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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, 2004
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, 2004
-------------------- ----------------
Common Stock, $.10 par value 2,599,171
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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,
2004 2003 2004 2003
------- ------ ------ ------
Revenues:
Financial services $3,846 $5,941 $11,905 $14,777
Insurance services 3,747 3,108 10,273 7,832
------ ------ ------ -----
Total revenues 7,593 9,049 22,178 22,609
Expenses:
Financial services 3,423 4,958 10,324 12,361
Insurance services 2,704 2,388 7,706 6,063
General and administrative 429 469 1,497 1,353
Gain on sale of assets - - (56) (8)
----- ----- ------ ---
Total expenses 6,556 7,815 19,471 19,769
----- ----- ------- ------
Operating income 1,037 1,234 2,707 2,840
Gain (loss) on investments (Note 4) (2,374) - (2,130) 89
Gain on forgivenes of debt (Note 5) - - 76 -
----- ----- ------ -----
Income (loss) from operations before interest,
income taxes and minority interest (1,337) 1,234 653 2,929
Interest income 99 59 254 229
Other income (loss) 21 (33) 39 (55)
Interest expense 2 5 4 7
Income tax expense (benefit) (386) 474 392 1,207
Minority interests 1 77 1 184
Equity in earnings of unconsolidated affiliates - 25 - 260
----- ----- ----- ----
Net income (loss) $(834) $729 $549 $1,965
===== ===== ====== ======
See accompanying notes to condensed 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,
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) per common share
Basic:
Income (loss) from operations $(0.32) $ 0.34 $ 0.22 $ 0.92
---- ----- ---- ----
Net income (loss) $(0.32) $ 0.34 $ 0.22 $ 0.92
==== ===== ==== ====
Diluted:
Income (loss) from operations $(0.32) $ 0.31 $ 0.19 $ 0.86
---- ----- ---- ----
Net income (loss) $(0.32) $ 0.31 $ 0.19 $ 0.86
==== ===== ==== ====
Basic weighted average shares
outstanding 2,589 2,168 2,523 2,146
===== ===== ===== =====
Diluted weighted average
shares outstanding 2,589 2,357 2,823 2,284
===== ===== ===== =====
See accompanying notes to condensed consolidated financial statements.
- 4 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2004 2003
--------- ----------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $6,646 $8,989
Trading account securities 66 67
Notes receivable 777 16
Management fees and other receivables 941 1,079
Deposit with clearing organization 660 500
Receivable from clearing organization 66 67
Income tax receivable 628 1,678
Net deferred income taxes - 532
Prepaid expenses and other current assets 568 565
------ -------
Total current assets 10,352 13,493
Notes receivable, less current portion 204 436
Property and equipment, net 603 378
Investment in available-for-sale equity
securities (Note 6) 7,700 8,729
Investment in available-for-sale fixed
income securities (Note 7) 4,688 897
Goodwill 1,247 1,257
Deferred income taxes - non-current 704 -
Other assets 360 448
------ -------
Total Assets $ 25,858 $ 25,638
======== =========
See accompanying notes to condensed consolidated financial statements.
- 5 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
2004 2003
-------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Current liabilities:
Accounts payable - trade $197 $201
Payable to clearing broker 66 67
Accrued incentive compensation 1,715 2,716
Accrued expenses and other liabilities (Note 8) 1,285 1,485
Deferred income tax liability - current 389 -
Deferred gain (Note 4) 488 487
------- --------
Total current liabilities 4,140 4,956
Payable under loan participation agreements 55 259
Deferred income tax liability - 146
Deferred gain, net of current portion (Note 4) 750 1,171
------- --------
Total liabilities 4,945 6,532
Minority interests 1 --
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;
2,599,172 and 2,454,667 issued and outstanding at 09/30/04
and 12/31/03, respectively 260 245
Additional paid-in capital 7,369 6,918
Retained earnings 12,459 12,314
Accumulated other comprehensive income (loss), net of taxes 824 (371)
------- --------
Total shareholders' equity 20,912 19,106
------- --------
Total Liabilities and Shareholders' Equity $25,858 $25,638
======== ========
See accompanying notes to condensed consolidated financial statements.
