-----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, Op/ze6H2Ai69F/m8ulsOb7oLrR49LZkLCmHlk2XqdIziH//yhinOdY0EYOy4xGcj b++wAKehNdVCWlfjDCceCA== 0000724024-99-000015.txt : 19990817 0000724024-99-000015.hdr.sgml : 19990817 ACCESSION NUMBER: 0000724024-99-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99689952 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, 1999 FORM 10-Q ===================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO -------------------- -------------------- COMMISSION FILE NUMBER 0-11453 AMERICAN PHYSICIANS SERVICE GROUP, INC. (Exact name of registrant as specified in its charter) TEXAS 75-1458323 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 1301 CAPITAL OF TEXAS HIGHWAY AUSTIN, TEXAS 78746 (Address of principal executive offices) (Zip Code) (512) 328-0888 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d ) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------- ------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. NUMBER OF SHARES OUTSTANDING AT TITLE OF EACH CLASS JULY 31, 1999 -------------------- ---------------- Common Stock, $.10 par value 2,738,233 ============================================================================ 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, ------------------------ ------------------------ 1999 1998 1999 1998 ---------- ---------- --------- -------- REVENUES: Financial services $2,754 $2,239 $5,664 $4,336 Insurance services 915 1,033 2,109 1,957 Real estate 166 181 356 359 Investments and other 1,738 9 1,816 41 ---------- ---------- -------- ------- Total revenue 5,573 3,462 9,945 6,693 EXPENSES: Financial services 2,415 1,955 4,973 3,843 Insurance services 1,011 1,000 2,357 1,894 Real estate 137 135 278 266 General and administrative 1,856 339 2,298 557 Interest 56 9 90 13 ---------- ---------- -------- ------- Total expenses 5,475 3,438 9,996 6,573 ---------- ---------- -------- ------- Operating income/(loss) 98 24 (51) 120 Equity in earnings of unconsolidated affiliates (Note 3) 474 527 992 230 ---------- ---------- -------- -------- Earnings from continuing operations before income taxes and minority interest 572 551 941 351 Income tax expense 203 193 329 129 Minority interest 12 (1) 37 (2) --------- --------- -------- -------- Earnings from continuing operations 381 357 649 219 Discontinued operations: Earnings from discontinued operations net of income tax of $0 and $0 and $31 and $19 for the three and six months in 1999 and 1998, respectively. --- --- 63 36 ---------- ---------- -------- ------- NET EARNINGS $ 381 $357 $712 $255 ========== ========== ======== =======
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) EARNINGS PER COMMON SHARE:
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ---------------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Basic: Earnings from continuing operations $ 0.13 $ 0.09 $ 0.18 $ 0.05 Discontinued operations 0.00 0.00 0.02 0.01 --------- --------- -------- -------- Net earnings $ 0.13 0.09 0.20 0.06 ========= ========= ======== ======== Diluted: Earnings from continuing opertions $ 0.13 0.08 0.18 0.05 Discontinued operations 0.00 0.00 0.02 0.01 --------- --------- -------- -------- Net earnings $ 0.13 $ 0.08 $ 0.20 $ 0.06 ========= ========= ======== ======== Basic weighted average shares outstanding 2,952 4,161 3,548 4,160 ========= ========= ======== ======== Diluted weighted average shares outstanding 2,962 4,477 3,569 4,437 ========= ========= ======== ========
See accompanying notes to consolidated financial statements - 4 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands) June 30, December 31, 1999 1998 ------------- ------------- ASSETS Current Assets: Cash and cash investments $1,646 $3,214 Trading account securities 527 535 Notes receivable - current 184 196 Management fees and other receivables 173 968 Receivable from clearing broker 1,036 1,036 Prepaid expenses and other 252 339 Deferred income tax asset 1,390 1,279 ------------- ------------- Total current assets 5,208 7,567 Notes receivable, less current portion 5,886 4,287 Property and equipment 1,580 1,653 Investment in affiliates 14,828 17,063 Preferred stock investment 2,078 2,078 Other assets 240 266 ------------- ------------- Total Assets $29,820 $32,914 ============= ============= See accompanying notes to consolidated financial statements - 5 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands) June 30, December 31, 1999 1998 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable - trade $ 668 $ 910 Payable to clearing broker 540 487 Income taxes payable 974 292 Accrued compensation 232 823 Accrued expenses and other liabilities (Note 4) 2,600 3,273 ----------- ----------- Total current liabilities 5,014 5,785 Notes payable 2,360 --- Net deferred income tax liability 1,991 2,474 ----------- ----------- Total liabilities 9,365 8,259 Minority interest 16 53 Shareholders' Equity: Preferred stock, $1.00 par value, 1,000,000 shares authorized ---- ---- Common stock, $0.10 par value, shares