=====================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
TO
-------------------- --------------------
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
incorporation or organization) identification No.)
1301 CAPITAL OF TEXAS HIGHWAY AUSTIN, TEXAS 78746 (Address of
principal executive offices) (Zip Code)
(512) 328-0888
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
NUMBER OF SHARES
OUTSTANDING AT
TITLE OF EACH CLASS JULY 31, 1998
-------------------- ----------------
Common Stock, $.10 par value 4,160,683
============================================================================
<PAGE>
PART I
FINANCIAL INFORMATION
-2-
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
REVENUES:
Financial services $3,271 1,625 6,293 3,570
Real estate 181 168 359 350
Investments and other 9 52 41 236
---------- ---------- -------- -------
Total revenues 3,461 1,845 6,693 4,156
EXPENSES:
Financial service expense 2,954 1,858 5,737 3,601
Real estate 135 129 266 258
General and administrative 338 522 557 787
Interest 9 2 13 5
---------- ---------- -------- -------
Total expenses 3,436 2,511 6,573 4,651
---------- ---------- -------- -------
Operating income/(loss) 25 (666) 120 (495)
Equity in earnings of
unconsolidated affiliates (Note 3) 527 580 230 1,041
---------- ---------- -------- --------
Earnings/(loss) from continuing
operations before income taxes
and minority interest 552 (86) 350 546
Gain on sale of portion of subsidiary --- 1,899 --- 1,899
Income tax expense 193 622 129 847
Minority interest (1) --- (2) ---
--------- --------- -------- --------
Earnings from continuing
operations 358 1,191 219 1,598
Discontinued operations:
Earnings/(loss) from discontinued operations
net of income tax (benefit) of $0 and $(21)
and $19 and $71 for the three and six
months in 1998 and 1997, respectively. --- (97) 36 (138)
Loss on disposal of computer software segment,
net of income tax benefit of $0 and $411 and
$0 and $411 for the three and six months in 1998
and 1997, respectively. --- (798) --- (798)
---------- ---------- -------- -------
NET EARNINGS $ 358 296 255 662
========== ========== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements
- 3 -
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENT OF EARNINGS PER SHARE (UNAUDITED)
EARNINGS PER COMMON SHARE:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic:
Earnings/(loss) from continuing
operations $ 0.09 0.29 0.05 0.39
Discontinued operations 0.00 (0.22) 0.01 (0.23)
--------- --------- -------- --------
Net earnings/(loss) $ 0.09 0.07 0.06 0.16
========= ========= ======== ========
Diluted:
Earnings/(loss) from continuing
opertions $ 0.08 0.28 0.05 0.38
Discontinued operations 0.00 (0.21) 0.01 (0.22)
--------- --------- -------- --------
Net earnings/(loss) $ 0.08 0.07 0.06 0.16
========= ========= ======== ========
Basic weighted average shares outstanding 4,161 4,086 4,160 4,059
========= ========= ======== ========
Diluted weighted average shares outstanding 4,477 4,194 4,437 4,183
========= ========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
- 4 -
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
June 30, December 31,
1998 1997
------------- -------------
ASSETS
Current Assets:
Cash and cash investments $2,861 5,188
Trading account securities 1,039 449
Notes receivable - current 812 1,157
Management fees and other receivables 1,020 815
Receivable from clearing broker 4 543
Income taxes receivable 70 0
Prepaid expenses and other 516 508
------------- -------------
Total current assets 6,322 8,660
Notes receivable, less current portion 3,703 2,982
Property and equipment 1,716 1,830
Investment in affiliates 15,837 15,611
Preferred stock investment 2,078 ---
Other assets 292 318
------------- -------------
Total Assets $29,948 29,401
============= =============
See accompanying notes to consolidated financial statements
- 5 -
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
June 30, December 31,
1998 1997
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 475 614
Payable to clearing broker --- 441
Accrued compensation 225 446
Accrued expenses and other
liabilities (Note 4) 5,011 3,573
Income taxes payable --- 226
----------- -----------
Total current liabilities 5,711 5,300
Net deferred income tax liability 865 822
----------- -----------
Total liabilities 6,576 6,122
Minority interest 27 175
Shareholders' Equity:
Preferred stock, $1.00 par value,
1,000,000shares authorized ---- ----
