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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 SEPTEMBER 30, 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 OCTOBER 25, 2005
-------------------- ----------------
Common Stock, $.10 par value 2,730,320
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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 Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
--------- ---------- ---------- ---------
Revenues:
Financial services $5,450 $3,846 $12,415 $11,905
Insurance services 3,732 3,747 10,462 10,273
------ ------ ------ -----
Total revenues 9,182 7,593 22,877 22,178
Expenses:
Financial services 4,788 3,423 11,009 10,324
Insurance services 2,931 2,704 7,856 7,706
General and administrative 573 429 1,961 1,497
Gain on sale of assets (Note 4) (47) - (131) (56)
------ ------ ------- ------
Total expenses 8,245 6,556 20,695 19,471
------ ------ ------- ------
Operating income 937 1,037 2,182 2,707
Gain on investments (Note 5) 1,114 - 3,091 244
Loss on impairment of investments (Note 6) (96) (2,374) (193) (2,374)
Gain on extinguishment of debt (Note 7) 24 - 24 76
------ ------ ------- ------
Income (loss) before interest, income
taxes and minority interest 1,979 (1,337) 5,104 653
Interest income 166 99 413 254
Other income 3 21 87 39
Interest expense 6 2 10 4
Income tax expense 747 (386) 1,966 392
Minority interests - 1 13 1
------ ------ ------- ------
Net income (loss) $1,395 $(834) $3,615 $549
======= ====== ======= =======
The accompanying notes are a 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 Nine Months Ended
September 30, September 30,
---------------- -----------------
2005 2004 2005 2004
---- ---- ---- ----
Net income (loss) per common share
Basic:
Income (loss) from operations $ 0.52 $ (0.32) $ 1.36 $ 0.22
---- ----- ---- ----
Net income (loss) $ 0.52 $ (0.32) $ 1.36 $ 0.22
==== ===== ==== ====
Diluted:
Income (loss) from operations $ 0.48 $ (0.32) $ 1.24 $ 0.19
---- ----- ---- ----
Net income (loss) $ 0.48 $ (0.32) $ 1.24 $ 0.19
==== ===== ==== ====
Basic weighted average shares
outstanding 2,702 2,589 2,667 2,523
===== ===== ===== =====
Diluted weighted average
shares outstanding 2,885 2,589 2,920 2,823
===== ===== ===== =====
The accompanying notes are a integral part of these consolidated financial
statements.
- 4 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
September 30, December 31,
2005 2004
------------ -------------
ASSETS
Current Assets:
Cash and cash equivalents $5,102 $9,673
Trading account securities 163 --
Trade receivables, net 413 19
Notes receivable - current 751 777
Management fees and other receivables 878 1,815
Deposit with clearing organization 991 660
Investment in available-for-sale fixed
income securities - current 8,667 1,983
Net deferred income tax asset 108 124
Income tax receivable 2 76
Prepaid expenses and other 615 642
------------ -----------
Total current assets 17,690 15,769
Notes receivable, less current portion 344 141
Property and equipment, net 696 619
Investment in available-for-sale equity
securities (Notes 5 and 8) 5,135 9,417
Investment in available-for-sale fixed
income securities - non-current 3,604 2,920
Net deferred income tax asset 741 --
Goodwill 1,247 1,247
Other assets 236 330
------------ -----------
Total Assets $29,693 $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
(Unaudited)
(In thousands, except share data)
September 30, December 31,
2005 2004
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $785 $266
Accrued incentive compensation 1,641 2,500
Accrued expenses and other liabilities (Note 10) 1,200 1,842
Deferred gain - current 563 488
-------- --------
Total current liabilities 4,189 5,096
Payable under loan participation agreements (Note 7) -- 24
Deferred tax liability - non-current -- 482
Deferred gain - non-current 49 627
-------- --------
Total liabilities 4,238 6,229
Minority interests 14 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;
2,731,770 and 2,646,646 issued and outstanding
at 09/30/05 and 12/31/04, respectively 273 265
Additional paid-in capital 7,727 7,919
Retained earnings 16,892 13,948
Accumulated other comprehensive income,
net of taxes 549 2,081
-------- --------
Total shareholders' equity 25,441 24,213
-------- --------
Total Liabilities and Shareholders' Equity $29,693 $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)
Nine Months Ended September 30,
2005 2004
--------- ----------
