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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 MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
TO
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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 April 30, 1999
-------------------- ----------------
Common Stock, $.10 par value 4,153,683
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<PAGE>
PART I
FINANCIAL INFORMATION
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AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
Three Months Ended
March 31,
1999 1998
---------- ----------
REVENUES:
Financial services $2,909 $2,097
Insurance services 1,194 925
Real estate 189 178
Investments and other 79 32
---------- ----------
Total revenues 4,371 3,232
EXPENSES:
Financial services 2,558 1,888
Insurance services 1,346 895
Real estate 141 131
General and administrative 441 219
Interest 34 4
---------- ----------
Total expenses 4,520 3,136
---------- ----------
Operating income/(loss) (149) 96
Equity in earnings/(loss) of
unconsolidated affiliates (Note 3) 518 (297)
---------- ----------
Earnings/(loss) from continuing
operations before income taxes
and minority interest 369 (201)
Income tax expense/(benefit) 126 (64)
Minority interest 25 (1)
--------- ---------
Earnings/(loss) from continuing
operations 268 (138)
Discontinued operations:
Earnings/(loss) from discontinued operations
net of income tax of $32 and $19
in 1999 and 1998, respectively. 63 36
---------- ----------
NET EARNINGS/(LOSS) $331 ($102)
========== ==========
See accompanying notes to consolidated financial statements
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AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENT OF EARNINGS PER SHARE (UNAUDITED)
EARNINGS PER COMMON SHARE:
March 31,
------------------------
1999 1998
--------- ---------
Basic:
Earnings/(loss) from continuing
operations $0.06 ($0.03)
Discontinued operations 0.02 0.01
---------- ----------
Net earnings/(loss) $0.08 ($0.02)
Diluted:
Earnings/(loss) from continuing
opertions $0.05 ($0.03)
Discontinued operations 0.01 0.01
---------- ----------
Net earnings/(loss) $0.06 ($0.02)
Basic weighted average shares outstanding 4,158 4,159
========== ==========
Diluted weighted average shares outstanding 5,211 4,398
========== ==========
See accompanying notes to consolidated financial statements
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AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
March 31, December 31,
1999 1998
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ASSETS
Current Assets:
Cash and cash investments $2,710 $3,214
Trading account securities 431 535
Notes receivable - current 193 196
Management fees and other receivables 299 968
Receivable from clearing broker 1,036 1,036
Income taxes receivable 113 ---
Prepaid expenses and other 262 339
Deferred income tax asset 1,156 1,279
---------- ----------
Total current assets 6,200 7,567
Notes receivable, less current portion 5,780 4,287
Property and equipment 1,601 1,653
Investment in affiliates 17,581 17,063
Preferred stock investment 2,078 2,078
Other assets 253 266
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Total Assets $33,493 $32,914
============= =============
See accompanying notes to consolidated financial statements
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AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
March 31, December 31,
1999 1998
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 839 $ 910
Payable to clearing broker 425 487
Accrued compensation 111 823
Accrued expenses and other
liabilities (Note 4) 2,987 3,273
Income taxes payable --- 292
----------- -----------
Total current liabilities 4,362 5,785
Note payable 1,610 ---
Net deferred income tax liability 2,583 2,474
----------- -----------
Total liabilities 8,555 8,259
Minority interest 28 53
Shareholders' Equity:
Preferred stock, $1.00 par value,
1,000,000 shares authorized ---- ----
Common stock, $0.10 par value, shares
authorized 20,000,000; issued 4,153,683
at 3/31/99 and 4,160,083 at 12/31/98 415 416
Additional paid-in capital 5,457 5,481
Retained earnings 19,038 18,705
----------- -----------
Total shareholders' equity 24,910 24,602
Total Liabilities and Shareholders' Equity $33,493 $32,914
=========== ===========
See accompanying notes to consolidated financial statements
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<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Three Months Ended
March 31,
1999 1998
----------- -----------
Cash flows from operating activities:
Cash received from customers $4,962 $3,243
Cash paid to suppliers and employees (5,328) (3,229)
Change in trading account securities 104 (248)
Change in receivable from clearing broker (62) 244
Interest paid (34) (4)
Income taxes paid (330) (286)
Interest, dividends and other investment
proceeds 79 54
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Net cash used in operating
activities (609) (226)
Cash flows from investing activities:
Proceeds from sale of property and equipment --- 2
Payments for purchase property and equipment (12) (26)
Proceeds from equity owners in investment --- 259
Investment in preferred stock --- (2,073)
