determined by the length of time each has held the office of vice president continuously) shall exercise the powers of the president during that officer’s absence or inability to act.

6.09 Treasurer. The treasurer shall have custody of the Corporation’s funds and securities, shall keep full and accurate accounts of receipts and disbursements, and shall deposit all moneys and valuable effects in the name and to the credit of the Corporation in such depository or depositories as may be designated by the board of directors. Additionally, the treasurer shall have the power to endorse for deposit, collection or otherwise, all checks, drafts, notes, bills of exchange, and other commercial paper payable to the corporation and to give proper receipts and discharges for all payments to the Corporation. The treasurer shall perform such other duties as may be prescribed from time to time by the board of directors or as may be delegated from time to time by the president.

6.10 Assistant Treasurers. Each assistant treasurer shall perform such duties as may be prescribed from time to time by the board of directors or as may be delegated from time to time by the president. The assistant treasurers (in the order as designated by the board of directors or, in the absence of such designation, as determined by the length of time each has held the office of assistant treasurer continuously) shall exercise the powers of the treasurer during that officer’s absence or inability to act.

 

 

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6.11 Secretary. The secretary shall maintain minutes of all meetings of the board of directors, of any committee, and of the shareholders or consents in lieu of such minutes in the Corporation’s minute books, and shall cause notice of such meetings to be given when requested by any person authorized to call such meetings. With respect to any contract, deed, deed of trust, mortgage, or other instrument executed by the Corporation through its duly authorized officer or officers, the attestation to such execution by the secretary shall not be necessary to constitute such contract, deed, deed of trust, mortgage, or other instrument a valid and binding obligation against the Corporation unless the resolution, if any, of the board of directors authorizing such execution expressly states that such attestation is necessary. The secretary shall have charge of the certificate books, stock transfer books, and stock papers as the board of directors may direct, all of which shall at all reasonable times be open to inspection by any director. The secretary shall perform such other duties as may be prescribed from time to time by the board of directors or as may be delegated from time to time by the president.

6.12 Assistant Secretaries. Each assistant secretary shall perform such duties as may be prescribed from time to time by the board of directors or as may be delegated from time to time by the president. The assistant secretaries (in the order designated by the board of directors or, in the absence of such designation, as determined by the length of time each has held the office of assistant secretary continuously) shall exercise the power of the secretary during that officer’s absence or inability to act.

• CERTIFICATES AND SHAREHOLDERS

7.01 Certificates for Shares. The certificates for shares of stock of the Corporation shall be in such form as shall be approved by the board of directors in conformity with law. The certificates shall be consecutively numbered, shall be entered as they are issued in the books of the Corporation or in the records of the Corporation’s designated transfer agent, if any, and shall state the shareholder’s name, the number of shares, and such other matters as may be required by law. The certificates shall be signed by the president or any vice president and also by the secretary, an assistant secretary, or any other officer, and may be sealed with the seal of the Corporation or a facsimile thereof. If any certificate is countersigned by a transfer agent or registered by a registrar, either of which is other than the Corporation itself or an employee of the Corporation, the signatures of the foregoing officers may be a facsimile.

7.02 Lost, Stolen, or Destroyed Certificates. The Corporation shall issue a new certificate in place of any certificate for shares previously issued if the registered owner of the certificate:

 

(a)

Claim. Makes proof by affidavit in form and substance satisfactory to the board of directors, that a previously issued certificate for shares has been lost, destroyed, or stolen;

 

(b)

Timely Request. Requests the issuance of a new certificate before the Corporation has notice that the certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim;

 

(c)

Bond. If requested by the board of directors, delivers to the Corporation a bond, in form and substance satisfactory, to the board of directors, with such surety or sureties and with fixed or open penalty, as the board of directors may direct, in its discretion, to indemnify the Corporation (and its transfer agent and registrar, if any) against any claim that may be made on account of the alleged loss, destruction, or theft of the certificate; and

 

(d)

Other Requirements. Satisfies any other reasonable requirements imposed by the board of directors.

When a certificate has been lost, destroyed, or stolen, and the shareholder of record fails to notify the Corporation within a reasonable time after he has notice of it, and the Corporation registers a transfer of the shares represented by the certificate before receiving such notification, the shareholder of record is precluded from making any claim against the Corporation for the transfer or for a new certificate.

