=============================================================================
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
SEPTEMBER 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 October 31, 2003
-------------------- ----------------
Common Stock, $.10 par value 2,330,067
=============================================================================
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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
--------- ---------- ---------- ----------
Revenues:
Financial services $5,892 $3,429 $14,728 $9,727
Insurance services 3,108 2,854 7,832 7,204
Consulting 990 899 2,662 2,499
--------- -------- --------- --------
Total revenue 9,990 7,182 25,222 19,430
Expenses:
Financial services 4,958 3,048 12,361 8,457
Insurance services 2,388 2,215 6,063 5,453
Consulting 826 760 2,068 2,120
General and administrative 469 694 1,353 1,373
Gain on sale of assets (Note 4) -- (3) (8) (515)
--------- -------- --------- ---------
Total expenses 8,641 6,714 21,838 16,888
--------- -------- --------- ---------
Operating income 1,349 468 3,384 2,542
Gain loss on sale of investments (Note 4) -- 64 89 2,855
Earnings from operations before interest,
income taxes, minority interests and equity
in unconsolidated affiliates 1,349 532 3,473 5,397
Interest income 76 59 224 103
Interest expense 4 4 7 25
Income tax expense 474 221 1,207 1,899
Minority interests (Note 10) 241 70 778 185
Equity in gain (loss) loss of unconsolidated
affiliates (Note 5) 25 -- 260 (44)
-------- -------- -------- ---------
Net earnings $731 $296 $1,965 $3,347
======== ======== ======== =========
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 Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2003 2002 2003 2002
--------- -------- ---------- ---------
Earnings per common share
Basic:
Earnings from operations $0.34 $0.13 $0.92 $1.48
-------- -------- --------- --------
Net earnings $0.34 $0.13 $0.92 $1.48
======== ======== ========= ========
Diluted:
Earnings from operations $0.31 $0.13 $0.86 $1.40
-------- -------- --------- --------
Net earnings $0.31 $0.13 $0.86 $1.40
======== ======== ========= ========
Basic weighted average shares
outstanding 2,168 2,223 2,146 2,266
======== ======== ========= ========
Diluted weighted average
shares outstanding 2,357 2,357 2,284 2,393
======== ======== ========= ========
See accompanying notes to consolidated financial statements.
- 4 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2003 2002
------------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $8,415 $6,691
Trading account securities 80 133
Trade receivables, net 779 460
Notes receivable - current 603 571
Management fees and other receivables 694 763
Deposit with clearing organization 750 500
Receivable from clearing organization 70 70
Investment in available-for-sale fixed
income securities - current -- 1,015
Income tax receivable -- 491
Deferred tax asset - current 333 --
Prepaid expenses and other 403 673
------- --------
Total current assets 12,127 11,367
Notes receivable, less current portion 17 374
Property and equipment, net 537 374
Investment in available-for-sale equity
securities (Notes 5 and 6) 8,745 6,996
Investment in available-for-sale fixed
income securities - non-current 828 3,273
Net deferred income tax asset - non-current 2,134 2,399
Other assets 195 198
------- --------
Total Assets $24,583 $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) September 30, December 31,
2003 2002
-------------- ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $739 $738
Payable to clearing broker 80 70
Accrued incentive compensation 1,932 1,804
Accrued expenses and other
liabilities (Note 7) 1,285 1,227
Federal income taxes payable 285 --
Deferred gain - current 488 487
Deferred tax liability - current -- 974
-------- --------
Total current liabilities 4,809 5,300
Payable under loan participation
agreements 259 259
Deferred gain - non-current 1,309 1,887
-------- --------
Total liabilities 6,377 7,446
Minority interests (Note 10) 1,035 393
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; 2,233,067 issued
and outstanding at 09/30/03 and
2,133,843 at 12/31/02 223 213
Additional paid-in capital 6,077 5,584
Retained earnings 11,277 9,515
Accumulated other comprehensive income
(loss), net of taxes (406) 1,830
-------- --------
Total shareholders' equity 17,171 17,142
-------- --------
Total Liabilities and Shareholders' Equity $24,583 $24,981
========= ========
See accompanying notes to consolidated financial statements.
