=====================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 2002
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, 2002
-------------------- ----------------
Common Stock, $.10 par value 2,208,231
============================================================================
PART I
FINANCIAL INFORMATION
2
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Financial services $3,201 $3,700 $6,298 $7,057
Insurance services 2,241 1,521 4,350 3,154
Consulting 903 730 1,600 1,286
Investments and other 8 44 44 86
------------ ------------ ------------ ------------
Total revenue 6,353 5,995 12,292 11,583
Expenses:
Financial services 2,826 3,277 5,471 6,107
Insurance services 1,720 1,223 3,390 2,584
Consulting 730 636 1,360 1,201
General and administrative 334 323 709 659
Gain on sale of assets (61) -- (756) --
------------ ------------ ------------ ------------
Total expenses 5,549 5,459 10,174 10,551
------------ ------------ ------------ ------------
Operating income 804 536 2,118 1,032
Gain (loss) on sale of investments (Note 4) (10) -- 2,791 --
Equity in earnings (loss) of unconsolidated
affiliates (Note 5) -- 41 (44) (96)
------------ ------------ ------------ ------------
Earnings from continuing operations before
interest, income taxes and minority interest 794 577 4,865 936
Interest expense 4 129 21 269
Income tax expense 283 163 1,678 269
Minority interests (58) (34) (115) (63)
------------ ------------ ------------ ------------
Earnings from continuing operations 449 251 3,051 335
Discontinued operations:
Earnings from discontinued operations net of
income tax expense of $17 and $38 for the
three and six months in 2001, respectively -- 34 -- 75
------------ ------------ ------------ ------------
Net earnings $449 $285 $3,051 $410
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
- 3 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENT OF EARNINGS PER SHARE (UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Earnings per common share
Basic:
Earnings from continuing operations $0.20 $0.11 $1.33 $0.14
Discontinued operations -- 0.01 -- 0.03
------------- ------------- ------------- -------------
Net earnings $0.20 $0.12 $1.33 $0.17
============= ============= ============= =============
Diluted:
Earnings from continuing operations $0.19 $0.09 $1.26 $0.12
Discontinued operations -- 0.01 -- 0.03
------------- ------------- ------------- -------------
Net earnings $0.19 $0.10 $1.26 $0.15
============= ============= ============= =============
Basic weighted average shares
outstanding 2,254 2,343 2,288 2,343
============= ============= ============= =============
Diluted weighted average
shares outstanding 2,402 2,758 2,412 2,762
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
- 4 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2002 2001
----------- -----------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $10,521 $3,851
Trading account securities 97 149
Notes receivable - current 594 573
Trade receivables, net 760 603
Management fees and other receivables 700 484
Deposit with clearing organization 499 499
Receivable from clearing organization 70 69
Net deferred income tax asset -- 282
Income tax receivable -- 167
Prepaid expenses and other 374 1,147
-------- -------
Total current assets 13,615 7,824
Notes receivable, less current portion 729 999
Property and equipment 401 415
Investment in available for sale equity
securities (Note 5) 8,875 --
Investment in available for sale fixed
income securities 1,382 --
Investment in affiliate (Note 5) -- 10,700
Other investments 68 68
Net deferred income tax asset - non-current 3,127 1,453
Other assets 201 201
------- -------
Total Assets $28,398 $21,660
======== ========
See accompanying notes to consolidated financial statements.
