-----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, P04XrFWm6240o2g3iUWtvQykw4J7GVWtrwQp1BOArfJmWYhhg0+10moo4Nt+hknd d45EZb02Q5+eMjH93bUM+A== 0000724024-98-000012.txt : 19981118 0000724024-98-000012.hdr.sgml : 19981118 ACCESSION NUMBER: 0000724024-98-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98750541 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 SEPTEMBER 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 SEPTEMBER 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 OCTOBER 31, 1998 -------------------- ---------------- Common Stock, $.10 par value 4,168,083 ============================================================================ PART I FINANCIAL INFORMATION -2- AMERICAN PHYSICIANS SERVICE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1998 1997 1998 1997 ---------- ---------- --------- -------- REVENUES: Financial services $3,307 2,792 9,599 6,363 Real estate 174 159 533 509 Investments and other 28 78 69 311 ---------- ---------- -------- ------- Total revenues 3,509 3,029 10,201 7,183 EXPENSES: Financial service expense 3,209 2,445 8,946 6,054 Real estate 135 132 401 390 General and administrative 365 298 922 879 Interest 11 7 24 12 ---------- ---------- -------- ------- Total expenses 3,720 2,883 10,293 7,335 ---------- ---------- -------- ------- Operating income/(loss) (211) 146 (92) (152) Equity in earnings of unconsolidated affiliates (Note 3) 546 596 776 1,439 ---------- ---------- -------- -------- Earnings from continuing operations before income taxes and minority interest 335 742 684 1,287 Gain on sale of portion of subsidiary --- --- --- 1,899 Income tax expense 119 251 247 1,097 Minority interest 3 (5) 1 (5) --------- --------- -------- -------- Earnings from continuing operations 219 486 438 2,084 Discontinued operations: Earnings/(loss) from discontinued operations net of income tax (benefit) of $0 and $19 and $0 and $71 for the three and nine months in 1998 and 1997, respectively. --- --- 36 (138) Loss on disposal of computer software segment, net of income tax benefit of $0 and $0 and $0 and $411 for the three and nine months in 1998 and 1997, respectively. --- --- --- (798) ---------- ---------- -------- ------- NET EARNINGS $ 219 486 475 1,148 ========== ========== ======== =======
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 Nine Months Ended September 30, September 30, ------------------------ ---------------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Basic: Earnings from continuing operations $ 0.05 0.12 0.11 0.51 Discontinued operations 0.00 0.00 0.01 (0.23) --------- --------- -------- -------- Net earnings $ 0.05 0.12 0.11 0.28 ========= ========= ======== ======== Diluted: Earnings from continuing opertions $ 0.04 0.11 0.09 0.50 Discontinued operations 0.00 0.00 0.01 (0.22) --------- --------- -------- -------- Net earnings $ 0.04 0.11 0.09 0.27 ========= ========= ======== ======== Basic weighted average shares outstanding 4,165 4,145 4,162 4,088 ========= ========= ======== ======== Diluted weighted average shares outstanding 4,689 4,251 4,563 4,205 ========= ========= ======== ========
See accompanying notes to consolidated financial statements - 4 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands) September 30, December 31, 1998 1997 ------------- ------------- ASSETS Current Assets: Cash and cash investments $3,867 5,188 Trading account securities 594 449 Notes receivable - current 191 1,157 Management fees and other receivables 960 815 Receivable from clearing broker 438 543 Income taxes receivable 197 --- Prepaid expenses and other 562 508 ------------- ------------- Total current assets 6,809 8,660 Notes receivable, less current portion 3,929 2,982 Property and equipment 1,730 1,830 Investment in affiliates 16,383 15,611 Preferred stock investment 2,078 --- Other assets 279 318 ------------- ------------- Total Assets $31,208 29,401 ============= ============= See accompanying notes to consolidated financial statements - 5 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands) September 30, December 31, 1998 1997 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable - trade $ 776 614 Payable to clearing broker --- 441 Accrued compensation 443 446 Accrued expenses and other liabilities (Note 4) 5,404 3,573 Income taxes payable --- 226 ----------- ----------- Total current liabilities 6,623 5,300 Net deferred income tax liability 1,039 822 ----------- ----------- Total liabilities 7,662 6,122 Minority interest (36) 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 4,170,683 at 9/30/98 and 4,160,861 at 12/31/97 417 416 Additional paid-in capital 5,530 5,528 Retained earnings 17,635 17,160 ----------- ----------- Total shareholders' equity 23,582 23,104 Total Liabilities and Shareholders' Equity $31,208 29,401 =========== =========== 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, 1998 1997 ----------- ----------- Cash flows from operating activities: Cash received from customers $9,989 7,575 Cash paid to suppliers and employees (8,153) (5,784) Change in trading account securities (145) (92) Change in receivable from clearing broker (336) (551) Interest paid (24) (12) Income taxes paid (439) (574) Interest, dividends and other investment proceeds 68 115 ----------- ----------- Net cash provided by operating activities 960 677 Cash flows from investing activities: Proceeds from sale of property and equipment 13 --- Payments for purchase property and equipment (185) (292) Proceeds from equity owners in investment 264 --- Investment in preferred stock (2,074) --- Proceeds from sale of insurance exchange --- 1,000 Proceeds from sale of 20% of Insurance Serv --- 2,000 Funds loaned to others (1,840) (180) Collection of notes receivable 1,711 41 Other 62 4 ----------- ----------- Net cash (used in) provided by investing activities (2,049) (2,573) Cash flows from financing activities: Repayment of long term obligations --- (542) Purchase/retire treasury stock (97) (324) Exercise of stock options 75 418 Distribution to minority interest (210) --- ----------- ----------- Net cash used in financing activities (232) (448) ----------- ----------- Net change in cash and cash equivalents $(1,321) 2,802 ----------- ----------- Cash and cash equivalents at beginning of period 5,188 5,770 ----------- ----------- Cash and cash equivalents at end of period $3,867 8,572 =========== =========== See accompanying notes to consolidated financial statements - 7 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, continued (In thousands) Nine Months Ended September 30, 1998 1997 --------- --------- Reconciliation of net earnings to net cash from operating activities: Net earnings $475 1,148 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 443 275 Earnings/(loss) from discontinued operations (55) 210 Loss on disposal of discontinued operations --- 1,209 Write-off of fixed assets 15 --- Undistributed (earnings)/loss of affiliate (776) (1,759) Gain on sale of 20% Insurance Services --- (1,899) Gain on sale of insurance exchange --- (133) Change in federal income tax payable (423) (158) Minority interest in consolidated earnings (1) (5) Provision for deferred taxes 216 76 Change in trading securities (145) (92) Change in unrealized holding loss --- 11 Change in receivable from clearing broker (336) (551) Change in management fees & other receivables (144) 321 Change in prepaids & other current assets (53) (182) Change in other assets --- 1,158 Change in trade payables 162 (2) Change in accrued expenses & other liabilities 1,582 1,050 --------- --------- Net cash from operating activities $960 677 ========= ========= 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 September 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 September 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 September 30, 1998 the Company owned 17.0% (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 September 30, 1998 the Company owned 63.4% 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 three quarters of 1998. 4. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consists of the following: September 30 December 31 1998 1997 ---- ---- Taxes payable-other $ 196,000 196,000 Deferred income (Note 7) 1,949,000 280,000 Health insurance and other claims payable 8,000 59,000 Contractual/legal claims 1,290,000 1,461,000 Vacation payable 95,000 102,000 Funds held for others 319,000 58,000 Discontinued operations disposition costs 1,376,000 1,138,000 Other 171,000 279,000 ---------- --------- $5,404,000 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 assumes that all clients will migrate to other software products by the end of 1999 and reflected the expected financial impact of discontinuing this segment on that date in the 1997 financial statements. Net assets/(liabilities) of the discontinued computer systems and software segment as of September 30, 1998 consisted of the following: Cash and cash investments $ 30,000 Trade accounts receivable 145,000 Other receivables 1,000 Prepaid and other current assets 49,000 Fixed assets, net of depreciation 41,000 Intercompany receivables 1,124,000 Trade accounts payable (2,000) F.I.T. Payable (19,000) Accrued expenses (1,409,000) --------- Net liabilities $ (40,000) ======= 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 September 30, 1998 --------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ---------- Earnings from continuing operations $219,000 Basic EPS Income available to common stockholders 219,000 4,165,000 $0.05 Effect of Dilutive Securities Options --- 64,000 Contingently issuable shares (28,000) 460,000 ---------- ---------- Diluted EPS Income available to common stockholders and assumed conversions $ 191,000 4,689,000 $0.04 ========== ========== ===== For the Three Months Ended September 30, 1997 --------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- Earnings from continuing operations $ 486,000 Discontinued Operations --- Basic EPS Income available to 486,000 4,145,000 $0.12 Common stockholders Effect of Dilutive Securities Options --- 106,000 Contingently issuable shares --- --- ----------- ----------- Diluted EPS Income available to common stockholders and assumed conversions $ 486,000 4,251,000 $0.11 ========= ========= ====== - 12 - 6. EARNINGS PER SHARE, continued For the Nine Months Ended September 30, 1998 -------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ---------- ------------ --------- Earnings from continuing operations 475,000 Basic EPS Income available to common stockholders 475,000 4,162,000 $0.11 Effect of Dilutive Securities Options --- 84,000 Contingently issuable shares (45,000) 317,000 ---------- ---------- Diluted EPS Income available to common stockholders and assumed conversions $ 430,000 4,563,000 $0.09 ========= ========= ====== For the Nine Months Ended September 30, 1997 -------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ---------- ------------ --------- Earnings from continuing $2,084,000 Operations Discontinued Operations (936,000) Basic EPS Income available to 1,148,000 4,088,000 $.28 Common stockholders Effect of Dilutive Securities Options --- 117,000 Contingently issuable shares --- --- ---------- --------- Diluted EPS Income available to common stockholders and assumed conversions $1,148,000 4,205,000 $.27 ========= ========= ======= - 13 - 6. EARNINGS PER SHARE, CONTINUED Unexercised employee stock options to purchase 683,800 and 533,300 shares of the Company's common stock for the three and nine month periods ended September 30, 1998, respectively, were not included in the computations of diluted EPS because the options' exercise prices were greater than the average market price of the Company's common stock during the period. Unexercised employee stock options to purchase 264,800 and 287,300 shares of the Company's common stock for the three and nine month periods ended September 30, 1997, respectively, were not included in the computations of diluted EPS because the options' exercise prices were greater than the average market price of the Company's common stock during the period. At September 30, 1998 the Company's affiliate, Syntera HealthCare Corp., had issued 585,000 shares which are contingently convertible into 317,000 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 All statements past and future, written or oral, made by the Company or its officers, directors, shareholders, agents, representatives or employees, including without limitation, those statements contained in this Report on Form 10-Q, that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, intentions or strategies regarding the future. Forward-looking statements may appear in this document or other documents, reports, press releases, and written or oral presentations made by officers of the Company to shareholders, analysts, news organizations or others. Readers should not place undue reliance on forward-looking statements. All forward-looking statements are based on information available to the Company and the declarant at the time the forward-looking statement is made, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Company's actual results could differ materially from those described in such forward-looking statements. In addition to any risks and uncertainties specifically identified in connection with such forward-looking statements, the reader should consult the Company's reports on previous Form 10-Q and other filings under the Securities Act of 1933 and the Securities Exchange Act of 1934, for factors that could cause actual results to differ materially from those presented. Forward-looking statements are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors and legislative, judicial and other governmental authorities and officials. Assumptions relating to the foregoing involve judgements with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Any such assumptions could be inaccurate and, therefore, there can be no assurance that any forward-looking statements by the Company or its officers, directors, shareholders, agents, representatives or employees, including those forward-looking statements contained in this Report on Form 10-Q, will prove to be accurate. RESULTS OF OPERATIONS REVENUES Revenues from operations increased $480,000 (15.8%) and $3,018,000 (42.0%) for the three and nine month periods ended September 30, 1998 compared to the same periods in 1997, respectively. For both the three and nine 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 $515,000 (18.4%) and $3,236,000 (50.9%) for the three and nine month periods ended September 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 $436,000 (23.5%) 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 nine month period ended September 30, 1998 revenues rose $3,177,000 (92.2%) compared to the same period in 1997. The Houston office, which currently employs seventeen brokers, contributed