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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, 2003
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, 2003
-------------------- ----------------
Common Stock, $.10 par value 2,147,130
=============================================================================
PART I
FINANCIAL INFORMATION
- 2 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Item 1 - Financial Statements
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Financial services $4,779 $3,201 $8,836 $6,298
Insurance services 2,167 2,241 4,724 4,350
Consulting 773 903 1,672 1,600
------------ ------------ ------------ ------------
Total revenue 7,719 6,345 15,232 12,248
Expenses:
Financial services 4,063 2,797 7,403 5,409
Insurance services 1,703 1,643 3,675 3,238
Consulting 616 730 1,242 1,360
General and administrative 458 318 884 679
(Gain) loss on sale of assets (Note 4) (6) 60 (8) (512)
------------ ------------ ------------ ------------
Total expenses 6,834 5,548 13,196 10,174
------------ ------------ ------------ ------------
Operating income 885 797 2,036 2,074
(Gain) loss on sale of investments (Note 4) 74 (10) 89 2,791
Earnings from operations before interest,
income taxes, minority interests and equity
in unconsolidated affiliates 959 787 2,125 4,865
Interest income 75 6 148 44
Interest expense 1 3 2 21
Income tax expense 380 283 733 1,678
Minority interests (Note 10) 204 58 537 115
Equity in gain (loss) loss of unconsolidated
affiliates (Note 5) 235 -- 235 (44)
------------ ------------ ------------ ------------
Net earnings $684 $449 $1,236 $3,051
============ ============ ============ ============
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,
------------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Earnings per common share
Basic:
Earnings from operations $0.32 $0.20 $0.58 $1.33
------------- ------------- ------------- -------------
Net earnings $0.32 $0.20 $0.58 $1.33
============= ============= ============= =============
Diluted:
Earnings from operations $0.30 $0.19 $0.55 $1.26
------------- ------------- ------------- -------------
Net earnings $0.30 $0.19 $0.55 $1.26
============= ============= ============= =============
Basic weighted average shares
outstanding 2,138 2,254 2,134 2,288
============= ============= ============= =============
Diluted weighted average
shares outstanding 2,269 2,402 2,247 2,412
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
- 4 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2003 2002
---------------- ---------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $6,173 $6,691
Trading account securities 103 133
Trade receivables, net 605 460
Notes receivable - current 650 571
Management fees and other receivables 510 763
Deposit with clearing organization 500 500
Receivable from clearing organization 70 70
Investment in available-for-sale fixed
income securities - current -- 1,015
Income tax receivable 269 491
Deferred tax asset - current 42 --
Prepaid expenses and other 591 673
--------- ---------
Total current assets 9,513 11,367
Notes receivable, less current portion 163 374
Property and equipment, net 456 374
Investment in available-for-sale equity
securities (Notes 5 and 6) 9,190 6,996
Investment in available-for-sale fixed
income securities - non-current 874 3,273
Net deferred income tax asset - non-current 2,229 2,399
Other assets 195 198
-------- --------
Total Assets $22,620 $24,981
======== ========
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,
2003 2002
-------------- ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $537 $738
Payable to clearing broker 77 70
Accrued incentive compensation 1,209 1,804
Accrued expenses and other liabilities (Note 7) 1,330 1,227
Deferred gain - current 487 487
Deferred tax liability - current -- 974
------- ------
Total current liabilities 3,640 5,300
Payable under loan participation agreements 259 259
Deferred gain - non-current 1,495 1,887
------- ------
Total liabilities 5,394 7,446
Minority interests (Note 10) 807 393
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;
2,147,130 issued and outstanding at 06/30/03
and 2,133,843 at 12/31/02 215 213
Additional paid-in capital 5,662 5,584
Retained earnings 10,726 9,515
Accumulated other comprehensive income (loss),
net of taxes (120) 1,830
Treasury stock (64) --
------- ------
Total shareholders' equity 16,419 17,142
------- ------
Total Liabilities and Shareholders' Equity $22,620 $24,981
======= =======
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,
2003 2002
-------------- -------------
Cash flows from operating activities:
Net income $1,236 $3,051
Adjustments to reconcile net income to cash
used in operating activities:
Depreciation and amortization 114 87
Forgiveness of debt and other 83 105
Minority interest in consolidated earnings 537 115
Undistributed (gain) loss of affiliates (235) 44
Gain on sale of assets (252) (756)
Gain on sale of investment (89) (2,791)
Provision for bad debt 6 54
Changes in operating assets and liabilities:
Trade receivables (151) (216)
Trading account securities 30 7
Income tax receivable 222 3,024
Deferred income taxes 113 (1,375)
Receivable from clearing organization 7 (83)
Management fees & other receivables 253 (166)
Prepaid expenses & other assets 82 773
