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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, 1999
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, 1999
-------------------- ----------------
Common Stock, $.10 par value 2,745,233
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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,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
REVENUES:
Financial services $2,505 $2,290 $8,168 $6,625
Insurance services 1,098 1,017 3,207 2,974
Consulting 163 --- 163 ---
Real estate 169 174 525 533
Investments and other 169 28 1,985 69
---------- ---------- -------- -------
Total revenue 4,104 3,509 14,048 10,201
EXPENSES:
Financial services 2,275 2,189 7,246 6,032
Insurance services 1,070 1,020 3,427 2,914
Consulting 162 --- 162 ---
Real estate 142 136 421 401
General and administrative 803 365 3,101 922
Interest 80 11 170 24
---------- ---------- -------- -------
Total expenses 4,532 3,721 14,527 10,293
---------- ---------- -------- -------
Operating loss (428) (212) (479) (92)
Equity in earnings of
unconsolidated affiliates (Note 3) 608 547 1,600 776
---------- ---------- -------- --------
Earnings from continuing
operations before income taxes
and minority interest 180 335 1,121 684
Income tax expense 52 119 381 246
Minority interest --- 3 37 1
--------- --------- -------- --------
Earnings from continuing
operations 128 219 777 439
Discontinued operations:
Earnings from discontinued operations
net of income tax of $100 and $0 and
$131 and $19 for the three and nine
months in 1999 and 1998, respectively. 194 --- 257 36
---------- ---------- -------- -------
NET EARNINGS $ 322 $ 219 $1,034 $ 475
========== ========== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements
- 3 -
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENT OF EARNINGS PER SHARE (UNAUDITED)
(In thousands, except per share amounts)
EARNINGS PER COMMON SHARE:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ----------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic:
Earnings from continuing
operations $ 0.05 $ 0.05 $ 0.24 $ 0.11
Discontinued operations 0.07 0.00 0.08 0.01
--------- --------- -------- --------
Net earnings $ 0.12 0.05 0.32 0.11
========= ========= ======== ========
Diluted:
Earnings from continuing
opertions $ 0.05 0.04 0.24 0.09
Discontinued operations 0.07 0.00 0.08 0.01
--------- --------- -------- --------
Net earnings $ 0.12 $ 0.04 $ 0.31 $ 0.09
========= ========= ======== ========
Basic weighted average shares outstanding 2,738 4,165 3,275 4,162
========= ========= ======== ========
Diluted weighted average shares outstanding 2,768 4,689 3,299 4,563
========= ========= ======== ========
</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,
1999 1998
------------- -------------
ASSETS
Current Assets:
Cash and cash investments $2,095 $3,214
Trading account securities 493 535
Notes receivable - current 222 196
Management fees and other receivables 882 968
Receivable from clearing broker 1,036 1,036
Prepaid expenses and other 428 339
Federal income tax receivable 139 ---
Deferred income tax asset 263 1,279
------------- -------------
Total current assets 5,558 7,567
Notes receivable, less current portion 5,153 4,287
Property and equipment 1,711 1,653
Investment in affiliates 11,638 17,063
Preferred stock investment 5,876 2,078
Goodwill 533 ---
Other assets 228 266
------------- -------------
Total Assets $30,697 $32,914
============= =============
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,
1999 1998
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 879 $ 910
Current portion of long-term debt 29 ---
Payable to clearing broker 601 487
Income taxes payable --- 292
Accrued compensation 568 823
Accrued expenses and other
liabilities (Note 4) 2,482 3,273
----------- -----------
Total current liabilities 4,559 5,785
Notes payable 3,075 ---
Net deferred income tax liability 2,200 2,474
----------- -----------
Total liabilities 9,834 8,259
Minority interest 16 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 2,745,233
at 9/30/99 and 4,160,083 at 12/31/98 275 416
Additional paid-in capital 5,549 5,481
Retained earnings 15,023 18,705
----------- -----------
Total shareholders' equity 20,847 24,602
Total Liabilities and Shareholders' Equity $30,697 $32,914
=========== ===========
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,
1999 1998
----------- -----------
Cash flows from operating activities:
Cash received from customers $12,668 $9,989