approximately $1,173,000 of this nine month increase. Revenues from premium-based insurance management fees were up $83,000 (8.9%) and $86,000 (3.0%) for the three month and nine month periods ended September 30, 1998 compared to the same periods in 1997, respectively. The increases in both current year periods were due to greater commissions earned by third party agents on new and renewal business. Real estate revenues increased $15,000 (9.4%) and $24,000 (4.7%) for the three and nine month periods ended September 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 $50,000 (64.1%) and $242,000 (77.8%) for the three and nine month periods ended September 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 nine 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 $837,000 (29.0%) and $2,958,000 (40.3%) for the three and nine month periods ended September 30, 1998 compared to the same periods in 1997, respectively. For both the three and nine month periods in 1998, all segments of the Company experienced expense increases compared to the same periods in 1997. - 16 - Financial services expense increased $764,000 (31.2%) and $2,892,000 (47.8%) for the three and nine month periods ended September 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 $134,000 (15.1%) and $291,000 (11.1%) for the three and nine month periods ended September 30, 1998 compared to the same periods in 1997, respectively, due primarily to higher commission expense which is the result of outside agents, who are paid a higher commission rate, producing a higher percentage of total premiums. 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 increased $67,000 (22.5%) and $43,000 (4.9%) for the three and nine month periods ended September 30, 1998 compared to the same periods in 1997, respectively. The increase in the current quarter was due to higher personnel costs as well as 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 $58,000 (8.1%) and $716,000 (40.7%) for the three and nine month periods ended September 30, 1998 compared to the same periods in 1997, respectively. Current nine month earnings were adversely affected by a nonrecurring write-off of approximately $5.0 million in fees incurred in connection with a $100 million senior subordinated debt offering by Prime, completed in March 1998. In addition, Prime expensed an additional $1.6 million in the first quarter of 1998 associated with nonrecurring development costs. Interest paid on the increased debt caused the decrease in current quarter earnings. Lastly, Prime's federal income tax rate increased to 40% for the third quarter as compared to 30% in the same period in 1997 due to the full utilization of net operating loss carryforwards in 1997. The Company's percentage ownership of Prime was 17.0% at September 30, 1998. This percentage is up from 15.9% at December 31, 1997 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 decreased $8,000 (6.6%) and $53,000 (16.6%) for the three and nine month periods ended September 30, 1998 compared to the same periods in 1997, respectively. The nine month loss in 1997 was due to the fact that Syntera was in the start-up stage and had no doctors under contract. The current year loss was reduced as a total of eleven long-term contracts have been entered into with OB/GYN physicians in 1998. The Company's equity ownership percentage in Syntera dropped from 69.4% at June 30, 1998 to 63.4% at September 30, 1998 as four additional physicians were issued shares in the current quarter upon signing long-term management contracts. - 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 September 1997 by Florida Physicians Insurance Company ("FPIC") for $2,000,000. LIQUIDITY AND CAPITAL RESOURCES Current assets exceeded current liabilities by $186,000 and $3,360,000 at September 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. Also, the short-term portion of the note receivable from Consolidated Eco-Systems, Inc. was reclassed to long-term in the current quarter as the note is technically in default. In addition, the Company loaned $530,000 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 September 30, 1998 were approximately $185,000. Total capital expenditures are expected to be approximately $225,000 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-nine months with a fluctuating interest rate (currently 8.25%) based upon the prime rate. The line is secured by securities owned by the Company. No balance was owed under this credit line as of October 31, 1998. - 18 - 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 vital operating systems within the Company are 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. Presently, the Company's internal hardware systems include a PC Windows-based network for its accounting and office software and a Unix-based network for its operations software. The PC accounting software has been verified as being Year 2000 compliant as is all hardware which runs the accounting