7.03 Transfer of Shares. Shares of stock of the Corporation shall be transferable only on the books of the Corporation by the shareholders thereof in person or by their duly authorized attorneys or legal representatives. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, the Corporation or its transfer agent shall issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction upon its books.

7.04 Registered Shareholders. The Corporation shall be entitled to treat the shareholder of record as the shareholder in fact of any shares and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have actual or other notice thereof, except as otherwise provided by law.

• MISCELLANEOUS PROVISIONS

8.01 Fiscal Year. The fiscal year of the Corporation shall be fixed by the board of directors; provided, that if such fiscal year is not fixed by the board of directors it shall be the calendar year.

8.02 Seal. The seal, if any, of the corporation shall be in such form as may be approved from time to time by the board of directors. If the board of directors approves a seal, the affixation of such seal shall not be required to create a valid and binding obligation against the Corporation.

8.03 Resignation. A director, committee member, officer, or agent may resign by so stating at any meeting of the board of directors or by giving written notice to the corporation. The effective time of such resignation shall be any time specified in the statement made at the board of directors’ meeting or in the written notice given to the Corporation, but in no event may the effective time of such resignation be prior to the time such statement is made or such notice is given. If no effective time is specified in the resignation, the resignation shall be effective immediately. Unless a resignation specifies otherwise, it is effective without being accepted.

8.04 Securities of Other Corporations. The president or any vice president of the Corporation or any other person authorized by resolution of the board of directors shall have the power and authority to transfer, endorse for transfer, vote, consent, or take any other action with respect to any securities of another issuer which may be held or owned by the Corporation and to make, execute, and deliver any waiver, proxy, or consent with respect to any such securities.

8.05 Amendment. The power to alter, amend, or repeal these bylaws or to adopt new bylaws is vested in the board of directors, subject to repeal or change by action of the shareholders. The shareholders shall not make, repeal, alter, amend, or rescind the bylaws of the Corporation except by the vote of the holders of not less than 80% of the total voting power of all shares of stock of the Corporation entitled to vote in the election of directors, considered for purposes of this Section as one class.

8.06 Invalid Provisions. If any provision of these bylaws is held to be illegal, invalid, or unenforceable under present or future laws, such provision shall be fully severable; these bylaws shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as a part of these bylaws a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable.

8.07 Headings. The headings used in these bylaws are for reference purposes only and do not affect in any way the meaning or interpretation of these bylaws.

 

 

