-----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, FtOW1OM7tn9ady72wcLSFYZ2xT2XaUUQHOP/nqALfdfyAU2KxnsTEX4xcRSRzw5o Fu6ahwzcvqYq2SDi1GQb0g== 0000724024-98-000008.txt : 19980817 0000724024-98-000008.hdr.sgml : 19980817 ACCESSION NUMBER: 0000724024-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD 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: 98687885 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 JUNE 30, 1998 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 JUNE 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO -------------------- -------------------- COMMISSION FILE NUMBER 0-11453 AMERICAN PHYSICIANS SERVICE GROUP, INC. (Exact name of registrant as specified in its charter) TEXAS 75-1458323 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 1301 CAPITAL OF TEXAS HIGHWAY AUSTIN, TEXAS 78746 (Address of principal executive offices) (Zip Code) (512) 328-0888 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d ) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------- ------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. NUMBER OF SHARES OUTSTANDING AT TITLE OF EACH CLASS JULY 31, 1998 -------------------- ---------------- Common Stock, $.10 par value 4,160,683 ============================================================================ PART I FINANCIAL INFORMATION -2- AMERICAN PHYSICIANS SERVICE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands)
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 1998 1997 1998 1997 ---------- ---------- --------- -------- REVENUES: Financial services $3,271 1,625 6,293 3,570 Real estate 181 168 359 350 Investments and other 9 52 41 236 ---------- ---------- -------- ------- Total revenues 3,461 1,845 6,693 4,156 EXPENSES: Financial service expense 2,954 1,858 5,737 3,601 Real estate 135 129 266 258 General and administrative 338 522 557 787 Interest 9 2 13 5 ---------- ---------- -------- ------- Total expenses 3,436 2,511 6,573 4,651 ---------- ---------- -------- ------- Operating income/(loss) 25 (666) 120 (495) Equity in earnings of unconsolidated affiliates (Note 3) 527 580 230 1,041 ---------- ---------- -------- -------- Earnings/(loss) from continuing operations before income taxes and minority interest 552 (86) 350 546 Gain on sale of portion of subsidiary --- 1,899 --- 1,899 Income tax expense 193 622 129 847 Minority interest (1) --- (2) --- --------- --------- -------- -------- Earnings from continuing operations 358 1,191 219 1,598 Discontinued operations: Earnings/(loss) from discontinued operations net of income tax (benefit) of $0 and $(21) and $19 and $71 for the three and six months in 1998 and 1997, respectively. --- (97) 36 (138) Loss on disposal of computer software segment, net of income tax benefit of $0 and $411 and $0 and $411 for the three and six months in 1998 and 1997, respectively. --- (798) --- (798) ---------- ---------- -------- ------- NET EARNINGS $ 358 296 255 662 ========== ========== ======== =======
See accompanying notes to consolidated financial statements - 3 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENT OF EARNINGS PER SHARE (UNAUDITED) EARNINGS PER COMMON SHARE:
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ---------------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Basic: Earnings/(loss) from continuing operations $ 0.09 0.29 0.05 0.39 Discontinued operations 0.00 (0.22) 0.01 (0.23) --------- --------- -------- -------- Net earnings/(loss) $ 0.09 0.07 0.06 0.16 ========= ========= ======== ======== Diluted: Earnings/(loss) from continuing opertions $ 0.08 0.28 0.05 0.38 Discontinued operations 0.00 (0.21) 0.01 (0.22) --------- --------- -------- -------- Net earnings/(loss) $ 0.08 0.07 0.06 0.16 ========= ========= ======== ======== Basic weighted average shares outstanding 4,161 4,086 4,160 4,059 ========= ========= ======== ======== Diluted weighted average shares outstanding 4,477 4,194 4,437 4,183 ========= ========= ======== ========
See accompanying notes to consolidated financial statements - 4 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands) June 30, December 31, 1998 1997 ------------- ------------- ASSETS Current Assets: Cash and cash investments $2,861 5,188 Trading account securities 1,039 449 Notes receivable - current 812 1,157 Management fees and other receivables 1,020 815 Receivable from clearing broker 4 543 Income taxes receivable 70 0 Prepaid expenses and other 516 508 ------------- ------------- Total current assets 6,322 8,660 Notes receivable, less current portion 3,703 2,982 Property and equipment 1,716 1,830 Investment in affiliates 15,837 15,611 Preferred stock investment 2,078 --- Other assets 292 318 ------------- ------------- Total Assets $29,948 29,401 ============= ============= See accompanying notes to consolidated financial statements - 5 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands) June 30, December 31, 1998 1997 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable - trade $ 475 614 Payable to clearing broker --- 441 Accrued compensation 225 446 Accrued expenses and other liabilities (Note 4) 5,011 3,573 Income taxes payable --- 226 ----------- ----------- Total current