Common stock, $0.10 par value, shares
authorized 20,000,000; issued 4,160,693
at 3/31/98 and 4,160,861 at 12/31/97 416 416
Additional paid-in capital 5,514 5,528
Retained earnings 17,415 17,160
----------- -----------
Total shareholders' equity 23,345 23,104
Total Liabilities and Shareholders' Equity $29,948 29,401
=========== ===========
See accompanying notes to consolidated financial statements
- 6 -
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended
June 30,
1998 1997
----------- -----------
Cash flows from operating activities:
Cash received from customers $6,447 3,562
Cash paid to suppliers and employees (5,458) (3,145)
Change in trading account securities (590) 148
Change in receivable from clearing broker 98 (297)
Interest paid (13) (5)
Income taxes paid (389) (244)
Interest, dividends and other investment
proceeds 41 89
----------- -----------
Net cash provided by operating
activities 136 108
Cash flows from investing activities:
Proceeds from sale of property and equipment 2 ---
Payments for purchase property and equipment (68) (236)
Proceeds from equity owners in investment 264 ---
Investment in preferred stock (2,074) ---
Funds loaned to others (875) (30)
Collection of notes receivable 401 15
Other 59 10
----------- -----------
Net cash used in investing
activities (2,291) (241)
Cash flows from financing activities:
Repayment of long term obligations --- (542)
Purchase/retire treasury stock (42) (317)
Exercise of stock options 20 219
Distribution to minority interest (150) ---
----------- -----------
Net cash used in financing
activities (172) (640)
----------- -----------
Net change in cash and cash equivalents $(2,327) (773)
----------- -----------
Cash and cash equivalents at beginning of period 5,188 5,770
----------- -----------
Cash and cash equivalents at end of period $2,861 4,997
=========== ===========
See accompanying notes to consolidated financial statements
- 7 -
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In thousands)
Six Months Ended
June 30,
1998 1997
--------- ---------
Reconciliation of net earnings to net cash
from operating activities:
Net earnings $255 662
Adjustments to reconcile net earnings
to net cash from operating activities:
Depreciation and amortization 295 181
Earnings from discontinued operations (55) 209
Loss on disposal of discontinued operations --- 1,209
Write-off of fixed assets 9 ---
Undistributed (earnings)/loss of affiliate (230) (1,041)
Change in federal income tax payable (296) 258
Minority interest in consolidated earnings 2 ---
Provision for deferred taxes 42 (137)
Change in trading securities (590) 148
Change in receivable from clearing broker 98 (297)
Change in management fees & other receivables (205) (2,593)
Change in prepaids & other current assets (8) (119)
Change in other assets --- (125)
Change in trade payables (139) (58)
Change in accrued expenses & other liabilities 958 1,811
--------- ---------
Net cash from operating activities $136 108
========= =========
Summary of non-cash transactions:
At March 31, 1997, the Company recognized a gain on the discontinuation of a
lawyer's professional liability insurance exchange resulting from the reversal
of accruals for contingencies which are no longer likely. The effect of this
transaction was an increase to revenue and an increase to other assets of
$133,000.
See accompanying notes to consolidated financial statements
- 8 -
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
1. GENERAL
The accompanying unaudited consolidated financial statements have been prepared
in conformity with the accounting principles described in the audited financial
statements for the year ended December 31, 1997 and reflect all adjustments
which are, in the opinion of management, necessary for a fair statement of the
financial position as of June 30, 1998 and the results of operations for the
periods presented. These statements have not been audited or reviewed by the
Company's independent certified public accountants. The operating results for
the interim periods are not necessarily indicative of results for the full
fiscal year.
The notes to consolidated financial statements appearing in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 filed with the
Securities Exchange Commission should be read in conjunction with this Quarterly
Report on Form 10-Q. There have been no significant changes in the information
reported in those notes other than from normal business activities of the
Company.