Trade accounts payable (202) (7)
Accrued expenses & other liabilities (492) (1,508)
-------- -------
Net cash used in operating activities 1,262 358
Cash flows from investing activities:
Capital expenditures (185) (84)
Proceeds from the sale of available-for-sale equity
and fixed income securities 4,038 10,600
Purchase of available-for-sale equity securities (5,697) (1,382)
Receipts from (advances to) affiliate 150 (230)
Funds loaned to others (150) (150)
Collection of notes receivable 263 317
-------- -------
Net cash (used in) provided by investing activities (1,581) 9,071
Cash flows from financing activities:
Payment of long term debt -- (2,275)
Exercise of stock options 80 17
Purchase and cancellation of treasury stock (89) (501)
Distribution to minority interest (190) --
------- -------
Net cash used in financing activities (199) (2,759)
Net change in cash and cash equivalents ($518) $6,670
Cash and cash equivalents at beginning of period 6,691 3,851
------- -------
Cash and cash equivalents at end of period $6,173 $10,521
======= =======
See accompanying notes to consolidated financial statements.
- 7 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
For the six months ended June 30, 2002 and 2003
(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, 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 purchase -- -- -- -- -- (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
================================================================================================
Balance December 31, 2002 (audited) $ 213 $ 5,584 $ 9,515 $ 1,830 $ -- $ 17,142
------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 1,236 $ 1,236 -- -- 1,236
Other comprehensive income:
Unrealized loss on securities,
net of taxes of $1,005 -- -- -- (1,950) (1,950) -- (1,950)
-------- --------
Comprehensive loss -- -- -- $ (714) -- -- --
========
Treasury stock purchases -- -- -- -- (89) (89)
Cancelled treasury stock -- -- (25) -- 25 --
Stock options exercised 2 78 -- -- -- -- 80
------------------------------------------------------------------------------------------------
Balance June 30, 2003 (unaudited) $ 215 $ 5,662 $10,726 $ -- $ (120) $ (64) $ 16,419
================================================================================================
See accompanying notes to consolidated financial statements.
- 8 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(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 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 June 30, 2003 and 2002 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, 2002 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 2003 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
We have extended various subordinated lines of credit to Uncommon Care
totaling $4.46 million with interest rates ranging between 10% and 12%. At June
30, 2003, Uncommon Care was not in compliance with its senior loan covenants.
Uncommon Care's senior lender has several options ranging from renegotiating new
loan terms to seizing collateral, thus forcing Uncommon Care into bankruptcy.
Although Uncommon Care was able to secure refinance funds from a third
- 9 -
party lender on some of its properties in April, 2003, they are still not in
compliance with bank covenants and it is unknown as of the date of this report
what action the lender may take. Uncommon Care has not paid us interest due on
their note since June, 2001. Uncommon Care's management has been informed by us
that we will not advance them additional funds. (See Note 5 to these
consolidated financial statements).
We have extended a line of credit to APS Consulting. See Note 10 to
these consolidated financial statements.
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 six months ended June 30, 2003, we received proceeds of
approximately $3,580,000 and recognized a gain of $89,000 resulting from the
sale of available-for-sale fixed income and equity securities.
Additionally, we recognized $244,000 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 $2.4 million of the approximately $5.1 million gain and are
recognizing it in earnings, as a reduction of rent expense, monthly through
November 2006. In addition, 15% of the gain ($0.76 million) 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 six
months of 2003, we recognized $8,000 of these deferred gains.
5. EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES
At June 30, 2003 we owned approximately 4% (728,000 shares) of the
outstanding common stock of Prime Medical. Our ownership percentage was reduced
during 2002 when we sold 1,570,000 shares of Prime Medical common stock. As a
result of our reduced ownership interest and as a result of the Company's
Chairman and CEO, Kenneth S. Shifrin, stepping down from day-to-day operations
as Executive Chairman of the Board of Prime Medical effective January 1, 2002,
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 and
no equity earnings were recorded during the first six months of 2003. We
recognized $186,000 of equity earnings during the first quarter of 2002 prior to
converting to the cost method of accounting for this investment.
- 10 -
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 annually, 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.