- 6 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine Months Ended September 30,
2003 2002
----------- ----------
Cash flows from operating activities:
Net income $1,965 $3,347
Adjustments to reconcile net income to cash
used in operating activities:
Depreciation and amortization 155 152
Forgiveness of debt and other 124 151
Minority interest in consolidated earnings 788 185
Undistributed (gain) loss of affiliates (260) 44
Gain on sale of assets (306) (881)
Gain on sale of investment (89) (2,797)
Provision for bad debt 6 117
Changes in operating assets and liabilities:
Trade receivables (325) (223)
Trading account securities 53 43
Income tax receivable 761 1,147
Deferred income taxes (39) (1,631)
Receivable from clearing organization (240) (99)
Management fees & other receivables 69 (12)
Prepaid expenses & other assets 270 609
Deferred income (58) --
Trade accounts payable 1 52
Accrued expenses & other liabilities 186 (724)
---------- --------
Net cash received in operating activities 3,061 (520)
Cash flows from investing activities:
Capital expenditures (308) (133)
Proceeds from the sale of available-for-sale equity
and fixed income securities 4,118 10,719
Purchase of available-for-sale equity securities (5,697) (1,394)
Receipts from (advances to) affiliate 175 (230)
Funds loaned to others (150) (150)
Collection of notes receivable 415 558
---------- --------
Net cash (used in) provided by investing activities (1,447) 9,370
Cash flows from financing activities:
Payment of long term debt -- (2,275)
Exercise of stock options 507 175
Purchase and cancellation of treasury stock (207) (1,058)
Distribution to minority interest (190) --
---------- ---------
Net cash received from (used in) financing activities 110 (3,158)
Net change in cash and cash equivalents $1,724 $5,692
Cash and cash equivalents at beginning of period 6,691 3,851
---------- ---------
Cash and cash equivalents at end of period $8,415 $9,543
========== =========
See accompanying notes to consolidated financial statements.
- 7 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
For the nine months ended September 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 Dec 31, 2001 (audited) $275 $5,539 $8,310 $(39) $(1,418) $12,667
------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 3,347 $3,347 -- -- 3,347
Other comprehensive income:
Unrealized gain on securities,
net of taxes of $1,843 -- -- -- 2,171 2,171 -- 2,171
-----
Comprehensive income -- -- -- $5,518 -- -- --
=====
Treasury stock purchase -- -- -- -- -- (1,058) (1,058)
Cancelled treasury stock (61) -- (2,415) -- -- 2,476 --
Stock options exercised 1 21 154 -- -- -- 176
Stock options expensed -- 30 -- -- -- -- 30
------------------------------------------------------------------------------------------------
Balance Sept 30, 2002 (unaudited) $215 $5,590 $9,395 $ -- $2,132 $-- $17,332
================================================================================================
Balance Dec 31, 2002 (audited) $213 $5,584 $9,515 $1,830 $-- $17,142
------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 1,965 1,965 -- -- 1,965
Other comprehensive income:
Unrealized loss on securities,
net of taxes of $1,152 -- -- -- (2,236) (2,236) -- (2,236)
-----
Comprehensive loss -- -- -- $(271) -- -- --
=====
Treasury stock purchases -- -- -- -- (207) (207)
Cancelled treasury stock (4) -- (203) -- 207 --
Stock options exercised 14 493 -- -- -- -- 507
------------------------------------------------------------------------------------------------
Balance Sept 30, 2003 (unaudited) $223 $6,077 $11,277 $-- $(406) $-- $17,171
================================================================================================
See accompanying notes to consolidated financial statements.
- 8 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine months ended September 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
September 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 party lender on some of its properties in April, 2003, they are still
not in compliance
- 9 -
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 September, 2001. Uncommon Care's management has been informed by us that
we will not advance them additional funds. During 2001, our total basis in
investments in and advances to Uncommon Care was reduced to zero.
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 nine months ended September 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. No securities
were sold, thus, no gain was recognized during the third quarter of 2003.
Additionally, during the nine months ended September 30, 2002, we
recognized $366,000 of deferred gain in 2003 related to the November 2001 sale
and subsequent leaseback of real estate to Prime Medical, including $122,000
recognized during the third quarter. 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 nine months of 2003, we recognized
$8,000 of these deferred gains.
5. EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES
At September 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 nine 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 nine months ended September 30, 2003
and 2002
2003 2002
---- ----
Total revenue $117,321 $126,305
Income from operations 25,673 19,852
Net income 3,925 (2,970)
At September 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 $380,000 to us as a result of certain asset
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 subsequent cash payments received from
Uncommon Care. Total cash receipts recorded as equity in earnings of
unconsolidated affiliates for the nine months ended September 30, 2003 was
$260,000. In the nine months ended September 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.
The condensed statements of operations for Uncommon Care follows (unaudited, in
thousands):
Condensed statements of operations for the nine months ended September 30, 2003
and 2002
2003 2002
---- ----
Total revenue $5,715 $5,691
Income from operations 381 562
Net loss (731) (631)
- 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:
September 30 December 31
2003 2002
(Unaudited)
----------- -----------
Commissions Payable $ 851,000 $ 798,000
Taxes 83,000 93,000
Vacation 144,000 154,000
Other 207,000 182,000
---------- ----------
$1,285,000 $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 weighted average shares
outstanding used in the calculation of basic and diluted earnings per share from
operations follows:
- 12 -
For the Three Months Ended September 30, 2003
----------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Earnings from operations $731,000
Basic EPS
Earnings available to
common stockholders 731,000 2,168,000 $0.34
=====
Diluted EPS
Effect of dilutive securities -- 189,000
-------- ----------
Earnings available to
common stockholders and
assumed conversions $731,000 2,357,000 $0.31
======== ========== =====
For the Three Months Ended September 30, 2002
----------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Earnings from operations $296,000
Basic EPS
Earnings available to
common stockholders 296,000 2,223,000 $ 0.13
======
Diluted EPS
Effect of dilutive securities -- 134,000
-------- ----------
Earnings available to common
stockholders and assumed
conversions $296,000 2,357,000 $ 0.13
======== ========= ======
- 13 -
For the Nine Months Ended September 30, 2003
---------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Earnings from operations $1,965,000
Basic EPS
Earnings available to
common stockholders 1,965,000 2,146,000 $0.92
=====
Diluted EPS
Effect of dilutive securities -- 138,000
---------- ----------
Earnings available to
common stockholders and
assumed conversions $1,965,000 2,284,000 $0.86
========== ========= =====
For the Nine Months Ended September 30, 2002
--------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Earnings from operations $3,347,000
Basic EPS
Earnings available to
common stockholders 3,347,000 2,266,000 $ 1.48
======
Diluted EPS
Effect of dilutive securities -- 127,000
---------- ---------
Earnings available to common
stockholders and assumed
conversions $3,347,000 2,393,000 $ 1.40
========== ========= ======
Unexercised employee stock options to purchase zero and 116,500 shares
of the Company's common stock as of September 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 nine month periods ended September 30, 2003 and 2002 are
shown as follows:
Three months ended September 30,
---------------------------------------
2003 2002
------------- -------------
Operating Revenue:
Financial services $ 5,892,000 $ 3,429,000
Insurance services 3,108,000 2,854,000
Consulting 990,000 899,000
Corporate 408,000 10,000
------------ -------------
Total Segment Revenues $ 10,398,000 $ 7,192,000
=========== ===========
Reconciliation to Consolidated
Statement of Operations:
Total segment revenues $ 10,398,000 $ 7,192,000
Less: Intercompany dividends (400,000) --
Intercompany interest (8,000) (10,000)
------------ -----------
Total Revenues $ 9,990,000 $ 7,182,000
============ ===========
Operating Income (Loss)
Financial services $ 934,000 $ 381,000
Insurance services 720,000 639,000
Consulting 164,000 139,000
Corporate (469,000) (691,000)
---------- ----------
Total segments operating income 1,349,000 468,000
Gain on sale of investments -- 64,000
Earnings from operations before interest, income