liabilities 5,711 5,300 Net deferred income tax liability 865 822 ----------- ----------- Total liabilities 6,576 6,122 Minority interest 27 175 Shareholders' Equity: Preferred stock, $1.00 par value, 1,000,000shares authorized ---- ---- Common stock, $0.10 par value, shares authorized 20,000,000; issued 4,160,693 at 3/31/98 and 4,160,861 at 12/31/97 416 416 Additional paid-in capital 5,514 5,528 Retained earnings 17,415 17,160 ----------- ----------- Total shareholders' equity 23,345 23,104 Total Liabilities and Shareholders' Equity $29,948 29,401 =========== =========== See accompanying notes to consolidated financial statements - 6 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Six Months Ended June 30, 1998 1997 ----------- ----------- Cash flows from operating activities: Cash received from customers $6,447 3,562 Cash paid to suppliers and employees (5,458) (3,145) Change in trading account securities (590) 148 Change in receivable from clearing broker 98 (297) Interest paid (13) (5) Income taxes paid (389) (244) Interest, dividends and other investment proceeds 41 89 ----------- ----------- Net cash provided by operating activities 136 108 Cash flows from investing activities: Proceeds from sale of property and equipment 2 --- Payments for purchase property and equipment (68) (236) Proceeds from equity owners in investment 264 --- Investment in preferred stock (2,074) --- Funds loaned to others (875) (30) Collection of notes receivable 401 15 Other 59 10 ----------- ----------- Net cash used in investing activities (2,291) (241) Cash flows from financing activities: Repayment of long term obligations --- (542) Purchase/retire treasury stock (42) (317) Exercise of stock options 20 219 Distribution to minority interest (150) --- ----------- ----------- Net cash used in financing activities (172) (640) ----------- ----------- Net change in cash and cash equivalents $(2,327) (773) ----------- ----------- Cash and cash equivalents at beginning of period 5,188 5,770 ----------- ----------- Cash and cash equivalents at end of period $2,861 4,997 =========== =========== See accompanying notes to consolidated financial statements - 7 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, continued (In thousands) Six Months Ended June 30, 1998 1997 --------- --------- Reconciliation of net earnings to net cash from operating activities: Net earnings $255 662 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 295 181 Earnings from discontinued operations (55) 209 Loss on disposal of discontinued operations --- 1,209 Write-off of fixed assets 9 --- Undistributed (earnings)/loss of affiliate (230) (1,041) Change in federal income tax payable (296) 258 Minority interest in consolidated earnings 2 --- Provision for deferred taxes 42 (137) Change in trading securities (590) 148 Change in receivable from clearing broker 98 (297) Change in management fees & other receivables (205) (2,593) Change in prepaids & other current assets (8) (119) Change in other assets --- (125) Change in trade payables (139) (58) Change in accrued expenses & other liabilities 958 1,811 --------- --------- Net cash from operating activities $136 108 ========= ========= Summary of non-cash transactions: At March 31, 1997, the Company recognized a gain on the discontinuation of a lawyer's professional liability insurance exchange resulting from the reversal of accruals for contingencies which are no longer likely. The effect of this transaction was an increase to revenue and an increase to other assets of $133,000. See accompanying notes to consolidated financial statements - 8 - AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1998 (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, 1997 and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the financial position as of June 30, 1998 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, 1997 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 1998 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 June 30, 1998 the Company owned 16.3% (3,064,000 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 June 30, 1998 the Company owned 69.4% 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. Due to the short time frame anticipated for this change in ownership to occur, the Company has accounted for its ownership on the equity basis in the first and second quarters of 1998. 4. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consists of the following: June 30 December 31 1998 1997 --------- ------------ Taxes payable-other $ 199,000 196,000 Commissions payable 550,000 287,000 Deferred income (Note 7) 1,257,000 280,000 Health insurance and other claims payable 7,000 59,000 Contractual/legal claims 1,398,000 1,461,000 Vacation payable 95,000 102,000 Funds held for others 308,000 58,000 Systems disposition costs 1,248,000 1,138,000 Other (51,000) (8,000) ---------- ---------- $5,011,000 3,573,000 ========== ========== - 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 assumed that all clients would migrate to other software products by the end of 1999 and reflected the expected financial impact of discontinuing this segment on that date in the 1997 financial