Certain reclassifications have been made to amounts presented in prior periods
to be consistent with the 1998 presentation.
2. CONTINGENCIES
In conjunction with a settlement agreement, the Company's broker/dealer
subsidiary, APS Financial, has guaranteed the future yield of a customer's
investment portfolio beginning in November 1994 for up to a five and one-half
year period. Management believes that the Company's financial statements
adequately provide for any loss that might occur under this agreement; however,
as defined in AICPA Statement of Position 94-6, it is reasonably possible that
the Company's estimate of loss could change over the remaining term of the
agreement. Management is unable to determine the range of potential adjustment
since it is based on securities markets, which are beyond its ability to
control.
- 9 -
<PAGE>
3. EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATE
At June 30, 1998 the Company owned 16.3% (3,064,000 shares) of the
outstanding common stock of Prime Medical Services, Inc. ("Prime"). The Company
records its pro-rata share of Prime's results on the equity basis. Prime is
primarily in the business of providing lithotripsy services. The common stock of
Prime is traded in the over-the-counter market under the symbol "PMSI". Prime is
a Delaware corporation which is required to file annual, quarterly and other
reports and documents with the Securities and Exchange Commission, which reports
and documents contain financial and other information regarding Prime. Such
reports and documents may be examined and copies may be obtained from the
offices of the Securities and Exchange Commission.
At June 30, 1998 the Company owned 69.4% of Syntera HealthCare Corporation
("Syntera"). The Company records its pro-rata share of Syntera's results on the
equity basis. Syntera specializes in the management of OB/GYN and related
medical practices. The Company expects to reduce its ownership to a minority
level as Syntera issues additional shares for future acquisitions. Due to the
short time frame anticipated for this change in ownership to occur, the Company
has accounted for its ownership on the equity basis in the first and second
quarters of 1998.
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following:
June 30 December 31
1998 1997
--------- ------------
Taxes payable-other $ 199,000 196,000
Commissions payable 550,000 287,000
Deferred income (Note 7) 1,257,000 280,000
Health insurance and other claims payable 7,000 59,000
Contractual/legal claims 1,398,000 1,461,000
Vacation payable 95,000 102,000
Funds held for others 308,000 58,000
Systems disposition costs 1,248,000 1,138,000
Other (51,000) (8,000)
---------- ----------
$5,011,000 3,573,000
========== ==========
- 10 -
<PAGE>
5. DISCONTINUED OPERATIONS
The Company, through its wholly owned subsidiary, APS Systems, Inc. ("Systems"),
had previously developed software and marketed it to medical clinics and medical
schools. This business segment became unprofitable and the Company ceased
marketing the software and reduced the scope of Systems' operations to a level
adequate to service existing clients through the terms of their contracts. The
Company assumed that all clients would migrate to other software products by the
end of 1999 and reflected the expected financial impact of discontinuing this
segment on that date in the 1997 financial statements.