Discontinued operations 96 ---
Funds loaned to others (2,503) ---
Collection of notes receivable 963 345
Other (14) 57
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Net cash used in investing
activities (1,470) (1,436)
Cash flows from financing activities:
Proceeds from borrowings 1,600 ---
Purchase/retire treasury stock (25) (42)
Exercise of stock options --- 20
Distribution to minority interest --- (150)
----------- -----------
Net cash provided by (used in) financing
activities 1,575 (172)
----------- -----------
Net change in cash and cash equivalents $(504) ($1,834)
Cash and cash equivalents at beginning of period 3,214 5,188
----------- -----------
Cash and cash equivalents at end of period $2,710 $3,354
=========== ===========
See accompanying notes to consolidated financial statements
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AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In thousands)
Three Months Ended
March 31,
1999 1998
--------- ---------
Reconciliation of net earnings/(loss) to net
cash from operating activities:
Net earnings/(loss) $331 ($102)
Adjustments to reconcile net earnings to net
cash from operating activities:
Depreciation and amortization 150 149
Provision for bad debts 42 ---
Earnings from discontinued operations (96) (55)
Minority interest in consolidated earnings (25) 1
Undistributed (earnings)/loss of affiliate (518) 297
Write-off of fixed assets --- 7
Change in federal income tax payable (405) (256)
Provision for deferred tax asset 233 (82)
Change in trading securities 104 (248)
Change in payable to clearing broker (62) 244
Change in management fees & other receivables 669 65
Change in prepaids & other current assets 77 58
Change in trade payables (71) (282)
Change in accrued expenses & other liabilities (1,038) (22)
--------- ---------
Net cash from operating activities $(609) ($226)
========= =========
See accompanying notes to consolidated financial statements
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<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(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, 1998 and reflect all adjustments
which are, in the opinion of management, necessary for a fair statement of the
financial position as of March 31, 1999 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, 1998 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 1999 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.
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3. EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATE
At March 31, 1999 the Company owned 17.8% (3,065,000 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 March 31, 1999 the Company owned 61.6% 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.
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following:
March 31 December 31
1999 1998
-------- -----------
Taxes payable-other $ 129,000 $ 115,000
Deferred income (Note 7) 816,000 740,000
Contractual/legal claims 1,096,000 1,096,000
Vacation payable 127,000 134,000
Funds held for others 280,000 280,000
Discontinued operations disposition costs 543,000 1,026,000
Other (4,000) (118,000)
--------- ----------
$2,987,000 $3,273,000
========= =========
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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 March 31, 1999 consisted of the following:
Cash and cash investments $ 26,000
Trade accounts receivable 26,000
Other receivables 26,000
Prepaid and other current assets 11,000
Fixed assets, net of depreciation 18,000
Intercompany receivables 980,000
Trade accounts payable (2,000)
F.I.T. Payable (203,000)
Accrued expenses (565,000)
---------
Net assets $ 317,000
==========
6. EARNINGS PER SHARE
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:
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<PAGE>
6. EARNINGS PER SHARE, CONTINUED
For the Three Months Ended March 31, 1999
------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Earnings from
continuing operations $ 268,000
Discontinued operations 63,000
Basic EPS
Income available to
common stockholders 331,000 4,158,000 $0.08
Effect of Dilutive Securities
Options --- 32,000
Contingently issuable shares (14,000) 1,021,000
------------ ----------
Diluted EPS
Income available to
common stockholders and
assumed conversions $ 317,000 5,211,000 $0.06
========== ========== =====
For the Three Months Ended March 31, 1998
------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Earnings from continuing
operations $ (102,000)
Basic EPS
Income available to (102,000) 4,159,000 $ (0.02)
Common stockholders
Effect of dilutive securities
Options --- 102,000
Contingently issuable shares (5,000) 137,000
---------- ---------
Diluted EPS
Income available to common
stockholders and assumed
conversions $ (107,000) 4,398,000 $ (0.02)
=========== ========= ========
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<PAGE>
6. EARNINGS PER SHARE, continued
Unexercised employee stock options to purchase 985,500 shares of the
Company's common stock for the three month period ended March 31, 1999
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 shares of
the Company's common stock for the three month period ended March 31,
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.