- 5 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS, continued
(In thousands, except share data)
June 30, December 31,
2002 2001
-------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Current liabilities:
Accounts payable - trade $1,037 $1,044
Payable to clearing broker 172 254
Accrued incentive compensation 673 1,246
Accrued expenses and other liabilities (Note 6) 402 1,337
Income tax payable 2,857 --
Deferred gain - current 488 499
Deferred tax liability - current 1,653 --
-------- -------
Total current liabilities 7,282 4,380
Payable under loan participation agreements 259 259
Deferred gain - non-current 1,959 1,955
Notes payable - long term -- 2,275
-------- -------
Total liabilities 9,500 8,869
Minority interests 239 124
Shareholders' Equity:
Preferred stock, $1.00 par value, 1,000,000
shares authorized, none issued or outstanding -- --
Common stock, $0.10 par value, shares authorized 20,000,000;
2,220,931 issued at 6/30/02 and 2,745,231 at 12/31/01
2,218,931 outstanding at 6/30/02 and 2,359,231 at 12/31/01 222 275
Additional paid-in capital 5,578 5,539
Retained earnings 9,504 8,310
Accumulated other comprehensive income (loss) 3,363 (39)
Treasury stock, at cost, 2,000 shares at 6/30/02
and 386,000 shares at 12/31/01 (8) (1,418)
--------- -------
Total shareholders' equity 18,659 12,667
--------- -------
Total Liabilities and Shareholders' Equity $28,398 $21,660
========= ========
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,
2002 2001
-------- -------
Cash flows from operating activities:
Cash received from customers $11,862 $11,791
Cash paid to suppliers and employees (11,430) (10,847)
Change in trading account securities 52 30
Change in receivable from clearing
organization (83) 48
Interest paid (21) (273)
Income tax paid (70) (45)
Interest, dividends and other investment
proceeds 48 53
--------- --------
Net cash provided by operating activities 358 757
Cash flows from investing activities:
Capital expenditures (84) (95)
Proceeds from the sale of an investment 10,600 --
Purchase of bonds (1,382) --
Investments in and advances to affiliate (230) --
Funds loaned to others (150) (1,898)
Collection of notes receivable 317 1,229
Other -- 69
--------- --------
Net cash provided by (used in)
investing activities 9,071 (695)
Cash flows from financing activities:
Proceeds from borrowings -- 1,165
Payment of long term debt (2,275) (56)
Purchase of treasury stock (501) --
Exercise of stock options 17 --
Distribution to minority interest -- (80)
--------- --------
Net cash provided by (used in)
financing activities (2,759) 1,029
--------- --------
Net change in cash and cash equivalents $6,670 $1,091
Cash and cash equivalents at beginning of period 3,851 2,988
--------- --------
Cash and cash equivalents at end of period $10,521 $4,079
========= ========
See accompanying notes to consolidated financial statements.
- 7 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), continued
(In thousands)
Six Months Ended
June 30,
2002 2001
--------- -------
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings $3,051 $410
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 87 151
Forgiveness of debt and other 105 126
Minority interest in consolidated earnings 115 63
Undistributed loss of affiliates 44 96
Gain on sale of assets (756) --
Gain on sale of investment (2,791) --
Change in income tax receivable 3,024 229
Provision for deferred taxes (1,375) --
Provision for bad debt 54 9
Change in trading account securities 7 30
Change in receivable from clearing organization (83) 48
Change in management fees & other receivables (166) (80)
Change in trade receivables (216) (35)
Change in prepaid expenses & other assets 773 (39)
Change in trade accounts payable (7) 350
Change in accrued expenses & other liabilities (1,508) (601)
--------- --------
Net cash provided by operating activities $358 $757
========= ========
See accompanying notes to consolidated financial statements.
- 8 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
For the six months ended June 30, 2001 and 2002
(In thousands)
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Comprehensive Treasury Shareholders'
Stock Capital Earnings Income (loss) Income (loss) Stock Equity
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Balance December 31, 2000 (audited) $ 275 $ 5,539 $ 8,888 $ (32) $ (1,418) $ 13,252
------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 410 410 -- -- 410
Other comprehensive loss
Unrealized loss on securities,
net of tax of $2 -- -- -- (7) (7) -- (7)
Comprehensive income -- -- -- 403 -- -- --
------------------------------------------------------------------------------------------------
Balance June 30, 2001 (unaudited) $ 275 $ 5,539 $ 9,298 $ (39) $ (1,418) $ 13,655
================================================================================================
Balance December 31, 2001(audited) $ 275 $ 5,539 $ 8,310 $ (39) $ (1,418) $ 12,667
------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 3,051 $ 3,051 -- -- 3,051
Other comprehensive income
Unrealized gain on securities,
net of taxes of $1,843 -- -- -- 3,402 3,402 -- 3,402
Comprehensive income -- -- -- $ 6,453 -- -- --
Treasury stock purchases -- -- -- -- (500) (500)
Cancelled treasury stock (54) (1,856) 1,910 --
Stock options exercised 1 16 -- -- -- 17
Stock Options Expensed -- 24 -- -- -- 24
------------------------------------------------------------------------------------------------
Balance June 30, 2002 (unaudited) $222 $5,578 $9,504 $ 3,363 $ (8) $ 18,659
================================================================================================
See accompanying notes to consolidated financial statements.
- 9 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
1. GENERAL
The accompanying unaudited consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America and pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles in the United States of America have been condensed or
omitted pursuant to such rules and regulations. The consolidated financial
statements for the three and six months ended June 30, 2002 and 2001 reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the periods presented. Such adjustments consist of only items of a normal
recurring nature. These consolidated financial statements have not been audited
by our independent certified public accountants. The operating results for the
interim periods are not necessarily indicative of results for the full fiscal
year.
