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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
MARCH 31, 2005
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 April 26, 2005
-------------------- ----------------
Common Stock, $.10 par value 2,632,203
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PART I
FINANCIAL INFORMATION
- 2 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Item 1 - Financial Statements
Three Months Ended
March 31,
------------------------------
2005 2004
------- --------
Revenues:
Financial services $3,267 $3,832
Insurance services 3,395 3,458
------- -------
Total revenues 6,662 7,290
Expenses:
Financial services 2,950 3,241
Insurance services 2,684 2,789
General and administrative 486 346
Gain on sale of assets (Note 4) (35) (12)
------- ------
Total expenses 6,085 6,364
Operating income 577 926
Gain on sale of investments (Note 5) 630 27
Loss on impairment of investment (Note 6) (39) -
Gain on extinguishment of debt - 63
------- -------
Income from continuing operations before
interest,income taxes and minority interest 1,168 1,016
Interest income 122 83
Other income (loss) 55 (8)
Interest expense 4 -
Income tax expense 477 397
Minority interests 11 -
------- -------
Net income $853 $694
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
- 3 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, continued
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
March 31,
------------------------
2005 2004
------ ------
Net income per common share
Basic:
Income from operations $ 0.32 $ 0.28
------ ------
Net income $ 0.32 $ 0.28
====== ======
Diluted:
Income from operations $ 0.30 $ 0.25
------ ------
Net income $ 0.30 $ 0.25
====== ======
Basic weighted average shares
outstanding 2,642 2,473
====== ======
Diluted weighted average
shares outstanding 2,867 2,769
====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
- 4 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2005 2004
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $4,388 $9,673
Trade receivables, net 4 19
Notes receivable - current 1,069 777
Management fees and other receivables 1,004 1,815
Deposit with clearing organization 660 660
Investment in available-for-sale fixed
income securities - current 4,448 1,983
Net deferred income tax asset 115 124
Income tax receivable -- 76
Prepaid expenses and other 913 642
-------- --------
Total current assets 12,601 15,769
Notes receivable, less current portion 107 141
Property and equipment, net 670 619
Investment in available-for-sale equity
securities (Notes 5 and 8) 8,478 9,417
Investment in available-for-sale fixed
income securities - non-current 4,865 2,920
Goodwill 1,247 1,247
Other assets 299 330
-------- --------
Total Assets $28,267 $30,443
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
- 5 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS, continued
(In thousands, except share data)
March 31, December 31,
2005 2004
-------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $225 $266
Accrued incentive compensation 416 2,500
Accrued expenses and other liabilities (Note 10) 1,404 1,842
Federal income tax payable 438 --
Deferred gain - current 488 488
------- -------
Total current liabilities 2,971 5,096
Payable under loan participation agreements 24 24
Deferred tax liability - non-current 195 482
Deferred gain - non-current 469 627
------- -------
Total liabilities 3,659 6,229
Minority interests 13 1
Commitments and contingencies (Note 3)
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;
2,638,803 and 2,646,646 issued and outstanding
at 03/31/05 and 12/31/04, respectively 264 265
Additional paid-in capital 7,838 7,919
Retained earnings 14,801 13,948
Accumulated other comprehensive income (loss),
net of taxes 1,692 2,081
------- -------
Total shareholders' equity 24,595 24,213
------- -------
Total Liabilities and Shareholders' Equity $28,267 $30,443
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
- 6 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
2005 2004
------- -------
Cash flows from operating activities:
Net Income $ 853 $ 694
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 67 76
Extinguishment of debt and other 63 (59)
Common stock awarded 159 --
Gain on sale of assets (35) (12)
Deferred gain on sale of building (122) (122)
Gain on sale of investment (630) (27)
Impairment of investment 39 --
Changes in operating assets and liabilities:
Trade receivables 15 --
Trading account securities -- (43)
Income tax receivable 514 822
Deferred income tax (278) 476
Receivable from clearing organization -- 54
Management fees & other receivables 811 904
Prepaid expenses & other assets (271) (318)
Trade payables (41) 52
Accrued expenses & other liabilities (2,311) (2,504)
------ ------
Net cash provided by operating activities (1,167) (7)
Cash flows from investing activities:
Capital expenditures (94) (30)
Proceeds from the sale of available-for-sale equity
and fixed income securities 1,154 207
Purchase of available-for-sale equity securities (4,616) --
Funds loaned to others (381) --
Collection of notes receivable 60 --
------ ------
Net cash used in investing activities (3,877) 177
Cash flows from financing activities:
Exercise of stock options 17 2
Purchase and cancellation of treasury stock (258) --
------ ------
Net cash provided by (used in) financing activities (241) 2
Net change in cash and cash equivalents $(5,285) $ 172
Cash and cash equivalents at beginning of period 9,673 8,989
------- -------
Cash and cash equivalents at end of period $ 4,388 $ 9,161
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