At March 31, 1999 the Company's affiliate, Syntera HealthCare Corp.,
had issued 639,100 shares which are contingently convertible into
1,020,700 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 collects commissions on certain medical malpractice
insurance policies. Such commissions are collected in total up front.
Income is earned on the policy over the course of the life of the
policy, typically twelve months. That which is not yet earned is
recorded as deferred income on the balance sheet.
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<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 $1,140,000 (35.3%) for the three
month period ended March 31, 1999 compared to the same period in 1998. All four
operating segments showed revenue increases in 1999 compared to 1998.
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<PAGE>
Financial services revenues increased $812,000 (38.7%) for the three
month period ended March 31, 1999 compared to the same period in 1998. The
increase was due to greater commission income at APS Financial Corp., a
broker/dealer division of APS Investment Services, Inc. The increase in current
year commission income is the result of greater volatility in the bond market, a
greater emphasis on internally generated market research and a greater number of
experienced brokers. Market volatility creates opportunities where customers are
motivated to restructure their holdings. This increased activity creates more
transactions and thus more commissions. Internal market research was bolstered
by additional staffing in 1999. It contributes to higher commissions by
providing additional investment ideas to be marketed by the brokers to a greater
number of customers. The growth in the number of experienced brokers employed
occurred in the latter half of 1998 primarily through the branch office in
Houston, Texas. The Houston office contributed approximately $559,000 of the
three month increase.
Insurance services revenues from premium-based insurance management
fees were up $269,000 (29.1%) for the three month period ended March 31, 1999
compared to the same period in 1998. The increase in the current year period was
due to greater commissions earned on new and renewal business. A corresponding
increase in commissions expense paid to third party agents resulted in third
party activity having no effect on profits.
Real estate revenues increased $11,000 (6.2%) for the three month
period ended March 31, 1999 compared to the same period in 1998. The current
three month increase reflects incremental increases in rates charged to outside
tenants and affiliates. In April, 1999 a major tenant vacated the building. Rent
revenues will be adversely affected in future periods until such time as the
vacated space becomes occupied.
Investment and other income increased $47,000 (146.9%) for the three
month period ended March 31, 1999 compared to the same period in 1998. The
increase in the current quarter was primarily due to a rise in interest income
arising from line of credit loans granted to the Company's OB/GYN management
affiliate, Syntera HealthCare Corporation, and to Uncommon Care, Inc., a
privately-held developer and operator of dedicated Alzheimer's care facilities
with which the Company has a cash investment in preferred stock.
EXPENSES
Total operating expenses increased $1,384,000 (44.1%) for the three
month period ended March 31, 1999 compared to the same period in 1998. All four
operating segments experienced expense increases in 1999 compared to 1998.
Financial services expense increased $670,000 (35.5%) for the three
month period ended March 31, 1999 compared to the same period in 1998. The
primary reason for the current year increase is higher commission expense
resulting from the increase in commission revenue at APS Financial, the
broker/dealer subsidiary of APS Investment Services, Inc. In addition, general
and administrative costs at APS Investment Services increased in the current
period primarily as a result of a fully staffed Houston branch office as well as
personnel costs associated with the asset management division of APS Investment
Services, APS Asset Management, Inc. No such asset
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<PAGE>
management related costs were incurred in the first quarter of 1998.