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 EX-10 3 magidagr.txt EMPLOYMENT AGR. - M. MAGIDS Exhibit 10.15 EXECUTIVE EMPLOYMENT AGREEMENT This Executive Employment Agreement (this "Agreement") is by and among American Physicians Service, Group, Inc and affiliates including, but not limited to, APS Facilities Management, Inc. and FMI Partners, Ltd. ("Employer"), and Maury Magids, an individual ("Executive"), and shall be effective as of March 1, 2006 (the "Effective Date"). Preliminary Statements Executive desires to be employed by Employer upon the terms and conditions stated herein, and Employer desires to employ Executive provided that, in so doing, it can protect its confidential information, business, accounts, patronage and goodwill. Employer and Executive have specifically determined that the terms of this Agreement are fair and reasonable. Statement of Agreement NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I. Term; Termination; Prior Agreements. Section 1.1 TERM. Employer hereby hires Executive and Executive accepts such employment for a term of two years commencing on the Effective Date. Section 1.2 Termination Upon Expiration. Unless earlier terminated by Employer or Executive in accordance with the terms of this Agreement, this Agreement shall terminate automatically upon the expiration of the two-year term described in Section 1.1. Section 1.3 Termination Upon Death or Permanent Disability. This Agreement shall be automatically terminated on the death of Executive or on the permanent disability of Executive if Executive is no longer able to perform in all material respects the usual and customary duties of Executive's employment hereunder. For purposes hereof, any condition which in reasonable likelihood is expected to impair Executive's ability to materially perform Executive's duties hereunder for a period of three months or more shall be considered to be permanent. Section 1.4 Termination for Cause. If this Agreement has not been previously terminated, and no party has previously given notice of termination pursuant to Section 1.5, Section 1.6 or Section 1.7, then Employer may terminate this Agreement "for cause" if: (a) In connection with the business of Employer, Executive is convicted of an offense constituting a felony or involving moral turpitude; or (b) in a material and substantial way, (i) Executive (A) violates any written policy of Employer, (B) violates any provision of this Agreement, (C) fails to follow reasonable written instructions or directions from the Board of Directors of Employer (the "Board"), or any person authorized by the Board to instruct or supervise Executive (for purposes of this Agreement, any such authorized person is referred to as an "Authorized Board Designee"), or (D) fails to use good-faith efforts to perform the services required pursuant to this Agreement; and (ii) Executive fails to materially cure such violation or failure within fifteen days after receiving written notice from the Board clearly specifying the act or circumstances that gave rise to such violation or failure. A notice of termination pursuant to this Section shall be in writing and shall state the alleged reason for termination. Executive, within not less than fifteen nor more than thirty days after such notice, shall be given the opportunity to appear before the Board, or a committee thereof, to rebut or dispute the alleged reason for termination. If the Board or committee determines, by a majority of the disinterested directors, after having given Executive the opportunity to rebut or dispute the allegations, that such reason is indeed valid, Employer may immediately terminate Executive's employment under this Agreement for cause. Immediately upon giving the notice contemplated by this paragraph, Employer may elect, during the pendency of such inquiry, to relieve Executive of Executive's regular duties. Section 1.5 TERMINATION FOR GOOD REASON. Any termination by Executive of this Agreement pursuant to this Section shall be deemed a termination by Executive for "good reason". Executive may terminate this Agreement for good reason any time after a Change of Control or, if Executive is employed by an affiliate of American Physicians Service Group, Inc. ("APSG") , after that affiliate is sold, merged, or otherwise ceases to be controlled by APSG. (a) Executive may terminate this Agreement for any or no reason upon six months prior written notice, which notice cannot be given before the consummation of such Change of Control or loss of affiliate control by APSG, or after the expiration of the term of this Agreement pursuant to Section 1.1; (b) Executive may terminate this Agreement upon thirty days prior written notice if Executive's base salary, as provided hereunder, is diminished; (c) Executive may terminate this Agreement upon thirty days prior written notice if Employer requires that Executive move to a city other than Austin or moves his workplace to a location that would require executive to commute more than 30 miles each way from his current residence; (d) Executive may terminate this Agreement upon thirty days prior written notice if the Board or any Authorized Board Designee materially and unreasonably interferes with Executive's ability to fulfill Executive's job duties; or (e) Executive may terminate this Agreement upon thirty days prior written notice if Executive is reassigned to a position with diminished responsibilities, or Executive's job responsibilities are materially narrowed or diminished. 