-----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, GUHKTdfsBcaxO6E3nOqGU4w6PJrbE8+R9eUz51H5Cy34HF9+hkAjFSF8eV8BwIgL MvXBBzVCS2prbbXMfru3bg== 0000724024-03-000019.txt : 20031112 0000724024-03-000019.hdr.sgml : 20031111 20031112091759 ACCESSION NUMBER: 0000724024-03-000019 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031112 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-31434 FILM NUMBER: 03990864 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 10QSB 1 qtr3text.txt QUARTERLY REPORT DATED SEPT 30, 2003 ============================================================================= UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED SEPTEMBER 30, 2003 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, 2003 -------------------- ---------------- Common Stock, $.10 par value 2,330,067 ============================================================================= PART I FINANCIAL INFORMATION - 2 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Item 1 - Financial Statements (In thousands)
Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 --------- ---------- ---------- ---------- Revenues: Financial services $5,892 $3,429 $14,728 $9,727 Insurance services 3,108 2,854 7,832 7,204 Consulting 990 899 2,662 2,499 --------- -------- --------- -------- Total revenue 9,990 7,182 25,222 19,430 Expenses: Financial services 4,958 3,048 12,361 8,457 Insurance services 2,388 2,215 6,063 5,453 Consulting 826 760 2,068 2,120 General and administrative 469 694 1,353 1,373 Gain on sale of assets (Note 4) -- (3) (8) (515) --------- -------- --------- --------- Total expenses 8,641 6,714 21,838 16,888 --------- -------- --------- --------- Operating income 1,349 468 3,384 2,542 Gain loss on sale of investments (Note 4) -- 64 89 2,855 Earnings from operations before interest, income taxes, minority interests and equity in unconsolidated affiliates 1,349 532 3,473 5,397 Interest income 76 59 224 103 Interest expense 4 4 7 25 Income tax expense 474 221 1,207 1,899 Minority interests (Note 10) 241 70 778 185 Equity in gain (loss) loss of unconsolidated affiliates (Note 5) 25 -- 260 (44) -------- -------- -------- --------- Net earnings $731 $296 $1,965 $3,347 ======== ======== ======== =========
See accompanying notes to consolidated financial statements. - 3 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENT OF EARNINGS PER SHARE (UNAUDITED) (In thousands, except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------ 2003 2002 2003 2002 --------- -------- ---------- --------- Earnings per common share Basic: Earnings from operations $0.34 $0.13 $0.92 $1.48 -------- -------- --------- -------- Net earnings $0.34 $0.13 $0.92 $1.48 ======== ======== ========= ======== Diluted: Earnings from operations $0.31 $0.13 $0.86 $1.40 -------- -------- --------- -------- Net earnings $0.31 $0.13 $0.86 $1.40 ======== ======== ========= ======== Basic weighted average shares outstanding 2,168 2,223 2,146 2,266 ======== ======== ========= ======== Diluted weighted average shares outstanding 2,357 2,357 2,284 2,393 ======== ======== ========= ========
See accompanying notes to consolidated financial statements. - 4 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) September 30, December 31, 2003 2002 ------------- ------------ (Unaudited) ASSETS Current Assets: Cash and cash equivalents $8,415 $6,691 Trading account securities 80 133 Trade receivables, net 779 460 Notes receivable - current 603 571 Management fees and other receivables 694 763 Deposit with clearing organization 750 500 Receivable from clearing organization 70 70 Investment in available-for-sale fixed income securities - current -- 1,015 Income tax receivable -- 491 Deferred tax asset - current 333 -- Prepaid expenses and other 403 673 ------- -------- Total current assets 12,127 11,367 Notes receivable, less current portion 17 374 Property and equipment, net 537 374 Investment in available-for-sale equity securities (Notes 5 and 6) 8,745 6,996 Investment in available-for-sale fixed income securities - non-current 828 3,273 Net deferred income tax asset - non-current 2,134 2,399 Other assets 195 198 ------- -------- Total Assets $24,583 $24,981 ======== ======== See accompanying notes to consolidated financial statements. - 5 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS, continued (In thousands, except share data) September 30, December 31, 2003 2002 -------------- ------------ (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade $739 $738 Payable to clearing broker 80 70 Accrued incentive compensation 1,932 1,804 Accrued expenses and other liabilities (Note 7) 1,285 1,227 Federal income taxes payable 285 -- Deferred gain - current 488 487 Deferred tax liability - current -- 974 -------- -------- Total current liabilities 4,809 5,300 Payable under loan participation agreements 259 259 Deferred gain - non-current 1,309 1,887 -------- -------- Total liabilities 6,377 7,446 Minority interests (Note 10) 1,035 393 Shareholders' Equity: Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued or outstanding -- -- Common stock, $0.10 par value, shares authorized 20,000,000; 2,233,067 issued and outstanding at 09/30/03 and 2,133,843 at 12/31/02 223 213 Additional paid-in capital 6,077 5,584 Retained earnings 11,277 9,515 Accumulated other comprehensive income (loss), net of taxes (406) 1,830 -------- -------- Total shareholders' equity 17,171 17,142 -------- -------- Total Liabilities and Shareholders' Equity $24,583 $24,981 ========= ======== See accompanying notes to consolidated financial statements. - 6 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Nine Months Ended September 30, 2003 2002 ----------- ---------- Cash flows from operating activities: Net income $1,965 $3,347 Adjustments to reconcile net income to cash used in operating activities: Depreciation and amortization 155 152 Forgiveness of debt and other 124 151 Minority interest in consolidated earnings 788 185 Undistributed (gain) loss of affiliates (260) 44 Gain on sale of assets (306) (881) Gain on sale of investment (89) (2,797) Provision for bad debt 6 117 Changes in operating assets and liabilities: Trade receivables (325) (223) Trading account securities 53 43 Income tax receivable 761 1,147 Deferred income taxes (39) (1,631) Receivable from clearing organization (240) (99) Management fees & other receivables 69 (12) Prepaid expenses & other assets 270 609 Deferred income (58) -- Trade accounts payable 1 52 Accrued expenses & other liabilities 186 (724) ---------- -------- Net cash received in operating activities 3,061 (520) Cash flows from investing activities: Capital expenditures (308) (133) Proceeds from the sale of available-for-sale equity and fixed income securities 4,118 10,719 Purchase of available-for-sale equity securities (5,697) (1,394) Receipts from (advances to) affiliate 175 (230) Funds loaned to others (150) (150) Collection of notes receivable 415 558 ---------- -------- Net cash (used in) provided by investing activities (1,447) 9,370 Cash flows from financing activities: Payment of long term debt -- (2,275) Exercise of stock options 507 175 Purchase and cancellation of treasury stock (207) (1,058) Distribution to minority interest (190) -- ---------- --------- Net cash received from (used in) financing activities 110 (3,158) Net change in cash and cash equivalents $1,724 $5,692 Cash and cash equivalents at beginning of period 6,691 3,851 ---------- --------- Cash and cash equivalents at end of period $8,415 $9,543 ========== =========