Net assets/(liabilities) of the discontinued computer systems and software
segment as of June 30, 1998 consisted of the following:
Cash and cash investments $ 24.8
Trade accounts receivable 156.9
Other receivables 6.2
Prepaid and other current assets 58.6
Fixed assets, net of depreciation 62.1
Intercompany receivables 948.9
Trade accounts payable (1.7)
F.I.T. Payable (18.6)
Accrued expenses (1,276.9)
---------
Net liabilities $ (39.7)
=========
6. EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, Earnings per Share
("Statement 128") specifies new measurement, presentation and disclosure
requirements for earnings per share and is required to be applied retroactively
upon initial adoption. The Company adopted Statement 128 effective December 31,
1997, and accordingly, has restated herein all previously reported earnings per
share data. Basic earnings per share is based on the weighted average shares
outstanding without any dilutive effects considered. Diluted earnings per share
reflect dilution from all contingently issuable shares, including options and
convertible debt. A reconciliation of income and average shares outstanding used
in the calculation of basic and diluted earnings per share from continuing
operations follows:
- 11 -
<PAGE>
6. EARNINGS PER SHARE, continued
For the Three Months Ended June 30, 1998
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
Earnings from
continuing operations 358,000
Basic EPS
Income available to
common stockholders 358,000 4,161,000 $0.09
Effect of Dilutive Securities
Options --- 102,000
Contingently issuable shares (1,000) 214,000
---------- ----------
Diluted EPS
Income available to
common stockholders and
assumed conversions $ 357,000 4,477,000 $0.08
========== ========== =====
For the Three Months Ended June 30, 1997
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Earnings from continuing
operations $ 1,191,000
Discontinued Operations (895,000)
Basic EPS
Income available to 296,000 4,086,000 $0.07
Common stockholders
Effect of Dilutive Securities
Options --- 108,000
Contingently issuable shares --- ---
----------- -----------
Diluted EPS
Income available to common
stockholders and assumed
conversions $ 296,000 4,194,000 $0.07
========= ========= ======
- 12 -
<PAGE>
6. EARNINGS PER SHARE, continued
For the Six Months Ended June 30, 1998
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Earnings from
continuing operations 255,000
Basic EPS
Income available to
common stockholders 255,000 4,160,000 $0.06
Effect of Dilutive Securities
Options --- 102,000
Contingently issuable shares (7,000) 175,000
---------- ----------
Diluted EPS
Income available to
common stockholders and
assumed conversions $ 248,000 4,437,000 $0.06
========= ========= ======
For the Six Months Ended June 30, 1997
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Earnings from continuing $1,598,000
Operations
Discontinued Operations (936,000)
Basic EPS
Income available to 662,000 4,059,000 $.16
Common stockholders
Effect of Dilutive Securities
Options --- 124,000
Contingently issuable shares --- ---
---------- ---------
Diluted EPS
Income available to common
stockholders and assumed
conversions $662,000 4,183,000 $.16
======== ========= =======
- 13 -
<PAGE>
6. EARNINGS PER SHARE, continued
Unexercised employee stock options to purchase 581,300 shares of the
Company's common stock as of June 30, 1998 were not included in the
computations of diluted EPS because the options' exercise prices were
greater than the average market price of the Company's common stock
during the period.
Unexercised employee stock options to purchase 522,300 shares of the
Company's common stock as of June 30, 1997 were not included in the
computations of diluted EPS because the options' exercise prices were
greater than the average market price of the Company's common stock
during the period.
At June 30, 1998 the Company's affiliate, Syntera HealthCare Corp., had
issued 329,000 shares which are convertible into 175,000 of the
Company's common shares in the event that the Syntera shares are not
publicly tradeable within two years of their determination date.
7. DEFERRED INCOME
The Company's policy is to defer quarterly recognition of the profit
sharing component of insurance management fees. The Company utilizes
this approach because the profit sharing formula is contingent and
based on annual net earnings. Accordingly, any potential income to be
recognized by the Company is dependent on the annual earnings of the
managed entity. Income will be recognized when all uncertainties as to
collectibility have been resolved. Typically, this is not until the
fourth quarter of the fiscal year.
- 14 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
The statements contained in this Report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Readers should not place undue
reliance on forward-looking statements. All forward-looking statements included
in this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements. It is important to note that the Company's actual results could
differ materially from those in such forward-looking statements. In addition to
any risks and uncertainties specifically identified in the text surrounding such
forward-looking statements, the reader should consult the Company's reports on
previous Form 10-Q and other filings under the Securities Act of 1933 and the
Securities Exchange Act of 1934, for factors that could cause actual results to
differ materially from those presented.
The forward-looking statements 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 judgements 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 the control of the Company. Any such
assumptions could be inaccurate and, therefore, there can be no assurance that
the forward-looking statements included in this Report on Form 10-Q will prove
to be accurate.
RESULTS OF OPERATIONS
REVENUES
Revenues from operations increased $1,617,000 (87.6%) and $2,537,000
(61.0%) for the three and six month periods ended June 30, 1998 compared to the
same periods in 1997, respectively. For both the three and six month periods in
1998, financial services and real estate revenues increased while investments
and other revenues decreased compared to the same periods in 1997.