The condensed statements of operations for Prime Medical follows (unaudited, in
thousands):
CONDENSED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND
2002
2003 2002
---- ----
Total revenue $77,762 $81,007
Income from operations 17,240 24,683
Net income 3,150 5,137
At June 30, 2003 the Company owned convertible preferred and common
stock of Uncommon Care, a developer and operator of dedicated Alzheimer's care
facilities. We have followed 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. In 2002 and 2003, Uncommon Care
was able to distribute a total of $355,000 to us as a result of certain sales
and refinancing of its debt. Of this, $120,000 was advanced back to Uncommon
Care. Upon receipt we recorded deferred income to be offset against future
advances to Uncommon Care. During the first quarter of 2003 we decided not to
extend any future cash advances to Uncommon Care. Consequently, we took into
income cash payments previously received from Uncommon Care that had been
recorded as deferred income as well as cash received from Uncommon Care during
the current quarter. Total cash receipts recorded as equity in earnings of
unconsolidated affiliates for the six months ended June 30, 2003 was $235,000.
In the six months ended June 30, 2002 we advanced $230,000 to Uncommon Care.
These advances were expensed when made to recognize previously unrecorded losses
by the investee.
The common and preferred shares owned by the Company, represent a 42%
interest in the common equity in Uncommon Care on a fully converted basis. 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, 2003 AND
2002
2003 2002
---- ----
Total revenue $3,872 $3,769
Income from operations 393 (300)
Net loss (353) (305)
- 11 -
6. INVESTMENT IN AVAILABLE-FOR-SALE EQUITY SECURITIES
On June 4, 2003 we purchased from Financial Industries Corporation
("FIC")(NASDAQ: FNIN) and a foundation 339,879 shares of FIC's common stock as
an investment. The purchase price was approximately $5,000,000, which was all
sourced from our cash reserves. 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 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. We have
classified all of these shares as securities available for sale and have
recorded changes in their value, net of tax, in our balance sheet as part of
Accumulated Other Comprehensive Income. A material decline in the value of this
investment could have a material effect in our financial condition and results
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.
7. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following:
June 30 December 31
2003 2002
(Unaudited)
------------ ------------
Commissions Payable $ 974,000 $ 798,000
Taxes 55,000 93,000
Vacation 144,000 154,000
Other 157,000 182,000
----------- -----------
$1,330,000 $1,227,000
=========== ===========
8. 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 operations
follows:
- 12 -
For the Three Months Ended June 30, 2003
---------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ----------- ---------
Earnings from operations $ 684,000
Basic EPS
Earnings available to
common stockholders 684,000 2,138,000 $0.32
=====
Diluted EPS
Effect of dilutive securities -- 131,000
--------- ----------
Earnings available to
common stockholders and
assumed conversions $ 684,000 2,269,000 $0.30
========== ========= =====
For the Three Months Ended June 30, 2002
--------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Earnings from operations $ 449,000
Basic EPS
Earnings available to 449,000 2,254,000 $ 0.20
======
common stockholders
Diluted EPS
Effect of dilutive securities -- 148,000
--------- ----------
Earnings available to common
stockholders and assumed
conversions $ 449,000 2,402,000 $ 0.19
========= ========== ======
- 13 -
For the Six Months Ended June 30, 2003
-------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
Earnings from operations $ 1,236,000
Basic EPS
Earnings available to
common stockholders 1,236,000 2,134,000 $0.58
=====
Diluted EPS
Effect of dilutive securities -- 113,000
---------- ----------
Earnings available to
common stockholders and
assumed conversions $ 1,236,000 2,247,000 $0.55
========== ========= =====
For the Six Months Ended June 30, 2002
------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
Earnings from operations $ 3,051,000
Basic EPS
Earnings available to 3,051,000 2,288,000 $ 1.33
======
common stockholders
Diluted EPS
Effect of dilutive securities -- 124,000
----------- ----------
Earnings available to common
stockholders and assumed
conversions $ 3,051,000 2,412,000 $ 1.26
========== ========= ======
Unexercised employee stock options to purchase 40,000 and 91,500 shares
of the Company's common stock as of June 30, 2003 and 2002, respectively, were
not included in the computations of diluted EPS because the effect would be
antidilutive as their exercise price exceeds the average stock price during the
period.