authorized 20,000,000; issued 2,712,283 at 6/30/99 and 4,160,083 at 12/31/98 271 416 Additional paid-in capital 5,467 5,481 Retained earnings 14,701 18,705 ----------- ----------- Total shareholders' equity 20,439 24,602 Total Liabilities and Shareholders' Equity $29,820 $32,914 =========== =========== See accompanying notes to consolidated financial statements - 6 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Six Months Ended June 30, 1999 1998 ----------- ----------- Cash flows from operating activities: Cash received from customers $8,908 $6,447 Cash paid to suppliers and employees (9,782) (5,458) Change in trading account securities 8 (590) Change in receivable from clearing broker 53 98 Interest paid (90) (13) Income taxes paid (385) (389) Interest, dividends and other investment proceeds 198 41 ----------- ----------- Net cash provided by operating activities (1,090) 136 Cash flows from investing activities: Proceeds from sale of property and equipment --- 2 Payments for purchase property and equipment (68) (68) Proceeds from equity owners in investment --- 264 Investment in preferred stock --- (2,074) Discontinued operations 96 --- Funds loaned to others (3,804) (875) Collection of notes receivable 963 401 Other --- 59 ----------- ----------- Net cash used in investing activities (2,813) (2,291) Cash flows from financing activities: Proceeds from borrowings 2,360 --- Purchase/retire treasury stock (25) (42) Exercise of stock options --- 20 Distribution to minority interest --- (150) ----------- ----------- Net cash used in financing activities 2,335 (172) ----------- ----------- Net change in cash and cash equivalents $(1,568) (2,327) ----------- ----------- Cash and cash equivalents at beginning of period 3,214 5,188 ----------- ----------- Cash and cash equivalents at end of period $1,646 $2,861 =========== =========== See accompanying notes to consolidated financial statements - 7 - AMERICAN PHYSICIANS SERVICE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, continued (In thousands) Six Months Ended June 30, 1999 1998 --------- --------- Reconciliation of net earnings to net cash from operating activities: Net earnings $712 $255 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 307 295 Provision for bad debts 1,479 --- Earnings from discontinued operations (96) (55) Minority interest in consolidated earnings (37) 2 Undistributed earnings of affiliate (992) (230) Gain on exchange of common stock (1,635) --- Write-off of fixed assets 28 9 Change in federal income tax payable 569 (296) Provision for deferred taxes (593) 42 Change in trading securities 8 (590) Change in payable from clearing broker 53 98 Change in management fees & other receivables 795 (205) Change in prepaids & other current assets 87 (8) Change in trade payables (485) (139) Change in accrued expenses & other liabilities (1,290) 958 --------- --------- Net cash from operating activities $(1,090) $136 ========= ========= Summary of non-cash transactions: During the second quarter, 1999, the Company acquired $4,862,000 in treasury stock by exchanging $4,862,000 in Prime Medical Services, Inc. common stock. The treasury stock was subsequently retired and the amount in excess of par was charged to Retained Earnings. See accompanying notes to consolidated financial statements - 8 - AMERICAN PHYSICIANS SERVICE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 (Unaudited) 1. GENERAL The accompanying unaudited consolidated financial statements have been prepared in conformity with the generally accepted accounting principles described in the audited financial statements for the year ended December 31, 1998 and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the financial position as of June 30, 1999 and the results of operations for the periods presented. These statements have not been audited by the Company's independent certified public accountants. The operating results for the interim periods are not necessarily indicative of results for the full fiscal year. The notes to consolidated financial statements appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 filed with the Securities Exchange Commission should be read in conjunction with this Quarterly Report on Form 10-Q. There have been no significant changes in the information reported in those notes other than from normal business activities of the Company. Certain reclassifications have been made to amounts presented in prior periods to be consistent with the 1999 presentation. 