- 6 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
--------------------------------
2004 2003
----------- ---------
Cash flows from operating activities:
Net Income $ 549 $ 1,965
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 225 155
Forgiveness of debt and other 75 124
Minority interest in consolidated earnings -- 788
Undistributed gain of affiliates -- (260)
Gain on sale of assets (76) (306)
Gain on sale of investment (56) (89)
Loss on other investments 2,129 --
Changes in operating assets and liabilities:
Trade receivables -- (325)
Trading account securities 1 53
Income tax receivable 1,050 761
Deferred income tax (542) (39)
Receivable from clearing organization (160) (240)
Management fees & other receivables 138 69
Prepaid expenses & other assets -- 270
Deferred income (365) (58)
Accrued expenses & other liabilities (1,199) 193
------- -------
Net cash provided by operating activities 1,769 3,061
Cash flows from investing activities:
Capital expenditures (362) (308)
Proceeds from the sale of available-for-sale equity
and fixed income securities 1,116 4,118
Purchase of available-for-sale equity securities (4,190) (5,697)
Receipts from affiliates -- 175
Funds loaned to others (624) (150)
Collection of notes receivable -- 415
------- -------
Net cash used in investing activities (4,060) (1,447)
Cash flows from financing activities:
Exercise of stock options 938 507
Purchase and cancellation of treasury stock (472) (207)
Dividends paid (518) --
Distribution to minority interest -- (190)
------- -------
Net cash provided by (used in) financing activities (52) 110
Net change in cash and cash equivalents $ (2,343) $ 1,724
Cash and cash equivalents at beginning of period 8,989 6,691
------- -------
Cash and cash equivalents at end of period $ 6,646 $ 8,415
======= =======
See accompanying notes to condensed consolidated financial statements.
- 7 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
For the nine months ended September 30, 2003 and September 30, 2004
(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, 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) -- -- --
========
Stock options exercised 14 493 -- -- -- 507
Treasury stock purchase -- -- -- -- (207) (207)
Cancelled treasury stock (4) -- (203) -- 207 --
------------------------------------------------------------------------------------------------
Balance Sept 30, 2003 (unaudited) $ 223 $ 6,077 $11,277 $ -- $ (406) $ -- $ 17,171
================================================================================================
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 -- -- --
========
Treasury stock purchase -- -- -- -- (472) (472)
Stock options exercised 19 919 -- -- -- 938
Dividends paid -- -- (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
================================================================================================
See accompanying notes to condensed consolidated financial statements.
- 8 -
AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(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, 2004 and 2003
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, 2003 filed with the
Securities Exchange Commission should be read in conjunction with this Quarterly
Report on Form 10-Q. There have been no significant changes in the information
reported in those notes other than from normal business activities.
Certain reclassifications have been made to amounts in prior periods to be
consistent with the 2004 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 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 (LOSS) ON INVESTMENTS
On September 4, 2003 we purchased from Financial Industries Corporation
("FIC")(OTC: FNIN.PK) and a foundation 339,879 shares of FIC's common stock as
an investment. Earlier in 2003 we had purchased 45,121 FIC shares in the open
market. The 385,000 shares represent an approximate 4% ownership in FIC. The
aggregate purchase price was approximately $5,647,000, which was all sourced
from our cash reserves. The shares purchased from FIC and the foundation are not
registered, but are subject to a registration rights agreement requiring FIC's
best efforts to register them within one year of the transaction. Due to FIC's
delay in filing its 2003 Form 10-K and its March 31, 2004 and June 30, 2004
Forms 10-Q, it has not been able to register these shares and was delisted from
the NASDAQ exchange in July, 2004.
By September 30, 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. Consequently, we recorded a pretax
charge to earnings of $2,374,000 in the current period. The charge reduces our
cost basis in FIC from $5,647,000, or $14.67 per share, to $3,273,000, or $8.50
per share which is equal to the quoted market price of FIC shares on September
30, 2004. As discussed in our Form 10-Q dated June 30, 2004, we believe the
decline in the market price of FIC has been brought about by its failure to file
its 2003 Form 10-K and its subsequent de-listing from the NASDAQ Stock Market.