- 14 -
9. SEGMENT INFORMATION
The Company's segments are distinct by type of service provided. Comparative
financial data for the three month periods ended June 30, 2003 and 2002 are
shown as follows:
Three months ended June 30,
2003 2002
------------ -------------
Operating Revenue:
Financial services $ 4,779,000 $ 3,201,000
Insurance services 2,167,000 2,241,000
Consulting 773,000 903,000
Corporate 1,182,000 117,000
----------- ----------
Total Segment Revenues $ 8,901,000 $ 6,462,000
=========== ==========
Reconciliation to Consolidated
Statement of Operations:
Total segment revenues $ 8,901,000 $ 6,462,000
Less: Intercompany dividends (1,177,000) (100,000)
Intercompany interest ( 5,000) (17,000)
----------- -----------
Total Revenues $ 7,719,000 $ 6,345,000
=========== ===========
Operating Income (Loss)
Financial services $ 716,000 $ 404,000
Insurance services 464,000 598,000
Consulting 157,000 173,000
Corporate (452,000) (378,000)
---------- -----------
Total segments operating income 885,000 797,000
Gain on sale of investments 74,000 (10,000)
Earnings from operations before
interest, incometaxes and minority
interests and equity inloss of 959,000 787,000
unconsolidated affiliates
Interest income 75,000 6,000
Interest expense 1,000 3,000
Income tax expense 380,000 283,000
Minority interests 204,000 58,000
Equity in unconsolidated affiliates 235,000 --
------- -------
Net earnings $ 684,000 $ 449,000
========= ========
- 15 -
Six months ended June 30,
2003 2002
-------- --------
Operating Revenue:
Financial services $8,836,000 $6,298,000
Insurance services 4,724,000 4,350,000
Consulting 1,672,000 1,600,000
Corporate 1,186,000 274,000
---------- -----------
Total Segment Revenues $16,418,000 $12,522,000
=========== ===========
Reconciliation to Consolidated
Statement of Operations:
Total segment revenues $16,418,000 $12,522,000
Less: Intercompany dividends (1,177,000) (245,000)
Intercompany interest ( 9,000) (29,000)
----------- ------------
Total Revenues $15,232,000 $12,248,000
=========== ============
Operating Income (Loss)
Financial services $ 1,433,000 $ 889,000
Insurance services 1,049,000 1,112,000
Consulting 430,000 240,000
Corporate (876,000) (167,000)
---------- -----------
Total segments operating income 2,036,000 2,074,000
Gain on sale of investments 89,000 2,791,000
Earnings from operations before
interest, incometaxes and minority
interests and equity in loss of
unconsolidated affiliates 2,125,000 4,865,000
Interest Income 148,000 44,000
Interest expense 2,000 21,000
Income tax expense 733,000 1,678,000
Minority interests 537,000 115,000
Equity in unconsolidated affiliates 235,000 (44,000)
------- ---------
Net earnings $1,236,000 $3,051,000
========== ==========
10. SALE OF APS CONSULTING
Effective November 1, 2002, we completed the sale of APS Consulting to
its management. We sold all of our APS Consulting shares for a de minimus amount
of cash plus a $250,000 seven year term note at the prime rate plus 3%. The note
is secured by the assets of APS Consulting. Our existing contract to provide
administrative support services to APS Consulting for a period of approximately
seven years remains in effect. Fees under this contract are dependent on APS
Consulting's pre-tax earnings but may not be less than $200,000 or more than
$518,000 over the life of the agreement.
- 16 -
In addition, we extended a line of credit to APS Consulting of up to
$450,000. This line is at the prime rate plus 3% and is collateralized by the
accounts receivable and cash of APS Consulting. Advances under the line are
dependent upon meeting borrowing base requirements.
Under the terms of the sale agreement, we are dependent upon the future
successful operation of the division to collect our proceeds from the disposal.
Additionally, as we have a security interest in the assets of the division, we
have retained a risk of loss on the division's assets and, under the terms of
our notes with the division, we have the ability to veto certain transactions,
including significant asset disposals.
Consistent with the guidance under FIN 46, we have not recognized the
divestiture of APS Consulting and continue to consolidate the division as an
entity in which we have a variable interest that will absorb the majority of the
entity's operating losses if they occur.
Accordingly, the assets and liabilities of APS Consulting are included
in our consolidated balance sheets as of June 30, 2003 and December 31, 2002.
