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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 JUNE 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 JULY 31, 1999
-------------------- ----------------
Common Stock, $.10 par value 2,738,233
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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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
REVENUES:
Financial services $2,754 $2,239 $5,664 $4,336
Insurance services 915 1,033 2,109 1,957
Real estate 166 181 356 359
Investments and other 1,738 9 1,816 41
---------- ---------- -------- -------
Total revenue 5,573 3,462 9,945 6,693
EXPENSES:
Financial services 2,415 1,955 4,973 3,843
Insurance services 1,011 1,000 2,357 1,894
Real estate 137 135 278 266
General and administrative 1,856 339 2,298 557
Interest 56 9 90 13
---------- ---------- -------- -------
Total expenses 5,475 3,438 9,996 6,573
---------- ---------- -------- -------
Operating income/(loss) 98 24 (51) 120
Equity in earnings of
unconsolidated affiliates (Note 3) 474 527 992 230
---------- ---------- -------- --------
Earnings from continuing
operations before income taxes
and minority interest 572 551 941 351
Income tax expense 203 193 329 129
Minority interest 12 (1) 37 (2)
--------- --------- -------- --------
Earnings from continuing
operations 381 357 649 219
Discontinued operations:
Earnings from discontinued operations
net of income tax of $0 and $0 and
$31 and $19 for the three and six
months in 1999 and 1998, respectively. --- --- 63 36
---------- ---------- -------- -------
NET EARNINGS $ 381 $357 $712 $255
========== ========== ======== =======
</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 Six Months Ended
June 30, June 30,
------------------------ ----------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic:
Earnings from continuing
operations $ 0.13 $ 0.09 $ 0.18 $ 0.05
Discontinued operations 0.00 0.00 0.02 0.01
--------- --------- -------- --------
Net earnings $ 0.13 0.09 0.20 0.06
========= ========= ======== ========
Diluted:
Earnings from continuing
opertions $ 0.13 0.08 0.18 0.05
Discontinued operations 0.00 0.00 0.02 0.01
--------- --------- -------- --------
Net earnings $ 0.13 $ 0.08 $ 0.20 $ 0.06
========= ========= ======== ========
Basic weighted average shares outstanding 2,952 4,161 3,548 4,160
========= ========= ======== ========
Diluted weighted average shares outstanding 2,962 4,477 3,569 4,437
========= ========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
- 4 -
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
June 30, December 31,
1999 1998
------------- -------------
ASSETS
Current Assets:
Cash and cash investments $1,646 $3,214
Trading account securities 527 535
Notes receivable - current 184 196
Management fees and other receivables 173 968
Receivable from clearing broker 1,036 1,036
Prepaid expenses and other 252 339
Deferred income tax asset 1,390 1,279
------------- -------------
Total current assets 5,208 7,567
Notes receivable, less current portion 5,886 4,287
Property and equipment 1,580 1,653
Investment in affiliates 14,828 17,063
Preferred stock investment 2,078 2,078
Other assets 240 266
------------- -------------
Total Assets $29,820 $32,914
============= =============
See accompanying notes to consolidated financial statements
- 5 -
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
June 30, December 31,
1999 1998
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 668 $ 910
Payable to clearing broker 540 487
Income taxes payable 974 292
Accrued compensation 232 823
Accrued expenses and other
liabilities (Note 4) 2,600 3,273
----------- -----------
Total current liabilities 5,014 5,785
Notes payable 2,360 ---
Net deferred income tax liability 1,991 2,474
----------- -----------
Total liabilities 9,365 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 2,712,283
at 6/30/99 and 4,160,083 at 12/31/98 271 416
Additional paid-in capital 5,467 5,481
Retained earnings 14,701 18,705
----------- -----------
Total shareholders' equity 20,439 24,602
Total Liabilities and Shareholders' Equity $29,820 $32,914