- 15 -
<PAGE>
Financial services revenues increased $1,646,000 (101.3%) and
$2,723,000 (76.3%) for the three and six month periods ended June 30, 1998
compared to the same periods in 1997, respectively. The increase in both periods
of 1998 was due to greater commission income at the Company's broker/dealer
subsidiary, APS Financial Corp. Total revenues at APS Financial rose $1,556,000
(227.7%) in the current quarter as a result of a more favorable bond market, a
greater number of institutional accounts and a greater number of experienced
brokers, most of whom joined the Company in the latter half of 1997 through the
branch office in Houston, Texas. For the six month period ended June 30, 1998
revenues rose $2,741,000 (172.0%) compared to the same period in 1997. The
Houston office, which currently employs seventeen brokers, contributed
approximately $1,000,000 of this six month increase.
Revenues from premium-based insurance management fees were up $103,000
(11.0%) and $3,000 (0.1%) for the three month and six month periods ended June
30, 1998 compared to the same periods in 1997, respectively. The three month
increase was due to a non-recurring premium. This was offset in the six month
period by stiffer competition in the Texas professional liability insurance
market which has resulted in fewer insureds and lower premium rates.
Real estate revenues increased $13,000 (7.7%) and $9,000 (2.6%) for the
three and six month periods ended June 30, 1998 compared to the same periods in
1997, respectively. The current three month increase reflects a higher
utilization of the office building by outside tenants and affiliates. Given the
current economic good health of the Austin real estate market, it is reasonable
to expect rental and occupancy rates to remain favorable throughout 1998.
Investment and other income decreased $43,000 (82.7%) and $195,000
(82.6%) for the three and six month periods ended June 30, 1998 compared to the
same periods in 1997, respectively. The decrease in the current quarter was
primarily due to a decline in interest income arising from a lower investable
cash balance. The cash balance declined due to a $4,387,000 cash investment in
the Company's OB/GYN management affiliate, Syntera HealthCare Corporation, in
November 1997 and a March 1998 cash investment of $1,962,000 in a privately-held
developer and operator of dedicated Alzheimer's care facilities, Uncommon Care,
Inc. The six month decrease in 1998 was due to the lower investable cash balance
as well as to a gain on the dissolution of an inactive insurance entity in the
first quarter of 1997.
EXPENSES
Total operating expenses increased $925,000 (36.8%) and $1,922,000
(41.3%) for the three and six month periods ended June 30, 1998 compared to the
same periods in 1997, respectively. For both the three and six month periods in
1998, financial services and real estate expenses increased while investments
and other expenses decreased compared to the same periods in 1997.
- 16 -
<PAGE>
Financial services expense increased $1,096,000 (59.0%) and $2,136,000
(59.3%) for the three and six month periods ended June 30, 1998 compared to the
same periods in 1997, respectively. The primary reason for the current year
increase is higher commission expense resulting from the increase in commission
revenue at the Company's broker/dealer subsidiary, APS Financial. In addition,
general and administrative costs at APS Financial increased in both periods in
1998 primarily as a result of opening the Houston branch office as well as costs
associated with opening a new asset management division at the Austin office.
Expenses at the insurance management subsidiary increased $121,000
(13.7%) and $157,000 (9.1%) for the three and six month periods ended June 30,
1998 compared to the same periods in 1997, respectively, due primarily to higher
commission expense which is the result of outside agents producing a higher
percentage of total premiums. Partially offsetting this was a decrease in
personnel related costs resulting from a reallocation of some salary expenses
from operations to administrative.
General and administrative expense decreased $184,000 (35.2%) and
$230,000 (29.2%) for the three and six month periods ended June 30, 1998
compared to the same periods in 1997, respectively. The decrease in the current
quarter was due primarily to personnel costs expensed in 1997 at the parent
Company but reclassified to the affiliate, Syntera HealthCare, in 1998. The six
month variance was also affected by the reversal of a certain contingent expense
accrual deemed no longer necessary. Partially offsetting these variances was an
increase in personnel related costs resulting from a reallocation of some salary
expenses from operations to administrative.