software. While there still exist some PC's within the company that are not compliant the Company expects to have them all replaced by the end of 1998. The operating system for the Unix-based system will be Year 2000 compliant by the end of 1998 when a final patch is installed. The Company's non-information technology, including elevators, phone system, security system and utilities, would present problems to the Company should either the phones or utilities fail. The Company is currently studying new phone systems and expects to replace the current system in the first quarter of 1999. Failure to receive electricity, gas or water present obvious problems to the operations of the Company. No written assurances from any utility provider have yet been received but the Company feels there is still sufficient time. There are no contingency plans for the loss of power. The most reasonably likely worst case scenario would include a failure by the clearing broker of the Company's broker/dealer subsidiary. New trades would not be possible nor would the Company know the positions in customer accounts. A contingency plan for this scenario would entail the use of another clearing broker to make new trades but this would not remedy the problem of losing current customer investment positions. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued FASB No. 131, Disclosures about Segments of an Enterprise and Related Information, which the Company is required to adopt for annual periods beginning after December 15, 1998 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. - 19 - In April 1998, the AICPA issued Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities, which is effective for financial statements for fiscal years beginning after December 15, 1998. The SOP requires costs of start-up activities and organization costs to be expensed as incurred. The Company's affiliate, Syntera Healthcare, has incurred start-up costs which were expensed in the current quarter and rolled through equity income of the Company. These costs were insignificant and did not have an adverse material effect on the Company's financials. - 20 - PART II OTHER INFORMATION - 21 - Item 1. LEGAL PROCEEDINGS The Company is involved in various claims and legal actions that have arisen in the ordinary course of business. The Company believes that the liability provision in its financial statements is sufficient to cover any unfavorable outcome related to lawsuits in which it is currently named. Management believes that liabilities, if any, arising from these actions will not have a significant adverse effect on the financial condition of the Company. However, due to the uncertain nature of legal proceedings, the actual outcome of these lawsuits may differ from the liability provision recorded in the Company's financial statements. Item 5. OTHER INFORMATION On October 31, 1996, the Company invested $3,300,000 in common stock of Exsorbet Industries, Inc. ("Exsorbet") (NASDAQ:EXSO) with a put option. Exsorbet is a diversified environmental and technical services company. On November 26, 1996, the Company exercised its put in exchange for a note receivable from Exsorbet. The note is secured by the shares that were subject to the put plus all the stock and substantially all of the assets of a wholly owned subsidiary of Exsorbet. On 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 agreed to roll all interest due into the note and extended the terms of the note for two years. Repayment terms were geared to track Consolidated ECO's cash flow and included monthly payments of $40,000 from January 1, 1998 through September 30, 1998, at which time payments were to 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. As of October 31, 1998 only two payments of $40,000 each were received from Consolidated Eco, the last of which was received April 10, 1998. 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. - 22 - 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. 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 63% owner of Syntera, a percentage expected to decline to a minority level as Syntera issues additional shares for future acquisitions. During the third quarter, Syntera signed four additional physicians to contracts bringing the total practices under contract to eleven. 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 September 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: November 13, 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 SEPTEMBER 30, 1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 9-MOS DEC-31-1998 DEC-31-1998 JUL-01-1998 JAN-01-1998 SEP-30-1998 SEP-30-1998 3,867 3,867 594 594 1,825 1,825 39 39 14 14 6,809 6,809 5,759 5,759 4,029 4,029 31,208 31,208 6,623 6,623 0 0 0 0 0 0 417 417 23,165 23,165 31,208 31,208 0 0 3,720 10,293 0 0 3,530 9,764 179 505 0 0 11 24 335 684 119 247 219 438 0 36 0 0 0 0 219 475 0.05 0.11 0.04 0.09
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