See accompanying notes to consolidated financial statements. - 7 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) For the nine months ended September 30, 2002 and 2003 (In thousands)
Accumulated Additional Other Total Common Paid-In Retained Comprehensive Comprehensive Treasury Shareholders' Stock Capital Earnings Income (loss) Income (loss) Stock Equity ------------------------------------------------------------------------------------------------ Balance Dec 31, 2001 (audited) $275 $5,539 $8,310 $(39) $(1,418) $12,667 ------------------------------------------------------------------------------------------------ Comprehensive income: Net income -- -- 3,347 $3,347 -- -- 3,347 Other comprehensive income: Unrealized gain on securities, net of taxes of $1,843 -- -- -- 2,171 2,171 -- 2,171 ----- Comprehensive income -- -- -- $5,518 -- -- -- ===== Treasury stock purchase -- -- -- -- -- (1,058) (1,058) Cancelled treasury stock (61) -- (2,415) -- -- 2,476 -- Stock options exercised 1 21 154 -- -- -- 176 Stock options expensed -- 30 -- -- -- -- 30 ------------------------------------------------------------------------------------------------ Balance Sept 30, 2002 (unaudited) $215 $5,590 $9,395 $ -- $2,132 $-- $17,332 ================================================================================================ Balance Dec 31, 2002 (audited) $213 $5,584 $9,515 $1,830 $-- $17,142 ------------------------------------------------------------------------------------------------ Comprehensive income: Net income -- -- 1,965 1,965 -- -- 1,965 Other comprehensive income: Unrealized loss on securities, net of taxes of $1,152 -- -- -- (2,236) (2,236) -- (2,236) ----- Comprehensive loss -- -- -- $(271) -- -- -- ===== Treasury stock purchases -- -- -- -- (207) (207) Cancelled treasury stock (4) -- (203) -- 207 -- Stock options exercised 14 493 -- -- -- -- 507 ------------------------------------------------------------------------------------------------ Balance Sept 30, 2003 (unaudited) $223 $6,077 $11,277 $-- $(406) $-- $17,171 ================================================================================================
See accompanying notes to consolidated financial statements. - 8 - AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (Unaudited) 1. GENERAL The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The consolidated financial statements for the nine months ended September 30, 2003 and 2002 reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Such adjustments consist of only items of a normal recurring nature. These consolidated financial statements have not been audited by our 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 our Annual Report on Form 10-KSB for the year ended December 31, 2002 filed with the Securities Exchange Commission should be read in conjunction with this Quarterly Report on Form 10-QSB. There have been no significant changes in the information reported in those notes other than from normal business activities. Certain reclassifications have been made to amounts in prior periods to be consistent with the 2003 presentation. 2. MANAGEMENT'S ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. CONTINGENCIES We have extended various subordinated lines of credit to Uncommon Care totaling $4.46 million with interest rates ranging between 10% and 12%. At September 30, 2003, Uncommon Care was not in compliance with its senior loan covenants. Uncommon Care's senior lender has several options ranging from renegotiating new loan terms to seizing collateral, thus forcing Uncommon Care into bankruptcy. Although Uncommon Care was able to secure refinance funds from a third party lender on some of its properties in April, 2003, they are still not in compliance - 9 - with bank covenants and it is unknown as of the date of this report what action the lender may take. Uncommon Care has not paid us interest due on their note since September, 2001. Uncommon Care's management has been informed by us that we will not advance them additional funds. During 2001, our total basis in investments in and advances to Uncommon Care was reduced to zero. We have extended a line of credit to APS Consulting. See Note 10 to these consolidated financial statements. We are involved in various claims and legal actions that have arisen in the ordinary course of business. Management believes that any liabilities arising from these actions will not have a significant adverse effect on our financial condition or results of operations. 4. GAIN RECOGNITION During the nine months ended September 30, 2003, we received proceeds of approximately $3,580,000 and recognized a gain of $89,000 resulting from the sale of available-for-sale fixed income and equity securities. No securities were sold, thus, no gain was recognized during the third quarter of 2003. Additionally, during the nine months ended September 30, 2002, we recognized $366,000 of deferred gain in 2003 related to the November 2001 sale and subsequent leaseback of real estate to Prime Medical, including $122,000 recognized during the third quarter. Due to our continuing involvement in the property, we deferred recognizing approximately $2.4 million of the approximately $5.1 million gain and are recognizing it in earnings, as a reduction of rent expense, monthly through November 2006. In addition, 15% of the gain ($0.76 million) related to our then 15% ownership in the purchaser, was deferred. As our ownership percentage in Prime declines through our sales of Prime common stock, we recognize these gains proportionately to our reduction of our interest in Prime. During the first nine months of 2003, we recognized $8,000 of these deferred gains. 5. EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES At September 30, 2003 we owned approximately 4% (728,000 shares) of the outstanding common stock of Prime Medical. Our ownership percentage was reduced during 2002 when we sold 1,570,000 shares of Prime Medical common stock. As a result of our reduced ownership interest and as a result of the Company's Chairman and CEO, Kenneth S. Shifrin, stepping down from day-to-day operations as Executive Chairman of the Board of Prime Medical effective January 1, 2002, we ceased accounting for our investment in Prime Medical using the equity method effective March 19, 2002 and began accounting for our investment in Prime as an available-for-sale security in accordance with SFAS 115. Accordingly, our investment in Prime Medical is reported at fair value in our balance sheet and no equity earnings were recorded during the first nine months of 2003. We recognized $186,000 of equity earnings during the first quarter of 2002 prior to converting to the cost method of accounting for this investment. - 10 - The common stock of Prime Medical is traded in the over-the-counter market under the symbol "PMSI". Prime Medical is a Delaware corporation which is required to file with the Securities and Exchange Commission annually, quarterly and other reports and documents containing financial and other information regarding Prime Medical. Such reports and documents may be examined and copies may be obtained from the offices of the Securities and Exchange Commission. The condensed statements of operations for Prime Medical follows (unaudited, in thousands): Condensed statements of operations for the nine months ended September 30, 2003 and 2002 2003 2002 ---- ---- Total revenue $117,321 $126,305 Income from operations 25,673 19,852 Net income 3,925 (2,970) At September 30, 2003 the Company owned convertible preferred and common stock of Uncommon Care, a developer and operator of dedicated Alzheimer's care facilities. We have followed the guidance of EITF 99-10, specifically the percentage of ownership method, in applying the equity method to our investment in Uncommon Care. Uncommon Care's common stock equity had been eliminated by losses prior to our investment and, accordingly, we recognized 100% of the losses of Uncommon Care based on our ownership of 100% of its preferred stock equity and subordinated debt. During 2001 our total basis in our investment and advances to Uncommon Care was reduced to zero. In 2002 and 2003, Uncommon Care was able to distribute a total of $380,000 to us as a result of certain asset sales and refinancing of its debt. Of this, $120,000 was advanced back to Uncommon Care. Upon receipt we recorded deferred income to be offset against future advances to Uncommon Care. During the first quarter of 2003 we decided not to extend any future cash advances to Uncommon Care. Consequently, we took into income cash payments previously received from Uncommon Care that had been recorded as deferred income as well as subsequent cash payments received from Uncommon Care. Total cash receipts recorded as equity in earnings of unconsolidated affiliates for the nine months ended September 30, 2003 was $260,000. In the nine months ended September 30, 2002 we advanced $230,000 to Uncommon Care. These advances were expensed when made to recognize previously unrecorded losses by the investee. The common and preferred shares owned by the Company, represent a 42% interest in the common equity in Uncommon Care on a fully converted basis. The condensed statements of operations for Uncommon Care follows (unaudited, in thousands): Condensed statements of operations for the nine months ended September 30, 2003 and 2002 2003 2002 ---- ---- Total revenue $5,715 $5,691 Income from operations 381 562 Net loss (731) (631) - 11 - 6. INVESTMENT IN AVAILABLE-FOR-SALE EQUITY SECURITIES On June 4, 2003 we purchased from Financial Industries Corporation ("FIC")(NASDAQ: FNIN) and a foundation 339,879 shares of FIC's common stock as an investment. The purchase price was approximately $5,000,000, which was all sourced from our cash reserves. Earlier in 2003 we had purchased 45,121 FIC shares in the open market. The 385,000 shares represents an approximate 4% ownership in FIC. The shares purchased from FIC and the foundation are not registered, but are subject to a registration rights agreement requiring FIC's best efforts to register them within one year of the transaction. We have classified all of these shares as securities available for sale and have recorded changes in their value, net of tax, in our balance sheet as part of Accumulated Other Comprehensive Income. A material decline in the value of this investment could have a material effect in our financial condition and results of operations. As part of this transaction we were granted options to purchase an additional 323,000 shares of FIC's common stock at $16.42 per share. There is a significant revenue-related performance requirement that must be met before these options are exercisable. There are presently no registered FIC shares available to issue upon the exercise of these options. We have assigned no value to these options. 7. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consists of the following: September 30 December 31 2003 2002 (Unaudited) ----------- ----------- Commissions Payable $ 851,000 $ 798,000 Taxes 83,000 93,000 Vacation 144,000 154,000 Other 207,000 182,000 ---------- ---------- $1,285,000 $1,227,000 ========== ========== 8. 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, such as options and convertible debt. A reconciliation of earnings and weighted average shares outstanding used in the calculation of basic and diluted earnings per share from operations follows: - 12 - For the Three Months Ended September 30, 2003 ---------------------------------------------- Earnings Shares Per Share (Numerator) (Denominator) Amount --------- ----------- --------- Earnings from operations $731,000 Basic EPS Earnings available to common stockholders 731,000 2,168,000 $0.34 ===== Diluted EPS Effect of dilutive securities -- 189,000 -------- ---------- Earnings available to common stockholders and assumed conversions $731,000 2,357,000 $0.31 ======== ========== ===== For the Three Months Ended September 30, 2002 ---------------------------------------------- Earnings Shares Per Share (Numerator) (Denominator) Amount --------- ----------- --------- Earnings from operations $296,000 Basic EPS Earnings available to common stockholders 296,000 2,223,000 $ 0.13 ====== Diluted EPS Effect of dilutive securities -- 134,000 -------- ---------- Earnings available to common stockholders and assumed conversions $296,000 2,357,000 $ 0.13 ======== ========= ====== - 13 - For the Nine Months Ended September 30, 2003 --------------------------------------------- Earnings Shares Per Share (Numerator) (Denominator) Amount --------- ----------- --------- Earnings from operations $1,965,000 Basic EPS Earnings available to common stockholders 1,965,000 2,146,000 $0.92 ===== Diluted EPS