Cash flows from operating activities:
Net Income $ 3,615 $ 549
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation and amortization 264 225
Extinguishment of debt and other 190 75
Common stock awarded 159 --
Gain on sale of assets (131) (56)
Deferred gain on sale of building (372) (365)
Tax benefit from exercise of stock options 408 --
Gain on investments (3,091) (244)
Impairment of investment 193 2,374
Changes in operating assets and liabilities:
Trade receivables (394) --
Trading account securities (163) 1
Income tax receivable 65 1,050
Deferred income tax (789) (542)
Receivable from clearing organization (331) (160)
Management fees & other receivables 964 138
Trade payables 519 --
Accrued expenses & other liabilities (1,148) (1,276)
-------- ---------
Net cash used in operating activities (42) 1,769
Cash flows from investing activities:
Capital expenditures (247) (362)
Proceeds from the sale of available-for-sale equity
and fixed income securities 6,174 1,116
Purchase of available-for-sale equity securities (8,483) (4,190)
Funds loaned to others (800) (624)
Collection of notes receivable 249 --
-------- --------
Net cash used in investing activities (3,107) (4,060)
Cash flows from financing activities:
Exercise of stock options 823 938
Purchase and cancellation of treasury stock (1,574) (472)
Dividends paid (671) (518)
-------- --------
Net cash used in financing activities (1,422) (52)
Net change in cash and cash equivalents $ (4,571) $ (2,343)
Cash and cash equivalents at beginning of period 9,673 8,989
---------- ----------
Cash and cash equivalents at end of period $ 5,102 $ 6,646
========== ==========
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 nine months ended September 30, 2004 and September 30, 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 -- -- 549 $549 -- -- 549
Other comprehensive income:
Unrealized gain on securities,
net of taxes of $616 -- -- -- 1,195 1,195 -- 1,195
-------
Comprehensive income: -- -- -- $1,744 -- -- --
=======
Stock options exercised 19 919 -- -- -- 938
Treasury stock purchase -- -- -- -- (472) (472)
Dividend paid (per share-$0.20) -- -- (518) -- -- (518)
Cancelled treasury stock (4) (468) -- -- 472 --
Forgiveness of Uncommon Care Debt -- -- 114 -- -- 114
------------------------------------------------------------------------------------------------
Balance Sept 30, 2004 (unaudited) $ 260 $ 7,369 $ 12,459 $ -- $ 824 $ -- $ 20,912
================================================================================================
Balance December 31, 2004 (audited) $ 265 $ 7,919 $ 13,948 $ -- $ 2,081 $ -- $ 24,213
------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 3,615 $ 3,615 -- -- 3,615
Other comprehensive income:
Unrealized loss on securities,
net of taxes of $789 -- -- -- (1,532) (1,532) -- (1,532)
-----
Comprehensive income: -- -- -- $ 2,083 -- -- --
========
Treasury stock purchase -- -- -- -- (1,574) (1,574)
Stock options exercised 20 803 -- -- -- 823
Tax benefit from exercise
of stock options -- 408 -- -- -- 408
Dividend paid (per share - $0.25) -- -- (671) -- -- (671)
Cancelled treasury stock (13) (1,561) -- -- 1,574 --
Stock awarded 1 158 -- -- -- 159
------------------------------------------------------------------------------------------------
Balance Sept 30, 2005 (unaudited) $ 273 $ 7,727 $16,892 $ -- $ 549 $ -- $ 25,441
================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
- 8 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 nine months ended September 30, 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.
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 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.
- 9 -
4. GAIN ON SALE OF ASSETS
During the nine months ended September 30, 2005, we recognized $372,000 of
deferred gain related to the November 2001 sale and subsequent leaseback of real
estate to Prime Medical (now called HealthTronics, Inc.). 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 September 2006. A total of $563,000
remains to be recognized in the coming twelve 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 HealthTronics declines through our
sales of HealthTronics common stock, we recognize these gains proportionately to
our reduction of our interest in HealthTronics. During the first nine months of
2005 we recognized $131,000 of these deferred gains, leaving a balance of
approximately $49,000 remaining to be recognized.