EQUITY IN EARNINGS/(LOSS) OF UNCONSOLIDATED AFFILIATES
The Company's equity in earnings of Prime Medical Services, Inc.
("Prime") decreased $10,000 (1.8%) and $657,000 (63.2%) for the three and six
month periods ended June 30, 1998 compared to the same periods in 1997,
respectively. Current year earnings were adversely affected by a nonrecurring
write-off of approximately $5.0 million in fees incurred in connection with a
$100 million senior subordinated debt offering by Prime, completed in March
1998. In addition, Prime expensed an additional $1.6 million in the first
quarter of 1998 associated with nonrecurring restructuring/development costs.
The Company's percentage ownership of Prime was 16.3% at June 30, 1998. This
percentage is up from 15.9% at March 31, 1998 as the total number of common
shares outstanding has been reduced as a result of the stock buy-back program
Prime has implemented this year.
The Company's equity in the loss of Syntera HealthCare Corporation
totaled $41,000 and $153,000 for the three and six month periods ended June 30,
1998. The Company's equity ownership percentage in Syntera dropped from 74.0% at
March 31, 1998 to 69.4% at June 30, 1998 as three additional physicians were
issued shares upon signing long-term management contracts. Syntera had entered
into management contracts with a total of seven OB/GYN physicians at June 30,
1998. Long-term contracts were entered into with three additional physicians as
of August 1, 1998 bringing the total number of practices under contract to ten.
- 17 -
<PAGE>
MINORITY INTEREST
The Company records twenty percent of the after-tax profit or loss of
Insurance Services as minority interest on the condensed consolidated statement
of operations as well as the condensed consolidated balance sheet. The minority
interest was purchased in June 1997 by Florida Physicians Insurance Company for
$2,000,000.
LIQUIDITY AND CAPITAL RESOURCES
Current assets exceeded current liabilities by $611,000 and $3,360,000
at June 30, 1998, and December 31, 1997, respectively. The decrease was
primarily the result of a $1,962,000 March 1998 cash investment in Uncommon
Care, Inc., a privately-held developer and operator of dedicated Alzheimer's
care facilities. In addition, the Company loaned $875,000 to Uncommon Care
bearing interest at 10%, payable quarterly with the principal due in March 2003.
The loan is part of the $2,400,000 line of credit the Company agreed to provide
per the purchase agreement with Uncommon Care dated March 20, 1998. Working
capital was reduced since the loan is classified as long term.
Capital expenditures through the period ended June 30, 1998 were
approximately $68,000. Total capital expenditures are expected to be
approximately $150,000 in 1998.
Historically, the Company has maintained a strong working capital position
and, has been able to satisfy its operational and capital expenditure
requirements with cash generated from its operating and investing activities.
These same sources of funds have also allowed the Company to pursue investment
and expansion opportunities consistent with its growth plans. To further its
ability to meet its liquidity requirements and to accelerate its growth, the
Company has established a $10,000,000 revolving line of credit with NationsBank
of Texas, N.A. The line of credit is for a term of thirty-six months with a
fluctuating interest rate (currently 8.25%) based upon the prime rate. The line
is secured by securities owned by the Company. A total of $300,000 was advanced
under this credit line as of July 31, 1998.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code
in existing computer systems as the year 2000 approaches and has formed a
company-wide committee to develop an implementation plan to resolve the issue.
The Company's goal is to have assurances that all hardware and software
operating systems within the Company is Year 2000 compliant by the end of the
fiscal year 1998. The Company anticipates the necessary actions to be Year 2000
compliant will be performed internally, in the ordinary course of business, at a
cost not to exceed $100,000. In addition, the Company has received written
assurances from some, but not all, of its significant outside vendors that they
are, or expect to be, Year 2000 compliant in time. The Company feels there is
still sufficient time to confirm the level of compliance with those outside
vendors that have not yet responded to or have not yet been requested to provide
written assurances.