Effect of dilutive securities -- 138,000 ---------- ---------- Earnings available to common stockholders and assumed conversions $1,965,000 2,284,000 $0.86 ========== ========= ===== For the Nine Months Ended September 30, 2002 -------------------------------------------- Earnings Shares Per Share (Numerator) (Denominator) Amount --------- ----------- --------- Earnings from operations $3,347,000 Basic EPS Earnings available to common stockholders 3,347,000 2,266,000 $ 1.48 ====== Diluted EPS Effect of dilutive securities -- 127,000 ---------- --------- Earnings available to common stockholders and assumed conversions $3,347,000 2,393,000 $ 1.40 ========== ========= ====== Unexercised employee stock options to purchase zero and 116,500 shares of the Company's common stock as of September 30, 2003 and 2002, respectively, were not included in the computations of diluted EPS because the effect would be antidilutive as their exercise price exceeds the average stock price during the period. - 14 - 9. Segment Information The Company's segments are distinct by type of service provided. Comparative financial data for the nine month periods ended September 30, 2003 and 2002 are shown as follows:
Three months ended September 30, --------------------------------------- 2003 2002 ------------- ------------- Operating Revenue: Financial services $ 5,892,000 $ 3,429,000 Insurance services 3,108,000 2,854,000 Consulting 990,000 899,000 Corporate 408,000 10,000 ------------ ------------- Total Segment Revenues $ 10,398,000 $ 7,192,000 =========== =========== Reconciliation to Consolidated Statement of Operations: Total segment revenues $ 10,398,000 $ 7,192,000 Less: Intercompany dividends (400,000) -- Intercompany interest (8,000) (10,000) ------------ ----------- Total Revenues $ 9,990,000 $ 7,182,000 ============ =========== Operating Income (Loss) Financial services $ 934,000 $ 381,000 Insurance services 720,000 639,000 Consulting 164,000 139,000 Corporate (469,000) (691,000) ---------- ---------- Total segments operating income 1,349,000 468,000 Gain on sale of investments -- 64,000 Earnings from operations before interest, income taxes and minority interests and equity in loss of unconsolidated affiliates 1,349,000 532,000 Interest income 76,000 59,000 Interest expense 4,000 4,000 Income tax expense 474,000 221,000 Minority interests 241,000 70,000 Equity in unconsolidated affiliates 25,000 -- --------- -------- Net earnings $ 731,000 $ 296,000 ========= =========
- 15 -
Nine months ended September 30, --------------------------------------- 2003 2002 --------- ---------- Operating Revenue: Financial services $ 14,728,000 $ 9,727,000 Insurance services 7,832,000 7,204,000 Consulting 2,662,000 2,499,000 Corporate 1,590,000 344,000 ----------- ----------- Total Segment Revenues $ 26,812,000 $ 19,774,000 =========== =========== Reconciliation to Consolidated Statement of Operations: Total segment revenues $ 26,812,000 $ 19,774,000 Less: Intercompany dividends (1,577,000) (245,000) Intercompany interest (13,000) (99,000) ----------- ------------ Total Revenues $ 25,222,000 $ 19,430,000 =========== ============ Operating Income (Loss) Financial services $ 2,367,000 $ 1,270,000 Insurance services 1,769,000 1,750,000 Consulting 594,000 379,000 Corporate (1,346,000) (857,000) ----------- ----------- Total segments operating income 3,384,000 2,542,000 Gain on sale of investments 89,000 2,855,000 Earnings from operations before interest, income taxes and minority interests and equity in loss of unconsolidated affiliates 3,473,000 5,397,000 Interest Income 224,000 103,000 Interest expense 7,000 25,000 Income tax expense 1,207,000 1,899,000 Minority interests 778,000 185,000 Equity in unconsolidated affiliates 260,000 (44,000) -------- --------- Net earnings $ 1,965,000 $ 3,347,000 =========== ===========
10. SALE OF APS CONSULTING Effective November 1, 2002, we completed the sale of APS Consulting to its management. We sold all of our APS Consulting shares for a de minimus amount of cash plus a $250,000 seven year term note at the prime rate plus 3%. The note is secured by the assets of APS Consulting. Our existing contract to provide administrative support services to APS Consulting for a period of approximately seven years remains in effect. Fees under this contract are dependent on APS Consulting's pre-tax earnings but may not be less than $200,000 or more than $518,000 over the life of the agreement. - 16 - In addition, we extended a line of credit to APS Consulting of up to $450,000. This line is at the prime rate plus 3% and is collateralized by the accounts receivable and cash of APS Consulting. Advances under the line are dependent upon meeting borrowing base requirements. Under the terms of the sale agreement, we are dependent upon the future successful operation of the division to collect our proceeds from the disposal. Additionally, as we have a security interest in the assets of the division, we have retained a risk of loss on the division's assets and, under the terms of our notes with the division, we have the ability to veto certain transactions, including significant asset disposals. Consistent with the guidance under FIN 46, we have not recognized the divestiture of APS Consulting and continue to consolidate the division as an entity in which we have a variable interest that will absorb the majority of the entity's operating losses if they occur. Accordingly, the assets and liabilities of APS Consulting are included in our consolidated balance sheets as of September 30, 2003 and December 31, 2002. The balance sheet below summarizes the assets and liabilities of APS Consulting that are included in our consolidated balance sheet: ASSETS September 30 December 31 2003 2002 (Unaudited) ------------- -------------- Cash $269,000 $347,000 Accounts Receivable, net 778,000 409,000 Prepaid Expenses 18,000 22,000 ---------- ---------- Total Current Assets 1,065,000 778,000 Property and Equipment 141,000 45,000 ---------- ---------- Total Assets $1,206,000 $823,000 ========== ========== LIABILITIES Accounts Payable $400,000 $445,000 Accrued Expenses 95,000 74,000 ---------- ---------- Total Current Liabilites 495,000 519,000 Notes Payable 235,000 248,000 Federal Income Tax Payable 162,000 -- Deferred Income 21,000 74,000 ---------- ---------- Total Liabilites $913,000 $841,000 ========== ========== Total Assets in excess (deficit) of Liabilities $293,000 $(18,000) ========== ========== We continue to consolidate APS Consulting's revenues and expenses. If APS Consulting reports operating losses, we record such losses in our statement of operations. If APS Consulting reports net earnings, we reduce our interest in such earnings to zero by increasing the minority interest presented in our statement of operations. - 17 - Creditors of APS Consulting have no recourse to the general credit of the Company or its other consolidated subsidiaries. 