5. GAIN ON INVESTMENTS
Our gains resulted primarily from the sales of available-for-sale equity
and fixed income securities. During the three and nine month periods ended
September 30, 2005, we received net cash proceeds of approximately $2,000,000
and $6,174,000, respectively, and recognized gains of $1,274,000 and $3,250,000,
respectively, resulting from these sales. Reducing these gains in the current
year three and nine month periods was a charge to earnings of $160,000 which
represented the balance of an investment loan made to a third party during 2004
which has since been deemed to be uncollectible.
6. LOSS ON IMPAIRMENT OF INVESTMENTS
On June 4, 2003 we purchased from Financial Industries Corporation
("FIC")(OTC: FNIN.PK) and from 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.
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 was equal to the quoted market price of FIC
shares on December 31, 2004. We chose
- 10 -
to take an additional pretax charge to earnings during the first quarter of 2005
of $39,000, reducing our cost basis in FIC to $3,042,000, or $7.90 per share
which was equal to the quoted market price of FIC shares on March 31, 2005. No
additional charge was taken during the second quarter of 2005 as the quoted
market price at June 30, 2005 remained above our adjusted cost. While we
currently continue to have the ability and the intent to hold the stock
indefinitely, we concluded that the additional uncertainty created by FIC's late
filings, together with the lack of its current financial information, dictated
that the decline should be viewed as other than temporary. During the quarter
ended September 30, 2005 the price per share of FIC common stock had declined to
$7.65. As a result we took an additional charge to earnings of $96,000, further
reducing our cost basis in FIC to $2,945,000. In July, 2005 FIC was able to file
its 2003 Form 10-K but has yet to file any 2004 or 2005 Forms 10-Q or 10-K and
thus continued to be de-listed on the NASDAQ Stock Market. 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".
In April 2004 we purchased $300,000 of Toys R Us bonds. In March, 2005 Toys
R Us announced a plan of merger with another toy company and a planned leveraged
buyout which precipitated a drop in the price of the bonds. An independent
analysis indicated that the new debt to be issued will put the existing bonds in
a subordinated position. Since these bonds have a 2018 maturity, we believe that
the impairment is "other than temporary" during our shorter expected holding
period. Consequently, we wrote a charge against earnings of $57,000 using the
quoted price of the bonds as of June 30, 2005. There were no additional charges
taken against earnings associated with these bonds in the current quarter ended
September 30, 2005. We will continue to monitor and evaluate the situation at
Toys R Us and further determine if changes in fair market value of the
investment are temporary or "other than temporary".
7. GAIN ON FORGIVENESS OF DEBT
We recorded $24,000 and zero during the three months ended September 30,
2005 and 2004, respectively, as gain on forgiveness of debt. For the nine months
ended September 30, 2005 and 2004 we recorded $24,000 and $76,000, respectively.
These gains represent that amount of liability from which we were released in
the respective periods by participants in our loan to a former affiliate, net of
any interest due them from prior period payments made by that affiliate. 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. During the current quarter, we determined there is
a remote possibility that the final obligation, totaling $24,000, will be
required to be paid under the terms of the participation agreement. As a result
we reversed it and recognized a gain in the same amount.
- 11 -
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
first nine months of 2005, we recognized additional "other than temporary"
impairment losses and, accordingly, our cost basis in the 385,000 shares of FIC
common stock we own was reduced from $8.00 per share at January 1, 2005 to $7.65
per share at September 30, 2005. The effect of these 2005 "other than temporary"
impairment losses totaling $135,000 was to reclassify from accumulated other
comprehensive income the unrealized losses to realized losses in the statement
of operations. 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. Changes in their fair market value deemed to be "other
than temporary" are charged to earnings in the period that the determination was
made.
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. The option expires, if not previously exercised,
on December 31, 2006. There are presently no registered FIC shares available to
issue upon the exercise of these options. We have assigned no value to these
options.