- 7 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
For the three months ended March 31, 2004 and March 31, 2005
(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, 2003 (audited) $ 245 $ 6,918 $ 12,314 $ -- $ (371) $ -- $ 19,106
------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 694 $ 694 -- -- 694
Other comprehensive income:
Unrealized gain on securities,
net of taxes of $155 -- -- -- 300 300 -- 300
------
Comprehensive income: -- -- -- $ 994 -- -- --
Stock options exercised 3 137 -- -- -- -- 140
Forgiveness of Uncommon Care Debt -- -- 60 -- -- -- 60
------------------------------------------------------------------------------------------------
Balance March 31, 2004 (unaudited) $ 248 $ 7,055 $13,067 $ -- $ (71) $ -- $ 20,299
================================================================================================
Balance December 31, 2004 (audited) $ 265 $ 7,919 $ 13,948 $ -- $ 2,081 $ -- $ 24,213
------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 853 $ 853 -- -- 853
Other comprehensive income:
Unrealized loss on securities,
net of taxes of $200 -- -- -- (389) (389) -- (389)
Comprehensive income: -- -- -- $ 464 -- -- --
Stock options exercised -- 17 -- -- -- -- 17
Treasury stock purchases -- -- -- -- -- (258) (258)
Cancelled treasury stock (2) (256) -- -- -- 258 --
Stock awarded 1 158 -- -- -- -- 159
------------------------------------------------------------------------------------------------
Balance March 31, 2005 (unaudited) $ 264 $ 7,838 $14,801 $ -- $ 1,692 $ -- $ 24,595
================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
- 8 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
1. GENERAL
The accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America and pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. The consolidated
financial statements for the three months ended March 31, 2005 and 2004 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 registered public accounting firm. 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-K for the year ended December 31, 2004 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.
Certain reclassifications have been made to amounts in prior periods to
be consistent with the 2005 presentation.
2. MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
3. CONTINGENCIES
The Internal Revenue Service ("the IRS") has examined our federal
income tax return for the year ended December 31, 2003. On April 13, 2005 we
received notification that the IRS disagrees with the timing of bad debt
expenses deducted for tax purposes in 2003 related to worthless loans
receivable. Although we received no payments on such receivable, the debtor
- 9 -
continued to operate after 2003. Even though the debtor ultimately went out of
business during the quarter ended March 31, 2005, the IRS' position is that it
was not determinable that the loans were worthless in 2003. We believe the
significant insolvency of the debtor, the presence of debt senior to our own,
and the lack of value in the assets or the operations of the debtor were clear
indications that our loans would not be repaid and support our deduction in
2003. Although the deduction would be allowed for the 2005 tax year, interest on
the perceived underpayment in the 2003 year would be approximately $82,000. We
are evaluating our course of action, including challenging the findings of the
IRS and, accordingly, have made no provision for this matter in our financial
statements as of and for the period ended March 31, 2005.
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 ON SALE OF ASSETS
During the three months ended March 31, 2005, we recognized $122,000 of
deferred gain related to the November 2001 sale and subsequent leaseback of real
estate to Prime Medical. Due to our continuing involvement in the property, we
deferred recognizing approximately $2,400,000 of the approximately $5,100,000
gain and are recognizing it in earnings, as a reduction of rent expense, monthly
through November 2006. A total of $813,000 remains to be recognized in the
coming twenty months. In addition, 15% of the gain ($760,000) related to our
then 15% ownership in the purchaser, was deferred. As our ownership percentage
in Prime declines through our sales of Prime common stock, we recognize these
gains proportionately to our reduction of our interest in Prime. During the
first three months of 2005 we recognized $35,000 of these deferred gains,
leaving a balance of approximately $144,000 remaining to be recognized.
5. GAIN ON SALE OF INVESTMENTS
The gains resulted from the sale of available-for-sale equity
securities. During the three months ended March 31, 2005, we received net cash
proceeds of approximately $1,154,000 and recognized gains of $630,000 resulting
from these sales.
6. LOSS ON IMPAIRMENT OF INVESTMENT
On June 4, 2003 we purchased from Financial Industries Corporation
("FIC")(OTC: FNIN.PK) and a foundation 339,879 shares of FIC's common stock as
an investment. Earlier in 2003 we had purchased 45,121 FIC shares in the open
market. The 385,000 shares represent an approximate 4% ownership in FIC. The
aggregate purchase price was approximately $5,647,000, which was all sourced
from our cash reserves. The shares purchased from FIC and the foundation are not
registered, but are subject to a registration rights agreement requiring FIC's
best efforts to register them within one year of the transaction. Due to FIC's
delay in filing its 2003 Form 10-K and its subsequent 10-Q's and 10-K, it has
not been able to register these shares and was delisted from the NASDAQ exchange
in July, 2004.