statements. Net assets/(liabilities) of the discontinued computer systems and software segment as of June 30, 1998 consisted of the following: Cash and cash investments $ 24.8 Trade accounts receivable 156.9 Other receivables 6.2 Prepaid and other current assets 58.6 Fixed assets, net of depreciation 62.1 Intercompany receivables 948.9 Trade accounts payable (1.7) F.I.T. Payable (18.6) Accrued expenses (1,276.9) --------- Net liabilities $ (39.7) ========= 6. EARNINGS PER SHARE Statement of Financial Accounting Standards No. 128, Earnings per Share ("Statement 128") specifies new measurement, presentation and disclosure requirements for earnings per share and is required to be applied retroactively upon initial adoption. The Company adopted Statement 128 effective December 31, 1997, and accordingly, has restated herein all previously reported earnings per share data. 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 June 30, 1998 ----------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ---------- Earnings from continuing operations 358,000 Basic EPS Income available to common stockholders 358,000 4,161,000 $0.09 Effect of Dilutive Securities Options --- 102,000 Contingently issuable shares (1,000) 214,000 ---------- ---------- Diluted EPS Income available to common stockholders and assumed conversions $ 357,000 4,477,000 $0.08 ========== ========== ===== For the Three Months Ended June 30, 1997 ----------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- Earnings from continuing operations $ 1,191,000 Discontinued Operations (895,000) Basic EPS Income available to 296,000 4,086,000 $0.07 Common stockholders Effect of Dilutive Securities Options --- 108,000 Contingently issuable shares --- --- ----------- ----------- Diluted EPS Income available to common stockholders and assumed conversions $ 296,000 4,194,000 $0.07 ========= ========= ====== - 12 - 6. EARNINGS PER SHARE, continued For the Six Months Ended June 30, 1998 --------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ---------- ------------ --------- Earnings from continuing operations 255,000 Basic EPS Income available to common stockholders 255,000 4,160,000 $0.06 Effect of Dilutive Securities Options --- 102,000 Contingently issuable shares (7,000) 175,000 ---------- ---------- Diluted EPS Income available to common stockholders and assumed conversions $ 248,000 4,437,000 $0.06 ========= ========= ====== For the Six Months Ended June 30, 1997 --------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ---------- ------------ --------- Earnings from continuing $1,598,000 Operations Discontinued Operations (936,000) Basic EPS Income available to 662,000 4,059,000 $.16 Common stockholders Effect of Dilutive Securities Options --- 124,000 Contingently issuable shares --- --- ---------- --------- Diluted EPS Income available to common stockholders and assumed conversions $662,000 4,183,000 $.16 ======== ========= ======= - 13 - 6. EARNINGS PER SHARE, continued Unexercised employee stock options to purchase 581,300 shares of the Company's common stock as of June 30, 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. Unexercised employee stock options to purchase 522,300 shares of the Company's common stock as of June 30, 1997 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 June 30, 1998 the Company's affiliate, Syntera HealthCare Corp., had issued 329,000 shares which are convertible into 175,000 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's policy is to defer quarterly recognition of the profit sharing component of insurance management fees. The Company utilizes this approach because the profit sharing formula is contingent and based on annual net earnings. Accordingly, any potential income to be recognized by the Company is dependent on the annual earnings of the managed entity. Income will be recognized when all uncertainties as to collectibility have been resolved. Typically, this is not until the fourth quarter of the fiscal year. - 14 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS The 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. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this document are based on information available to the Company on the date hereof, 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 in such forward-looking statements. In addition to any risks and uncertainties specifically identified in the text surrounding 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. The forward-looking statements herein 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 the forward-looking statements included in this Report on Form 10-Q will prove to be accurate. RESULTS OF OPERATIONS REVENUES Revenues from operations increased $1,617,000 (87.6%) and $2,537,000 (61.0%) for the three and six month periods ended June 30, 1998 compared to the same periods in 1997, respectively. For both the three and six month periods in 1998, financial services and real estate revenues increased while investments and other revenues decreased compared to the same periods in 1997. - 15 - Financial services revenues increased $1,646,000 (101.3%) and $2,723,000 (76.3%) for the three and six