The balance sheet below summarizes the assets and liabilities of APS Consulting
that are included in our consolidated balance sheet at June 30, 2003:
June 30 Dec 31
2003 2002
ASSETS (Unaudited)
----------- ---------
Cash $171,000 $347,000
Accounts Receivable, net 601,000 409,000
Prepaid Expenses 18,000 22,000
---------- ---------
Total Current Assets 790,000 778,000
Property and Equipment 63,000 45,000
---------- ---------
Total Assets $853,000 $823,000
========== =========
LIABILITIES
Accounts Payable $217,000 $445,000
Accrued Expenses 50,000 74,000
--------- ---------
Total Current Liabilites 267,000 519,000
Notes Payable 240,000 248,000
Federal Income Tax Payable 108,000 --
Deferred Income 23,000 74,000
--------- ---------
Total Liabilites $638,000 $841,000
========= =========
Total Assets in excess (deficit) of
Liabilities $215,000 $(18,000)
========= =========
We continue to consolidate APS Consulting's revenues and expenses. If
APS Consulting reports operating losses, we record such losses in our statement
of operations. If APS Consulting reports net earnings, we reduce our interest in
such earnings to zero by increasing the minority interest presented in our
statement of operations.
- 17 -
Creditors of APS Consulting have no recourse to the general credit of
the Company or its other consolidated subsidiaries.
11. 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 options' vesting period.
Three Months Ended June 30,
---------------------------
2003 2002
---- ----
Net Earnings as reported $684,000 $449,000
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (59,000) (63,000)
---------- ----------
Pro forma net earnings 625,000 386,000
Earnings per share
Basic - as reported $ 0.32 $ 0.20
====== ======
Basic - pro forma $ 0.29 $ 0.17
====== ======
Diluted - as reported $ 0.30 $ 0.19
====== ======
Diluted - pro forma $ 0.28 $ 0.16
====== ======
Six Months Ended June 30,
--------------------------
2003 2002
---- ----
Net Earnings as reported $1,236,000 $3,051,000
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (117,000) (121,000)
---------- ----------
Pro forma net earnings 1,119,000 2,930,000
Earnings per share
Basic - as reported $ 0.58 $ 1.33
====== ======
Basic - pro forma $ 0.52 $ 1.28
====== ======
Diluted - as reported $ 0.55 $ 1.26
====== ======
Diluted - pro forma $ 0.50 $ 1.21
====== ======
- 18 -
12. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF)Issue 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The adoption of SFAS No. 146 did not have a material effect on our consolidated
financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and did not have a material effect on our consolidated financial
statements. The disclosure requirements are effective for financial statements
of interim and annual periods ending after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to a variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. We have voluntarily elected early adoption of
Interpretation No. 46. The effect of the application of this Interpretation is
described in Note 9 to these consolidated financial statements.
- 19 -
Item 2.
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 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
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
- 20 -
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 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 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 reasonably certain
the managed company will have an annual profit, and, typically, has been
recognized during the fourth quarter.
When necessary, we record an allowance for doubtful accounts based on
specifically identified amounts that we believe to be uncollectible. If our
actual collections experience changes, revisions to our allowance may be
required. We have a limited number of customers with individually large amounts
due at any given balance sheet date. Any unanticipated change in one of those
customer's credit could have a material affect on our results of operations in
the period in which such changes or events occur. After all attempts to collect
a receivable have failed, the receivable is written off against the allowance.
When necessary, we record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. While we have
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event we
were to determine that we would be able to realize our deferred tax assets in
the future in excess of its net recorded amount, an adjustment to the deferred
tax asset would increase income in the period the determination was made.
Likewise, should we determine that we would not be able to realize all or part
of our net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to income in the period the determination was made.
During 2001, it was our judgment that the equity method of accounting for
our investment in Prime Medical and Uncommon Care was more appropriate than the
cost method, on the basis that even though we held less than a 20% equity
interest in Prime Medical, we had significant influence over the operational and
financial policies of Prime Medical and Uncommon Care. Using the equity method
we recorded our share of Prime Medical's and Uncommon Care's
- 21 -
earnings or losses. As described earlier in the "Our other investments" section
of this Form 10-KSB, during the first quarter of 2002 our sales of shares of
Prime Medical common stock reduced our ownership to less than 5% of their total
shares outstanding. Consequently, we stopped accounting for our investment in
Prime Medical using the equity method and changed to the cost method. Unrealized
gains/losses related to our investment in Prime Medical are recorded in equity
as other comprehensive income, net of taxes.
