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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 SEPTEMBER 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 OCTOBER 31, 1998
-------------------- ----------------
Common Stock, $.10 par value 4,168,083
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<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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
REVENUES:
Financial services $3,307 2,792 9,599 6,363
Real estate 174 159 533 509
Investments and other 28 78 69 311
---------- ---------- -------- -------
Total revenues 3,509 3,029 10,201 7,183
EXPENSES:
Financial service expense 3,209 2,445 8,946 6,054
Real estate 135 132 401 390
General and administrative 365 298 922 879
Interest 11 7 24 12
---------- ---------- -------- -------
Total expenses 3,720 2,883 10,293 7,335
---------- ---------- -------- -------
Operating income/(loss) (211) 146 (92) (152)
Equity in earnings of
unconsolidated affiliates (Note 3) 546 596 776 1,439
---------- ---------- -------- --------
Earnings from continuing
operations before income taxes
and minority interest 335 742 684 1,287
Gain on sale of portion of subsidiary --- --- --- 1,899
Income tax expense 119 251 247 1,097
Minority interest 3 (5) 1 (5)
--------- --------- -------- --------
Earnings from continuing
operations 219 486 438 2,084
Discontinued operations:
Earnings/(loss) from discontinued operations
net of income tax (benefit) of $0 and $19 and $0
and $71 for the three and nine months in 1998
and 1997, respectively. --- --- 36 (138)
Loss on disposal of computer software segment,
net of income tax benefit of $0 and $0 and
$0 and $411 for the three and nine months in
1998 and 1997, respectively. --- --- --- (798)
---------- ---------- -------- -------
NET EARNINGS $ 219 486 475 1,148
========== ========== ======== =======
</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 Nine Months Ended
September 30, September 30,
------------------------ ----------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic:
Earnings from continuing
operations $ 0.05 0.12 0.11 0.51
Discontinued operations 0.00 0.00 0.01 (0.23)
--------- --------- -------- --------
Net earnings $ 0.05 0.12 0.11 0.28
========= ========= ======== ========
Diluted:
Earnings from continuing
opertions $ 0.04 0.11 0.09 0.50
Discontinued operations 0.00 0.00 0.01 (0.22)
--------- --------- -------- --------
Net earnings $ 0.04 0.11 0.09 0.27
========= ========= ======== ========
Basic weighted average shares outstanding 4,165 4,145 4,162 4,088
========= ========= ======== ========
Diluted weighted average shares outstanding 4,689 4,251 4,563 4,205
========= ========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
- 4 -
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
September 30, December 31,
1998 1997
------------- -------------
ASSETS
Current Assets:
Cash and cash investments $3,867 5,188
Trading account securities 594 449
Notes receivable - current 191 1,157
Management fees and other receivables 960 815
Receivable from clearing broker 438 543
Income taxes receivable 197 ---
Prepaid expenses and other 562 508
------------- -------------
Total current assets 6,809 8,660
Notes receivable, less current portion 3,929 2,982
Property and equipment 1,730 1,830
Investment in affiliates 16,383 15,611
Preferred stock investment 2,078 ---
Other assets 279 318
------------- -------------
Total Assets $31,208 29,401
============= =============
See accompanying notes to consolidated financial statements
- 5 -
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
September 30, December 31,
1998 1997
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 776 614
Payable to clearing broker --- 441
Accrued compensation 443 446
Accrued expenses and other
liabilities (Note 4) 5,404 3,573
Income taxes payable --- 226
----------- -----------
Total current liabilities 6,623 5,300
Net deferred income tax liability 1,039 822
----------- -----------
Total liabilities 7,662 6,122
Minority interest (36) 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 4,170,683
at 9/30/98 and 4,160,861 at 12/31/97 417 416
Additional paid-in capital 5,530 5,528
Retained earnings 17,635 17,160
----------- -----------
Total shareholders' equity 23,582 23,104
Total Liabilities and Shareholders' Equity $31,208 29,401
=========== ===========
See accompanying notes to consolidated financial statements
- 6 -
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine Months Ended
September 30,
1998 1997
----------- -----------
Cash flows from operating activities:
Cash received from customers $9,989 7,575
Cash paid to suppliers and employees (8,153) (5,784)
Change in trading account securities (145) (92)
Change in receivable from clearing broker (336) (551)
Interest paid (24) (12)
Income taxes paid (439) (574)
Interest, dividends and other investment
proceeds 68 115
----------- -----------
Net cash provided by operating
activities 960 677
Cash flows from investing activities:
Proceeds from sale of property and equipment 13 ---
Payments for purchase property and equipment (185) (292)
Proceeds from equity owners in investment 264 ---