2. CONTINGENCIES In conjunction with a settlement agreement, the Company's broker/dealer subsidiary, APS Financial, has guaranteed the future yield of a customer's investment portfolio beginning in November 1994 for up to a five and one-half year period ending in May, 2000. Management believes that the Company's financial statements adequately provide for any loss that might occur under this agreement; however, as defined in AICPA Statement of Position 94-6, it is reasonably possible that the Company's estimate of loss could change over the remaining term of the agreement. Management is unable to determine the range of potential adjustment since it is based on securities markets, which are beyond its ability to control. - 9 - 3. EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES At June30, 1999 the Company owned 13.8% (2,344,000 shares) of the outstanding common stock of Prime Medical Services, Inc. ("Prime"). The Company records its pro-rata share of Prime's results on the equity method. Prime is primarily in the business of providing lithotripsy services. The common stock of Prime is traded in the over-the-counter market under the symbol "PMSI". Prime is a Delaware corporation which is required to file annual, quarterly and other reports and documents with the Securities and Exchange Commission, which reports and documents contain financial and other information regarding Prime. Such reports and documents may be examined and copies may be obtained from the offices of the Securities and Exchange Commission. The Company owns 61.6% of Syntera HealthCare Corporation ("Syntera") and records its pro-rata share of Syntera's results on the equity basis. Syntera specializes in the management of OB/GYN and related medical practices. At the time of this report the Company was in negotiations to merge Syntera with another PPM company. APS will account for its interest in the merged companies on the cost basis. 4. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consists of the following: June 30 December 31 1999 1998 ------- ----------- Taxes payable-other $ 67,000 115,000 Deferred income (Note 7) 591,000 740,000 Contractual/legal claims 1,150,000 1,096,000 Vacation payable 109,000 134,000 Funds held for others 267,000 280,000 Discontinued operations disposition costs 512,000 1,026,000 Other (96,000) (118,000) ---------- ---------- $2,600,000 3,273,000 ========= ========= - 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. Termination support for one client, whose contract runs until 2002, may now extend past December 31, 1999. Consequently, the Company has adjusted its loss allowance and believes that such allownace is adequate to cover potential future obligations. Net assets/(liabilities) of the discontinued computer systems and software segment as of June 30, 1999 consisted of the following: Cash and cash investments $ 7,000 Trade accounts receivable 16,000 Other receivables 1,000 Prepaid and other current assets 7,000 Fixed assets, net of depreciation 14,000 Intercompany receivables 1,004,000 Trade accounts payable (2,000) F.I.T. Payable (203,000) Accrued expenses (526,000) --------- Net assets $ 318,000 ========= 6. EARNINGS PER SHARE Basic earnings per share is based on the weighted average shares outstanding without any dilutive effects considered. Diluted earnings per share reflect dilution from all contingently issuable shares, including options and convertible debt. A reconciliation of income and average shares outstanding used in the calculation of basic and diluted earnings per share from continuing operations follows: - 11 - 6. EARNINGS PER SHARE, continued For the Three Months Ended June 30, 1999 ----------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ---------- Earnings from continuing operations 381,000 Basic EPS Income available to common stockholders 381,000 2,952,000 $0.13 Effect of Dilutive Securities Options --- 10,000 Contingently issuable shares --- --- ---------- ---------- Diluted EPS Income available to common stockholders and assumed conversions $ 381,000 2,962,000 $0.13 ========== ========== ===== For the Three Months Ended June 30, 1998 ----------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- Earnings from continuing operations $ 358,000 Basic EPS Income available to 358,000 4,161,000 $0.09 Common stockholders Effect of Dilutive Securities Options --- 102,000 Contingently issuable shares (1,000) 214,000 ----------- ----------- Diluted EPS Income available to common stockholders and assumed conversions $ 357,000 4,477,000 $0.08 ========= ========= ====== - 12 - 6. EARNINGS PER SHARE, continued For the Six Months Ended June 30, 1999 --------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ---------- ------------ --------- Earnings from continuing operations 649,000 Discontinued operations 63,000 Basic EPS Income available to common stockholders 712,000 3,548,000 $0.20 Effect of Dilutive Securities Options --- 21,000 Contingently issuable shares --- --- ---------- ---------- Diluted EPS Income available to common stockholders and assumed conversions $ 712,000 3,569,000 $0.20 ========= ========= ====== For the Six Months Ended June 30, 1998 --------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ---------- ------------ --------- Earnings from continuing $ 219,000 Operations Discontinued Operations 36,000 Basic EPS Income available to 255,000 4,160,000 $.06 Common stockholders Effect of Dilutive Securities Options --- 102,000 Contingently issuable shares (7,000) 175,000 ---------- --------- Diluted EPS Income