11. STOCK-BASED COMPENSATION We have adopted the disclosure-only provisions of Statement of Accouting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), as amended by SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", but measure compensation expense for our stock-based employee compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. Proforma disclosures of net income and earnings per share as if the fair value-based method prescribed by SFAS 123 had been applied in measuring compensation expense follow. For purposes of the proforma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting periods. Three Months Ended September 30, 2003 2002 ---- ---- Net Earnings as reported $731,000 $296,000 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (58,000) (54,000) -------- --------- Pro forma net earnings 673,000 242,000 Earnings per share Basic - as reported $ 0.34 $ 0.13 ====== ====== Basic - pro forma $ 0.31 $ 0.11 ====== ====== Diluted - as reported $ 0.31 $ 0.13 ====== ====== Diluted - pro forma $ 0.29 $ 0.10 ====== ====== Nine Months Ended September 30, 2003 2002 ---- ---- Net Earnings as reported $1,965,000 $3,347,000 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (175,000) (175,000) ----------- ---------- Pro forma net earnings 1,790,000 3,172,000 Earnings per share Basic - as reported $ 0.92 $ 1.48 ====== ====== Basic - pro forma $ 0.83 $ 1.40 ====== ====== Diluted - as reported $ 0.86 $ 1.40 ====== ====== Diluted - pro forma $ 0.78 $ 1.33 ====== ====== - 18 - 12. RECENT ACCOUNTING PRONOUNCEMENTS In September 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 did not have a material effect on our consolidated financial statements. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and did not have a material effect on our consolidated financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to a variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. We have voluntarily elected early adoption of Interpretation No. 46. The effect of the application of this Interpretation is described in Note 10 to these consolidated financial statements. - 19 - In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS No. 150"). SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company's existing financial instruments effective July 1, 2003, the beginning of the first fiscal period after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the Company's consolidated financial statements. 13. SUBSEQUENT EVENTS In October 2003, we acquired the twenty percent minority interest in our Insurance Services segment from First Professionals Insurance Company, Inc. (FPIC) for cash consideration of $2,050,000. The transaction will be accounted for as a business combination under the purchase method. Accordingly, the assets, including previously unrecognized intangible assets, and liabilities acquired in the transaction will be adjusted to their fair value and the excess value will be recorded as goodwill. - 20 - Item 2 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 us or our officers, directors, shareholders, agents, representatives or employees, including without limitation, those statements contained in this Report on Form 10-QSB, 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 our 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 our officers 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 us and the declarant at the time the forward-looking statement is made, and we assume no obligation to update any such forward-looking statements. It is important to note that our 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 our reports on previous 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 control. Any such assumptions could be inaccurate and, therefore, there can be no assurance that any forward-looking statements by us or our officers, directors, shareholders, agents, representatives or employees, including those forward-looking statements contained in this Report on Form 10-QSB, will prove to be accurate. CRITICAL ACCOUNTING POLICIES The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates, including those related to impairment of assets; bad debts; income taxes; and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities - 21 - that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. We periodically review the carrying value of our assets to determine if events and circumstances exist indicating that assets might be impaired. If facts and circumstances support this possibility of impairment, our management will prepare undiscounted and discounted cash flow projections which require judgments that are both subjective and complex. Management may also obtain independent valuations. Our financial services revenues are composed primarily of commissions on securities trades and asset management fees. Revenues related to securities transactions are recognized on a trade date basis. Asset management fees are recognized as a percentage of assets under management during the period based upon the terms of agreements with the applicable customers. Our insurance services revenues are primarily related to management fees based on the earned premiums of the managed company and include a profit sharing component related to the managed company's annual earnings. Management fees are recorded, based upon the terms of the management agreement, in the period the related premiums are earned by the managed company. The managed company recognizes premiums as earned ratably over the terms of the related policy. The profit sharing component is recognized when it is reasonably certain the managed company will have an annual profit, and, typically, has been recognized during the fourth quarter. When necessary, we record an allowance for doubtful accounts based on specifically identified amounts that we believe to be uncollectible. If our actual collections experience changes, revisions to our allowance may be required. We have a limited number of customers with individually large amounts due at any given balance sheet date. Any unanticipated change in one of those customer's credit could have a material affect on our results of operations in the period in which such changes or events occur. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. When necessary, we record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period the determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period the determination was made. During 2001, it was our judgment that the equity method of accounting for our investment in Prime Medical and Uncommon Care was more appropriate than the cost method, on the basis that even though we held less than a 20% equity interest in Prime Medical, we had significant influence over the operational and financial policies of Prime Medical and Uncommon Care. Using the equity method we recorded our share of Prime Medical's and Uncommon Care's - 22 - earnings or losses. During the first quarter of 2002 our sales of shares of Prime Medical common stock reduced our ownership to less than 5% of their total shares outstanding. Consequently, we stopped accounting for our investment in Prime Medical using the equity method and changed to the cost method. Unrealized gains/losses related to our investment in Prime Medical are recorded in equity as other comprehensive income, net of taxes. In November 2002, we sold our consulting division, APS Consulting, to its management for a de minimus amount of cash and a $250,000 seven year term note. Additionally, we retained a security interest in the assets of the division, agreed to provide continuing financial support to the division under a $450,000 line of credit and continue to perform, for a fee, certain administrative services for the division. We determined that, under the terms of the transaction, we were dependent upon the future successful operation of the division to collect the term note receivable accepted as consideration for the sale. We further determined that we had a risk of loss in the division's assets in which we retained a security interest and, through our administrative services arrangement, maintained continuing involvement with the division. We have accounted for the division as variable interest entity under the guidance of FIN 46 "Consolidation of Variable Interest Entities." Consistent with the guidance under FIN 46, we have not recognized the divestiture of APS Consulting and continue to consolidate the division as an entity in which we have a variable interest that will absorb the majority of the entity's operating losses if they occur. At September 30, 2003 the Company owned convertible preferred and common stock of Uncommon Care, a developer and operator of dedicated Alzheimer's care facilities. We have followed the guidance of EITF 99-10, specifically the percentage of ownership method, in applying the equity method to our investment in Uncommon Care. Uncommon Care's common stock equity had been eliminated by losses prior to our investment and, accordingly, we recognized 100% of the losses of Uncommon Care based on our ownership of 100% of its preferred stock equity and subordinated debt. During 2001 our total basis in our investment and advances to Uncommon Care was reduced to zero. In 2002 and 2003, Uncommon Care was able to distribute a total of $380,000 to us as a result of certain sales and refinancing of its debt. Of this, $120,000 was advanced back to Uncommon Care. Upon receipt we recorded deferred income to be offset against future advances to Uncommon Care. During the first quarter of 2003 we decided not to extend any future cash advances to Uncommon Care. Consequently, we took into income cash payments previously received from Uncommon Care that had been recorded as deferred income as well as cash received from Uncommon Care during the current quarter. Total cash receipts recorded as equity in earnings of unconsolidated affiliates for the nine months ended September 30, 2003 was $260,000. In the nine months ended September 30, 2002 we advanced $230,000 to Uncommon Care. These advances were expensed when made to recognize previously unrecorded losses by the investee. - 23 - RESULTS OF OPERATIONS REVENUES Revenues from operations increased $2,808,000 (39%) and $5,792,000 (30%) for the three and nine month periods ended September 30, 2003, respectively, compared to the same periods in 2002. Revenues increased in the current three month and nine month periods at all of our segments compared to the same periods in 2002. Financial services revenues increased $2,463,000 (72%) and $5,001,000 (51%) for the three and nine month periods ended September 30, 2003, respectively, compared to the same periods in 2002. The increase in the current year three and nine month periods was due to strong commission revenues at APS Financial, the broker/dealer division of our financial services segment. APS Financial derives most of its revenue from trading in the fixed income market, both in investment and non-investment securities. While revenue from investment grade transactions has increased, revenue derived from the high yield market has been particularly strong, as that sector has performed particularly well throughout the year. Also, we continue to have very low turnover in personnel, while expanding our customer base using the value added service we provide in corporate bond research. Our insurance services revenues from our premium-based insurance management segment, APS Insurance Services, increased $254,000 (9%) and $628,000 (9%) for the three and nine month periods ended September 30, 2003, respectively, compared to the same periods in 2002. The three and nine month current year increases are due to greater management fees resulting from higher insurance premiums. The increase in premiums has been a result of several rate increases throughout the 2002-2003 years coupled with an increase in retention resulting from the limited carriers writing medical malpractice insurance in Texas. Consulting revenues increased $91,000 (10%) and $163,000 (7%) for the three and nine month periods ended September 30, 2003, respectively, compared to the same periods in 2002. The increase in both current year periods is due to a greater amount of environmental compliance work performed for oil and gas companies in the Houston and Mobile markets. As described in Note 10 to our consolidated financial statements, we completed the sale of APS Consulting to its management effective November 1, 2002. However, since we did not satisfy the conditions to treat the sale as a divestiture, we will record operating losses of APS Consulting in our statement of operations and will record operating earnings of APS Consulting as a reduction of our interest in such earnings by increasing the minority interest presented in our statement of operations. - 24 - EXPENSES Total operating expenses increased $1,927,000 (29%) and $4,949,000 (29%) for the three and nine month period ended September 30, 2003, respectively, compared to the same periods in 2002. For the current year three month period, expenses increased at our financial services, insurances services and consulting segments and decreased at our corporate segment. For the current year nine month period, expenses increased at our financial services and insurance services segments and decreased at our corporate and consulting