- 10 -
During 2004, the value of our investment in FIC had declined
significantly. On October 12, 2004, we determined that this decline in market
price should be considered "other than temporary" as defined in Statements of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities, as amended. Consequently, we recorded
pretax charges to earnings totaling $2,567,000 during the third and fourth
quarters of 2004. These charges reduced our cost basis in FIC from $5,647,000,
or $14.67 per share, to $3,080,000, or $8.00 per share which is equal to the
quoted market price of FIC shares on December 31, 2004. As discussed in our Form
10-K dated Decmber 31, 2004, we believe the decline in the market price of FIC
has been brought about by its failure to file its 2003 Form 10-K and its
subsequent de-listing from the NASDAQ Stock Market. We had expected FIC to bring
its filings current and pursue restoring its exchange listing by March 31, 2005.
These events have not yet occurred. As a result, we chose to take an additional
pretax charge to earnings during the current period of $39,000, further reducing
our cost basis in FIC to $3,042,000, or $7.90 per share which is equal to the
quoted market price of FIC shares on March 31, 2005. While we currently continue
to have the ability and the intent to hold the stock indefinitely, we concluded
that the additional uncertainty created by the late filings together with the
lack of current financial information dictated that the decline should be viewed
as other than temporary.
7. GAIN ON FORGIVENESS OF DEBT
We recorded $0 and $63,000 during the three months ended March 31, 2005
and 2004, respectively, as gain on forgiveness of debt. This represents that
amount of liability that was released in the respective period by participants
in our loan to an affiliate, net of $15,000 interest due them from prior period
payments made by Uncommon Care. Due to poor operating results, Uncommon Care was
in default and not making scheduled payments under its loan agreement with us in
which the participations had been sold. As a result, the loan participants
released us from any obligations under the participation agreements.
8. INVESTMENT IN AVAILABLE-FOR-SALE EQUITY SECURITIES
A significant portion of this balance sheet account is comprised of our
investment in FIC common stock. As mentioned in Footnote 6 above, during the
current quarter, we recognized an "other than temporary" impairment loss and,
accordingly, our cost basis in the 385,000 shares of FIC common stock we own was
reduced from $8.00 per share to $7.90 per share. We classify all of these shares
as securities available-for-sale and record temporary unrealized changes in
their value, net of tax, in our balance sheet as part of Accumulated Other
Comprehensive Income (Loss) in Stockholders' Equity. The effect of the "other
than temporary" impairment loss of $39,000 was to reclassify from accumulated
other comprehensive income the unrealized losses to realized losses in the
statement of operations.
As part of this transaction we were granted options to purchase an
additional 323,000 shares of FIC's common stock at $16.42 per share. There is a
significant revenue-related performance requirement that must be met before
these options are exercisable. There are presently no registered FIC shares
available to issue upon the exercise of these options. We have assigned no value
to these options.
- 11 -
9. INVESTMENT IN AVAILABLE-FOR-SALE FIXED INCOME SECURITIES
We have invested primarily in U.S. government-backed securities with
maturities varying from one to three years, as well as three corporate bonds
with Standard and Poor's ratings of no lower than B (investment grade).
10. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following:
March 31 December 31
2005 2004
--------- -----------
Commissions payable $ 823,000 $ 1,260,000
Taxes payable 250,000 205,000
Vacation 153,000 153,000
401(k) plan matching 83,000 169,000
Other accrued liabilities 96,000 55,000
---------- -----------
$ 1,404,000 $ 1,842,000
========== ===========
11. NET INCOME PER SHARE
Basic income per share is based on the weighted average shares
outstanding without any dilutive effects considered. Diluted income per share
reflects dilution from all contingently issuable shares, such as options and
convertible debt. A reconciliation of earnings and weighted average shares
outstanding used in the calculation of basic and diluted earnings per share from
operations follows:
For the Three Months Ended March 31, 2005
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Basic EPS
Net income $ 853,000 2,642,000 $ 0.32
======
Diluted EPS
Effect of dilutive securities -- 225,000
---------- ----------
Net income $ 853,000 2,867,000 $ 0.30
========== ========== ======
- 12 -
For the Three Months Ended March 31, 2004
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ----------- ---------
Basic EPS
Net income $ 694,000 2,473,000 $ 0.28
======
Diluted EPS
Effect of dilutive securities -- 296,000
---------- ----------
Net income $ 694,000 2,769,000 $ 0.25
========== ========== ======
12. SEGMENT INFORMATION
The Company's segments are distinct by type of service provided. Comparative
financial data for the three and three month periods ended March 31, 2005 and
2004 are shown as follows:
Three months ended March 31,
2005 2004
----------- -----------
Operating Revenue:
Financial services ....................... $ 3,267,000 $ 3,832,000
Insurance services ....................... 3,395,000 3,458,000
Corporate ................................ -- 1,600,000
---------- -----------
Total Segment Revenues .............. $ 6,662,000 $ 8,890,000
=========== ===========
Reconciliation to Consolidated
Statement of Operations:
Total segment revenues ................... $ 6,662,000 $ 8,890,000
Less: Intercompany dividends ............... -- (1,600,000)
----------- -----------
Total Revenues ..................... $ 6,662,000 $ 7,290,000
=========== ===========
Operating Income
Financial services ........................ $ 317,000 $ 591,000
Insurance services ........................ 711,000 669,000
Corporate ................................. (451,000) (334,000)
----------- -----------
Total segments operating income .............. 577,000 926,000
Gain on sale of investments ................. 630,000 27,000
Loss on impairment of investment ............. (39,000) --
Gain on extinguishment of debt ................. -- 63,000
----------- -----------
Income from operations before interest
income taxes and minority interest ........ 1,168,000 1,016,000
- 13 -
Three months ended March 31,
2005 2004
--------- ---------
Interest income ................................ 122,000 83,000
Other gain (loss) .............................. 55,000 (8,000)
Interest expense ............................... 4,000 --
Income tax expense ............................. 477,000 397,000
Minority interest .............................. 11 --
--------- ---------
Net income ..................................... $ 853,000 $ 694,000
========= =========
13. STOCK-BASED COMPENSATION
We have adopted the disclosure-only provisions of Statement of
Accouting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), as amended by SFAS 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure", but measure compensation expense for our stock-based
employee compensation plans using the intrinsic value method prescribed by APB
Opinion No. 25, Accounting for Stock Issued to Employees. Proforma disclosures
of net income and earnings per share as if the fair value-based method
prescribed by SFAS 123 had been applied in measuring compensation expense
follow. For purposes of the proforma disclosures, the estimated fair value of
the options is amortized to expense over the option's vesting periods.