- 18 -
<PAGE>
Significant uncertainty exists concerning the potential costs and effects
associated with any year 2000 compliance. Any year 2000 compliance problem of
either the Company or its vendors, third party payors or customers could have a
material adverse effect on the Company's business, results of operations,
financial condition and prospects. The Company does not yet have a contingency
plan to handle the most reasonably likely worst case scenarios but intends to
create one by fiscal year end 1998.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued FASB No. 131, Disclosure about Segments of an
Enterprise and Related Information, which the Company is required to adopt for
annual periods beginning after December 15, 1997 and interim periods beginning
in fiscal year 1999. SFAS No. 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires that those companies report information about segments
in interim financial reports issued to shareholders. The Company will comply
with this expanded disclosure requirement beginning with the December 31, 1998
financial statements.
In June 1998, the AICPA issued Statement of Position (SOP) 98-5, Reporting
on the Costs of Start-Up Activities, which is effective for financial statements
for fiscal years beginning after December 15, 1998. The SOP requires costs of
start-up activities and organizational costs to be expensed as incurred. The
Company's affiliate, Syntera Healthcare, has incurred start-up costs which, when
expensed this year, will roll through equity income of the Company. These costs
are insignificant and will not have a material adverse effect on the Company's
financials.
- 19 -
<PAGE>
PART II
OTHER INFORMATION
- 20 -
<PAGE>
Item 1. Legal Proceedings
The Company is involved in various claims and legal actions that have
arisen in the ordinary course of business. The Company believes that the
liability provision in its financial statements is sufficient to cover any
unfavorable outcome related to lawsuits in which it is currently named.
Management believes that liabilities, if any, arising from these actions will
not have a significant adverse effect on the financial condition of the Company.
However, due to the uncertain nature of legal proceedings, the actual outcome of
these lawsuits may differ from the liability provision recorded in the Company's
financial statements.
Item 4. Results of Votes of Security Holders
On June 11, 1998 the annual meeting of shareholders of American
Physicians Service Group, Inc. was held in Austin, Texas. Shareholders voted on
the following two items.
a.) Election of Directors
The names of the directors elected at the meeting along with number of
votes for, against and withheld are as follows:
Name For Against Withheld
------------------- --------- ---------- -----------
Jack Murphy 3,359,547 301,516 ---
Robert L. Myer 3,359,917 301,146 ---
William A. Searles 3,359,917 301,146 ---
Kenneth S. Shifrin 3,359,917 301,146 ---
b.) Proposal to Amend the 1995 Incentive and Non-Qualified Stock Option
Plan
Shareholders were asked to vote on a proposal to increase the aggregate
number of shares of common stock that may be issued upon the exercise of all
options under the 1995 Plan by 400,000 to a new maximum of 1,200,000. The
proposal passed and the results of the vote for, against, and withheld are as
follows:
For 2,083,204
Against 799,072
Withheld ---
- 21 -
<PAGE>
Item 5. Other Information
On October 31, 1996, the Company invested $3,300,000 in common stock of
Exsorbet Industries, Inc. ("Exsorbet") (NASDAQ:EXSO) with a put option. Exsorbet
is a diversified environmental and technical services company. On November 26,
1996, the Company exercised its put in exchange for a note receivable from
Exsorbet. The note is secured by the shares that were subject to the put plus
all the stock and substantially all of the assets of a wholly owned subsidiary
of Exsorbet.
On November 13, 1997, the Company announced that it has reached an
agreement with Consolidated Eco-Systems, Inc. ("Consolidated ECO", formerly
Exsorbet) to restructure the terms of the $3,300,000 note due October 1, 1997.
In exchange for additional collateral and certain covenants, APS has agreed to
roll all interest due into the note and has extended the terms of the note for
two years. Repayment terms are geared to track Consolidated ECO's cash flow and
will include monthly payments of $40,000 from January 1, 1998 through September
30, 1998, at which time payments become $85,000. The remaining note balance is
due October 1, 1999. No interest has been accrued on this note and,
consequently, there was no income effect from converting the interest to
additional debt.