available to common stockholders and assumed conversions $248,000 4,437,000 $.06 ======== ========= ======= - 13 - 6. EARNINGS PER SHARE, continued Unexercised employee stock options to purchase 862,100 and 855,500 shares of the Company's common stock for the three and six month periods ended June 30, 1999, respectively, were not included in the computations of diluted EPS because the options' exercise prices were greater than the average market price of the Company's common stock during the period. Unexercised employee stock options to purchase 581,300 and 264,800 shares of the Company's common stock for the three and six month periods ended June 30, 1998, respectively, were not included in the computations of diluted EPS because the options' exercise prices were greater than the average market price of the Company's common stock during the period. 7. DEFERRED INCOME The Company collects commissions on certain medical malpractice insurance policies. Such commissions are collected in advance. Income is earned ratably on the policy over the course of the life of the policy, typically twelve months. Commissions which are not yet earned are recorded as deferred income on the balance sheet. 8. SEGMENT INFORMATION The Company's segments are distinct by type of service provided. There has been no change in the basis of segmentation or in the basis of measurement of segment profit or loss from those criteria used in the December 31, 1998 Form 10-K. June 30, ------------------------------------ 1999 1998 Operating Revenues: -------------- -------------- Investment services 5,664,000 4,335,000 Insurance services 2,109,000 1,957,000 Real estate 433,000 438,000 Corporate 3,116,000 642,000 --------- --------- $11,322,000 $7,372,000 =========== ========== Reconciliation to Consolidated Statement of Earnings: Total segment revenues 11,322,000 7,372,000 Less: Intercompany profits (77,000) (79,000) Intercompany dividends (1,300,000) (600,000) ---------- ----------- Total Revenues $9,945,000 $6,693,000 ========== ========== - 14 - 8. Segment Information, (continued) June 30, -------------------------------- 1999 1998 Operating Profit (Loss) ----------- ----------- Investment services 681,000 479,000 Insurance services (248,000) 63,000 Real estate 78,000 93,000 Corporate 738,000 85,000 --------- -------- $1,249,000 $720,000 ========== ======== Reconciliation to Consolidated Statement of Earnings: Total segment operating profits 1,249,000 720,000 Less: intercompany dividends (1,300,000) (600,000) ---------- --------- Operating Income (Loss) (51,000) 120,000 ========== ======= Equity in earnings of affiliates 992,000 230,000 ---------- ------- Earnings from continuing operating before income taxes and minority interests 941,000 350,000 Income tax expense (329,000) (129,000) Minority interests 37,000 (2,000) -------- -------- Earnings from continuing operations 649,000 219,000 -------- -------- Net profit from discontinued operations, net of income tax 63,000 36,000 -------- -------- Net income $712,000 $255,000 ======== ======== - 15 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS All statements past and future, written or oral, made by the Company or its officers, directors, shareholders, agents, representatives or employees, including without limitation, those statements contained in this Report on Form 10-Q, that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, intentions or strategies regarding the future. Forward-looking statements may appear in this document or other documents, reports, press releases, and written or oral presentations made by officers of the Company to shareholders, analysts, news organizations or others. Readers should not place undue reliance on forward-looking statements. All forward-looking statements are based on information available to the Company and the declarant at the time the forward-looking statement is made, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Company's actual results could differ materially from those described in such forward-looking statements. In addition to any risks and uncertainties specifically identified in connection with such forward-looking statements, the reader should consult the Company's reports on previous Form 10-Q and other filings under the Securities Act of 1933 and the Securities Exchange Act of 1934, for factors that could cause actual results to differ materially from those presented. Forward-looking statements are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors and legislative, judicial and other governmental authorities and officials. Assumptions relating to the foregoing involve judgements with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Any such assumptions could be inaccurate and, therefore, there can be no assurance that any forward-looking statements by the Company or its officers, directors, shareholders, agents, representatives or employees, including those forward-looking statements contained in this Report on Form 10-Q, will prove to be accurate. RESULTS