We had expected FIC to bring its filings current and pursue restoring its
exchange listing by September 30, 2004. These events have not yet occurred.
While we currently continue to have the ability and the intent to hold the stock
indefinitely, we concluded that the additional uncertainty created by the late
filings together with the lack of current financial information dictated that
the decline should be viewed as other than temporary. The effect on our
financial statetments as a result of this write-down was to reduce pre-tax
income by $2,374,000, increase unrealized holding gains by $1,567,000 and
increase our deferred tax liability by $807,000.
Partially offsetting this write-down were gains resulting from the sale of
available-for-sale equity securities. During the three and nine months ended
September 30, 2004, we received proceeds of zero and approximately $1,118,000,
respectively, and recognized gains of zero and $245,000, respectively, resulting
from these sales.
Additionally, during the three and nine months ended September 30, 2004, we
recognized $122,000 and $366,000, respectively, of deferred gain related to the
November 2001 sale and subsequent leaseback of real estate to Prime Medical. Due
to our continuing involvement in the property, we deferred recognizing
approximately $2,400,000 of the approximately $5,100,000 gain and are
recognizing it in earnings, as a reduction of rent expense, monthly through
November 2006. A total of $1,057,000 remains to be recognized in the coming
twenty-six months. In addition, 15% of the gain ($760,000) related to our then
15% ownership in the purchaser, was deferred. As our ownership percentage in
Prime declines through our sales of Prime common stock, we recognize these gains
proportionately to our reduction of our interest in Prime. During the first nine
months of 2004 and 2003, we recognized $56,000 and $8,000, respectively, of
these deferred gains, leaving a balance of approximately $180,000 remaining to
be recognized.
- 10 -
5. GAIN ON FORGIVENESS OF DEBT
We recorded zero and $76,000 during the three and nine months ended
September 30, 2004, respectively, as gain on forgiveness of debt. This
represents that amount of liability that was released in the respective period
by participants in our loan to an affiliate, net of $15,000 interest due them
from prior period payments made by Uncommon Care. Due to poor operating results,
Uncommon Care was in default and not making scheduled payments under its loan
agreement with us in which the participations had been sold. As a result, the
loan participants released us from any obligations under the participation
agreements. That portion of the releases entered into with related parties,
totaling $114,000, was taken directly into equity. The effect of these
transactions on our balance sheet for the period ended September 30, 2004 was to
reduce the long-term liability account, "Payable under loan participation
agreements", by $204,000.
6. 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 4 above, during the
current quarter, we recognized an "other than temporary" impairment loss and,
accordingly, our cost basis in the 385,000 shares of FIC common stock we own was
reduced from $14.67 per share to $8.50 per share. We classify all of these
shares as securities available-for-sale and record temporary unrealized changes
in their value, net of tax, in our balance sheet as part of Accumulated Other
Comprehensive Income (Loss) in Stockholders' Equity. The effect of the "other
than temporary" impairment loss of $2,374,000 was to reclassify from accumulated
other comprehensive income the unrealized losses to realized losses in the
statement of operations.
As part of this transaction we were granted options to purchase an
additional 323,000 shares of FIC's common stock at $16.42 per share. There is a
significant revenue-related performance requirement that must be met before
these options are exercisable. There are presently no registered FIC shares
available to issue upon the exercise of these options. We have assigned no value
to these options.
7. INVESTMENT IN AVAILABLE-FOR-SALE FIXED INCOME SECURITIES
We have invested primarily in U.S. government-backed securities with
maturities varying from in one to three years, as well as two corporate bonds
with Standard and Poor's ratings of no lower than B (investment grade).