Three Months Ended March 31,
2005 2004
---------- -----------
Net income as reported .......................... $ 853,000 $ 694,000
Deduct: Total additional stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects .................... (53,000) (86,000)
---------- -----------
Pro forma net income ............................ $ 800,000 $ 608,000
========== ===========
Net income per share
Basic - as reported ..................... $ 0.32 $ 0.28
========== ===========
Basic - pro forma ....................... $ 0.30 $ 0.25
========== ===========
Diluted - as reported ................... $ 0.30 $ 0.25
========== ===========
Diluted - pro forma ..................... $ 0.28 $ 0.22
========== ===========
- 14 -
14. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary
Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions.
SFAS 153 requires exchanges of productive assets to be accounted for at fair
value, rather than at carryover basis, unless (1) neither the asset received nor
the asset surrendered has a fair value that is determinable within reasonable
limits or (2) the transactions lack commercial substance. SFAS 153 is effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. The Company does not expect the adoption of this standard to have a
material effect on its financial position, results of operations or cash flows.
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards, or SFAS, No. 123 (revised 2004),
"Share-Based Payment". Statement 123(R) will provide investors and other users
of financial statements with more complete and neutral financial information by
requiring that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured
based on the fair value of the equity or liability instruments used. Statement
123(R) covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. Statement 123(R)
replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
Statement 123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment transactions with
employees. However, that Statement permitted entities the option of continuing
to apply the guidance in Opinion 25, as long as the footnotes to financial
statements disclosed what net income would have been had the preferable
fair-value-based method been used. Public entities (other than those filing as
small business issuers) will be required to apply Statement 123(R) as of the
first interim or annual reporting period that begins after December 31, 2005. We
are currently evaluating the effect of adoption of SFAS 123(R) will have on our
overall results of operations and financial position
- 15 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
Our statements contained in this report 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. You should not place undue reliance on forward-looking
statements. All forward-looking statements included in this report are based on
information available to us on the date hereof, 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 in the forward-looking
statements. In addition to any risks and uncertainties specifically identified
in the text surrounding the forward-looking statements, you should consult our
reports on Forms 10-K and our other filings under the Securities Act of 1933 and
the Securities Exchange Act of 1934, for factors that could cause our actual
results to differ materially from those presented.
The forward-looking statements included herein are necessarily based on
various assumptions and estimates and are inherently subject to various risks
and uncertainties, including risks and uncertainties relating to the possible
invalidity of the underlying assumptions and estimates and possible changes or
developments in social, economic, business, industry, market, legal and
regulatory circumstances and conditions and actions taken or omitted to be taken
by third parties, including customers, suppliers, business partners and
competitors and legislative, judicial and other governmental authorities and
officials. Assumptions relating to the foregoing involve judgments 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 our control. Any of these assumptions
could be inaccurate and, therefore, there can be no assurance that the
forward-looking statements included in this report will prove to be accurate.
GENERAL
We provide (1) financial services, including brokerage and investment
services to individuals and institutions, and (2) insurance services, including
management and agency services to medical malpractice insurance companies.
FINANCIAL SERVICES. We provide investment and investment advisory services to
institutions and individuals throughout the United States through the following
subsidiaries:
- 16 -
o APS Financial. APS Financial is a fully licensed broker/dealer that
provides brokerage and investment services primarily to institutional and
high net worth individual clients. APS Financial also provides portfolio
accounting, analysis, and other services to insurance companies, banks
and public funds. We recognize commissions revenue, and the related
compensation expense, on a trade date basis.
o Asset Management. Asset Management manages fixed income and equity assets
for institutional and individual clients on a fee basis. We recognize fee
revenues monthly based on the amount of funds under management.