Investment in preferred stock (2,074) ---
Proceeds from sale of insurance exchange --- 1,000
Proceeds from sale of 20% of Insurance Serv --- 2,000
Funds loaned to others (1,840) (180)
Collection of notes receivable 1,711 41
Other 62 4
----------- -----------
Net cash (used in) provided by
investing activities (2,049) (2,573)
Cash flows from financing activities:
Repayment of long term obligations --- (542)
Purchase/retire treasury stock (97) (324)
Exercise of stock options 75 418
Distribution to minority interest (210) ---
----------- -----------
Net cash used in financing
activities (232) (448)
----------- -----------
Net change in cash and cash equivalents $(1,321) 2,802
----------- -----------
Cash and cash equivalents at beginning of period 5,188 5,770
----------- -----------
Cash and cash equivalents at end of period $3,867 8,572
=========== ===========
See accompanying notes to consolidated financial statements
- 7 -
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In thousands)
Nine Months Ended
September 30,
1998 1997
--------- ---------
Reconciliation of net earnings to net cash from operating activities:
Net earnings $475 1,148
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization 443 275
Earnings/(loss) from discontinued operations (55) 210
Loss on disposal of discontinued operations --- 1,209
Write-off of fixed assets 15 ---
Undistributed (earnings)/loss of affiliate (776) (1,759)
Gain on sale of 20% Insurance Services --- (1,899)
Gain on sale of insurance exchange --- (133)
Change in federal income tax payable (423) (158)
Minority interest in consolidated earnings (1) (5)
Provision for deferred taxes 216 76
Change in trading securities (145) (92)
Change in unrealized holding loss --- 11
Change in receivable from clearing broker (336) (551)
Change in management fees & other receivables (144) 321
Change in prepaids & other current assets (53) (182)
Change in other assets --- 1,158
Change in trade payables 162 (2)
Change in accrued expenses & other liabilities 1,582 1,050
--------- ---------
Net cash from operating activities $960 677
========= =========
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
September 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 September 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 September 30, 1998 the Company owned 17.0% (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 September 30, 1998 the Company owned 63.4% 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 three quarters
of 1998.
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following:
September 30 December 31
1998 1997
---- ----
Taxes payable-other $ 196,000 196,000
Deferred income (Note 7) 1,949,000 280,000
Health insurance and other claims payable 8,000 59,000
Contractual/legal claims 1,290,000 1,461,000
Vacation payable 95,000 102,000
Funds held for others 319,000 58,000
Discontinued operations disposition costs 1,376,000 1,138,000
Other 171,000 279,000
---------- ---------
$5,404,000 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 assumes that all clients will 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 September 30, 1998 consisted of the following:
Cash and cash investments $ 30,000
Trade accounts receivable 145,000
Other receivables 1,000
Prepaid and other current assets 49,000
Fixed assets, net of depreciation 41,000
Intercompany receivables 1,124,000
Trade accounts payable (2,000)
F.I.T. Payable (19,000)
Accrued expenses (1,409,000)
---------
Net liabilities $ (40,000)
=======
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 September 30, 1998
---------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
Earnings from
continuing operations $219,000
Basic EPS
Income available to
common stockholders 219,000 4,165,000 $0.05
Effect of Dilutive Securities
Options --- 64,000
Contingently issuable shares (28,000) 460,000
---------- ----------
Diluted EPS
Income available to
common stockholders and
assumed conversions $ 191,000 4,689,000 $0.04
========== ========== =====
For the Three Months Ended September 30, 1997
---------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Earnings from continuing
operations $ 486,000
Discontinued Operations ---
Basic EPS
Income available to 486,000 4,145,000 $0.12
Common stockholders
Effect of Dilutive Securities
Options --- 106,000
Contingently issuable shares --- ---
----------- -----------
Diluted EPS
Income available to common
stockholders and assumed
conversions $ 486,000 4,251,000 $0.11
========= ========= ======
- 12 -
<PAGE>
6. EARNINGS PER SHARE, continued
For the Nine Months Ended September 30, 1998
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Earnings from
continuing operations 475,000
Basic EPS
Income available to
common stockholders 475,000 4,162,000 $0.11
Effect of Dilutive Securities
Options --- 84,000
Contingently issuable shares (45,000) 317,000
---------- ----------
Diluted EPS
Income available to
common stockholders and
assumed conversions $ 430,000 4,563,000 $0.09
========= ========= ======
For the Nine Months Ended September 30, 1997
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Earnings from continuing $2,084,000