The notes to consolidated financial statements appearing in our Annual Report on
Form 10-KSB for the year ended December 31, 2001 filed with the Securities
Exchange Commission should be read in conjunction with this Quarterly Report on
Form 10-QSB. There have been no significant changes in the information reported
in those notes other than from normal business activities.
Certain reclassifications have been made to amounts in prior periods to be
consistent with the 2002 presentation.
2. ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
3 CONTINGENCIES
Under agreements with former doctor shareholders of Syntera, our practice
management company that was merged with FemPartners in 1999, we agreed to
exchange their shares in Syntera for the common stock of American Physicians, or
cash, if the Syntera shares did not become publicly traded. Through March 31,
2002 we paid approximately $2,956,000 in cash related to these agreements, thus
satisfying all liabilities related to these agreements.
- 10 -
3 CONTINGENCIES, continued
We have extended various lines of credit to Uncommon Care totaling $4.69 million
with interest rates between 10% and 12%. During 2001 we agreed to modify the
terms of the foregoing notes. For the period July 1, 2001 through June 30, 2002
the interest rate was 4% and payments were paid in-kind (PIK) in the form of
Uncommon Care common stock at $0.57 per share. Additionally, the PIK stock may
be repurchased by Uncommon Care through June 30, 2004 at a price of $.64 per
share. We agreed to these modified terms to improve Uncommon Care's liquidity
and to assist it in complying with the terms of its bank covenants. PIK payments
during 2002 increased our ownership in Uncommon Care preferred and common stock
from 38% to 42% on a fully converted basis.
We guaranteed a loan in the maximum amount of $110,000 for a director, William
Searles. The guarantee is collateralized by Mr. Searles' options to purchase
American Physicians and Prime Medical shares as well as Mr. Searles' common
stock interest in Uncommon Care. The loan had a balance of $7,500 at June 30,
2002.
We are involved in various claims and legal actions that have arisen in the
ordinary course of business. Management believes that any liabilities arising
from these actions will not have a significant adverse effect on our financial
condition or results of operations.
4. GAIN RECOGNITION
During the first six months of 2002, we sold 1,580,000 shares of the common
stock of Prime Medical reducing our interest to less than 5%. In connection with
these sales we received proceeds of approximately $10,600,000 and recognized a
gain of $2,791,000.
In connection with these sales, we recognized an additional $512,000 gain
related to the sale of real estate to Prime in November 2001. At the time of the
sale, we deferred a portion of the total gain to reflect our interest in the
purchaser. During the first six months of 2002, we have recognized these
deferred gains proportionately as our interest in Prime has been reduced.
5. EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES
At June 30, 2002 we owned slightly less than 5% (763,803 shares) of the
outstanding common stock of Prime Medical. As a result of our reduced ownership
interest and as a result of Board resignations mentioned in our Form 10-KSB for
the year ended December 31, 2001, we ceased accounting for our investment in
Prime Medical using the equity method effective March 19, 2002 and began
accounting for our investment in Prime as an available for sale security in
accordance with SFAS 115. Accordingly, our investment in Prime Medical is
reported at fair value in our balance sheet. We recognized $186,000 of equity
earnings in 2002 prior to converting to the cost method. This change in
accounting also resulted in a balance sheet reclassification for our investment
in Prime Medical from "Investment in Affiliate" to "Investment in Available for
Sale Equtiy Securities".
- 11 -
5. EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES, continued
The common stock of Prime Medical is traded in the over-the-counter market under
the symbol "PMSI". Prime Medical is a Delaware corporation which is required to
file with the Securities and Exchange Commission annual, quarterly and other
reports and documents containing financial and other information regarding Prime
Medical. Such reports and documents may be examined and copies may be obtained
from the offices of the Securities and Exchange Commission. A table detailing
our investment in Prime Medical follows:
Fair Value June 30, 2002 Book Value at Date of Conversion*
------------------------------------------ ---------------------------------
No. of MV BV
Shares Owned per Share Fair Value per Share Book Value
------------ ---------- ---------- ---------- ------------
763,803 $11.62 $8,875,000 $5.02 $3,837,000
* Book Value at March 19, 2002, the date of conversion from accounting for
our investment in Prime Medical common stock using the equity method to
accounting for it as a marketable security.
The difference between the June 30, 2002 fair value and book value at date of
conversion is represented on the consolidated balance sheet in accumulated other
comprehensive income.