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:
September 30 December 31
2005 2004
----------- ------------
Commissions payable $ 739,000 $ 1,260,000
Taxes payable 119,000 205,000
Vacation 153,000 153,000
401(k) plan matching 174,000 169,000
Other accrued liabilities 15,000 55,000
-------- ---------
$1,200,000 $ 1,842,000
========== ===========
- 12 -
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 September 30, 2005
---------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ------------ --------
Basic EPS
Net income $1,395,000 2,702,000 $ 0.52
======
Diluted EPS
Effect of dilutive
securities -- 183,000
---------- ---------
Net income $1,395,000 2,885,000 $ 0.48
========== ========== ======
For the Three Months Ended September 30, 2004
---------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Basic EPS
Net loss $ (834,000) 2,589,000 $ (0.32)
=======
Diluted EPS
None (Anti-dilutive) -- --
---------- ---------
Net loss $ (834,000) 2,589,000 $ (0.32)
=========== ========= =======
- 13 -
For the Nine Months Ended September 30, 2005
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Basic EPS
Net income $3,615,000 2,667,000 $ 1.36
======
Diluted EPS
Effect of dilutive
securities -- 253,000
---------- ----------
Net income $3,615,000 2,920,000 $ 1.24
========= ========= ======
For the Nine Months Ended September 30, 2004
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Basic EPS
Net income $ 549,000 2,523,000 $ 0.22
======
Diluted EPS
Effect of dilutive
securities -- 300,000
--------- ---------
Net income $ 549,000 2,823,000 $ 0.19
========= ========= ======
12. SEGMENT INFORMATION
The Company's segments are distinct by type of service provided. Comparative
financial data for the three and nine month periods ended September 30, 2005 and
2004 are shown as follows:
Three months ended September 30,
2005 2004
--------- ----------
Operating Revenue:
Financial services $ 5,450,000 $ 3,846,000
Insurance services 3,732,000 3,747,000
Corporate 600,000 100,000
---------- ----------
Total Segment Revenues $ 9,782,000 $ 7,693,000
=========== ===========
- 14 -
Three months ended September 30,
2005 2004
---------- ---------
Reconciliation to Consolidated
Statement of Operations:
Total segment revenues $ 9,782,000 $ 7,693,000
Less: Intercompany dividends (600,000) (100,000)
---------- ------------
Total Revenues $ 9,182,000 $ 7,593,000
========== ============
Operating Income
Financial services $ 662,000 $ 423,000
Insurance services 801,000 1,043,000
Corporate (526,000) (429,000)
--------- ---------
Total segments operating income 937,000 1,037,000
Gain on investments 1,114,000 --
Loss on impairment of investment (96,000) (2,374,000)
Gain on extinguishment of debt 24,000 --
--------- ---------
Income (loss) before interest, income
taxes and minority interest 1,979,000 (1,337,000)
Interest income 166,000 99,000
Other gain 3,000 21,000
Interest expense 6,000 2,000
Income tax expense 747,000 (386,000)
Minority interest -- 1
--------- ---------
Net income (loss) $ 1,395,000 $ (834,000)
=========== ===========
- 15 -
Nine months ended September 30,
2005 2004
---------- -----------
Operating Revenue:
Financial services $ 12,415,000 $ 11,905,000
Insurance services 10,462,000 10,273,000
Corporate 600,000 1,700,000
----------- -----------
Total Segment Revenues $ 23,477,000 $ 23,878,000
============ ===========
Reconciliation to Consolidated
Statement of Operations:
Total segment revenues $ 23,477,000 $ 23,878,000
Less: Intercompany dividends (600,000) (1,700,000)
----------- -----------
Total Revenues $ 22,877,000 $ 22,178,000
============ ============
Operating Income
Financial services $ 1,406,000 $ 1,581,000
Insurance services 2,606,000 2,567,000
Corporate (1,830,000) (1,441,000)
----------- -----------
Total segments operating income 2,182,000 2,707,000
Gain on sale of investments 3,091,000 244,000
Loss on impairment of investment (193,000) (2,374,000)
Gain on extinguishment of debt 24,000 76,000
---------- ----------
Income before interest, income
taxes and minority interest 5,104,000 653,000
Interest income 413,000 254,000
Other gain 87,000 39,000
Interest expense 10,000 4,000
Income tax expense 1,966,000 392,000
Minority interest 13,000 1
--------- --------
Net income $ 3,615,000 $ 549,000
=========== ==========
- 16 -
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 (loss) and earnings (loss) 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 September 30,
2005 2004
---- ----
Net income (loss) as reported $ 1,395,000 $ (834,000)
Deduct: Total additional stock-based
employee compensation expense determined
under fair value based method for all
awards, net of related tax effects (45,000) (77,000)
----------- ---------
Pro forma net income (loss) $ 1,350,000 $ (911,000)
=========== =========
Net income (loss) per share
Basic - as reported $ 0.52 $ (0.32)
====== =======
Basic - pro forma $ 0.50 $ (0.35)
====== =======
Diluted - as reported $ 0.48 $ (0.32)