OF OPERATIONS REVENUES Revenues from operations increased $2,112,000 (61.0%) and $3,252,000 (48.6%) for the three and six month periods ended June 30, 1999 compared to the same periods in 1998. For the current three month period, revenues increased at the financial services and investments and other operating segments but decreased at the insurance services and real estate operating segments - 16 - when compared to the same period in 1998. For the current six month period, revenues increased at the financial services, insurance services and general and administrative operating segments but decreased at the real estate segment compared to the same six month period in 1998. Financial services revenues increased $515,000 (23.0%) and $1,329,000 (30.6%) for the three and six month periods ended June 30, 1999 compared to the same periods in 1998. The increase was due to greater commission income at APS Financial Corp., a broker/dealer division of APS Investment Services, Inc. The increase in current quarter and current year commission income is the result of greater volatility in the bond market, a greater emphasis on internally generated market research and continued success at recruiting experienced, proven producing brokers. Market volatility creates opportunities where customers are motivated to restructure their holdings. This increased activity creates more transactions and thus more commissions. Internal market research contributes to higher commissions by providing additional investment ideas to be marketed by the brokers to a greater number of customers. Insurance services revenues from premium-based insurance management fees decreased $118,000 (11.4%) but increased $152,000 (7.8%) for the three and six month periods ended June 30, 1999 compared to the same periods in 1998. The decrease in the current three month period was due to a timing difference with the recognition of commission income on new and renewal business between 1999 and 1998. During 1998, a large portion of new business insurance commissions were issued in the first quarter but not recognized until the second quarter when the policies were actually signed. When these policies were renewed, income was recognized on the anniversary of the issuance date, which was in the first quarter of 1999. Overall, commissions from new and renewal business are up for the six month period ended June 30, 1999 when compared to the same period in 1998. Real estate revenues decreased $15,000 (8.0%) and $3,000 (0.9%) for the three and six month periods ended June 30, 1999 compared to the same periods in 1998. The current three month decrease is primarily the result of a major tenant vacating the building in April, 1999. As of July 31, this vacated office space was being leased and rent revenues should rebound in the final two quarters of 1999. Investment and other income increased $1,729,000 (18,878.7%) and $1,775,000 (4,292.4%) for the three and six month periods ended June 30, 1999 compared to the same periods in 1998. The increase in the current quarter was primarily due to gains from the exchanges of Prime Medical Services, Inc. (NASDAQ:PMSI) common stock for American Physicians Service Group, Inc. (NASDAQ:AMPH) common stock. As part of a common stock buy-back strategy, the Company exchanged 720,700 shares of PMSI common stock held at two mutual funds companies for 1,441,400 shares of AMPH common stock. The AMPH common stock was then retired and gains totaling $1,635,000 were recorded. The remainder of the revenue increase in the current quarter was the result of a rise in interest income resulting from line of credit loans granted to the Company's OB/GYN management affiliate, Syntera HealthCare Corporation, and to Uncommon Care, Inc., a privately-held developer and operator of dedicated Alzheimer's care facilities in which the Company has a preferred stock investment. - 17 - EXPENSES Total operating expenses increased $2,039,000 (59.3%) and $3,423,000 (52.1%) for the three and six month periods ended June 30, 1999 compared to the same periods in 1998. All four operating segments experienced expense increases in both periods of 1999 compared to 1998. Financial services expense increased $460,000 (23.5%) and $1,129,000 (29.4%) for the three and six month periods ended June 30, 1999 compared to the same periods in 1998. The primary reason for the current year increase is higher commission expense resulting from the increase in commission revenue at APS Financial, the broker/dealer subsidiary of APS Investment Services, Inc. In addition, general and administrative costs at APS Investment Services increased in the current periods primarily as a result of personnel costs associated with the asset management division of APS Investment Services, APS Asset Management, Inc. No such asset management related costs were incurred in the first five months of 1998. Insurance services expenses at the insurance management subsidiary increased $11,000 (1.1%) and $463,000 (24.5%) for the three and six month