=========== ===========
See accompanying notes to consolidated financial statements
- 6 -
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended
June 30,
1999 1998
----------- -----------
Cash flows from operating activities:
Cash received from customers $8,908 $6,447
Cash paid to suppliers and employees (9,782) (5,458)
Change in trading account securities 8 (590)
Change in receivable from clearing broker 53 98
Interest paid (90) (13)
Income taxes paid (385) (389)
Interest, dividends and other investment
proceeds 198 41
----------- -----------
Net cash provided by operating
activities (1,090) 136
Cash flows from investing activities:
Proceeds from sale of property and equipment --- 2
Payments for purchase property and equipment (68) (68)
Proceeds from equity owners in investment --- 264
Investment in preferred stock --- (2,074)
Discontinued operations 96 ---
Funds loaned to others (3,804) (875)
Collection of notes receivable 963 401
Other --- 59
----------- -----------
Net cash used in investing
activities (2,813) (2,291)
Cash flows from financing activities:
Proceeds from borrowings 2,360 ---
Purchase/retire treasury stock (25) (42)
Exercise of stock options --- 20
Distribution to minority interest --- (150)
----------- -----------
Net cash used in financing
activities 2,335 (172)
----------- -----------
Net change in cash and cash equivalents $(1,568) (2,327)
----------- -----------
Cash and cash equivalents at beginning of period 3,214 5,188
----------- -----------
Cash and cash equivalents at end of period $1,646 $2,861
=========== ===========
See accompanying notes to consolidated financial statements
- 7 -
<PAGE>
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In thousands)
Six Months Ended
June 30,
1999 1998
--------- ---------
Reconciliation of net earnings to net
cash from operating activities:
Net earnings $712 $255
Adjustments to reconcile net earnings to
net cash from operating activities:
Depreciation and amortization 307 295
Provision for bad debts 1,479 ---
Earnings from discontinued operations (96) (55)
Minority interest in consolidated earnings (37) 2
Undistributed earnings of affiliate (992) (230)
Gain on exchange of common stock (1,635) ---
Write-off of fixed assets 28 9
Change in federal income tax payable 569 (296)
Provision for deferred taxes (593) 42
Change in trading securities 8 (590)
Change in payable from clearing broker 53 98
Change in management fees & other receivables 795 (205)
Change in prepaids & other current assets 87 (8)
Change in trade payables (485) (139)
Change in accrued expenses & other liabilities (1,290) 958
--------- ---------
Net cash from operating activities $(1,090) $136
========= =========
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
June 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 June 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 June30, 1999 the Company owned 13.8% (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 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.
The Company owns 61.6% of Syntera HealthCare Corporation ("Syntera") and 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. At the time of this
report the Company was in negotiations to merge Syntera with another PPM
company. APS will account for its interest in the merged companies on the cost
basis.
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following:
June 30 December 31
1999 1998
------- -----------
Taxes payable-other $ 67,000 115,000
Deferred income (Note 7) 591,000 740,000
Contractual/legal claims 1,150,000 1,096,000
Vacation payable 109,000 134,000
Funds held for others 267,000 280,000
Discontinued operations disposition costs 512,000 1,026,000
Other (96,000) (118,000)
---------- ----------
$2,600,000 3,273,000
========= =========
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<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. Termination support for
one client, whose contract runs until 2002, may now extend past December 31,
1999. Consequently, the Company has adjusted its loss allowance and believes
that such allownace is adequate to cover potential future obligations.