taxes and minority interests and equity in
loss of unconsolidated affiliates 1,349,000 532,000
Interest income 76,000 59,000
Interest expense 4,000 4,000
Income tax expense 474,000 221,000
Minority interests 241,000 70,000
Equity in unconsolidated affiliates 25,000 --
--------- --------
Net earnings $ 731,000 $ 296,000
========= =========
- 15 -
Nine months ended September 30,
---------------------------------------
2003 2002
--------- ----------
Operating Revenue:
Financial services $ 14,728,000 $ 9,727,000
Insurance services 7,832,000 7,204,000
Consulting 2,662,000 2,499,000
Corporate 1,590,000 344,000
----------- -----------
Total Segment Revenues $ 26,812,000 $ 19,774,000
=========== ===========
Reconciliation to Consolidated
Statement of Operations:
Total segment revenues $ 26,812,000 $ 19,774,000
Less: Intercompany dividends (1,577,000) (245,000)
Intercompany interest (13,000) (99,000)
----------- ------------
Total Revenues $ 25,222,000 $ 19,430,000
=========== ============
Operating Income (Loss)
Financial services $ 2,367,000 $ 1,270,000
Insurance services 1,769,000 1,750,000
Consulting 594,000 379,000
Corporate (1,346,000) (857,000)
----------- -----------
Total segments operating income 3,384,000 2,542,000
Gain on sale of investments 89,000 2,855,000
Earnings from operations before interest, income
taxes and minority interests and equity in
loss of unconsolidated affiliates 3,473,000 5,397,000
Interest Income 224,000 103,000
Interest expense 7,000 25,000
Income tax expense 1,207,000 1,899,000
Minority interests 778,000 185,000
Equity in unconsolidated affiliates 260,000 (44,000)
-------- ---------
Net earnings $ 1,965,000 $ 3,347,000
=========== ===========
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 September 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:
ASSETS September 30 December 31
2003 2002
(Unaudited)
------------- --------------
Cash $269,000 $347,000
Accounts Receivable, net 778,000 409,000
Prepaid Expenses 18,000 22,000
---------- ----------
Total Current Assets 1,065,000 778,000
Property and Equipment 141,000 45,000
---------- ----------
Total Assets $1,206,000 $823,000
========== ==========
LIABILITIES
Accounts Payable $400,000 $445,000
Accrued Expenses 95,000 74,000
---------- ----------
Total Current Liabilites 495,000 519,000
Notes Payable 235,000 248,000
Federal Income Tax Payable 162,000 --
Deferred Income 21,000 74,000
---------- ----------
Total Liabilites $913,000 $841,000
========== ==========
Total Assets in excess (deficit)
of Liabilities $293,000 $(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 option's vesting periods.
Three Months Ended September 30,
2003 2002
---- ----
Net Earnings as reported $731,000 $296,000
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (58,000) (54,000)
-------- ---------
Pro forma net earnings 673,000 242,000
Earnings per share
Basic - as reported $ 0.34 $ 0.13
====== ======
Basic - pro forma $ 0.31 $ 0.11
====== ======
Diluted - as reported $ 0.31 $ 0.13
====== ======
Diluted - pro forma $ 0.29 $ 0.10
====== ======
Nine Months Ended September 30,
2003 2002
---- ----
Net Earnings as reported $1,965,000 $3,347,000
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (175,000) (175,000)
----------- ----------
Pro forma net earnings 1,790,000 3,172,000
Earnings per share
Basic - as reported $ 0.92 $ 1.48
====== ======
Basic - pro forma $ 0.83 $ 1.40
====== ======
Diluted - as reported $ 0.86 $ 1.40
====== ======
Diluted - pro forma $ 0.78 $ 1.33
====== ======
- 18 -
12. RECENT ACCOUNTING PRONOUNCEMENTS
In September 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 10 to these consolidated financial statements.
- 19 -
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS
No. 150"). SFAS No. 150 requires that certain financial instruments, which under
previous guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include mandatorily redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets and certain
obligations that can be settled with shares of stock. SFAS No. 150 is effective
for all financial instruments entered into or modified after May 31, 2003 and
must be applied to the Company's existing financial instruments effective July
1, 2003, the beginning of the first fiscal period after June 15, 2003. The
adoption of SFAS No. 150 did not have a material effect on the Company's
consolidated financial statements.