- 11 -
8. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following:
September 30 December 31
2004 2003
(Unaudited)
------------------ ---------------
Commissions payable $ 827,000 $ 964,000
Taxes payable 127,000 116,000
Vacation 158,000 158,000
401(k) plan matching 148,000 121,000
Other accrued liabilities 25,000 126,000
--------- ---------
$1,285,000 $1,485,000
========== ==========
9. 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, 2004
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
Income (loss) from operations $ (834,000)
Basic EPS
Income (loss) available to
common stockholders (834,000) 2,589,000 $(0.32)
=======
Diluted EPS
Effect of dilutive securities -- --
--------- ---------
Income (loss) available to
common stockholders and
assumed conversions $ (834,000) 2,589,000 $(0.32)
========= ========= =======
- 12 -
For the Three Months Ended September 30, 2003
-----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
Income from operations $ 729,000
Basic EPS
Income available to 729,000 2,168,000 $ 0.34
common stockholders ======
Diluted EPS
Effect of dilutive securities -- 189,000
--------- ---------
Income available to common
stockholders and assumed
conversions $ 729,000 2,357,000 $ 0.31
========= ========= ======
For the Nine Months Ended September 30, 2004
---------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
Income from operations $ 549,000
Basic EPS
Income available to 549,000 2,523,000 $ 0.22
common stockholders ======
Diluted EPS
Effect of dilutive securities -- 300,000
--------- ----------
Income available to common
stockholders and assumed
conversions $ 549,000 2,823,000 $ 0.19
========= ========= ======
- 13 -
For the Nine Months Ended September 30, 2003
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
Income from operations $ 1,965,000
Basic EPS
Income available to 1,965,000 2,146,000 $ 0.92
common stockholders ======
Diluted EPS
Effect of dilutive securities -- 138,000
----------- ----------
Income available to common
stockholders and assumed
conversions $ 1,965,000 2,284,000 $ 0.86
=========== ========= ======
10. 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, 2004 and
2003 are shown as follows:
Three months ended September 30,
2004 2003
---------- ---------
Operating Revenue
Financial services $ 3,846,000 $ 5,941,000
Insurance services 3,747,000 3,108,000
Corporate 100,000 400,000
---------- ----------
Total Segment Revenues $ 7,693,000 $ 9,449,000
========== ==========
Reconciliation to Consolidated
Statement of Operations:
Total segment revenues $ 7,693,000 $ 9,449,000
Less: Intercompany dividends (100,000) (400,000)
---------- ----------
Total Revenues $ 7,593,000 $ 9,049,000
========== ==========
Operating Income
Financial services $ 423,000 $ 983,000
Insurance services 1,043,000 720,000
Corporate (429,000) (469,000)
--------- ---------
Total segments operating income 1,037,000 1,234,000
- 14 -
Three months ended September 30,
2004 2003
-------- ---------
Loss on investments (2,374,000) --
---------- ---------
Income (loss) from operations before
interest, income taxes and minority
interest (1,337,000) 1,234,000
Interest income 99,000 59,000
Other gain (loss) 21,000 (33,000)
Interest expense 2,000 5,000
Income tax expense (benefit) (386,000) 474,000
Minority interest 1 77,000
Equity in gain of unconsolidated affiliates -- 25,000
--------- --------
Net income (loss) $ (834,000) $ 729,000
========== =========
Nine months ended September 30,
2004 2003
-------- ---------
Operating Revenue:
Financial services $ 11,905,000 $ 14,777,000
Insurance services 10,273,000 7,832,000
Corporate 1,700,000 1,577,000
----------- ----------
Total Segment Revenues $ 23,878,000 $ 24,186,000
=========== ==========
Reconciliation to Consolidated
Statement of Operations:
Total segment revenues $ 23,878,000 $ 24,186,000
Less: Intercompany dividends (1,700,000) (1,577,000)
----------- ----------
Total Revenues $ 22,178,000 $ 22,609,000
=========== ==========
Operating Income
Financial services $ 1,581,000 $ 2,416,000
Insurance services 2,567,000 1,769,000
Corporate (1,441,000) (1,345,000)
---------- ---------
Total segments operating income 2,707,000 2,840,000
Gain (loss) on investments (2,130,000) 89,000
Gain on forgiveness of debt 76,000 --
---------- ---------
- 15 -
Nine months ended September 30,
2004 2003
--------- --------
Income from operations before interest,
income taxes and minority interest 653,000 2,929,000
Interest income 254,000 229,000
Other gain (loss) 39,000 (55,000)
Interest expense 4,000 7,000
Income tax expense 392,000 1,207,000
Minority interest 1 184,000
Equity in gain of unconsolidated
affiliates -- 260,000
-------- --------
Net income $ 549,000 $ 1,965,000
========= =========
11. SALE OF APS CONSULTING
Effective November 1, 2003, APS Consulting was able to obtain third party
financing and repay their note payable to us in exchange for our agreeing to