====== ========
Diluted - pro forma $ 0.47 $ (0.35)
====== ========
Nine Months Ended September 30,
2005 2004
---- ----
Net income as reported $ 3,615,000 $ 549,000
Deduct: Total additional stock-based
employee compensation expense determined
under fair value based method for all
awards, net of related tax effects (180,000) (250,000)
---------- ---------
Pro forma net income $ 3,435,000 $ 299,000
=========== =========
Net income per share
Basic - as reported $ 1.36 $ 0.22
====== ======
Basic - pro forma $ 1.29 $ 0.12
====== ======
Diluted - as reported $ 1.24 $ 0.19
====== ======
Diluted - pro forma $ 1.18 $ 0.11
====== ======
- 17 -
14. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error
Corrections. This Statement replaces APB Opinion No. 20, Accounting Changes, and
FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principle. This Statement applies to all voluntary
changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. FASB 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 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 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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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:
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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 September 30, 2005, we have the following significant
investments accounted for as available-for-sale securities: (1) we own
approximately 151,000 shares of HealthTronics (formerly Prime Medical) common
stock, representing less than 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.
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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 related to management fees are recognized
monthly at 13.5% of the earned premiums of the managed company. We also share
equally any profits of the managed company, to a maximum of 3% of the earned
insurance premiums. Any past losses of the managed company are carried forward
and applied against earnings before any profits are shared. The profit sharing
component is recorded in the fourth quarter based on the audited financial
results of the managed company, which also has a December 31, year end.
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
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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 de-listed from the NASDAQ exchange in July, 2004.
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 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 was
equal to the quoted market price of FIC shares on December 31, 2004. 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 was equal to the quoted market price of FIC
shares on March 31, 2005. No additional charge was taken during the second
quarter of 2005 as the quoted market price at June 30, 2005 remained above our
adjusted cost. 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.
No additional charge was necessary in the second quarter of 2005 but a charge
totaling $96,000 was recorded in the third quarter of 2005 as the quoted market
price of FIC shares had fallen to $7.65 per share on September 30, 2005. This
latest charge further reduced our cost basis in FIC from $3,041,000 to
$2,945,000. We will continue to closely monitor FIC's situation.
RESULTS OF OPERATIONS
REVENUES
Revenues from operations increased $1,589,000 (21%) and $699,000 (3%) in
the three and nine month periods ended September 30, 2005, respectively,
compared to the same periods in 2004. Our income from operations before
interest, income taxes and minority interest increased $3,316,000 and $4,451,000
(682%) in the current year three and nine months, respectively, compared to the
same periods in 2004. Our net income increased $2,229,000 and $3,066,000 (558%)
in the current year three and nine months, respectively, compared to the same
periods in 2004. Lastly, our diluted net income per share increased $0.80 and
$1.05 (553%) in the current year three and nine months, respectively, compared
to the same periods in 2004. The reasons for these changes are described below.
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FINANCIAL SERVICES
Our financial services revenue increased $1,604,000 (42%) and $510,000 (4%)
in the three and nine months ended September 30, 2005, respectively compared to
the same periods in 2004. Higher 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. During the current quarter, trading revenue from
non-investment grade securities (high yield) transactions significantly
increased. Even though the market for non-investment grade securities remained
relatively soft during the current quarter, we were able to capitalize on credit
specific trading opportunities. Revenue from our investment grade trading
continued to be flat in a soft investment climate in which the Federal Reserve
has raised rates six times since the beginning of the year (150 basis points).