month periods ended June 30, 1998 compared to the same periods in 1997, respectively. The increase in both periods of 1998 was due to greater commission income at the Company's broker/dealer subsidiary, APS Financial Corp. Total revenues at APS Financial rose $1,556,000 (227.7%) in the current quarter as a result of a more favorable bond market, a greater number of institutional accounts and a greater number of experienced brokers, most of whom joined the Company in the latter half of 1997 through the branch office in Houston, Texas. For the six month period ended June 30, 1998 revenues rose $2,741,000 (172.0%) compared to the same period in 1997. The Houston office, which currently employs seventeen brokers, contributed approximately $1,000,000 of this six month increase. Revenues from premium-based insurance management fees were up $103,000 (11.0%) and $3,000 (0.1%) for the three month and six month periods ended June 30, 1998 compared to the same periods in 1997, respectively. The three month increase was due to a non-recurring premium. This was offset in the six month period by stiffer competition in the Texas professional liability insurance market which has resulted in fewer insureds and lower premium rates. Real estate revenues increased $13,000 (7.7%) and $9,000 (2.6%) for the three and six month periods ended June 30, 1998 compared to the same periods in 1997, respectively. The current three month increase reflects a higher utilization of the office building by outside tenants and affiliates. Given the current economic good health of the Austin real estate market, it is reasonable to expect rental and occupancy rates to remain favorable throughout 1998. Investment and other income decreased $43,000 (82.7%) and $195,000 (82.6%) for the three and six month periods ended June 30, 1998 compared to the same periods in 1997, respectively. The decrease in the current quarter was primarily due to a decline in interest income arising from a lower investable cash balance. The cash balance declined due to a $4,387,000 cash investment in the Company's OB/GYN management affiliate, Syntera HealthCare Corporation, in November 1997 and a March 1998 cash investment of $1,962,000 in a privately-held developer and operator of dedicated Alzheimer's care facilities, Uncommon Care, Inc. The six month decrease in 1998 was due to the lower investable cash balance as well as to a gain on the dissolution of an inactive insurance entity in the first quarter of 1997. EXPENSES Total operating expenses increased $925,000 (36.8%) and $1,922,000 (41.3%) for the three and six month periods ended June 30, 1998 compared to the same periods in 1997, respectively. For both the three and six month periods in 1998, financial services and real estate expenses increased while investments and other expenses decreased compared to the same periods in 1997. - 16 - Financial services expense increased $1,096,000 (59.0%) and $2,136,000 (59.3%) for the three and six month periods ended June 30, 1998 compared to the same periods in 1997, respectively. The primary reason for the current year increase is higher commission expense resulting from the increase in commission revenue at the Company's broker/dealer subsidiary, APS Financial. In addition, general and administrative costs at APS Financial increased in both periods in 1998 primarily as a result of opening the Houston branch office as well as costs associated with opening a new asset management division at the Austin office. Expenses at the insurance management subsidiary increased $121,000 (13.7%) and $157,000 (9.1%) for the three and six month periods ended June 30, 1998 compared to the same periods in 1997, respectively, due primarily to higher commission expense which is the result of outside agents producing a higher percentage of total premiums. Partially offsetting this was a decrease in personnel related costs resulting from a reallocation of some salary expenses from operations to administrative. General and administrative expense decreased $184,000 (35.2%) and $230,000 (29.2%) for the three and six month periods ended June 30, 1998 compared to the same periods in 1997, respectively. The decrease in the current quarter was due primarily to personnel costs expensed in 1997 at the parent Company but reclassified to the affiliate, Syntera HealthCare, in 1998. The six month variance was also affected by the reversal of a certain contingent expense accrual deemed no longer necessary. Partially offsetting these variances was an increase in personnel related costs resulting from a reallocation of some salary expenses from operations to administrative. EQUITY IN EARNINGS/(LOSS) OF UNCONSOLIDATED AFFILIATES The Company's equity in earnings of Prime Medical Services, Inc. ("Prime") decreased $10,000 (1.8%) and $657,000 (63.2%) for the three and six month periods ended June 30, 1998 compared to the same periods in 1997, respectively. Current year 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 restructuring/development costs. The Company's percentage ownership of Prime was 16.3% at June 30, 1998. 