Cash paid to suppliers and employees (13,509) (8,153)
Change in trading account securities 42 (145)
Change in receivable from clearing broker 114 (336)
Interest paid (170) (24)
Income taxes paid (385) (439)
Interest, dividends and other investment
proceeds 309 68
----------- -----------
Net cash provided by (used in)
operating (931) 960
Cash flows from investing activities:
Proceeds from sale of property and equipment --- 13
Payments for purchase property and equipment (148) (185)
Proceeds from equity owners in investment --- 264
Investment in preferred stock --- (2,074)
Proceeds from prior year disposition 40 ---
Discontinued operations (62) ---
Proceeds from Eco-Systems acquisition 149 ---
Funds loaned to others (4,437) (1,840)
Collection of notes receivable 1,138 1,711
Other 32 62
----------- -----------
Net cash used in investing
activities (3,288) (2,049)
Cash flows from financing activities:
Proceeds from borrowings 3,050 ---
Purchase/retire treasury stock (25) (97)
Exercise of stock options 75 75
Distribution to minority interest --- (210)
----------- -----------
Net cash used in financing
activities 3,100 (232)
----------- -----------
Net change in cash and cash equivalents $(1,119) (1,321)
----------- -----------
Cash and cash equivalents at beginning of period 3,214 5,188
----------- -----------
Cash and cash equivalents at end of period $2,095 $3,867
=========== ===========
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,
1999 1998
--------- ---------
Reconciliation of net earnings to net cash
from operating activities:
Net earnings $1,034 $475
Adjustments to reconcile net earnings to net
cash from operating activities:
Depreciation and amortization 494 443
Provision for bad debts 1,869 ---
Earnings from discontinued operations (257) (55)
Minority interest in consolidated earnings (37) (1)
Undistributed earnings of affiliate (1,600) (776)
Gain on exchange of common stock (1,635) ---
Write-off of fixed assets --- 15
Change in federal income tax payable (431) (423)
Changes in operating assets and liabilities
net of effect of purchase transactions:
Provision for deferred taxes 743 216
Change in trading securities 42 (145)
Change in payable to clearing broker 114 (336)
Change in management fees & other receivables 564 (144)
Change in prepaids & other current assets (265) (53)
Change in trade payables (161) 162
Change in accrued expenses & other liabilities (1,405) 1,582
--------- ---------
Net cash from operating activities $ (931) $960
========= =========
Summary of non-cash transactions:
During the second quarter, 1999, the Company acquired $4,862,000 in treasury
stock by exchanging $4,862,000 in Prime Medical Services, Inc. common stock. The
treasury stock was subsequently retired and the amount in excess of par was
charged to Retained Earnings.
See accompanying notes to consolidated financial statements
- 8 -
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
1. GENERAL
The accompanying unaudited consolidated financial statements have been prepared
in conformity with the generally accepted 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 September 30, 1999 and the results of
operations for the periods presented. These statements have not been audited 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 ending in May, 2000. 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 AFFILIATES
At September 30, 1999 the Company owned 14.1% (2,344,000 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 method. Prime is
primarily in the business of providing lithotripsy and refractive vision surgery
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.
Effective June 30, 1999 the Company merged its interest in Syntera HealthCare
Corporation ("Syntera") with FemPartners, Inc. As a result the Company no longer
accounts for its pro-rata share of Syntera on the equity basis, but rather, now
accounts for its twelve percent interest in the merged companies on the cost
basis.
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following:
September 30 December 31
1999 1998
----------- ------------
Taxes payable $ 109,000 115,000
Deferred income (Note 7) 1,026,000 740,000
Contractual/legal claims 1,050,000 1,096,000
Vacation payable 107,000 134,000
Funds held for others 272,000 280,000
Discontinued operations disposition costs 50,000 1,026,000
Other (132,000) (118,000)
---------- ----------
$2,482,000 3,273,000
========= =========
- 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.