The condensed statements of operations for Prime Medical follows (unaudited, in
thousands):
Condensed statements of operations for the six months ended
June 30, 2002 and 2001
-----------------------------------------------------------
2002 2001
---- ----
Total revenue $81,007 $71,673
Gross profit 28,292 32,382
Income from continuing operations 24,683 25,397
Net income 5,137 4,015
At June 30, 2002 the Company owned Convertible Preferred and Common Stock of
Uncommon Care, a developer and operator of dedicated Alzheimer's care
facilities. We have applied the guidance of EITF 99-10, specifically the
percentage of ownership method, in applying the equity method to our investment
in Uncommon Care. Uncommon Care's common stock equity had been eliminated by
losses prior to our investment and, accordingly, we recognized 100% of the
losses of Uncommon Care based on our ownership of 100% of its preferred stock
equity and subordinated debt. During 2001 our total basis in our investment and
advances to Uncommon Care was reduced to zero. Until such time as Uncommon Care
becomes profitable and our future equity in these profits fully offsets our
prior period combined equity losses, future advances to Uncommon Care will
result in a loss when advanced. Advances to Uncommon Care have totaled $230,000
in 2002.
- 12 -
5. EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES, continued
The common and preferred shares owned by the Company, together with common stock
to be paid-in-kind, are convertible into approximately a 42% interest in the
common equity in Uncommon Care. We continue to record our investment in and
advances to Uncommon Care on the equity method.
The condensed statements of operations for Uncommon Care follows (unaudited, in
thousands):
Condensed statements of operations for the six months ended
June 30, 2002 and 2001
------------------------------------------------------------
2002 2001
---- ----
Total revenue $3,769 $3,022
Gross profit 649 199
Income from continuing operations (300) (983)
Net income (loss) (305) (909)
6. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following:
June 30 December 31
2002 2001
---- -----
Taxes $ 57,000 $ 61,000
Contractual/legal fees and claims 55,000 1,031,000
Vacation 140,000 140,000
Other 150,000 105,000
-------- ----------
$402,000 $1,337,000
======== ==========
7. EARNINGS PER SHARE
Basic earnings per share is based on the weighted average shares outstanding
without any dilutive effects considered. Diluted earnings per share reflect
dilution from all contingently issuable shares, such as options and convertible
debt. A reconciliation of earnings and average shares outstanding used in the
calculation of basic and diluted earnings per share from continuing and
discontinued operations follows:
- 13 -
7. EARNINGS PER SHARE, continued
For the Three Months Ended June 30, 2002
-------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Earnings from
continuing operations $ 449,000
Basic EPS
Earnings available to
common stockholders 449,000 2,254,000 $0.20
=====
Effect of dilutive securities -- 148,000
--------- ---------
Diluted EPS
Earnings available to
common stockholders and
assumed conversions $ 449,000 2,402,000 $0.19
========= ========== =====
For the Three Months Ended June 30, 2001
-------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Earnings from continuing
operations $ 251,000
Discontinued operations,
net of tax 34,000
---------
Basic EPS
Earnings available to 285,000 2,343,000 $ 0.12
======
Common stockholders
Effect of dilutive securities -- 415,000
--------- ---------
Diluted EPS
Earnings available to common
stockholders and assumed
conversions $ 285,000 2,758,000 $ 0.10
========= ========= ======
- 14 -
7. EARNINGS PER SHARE, continued
For the Six Months Ended June 30, 2002
----------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- --------
Earnings from
continuing operations $ 3,051,000
Basic EPS
Earnings available to
common stockholders 3,051,000 2,288,000 $1.33
=====
Effect of dilutive securities -- 124,000
--------- ----------
Diluted EPS
Earnings available to
common stockholders and
assumed conversions $ 3,051,000 2,412,000 $1.26
============ ========= =====
For the Six Months Ended June 30, 2001
----------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ --------
Earnings from
continuing operations $ 335,000
Discontinued operations,
net of tax 75,000
---------
Basic EPS
Earnings available to
common stockholders 410,000 2,343,000 $0.17
=====
Effect of dilutive securities -- 419,000
-------- ---------
Diluted EPS
Earnings available to
common stockholders and
assumed conversions $ 410,000 2,762,000 $0.15
========= ========= =====
Unexercised employee stock options to purchase 91,500 and 959,500 shares of the
Company's common stock as of June 30, 2002 and 2001, respectively, were not
included in the computations of diluted EPS because the effect would be
antidilutive.