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 implemented this year. The Company's equity in the loss of Syntera HealthCare Corporation totaled $41,000 and $153,000 for the three and six month periods ended June 30, 1998. The Company's equity ownership percentage in Syntera dropped from 74.0% at March 31, 1998 to 69.4% at June 30, 1998 as three additional physicians were issued shares upon signing long-term management contracts. Syntera had entered into management contracts with a total of seven OB/GYN physicians at June 30, 1998. Long-term contracts were entered into with three additional physicians as of August 1, 1998 bringing the total number of practices under contract to ten. - 17 - 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. The minority interest was purchased in June 1997 by Florida Physicians Insurance Company for $2,000,000. LIQUIDITY AND CAPITAL RESOURCES Current assets exceeded current liabilities by $611,000 and $3,360,000 at June 30, 1998, and December 31, 1997, respectively. The decrease was primarily the result of a $1,962,000 March 1998 cash investment in Uncommon Care, Inc., a privately-held developer and operator of dedicated Alzheimer's care facilities. In addition, the Company loaned $875,000 to Uncommon Care bearing interest at 10%, payable quarterly with the principal due in March 2003. The loan is part of the $2,400,000 line of credit the Company agreed to provide per the purchase agreement with Uncommon Care dated March 20, 1998. Working capital was reduced since the loan is classified as long term. Capital expenditures through the period ended June 30, 1998 were approximately $68,000. Total capital expenditures are expected to be approximately $150,000 in 1998. 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-six months with a fluctuating interest rate (currently 8.25%) based upon the prime rate. The line is secured by securities owned by the Company. A total of $300,000 was advanced under this credit line as of July 31, 1998. YEAR 2000 COMPLIANCE The Company is aware of the issues associated with the programming code in existing computer systems as the year 2000 approaches and has formed a company-wide committee to develop an implementation plan to resolve the issue. The Company's goal is to have assurances that all hardware and software operating systems within the Company is Year 2000 compliant by the end of the fiscal year 1998. The Company anticipates the necessary actions to be Year 2000 compliant will be performed internally, in the ordinary course of business, at a cost not to exceed $100,000. In addition, the Company has received written assurances from some, but not all, of its significant outside vendors that they are, or expect to be, Year 2000 compliant in time. The Company feels there is still sufficient time to confirm the level of compliance with those outside vendors that have not yet responded to or have not yet been requested to provide written assurances. - 18 - Significant uncertainty exists concerning the potential costs and effects associated with any year 2000 compliance. Any year 2000 compliance problem of either the Company or its vendors, third party payors or customers could have a material adverse effect on the Company's business, results of operations, financial condition and prospects. The Company does not yet have a contingency plan to handle the most reasonably likely worst case scenarios but intends to create one by fiscal year end 1998. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued FASB No. 131, Disclosure about Segments of an Enterprise and Related Information, which the Company is required to adopt for annual periods beginning after December 15, 1997 and interim periods beginning in fiscal year 1999. SFAS No. 131 establishes standards for the way that public companies report information about operating segments in annual financial statements and requires that those companies report information about segments in interim financial reports issued to shareholders. The Company will comply with this expanded disclosure requirement beginning with the December 31, 1998 financial statements. In June 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 organizational costs to be expensed as incurred. The Company's affiliate, Syntera Healthcare, has incurred start-up costs which, when expensed this year, will roll through equity income of the Company. These costs are insignificant and will not have a material adverse effect on the Company's financials. - 19 - PART II OTHER INFORMATION - 20 - Item 1. Legal Proceedings The Company is involved in various claims and legal actions that have arisen in the ordinary course of business. The Company believes that the liability provision in its financial statements is sufficient to cover any unfavorable outcome related to lawsuits in which it is currently named. Management believes that liabilities, if any, arising from these actions will not have a significant adverse effect on the financial condition of the Company. However, due to the uncertain nature of legal proceedings, the actual outcome of these lawsuits may differ from the liability provision recorded in the Company's financial statements. Item 4. Results of Votes of Security Holders On June 11, 1998 