As of September, 1999 all remaining clients have signed termination
agreements with the Company to end all support as of December 31, 1999.
Consequently, the Company has adjusted its loss allowance resulting in the
after-tax income from discontinued operations reported in the financial
statements of this Form 10Q.
Net assets/(liabilities) of the discontinued computer systems and software
segment as of September 30, 1999 consisted of the following:
Cash and cash investments $ 29,000
Trade accounts receivable 3,000
Other receivables 1,000
Prepaid and other current assets 3,000
Fixed assets, net of depreciation 11,000
Intercompany receivables 830,000
F.I.T. Payable (303,000)
Accrued expenses and other (61,000)
--------
Net assets $ 513,000
========
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:
- 11 -
<PAGE>
6. EARNINGS PER SHARE, continued
For the Three Months Ended September 30, 1999
---------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ----------- --------
Earnings from
continuing operations $ 128,000
Discontinued operations 194,000
Basic EPS
Income available to
common stockholders 322,000 2,738,000 $0.12
Effect of Dilutive Securities
Options --- 30,000
------- ---------
Diluted EPS
Income available to
common stockholders and
assumed conversions $ 322,000 2,768,000 $0.12
========= ========= =====
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 219,000 4,165,000 $ 0.05
Common stockholders
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
========= ========= ======
- 12 -
<PAGE>
6. EARNINGS PER SHARE, continued
For the Nine Months Ended September 30, 1999
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- -------
Earnings from
continuing operations $ 777,000
Discontinued operations 257,000
Basic EPS
Income available to
common stockholders 1,034,000 3,275,000 $0.32
Effect of Dilutive Securities
Options --- 24,000
--------- ---------
Diluted EPS
Income available to
common stockholders and
assumed conversions $1,034,000 3,299,000 $0.31
=========== ========= =====
For the Nine Months Ended September 30, 1998
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Earnings from continuing
operations $ 439,000
Discontinued operations 36,000
Basic EPS
Income available to 475,000 4,162,000 $ 0.11
Common stockholders
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
========= ========= ======
- 13 -
<PAGE>
6. EARNINGS PER SHARE, continued
Unexercised employee stock options to purchase 649,900 and 683,800
shares of the Company's common stock as of September 30, 1999 and
1998, respectively, were not included in the computations of diluted
EPS because the effect would be antidilutive.
7. DEFERRED INCOME
The Company collects commissions on certain medical malpractice
insurance policies. Such commissions are collected in advance. Income
is earned ratably on the policy over the course of the life of the
policy, typically twelve months. Commissions which are not yet earned
are recorded as deferred income on the balance sheet.
8. SEGMENT INFORMATION
The Company's segments are distinct by type of service provided. There
has been a change in the basis of segmentation but not in the basis of
measurement of segment profit or loss from those criteria used in the
December 31, 1998 Form 10-K. This change is the inclusion of the
segment, "Consulting". As of September 1, 1999 the Company began
consolidating APS Consulting (Eco-Systems), an environmental consulting
and engineering firm. The Company acquired 100% if the common stock of
Eco-Systems when it foreclosed on Consolidated Eco-Systems, Inc. for
violating the terms of its note agreement. Consolidated Eco-Systems,
Inc. has subsequently ceased all operations.