discount the note by $35,000. We provided no guarantees or credit enhancements
in connection with APS Consulting securing this financing. Accordingly, we no
longer have a risk of loss related to these operations and have recognized the
transaction as a divestiture. As a result, we ceased consolidation of APS
Consulting financial statements effective November 1, 2003. Our consolidated
statements of operations for the three and nine months ended September 30, 2003
have been adjusted to reflect this divestiture. Specifically, revenues of
$990,000 and $2,662,000 have been reversed, expenses of $826,000 and $2,068,000
have been reversed, and the operating profit of $164,000 and $594,000 was
reversed for the three and nine month periods ended September 30, 2003,
respectively, from federal income taxes and minority interest. There was no
change to the net income as of September 30, 2003 as a result of these reversals
because, prior to the disposal transaction, we consolidated the division's
operations, but recognized a 100% minority interest in its earnings. As the
division had earnings in the prior period presented, there were no earnings
attributable to discontinued operations, after adjustments made to reclassify
its revenue, expenses and the related minority interest.
- 16 -
12. 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,
2004 2003
---- ----
Net Income (loss) as reported $(834,000) $729,000
Deduct: Total additional stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (77,000) (59,000)
--------- --------
Pro forma net income (loss) $(911,000) $670,000
========= ========
Net income (loss) per share
Basic - as reported $(0.32) $ 0.34
====== ======
Basic - pro forma $(0.35) $ 0.31
====== ======
Diluted - as reported $(0.32) $ 0.31
====== ======
Diluted - pro forma $(0.35) $ 0.29
====== ======
Nine Months Ended September 30,
2004 2003
---- ----
Net Income as reported $ 549,000 $1,965,000
Deduct: Total additional stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (250,000) (178,000)
-------- --------
Pro forma net income $ 299,000 $1,787,000
======== ==========
Net income per share
Basic - as reported $ 0.22 $ 0.92
====== ======
Basic - pro forma $ 0.12 $ 0.83
====== ======
Diluted - as reported $ 0.19 $ 0.86
====== ======
Diluted - pro forma $ 0.11 $ 0.78
====== ======
- 17 -
13. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Financial Accounting Standards Board ("FASB") issued an
exposure draft entitled "Share-Based Payment, an Amendment of FASB Statements
No. 123 and 95." This proposed statement addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed Statement would eliminate the ability to account for share-based
compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued
to Employees", and generally would require instead that such transactions be
accounted for using a fair-value-based method. As proposed, this statement would
be effective for the Company on January 1, 2005. We are currently evaluating the
effect this proposed standard will have on our financial position or results of
operations.
In September 2004, the FASB approved a Staff Position to delay the
implementation of EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments" (" EITF 03-1"). EITF 03-1 provides
guidance for determining when an investment is impaired and whether the
impairment is other than temporary. EITF 03-1 also incorporates into its
consensus the required disclosures about unrealized losses on investments
announced by the EITF in late 2003 and adds new disclosure requirements relating
to cost-method investments. The approved delay will apply to all securities
within the scope of EITF 03-1 and is expected to end when new guideance is
issued and comes into effect. The original requirements prescribed by EITF 03-1
and SAB 59 will remain in effect. We are currently monitoring the progress of
this guidance as adoption of EITF 03-1 may have an effect on our financial
position or results of operations.
- 18 -
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
Our statements contained in this report that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding our expectations, hopes, intentions or strategies regarding
the future. You should not place undue reliance on forward-looking statements.
All forward-looking statements included in this report are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. It is important to note that our actual results
could differ materially from those in the forward-looking statements. In
addition to any risks and uncertainties specifically identified in the text
surrounding the forward-looking statements, you should consult our reports on
Forms 10-KSB 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 when it is reasonably
certain the managed company will have an annual profit, generally in
the fourth quarter. FMI's assets are not subject to APIE policyholder
claims.