INSURANCE SERVICES. Through Insurance Services we provide management and agency
services to medical malpractice insurance companies through the following
subsidiary:
o FMI. APS Facilities Management, Inc., dba APMC Insurance Services,
Inc., or FMI, provides management and administrative services to APIE,
a regional insurance exchange that sells medical professional liability
insurance only to its physician subscribers, who pay annual insurance
premiums and maintenance fees to APIE. APIE is governed by a physician
board of directors. Pursuant to a management agreement and the
direction of this board, FMI manages and operates APIE, including
performing policy issuance, claims investigation and settlement, and
all other management and operational functions. As a management fee,
FMI receives a percentage of APIE's earned premiums and a portion of
APIE's profit, subject to a cap based on premium levels. We recognize
revenues for the management fee portion based on a percentage of earned
premium on a monthly basis, and we recognize revenues for the
management fee portion based on profit sharing in the fourth quarter,
when it is certain the managed company will have an annual profit.
FMI's assets are not subject to APIE policyholder claims.
In addition, as of March 31, 2005, we have the following significant
investments accounted for as available-for-sale securities: (1) we own
approximately 451,000 shares of HealthTronics (formerly Prime Medical) common
stock, representing about 1% of its outstanding common stock, and (2) we own
385,000 shares of Financial Industries Corporation, representing approximately
4% of its outstanding common stock. We account for these investments as
available-for-sale securities, which means they are reflected on our
consolidated balance sheets at fair value, and fluctuations in fair value are
recognized as unrealized gains or losses excluded from earnings and reported as
a separate component of stockholders' equity, net of income taxes. As discussed
later in this report, we recorded an "other than temporary" impairment loss from
market value declines in our FIC holdings totaling $39,000 in the first quarter
of 2005.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our consolidated financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an on-going basis, we evaluate our
estimates, including those related to, impairment of assets; bad debts; income
taxes; and contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies and estimates
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements. We periodically review the carrying value
of our assets to determine if events and circumstances exist indicating that
assets might be impaired. If facts and circumstances support this possibility of
impairment, our management will prepare undiscounted and discounted cash flow
projections, which require judgments that are both subjective and complex.
Management may also obtain independent valuations.
Our financial services revenues are composed primarily of commissions
on securities trades and asset management fees. Revenues related to securities
transactions are recognized on a trade date basis. Asset management fees are
recognized as a percentage of assets under management during the period based
upon the terms of agreements with the applicable customers.
Our insurance services revenues are primarily related to management
fees based on the earned premiums of the managed company and include a profit
sharing component, as defined in the management agreement, related to the
managed company's annual earnings. Management fees are recorded, based upon the
terms of the management agreement, in the period the related premiums are earned
by the managed company. The managed company recognizes premiums as earned
ratably over the terms of the related policy. The profit sharing component is
recognized when it is certain the managed company will have an annual profit,
and, historically, has been recognized during the fourth quarter following the
completion of a loss reserve analysis by outside actuaries.
- 18 -
On June 4, 2003 we purchased from Financial Industries Corporation
("FIC")(OTC: FNIN.PK) and a foundation 339,879 shares of FIC's common stock as
an investment. Earlier in 2003 we had purchased 45,121 FIC shares in the open
market. The 385,000 shares represents an approximate 4% ownership in FIC. The
aggregate purchase price was approximately $5,647,000, which was all sourced
from our cash reserves. The shares purchased from FIC and the foundation are not
registered, but are subject to a registration rights agreement requiring FIC's
best efforts to register them within one year of the transaction. Due to FIC's
delay in filing its 2003 Form 10-K and its subsequent 10-Q's and 10-K, it has
not been able to register these shares and was delisted from the NASDAQ exchange
in July, 2004.
During 2004, the value of our investment in FIC has declined
significantly. On October 12, 2004, we determined that this decline in market
price should be considered "other than temporary" as defined in Statements of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities, as amended. Consequently, we recorded
a pretax charge to earnings of $2,567,000 in 2004. The charge reduced our cost
basis in FIC from $5,647,000, or $14.67 per share, to $3,080,000, or $8.00 per
share which is equal to the quoted market price of FIC shares on December 31,
2004. As discussed in our Form 10-K dated December 31, 2004, we believe the
decline in the market price of FIC has been brought about by its failure to file
its 2003 Form 10-K and its subsequent de-listing from the NASDAQ Stock Market.
We had expected FIC to bring its filings current and pursue restoring its
exchange listing during 2004. These events have not yet occurred. As a result,
we recorded an additional pretax charge to earnings of $39,000 in the first
quarter of 2005. The charge reduced our cost basis in FIC from $3,080,000, or
$8.00 per share, to $3,041,000, or $7.90 per share which is equal to the quoted
market price of FIC shares on March 31, 2005. While we currently continue to
have the ability and the intent to hold the stock indefinitely, we concluded
that the additional uncertainty created by the late filings together with the
lack of current financial information dictated that the decline should be viewed
as other than temporary. We will continue to closely monitor FIC's situation.