September 30,
-----------------------------------
1999 1998
Operating Revenues: -------------- --------------
Investment services 8,168,000 6,625,000
Insurance services 3,207,000 2,974,000
Consulting 163,000 ---
Real estate 632,000 650,000
Corporate 3,435,000 909,000
--------- ---------
$15,605,000 $11,158,000
=========== ===========
- 14 -
<PAGE>
8. SEGMENT INFORMATION, (continued)
September 30,
----------------------------------
1999 1998
------------- --------------
Reconciliation to Consolidated
Statement of Earnings:
Total segment revenues $15,605,000 $11,158,000
Less: Intercompany profits (107,000) (117,000)
Intercompany dividends (1,450,000) (840,000)
---------- -----------
Total Revenues $14,048,000 $10,201,000
========== ===========
Operating Profit (Loss)
Investment services 892,000 569,000
Insurance services (220,000) 60,000
Consulting 1,000 ---
Real estate 104,000 132,000
Corporate 194,000 (13,000)
------- ---------
$ 971,000 $748,000
========= ========
Reconciliation to Consolidated
Statement of Earnings:
Total segment operating profits 971,000 748,000
Less: intercompany dividends (1,450,000) (840,000)
---------- ---------
Operating Loss (479,000) (92,000)
Equity in earnings of affiliates 1,600,000 776,000
--------- -------
Earnings from continuing operating
before income taxes and minority
interests 1,121,000 684,000
Income tax expense (381,000) (246,000)
Minority interests 37,000 1,000
--------- ---------
Earnings from continuing operations 777,000 439,000
------- -------
Net profit from discontinued
operations, net of income tax 257,000 36,000
------- --------
Net income $1,034,000 $475,000
========= ========
- 15 -
<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 Forms
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 $595,000 (17.0%) and $3,846,000
(37.7%) for the three and nine month periods ended September 30, 1999 compared
to the same periods in 1998. For the current three month period, revenues
increased at the financial services, insurance services, consulting and
investments and other operating segments but decreased at the real estate
segment
- 16 -
<PAGE>
when compared to the same period in 1998. For the current nine month period,
revenues increased at the financial services, insurance services, consulting and
general and administrative operating segments but decreased at the real estate
segment compared to the same nine month period in 1998.
Financial services revenues increased $215,000 (9.4%) and $1,543,000
(23.3%) for the three and nine month periods ended September 30, 1999 compared
to the same periods 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 quarter and current year commission income is the
result of greater volatility in the bond market, a greater emphasis on
internally generated market research and continued success at recruiting
experienced, proven producing 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 contributes to higher commissions by providing additional investment
ideas to be marketed by the brokers to a greater number of customers.
Insurance services revenues from premium-based insurance management
fees increased $81,000 (8.0%) and $233,000 (7.8%) for the three and nine month
periods ended September 30, 1999 compared to the same periods in 1998. The
increase in both current year periods was due to an increase in commissions
earned on new business as well as from higher commissions earned by third party
agents whose commission rate is higher in 1999 than the rate paid to agents in
1998. Income from third party agents is offset by corresponding commission
expense paid to third party agents. Partially offsetting the revenue increase
was lower commissions earned on renewal business, the result of lowering
premiums to remain competitive in the industry.
Consulting income is a new business segment beginning in the third
quarter of 1999 that is earned at our new environmental engineering and
consulting subsidiary, APS Consulting. As of September 30, 1999 APS Consulting
was composed of sixteen science professionals and three administrative
professionals. Income is derived from contamination assessment, remediation
design and construction oversight, litigation support, environmental monitoring,
landfill design and construction oversight, environmental data management and
permitting. The income reported for 1999 represents only one month of consulting
revenue as APS Consulting was acquired August 31, 1999.
Real estate revenues decreased $5,000 (2.9%) and $8,000 (1.6%) for the
three and nine month periods ended September 30, 1999 compared to the same
periods in 1998. The current year decrease is primarily the result of a major
tenant vacating the building in April, 1999. As of October 31, most of this
vacated office space was being leased and rent revenues should rebound in the
final quarter of 1999.
- 17 -
<PAGE>
Investment and other income increased $141,000 (504.9%) and $1,916,000
(2,766.6%) for the three and nine month periods ended September 30, 1999
compared to the same periods in 1998. The increase in the current quarter was
the result of a rise in interest income resulting from line of credit loans
granted to the Company's former OB/GYN management affiliate, Syntera HealthCare
Corporation, and to Uncommon Care, Inc., a privately-held developer and operator
of dedicated Alzheimer's care facilities in which the Company has a preferred
stock investment.