In November 2002, we sold our consulting division, APS Consulting, to
its management for a de minimus amount of cash and a $250,000 seven year term
note. Additionally, we retained a security interest in the assets of the
division, agreed to provide continuing financial support to the division under a
$450,000 line of credit and continue to perform, for a fee, certain
administrative services for the division. We determined that, under the terms of
the transaction, we were dependent upon the future successful operation of the
division to collect the term note receivable accepted as consideration for the
sale. We further determined that we had a risk of loss in the division's assets
in which we retained a security interest and, through our administrative
services arrangement, maintained continuing involvement with the division.
We have accounted for the division as variable interest entity under
the guidance of FIN 46 "Consolidation of Variable Interest Entities." Consistent
with the guidance under FIN 46, we have not recognized the divestiture of APS
Consulting and continue to consolidate the division as an entity in which we
have a variable interest that will absorb the majority of the entity's operating
losses if they occur.
At June 30, 2003 the Company owned convertible preferred and common
stock of Uncommon Care, a developer and operator of dedicated Alzheimer's care
facilities. We have followed 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. In 2002 and 2003, Uncommon Care
was able to distribute a total of $355,000 to us as a result of certain sales
and refinancing of its debt. Of this, $120,000 was advanced back to Uncommon
Care. Upon receipt we recorded deferred income to be offset against future
advances to Uncommon Care. During the first quarter of 2003 we decided not to
extend any future cash advances to Uncommon Care. Consequently, we took into
income cash payments previously received from Uncommon Care that had been
recorded as deferred income as well as cash received from Uncommon Care during
the current quarter. Total cash receipts recorded as equity in earnings of
unconsolidated affiliates for the six months ended June 30, 2003 was $235,000.
In the six months ended June 30, 2002 we advanced $230,000 to Uncommon Care.
These advances were expensed when made to recognize previously unrecorded losses
by the investee.
- 22 -
RESULTS OF OPERATIONS
REVENUES
Revenues from operations increased $1,374,000 (22%) and $2,984,000
(24%) for the three and six month periods ended June 30, 2003, respectively,
compared to the same periods in 2002. Revenues increased in the current three
month period increased at our financial services segment and decreased at our
insurance and consulting segments. For the current year six month period,
revenues increased at all segments compared to the same period in 2002.
Financial services revenues increased $1,578,000 (49%) and $2,538,000
(40%) for the three and six month periods ended June 30, 2003, respectively,
compared to the same periods in 2002. The increase in the current year three and
six month periods was due to strong commission revenues at APS Financial, the
broker/dealer division of our financial services segment. APS Financial
continues to trade predominantly in investment grade bond markets. These markets
experienced volatility during the second quarter of 2003 and created trading
opportunities for our customers. Commissions are higher this year as we have
experienced zero turnover in broker personnel and they continue to open new
institutional accounts. Corporate bond business volumes have been significant
this year as investors look for yields above those offered by treasury
securities. Additionally, the success of our corporate bond research has driven
an increase in this business.
Our insurance services revenues from our premium-based insurance
management segment, APS Insurance Services, decreased $74,000 (3%) but increased
$374,000 (9%) for the three and six month periods ended June 30, 2003,
respectively, compared to the same periods in 2002. The decrease in the current
quarter was due to a decision by the medical malpractice insurance company whose
business we manage, American Physicians Insurance Exchange ("APIE"), to no
longer pay commissions on maintenance fees and on tail coverage policies.
Although this will result in lower commission revenues in the future, net income
is unaffected since an equal reduction in commission expense will also be
experienced. The six month increase is due to greater management fees resulting
from higher insurance premiums. Premiums have increased due to rate increases at
APIE.
Consulting revenues decreased $130,000 (14%) but increased $72,000 (5%)
for the three and six month periods ended June 30, 2003, respectively, compared
to the same periods in 2002. The decrease in the current quarter is due to a
greater amount of work performed in the 2nd quarter of 2002 by sub-contractors
involved in environmental assessment field activities. These sub-contractor
generated fees were primarily pass-through in nature, with an equal increase in
expenses. As described in Note 9 to our consolidated financial statements, we
completed the sale of APS Consulting to its management effective November 1,
2002. However, since we did not satisfy the conditions to treat the sale as a
divestiture, we will record operating losses of APS Consulting in our statement
of operations and will record operating earnings of APS Consulting as a
reduction of our interest in such earnings by increasing the minority interest
presented in our statement of operations.