segments. Financial services expense increased $1,910,000 (63%) and $3,904,000 (46%) for the three and nine month periods ended September 30, 2003, respectively, compared to the same periods in 2002. The primary reason for the current year increases is a $1,609,000 (81%) and $3,139,000 (59%) increase in commission expense in the three and nine month periods ended September 30, 2003, respectively, compared to the same periods in 2002 resulting from the increase in commission revenue at APS Financial mentioned earlier. In addition, increased net profits at APS Financial resulted in a $296,000 (128%) and $681,000 (110%) increase in the current year three and nine month periods, respectively, in formula driven management incentive costs. Partially offsetting these increases were relatively minor current year decreases in ticket charges, information services, legal and rent expenses. Insurance services expenses at the insurance management subsidiary increased $173,000 (8%) and $610,000 (11%) for the three and nine month periods ended September 30, 2003, respectively, compared to the same periods in 2002. The three month increase is due to increases in payroll related costs ($68,000), management incentives ($12,000) and advertising expenses ($5,000). The current year nine month increase is due primarily to increased payroll related costs ($239,000) as a result of an industry salary analysis conducted in the latter half of 2002 which resulted in wages within certain departments increasing to competitive levels in order to retain personnel. Also management incentive increased $115,000 and advertising expenses increased $93,000, the latter due to marketing efforts relating to re-branding efforts. Consulting expenses increased $66,000 (9%) but have decreased $52,000 (2%) for the three and nine month periods ended September 30, 2003, respectively, compared to the same periods in 2002. The increase in the current year three month period was due to higher payroll related and higher professional fees, the latter resulting from an employment related suit brought against Eco-Systems that has since been dismissed. The primary reason for the nine month decline was above-average sub-contractor pass-through work performed in the second quarter of 2002 in environmental assessment field activities. General and administrative expenses decreased $225,000 (32%) and $20,000 (1%) for the three and nine month periods ended September 30, 2003, respectively, compared to the same periods in 2002. The primary reason for the decrease in the current year three month period is due to formula driven management incentive accruals totaling $375,000 in the third quarter of 2002. These accruals were necessary as profits in 2002 were greatly affected by gains of the sale of Prime Medical common stock. During the third quarter of 2003, only $75,000 was added to the management incentive accrual. - 25 - Gain on sale of assets primarily represents the recognition of deferred income. Approximately $760,000 of the $5,100,000 gain on the sale of real estate to Prime Medical in 2001 was deferred in 2001 due to our ownership interest in Prime and is to be recognized upon the reduction of our percentage in Prime Medical through the sale of its stock. To date, a total of $527,000 of the $760,000 originally deferred amount has been recognized, including $2,000 in the first quarter of 2003 and $6,000 in the second quarter of 2003. Interest expense decreased $18,000 (72%) for the nine month period ended September 30, 2003 compared to the same period in 2002. The primary cause of the current period decrease is the payoff of the Company's note payable which carried a balance of $2,750,000 during the first quarter of 2002. There was no long-term debt at September 30, 2003. GAIN ON SALE OF INVESTMENTS Gain on the sale of investments decreased $64,000 and $2,766,000 for the three and nine month periods ended September 30, 2003, respectively, compared to the same periods in 2002. The nine month decline was due to the sale of significantly less shares of Prime Medical common stock in 2003 compared to 2002. In 2002, we recorded gains on the sales of 1,580,000 shares compared to 24,000 shares sold in 2003. As a result of these sales, as of September 30, 2003, we own approximately 728,000 shares of Prime Medical amounting to an ownership percentage of approximately 4%. The three month current year decrease is due to the fact that no Prime Medical common stock nor any other available-for-sale equity or fixed income securities were sold during the quarter. EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES Our equity in the earnings of Prime Medical was zero in 2003 as we no longer account for our investment in Prime Medical using the equity method of accounting, as was the case in the first quarter of 2002 when we recorded $186,000 in equity earnings. As of March 19, 2002, we ceased accounting for our investment in Prime Medical using the equity method of accounting because (1) on January 1, 2002, Kenneth S. Shifrin, the Company's Chairman and CEO, stepped down from day-to-day operations as Executive Chairman of the Board of Prime Medical, but continues to serve as non-executive Chairman; and (2) from January to March 19, 2002, we sold 1,570,000 shares of Prime Medical reducing our ownership percentage to slightly less than 5%. Our equity in earnings of Uncommon Care increased $260,000 and $490,000 for the three and nine month periods ended September 30, 2003, respectively, compared to the same periods in 2002. Because our total investment and advances to Uncommon Care has been reduced to zero we ceased recording equity losses, as required under the equity method. In 2002, we advanced them $230,000 and recorded a loss for the full amount of the advance. In 2003, after informing management that no further advances would be made to the Company, we recorded equity in earnings of unconsolidated affiliates in the amount of $260,000 related to the cash received from Uncommon Care. - 26 - MINORITY INTERESTS Minority interests represents the combination of two outside interests in subsidiaries of the Company: a twenty percent interest in Insurance Services owned by FPIC Insurance Group, Inc. and a three percent interest in APS Asset Management, a subsidiary of the financial services subsidiary of the Company (APS Investment Services), owned by key individuals within APS Asset Management. In addition, we are now recording net earnings from APS Consulting as minority interest. See Note 10 to these consolidated financial statements. Minority interests increased in the current year primarily due to increased profitability of our insurance services segment as well as to net earnings from APS Consulting. SHAREHOLDERS' EQUITY For the nine