periods June 30, 1999 compared to the same periods in 1998. The six month increase is due primarily to higher commission and payroll related expenses. The increase in commission expense is the result of outside agents, who are paid a higher commission rate, producing a higher percentage of total premiums. A corresponding increase in commission revenue earned by third party agents resulted in third party activity having no effect on profits. The increase payroll related expense is primarily the result of normal annual merit raises. Real estate expenses increased $2,000 (2.0%) and $12,000 (4.8%) for the three and six month periods June 30, 1999 compared to the same periods in 1998 primarily as a result of increased condominium fees charged by the condominium association. General and administrative expense increased $1,519,000 (448.3%) and $1,741,000 (312.3%) for the three and six month periods ended June 30, 1998 compared to the same periods in 1998. The increase in the current quarter was primarily due to a charge to bad debt resulting from a decrease in estimated discounted future cash flows of a note receivable as well as a separate charge to bad debt pertaining to receivables from Syntera HealthCare, Inc. The increase for the six months ended June 30, 1999 was due to the charges to bad debt mentioned above as well as to higher personnel costs and higher legal fees resulting from the restructuring of certain receivables. The first six months of 1998 reflects the release of an accrual for certain contingencies. - 18 - EQUITY IN EARNINGS/(LOSS) OF UNCONSOLIDATED AFFILIATES The Company's equity in earnings of Prime Medical Services, Inc. ("Prime") increased $41,000 (7.2%) and $785,000 (205.0%) for the three and six month periods ended June 30, 1999 compared to the same periods in 1998. Earnings for the six months ended June 30, 1998 were adversely affected by a nonrecurring write-off of approximately $5.0 million in fees incurred in connection with a $100 million senior subordinated debt offering by Prime, completed in March 1998. In addition, Prime expensed an additional $1.6 million in the first quarter of 1998 associated with nonrecurring development costs. No such expenses were incurred by Prime in the first six months of 1999. The Company's percentage ownership of Prime was 13.8% at June 30, 1999. This percentage is down from 16.3% at June 30, 1998 as a result of the common stock exchanges mentioned earlier in the Notes to Condensed Consolidated Financial Statements. The Company's equity in the loss of Syntera HealthCare Corporation increased $94,000 (229.3%) and $24,000 (15.0%) for the three and six month periods ended June 30, 1999 compared to the same periods in 1998. The current quarter loss was due primarily to bad debt charge-offs on certain practice receivables. At the time of this report the Company was in negotiations to merge Syntera with another PPM company. APS would account for its interest in the merged companies on an investment basis. MINORITY INTEREST Minority interest represents the twenty percent interest of Insurance Services owned by outside interests. LIQUIDITY AND CAPITAL RESOURCES Current assets exceeded current liabilities by $194,000 and $1,782,000 at June 30, 1999, and December 31, 1998, respectively. The primary cause of the decline in working capital is cash loaned to Uncommon Care and Syntera HealthCare. These loans are recorded as long-term receivables. Capital expenditures through the six month period ended June 30, 1999 were approximately $69,000. Total capital expenditures are expected to be approximately $200,000 in 1999. Historically, the Company has maintained a strong working capital position and, has been able to satisfy its operational and capital expenditure requirements with cash generated from its operating and investing activities. These same sources of funds have also allowed the Company to pursue investment and expansion opportunities consistent with its growth plans. To further its ability to meet its liquidity requirements and to accelerate its growth, the Company has established a $7,500,000 revolving line of credit with Bank of America. The line of credit is for a term of thirty-nine months with a fluctuating interest rate (currently 7.50%) based upon the prime rate. The line is secured by securities owned by the Company. A balance of $2,360,000 was owed under this credit line as of June 30, 1999. - 19 - YEAR 2000 COMPLIANCE The Company formed a Year 2000 Committee in mid 1998. The Committee was charged with examining (1) internal hardware and software systems; (2) physical facilities; and (3) outside suppliers, as these items relate to potential problems that could be caused by the inability to process dates beyond December 31, 1999. The Committee divided its task into four parts - assessment, remediation planning, implementation and testing and contingency planning. Assessment and remediation planning have been completed for all three phases of the project. Implementation and testing and