Financial services also saw a net increase in revenues of $311,000 and $574,000
in the three and nine month periods ended September 30, 2005 compared to the
same periods in 2004, respectively, derived from investment banking activities
and from our newly ramped-up bank debt clearing activities.
Our financial services expenses increased $1,365,000 (40%) and $685,000
(7%) in the three and nine month periods ended September 30, 2005, respectively,
compared to the same periods in 2004. The primary reason for the current year
increase is a $1,036,000 (46%) and $441,000 (6%) increase in commission expense
in the current year three and nine month periods, respectively, compared to the
same periods in 2004 resulting from the increase in commission income mentioned
above. In addition, incentive compensation costs were up $158,000 (65%) but
still down $263,000 (33%) in the three and nine months of 2005, respectively,
compared to same periods in 2004. The current quarter increase is the result of
higher profits at APS Financial during the third quarter of 2005 while the nine
month decrease is the result of lower year-to-date profits as well as to higher
minimum performance thresholds placed upon management in 2005. Payroll expense
increased $104,000 (28%) and $315,000 (32%) in the three and nine month periods
ended September 30, 2005, respectively, compared to the same periods in 2004 due
to normal annual merit raises, an increase in performance-related forgivable
loans, and to the hiring of two new full-time positions. Lastly, professional
fees increased $38,000 (88%) and $150,000 (116%) in the three and nine month
periods ended September 30, 2005, respectively, compared to the same periods in
2004 primarily as a result of fees incurred related to Sarbanes Oxley compliance
as well as to fees related to establishing our new bank debt clearing line of
business.
- 23 -
INSURANCE SERVICES
Our insurance services revenues from our premium-based insurance management
segment, APS Insurance Services, declined $15,000 (0%) but increased $189,000
(2%) in the three and nine month periods ended September 30, 2005, respectively,
compared to the same periods in 2004. For the three month period ending
September 30, 2005, management fee revenue declined as compared to the same
period in 2004 as a result of lower earned premiums in 2005 due to lower written
premiums in the current year. For the nine month period, written premiums which
earn-out pro-rata on an annual basis, have decreased by $4.7 million this year
as compared to 2004. Additionally, pass-through commissions earned by
third-party agents increased by $113,000 (8%) and decreased by $181,000 (5%) for
the three and nine-month periods, respectively, as compared to same periods in
2004. For the three month period ending September 30, 2005, the increase in
pass-through commissions is the result of higher effective commission rates paid
to agents as well as an increase in third party agent business versus direct
writings over the same period in 2004. For the nine month period ending
September 30, 2005, the increase in management fee revenue as compared to the
same period in 2005 is the result of higher 2004 written premiums "earning-out"
in the first and second quarter of 2005 and an increase in the basis by which
management fee is calculated. Earned premium was $50.6 million as of September
30, 2005 as compared to $47.2 million as of September 30, 2004. Overall for the
nine months ended September 30, 2005, the decrease of pass-through commissions
is attributable to lower written premium over the same period for 2004. 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. Lastly,
risk management fee income decreased $77,000 (65%) and $111,000 (39%) in the
three and nine month periods ending September 30, 2005, respectively, as
compared to the comparable periods in 2004, due to lower number of renewals
utilizing this service.
Insurance services expenses increased $227,000 (8%) and $150,000 (2%) in
the three and nine month periods ended September 30, 2005, respectively,
compared to the same periods in 2004. The current quarter increase is primarily
due to a $113,000 (8%) increase in commissions expense due to the
above-mentioned increase in commissions paid to third party independent agents
during the third quarter of 2005 compared to the same period in 2004. Also,
payroll increased $50,000 (7%) and $117,000 (5%) in the three and nine month
periods ended September 30, 2005, respectively, compared to the same periods in
2004 as a result of normal merit raises as well as the addition of two new
managerial positions. Lastly, professional fees increased $60,000 and $142,000
(338%) for the current year three and nine months, respectively, compared to the
same periods in 2004 primarily as a result of fees incurred related to Sarbanes
Oxley compliance.
