-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WE6b3DAUj6Nfnox4N/h5DcxwFmngM65U3lNOBbaonOjlcQgV+G0ByFloXCulAJAG XHhxgFZhkRdF+kPFteJe9g== 0000724024-99-000008.txt : 19990518 0000724024-99-000008.hdr.sgml : 19990518 ACCESSION NUMBER: 0000724024-99-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN PHYSICIANS SERVICE GROUP INC CENTRAL INDEX KEY: 0000724024 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT SERVICES [8741] IRS NUMBER: 751458323 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11453 FILM NUMBER: 99627145 BUSINESS ADDRESS: STREET 1: 1301 CAPITAL OF TEXAS HWY STREET 2: C-300 CITY: AUSTIN STATE: TX ZIP: 78746 BUSINESS PHONE: 5123280888 MAIL ADDRESS: STREET 1: 1301 CAPITAL OF TEXAS HIGHWAY CITY: AUTIN STATE: TX ZIP: 78746 10-Q 1 MARCH 31, 1999 FORM 10-Q ===================================================================== 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 -------------------- -------------------- 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 ============================================================================ PART I FINANCIAL INFORMATION -2- 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 - 3 - 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 - 4 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands) March 31, December 31, 1999 1998 ------------- ------------- 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 ------------- ------------- Total Assets $33,493 $32,914 ============= ============= See accompanying notes to consolidated financial statements - 5 - 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 - 6 - 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 ----------- ----------- 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 ----------- ----------- 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 - 7 - 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 - 8 - 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. - 9 - 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 ========= ========= - 10 - 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: - 11 - 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) =========== ========= ======== - 12 - 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. - 13 - 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. - 14 - 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 - 15 - 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. - 16 - 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. - 17 - 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. - 18 - PART II OTHER INFORMATION - 19 - 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 - 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 - 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 - EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 2,710 431 193 0 0 6,200 5,000 3,399 33,493 4,362 0 0 0 415 24,495 33,493 0 4,371 0 4,269 175 42 34 369 126 268 63 0 0 331 0.08 0.06
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