- 15 -
8. SEGMENT INFORMATION
The Company's segments are distinct by type of service provided. Comparative
financial data for the three and six month periods ended June 30, 2002 and 2001
are shown as follows:
THREE MONTHS ENDED JUNE 30,
2002 2001
Operating Revenue: --------- ---------
Financial services $3,201,000 $3,700,000
Insurance services 2,241,000 1,521,000
Consulting 903,000 730,000
Corporate 125,000 456,000
--------- ----------
$6,470,000 $6,407,000
========== ==========
Reconciliation to Consolidated
Statement of Operations:
Total segment revenues $6,470,000 $6,407,000
Less: Intercompany dividends (100,000) (300,000)
Intercompany interest (17,000) (112,000)
----------- -----------
Total Revenues $6,353,000 $5,995,000
=========== ===========
Operating Income (Loss)
Financial services $ 375,000 $ 423,000
Insurance services 521,000 298,000
Consulting 173,000 94,000
Corporate (265,000) (279,000)
----------- ---------
Total segments operating profits 804,000 536,000
Loss on sale of investments (10,000) --
Equity in earnings of unconsolidated
affiliates -- 41,000
---------- --------
Earnings from continuing operations
before income taxes and minority
interests 794,000 577,000
Interest expense 4,000 129,000
Income tax expense 283,000 163,000
Minority interests (58,000) (34,000)
--------- --------
Earnings from continuing operations $ 449,000 $251,000
Net earnings from discontinued operations,
net of income tax -- 34,000
--------- ---------
Net earnings $ 449,000 $285,000
========== =========
- 16 -
8. SEGMENT INFORMATION, continued
SIX MONTHS ENDED JUNE 30,
2002 2001
Operating Revenue: ---------- ----------
Financial services $ 6,298,000 $ 7,057,000
Insurance services 4,350,000 3,154,000
Consulting 1,600,000 1,286,000
Corporate 318,000 1,068,000
----------- ----------
$12,566,000 $12,565,000
Reconciliation to Consolidated
Statement of Operations:
Total segment revenues $12,566,000 $12,565,000
Less: Intercompany dividends (245,000) (770,000)
Intercompany interest (29,000) (212,000)
------------ -----------
Total Revenues $12,292,000 $11,583,000
============ ===========
Operating Income (Loss)
Financial services $ 827,000 $ 950,000
Insurance services 960,000 570,000
Consulting 240,000 85,000
Corporate 91,000 (573,000)
----------- ----------
Total segments operating profits 2,118,000 1,032,000
Gain on sale of investments 2,791,000 --
Equity in loss of unconsolidated
affiliates (44,000) (96,000)
----------- ----------
Earnings from continuing operations
before income taxes and minority
interests 4,865,000 936,000
Interest expense 21,000 269,000
Income tax expense 1,678,000 269,000
Minority interests (115,000) (63,000)
----------- ---------
Earnings from continuing operations $3,051,000 $335,000
Net earnings from discontinued operations,
net of income tax -- 75,000
----------- ----------
Net earnings $3,051,000 $410,000
=========== ========
- 17 -
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 us or our
officers, directors, shareholders, agents, representatives or employees,
including without limitation, those statements contained in this Report on Form
10-QSB, that are not purely historical are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements regarding our
expectations, hopes, intentions or strategies regarding the future.
Forward-looking statements may appear in this document or other documents,
reports, press releases, and written or oral presentations made by our officers
to shareholders, analysts, news organizations or others. Readers should not
place undue reliance on forward-looking statements. All forward-looking
statements are based on information available to us and the declarant at the
time the forward-looking statement is made, and we assume no obligation to
update any such forward-looking statements. It is important to note that our
actual results could differ materially from those described in such
forward-looking statements. In addition to any risks and uncertainties
specifically identified in connection with such forward-looking statements, the
reader should consult our reports on previous filings under the Securities Act
of 1933 and the Securities Exchange Act of 1934, for factors that could cause
actual results to differ materially from those presented.
Forward-looking statements are necessarily based on various assumptions and
estimates and are inherently subject to various risks and uncertainties,
including risks and uncertainties relating to the possible invalidity of the
underlying assumptions and estimates and possible changes or developments in
social, economic, business, industry, market, legal and regulatory circumstances
and conditions and actions taken or omitted to be taken by third parties,
including customers, suppliers, business partners and competitors and
legislative, judicial and other governmental authorities and officials.
Assumptions relating to the foregoing involve judgements with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond control. Any such assumptions could be
inaccurate and, therefore, there can be no assurance that any forward-looking
statements by us or our officers, directors, shareholders, agents,
representatives or employees, including those forward-looking statements
contained in this Report on Form 10-QSB, will prove to be accurate.
CRITICAL ACCOUNTING POLICIES
For our more significant judgements and estimates used in the preparation
of our consolidated financial statements, we employ those critical accounting
policies which are discussed in detail in our Form 10-KSB dated December 31,
2001.