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GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $144,000 (34%) and $464,000
(31%) in the three and nine month periods ended September 30, 2005,
respectively, compared to the same periods in 2004. Incentive compensation
expense increased $133,000 (125%) and $270,000 (66%) in the current year three
and nine month periods, respectively, compared to the same periods in 2004
resulting from additional bonuses that will be paid on the gains from the sale
of HealthTronics common stock completed in 2005. Also, salaries expense
increased $20,000 (12%) and $133,000 (28%) in the current year three and nine
month periods, respectively, compared to the same periods in 2004 resulting from
merit raises during the year. The large nine month current year increase is
primarily the result of a severance payment to a former employee who has since
been retained as a tax consultant. Lastly, audit and consulting fees increased
$22,000 (87%) and $103,000 (109%) during the current year three and nine month
periods as a result of fees incurred related to Sarbanes Oxley compliance.
GAIN ON SALE OF ASSETS
During the nine months ended September 30, 2005, we recognized $372,000 of
deferred gain related to the November 2001 sale and subsequent leaseback of real
estate to Prime Medical (now called HealthTronics, Inc.) 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 $563,000
remains to be recognized in the coming twelve 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 HealthTronics declines through our
sales of HealthTronics common stock, we recognize these gains proportionately to
our reduction of our interest in that company. During the first nine months of
2005 we recognized $131,000 of these deferred gains, leaving a balance of
approximately $49,000 remaining to be recognized. The increase in both periods
of the current year is the result of an increased number of HealthTronics shares
of common stock sold during 2005.
GAIN ON INVESTMENTS
The increase in the current three and nine month periods of 2005 is due to
the sale of a greater number of available-for-sale equity and fixed income
securities in 2005 than were sold in the comparable periods of 2004. Reducing
these gains in the current year three and nine month periods was a charge to
earnings of $160,000 which represented the balance of an investment loan made to
a third party during 2004 which has since been deemed to be uncollectible.
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LOSS ON IMPAIRMENT OF INVESTMENTS
The loss in the three months ended September 30, 2005 represents a
write-down of our investment in Financial Industries ("FIC") common stock.
During the fourth quarter of 2004, we determined that the decline in market
value of FIC common stock should be considered "other than temporary" and we
have since been recording a pretax charge to earnings should there be a decline
in market value of FIC common stock below our cost basis at the end of a
quarter. At September 30, 2005 we took an additional charge to earnings totaling
$96,000 as the quoted price per share had declined below our cost basis. This
charge reduced our cost basis in FIC from $3,040,000, or $7.90 per share, to
$2,945,000, or $7.65 per share which was equal to the quoted market price of FIC
shares on September 30, 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. FIC has since filed its 2003 Form 10-K in July 2005 but
is still delinquent in filing its 2004 Forms 10-Q and 10-K as well as its 2005
Forms 10-Q. 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. 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".
The loss in the nine months ended September 30, 2005 represents a
write-down of our investment in Toys R Us bonds together with first and third
quarter 2005 write-downs totaling $135,000 of our investment in FIC mentioned
above. In April 2004 we purchased $300,000 of Toys R Us bonds. In March, 2005
Toys R Us announced a plan of merger with another toy company and a planned
leveraged buyout which precipitated a drop in the price of the bonds. An
independent analysis indicated that the new debt to be issued will put the
existing bonds in a subordinated position. Since these bonds have a 2018
maturity, we believe that the impairment is "other than temporary" during our
shorter expected holding period. Consequently, we wrote a charge against
earnings of $57,000 using the quoted price of the bonds as of June 30, 2005. We
will continue to monitor and evaluate the situation at Toys R Us and further
determine if changes in fair market value of the investment are temporary or
"other than temporary".
- 26 -
GAIN ON FORGIVENESS OF DEBT
During the three and nine months ended September 30, 2004, we recorded $0
and $76,000, respectively, as gains on forgiveness of debt. This represented
that amount of liability from which we were released by participants in our loan
to this affiliate. 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. During the current
quarter, we determined there is a remote possibility that the final obligation,
totaling $24,000, will be required to be paid under the terms of the
participation agreement. As a result, we reversed it and recognized a gain in
the same amount.