Net assets/(liabilities) of the discontinued computer systems and software
segment as of June 30, 1999 consisted of the following:
Cash and cash investments $ 7,000
Trade accounts receivable 16,000
Other receivables 1,000
Prepaid and other current assets 7,000
Fixed assets, net of depreciation 14,000
Intercompany receivables 1,004,000
Trade accounts payable (2,000)
F.I.T. Payable (203,000)
Accrued expenses (526,000)
---------
Net assets $ 318,000
=========
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 June 30, 1999
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
Earnings from
continuing operations 381,000
Basic EPS
Income available to
common stockholders 381,000 2,952,000 $0.13
Effect of Dilutive Securities
Options --- 10,000
Contingently issuable shares --- ---
---------- ----------
Diluted EPS
Income available to
common stockholders and
assumed conversions $ 381,000 2,962,000 $0.13
========== ========== =====
For the Three Months Ended June 30, 1998
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Earnings from continuing
operations $ 358,000
Basic EPS
Income available to 358,000 4,161,000 $0.09
Common stockholders
Effect of Dilutive Securities
Options --- 102,000
Contingently issuable shares (1,000) 214,000
----------- -----------
Diluted EPS
Income available to common
stockholders and assumed
conversions $ 357,000 4,477,000 $0.08
========= ========= ======
- 12 -
<PAGE>
6. EARNINGS PER SHARE, continued
For the Six Months Ended June 30, 1999
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Earnings from
continuing operations 649,000
Discontinued operations 63,000
Basic EPS
Income available to
common stockholders 712,000 3,548,000 $0.20
Effect of Dilutive Securities
Options --- 21,000
Contingently issuable shares --- ---
---------- ----------
Diluted EPS
Income available to
common stockholders and
assumed conversions $ 712,000 3,569,000 $0.20
========= ========= ======
For the Six Months Ended June 30, 1998
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Earnings from continuing $ 219,000
Operations
Discontinued Operations 36,000
Basic EPS
Income available to 255,000 4,160,000 $.06
Common stockholders
Effect of Dilutive Securities
Options --- 102,000
Contingently issuable shares (7,000) 175,000
---------- ---------
Diluted EPS
Income available to common
stockholders and assumed
conversions $248,000 4,437,000 $.06
======== ========= =======
- 13 -
<PAGE>
6. EARNINGS PER SHARE, continued
Unexercised employee stock options to purchase 862,100 and 855,500
shares of the Company's common stock for the three and six month
periods ended June 30, 1999, 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 581,300 and 264,800
shares of the Company's common stock for the three and six month
periods ended June 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.
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 no change in the basis of segmentation or in the basis of
measurement of segment profit or loss from those criteria used in the
December 31, 1998 Form 10-K.
June 30,
------------------------------------
1999 1998
Operating Revenues: -------------- --------------
Investment services 5,664,000 4,335,000
Insurance services 2,109,000 1,957,000
Real estate 433,000 438,000
Corporate 3,116,000 642,000
--------- ---------
$11,322,000 $7,372,000
=========== ==========
Reconciliation to Consolidated
Statement of Earnings:
Total segment revenues 11,322,000 7,372,000
Less: Intercompany profits (77,000) (79,000)
Intercompany dividends (1,300,000) (600,000)
---------- -----------
Total Revenues $9,945,000 $6,693,000
========== ==========
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<PAGE>
8. Segment Information, (continued)
June 30,
--------------------------------
1999 1998
Operating Profit (Loss) ----------- -----------
Investment services 681,000 479,000
Insurance services (248,000) 63,000
Real estate 78,000 93,000
Corporate 738,000 85,000
--------- --------
$1,249,000 $720,000
========== ========
Reconciliation to Consolidated
Statement of Earnings:
Total segment operating profits 1,249,000 720,000
Less: intercompany dividends (1,300,000) (600,000)
---------- ---------
Operating Income (Loss) (51,000) 120,000
========== =======
Equity in earnings of affiliates 992,000 230,000
---------- -------
Earnings from continuing operating
before income taxes and minority
interests 941,000 350,000
Income tax expense (329,000) (129,000)
Minority interests 37,000 (2,000)
-------- --------
Earnings from continuing operations 649,000 219,000
-------- --------
Net profit from discontinued
operations, net of income tax 63,000 36,000
-------- --------
Net income $712,000 $255,000
======== ========
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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 $2,112,000 (61.0%) and $3,252,000
(48.6%) for the three and six month periods ended June 30, 1999 compared to the
same periods in 1998. For the current three month period, revenues increased at
the financial services and investments and other operating segments but
decreased at the insurance services and real estate operating segments
- 16 -
<PAGE>
when compared to the same period in 1998. For the current six month period,
revenues increased at the financial services, insurance services and general and
administrative operating segments but decreased at the real estate segment
compared to the same six month period in 1998.