In addition, as of September 30, 2004, we have the following significant
investments accounted for as available-for-sale securities: (1) we own
approximately 555,000 shares of Prime Medical common stock, representing less
than 3% of its outstanding common stock, and (2) we own 385,000 shares of
Financial Industries Corporation, representing approximately 4% of its
outstanding common stock. We account for these investments as available-for-sale
securities, which means they are reflected on our consolidated balance sheets at
fair value, and fluctuations in fair value are recognized as unrealized gains or
losses excluded from earnings and reported as a separate component of
stockholders' equity, net of income taxes. As discussed later in this report, we
recorded an "other than temporary" impairment loss from market value declines in
our FIC holdings totaling $2,374,000.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our consolidated financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an on-going basis, we evaluate our
estimates, including those related to, impairment of assets; bad debts; income
taxes; and contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies and estimates affect
our more significant judgments and estimates used in the preparation of our
consolidated financial statements. We periodically review the carrying value of
our assets to determine if events and circumstances exist indicating that assets
might be impaired. If facts and circumstances support this possibility of
impairment, our management will prepare undiscounted and discounted cash flow
projections, which require judgments that are both subjective and complex.
Management may also obtain independent valuations.
Our financial services revenues are composed primarily of commissions on
securities trades and asset management fees. Revenues related to securities
transactions are recognized on a trade date basis. Asset management fees are
recognized as a percentage of assets under management during the period based
upon the terms of agreements with the applicable customers.
Our insurance services revenues are primarily related to management fees
based on the earned premiums of the managed company and include a profit sharing
component, as defined in the management agreement, related to the managed
company's annual earnings. Management fees are recorded, based upon the terms of
the management agreement, in the period the related premiums are earned by the
managed company. The managed company recognizes premiums as earned ratably over
the terms of the related policy. The profit sharing component is recognized when
it is reasonably certain the managed company will have an annual profit, and,
typically, has been recognized during the fourth quarter.
Effective November 1, 2003, our former consulting subsidiary, APS
Consulting, paid off the negotiated remainder of the note due us, allowing us to
cease accounting for them as a variable interest entity. Consequently, we have
reclassified the three and nine months ended September 30, 2003 income
statements to reflect the disposition of APS Consulting.
- 21 -
On September 4, 2003 we purchased from Financial Industries Corporation
("FIC")(OTC: FNIN.PK) and a foundation 339,879 shares of FIC's common stock as
an investment. Earlier in 2003 we had purchased 45,121 FIC shares in the open
market. The 385,000 shares represents an approximate 4% ownership in FIC. The
aggregate purchase price was approximately $5,647,000, which was all sourced
from our cash reserves. The shares purchased from FIC and the foundation are not
registered, but are subject to a registration rights agreement requiring FIC's
best efforts to register them within one year of the transaction. Due to FIC's
delay in filing its 2003 Form 10-K and its March 31, 2004 and June 30, 2004
Forms 10-Q, it has not been able to register these shares and was delisted from
the NASDAQ exchange in July, 2004. Through the quarter ended June 30, 2004, we
determined that the unrealized losses of $2,075,000 resulting from the fair
market value decline were temporary market declines and accordingly had
recognized such unrealized losses in other comprehensive income (loss).
By September 30, 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. Consequently, we recorded a pretax
charge to earnings of $2,374,000 in the current period. The charge reduces our
cost basis in FIC from $5,647,000, or $14.67 per share, to $3,273,000, or $8.50
per share which is equal to the quoted market price of FIC shares on September
30, 2004. As discussed in our Form 10-Q dated June 30, 2004, we believe the
decline in the market price of FIC has been brought about by its failure to file
its 2003 Form 10-K and its subsequent de-listing from the NASDAQ Stock Market.
We had expected FIC to bring its filings current and pursue restoring its
exchange listing by September 30, 2004. These events have not yet occurred.
While we currently continue to have the ability and the intent to hold the stock
indefinitely, we concluded that the additional uncertainty created by the late
filings together with the lack of current financial information dictated that
the decline should be viewed as other than temporary. The effect on our
financial statements as a result of this write-down was to reduce pre-tax income
by $2,374,000, increase unrealized holding gains by $1,567,000 and increase
deferred tax liability by $807,000. We will continue to closely monitor FIC's
situation.