- 23 -
EXPENSES
Total operating expenses increased $1,286,000 (23%) and $3,022,000
(30%) for the three and six month period ended June 30, 2003, respectively,
compared to the same periods in 2002. For the current year three month period,
expenses increased at our financial services, insurances services and corporate
segments and decreased at our consulting segment. For the current year six month
period, expenses increased at our financial services, insurance services and
corporate segments and decreased at our consulting segment.
Financial services expense increased $1,266,000 (45%) and $1,994,000
(37%) for the three and six month periods ended June 30, 2003, respectively,
compared to the same periods in 2002. The primary reason for the current year
increases is a $1,039,000 (60%) and $1,530,000 (46%) increase in commission
expense in the three and six month periods ended June 30, 2003, respectively,
compared to the same periods in 2002 resulting from the increase in commission
revenue at APS Financial mentioned earlier. In addition, increased net profits
at APS Financial resulted in a $188,000 (71%) and $384,000 (99%) increase in the
current year three and six month periods, respectively, in formula driven
management incentive costs.
Insurance services expenses at the insurance management subsidiary
increased $60,000 (4%) and $437,000 (13%) for the three and six month periods
ended June 30, 2003, respectively, compared to the same periods in 2002. The
three month increase is due to increases in payroll ($53,000), management
incentive ($36,000) and advertising ($64,000). Partially offsetting these
increases was the decision by APIE, mentioned above, to no longer pay
commissions on maintenance fees and on tail coverage policies. The current year
six month increase is due primarily to increased payroll ($130,000) as a result
of an industry salary analysis conducted in the latter half of 2002 which
resulted in wages within certain departments increasing to competitive levels in
order to retain personnel. Also management incentive increased $103,000 and
advertising increased $88,000, the latter due to marketing efforts relating to
re-branding efforts. Partially offsetting this was a decrease in third party
commission expense due to the decision mentioned above.
Consulting expenses decreased $114,000 (16%) and $118,000 (9%) for the
three and six month periods ended June 30, 2003, respectively, compared to the
same periods in 2002. The primary reason for the decline was, as mentioned
above, above-average sub-contractor pass-through work performed in the 2nd
quarter of 2002 in environmental assessment field activities.
General and administrative expenses increased $140,000 (44%) and
$205,000 (30%) for the three and six month periods ended June 30, 2003,
respectively, compared to the same periods in 2002. The primary reason for the
increase in both current year periods is due to reimbursement of certain
litigation costs from our consulting segment. Also, legal fees are up in 2003
from costs associated with our investment in Financial Industries Corporation.
- 24 -
Gain on sale of assets primarily represents the recognition of deferred
income resulting from reducing our investment in Prime Medical through the sale
of its common stock. Approximately $760,000 of the $5,100,000 gain on the sale
of real estate to Prime Medical in 2001 was deferred in 2001 and is to be
recognized upon the reduction of our percentage in Prime Medical through the
sale of its stock. To date, a total of $527,000 of the $760,000 originally
deferred has been recognized, including $2,000 in the first quarter of 2003 and
$6,000 in the second quarter of 2003.
Interest expense decreased $19,000 (90%) for the six month period ended
June 30, 2003 compared to the same period in 2002. The primary cause of the
current period decrease is the payoff of the Company's note payable which
carried a balance of $2,750,000 during the first quarter of 2002. There was no
long-term debt at June 30, 2003.
GAIN ON SALE OF INVESTMENTS
Gain on the sale of investments increased $84,000 but decreased
$2,702,000 for the three and six month periods ended June 30, 2003,
respectively, compared to the same periods in 2002. The six month decline was
due to the sale of far fewer shares of Prime Medical common stock in 2003
compared to 2002. In 2002, we recorded gains on the sales of 1,580,000 shares
compared to 24,000 shares sold in 2003. As a result of these sales, as of June
30, 2003, we own approximately 728,000 shares of Prime Medical amounting to an
ownership percentage of approximately 4%. The three month current year increase
is due to gains on the sale of Prime Medical common stock as well as to gains on
the sales of other available-for-sale equity and fixed income securities. The
sales of these securites was completed for the purpose of investing in Financial
Industries Corporation.
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES
Our equity in the earnings of Prime Medical was zero in 2003 as we no
longer account for our investment in Prime Medical using the equity method of
accounting, as was the case in the first quarter of 2002 when we recorded
$186,000 in equity earnings. 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 continues to serve as non-executive Chairman; and (2) 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 earnings of Uncommon Care increased $235,000 and $465,000
for the three and six month periods ended June 30, 2003, respectively, compared
to the same periods in 2002. Because our total investment and advances to
Uncommon Care has been reduced to zero we ceased recording equity losses, as
required under the equity method. Accordingly, any further advances to Uncommon
Care will result in a loss when advanced. In 2002, we advanced them $230,000 and
recorded a loss for the full amount of the advance. In 2003, we recorded equity
in earnings of unconsolidated affiliates in the amount of $235,000 related to
the cash received from Uncommon Care.