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RESULTS OF OPERATIONS
REVENUES
Revenues from operations decreased $628,000 (9%) in the three months
ended March 31, 2005 compared to the same period in 2004. Our income from
operations before interest, income taxes and minority interest increased
$152,000 (15%) in the current year three months compared to the same period in
2004. Our net income increased $159,000 (23%) in the current year three months
compared to the same period in 2004. Lastly, our diluted net income per share
increased $0.05 (20%) in the current year three compared to the same period in
2004. The reasons for these changes are described below.
FINANCIAL SERVICES
Our financial services revenue decreased $565,000 (15%) in the first
three months of 2005 compared to the same period in 2004. Lower commission
revenues were earned at APS Financial, the broker/dealer, which derives most of
its revenue from transactions in the fixed income market, in both investment and
non-investment grade securities. The investment climate continued to be soft as
the Federal Reserve raised rates 50 basis points during the quarter, continuing
the trend started in June 2004 (rates have risen 175 basis points total).
Inflationary pressures were fueled by rising oil/gas prices which set a record
in March of this quarter. Additionally, the high yield market which had been
viewed as over valued, finally began a sharp correction led predominately by the
automotive sector. Many of our customers have chosen to stay relatively liquid,
reducing their commitment of funds in the fixed income securities where we earn
the bulk of our commissions.
Our financial services expenses decreased $291,000 (9%) in the three
months ended March 31, 2005 compared to the same period in 2004. The primary
reason for the current quarter decrease is a $335,000 (16%) decrease in
commission expense in the current year three months compared to the same period
in 2004 resulting from the decrease in commission income mentioned above. In
addition, incentive compensation costs were zero in 2005 compared to $145,000 in
the first three months of 2004 primarily as a result of lower profits at APS
Financial for 2005. Partially offsetting these decreases was an increase in
payroll expense of $111,000 (38%) in the three months ended March 31, 2005
compared to the same period in 2004. Payroll was up as a result of normal annual
merit raises as well as the hiring of two new full-time positions. Also,
professional fees increased $67,000 (151%) in the three months ended March 31,
2005 compared to the same period in 2004 as a result of fees incurred related to
Sarbanes Oxley compliance.
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INSURANCE SERVICES
Our insurance services revenues from our premium-based insurance
management segment, APS Insurance Services, decreased $63,000 (2%) in the three
months ended March 31, 2005 compared to the same period in 2004. Current year
declines in commission income and in risk management fees were the reasons for
this decrease in revenues. Commission income was down $273,000 (20%) as a result
of a decrease in written premium totaling $2,300,000 (12%) in the first three
months in 2005 resulting primarily from a timing difference in the renewal of
our largest insured group. As noted in the following paragraph, commissions paid
to third party independent agents decreased by an equivalent amount, resulting
in no impact on net income. Risk management fees decreased in the three months
ended March 31, 2005 compared to the same period in 2004 as a result of one of
our large group's risk rating being upgraded this year which resulted in their
not having to pay risk management fees in 2005. Partially offsetting these
decreases was a $289,000 (15%) increase in management fee revenues in the three
months ended March 31, 2005 compared to the same period in 2004. The primary
reason for this increase comes from fees earned resulting from new business
written in 2004, much of whose revenue is earned in 2005.
Insurance services expenses decreased $105,000 (4%) in the three months
ended March 31, 2005 compared to the same period in 2004. The current year
decrease is primarily due to the above-mentioned $273,000 (20%) decrease in
commissions paid to third party independent agents. Partially offsetting this
decrease were increases in payroll expenses and professional fees. Payroll was
up $38,000 (5%) on normal annual merit raises. Professional fees increased
$160,000 (881%) in the first three months of 2005 compared to the same period in
2004 as a result of fees incurred related to Sarbanes Oxley compliance.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $140,000 (40%) in the
three months ended March 31, 2005 compared to the same period in 2004. The
primary reason for this increase is a $76,000 (174%) increase in outside
professional fees resulting mainly from fees incurred related to Sarbanes Oxley
compliance. In addition, incentive compensation expense is $46,000 (32%) higher
in the current year as a result of additional bonuses that will be paid on the
gains from the sale of HealthTronics common stock made in the first three months
of 2005.
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GAIN ON SALE OF ASSETS
During the three months ended March 31, 2005, we recognized $122,000 of
deferred gain related to the November 2001 sale and subsequent leaseback of real
estate to Prime Medical. Due to our continuing involvement in the property, we
deferred recognizing approximately $2,400,000 of the approximately $5,100,000
gain and are recognizing it in earnings, as a reduction of rent expense, monthly
through November 2006. A total of $813,000 remains to be recognized in the
coming twenty months. In addition, 15% of the gain ($760,000) related to our
then 15% ownership in the purchaser, was deferred. As our ownership percentage
in Prime declines through our sales of Prime common stock, we recognize these
gains proportionately to our reduction of our interest in Prime. During the
first three months of 2005 we recognized $35,000 of these deferred gains,
leaving a balance of approximately $144,000 remaining to be recognized.