2 Without limiting the provisions of Section 1.8 hereof, Executive agrees that Employer can relieve Executive of Executive's duties hereunder prior to the end of the applicable notice period provided for in this Section, and in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article III hereof. Furthermore, if the term of this Agreement expires pursuant to Section 1.1 prior to the end of any notice period otherwise required under this Section, then the applicable notice period does not apply and notice may be given at any time prior to expiration pursuant to Section 1.1. Section 1.6 TERMINATION OF AGREEMENT BY EMPLOYER WITHOUT CAUSE. Employer has the right to terminate this Agreement, other than "for cause," on 30 days prior written notice. Any termination of this Agreement by Employer other than pursuant to the express terms of Section 1.2, Section 1.3 or Section 1.4 shall be deemed a termination pursuant to this Section, irrespective of whether the notice required under this Section is properly given. Section 1.7 TERMINATION OF AGREEMENT BY EXECUTIVE WITHOUT GOOD REASON. Executive may terminate Executive's employment, other than for "good reason," upon 30 days prior written notice stating that this Agreement is terminated other than for "good reason". Executive agrees that Employer can relieve Executive of Executive's duties hereunder prior to the end of such 30 day notice period, and in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article III hereof. Section 1.8 EXECUTIVE'S RIGHTS UPON TERMINATION. Upon termination of this Agreement, Executive shall be entitled to the following: (a) If this Agreement is terminated pursuant to Section 1.2, Section 1.3, Section 1.4, or Section 1.7 then Employer shall pay Executive or Executive's representative, as the case may be, Executive's then-current base salary (excluding any bonuses and non-cash benefits) through the effective date of termination (which, in the case of Section 1.7, shall follow any portion of the applicable notice period during which Executive has not been relieved of Executive's duties hereunder), and Employer shall have no further obligations hereunder. (b) If Employer terminates this Agreement without cause pursuant to Section 1.6, or Executive terminates this Agreement pursuant to Section 1.5 (b),(c),(d), or (e), then, in addition to receiving Executive's then current base salary through the effective date of termination: (i) Executive shall receive within 15 days of the effective date of termination a lump-sum payment equal to two times the average annual total cash compensation earned by Executive for the prior two years (including, without limitation, salary and bonus, and excluding stock-based awards, such as deferred stock awards and stock options). 3 (c) If Executive terminates this Agreement for good reason pursuant to Section 1.5 (a), then, in addition to receiving Executive's then current base salary through the effective date of termination: (i) Executive shall receive within 15 days of the effective date of termination a lump-sum payment equal to one times the average annual total cash compensation earned by Executive for the prior two years (including, without limitation, salary and bonus, and excluding stock-based awards, such as deferred stock awards and stock options). Executive and Employer agree that the effective date of any termination pursuant to Section 1.5 shall be the earlier of the end of the applicable notice period, if any, or the date on which Employer relieves Executive of Executive's duties hereunder. Executive and Employer agree that the effective date of any termination pursuant to Section 1.6 hereof shall be only upon the expiration of the 30 day notice period described in Section 1.6, regardless of whether Employer earlier relieves Executive of Executive's duties hereunder. Section 1.9 SURVIVAL. Any termination of this Agreement and Executive's employment as a result thereof shall not release either Employer or Executive from their respective obligations to the date of termination nor from the provisions of this Agreement which, by necessary or reasonable implication, are intended to apply after termination of this Agreement, including, without limitation, the provisions of Article IV. Furthermore, neither the termination of this Agreement nor the termination of Executive's employment under this Agreement shall affect, limit, or modify in any manner the existence or enforceability of any other written agreement between Executive and Employer, even if such other agreements provide employment related benefits to Executive. Section 1.10 "CHANGE OF CONTROL." As used in this Agreement, "Change of Control" shall mean the occurrence of any of the following with respect to American Physicians Service Group, Inc., a Texas corporation ("APS"): (a) Any person, entity or "group" within the meaning of ss. 13(d) or 14(d) of the of the Securities and Exchange Act of 1934 (the "Exchange Act") becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities of APS entitled to vote generally in the election of the APS's Board of Directors (the "APS Board"), but only if such event results in a change in the APS Board composition such that the directors immediately preceding such event do not comprise a majority of the APS Board following such event; (b) a merger, reorganization or consolidation whereby APS's equity holders existing immediately prior to such merger, reorganization or consolidation do not, immediately after consummation of such reorganization, merger or consolidation, own more than 50% of the combined voting power of the surviving entity's then outstanding voting securities entitled to vote generally in the election of directors, but only if such event results in a change in the APS Board composition such that the directors immediately preceding such event do not comprise a majority of the APS Board following such event; 4 (c) the sale of all or substantially all of APS's assets to an entity in which APS, any subsidiary of APS, or APS's equity holders existing immediately prior to such sale beneficially own less than 50% of the combined voting power of such acquiring entity's then outstanding voting securities entitled to vote generally in the election of directors, but only if such event results in a change in the APS Board composition such that the directors