13. SUBSEQUENT EVENTS
In October 2003, we acquired the twenty percent minority interest in
our Insurance Services segment from First Professionals Insurance Company, Inc.
(FPIC) for cash consideration of $2,050,000. The transaction will be accounted
for as a business combination under the purchase method. Accordingly, the
assets, including previously unrecognized intangible assets, and liabilities
acquired in the transaction will be adjusted to their fair value and the excess
value will be recorded as goodwill.
- 20 -
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
- 21 -
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
- 22 -
earnings or losses. 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 September 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 $380,000 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 nine months ended September 30, 2003 was
$260,000. In the nine months ended September 30, 2002 we advanced $230,000 to
Uncommon Care. These advances were expensed when made to recognize previously
unrecorded losses by the investee.
- 23 -
RESULTS OF OPERATIONS
REVENUES
Revenues from operations increased $2,808,000 (39%) and $5,792,000
(30%) for the three and nine month periods ended September 30, 2003,
respectively, compared to the same periods in 2002. Revenues increased in the
current three month and nine month periods at all of our segments compared to
the same periods in 2002.
Financial services revenues increased $2,463,000 (72%) and $5,001,000
(51%) for the three and nine month periods ended September 30, 2003,
respectively, compared to the same periods in 2002. The increase in the current
year three and nine month periods was due to strong commission revenues at APS
Financial, the broker/dealer division of our financial services segment. APS
Financial derives most of its revenue from trading in the fixed income market,
both in investment and non-investment securities. While revenue from investment
grade transactions has increased, revenue derived from the high yield market has
been particularly strong, as that sector has performed particularly well
throughout the year. Also, we continue to have very low turnover in personnel,
while expanding our customer base using the value added service we provide in
corporate bond research.
Our insurance services revenues from our premium-based insurance
management segment, APS Insurance Services, increased $254,000 (9%) and $628,000
(9%) for the three and nine month periods ended September 30, 2003,
respectively, compared to the same periods in 2002. The three and nine month
current year increases are due to greater management fees resulting from higher
insurance premiums. The increase in premiums has been a result of several rate
increases throughout the 2002-2003 years coupled with an increase in retention
resulting from the limited carriers writing medical malpractice insurance in
Texas.
Consulting revenues increased $91,000 (10%) and $163,000 (7%) for the
three and nine month periods ended September 30, 2003, respectively, compared to
the same periods in 2002. The increase in both current year periods is due to a
greater amount of environmental compliance work performed for oil and gas
companies in the Houston and Mobile markets. As described in Note 10 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.
- 24 -
EXPENSES
Total operating expenses increased $1,927,000 (29%) and $4,949,000
(29%) for the three and nine month period ended September 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 consulting segments and decreased at our corporate segment. For the current
year nine month period, expenses increased at our financial services and
insurance services segments and decreased at our corporate and consulting
segments.
Financial services expense increased $1,910,000 (63%) and $3,904,000
(46%) for the three and nine month periods ended September 30, 2003,
respectively, compared to the same periods in 2002. The primary reason for the
current year increases is a $1,609,000 (81%) and $3,139,000 (59%) increase in
commission expense in the three and nine month periods ended September 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 $296,000 (128%) and $681,000 (110%)
increase in the current year three and nine month periods, respectively, in
formula driven management incentive costs. Partially offsetting these increases
were relatively minor current year decreases in ticket charges, information
services, legal and rent expenses.
Insurance services expenses at the insurance management subsidiary
increased $173,000 (8%) and $610,000 (11%) for the three and nine month periods
ended September 30, 2003, respectively, compared to the same periods in 2002.
The three month increase is due to increases in payroll related costs ($68,000),
management incentives ($12,000) and advertising expenses ($5,000). The current
year nine month increase is due primarily to increased payroll related costs
($239,000) 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 $115,000 and advertising expenses increased $93,000, the latter due to
marketing efforts relating to re-branding efforts.
Consulting expenses increased $66,000 (9%) but have decreased $52,000
(2%) for the three and nine month periods ended September 30, 2003,
respectively, compared to the same periods in 2002. The increase in the current
year three month period was due to higher payroll related and higher
professional fees, the latter resulting from an employment related suit brought
against Eco-Systems that has since been dismissed. The primary reason for the
nine month decline was above-average sub-contractor pass-through work performed
in the second quarter of 2002 in environmental assessment field activities.