months ended September 30, 2003, we purchased and cancelled 43,976 shares of treasury stock. In addition, 143,200 shares were issued upon exercise of options. The result of these purchases and cancellations of treasury stock and the exercising of stock options was a net zero effect on treasury stock, an increase to common stock by $10,000, an increase to paid-in capital by $493,000 and a decrease to retained earnings by $203,000. Through September 30, 2003, we recorded other comprehensive loss of $2,236,000 which represents unrealized holding losses on securities held for sale, primarily in Prime Medical common stock, net of tax. Changes in fair value for securities categorized as "available-for-sale" are excluded from earnings and reported net of deferred income taxes in shareholders' equity until realized. LIQUIDITY AND CAPITAL RESOURCES Current assets exceeded current liabilities by $7,318,000 at September 30, 2003 and $6,067,000 at December 31, 2002. Working capital rose in 2003 due primarily to cash received from operations. Capital expenditures through the three month period ended September 30, 2003 were approximately $308,000, although approximately $114,000 was recorded at Eco-Systems for primarily field equipment purchases not in the ordinary course of our core businesses. Total capital expenditures are expected to be approximately $325,000 in 2003. 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 us to pursue investment and expansion opportunities consistent with our growth plans. Although it is uncertain if our operating activities will continue to provide positive cash flow in 2003, we believe that our current strong working capital position will enable us to meet our working capital requirements for the foreseeable future. - 27 - ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS In September 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 did not have a material effect on our consolidated financial statements. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and did not have a material effect on our consolidated financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to a variable interest in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. We have voluntarily elected early adoption of Interpretation No. 46. The effect of the application of this Interpretation is described in Note 10 to these consolidated financial statements. - 28 - In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS No. 150"). SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company's existing financial instruments effective July 1, 2003, the beginning of the first fiscal period after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the Company's consolidated financial statements. Item 3. CONTROLS AND PROCEDURES a.) Within the 90-day period prior to the date of this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 of the Securities and Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to our reports (including those of our consolidated subsidiaries) required to be included in our Exchange Act filings. b) There have been no significant changes in our internal controls or in other factors which could significantly affect internal controls subsequent to the date we carried out our evaluation. - 29 - PART II OTHER INFORMATION - 30 - Item 1. LEGAL PROCEEDINGS We are involved in various claims and legal actions that have arisen in the ordinary course of business. We believe that the liability provision in our consolidated financial statements is sufficient to cover any unfavorable outcome related to lawsuits in which we are currently named. Management believes that liabilities, if any, arising from these actions will not have a significant adverse effect on our financial condition or results of operations. However, due to the uncertain nature of legal proceedings, the actual outcome of these lawsuits may differ from the liability provision recorded in our consolidated financial statements. Item 2. CHANGES IN SECURITIES For the nine months ended September 30, 2003, we purchased and cancelled 43,976 shares of treasury stock. In addition, 143,200 shares were issued upon exercise of options. The result of these purchases and cancellations of treasury stock and the exercisings of stock options was a net zero effect on treasury stock, an increase to common stock by $10,000, an increase to paid-in capital by $493,000 and a decrease to retained earnings by $203,000. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Section 302 Certification of Chief Executive Officer 31.2 Section 302 Certification of Chief Financial Officer 32.1 Section 906 Certification of Chief Executive Officer 32.2 Section 906 Certification of Chief Financial Officer (b) Reports on Form 8-K. Report filed August 14, 2003 concerning the press release reporting second quarter 2003 results of operations and financial condition. - 31 - EX-31 3 exh311e.txt 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED CERTIFICATION I, Kenneth S. Shifrin, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of American Physicians Service Group, Inc.; 2. based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. the registrant's other certifying officersand I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 11, 2003 /s/ Kenneth S. Shifrin ------------------------------ Kenneth S. Shifrin Chairman of the Board EX-31 4 exh312e.txt 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED CERTIFICATION I, William H. Hayes, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of American Physicians Service Group, Inc.; 2. based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. the registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 11, 2003 /s/ William H. Hayes ------------------------------ William H. Hayes Senior Vice President-Finance EX-32 5 exh321e.txt 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of American Physicians Service Group, Inc. (the "Company") on Form 10-QSB for the period ending September 30, 2003 as filed with the Securities and Exchange commission on the date hereof (the "Report"), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. /s/ Kenneth S. Shifrin November 11, 2003 - --------------------------- ------------------ Kenneth S. Shifrin Date Chief Executive Officer EX-32 6 exh322e.txt 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of American Physicians Service Group, Inc. (the "Company") on Form 10-QSB for the period ending September 30, 2003 as filed with the Securities and Exchange commission on the date hereof (the "Report"), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. /s/ William H. Hayes November 11, 2003 - ---------------------------- ----------------- William H. Hayes Date Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----