In addition to this increase in interest income, revenue for the nine
month period ended September 30, 1999 was up due to gains from the exchanges of
Prime Medical Services, Inc. (NASDAQ:PMSI) common stock for American Physicians
Service Group, Inc. (NASDAQ:AMPH) common stock. As part of a common stock
buy-back strategy, the Company exchanged 720,700 shares of PMSI common stock for
1,441,400 shares of AMPH common stock held by two mutual funds companies. The
AMPH common stock was then retired and gains totaling $1,635,000 were recorded.
EXPENSES
Total operating expenses increased $811,000 (21.8%) and $4,234,000
(41.1%) for the three and nine month periods ended September 30, 1999 compared
to the same periods in 1998. All of the operating segments expenses increased in
both periods of 1999 compared to 1998.
Financial services expense increased $86,000 (3.9%) and $1,215,000
(20.1%) for the three and nine month periods ended September 30, 1999 compared
to the same periods in 1998. The primary reason for the current year three month
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 to the higher commissions expense, the current year
nine month expense increase was further caused by higher general and
administrative costs at APS Investment Services. This was primarily a result of
personnel costs associated with the asset management division of APS Investment
Services, APS Asset Management, Inc. No such asset management related costs were
incurred in the first five months of 1998.
Insurance services expenses at the insurance management subsidiary
increased $50,000 (4.9%) and $513,000 (17.6%) for the three and nine month
periods September 30, 1999 compared to the same periods in 1998. The nine month
increase is due primarily to higher commission and payroll related expenses. The
increase in commission expense 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. The increase in
payroll related expense is primarily the result of normal annual merit raises.
Real estate expenses increased $6,000 (4.4%) and $20,000 (5.0%) for the
three and nine month periods September 30, 1999 compared to the same periods in
1998 primarily as a result of increased condominium fees charged by the
condominium association.
- 18 -
<PAGE>
General and administrative expense increased $438,000 (120.0%) and
$2,179,000 (236.3%) for the three and nine month periods ended September 30,
1999 compared to the same periods in 1998. The increase in the current quarter
was primarily due to a charge to bad debts resulting from a decrease in
estimated discounted future cash flows of a note receivable. In addition, legal
fees increased due to the foreclosure of Eco-Systems and additional legal fees
and restructuring charges were incurred related to the merger of Syntera with
FemPartners.
The increase for the nine months ended September 30, 1999 was due to
the charges mentioned above as well as to the fact that the first nine months of
1998 reflects the release of an accrual for certain contingencies.
Interest expense increased $69,000 (627.3%) and $146,000 (608.3%) for
the three and nine month periods ended September 30, 1999 compared to the same
periods in 1998. Notes payable resulting from draws taken from the Company's
line of credit with Bank of America totalled $3,075,000 at September 30, 1999
compared to zero at September 30, 1998.
EQUITY IN EARNINGS/(LOSS) OF UNCONSOLIDATED AFFILIATES
The Company's equity in earnings of Prime Medical Services, Inc.
("Prime") decreased $52,000 (7.9%) but increased $733,000 (70.3%) for the three
and nine month periods ended September 30, 1999 compared to the same periods in
1998. Earnings for the three months ended September 30, 1999 were down due to
the Company's smaller percentage ownership in Prime resulting from the common
stock exchanges to acquire treasury shares that occurred in the second quarter
of 1999. The Company's percentage ownership of Prime was 14.0% at September 30,
1999 versus 17.0% at September 30, 1998.
Equity in earnings for the nine months ended September 30, 1998 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 development
costs related to a project discontinued due to an uncertain regulatory climate.
No such expenses were incurred by Prime in the first nine months of 1999.
As of June 30, 1999 the Company merged its OB/GYN practice management
affiliate with another unaffiliated practice management company, FemPartners,
Inc. and no longer records its share of the gain or loss of Syntera HealthCare
on the equity basis. Since the Company's ownership percentage in the merged
companies is now 12%, it now accounts for its interest on the cost basis.