General and administrative expenses decreased $225,000 (32%) and
$20,000 (1%) for the three and nine month periods ended September 30, 2003,
respectively, compared to the same periods in 2002. The primary reason for the
decrease in the current year three month period is due to formula driven
management incentive accruals totaling $375,000 in the third quarter of 2002.
These accruals were necessary as profits in 2002 were greatly affected by gains
of the sale of Prime Medical common stock. During the third quarter of 2003,
only $75,000 was added to the management incentive accrual.
- 25 -
Gain on sale of assets primarily represents the recognition of deferred
income. Approximately $760,000 of the $5,100,000 gain on the sale of real estate
to Prime Medical in 2001 was deferred in 2001 due to our ownership interest in
Prime 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 amount has been recognized, including $2,000 in the
first quarter of 2003 and $6,000 in the second quarter of 2003.
Interest expense decreased $18,000 (72%) for the nine month period
ended September 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 September 30, 2003.
GAIN ON SALE OF INVESTMENTS
Gain on the sale of investments decreased $64,000 and $2,766,000 for
the three and nine month periods ended September 30, 2003, respectively,
compared to the same periods in 2002. The nine month decline was due to the sale
of significantly less 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 September 30,
2003, we own approximately 728,000 shares of Prime Medical amounting to an
ownership percentage of approximately 4%. The three month current year decrease
is due to the fact that no Prime Medical common stock nor any other
available-for-sale equity or fixed income securities were sold during the
quarter.
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 $260,000 and $490,000
for the three and nine month periods ended September 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. In 2002, we advanced them $230,000 and
recorded a loss for the full amount of the advance. In 2003, after informing
management that no further advances would be made to the Company, we recorded
equity in earnings of unconsolidated affiliates in the amount of $260,000
related to the cash received from Uncommon Care.
- 26 -
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 earnings 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 earnings from APS
Consulting.
SHAREHOLDERS' EQUITY
For the nine months ended September 30, 2003, we purchased and
cancelled 43,976 shares of treasury stock. In addition, 143,200 shares were
issued upon exercise of options. The result of these purchases and cancellations
of treasury stock and the exercising of stock options was a net zero effect on
treasury stock, an increase to common stock by $10,000, an increase to paid-in
capital by $493,000 and a decrease to retained earnings by $203,000.
Through September 30, 2003, we recorded other comprehensive loss of
$2,236,000 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 $7,318,000 at September
30, 2003 and $6,067,000 at December 31, 2002. Working capital rose in 2003 due
primarily to cash received from operations.
Capital expenditures through the three month period ended September 30,
2003 were approximately $308,000, although approximately $114,000 was recorded
at Eco-Systems for primarily field equipment purchases not in the ordinary
course of our core businesses. Total capital expenditures are expected to be
approximately $325,000 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.
- 27 -
ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
In September 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 10 to these consolidated financial statements.
- 28 -
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS
No. 150"). SFAS No. 150 requires that certain financial instruments, which under
previous guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include mandatorily redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets and certain
obligations that can be settled with shares of stock. SFAS No. 150 is effective
for all financial instruments entered into or modified after May 31, 2003 and
must be applied to the Company's existing financial instruments effective July
1, 2003, the beginning of the first fiscal period after June 15, 2003. The
adoption of SFAS No. 150 did not have a material effect on the Company's
consolidated financial statements.
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.
- 29 -
PART II
OTHER INFORMATION
- 30 -
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 nine months ended September 30, 2003, we purchased and
cancelled 43,976 shares of treasury stock. In addition, 143,200 shares were
issued upon exercise of options. The result of these purchases and cancellations
of treasury stock and the exercisings of stock options was a net zero effect on
treasury stock, an increase to common stock by $10,000, an increase to paid-in
capital by $493,000 and a decrease to retained earnings by $203,000.
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 August 14, 2003 concerning the press
release reporting second quarter 2003 results of operations
and financial condition.
- 31 -