- 25 -
MINORITY INTERESTS
Minority interests represents the combination of two outside interests
in subsidiaries of the Company: a twenty percent interest in Insurance Services
owned by FPIC Insurance Group, Inc. and a three percent interest in APS Asset
Management, a subsidiary of the financial services subsidiary of the Company
(APS Investment Services), owned by key individuals within APS Asset Management.
In addition, we are now recording net income from APS Consulting as minority
interest. See Note 10 to these consolidated financial statements. Minority
interests increased in the current year primarily due to increased profitability
of our insurance services segment as well as to net income from APS Consulting.
SHAREHOLDERS' EQUITY
For the six months ended June 30, 2003, we purchased 20,576
and cancelled 6,713 shares of treasury stock. In addition, options were
exercised for the purchase of 20,000 shares. The effect of these purchases and
cancellations of treasury stock and the exercisings of stock options was to
increase treasury stock by $64,000, increase common stock by $1,300, increase
paid-in capital by $78,000 and decrease retained earnings by $25,000.
Through June 30, 2003, we recorded other comprehensive loss of
$1,950,000 which represents unrealized holding losses 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 $5,873,000 at June 30,
2003 and $6,067,000 at December 31, 2002. Working capital declined in 2003 due
primarily to a decrease in current deferred income tax liability resulting from
unrealized losses incurred from the market value decline in our investment in
available-for-sale equity securities. In addition, increased investments in
long-term available-for-sale equity securites resulted from using funds derived
from the sale of current available-for-sale fixed income securities.
Capital expenditures through the three month period ended June 30, 2003
were approximately $185,000. Total capital expenditures are expected to be
approximately $250,000 in 2003.
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 us to pursue investment and
expansion opportunities consistent with our growth plans. Although it is
uncertain if our operating activities will continue to provide positive cash
flow in 2003, we believe that our current strong working capital position will
enable us to meet our working capital requirements for the foreseeable future.
- 26 -
ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF)Issue 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The adoption of SFAS No. 146 did not have a material effect on our consolidated
financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and did not have a material effect on our consolidated financial
statements. The disclosure requirements are effective for financial statements
of interim and annual periods ending after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to a variable interest in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. We have voluntarily elected early adoption of
Interpretation No. 46. The effect of the application of this Interpretation is
described in Note 9 to these consolidated financial statements.
- 27 -
Item 3.
CONTROLS AND PROCEDURES
a.) Within the 90-day period prior to the date of this report, we carried
out an evaluation under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Rule 13a-14 of the
Securities and Exchange Act of 1934 (the "Exchange Act"). Based upon
that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to
our reports (including those of our consolidated subsidiaries)
required to be included in our Exchange Act filings.
b) There have been no significant changes in our internal controls or in
other factors which could significantly affect internal controls
subsequent to the date we carried out our evaluation.
- 28 -
PART II
OTHER INFORMATION
- 29 -
Item 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 2. CHANGES IN SECURITIES
For the six months ended June 30, 2003, we purchased 20,576 and
cancelled 6,713 shares of treasury stock. In addition, 20,000 shares were issued
upon exercise of options. The effect of these purchases and cancellations of
treasury stock and the exercisings of stock options was to increase treasury
stock by $64,000, increase common stock by $1,300, increase paid-in capital by
$78,000 and decrease retained earnings by $25,000.
Item 4. RESULTS OF VOTES OF SECURITY HOLDERS
On June 30, 2003 the annual meeting of American Physicians Service Group,
Inc. was held in Austin, Texas. Shareholders voted and approved the following
motion:
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
-------------------- ---------------- ---------------
Brad A. Hummel 2,025,959 8,298
Jackie Majors 2,025,957 8,300
Robert L. Myer 2,025,958 8,299
William A. Searles 2,025,959 8,298
Kenneth S. Shifrin 2,025,954 8,303
- 30 -
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 May 15, 2003 concerning the press
release reporting first quarter 2003 results of operations and
financial condition.
Report dated June 4, 2003 concerning our acquisition
of approximately 340,000 shares of Financial Industries
Corporation common stock.
- 31 -