MINORITY INTEREST
Minority interest represents the twenty percent interest of Insurance
Services owned by Florida Physicians Insurance Group, Inc., an A- (Excellent)
rated insurance company as rated by AM Best.
- 19 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Current assets exceeded current liabilities by $999,000 and $1,782,000
at September 30, 1999, and December 31, 1998, respectively. The primary cause of
the decline in working capital is cash loaned to Uncommon Care and Syntera
HealthCare. These loans are recorded as long-term receivables.
Capital expenditures through the nine month period ended September 30,
1999 were approximately $148,000. Total capital expenditures are expected to be
approximately $250,000 in 1999.
Historically, the Company has maintained a positive 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 $7,500,000 revolving line of credit with Bank of
America. The line of credit is for a term of thirty-nine months with a
fluctuating interest rate (currently 8.0%) based upon the prime rate. The line
is secured by marketable securities owned by the Company. A balance of
$3,075,000 was owed under this credit line as of September 30, 1999. The Company
believes that its positive working capital position together with its ability to
draw upon its line of credit will provide sufficient working capital for its
foreseeable future needs.
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 purchase of several new PC's in October for the new subsidiary, APS
Consulting, all hardware is now compliant and has been placed in service.
PHYSICAL FACILITIES: The Committee has evaluated its non-computer
equipment and has determined that, except for its telephone system, there are no
devices whose failure would materially affect the ability to carry out the
business of the Company. A compliant telephone system is expected to be
installed during the fourth 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 per
representatives from third party service providers.
- 20 -
<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 all of these critical services providers as of September 30, 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 expects to complete
the process of formalizing plans for carrying on its business in the event of
unanticipated Year 2000-related failures during the fourth quarter of 1999.
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 plan 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 $415,000, of which approximately 50% will be
capitalized hardware purchases. The remainder of the expenditures are labor
costs. Approximately 73% 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
have 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
third quarter of 1999. The Company does not have any significant capitalized
start-up costs that would be required to be expensed January 1, 2000.
- 21 -
<PAGE>
PART II
OTHER INFORMATION
- 22 -
<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. 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 became a 100% owner of Eco-Systems, an
environmental consulting and engineering firm, but had not consolidated their
earnings/loss due to the fact that Con-Eco had an option to purchase back their
common stock for a minimal sum if dividends over a certain future period was
paid to APS and certain other terms were met.
As of September 1, 1999 the Company was notified that Con-Eco would not
meet the terms of this agreement. As a result, the Company began consolidating
APS Consulting (Eco-Systems) effective September 1, 1999. In addition, the
Company wrote off the note due from Con-Eco on its financial statements after
allocating $630,000 of such amount to the acquisition of Eco-Systems. During the
nine months ended September 30, 1999 the Company wrote off to bad debt expense a
total of $1,293,000 bringing the total written off since inception to
$1,685,000.
- 23 -
<PAGE>
As of June 30, 1999 the Company merged it OB/GYN practice management
affiliate, Syntera HealthCare Corporation, with another PPM company in return
for a minority ownership in the new company. APS will no longer account for
Syntera on the equity basis but rather will account for its interest in the
merged companies on the cost basis.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Current reports on Form 8-K.
September 21, 1999 extention by the Board of Directors of its
shareholder protection rights plan. The plan provides that one
Preferred Share purchase right will be distributed as a
dividend on each outstanding share of common stock held of
record as of the close of business on August 15, 1999.
- 24 -
<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 15, 1999 By: /s/ William H. Hayes
--------------------------------------
William H. Hayes, Vice President
and Chief Financial Officer
- 26 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1999 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 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 1,883 1,883
<SECURITIES> 493 493
<RECEIVABLES> 222 222
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 5,558 5,558
<PP&E> 5,040 5,040
<DEPRECIATION> 3,328 3,328
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0 0
0 0
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<OTHER-SE> 20,487 20,487
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<INCOME-PRETAX> 180 1,121
<INCOME-TAX> 52 381
<INCOME-CONTINUING> 128 777
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