Operations
Discontinued Operations (936,000)
Basic EPS
Income available to 1,148,000 4,088,000 $.28
Common stockholders
Effect of Dilutive Securities
Options --- 117,000
Contingently issuable shares --- ---
---------- ---------
Diluted EPS
Income available to common
stockholders and assumed
conversions $1,148,000 4,205,000 $.27
========= ========= =======
- 13 -
<PAGE>
6. EARNINGS PER SHARE, CONTINUED
Unexercised employee stock options to purchase 683,800 and 533,300
shares of the Company's common stock for the three and nine month
periods ended September 30, 1998, respectively, 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 264,800 and 287,300
shares of the Company's common stock for the three and nine month
periods ended September 30, 1997, respectively, 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 September 30, 1998 the Company's affiliate, Syntera HealthCare
Corp., had issued 585,000 shares which are contingently convertible
into 317,000 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
All statements past and future, written or oral, made by the Company or
its officers, directors, shareholders, agents, representatives or employees,
including without limitation, those 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.
Forward-looking statements may appear in this document or other documents,
reports, press releases, and written or oral presentations made by officers of
the Company to shareholders, analysts, news organizations or others. Readers
should not place undue reliance on forward-looking statements. All
forward-looking statements are based on information available to the Company and
the declarant at the time the forward-looking statement is made, 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 described in such forward-looking statements. In addition to any risks and
uncertainties specifically identified in connection with 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.
Forward-looking statements 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
any forward-looking statements by the Company or its officers, directors,
shareholders, agents, representatives or employees, including those
forward-looking statements contained in this Report on Form 10-Q, will prove to
be accurate.
RESULTS OF OPERATIONS
REVENUES
Revenues from operations increased $480,000 (15.8%) and $3,018,000
(42.0%) for the three and nine month periods ended September 30, 1998 compared
to the same periods in 1997, respectively. For both the three and nine 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 $515,000 (18.4%) and $3,236,000
(50.9%) for the three and nine month periods ended September 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 $436,000 (23.5%) 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 nine month period ended September 30, 1998 revenues rose
$3,177,000 (92.2%) compared to the same period in 1997. The Houston office,
which currently employs seventeen brokers, contributed approximately $1,173,000
of this nine month increase.
Revenues from premium-based insurance management fees were up $83,000
(8.9%) and $86,000 (3.0%) for the three month and nine month periods ended
September 30, 1998 compared to the same periods in 1997, respectively. The
increases in both current year periods were due to greater commissions earned by
third party agents on new and renewal business.
Real estate revenues increased $15,000 (9.4%) and $24,000 (4.7%) for
the three and nine month periods ended September 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 $50,000 (64.1%) and $242,000
(77.8%) for the three and nine month periods ended September 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 nine 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 $837,000 (29.0%) and $2,958,000
(40.3%) for the three and nine month periods ended September 30, 1998 compared
to the same periods in 1997, respectively. For both the three and nine month
periods in 1998, all segments of the Company experienced expense increases
compared to the same periods in 1997.
- 16 -
<PAGE>
Financial services expense increased $764,000 (31.2%) and $2,892,000
(47.8%) for the three and nine month periods ended September 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 $134,000
(15.1%) and $291,000 (11.1%) for the three and nine month periods ended
September 30, 1998 compared to the same periods in 1997, respectively, due
primarily to higher commission expense which is the result of outside agents,
who are paid a higher commission rate, 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 increased $67,000 (22.5%) and
$43,000 (4.9%) for the three and nine month periods ended September 30, 1998
compared to the same periods in 1997, respectively. The increase in the current
quarter was due to higher personnel costs as well as 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 $58,000 (8.1%) and $716,000 (40.7%) for the three and nine
month periods ended September 30, 1998 compared to the same periods in 1997,
respectively. Current nine month 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 development costs.