immediately preceding such event do not comprise a majority of the APS Board following such event; or (d) any change in the identity of directors constituting a majority of the APS Board within a twenty-four month period unless the change was approved by a majority of the Incumbent Directors, where "Incumbent Director" means a member of the APS Board at the beginning of the period in question, including any director who was not a member of the APS Board at the beginning of such period but was elected or nominated to the APS Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors. ARTICLE II. Duties of Executive Subject to the approvals by and the ultimate supervision of the Board and each Authorized Board Designee, Executive during the term hereof shall serve as President and Chief Operating Officer of APS Facilities Management , Inc.. Subject to the control and oversight of the Board and any Authorized Board Designee, Executive shall have the responsibilities commensurate with Executive's title and as otherwise provided in Employer's bylaws and other governing documents, but in any event, construed in a manner generally consistent with the responsibilities of Executive that existed immediately prior to the Effective Date. During the period of employment hereunder, Executive shall devote substantially all of Executive's professional time and best efforts to the businesses of Employer and for the profit, benefit and advantage of Employer, and shall perform such other services as shall be designated, from time to time, by the Board or any Authorized Board Designee; provided, however, that this Section shall not be construed as preventing Executive from investing Executive's personal assets in business ventures that do not compete with Employer or Employer's Affiliates (as hereinafter defined) or are not otherwise prohibited by this Agreement, and spending reasonable amounts of personal time in the management thereof. Executive shall use Executive's best efforts to promote the interests of Employer and Employer's Affiliates, and to preserve their goodwill with respect to their employees, customers, suppliers and other persons having business relations with Employer. Executive agrees to accept and hold all such offices and/or directorships with Employer and Employer's Affiliates as to which Executive may, from time to time, be elected. For purposes of this Agreement, Employer's, subsidiaries, parent companies and other affiliates are collectively referred to as "Affiliates." ARTICLE III. Salary; Expense Reimbursements Section 3.1 SALARY. As compensation for Executive's service under and during the term of this Agreement (or until terminated pursuant to the provisions hereof) Employer shall pay Executive a salary of $25,000 per calendar month (prorated for partial months), payable in accordance with the regular 5 payroll practices of Employer, as in effect from time to time. Such salary shall be subject to withholding for the prescribed federal income tax, social security and other items as required by law and for other items consistent with Employer's policy with respect to health insurance and other benefit plans for similarly situated employees of Employer in which Executive may elect to participate. Section 3.2 OTHER BENEFITS. During the term of this Agreement, Executive also shall be entitled to the same amount of paid vacation per year as was available to Executive and other senior management executives of Employer under the policy of Employer in effect on the Effective Date. Executive will not be paid for unused vacation, and unused vacation cannot be carried forward to subsequent years. Without limiting the foregoing, Executive shall also receive such paid sick leave, insurance and other fringe benefits as are generally made available to other personnel of Employer in comparable positions, with comparable service credit and with comparable duties and responsibilities. Any benefits in excess of those granted other salaried employees of Employer shall be subject to the prior approval of the Board. Section 3.3 BONUSES. In the discretion of the Board, and without implying any obligation on Employer ever to award a bonus to Executive, Executive may from time to time be awarded a cash bonus or bonuses for services rendered to Employer during the term of Executive's employment under this Agreement. If and to the extent a bonus is ever considered for Executive, it is expected that any such bonus will be based not only on Executive's individual performance and Executive's relative position, service tenure and responsibilities with Employer, but also on the performance and profitability of the entire business of Employer. Section 3.4 EXPENSES. Employer shall reimburse all reasonable out-of-pocket travel and business expenses incurred by Executive in connection with the performance of Executive's duties pursuant to this Agreement. Executive shall provide Employer with documentation of Executive's expenses, in a form acceptable to Employer and which satisfies applicable federal income tax reporting and record keeping requirements. Section 3.5 LOCATION OF EMPLOYMENT. The parties acknowledge and agree that Executive's employment duties hereunder are performable in Austin, Texas, subject to business travel commensurate with Executive's duties hereunder and as otherwise requested by Employer. ARTICLE IV. Executive's Restrictive Covenants Section 4.1 Confidentiality Agreement. Executive acknowledges that Executive has been and will continue to be exposed to confidential information and trade secrets ("Proprietary Information") pertaining to, or arising from, the business of Employer and/or Employer's Affiliates, that such Proprietary Information is unique and valuable and that Employer and/or Employer's Affiliates would suffer irreparable injury if this information were divulged to those in competition with Employer or Employer's Affiliates. Therefore, Executive