INTEREST INCOME
Our interest income increased $67,000 (68%) and $159,000 (63%) in the three
and nine month periods ended September 30, 2005, respectively, compared to the
same periods in 2004. The current year three and nine month increases were due
to interest earned on a much higher balance of interest-bearing fixed income
securities. At September 30, 2005 there was a balance of $12.3 million compared
to a balance of $4.7 million held at September 30, 2004.
OTHER INCOME (LOSS)
Our other income decreased $18,000 (86%) but increased $48,000 (123%) for
the three and nine month periods ended September 30, 2005, respectively,
compared to the same periods in 2004. The decrease in the current year three
month period is primarily due to the receipt of management fees from a former
affiliate received in the third quarter of 2004 that have not been received in
the third quarter of 2005. The increase in the current year nine month period
represents primarily inventory gains of $20,000 on securities held at APS
Financial during 2005 compared to inventory losses of $25,000 in 2004.
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LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Our net working capital was $13,501,000 and $10,673,000 at September 30,
2005 and December 31, 2004, respectively. The increase in the current year was
due primarily to cash received upon the sale of long-term available-for-sale
equity securities which was used, in part, to purchase short-term
available-for-sale fixed income securities. Cash and cash equivalents decreased
during this period by $4,571,000 as there were net cash uses in operating,
investing and financing activities. Cash from operating activities decreased
from $1,769,000 provided by operating activities in 2004 to $42,000 used in
operating activities in 2005 primarily as a result of cash paid in March 2005
for incentive compensation earned and accrued in 2004. In addition, estimated
2005 federal income tax payments have totaled $1.8 million and cash paid out in
the form of a dividend to shareholders totaled $671,000. Cash used in investing
activities decreased from $4,060,000 in 2004 to $3,107,000 in 2005 as purchases
of available-for-sale securities exceeded cash received from the sales of other
available-for-sale securities. Cash used in financing activities increased from
$52,000 in 2004 to $1,422,000 in 2005 due to purchases of treasury stock
exceeding cash received from the exercise of employee stock options. For details
of the amounts described above, refer to the Condensed Consolidated Statements
of Cash Flows on page 7 of this Form 10-Q.
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. 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 $5.1 million comprising 17 percent
of our total assets; (2) our investments in available-for-sale equity and fixed
income securities could provide an additional $14.5 million should the need
arise; and (3) we renewed a line of credit in April 2005 that is described
below.
LINE OF CREDIT
During April 2005, 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, 2006,
when the entire amount of the note, principal and interest then remaining
unpaid, became due and
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payable. At September 30, 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 $247,000 in the nine months of
2005. The majority of these expenditures were necessary to upgrade our reporting
software at our insurance services subsidiary. At September 30, 2005, our
reporting software upgrade is considered to be "in progress" with anticipated
implementation in phases during the rest of 2005 and 2006. Those 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.
ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error
Corrections. This Statement replaces APB Opinion No. 20, Accounting Changes, and
FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principle. This Statement applies to all voluntary
changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. FASB 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 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 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.
- 29 -
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.
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.
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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 September 30, 2005, our recorded basis in debt and equity securities
was approximately $17.4 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 151,200 shares of common sock of
HealthTronics, Inc. Although we have an unrealized gain of approximately
$746,000 as of September 30, 2005, this investment can also be at risk should
market or economic conditions change 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.
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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
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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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Items 2(a) through(d) are not applicable.
(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 Announced Plans the Plans or
Purchased (1) per Share or Programs Programs
------------- ------------ ----------------- ----------------
July 1, 2005 - July 31, 2005 -- -- -- $ 618,000
Aug 1, 2005 - Aug 31, 2005 32,963 $ 12.81 32,963 $ 196,000
Sept 1, 2005 - Sept 30, 2005 3,000 12.55 3,000 $ 158,000
(1) Of the total shares purchased 5,363 were purchased in open market
transactions and 30,600 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.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
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Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS
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
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