- 18 -
RESULTS OF OPERATIONS
REVENUES
Revenues from operations increased $358,000 (6%) and $709,000 (6%) for the
three and six month periods ended June 30, 2002, respectively, compared to the
same periods in 2001. Revenues increased in the current three and six month
periods at our insurance services and consulting segments and decreased at our
financial services and administrative segments compared to the same periods in
2001.
Our financial services revenues decreased $499,000 (13%) and $759,000 (11%)
for the three and six month periods ended June 30, 2002, respectively, compared
to the same periods in 2001. The decrease was due to lower commission income at
APS Financial Corp., our broker/dealer division of APS Investment Services, Inc.
Market conditions have become increasingly difficult this year. Investor demand
for corporate bond issues has been limited due to rising credit concerns
emanating from a combination of high profile corporate accounting
scandals/bankruptcies and weaker industry profit forecasts. Investors have also
been reluctant to put money to work in longer-term fixed income securities with
yields at historically low levels. While high yield transactions declined during
the period, volume in government bonds and short-term issues rose as market
participants sought a safe haven from the woes in corporate America, and kept
funds short term in anticipation of higher market rates over the next several
quarters.
Our insurance services revenues from our premium-based insurance management
segment, APS Insurance Services, increased $720,000 (47%) and $1,196,000 (38%)
for the three and six month periods ended June 30, 2002, respectively, compared
to the same periods in 2001. The increase in both periods are due to greater
management fees and commissions, a result of higher premiums. Premiums have
increased due to rate increases at the managed insurance company.
Our consulting revenue increased $173,000 (24%) and $314,000 (24%) for the
three and six month periods ended June 30, 2002, respectively, compared to the
same periods in 2001. The current year increase is due primarily to a 40%
increase in revenues generated through work performed by sub-contractors
involved in environmental assessment field activities. In addition, chargeable
hours increased 8%, the result of an increase in the number of professional
personnel employed as well as higher project demands from our largest
environmental client.
EXPENSES
Total operating expenses increased $90,000 (2%) but decreased $377,000 (4%)
for the three and six month periods ended June 30, 2002, respectively, compared
to the same periods in 2001. For both the current year three and six month
periods, expenses at our insurance services, consulting and administrative
segments increased while expenses at our financial services segment decreased.
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Financial services expense decreased $451,000 (14%) and $636,000 (10%) for
the three and six month periods ended June 30, 2002, respectively, compared to
the same periods in 2001. The primary reason for the current year decreases in
both periods is a decrease in commission expense resulting from lower commission
revenue at APS Financial, our broker/dealer division of APS Investment Services,
Inc. For the year, commission expenses are down $495,000 (13%) compared to the
same six months in 2001. Profits at APS Financial are down 24% in 2002 which has
resulted in a $116,000 (23%) decrease in management incentive compensation.
Also, legal and professional fees decreased 51% in the first six months of 2002
compared to the same period in 2001 as there were no legal fees associated with
investment banking activities this year that were incurred last year.
Insurance services expenses at the insurance management subsidiary
increased $497,000 (41%) and $806,000 (31%) for the three and six month periods
June 30, 2002, respectively, compared to the same periods in 2001. The current
three and six month period increase is due primarily to a $316,000 (95%) and
$477,000 (56%) increase, respectively, in commission expense paid to third party
agents arising because of the aforementioned increase in commission income. Also
higher this year is payroll related expenses which rose $105,000 (15%) and
$201,000 (15%) in the current year three and six month periods, respectively, as
a result of creating two new vice-presidential positions and normal annual merit
raises.
Consulting expenses increased $94,000 (15%) and $159,000 (13%) for the
three and six month periods ended June 30, 2002, respectively, compared to the
same periods in 2001. The primary reason for the increase in both current year
periods is an increase in work performed by sub-contractors involved in
environmental assessment field activities. These direct expenses increased
$75,000 (54%) and $88,000 (40%) for the three and six month periods ended June
30, 2002, respectively, compared to the same periods in 2001. In addition,
payroll related costs increased $47,000 (14%) and $120,000 (18%) in the current
three and six month periods, respectively, as a result of the hiring of
additional professionals. Partially offsetting these increases is a decrease in
professional fees of $28,000 (77%) and $64,000 (82%) in the current three and
six month periods, respectively, as a result of litigation in 2001 that
concluded before 2002.