Insurance services expenses at the insurance management subsidiary
increased $451,000 (50.4%) for the three month period March 31, 1999 compared to
the same period in 1998 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. A corresponding increase in commission
revenue earned by third party agents resulted in third party activity having no
effect on profits.
Real estate expenses increased $10,000 (7.6%) primarily as a result of
increased condo fees charged by the building condo association.
General and administrative expense increased $222,000 (101.4%) for the
three month period ended March 31, 1998 compared to the same period in 1998. The
increase in the current quarter was due to higher personnel costs, higher legal
fees resulting from the restructuring of certain receivables, and a charge to
bad debt resulting from a change in discounted fuure cash flows of a certain
receivable. Lastly, the first quarter of 1998 benefitted from the reversal of an
accrual for certain contingencies. No such expense reversal was booked in the
current quarter.
EQUITY IN EARNINGS/(LOSS) OF UNCONSOLIDATED AFFILIATES
The Company's equity in earnings of Prime Medical Services, Inc.
("Prime") increased $738,000 for the three month period ended March 31, 1999
compared to the same period in 1998. Prior year three 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. No such expenses were incurred by Prime in the
first three months of 1999. The Company's percentage ownership of Prime was
17.8% at March 31, 1999. 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 continued this year.
The Company's equity in the loss of Syntera HealthCare Corporation
decreased $70,000 (62.9%) for the three month period ended March 31, 1999
compared to the same period in 1998. The three month loss in 1998 was due to the
fact that Syntera was in the start-up stage and had no doctors under contract.
The current year loss was greatly reduced as a total of thirteen long-term
contracts have been entered into with OB/GYN physicians as of March 31, 1999.
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.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Current assets exceeded current liabilities by $1,838,000 and
$1,782,000 at March 31, 1999, and December 31, 1998, respectively.
Capital expenditures through the period ended March 31, 1999 were
approximately $12,000. Total capital expenditures are expected to be
approximately $175,000 in 1999.
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 7.50%) based upon the prime rate. The line
is secured by securities owned by the Company. A balance of $1,600,000 was owed
under this credit line as of March 31, 1999.
YEAR 2000 COMPLIANCE
The Company formed a Year 2000 Committee in mid 1998. The Committee was
charged with examining (1) internal hardware and software systems; (2) physical
facilities; and (3) outside suppliers, as these items relate to potential
problems that could be caused by the inability to process dates beyond December
31, 1999.
The Committee divided its task into four parts - assessment,
remediation planning, implementation and testing and contingency planning.
Assessment and remediation planning have been completed for all three phases of
the project. Implementation and testing and contingency planning are discussed
below.
Internal hardware and software systems: All network application
software and workstation software have been upgraded and tested to be compliant
with the exception of the Company's accounting software, which has been upgraded
but not yet tested. Hardware compliance, which will entail the purchase of an
additional twenty-five PC's, is scheduled to be complete by June 30, 1999.
Physical facilities: The Committee has evaluated its non-computer
equipment and has determined that, except for it telephone system, there are no
devices whose failure would materially affect the ability to carry out business
of the Company. A compliant telephone system is expected to be installed during
the third quarter of 1999. The outside managers of the Company's office
buildings have reported that all aspects of the physical facilities - elevators,
fire and security systems, etc. are compliant. Electric power is supplied by the
City of Austin which has reported that they are 80 percent complete with their
mission critical objectives. They expect to be fully compliant by June 30, 1999
per N.E.R.C. guidelines.
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<PAGE>
Outside suppliers: The Company has inquired about the state of Year
2000 readiness of those outside suppliers who were determined to be critical to
the Company's ability ot carry out its business. Written assurances have been
received from most of these critical services providers. Contingency plans are
in place to switch to alternative providers should current providers remain not
yet compliant at September, 1999.