Financial services revenues increased $515,000 (23.0%) and $1,329,000
(30.6%) for the three and six month periods ended June 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 decreased $118,000 (11.4%) but increased $152,000 (7.8%) for the three and
six month periods ended June 30, 1999 compared to the same periods in 1998. The
decrease in the current three month period was due to a timing difference with
the recognition of commission income on new and renewal business between 1999
and 1998. During 1998, a large portion of new business insurance commissions
were issued in the first quarter but not recognized until the second quarter
when the policies were actually signed. When these policies were renewed, income
was recognized on the anniversary of the issuance date, which was in the first
quarter of 1999. Overall, commissions from new and renewal business are up for
the six month period ended June 30, 1999 when compared to the same period in
1998.
Real estate revenues decreased $15,000 (8.0%) and $3,000 (0.9%) for the
three and six month periods ended June 30, 1999 compared to the same periods in
1998. The current three month decrease is primarily the result of a major tenant
vacating the building in April, 1999. As of July 31, this vacated office space
was being leased and rent revenues should rebound in the final two quarters of
1999.
Investment and other income increased $1,729,000 (18,878.7%) and
$1,775,000 (4,292.4%) for the three and six month periods ended June 30, 1999
compared to the same periods in 1998. The increase in the current quarter was
primarily 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 held at two mutual funds
companies for 1,441,400 shares of AMPH common stock. The AMPH common stock was
then retired and gains totaling $1,635,000 were recorded.
The remainder of the revenue 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 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.
- 17 -
<PAGE>
EXPENSES
Total operating expenses increased $2,039,000 (59.3%) and $3,423,000
(52.1%) for the three and six month periods ended June 30, 1999 compared to the
same periods in 1998. All four operating segments experienced expense increases
in both periods of 1999 compared to 1998.
Financial services expense increased $460,000 (23.5%) and $1,129,000
(29.4%) for the three and six month periods ended June 30, 1999 compared to the
same periods 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 periods primarily as 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 $11,000 (1.1%) and $463,000 (24.5%) for the three and six month
periods June 30, 1999 compared to the same periods in 1998. The six 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
payroll related expense is primarily the result of normal annual merit raises.
Real estate expenses increased $2,000 (2.0%) and $12,000 (4.8%) for the
three and six month periods June 30, 1999 compared to the same periods in 1998
primarily as a result of increased condominium fees charged by the condominium
association.
General and administrative expense increased $1,519,000 (448.3%) and
$1,741,000 (312.3%) for the three and six month periods ended June 30, 1998
compared to the same periods in 1998. The increase in the current quarter was
primarily due to a charge to bad debt resulting from a decrease in estimated
discounted future cash flows of a note receivable as well as a separate charge
to bad debt pertaining to receivables from Syntera HealthCare, Inc.
The increase for the six months ended June 30, 1999 was due to the
charges to bad debt mentioned above as well as to higher personnel costs and
higher legal fees resulting from the restructuring of certain receivables. The
first six months of 1998 reflects the release of an accrual for certain
contingencies.
- 18 -
<PAGE>
EQUITY IN EARNINGS/(LOSS) OF UNCONSOLIDATED AFFILIATES
The Company's equity in earnings of Prime Medical Services, Inc.
("Prime") increased $41,000 (7.2%) and $785,000 (205.0%) for the three and six
month periods ended June 30, 1999 compared to the same periods in 1998. Earnings
for the six months ended June 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 nonrecurring development costs. No such expenses
were incurred by Prime in the first six months of 1999. The Company's percentage
ownership of Prime was 13.8% at June 30, 1999. This percentage is down from
16.3% at June 30, 1998 as a result of the common stock exchanges mentioned
earlier in the Notes to Condensed Consolidated Financial Statements.