contingency planning are discussed below. INTERNAL HARDWARE AND SOFTWARE SYSTEMS: All network application software and workstation software have been upgraded and tested to be compliant with the exception of the Company's accounting software, which has been upgraded but not yet tested. Testing of the accounting software will be completed in the third quarter of 1999. With the purchase of several new PC's this quarter, all hardware is now compliant and is expected to be placed in service by August 31, 1999. PHYSICAL FACILITIES: The Committee has evaluated its non-computer equipment and has determined that, except for its telephone system, there are no devices whose failure would materially affect the ability to carry out the business of the Company. A compliant telephone system is expected to be installed during the third quarter of 1999. The outside managers of the Company's office buildings have reported that all aspects of the physical facilities - elevators, fire and security systems, etc. are compliant. Electric power is supplied by the City of Austin which has reported that they are 100 percent complete with their mission critical objectives. They report to be fully compliant as of June 30, 1999 per N.E.R.C. guidelines. OUTSIDE SUPPLIERS: The Company has inquired about the state of Year 2000 readiness of those outside suppliers who were determined to be critical to the Company's ability ot carry out its business. Written assurances have been received from all of these critical services providers as of June 30, 1999. CONTINGENCY PLANNING: The Company cannot be certain that it has identified and will be successful in bringing into compliance all Year 2000 issues within its control. It can be less certain of critical services being supplied by third parties beyond its control. The Company expects to complete the process of formalizing plans for carrying on its business in the event of unanticipated Year 2000-related failures during the third quarter of 1999. Presently, the Company believes that the most reasonably likely worst case scenario would be a failure of relatively short duration of basic third party services such as the power grid. With such a failure the Company's planning will be directed toward a temporary suspension of operations followed by plans for resumption and catch up operations. Due to the magnitude of uncertainties related to Year 2000 issues, the Company is unable to fully assess the consequences of Year 2000 failures and, consequently, there could be a material adverse effect on the Company's results of operations, financial position and cash flows. - 20 - YEAR 2000 COSTS: The Company estimates that total expenditures to address Year 2000 issues will be $400,000, of which approximately 50% will be capitalized hardware purchases. The remainder of the expenditures are labor costs. Approximately 67% of the expenditures have been made to date. Since the Company is in a constant state of upgrading its technology and since all labor costs involve existing in-house staff, few of the costs incurred are incremental. Extensive use of in-house MIS personnel for Year 2000 issues has delayed implementation of other work designed to improve user productivity and the value of information provided. The Company does not believe such delays will a material adverse effect on the results of operations, financial position, or cash flows. NEW ACCOUNTING PRONOUNCEMENTS In April 1998, the AICPA issued Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities, which is effective for financial statements for fiscal years beginning after December 15, 1998. The SOP requires costs of start-up activities and organization costs to be expensed as incurred. No start-up costs were incurred by the Company or its affiliates during the second quarter of 1999. - 21 - PART II OTHER INFORMATION - 22 - Item 1. LEGAL PROCEEDINGS The Company is involved in various claims and legal actions that have arisen in the ordinary course of business. The Company believes that the liability provision in its financial statements is sufficient to cover any unfavorable outcome related to lawsuits in which it is currently named. Management believes that liabilities, if any, arising from these actions will not have a significant adverse effect on the financial condition of the Company. However, due to the uncertain nature of legal proceedings, the actual outcome of these lawsuits may differ from the liability provision recorded in the Company's financial statements. Item 4. RESULTS OF VOTES OF SECURITY HOLDERS On June 8, 1999 the annual meeting of shareholders of American Physicians Service Group, Inc. was held in Austin, Texas. Shareholders voted on the following item. Election of Directors The names of the directors elected at the meeting along with number of votes for, against and withheld are as follows: Name For Against Withheld ------------------- --------- ---------- ----------- Brad A. Hummel 2,755,051 35,491 --- Robert L. Myer 2,755,051 35,491 --- William A. Searles 