Contingency planning: The Company cannot be certain that it has
identified and will be successful in bringing into compliance all Year 2000
issues within its control. It can be less certain of critical services being
supplied by third parties beyond its control. The Company is in the process of
formalizing plans for carrying on its business in the event of unanticipated
Year 2000-related failures. Presently, the Company believes that the most
reasonably likely worst case scenario would be a failure of relatively short
duration of basic third party services such as the power grid. With such a
failure the Company's planning will be directed toward a temporary suspension of
operations followed by plans for resumption and catch up operations. Due to the
magnitude of uncertainties related to Year 2000 issues, the Company is unable to
fully assess the consequences of Year 2000 failures and, consequently, there
could be a material adverse effect on the Company's results of operations,
financial position and cash flows.
Year 2000 costs: The Company estimates that total expenditures to
address Year 2000 issues will be $350,000, of which approximately 60% will be
capitalized hardware purchases. The remainder of the expenditures are labor
costs. Approximately 53% of the expenditures have been made to date. Since the
Company is in a constant state of upgrading its technology and since all labor
costs involve existing in-house staff, few of the costs incurred are
incremental. Extensive use of in-house MIS personnel for Year 2000 issues has
delayed implementation of other work designed to improve user productivity and
the value of information provided. The Company does not believe such delays will
a material adverse effect on the results of operations, financial position, or
cash flows.
New Accounting Pronouncements
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.
No start-up costs were incurred by the Company or its affiliates during the
first quarter of 1999.
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<PAGE>
PART II
OTHER INFORMATION
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<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 June 17, 1998 the Company filed suit against Consolidated
Eco-Systems, Inc. ("Con-Eco"), formerly known as Exsorbet Industries, Inc., and
its directors and officers alleging breach of contract, negligent
misrepresentation and conspiracy. The misrepresentations included, but were 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 sought 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.
In February, 1999 the Company settled this litigation with the
directors of Con-Eco. The Company recovered $950,000 for the full release of all
claims against the directors of Con-Eco.
On April 6, 1999 the Company foreclosed on the common stock of
Eco-Systems, Inc., a subsidiary of Con-Eco, as part of a restructuring agreement
with the Company. The Company now owns 100% of Eco-Systems, an environmental
consulting and engineering firm. Other terms of the restructuring agreement
include the Company forgiving a portion of the indebtedness presently
outstanding and accepting a new note in the amount of $2.5 million in
approximately eighteen months if certain terms are met.
- 20 -
<PAGE>
These terms include: (1) Con-Eco must pay the Company a total of $375,000 within
the eighteen months; (2) Con-Eco must not file bankruptcy during the eighteen
months; and (3) the Company receives a first lien on the stock of all
subsidiaries and a second lien on the assets of the subsidiaries. The original
note stands, with a balance now exceeding $4.5 million, if these conditions are
not met.
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 March 31, 1999.
- 21 -
<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: May 17, 1999 By: /s/ William H. Hayes
--------------------------------------
William H. Hayes, Vice President
and Chief Financial Officer
- 22 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARCH 31, 1999 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,710
<SECURITIES> 431
<RECEIVABLES> 193
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,200
<PP&E> 5,000
<DEPRECIATION> 3,399
<TOTAL-ASSETS> 33,493
<CURRENT-LIABILITIES> 4,362
<BONDS> 0
0
0
<COMMON> 415
<OTHER-SE> 24,495
<TOTAL-LIABILITY-AND-EQUITY> 33,493
<SALES> 0
<TOTAL-REVENUES> 4,371
<CGS> 0
<TOTAL-COSTS> 4,269
<OTHER-EXPENSES> 175
<LOSS-PROVISION> 42
<INTEREST-EXPENSE> 34
<INCOME-PRETAX> 369
<INCOME-TAX> 126
<INCOME-CONTINUING> 268
<DISCONTINUED> 63
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 331
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.06
</TABLE>