The Company's equity in the loss of Syntera HealthCare Corporation
increased $94,000 (229.3%) and $24,000 (15.0%) for the three and six month
periods ended June 30, 1999 compared to the same periods in 1998. The current
quarter loss was due primarily to bad debt charge-offs on certain practice
receivables. At the time of this report the Company was in negotiations to merge
Syntera with another PPM company. APS would account for its interest in the
merged companies on an investment basis.
MINORITY INTEREST
Minority interest represents the twenty percent interest of Insurance
Services owned by outside interests.
LIQUIDITY AND CAPITAL RESOURCES
Current assets exceeded current liabilities by $194,000 and $1,782,000
at June 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 six month period ended June 30, 1999
were approximately $69,000. Total capital expenditures are expected to be
approximately $200,000 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 $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 7.50%) based upon the prime rate. The line
is secured by securities owned by the Company. A balance of $2,360,000 was owed
under this credit line as of June 30, 1999.
- 19 -
<PAGE>
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. Testing of the accounting software will be completed in the
third quarter of 1999. With the purchase of several new PC's this quarter, all
hardware is now compliant and is expected to be placed in service by August 31,
1999.
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 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 100
percent complete with their mission critical objectives. They report to be fully
compliant as of June 30, 1999 per N.E.R.C. guidelines.
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 June 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 third 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 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.
- 20 -
<PAGE>
YEAR 2000 COSTS: The Company estimates that total expenditures to
address Year 2000 issues will be $400,000, of which approximately 50% will be
capitalized hardware purchases. The remainder of the expenditures are labor
costs. Approximately 67% 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
second quarter of 1999.
- 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 4. RESULTS OF VOTES OF SECURITY HOLDERS
On June 8, 1999 the annual meeting of shareholders of American
Physicians Service Group, Inc. was held in Austin, Texas. Shareholders voted on
the following item.
Election of Directors
The names of the directors elected at the meeting along with number of
votes for, against and withheld are as follows:
Name For Against Withheld
------------------- --------- ---------- -----------
Brad A. Hummel 2,755,051 35,491 ---
Robert L. Myer 2,755,051 35,491 ---
William A. Searles 2,755,051 35,491 ---
Kenneth S. Shifrin 2,755,051 35,491 ---
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.
- 23 -
<PAGE>
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, but does not consolidate their earnings/loss
due to the fact that Con-Eco has an option to purchase back their common stock
for a minimal sum if dividends over a certain future period are paid to APS
equal to the total amount due. 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 due in
approximately eighteen months if certain terms are met. 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 $4.75 million, if these conditions are not met.
The Company is carrying the note due from Con-Eco on its financial
statements at $880,000, based on estimated total discounted future cash flows.
During the six months ended June 30, 1999 the Company wrote off to bad debt a
total of $1,043,000 bringing the total written off since inception to
$1,435,000.
At the time of this report the Company was in negotiations to merge
Syntera HealthCare Corp. with another PPM company in return for a minority
ownership in the new company. APS 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
- 24 -
<PAGE>
(b) Current reports on Form 8-K.
April 6, 1999 agreement between American Physicians Service
Group, Inc., M.J. Whitman Advisers, Inc., Third Avenue Value
Fund and Third Avenue Value Portfolio of the WRL Series Fund.
The Company exchanged 599,700 shares of $0.01 par value common
stock of Prime Medical Services, Inc., held by the Company for
a total of 1,199,400 shares of $0.10 par value common stock of
the Company held by Whitman, TAVF and TAP.
June 3, 1999 agreement between American Physicians Service
Group, Inc. and Franklin MicroCap Value Fund. The Company
exchanged 121,000 shares of $0.01 par value common stock of
Prime Medical Services, Inc., held by the Company for a total
of 242,000 shares of $0.10 par value common stock of the
Company held by Franklin MicroCap Value Fund.
- 25 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN PHYSICIANS SERVICE GROUP, INC.
Date: August 13, 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
JUNE 30, 1999 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
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