2,755,051 35,491 --- Kenneth S. Shifrin 2,755,051 35,491 --- Item 5. OTHER INFORMATION On October 31, 1996, the Company invested $3,300,000 in common stock of Exsorbet Industries, Inc. ("Exsorbet") (NASDAQ:EXSO) with a put option. Exsorbet is a diversified environmental and technical services company. On November 26, 1996, the Company exercised its put in exchange for a note receivable from Exsorbet. The note is secured by the shares that were subject to the put plus all the stock and substantially all of the assets of a wholly owned subsidiary of Exsorbet. - 23 - On June 17, 1998 the Company filed suit against Consolidated Eco-Systems, Inc. ("Con-Eco"), formerly known as Exsorbet Industries, Inc., and its directors and officers alleging breach of contract, negligent misrepresentation and conspiracy. The misrepresentations included, but were not limited to, incorrect financial statements and financial projections, failure to disclose bargain-priced stock options to the directors and officers, failure to apprise APS of the lack of due diligence performed on 7-7, Inc., failure to capitalize 7-7, Inc., acquisition of additional indebtedness without APS's knowledge or consent, disposition of assets without APS's knowledge or consent and failure to report material adverse changes in Con-Eco's and its subsidiaries' financial condition. APS sought final judgement against defendants, jointly and severally, for all actual damages, interest, attorney's fees, court costs, and for any other relief to which APS may be entitled, at law or in equity. In February, 1999 the Company settled this litigation with the directors of Con-Eco. The Company recovered $950,000 for the full release of all claims against the directors of Con-Eco. On April 6, 1999 the Company foreclosed on the common stock of Eco-Systems, Inc., a subsidiary of Con-Eco, as part of a restructuring agreement with the Company. The Company now owns 100% of Eco-Systems, an environmental consulting and engineering firm, but does not consolidate their earnings/loss due to the fact that Con-Eco has an option to purchase back their common stock for a minimal sum if dividends over a certain future period are paid to APS equal to the total amount due. Other terms of the restructuring agreement include the Company forgiving a portion of the indebtedness presently outstanding and accepting a new note in the amount of $2.5 million due in approximately eighteen months if certain terms are met. These terms include: (1) Con-Eco must pay the Company a total of $375,000 within the eighteen months; (2) Con-Eco must not file bankruptcy during the eighteen months; and (3) the Company receives a first lien on the stock of all subsidiaries and a second lien on the assets of the subsidiaries. The original note stands, with a balance now exceeding $4.75 million, if these conditions are not met. The Company is carrying the note due from Con-Eco on its financial statements at $880,000, based on estimated total discounted future cash flows. During the six months ended June 30, 1999 the Company wrote off to bad debt a total of $1,043,000 bringing the total written off since inception to $1,435,000. At the time of this report the Company was in negotiations to merge Syntera HealthCare Corp. with another PPM company in return for a minority ownership in the new company. APS will account for its interest in the merged companies on the cost basis. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None - 24 - (b) Current reports on Form 8-K. April 6, 1999 agreement between American Physicians Service Group, Inc., M.J. Whitman Advisers, Inc., Third Avenue Value Fund and Third Avenue Value Portfolio of the WRL Series Fund. The Company exchanged 599,700 shares of $0.01 par value common stock of Prime Medical Services, Inc., held by the Company for a total of 1,199,400 shares of $0.10 par value common stock of the Company held by Whitman, TAVF and TAP. June 3, 1999 agreement between American Physicians Service Group, Inc. and Franklin MicroCap Value Fund. The Company exchanged 121,000 shares of $0.01 par value common stock of Prime Medical Services, Inc., held by the Company for a total of 242,000 shares of $0.10 par value common stock of the Company held by Franklin MicroCap Value Fund. - 25 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN PHYSICIANS SERVICE GROUP, INC. Date: August 13, 1999 By: /s/ William H. Hayes -------------------------------------- William H. Hayes, Vice President and Chief Financial Officer - 26 - EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30, 1999 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS DEC-31-1999 DEC-31-1999 APR-01-1999 JAN-01-1999 JUN-30-1999 JUN-30-1999 1,646 1,646 527 527 184 184 0 0 0 0 5,208 5,208 5,010 5,010 3,429 3,429 29,820 29,820 5,785 5,785 0 0 0 0 0 0 271 271 20,168 20,168 29,820 29,820 0 0 5,573 9,945 0 0 3,837 8,107 145 320 1,437 1,479 56 90 572 941 203 329 381 649 0 63 0 0 0 0 381 712 0.13 0.20 0.13 0.20
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