Gain on sale of assets for the three monthes ended June 30, 2002 primarily
represents the amortization of deferred gain attributable to the November, 2001
sale of real estate and subsequent leaseback of office space. We had deferred
$2.4 million of the $5,000,000 gain and will recognize income monthly over the
life of the five year lease. For the six month period ended June 30, 2002,
amortization of deferred gains equaled $244,000. In addition, since the sale of
the real estate was to our then 15% owned affiliate, Prime Medical, we had
deferred an additional $760,000 of the $5,000,000 gain, as required by the
equity method of accounting. During 2002 we reduced our investment in Prime
Medical and subsequently recognized a proportionate percentage of the deferred
gain, or about $512,000.
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Interest expense decreased $125,000 (97%) and $248,000 (92%) for the three
and six month periods ended June 30, 2002, respectively, compared to the same
periods in 2001. The primary cause of the current period decrease is the payoff
of the Company's note payable from a balance of $6,300,000 at June 30, 2001 to
zero at June 30, 2002.
GAIN ON SALE OF INVESTMENTS
The three month loss was caused by an adjustment related to changing the
method of accounting in Prime Medical between the equity method and the cost
method. The result increased our equity earnings in Prime for the six months
ended June 30, 2002 but reduced our gain on sale in the three month period. The
six month gain represents gains on the sale of 1,580,000 shares of Prime Medical
common stock. As a result of these sales, we now own approximately 764,000
shares of Prime Medical amounting to an ownership percentage of slightly less
than 5%.
EQUITY IN EARNINGS (LOSS) OF UNCONSOLIDATED AFFILIATES
Our equity in the earnings of Prime Medical decreased $308,000 (100%) and
$419,000 (69%) for the three and six month periods ended June 30, 2002,
respectively, compared to the same periods in 2001 as we no longer account for
our investment in Prime Medical using the equity method of accounting as was the
case in 2001. As of March 19, 2002, we ceased accounting for our investment in
Prime Medical using the equity method of accounting because (1) on January 1,
2002, Kenneth S. Shifrin, the Company's Chairman and CEO, stepped down from
day-to-day operations as Executive Chairman of the Board of Prime Medical, but
will continue to serve as non-executive Chairman; (2) in December 2001, Prime
Medical's CEO, Brad Hummel, resigned from our board of directors; and (3) from
January to March 19, 2002, we sold 1,570,000 shares of Prime Medical reducing
our ownership percentage to slightly less than 5%.
Our equity in losses of Uncommon Care decreased $267,000 (100%) and
$470,000 (67%) for the three and six month periods ended June 30, 2002,
respectively, compared to the same periods in 2001 primarily as a result of our
limiting our losses in Uncommon Care to our total investment and advances to
Uncommon Care, which was reduced to zero during 2001. Once we reduced our total
investment to zero, as required under the equity method, we ceased recording
equity losses. Until such time as Uncommon Care becomes profitable and future
equity in these profits fully offsets our prior period combined equity losses,
future advances to Uncommon Care will result in a loss when advanced. Advances
to Uncommon Care totaling $230,000 in February 2002 accounts for the loss
recorded during the first quarter 2002. No advances or repayments were booked in
the second quarter of 2002.
MINORITY INTERESTS
Minority interests represents the combination of two outside interests in
subsidiaries of the Company: a twenty percent interest of Insurance Services
owned by Florida Physicians Insurance Group, Inc. and a three percent interest
of APS Asset Management, a subsidiary of the financial services subsidiary of
the Company (APS Investment Services), owned by key individuals within APS Asset
Management. Minority interests increased in the current year primarily as a
result of increased profitability of our insurance services segment.
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SHAREHOLDERS' EQUITY
Through June 30, 2002, we purchased 155,000 and cancelled 539,000 shares of
treasury stock. The net effect of these purchases and cancellations was to
decrease the treasury stock $1,410,000, representing the cost of the cancelled
shares, to decrease common stock by $54,000, determined by multiplying the
number of shares cancelled by $0.10 par value, and to decrease retained earnings
$1,856,000.
Through June 30, 2002, we recorded other comprehensive income of $3,402,000
which represents unrealized holding gains on securities held for sale, primarily
in Prime Medical common stock, net of tax. Changes in fair value for securities
categorized as "available for sale" are excluded from earnings and reported net
of deferred income taxes in shareholders' equity until realized.
LIQUIDITY AND CAPITAL RESOURCES
Current assets exceeded current liabilities by $6,333,000 at June 30, 2002
and $3,444,000 at December 31, 2001. Working capital rose in 2002 due to the
sale of 1,580,000 shares of Prime Medical common stock which added approximately
$10,600,000 in cash. Partially offsetting this was $2,275,000 in cash used to
pay off a note payable and the purchase of $1,382,000 in available for sale
bonds.