agrees to keep in strict secrecy and confidence, both during and after the period of Executive's employment, any and all information which Executive acquires, or to which Executive has access, during Executive's employment by Employer, that has not been publicly disclosed by Employer or Employer's Affiliates, that is not a matter of common knowledge by their respective 6 competitors or that is not required to be disclosed through legal process. The Proprietary Information covered by this Agreement shall include, but shall not be limited to, information relating to any inventions, processes, software, formulae, plans, devices, compilations of information, technical data, mailing lists, management strategies, business distribution methods, names of suppliers (of both goods and services) and customers, names of employees and terms of employment, arrangements entered into with suppliers and customers, including, but not limited to, proposed expansion plans of Employer, marketing and other business and pricing strategies, and trade secrets of Employer and/or Employer's Affiliates. Except with prior approval of the Board or any Authorized Board Designee, Executive will not, either during or after Executive's employment hereunder: (a) directly or indirectly disclose any Proprietary Information to any person except authorized personnel of Employer; nor, (b) use Proprietary Information in any manner other than in furtherance of the business of Employer. Upon termination of employment, whether voluntary or involuntary, within forty-eight hours of termination, Executive will deliver to Employer (without retaining copies thereof) all documents, records or other memorializations including copies of documents and any notes which Executive has prepared, that contain Proprietary Information or relate to Employer's or Employer's Affiliates' business, all other tangible Proprietary Information in Executive's possession or control, and all of Employer's and the Affiliates' credit cards, keys, equipment, vehicles, supplies and other materials that are in possession or under Executive's control. Section 4.2 NONSOLICITATION AGREEMENT. During Executive's employment hereunder and for a period of two years after Executive ceases to be employed by Employer, Executive shall not, directly or indirectly, for Executive's own account or otherwise (i) solicit business from, divert business from, or attempt to convert to other methods of using the same or similar products or services as provided by Employer or Employer's Affiliates, any client, account or location of Employer or Employer's Affiliates with which Executive has had any contact as a result of Executive's employment hereunder; or (ii) solicit for employment or employ any employee or former employee of Employer or Employer's Affiliates. Section 4.3 REMEDIES. Executive understands and acknowledges damages at law alone will be an insufficient remedy for Employer and Employer will suffer irreparable injury if Executive violates the terms of this Agreement. Accordingly, Employer, upon application to a court of competent jurisdiction, shall be entitled to injunctive relief to enforce the provisions of this Agreement in the event of any breach, or threatened breach, of its terms. Executive hereby waives any requirement that Employer post bond or other security prior to obtaining such injunctive relief. Injunctive relief may be sought in addition to any other available rights or remedies at law. Employer shall additionally be entitled to reasonable attorneys' fees incurred in enforcing the provisions of this Agreement. ARTICLE V. Miscellaneous Section 5.1 ASSIGNMENT. No party to this Agreement may assign this Agreement or any or all of its rights or obligations hereunder without first obtaining the written consent of all other parties hereto. Any assignment in violation of the foregoing shall be null and void. Subject to the preceding sentences of this Section, the terms and conditions of this Agreement shall 7 inure to the benefit of and be binding upon the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. This Agreement shall not be deemed to confer upon any person not a party to this Agreement any rights or remedies hereunder. The provisions of this Section do not preclude the sale, transfer or assignment of the ownership interests of any entity that is a party to this Agreement, although such a sale, transfer or assignment may be expressly prohibited or conditioned pursuant to other provisions of this Agreement. Section 5.2 AMENDMENTS. This Agreement cannot be modified or amended except by a written agreement executed by all parties hereto. Section 5.3 WAIVER OF PROVISIONS; Remedies Cumulative. Any waiver of any term or condition of this Agreement must be in writing, and signed by all of the parties hereto. The waiver of any term or condition hereof shall not be construed as either a continuing waiver with respect to the term or condition waived, or a waiver of any other term or condition hereof. No party hereto shall by any act (except by written instrument pursuant to this Section), delay, indulgence, omission or otherwise be deemed to have waived any right, power, privilege or remedy hereunder or to have acquiesced in any default in or breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of any party hereto, any right, power, privilege or remedy hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power, privilege or remedy hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power, privilege or remedy. No remedy set forth in this Agreement or otherwise conferred upon or reserved to any party shall be considered exclusive of any other remedy available to any party, but the same shall be distinct, separate and cumulative and may be exercised from time to time as often as occasion may arise or as may be deemed expedient. Section 5.4 FURTHER ASSURANCES. At and from time to time after the Closing, each party shall, at