On March 13, 1998 Consolidated Eco announced that its subsidiary, 7-7
Inc., had been declared in default of a Loan Agreement, Security Agreement, and
Forebearance Agreement by Dollar Bank of Cleveland, Ohio. Dollar Bank had
additionally accelerated all amounts due to it from 7-7, Inc. The amounts
totaled approximately $850,000. As a result of the actions of Dollar Bank, the
business operations of 7-7, Inc. were terminated. APS is a second lien holder of
the assets of 7-7, Inc. and does not expect to recoup any funds realized by the
foreclosure and subsequent sale of these assets by Dollar Bank. However, APS's
debt continues to be collateralized by common stock of Consolidated Eco and one
of its subsidiaries, Eco Acquisition, Inc. APS is also the second lien holder of
the assets of another Consolidated Eco subsidiary, LARCO Environmental Services,
Inc.
On June 17, 1998 the Company filed suit against Consolidated
Eco-Systems, Inc. and its directors and officers alleging breach of contract,
negligent misrepresentation and conspiracy. The misrepresentations include, but
are not limited to, incorrect financial statements and financial projections,
failure to disclose bargain-priced stock options to the directors and officers,
failure to apprise APS of the lack of due diligence performed on 7-7, Inc.,
failure to capitalize 7-7, Inc., acquisition of additional indebtedness without
APS's knowledge or consent, disposition of assets without APS's knowledge or
consent and failure to report material adverse changes in Con-Eco's and its
subsidiaries' financial condition. APS is seeking final judgement against
defendants, jointly and severally, for all actual damages, interest, attorney's
fees, court costs, and for any other relief to which APS may be entitled, at law
or in equity. Both Con-Eco and its D&O insurance carrier have been notified of
this suit.
- 22 -
<PAGE>
On March 20, 1998 the Company purchased non-voting convertible
preferred stock of Uncommon Care, Inc., a developer and operator of dedicated
Alzheimer's care facilities. The shares are convertible into approximately 34%
of Uncommon Care's equity. In addition to the purchase price of approximately
$2.0 million, APS has provided a line of credit to Uncommon Care of $2.4 million
to be used for working capital and interim development financing. As of July 31,
1998 a total of $1,175,000 has been advanced.
On April 23, 1998 the Company's affiliate, APS Practice Management,
announced that it had changed its name to Syntera HealthCare Corporation
("Syntera"). Syntera is a physician practice management company specializing in
OB/GYN practices. The Company is currently a 69% owner of Syntera, a percentage
expected to decline to a minority level as Syntera issues additional shares for
future acquisitions. During the second quarter Syntera also announced that it
had signed additional physician contracts in its Austin, Texas location and had
established a San Antonio presence by entering into contracts with two
physicians there. Subsequent to the second quarter, the Company entered into
contracts with three additional physicians bringing the total practices under
contract to ten.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Current reports on Form 8-K.
No current reports on Form 8-K were filed during the quarter
ended June 30, 1998.
- 23 -
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Date: August 14, 1998 By: /s/ William H. Hayes
--------------------------------------
William H. Hayes, Vice President
and Chief Financial Officer
- 24 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
JUNE 30, 1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 2,861 2,861
<SECURITIES> 1,039 1,039
<RECEIVABLES> 1,848 1,848
<ALLOWANCES> 34 34
<INVENTORY> 18 18
<CURRENT-ASSETS> 6,322 6,322
<PP&E> 5,653 5,653
<DEPRECIATION> 3,937 3,937
<TOTAL-ASSETS> 29,948 29,948
<CURRENT-LIABILITIES> 5,711 5,711
<BONDS> 0 0
0 0
0 0
<COMMON> 416 416
<OTHER-SE> 22,929 22,929
<TOTAL-LIABILITY-AND-EQUITY> 29,948 29,948
<SALES> 0 0
<TOTAL-REVENUES> 3,461 6,693
<CGS> 0 0
<TOTAL-COSTS> 3,237 6,234
<OTHER-EXPENSES> 191 326
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 9 13
<INCOME-PRETAX> 552 350
<INCOME-TAX> 193 129
<INCOME-CONTINUING> 358 219
<DISCONTINUED> 0 36
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 358 255
<EPS-PRIMARY> 0.09 0.06
<EPS-DILUTED> 0.08 0.06
</TABLE>