Capital expenditures through the six month period ended June 30, 2002 were
approximately $84,000. Total capital expenditures are expected to be
approximately $150,000 in 2002.
Historically, the Company has maintained a positive working capital
position and has been able to satisfy its operational and capital expenditure
requirements with cash generated from its operating and investing activities.
These same sources of funds have also allowed the Company to pursue investment
and expansion opportunities consistent with its growth plans. Although it is
uncertain if our operating activities will continue to provide positive cash
flow in 2002, we believe that our current strong working capital position will
enable us to meet our working capital requirements for the foreseeable future.
ADOPTION OF ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 142. Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"), applies to all acquired intangible assets whether acquired singularly, as
part of a group, or in a business combination. SFAS 142 supersedes APB Opinion
No. 17, "Intangible Assets," and carries forward provisions in Opinion 17
related to internally developed intangible assets. SFAS 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Goodwill should no longer be amortized, but instead tested for
impairment at least annually at the reporting unit level. The accounting
provisions are effective for fiscal years beginning after December 31, 2001. A
final Statement regarding this proposal is expected to be issued in the fourth
quarter of 2002. Our adoption of Statement 144 effective January 1, 2002 did not
have a material effect on our financial position or results of operations.
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In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("Statement 144"), Accounting for the Impairment or Disposal of
Long-Lived Assets. Statement 144 addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. Statement 144 requires that
one accounting model be used for long-lived assets to be disposed of by sale and
broadens presentation of discontinued operations to include more disposals. Our
adoption of Statement 144 effective January 1, 2002 did not have a material
effect on our financial position or results of operations.
Statement of Financial Accounting Standards No. 145. Statement of Financial
Accounting Standards No. 145, "Rescission of SFAS Statements No. 4, 44, and 64,
Amendment of SFAS Statement No. 13, and Technical Corrections" ("SFAS 145"),
updates, clarifies and simplifies existing accounting pronouncements. SFAS 145
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt."
SFAS 145 amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. The provisions of SFAS
145 related to SFAS No. 4 and SFAS No. 13 are effective for fiscal years
beginning and transactions occurring after May 15, 2002, respectively. It is
anticipated that the financial impact of SFAS 145 will not have a material
effect on on our financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force (EITF) Issue No. 94-3. PGE NEG
will adopt the provisions of SFAS No. 146 for restructuring activities initiated
after December 31, 2002. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at
the date of a companys commitment to an exit plan. SFAS No. 146 also establishes
that the liability should initially be measured and recorded at fair value.
Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amount recognized. It is anticipated that the
financial impact of SFAS 146 will not have a material effect on on our financial
position or results of operations.
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PART II
OTHER INFORMATION
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1. LEGAL PROCEEDINGS
We are involved in various claims and legal actions that have arisen in the
ordinary course of business. We believe that the liability provision in our
consolidated financial statements is sufficient to cover any unfavorable outcome
related to lawsuits in which we are currently named. Management believes that
liabilities, if any, arising from these actions will not have a significant
adverse effect on our financial condition or results of operations. However, due
to the uncertain nature of legal proceedings, the actual outcome of these
lawsuits may differ from the liability provision recorded in our consolidated
financial statements.
Item 4. RESULTS OF VOTES OF SECURITY HOLDERS
On June 12, 2002 the annual meeting of shareholders of American Physicians
Service Group, Inc. was held in Austin, Texas. Shareholders voted and approved
the following motions:
ELECTION OF DIRECTORS
The names of the directors elected at the meeting along with numbers of
votes for and withheld are as follows:
Name For Withheld
------------------ ------------ -------------
Robert L. Myer 1,947,474 40,095
William A. Searles 1,947,470 40,099
Kenneth S. Shifrin 1,947,470 40,099
Marc. R. Still 1,947,475 40,094
AMENDMENT TO STOCK OPTION PLAN
Approval of amendment to the Company's 1995 Incentive and
Non-qualified Stock Option Plan. The votes for, against, and
abstain are as follows:
For: 945,425
Against 375,842
Abstain 2,109
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) CURRENT REPORTS ON FORM 8-K.
Report filed March 6, 2002 concerning the February 25, 2002
sale by American Physicians Service Group, Inc. of 500,000
shares of common stock of Prime Medical Services, Inc.
Report filed April 2, 2002 concerning the March 19, 2002
sale by American Physicians Service Group, Inc. of
1,070,000 shares of common stock of Prime Medical Services,
Inc.
Report filed July 25, 2002 concerning the change in
certifying accountants from KPMG LLP to BDO Seidman LLP.
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