the request of another party hereto, but without further consideration, execute and deliver such other instruments and take such other actions as the requesting party may reasonably request in order to more effectively evidence or consummate the transactions or activities contemplated hereunder. Section 5.5 ENTIRE AGREEMENT. This Agreement and the agreements contemplated hereby or executed in connection herewith constitute the entire agreement of the parties hereto regarding the subject matter hereof and, except as provided otherwise herein, supersede all prior agreements and understandings, both written and oral, among the parties hereto with respect to the subject matter hereof. Section 5.6 SEVERABILITY; ILLEGALITY. In the event any state or federal laws or regulations, now existing or enacted or promulgated after the date hereof, are interpreted by judicial decision, a regulatory agency or legal counsel in such a manner as to indicate that any provision hereof may be illegal, invalid or unenforceable, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance 8 herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision that (a) preserves the underlying economic and financial arrangements between the parties hereto without substantial economic detriment to any particular party and (b) is as similar in effect to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. No party to this Agreement shall claim or assert illegality as a defense to the enforcement of this Agreement or any provision hereof; instead, any such purported illegality shall be resolved pursuant to the terms of this Section. Section 5.7 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE STATE OF TEXAS. Section 5.8 LANGUAGE CONSTRUCTION. This Agreement shall be construed, in all cases, according to its fair meaning, and without regard to the identity of the person who drafted the various provisions contained herein. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation hereof. As used in this Agreement, "day" or "days" refers to calendar days unless otherwise expressly stated in each instance. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. When the context requires, the gender of all words used herein shall include the masculine, feminine and neuter and the number of all words shall include the singular and plural. Use of the words "herein", "hereof", "hereto", "hereunder" and the like in this Agreement shall be construed as references to this Agreement as a whole and not to any particular Article, Section or provision of this Agreement, unless otherwise expressly noted. Section 5.9 NOTICE. Whenever this Agreement requires or permits any notice, request, or demand from one party to another, the notice, request, or demand must be in writing to be effective and shall be deemed to be delivered and received (a) if personally delivered or if delivered by facsimile or courier service, when actually received by the party to whom notice is sent or (b) if delivered by mail (whether actually received or not), at the close of business on the third business day next following the day when placed in the mail, postage prepaid, certified or registered, addressed to the appropriate party or parties, at the address of such party set forth below (or at such other address as such party may designate by written notice to all other parties in accordance herewith): If to Employer: American Physicians Service Group, Inc. 1301 Capital of Texas Hwy, Suite C-300 Austin, TX 78746 Attention: Board of Directors Facsimile Transmission: (512) 314-4398 9 If to Executive: Maury Magids 1500 Marshall Lane Austin, TX 78703 Section 5.10 CHOICE OF FORUM; ATTORNEYS' FEES. THE PARTIES HERETO AGREE THAT THIS AGREEMENT IS PERFORMABLE IN WHOLE AND IN PART IN TRAVIS COUNTY, TEXAS, AND SHOULD ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT BE INSTITUTED BY ANY PARTY HERETO (OTHER THAN A SUIT, ACTION OR PROCEEDING TO ENFORCE OR REALIZE UPON ANY FINAL COURT JUDGMENT ARISING OUT OF THIS AGREEMENT), SUCH SUIT, ACTION OR PROCEEDING SHALL BE INSTITUTED ONLY IN A STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS. EACH OF THE PARTIES HERETO CONSENTS TO THE IN PERSONAM JURISDICTION OF ANY STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS AND WAIVES ANY OBJECTION TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING. THE PARTIES HERETO RECOGNIZE THAT COURTS OUTSIDE TRAVIS COUNTY, TEXAS MAY ALSO HAVE JURISDICTION OVER SUITS, ACTIONS OR PROCEEDINGS ARISING OUT OF THIS AGREEMENT, AND IN THE EVENT THAT ANY PARTY HERETO SHALL INSTITUTE A PROCEEDING INVOLVING THIS AGREEMENT IN A JURISDICTION OUTSIDE TRAVIS COUNTY, TEXAS, THE PARTY INSTITUTING SUCH PROCEEDING SHALL INDEMNIFY ANY OTHER PARTY HERETO FOR ANY LOSSES AND EXPENSES THAT MAY RESULT FROM THE BREACH OF THE FOREGOING COVENANT TO INSTITUTE SUCH PROCEEDING ONLY IN A STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS, INCLUDING WITHOUT LIMITATION ANY ADDITIONAL EXPENSES INCURRED AS A RESULT OF LITIGATING IN ANOTHER JURISDICTION, SUCH AS REASONABLE FEES AND EXPENSES OF LOCAL COUNSEL AND TRAVEL AND LODGING EXPENSES FOR PARTIES, WITNESSES, EXPERTS AND SUPPORT PERSONNEL. THE PREVAILING PARTY IN ANY ACTION TO ENFORCE OR DEFEND RIGHTS UNDER THIS AGREEMENT SHALL BE ENTITLED TO RECOVER ITS COSTS AND REASONABLE ATTORNEYS' FEES IN ADDITION TO ANY OTHER RELIEF GRANTED. 10 Section 5.11 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. [Signature page follows] 11 S-1 SIGNATURE PAGE TO EXECUTIVE EMPLOYMENT AGREEMENT EXECUTED by Employer, its General Partner and Executive to be effective for all purposes as of the Effective Date provided above. EMPLOYER: AMERICAN PHYSICIANS SERVICE GROUP, INC. /s/ Kenneth S. Shifrin ----------------------------------- Kenneth S. Shifrin, Chairman of the Board and Chief Executive Officer EXECUTIVE: /s/ Maury L. Magids ----------------------------------- Maury L. Magids EX-21 4 exh_211.htm SUBSIDIARIES OF APS GROUP, INC.