GAIN ON SALE OF INVESTMENTS
The increase in the current quarter is due to the sale of a greater
number of available-for-sale equity securities in 2005 than were sold in the
first three months of 2004.
LOSS ON IMPAIRMENT OF INVESTMENT
The loss recorded in the first quarter of 2005 represents a write-down
of our investment in Financial Industries ("FIC") common stock. During the
current quarter, we determined that the decline in market value of FIC common
stock should be considered "other than temporary" and we recorded a pretax
charge to earnings of $39,000. This charge reduced our cost basis in FIC from
$3,080,000, or $8.00 per share, to $3,041,000, or $7.90 per share which is equal
to the quoted market price of FIC shares on March 31, 2005. We believe the
decline in the market price of FIC has been brought about by its failure to file
its 2003 Form 10-K and its subsequent de-listing from the NASDAQ Stock Market.
We had expected FIC to bring its filings current and pursue restoring its
exchange listing but these events have not yet occurred. While we currently
continue to have the ability and the intent to hold the stock indefinitely, we
concluded that the additional uncertainty created by the late filings together
with the continued lack of current financial information dictated that the
decline should be viewed as other than temporary. As mentioned in our 2004
annual report on Form 10-K, we will continue to monitor and evaluate the
situation at FIC and further determine if changes in fair market value of the
investment are temporary or "other than temporary".
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GAIN ON FORGIVENESS OF DEBT
During the three months ended March 31, 2004, we recorded $63,000 as a
gain on forgiveness of debt. This represented that amount of liability that were
released by participants in our loan to this affiliate, net of $15,000 in
expenses associated with these releases. Due to poor operating results, Uncommon
Care was in default and not making scheduled payments under its loan agreement
with us in which the participations had been sold. As a result, the loan
participants released us from any obligations under the participation
agreements. For the three months ended March 31, 2005, no further releases of
liabilities have been acquired, therefore no gains were recorded.
INTEREST INCOME
Our interest income increased $39,000 (47%) in the three month period
ended March 31, 2005 compared to the same period in 2004. The current year three
month increase was due to interest earned on a larger balance of
interest-bearing fixed income securities purchased after March 31, 2004.
OTHER INCOME (LOSS)
Our other income rose $63,000 for the three months ended March 31, 2005
compared to the same period in 2004. The increase in the current year represents
primarily inventory gains of $18,000 on securities held at APS Financial during
2005 compared to inventory losses of $29,000 in 2004.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Our net working capital was $9,630,000 and $10,673,000 at March 31,
2005 and December 31, 2004, respectively. The decrease in the current year was
due in part to cash used to purchase long-term available-for-sale fixed income
securities. Partially offsetting this was cash received from the sale of
available-for-sale equity securities. Historically, we have maintained a strong
working capital position and, as a result, we have been able to satisfy our
operational and capital expenditure requirements with cash generated from our
operating and investing activities. These same sources of funds have also
allowed us to pursue investment and expansion opportunities consistent with our
growth plans.
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Although there can be no assurance our operating activities will
provide positive cash flow in 2005, we are optimistic that our working capital
requirements will be met for the foreseeable future for the following reasons:
(1) our current cash position is very strong, with a balance of approximately
$4.4 million comprising 16 percent of our total assets; (2) our investments in
available-for-sale equity and fixed income securities could provide an
additional $17.8 million should the need arise; and (3) we renewed a line of
credit in April 2004 that is described below.
LINE OF CREDIT
During April 2004, we renewed a $3.0 million line of credit that was
originally established in November 2003 with PlainsCapital Bank. The loan called
for interest payments only to be made on any amount drawn until April 15, 2005,
when the entire amount of the note, principal and interest then remaining
unpaid, became due and payable. At March 31, 2005, there were no draws taken
against this line of credit. We are in compliance with the covenants of the loan
agreement, including requirements for a minimum of $5.0 million of unencumbered
liquidity and a minimum 2 to 1 net worth ratio.
CAPITAL EXPENDITURES
Our capital expenditures for equipment were $94,000 in the three months
of 2005. The majority of these expenditures were necessary to upgrade our
reporting software at our insurance services subsidiary. At March 31, 2005, our
reporting software upgrade is considered to be "in progress" with anticipated
implementation in phases during the rest of 2005 and 2006. Those the assets
purchased during 2005 that have not been placed in service, are appropriately
not being depreciated. We expect capital expenditures in 2005 to be
approximately $500,000, including $200,000 in improvements to our business
intelligence reporting software. Our 2005 capital expenditure budget is expected
to be funded through cash on hand.
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ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary
Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions.