the annual meeting of shareholders of American Physicians Service Group, Inc. was held in Austin, Texas. Shareholders voted on the following two items. a.) Election of Directors The names of the directors elected at the meeting along with number of votes for, against and withheld are as follows: Name For Against Withheld ------------------- --------- ---------- ----------- Jack Murphy 3,359,547 301,516 --- Robert L. Myer 3,359,917 301,146 --- William A. Searles 3,359,917 301,146 --- Kenneth S. Shifrin 3,359,917 301,146 --- b.) Proposal to Amend the 1995 Incentive and Non-Qualified Stock Option Plan Shareholders were asked to vote on a proposal to increase the aggregate number of shares of common stock that may be issued upon the exercise of all options under the 1995 Plan by 400,000 to a new maximum of 1,200,000. The proposal passed and the results of the vote for, against, and withheld are as follows: For 2,083,204 Against 799,072 Withheld --- - 21 - 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 November 13, 1997, the Company announced that it has reached an agreement with Consolidated Eco-Systems, Inc. ("Consolidated ECO", formerly Exsorbet) to restructure the terms of the $3,300,000 note due October 1, 1997. In exchange for additional collateral and certain covenants, APS has agreed to roll all interest due into the note and has extended the terms of the note for two years. Repayment terms are geared to track Consolidated ECO's cash flow and will include monthly payments of $40,000 from January 1, 1998 through September 30, 1998, at which time payments become $85,000. The remaining note balance is due October 1, 1999. No interest has been accrued on this note and, consequently, there was no income effect from converting the interest to additional debt. On March 13, 1998 Consolidated Eco announced that its subsidiary, 7-7 Inc., had been declared in default of a Loan Agreement, Security Agreement, and Forebearance Agreement by Dollar Bank of Cleveland, Ohio. Dollar Bank had additionally accelerated all amounts due to it from 7-7, Inc. The amounts totaled approximately $850,000. As a result of the actions of Dollar Bank, the business operations of 7-7, Inc. were terminated. APS is a second lien holder of the assets of 7-7, Inc. and does not expect to recoup any funds realized by the foreclosure and subsequent sale of these assets by Dollar Bank. However, APS's debt continues to be collateralized by common stock of Consolidated Eco and one of its subsidiaries, Eco Acquisition, Inc. APS is also the second lien holder of the assets of another Consolidated Eco subsidiary, LARCO Environmental Services, Inc. On June 17, 1998 the Company filed suit against Consolidated Eco-Systems, Inc. and its directors and officers alleging breach of contract, negligent misrepresentation and conspiracy. The misrepresentations include, but are 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 is seeking 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. Both Con-Eco and its D&O insurance carrier have been notified of this suit. - 22 - On March 20, 1998 the Company purchased non-voting convertible preferred stock of Uncommon Care, Inc., a developer and operator of dedicated Alzheimer's care facilities. The shares are convertible into approximately 34% of Uncommon Care's equity. In addition to the purchase price of approximately $2.0 million, APS has provided a line of credit to Uncommon Care of $2.4 million to be used for working capital and interim development financing. As of July 31, 1998 a total of $1,175,000 has been advanced. On April 23, 1998 the Company's affiliate, APS Practice Management, announced that it had changed its name to Syntera HealthCare Corporation ("Syntera"). Syntera is a physician practice management company specializing in OB/GYN practices. The Company is currently a 69% owner of Syntera, a percentage expected to decline to a minority level as Syntera issues additional shares for future acquisitions. During the second quarter Syntera also announced that it had signed additional physician contracts in its Austin, Texas location and had established a San Antonio presence by entering into contracts with two physicians there. Subsequent to the second quarter, the Company entered into contracts with three additional physicians bringing the total practices under contract to ten. 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 June 30, 1998. - 23 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN PHYSICIANS SERVICE GROUP, INC. Date: August 14, 1998 By: /s/ William H. Hayes -------------------------------------- William H. Hayes, Vice President and Chief Financial Officer - 24 - EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30, 1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS DEC-31-1998 DEC-31-1998 APR-01-1998 JAN-01-1998 JUN-30-1998 JUN-30-1998 2,861 2,861 1,039 1,039 1,848 1,848 34 34 18 18 6,322 6,322 5,653 5,653 3,937 3,937 29,948 29,948 5,711 5,711 0 0 0 0 0 0 416 416 22,929 22,929 29,948 29,948 0 0 3,461 6,693 0 0 3,237 6,234 191 326 0 0 9 13 552 350 193 129 358 219 0 36 0 0 0 0 358 255 0.09 0.06 0.08 0.06
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