Interest paid on the increased debt caused the decrease in current quarter
earnings. Lastly, Prime's federal income tax rate increased to 40% for the third
quarter as compared to 30% in the same period in 1997 due to the full
utilization of net operating loss carryforwards in 1997. The Company's
percentage ownership of Prime was 17.0% at September 30, 1998. This percentage
is up from 15.9% at December 31, 1997 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
decreased $8,000 (6.6%) and $53,000 (16.6%) for the three and nine month periods
ended September 30, 1998 compared to the same periods in 1997, respectively. The
nine month loss in 1997 was due to the fact that Syntera was in the start-up
stage and had no doctors under contract. The current year loss was reduced as a
total of eleven long-term contracts have been entered into with OB/GYN
physicians in 1998. The Company's equity ownership percentage in Syntera dropped
from 69.4% at June 30, 1998 to 63.4% at September 30, 1998 as four additional
physicians were issued shares in the current quarter upon signing long-term
management contracts.
- 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 September 1997 by Florida Physicians Insurance Company
("FPIC") for $2,000,000.
LIQUIDITY AND CAPITAL RESOURCES
Current assets exceeded current liabilities by $186,000 and $3,360,000
at September 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. Also, the short-term portion of the note receivable from
Consolidated Eco-Systems, Inc. was reclassed to long-term in the current quarter
as the note is technically in default. In addition, the Company loaned $530,000
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 September 30, 1998 were
approximately $185,000. Total capital expenditures are expected to be
approximately $225,000 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-nine months with a
fluctuating interest rate (currently 8.25%) based upon the prime rate. The line
is secured by securities owned by the Company. No balance was owed under this
credit line as of October 31, 1998.
- 18 -
<PAGE>
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 vital operating systems within
the Company are 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.
Presently, the Company's internal hardware systems include a PC
Windows-based network for its accounting and office software and a Unix-based
network for its operations software. The PC accounting software has been
verified as being Year 2000 compliant as is all hardware which runs the
accounting software. While there still exist some PC's within the company that
are not compliant the Company expects to have them all replaced by the end of
1998. The operating system for the Unix-based system will be Year 2000 compliant
by the end of 1998 when a final patch is installed.
The Company's non-information technology, including elevators, phone
system, security system and utilities, would present problems to the Company
should either the phones or utilities fail. The Company is currently studying
new phone systems and expects to replace the current system in the first quarter
of 1999. Failure to receive electricity, gas or water present obvious problems
to the operations of the Company. No written assurances from any utility
provider have yet been received but the Company feels there is still sufficient
time. There are no contingency plans for the loss of power.
The most reasonably likely worst case scenario would include a failure
by the clearing broker of the Company's broker/dealer subsidiary. New trades
would not be possible nor would the Company know the positions in customer
accounts. A contingency plan for this scenario would entail the use of another
clearing broker to make new trades but this would not remedy the problem of
losing current customer investment positions.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued FASB No. 131, Disclosures about Segments
of an Enterprise and Related Information, which the Company is required to adopt
for annual periods beginning after December 15, 1998 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.
- 19 -
<PAGE>
In April 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 organization costs to be expensed as incurred. The
Company's affiliate, Syntera Healthcare, has incurred start-up costs which were
expensed in the current quarter and rolled through equity income of the Company.
These costs were insignificant and did not have an adverse material effect on
the Company's financials.
- 20 -
<PAGE>
PART II
OTHER INFORMATION
- 21 -
<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 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 agreed to roll
all interest due into the note and extended the terms of the note for two years.
Repayment terms were geared to track Consolidated ECO's cash flow and included
monthly payments of $40,000 from January 1, 1998 through September 30, 1998, at
which time payments were to 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. As
of October 31, 1998 only two payments of $40,000 each were received from
Consolidated Eco, the last of which was received April 10, 1998.
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.
- 22 -
<PAGE>
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.
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 63% owner of Syntera, a percentage
expected to decline to a minority level as Syntera issues additional shares for
future acquisitions. During the third quarter, Syntera signed four additional
physicians to contracts bringing the total practices under contract to eleven.
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 September 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: November 13, 1998 By: /s/ William H. Hayes
--------------------------------------
William H. Hayes, Vice President
and Chief Financial Officer
- 24 -
<PAGE>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
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<PERIOD-END> SEP-30-1998 SEP-30-1998
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