SFAS 153 requires exchanges of productive assets to be accounted for at fair
value, rather than at carryover basis, unless (1) neither the asset received nor
the asset surrendered has a fair value that is determinable within reasonable
limits or (2) the transactions lack commercial substance. SFAS 153 is effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. The Company does not expect the adoption of this standard to have a
material effect on its financial position, results of operations or cash flows.
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards, or SFAS, No. 123 (revised 2004),
"Share-Based Payment". Statement 123(R) will provide investors and other users
of financial statements with more complete and neutral financial information by
requiring that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured
based on the fair value of the equity or liability instruments used. Statement
123(R) covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. Statement 123(R)
replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
Statement 123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment transactions with
employees. However, that Statement permitted entities the option of continuing
to apply the guidance in Opinion 25, as long as the footnotes to financial
statements disclosed what net income would have been had the preferable
fair-value-based method been used. Public entities (other than those filing as
small business issuers) will be required to apply Statement 123(R) as of the
first interim or annual reporting period that begins after December 31, 2005. We
are currently evaluating the effect of adoption of SFAS 123(R) will have on our
overall results of operations and financial position.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We have exposure to changes in interest rates and the market values of our
investments but have no material exposure to fluctuations in foreign currency.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates to both
our investment portfolio and our revenues generated through commissions at our
financial services segment. All of our marketable fixed income securities are
designated as available-for-sale and, accordingly, are presented at fair value
on our balance sheets. Fixed rate securities may have their fair market value
adversely affected due to a rise in interest rates, and we may suffer losses in
principal if forced to sell securities that have declined in market value due to
changes in interest rates.
Changes in interest rates could have an impact at our broker/dealer
subsidiary, APS Financial. The general level of interest rates may trend higher
or lower in 2005, and this move may impact our level of business in different
fixed-income sectors. If a generally improving economy is the impetus behind
higher rates, then while our investment grade business may drop off, our high
yield business might improve with improving credit conditions. A volatile
interest rate environment in 2005 could also impact our business as this type of
market condition can lead to investor uncertainty and their corresponding
willingness to commit funds.
As we currently have no debt and do not anticipate the need to take on any
debt in 2005, interest rate changes will have no impact on our financial
position as it pertains to interest expense.
INVESTMENT RISK
As of March 31, 2005, our recorded basis in debt and equity securities was
approximately $17.8 million. We regularly review the carrying value of our
investments and identify and record losses when events and circumstances
indicate that such declines in the fair value of such assets below our
accounting basis are other-than-temporary. See Footnote 6 to this report on Form
10-Q for a detailed description of charges to earnings in the prior year and the
current quarter that were considered to be "other than temporary".
We also have an investment of 451,000 shares of common sock of
HealthTronics, Inc. Although we have an unrealized gain of approximately
$2,587,000 as of March 31, 2005, this investment can also be at risk should
market or economic conditions change
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for the worse or should adverse situations occur at HealthTronics, such as a
major product line becoming obsolete. The remainder of our corporate equity and
fixed income investments share the same risks as HealthTronics but our exposure
is much lower.
Item 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed by us in reports that we file
or submit under the Securities Exchange Act, is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurances of achieving the desired
control objectives, and management necessarily is required to apply its judgment
in evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, and under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated the effectiveness of the
design and operation of these disclosure procedures. Based on this evaluation
and subject to the foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective in
reaching a reasonable level of assurance of achieving management's desired
controls and procedures objectives.
There have been no changes in internal controls over financial
reporting that occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to affect, our internal control
over financial reporting.
As part of a continuing effort to improve our business processes we are
evaluating our internal controls and may update certain controls to accommodate
any modifications to our business processes or accounting procedures.
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PART II
OTHER INFORMATION
- 28 -
Item 1. LEGAL PROCEEDINGS
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.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Items 2(a) through(d) are inapplicable.
(e) Stock Repurchases
(d) Maximum
(c) Total Number Dollar Value
of Shares of Shares that
Purchased as Part May Yet be
Period (a) Total Number (b) Average of Publicly Purchased Under
of shares Price Paid Annonuced Plans the Plans or
Purchased (1) per Share or Programs Programs
-------------------------- ------------------ ------------- ------------------- ------------------
Jan 1, 2005 - Jan 31, 2005 7,612 $ 10.43 7,612 $ 1,654,000
Febr 1, 2005 - Febr 28, 2005 104 $ 11.39 104 $ 1,653,000
March 1, 2005 - March 31, 2005 14,708 $ 12.07 14,708 $ 1,476,000
(1) Of the total shares purchased 22,412 were purchased in open market
transactions and 12 were purchased in private transactions. Our share
repurchase program was announced August 17, 2004 and authorizes
the purchase of up to $2 million of common stock.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
(b) Reports on Form 8-K.
Report filed March 30, 2005 concerning the press release
reporting Year-end 2004 results of operations and financial
condition.
Report filed April 21, 2005 concerning the notification that
Robert L. Myer, director, will not stand for re-election to
our Board of Directors.
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