 

Exhibit 21.1

 

AMERICAN PHYSICIANS SERVICE GROUP, INC.

 

LIST OF SUBSIDIARIES

 

AS OF DECEMBER 31, 2006

 

APS Investment Services, Inc.

 

APS Financial, Inc.

 

APS Asset Management. Inc.

 

APS Insurance Services, Inc.

 

APS Facilities Management, Inc. dba APMC Insurance Services, Inc.

 

APSFM, Inc.

 

American Physicians Insurance Agency, Inc.

 

APSC, Inc.

 

APS Professional Liability Insurance Agency, Inc.

 

FMI Partners, Ltd.

 

American Physicians Management Consulting, Inc.

 

APMC Financial Services, Inc.

 

APS Capital Corporation

 

 

 

 EX-23 5 bdoconst.htm CONSENT OF AUDITORS - BDO SEIDMAN

                    

 

Consent of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders

American Physicians Service Group, Inc.

 

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-07427, No. 333-62233, No. 333-116848 and No, 333-133544) of American Physicians Service Group, Inc. of our report dated March 26, 2007, relating to the consolidated financial statements and Schedule, which appears in this Form 10-K.

 

 

BDO Seidman, LLP

 

Houston, Texas

March 26, 2007

 

 

 EX-31 6 bh302.htm SEC 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER

 

Exhibit 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO RULE 13a-14(a) AND 15d-14(a) UNDER

THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

 

CERTIFICATION

 

I, William H. Hayes, certify that:

1.            I have reviewed this annual report on Form 10-K of American Physicians Service Group, Inc.;

2.            based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.            based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.            the registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(c)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.            The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: March 30, 2007

/s/ William H. Hayes

------------------------------

William H. Hayes

Senior Vice President-Finance

 

 

 

 EX-31 7 ks302.htm SEC. 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER

 

Exhibit 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULE 13a-14(a) AND 15d-14(a) UNDER

THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

 

CERTIFICATION

 

I, Kenneth S. Shifrin, certify that:

1.            I have reviewed this annual report on Form 10-K of American Physicians Service Group, Inc.;

2.            based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.            based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.            the registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(c)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.            The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: March 30, 2007

/s/ Kenneth S. Shifrin

------------------------------

Kenneth S. Shifrin

Chief Executive Officer

 

 

 

 EX-32 8 bh906.htm SEC. 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

 

In connection with the Annual Report of American Physicians Service Group, Inc. (the ”Company”) on Form 10-K for the year ending December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

 

 

1.

The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and

 

 

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

 

Date: March 30, 2007

 

/s/ William H. Hayes

 

William H. Hayes

Chief Financial Officer

 

 

 

 EX-32 9 ks906.htm SEC. 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

 

In connection with the Annual Report of American Physicians Service Group, Inc. (the ”Company”) on Form 10-K for the year ending December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

 

 

1.

The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and

 

 

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

 

Date: March 30, 2007

 

/s/ Kenneth S. Shifrin

 

Kenneth S. Shifrin

Chief Executive Officer

 

 

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