- 22 -
RESULTS OF OPERATIONS
REVENUES
Revenues from operations decreased $1,456,000 (16%) and $431,000 (2%) in
the three and nine months ended September 30, 2004, respectively, compared to
the same periods in 2003. Our income from continuing operations before interest,
income taxes and minority interest decreased $2,571,000 and $2,276,000 (78%) in
the current year three and nine months, respectively, compared to the same
periods in 2003. Our net income decreased $1,563,000 and $1,416,000 (72%) in the
current year three and nine months, respectively, compared to the same periods
in 2003. Our diluted net income per share declined $0.61 and $0.67 (78%) in the
current year three and nine months, respectively, compared to the same periods
in 2003 as a result of the current quarter loss. The reasons for these changes
are described below.
FINANCIAL SERVICES
Our financial services revenues decreased $2,095,000 (35%) and $2,872,000
(19%) in the three and nine months ended September 30 2004, respectively,
compared to the same periods in 2003. The decrease in both current year periods
was due to lower 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. A decline in customer trading activity was
responsible for decreased revenues in the current quarter. This quarter
experienced generally declining rates in the middle of the treasury curve.
However, our investors still were hesitant to commit funds in the market amid
the uncertainties of continually rising oil prices, health of the economy and
labor force, foreign military commitments and costs, election year jitters and
future Federal Reserve actions. Although still down from the previous year,
there was evidence of increased interest and activity in non-investment grade
bond markets, while the treasury and other high grade markets were marked with
lackluster trading. Our results during the current quarter were consistent with
many of the reported results of large public securities trading firms.
Our financial services expense decreased $1,535,000 (31%) and $2,037,000
(16%) in the three and nine months ended September 30, 2004, respectively,
compared to the same periods in 2003. The primary reason for the current quarter
decrease is a $1,336,000 (37%) and $1,680,000 (20%) decrease in commission
expense in the current year three and nine months, respectively, compared to the
same periods in 2003 resulting from the decrease in commission income mentioned
above. In addition, incentive compensation costs were down $286,000 (54%) and
$512,000 (39%) in the current year periods compared to the same periods in 2003
as a result of lower profits and higher minimum performance criteria placed upon
management at APS Financial for 2004.
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INSURANCE SERVICES
Our insurance services revenues from our premium-based insurance management
segment, APS Insurance Services, increased $639,000 (21%) and $2,441,000 (31%)
in the three and nine months ended September 30, 2004, respectively, compared to
the same periods in 2003. The primary reason for the current year increase is
the fact that management fee revenues increased $453,000 (25%) and $1,125,000
(21%) in the three and nine month periods ended September 30, 2004 compared to
the same periods in 2003. These higher management fees are the result of an
increase in earned premium of approximately $12.1 million for the year. Further
contributing to the 2004 increase is a $123,000 (10%) and $1,120,000 (43%)
increase in respective current year three and nine month pass-through
commissions earned by third party agents resulting from approximately $12.4
million in additional written premium this year compared to 2003. Net income is
not affected by outside sales commissions as these agents are paid commissions
equivalent to the revenue earned. Lastly, our risk management fees earned
increased $68,000 (135%) and $169,000 (143%) in the current year periods
compared to the same periods in 2003 as a result of a greater number of doctor
groups receiving this service as well as an increase in the rate charged.
Insurance services expenses increased $316,000 (13%) and $1,643,000 (27%)
in the three and nine months ended September 30, 2004, respectively, compared to
the same periods in 2003. The current year increase is primarily due to the
above-mentioned increase in respective current year three and nine month third
party pass-through commissions paid. In addition, salaries expense was $48,000
(7%) and $195,000 (10%) higher in the three and nine months, respectively, as a
result of personnel additions, including a high-level management position to
help meet our growing financial reporting requirements, as well as normal annual
merit raises. Also, depreciation and amortization expense increased $30,000
(97%) and $101,000 (128%) in the current three and nine months, respectively,
primarily as a result of amortizing the non-compete agreement that was created
upon the repurchase of the 20% minority interest in October, 2003. Partially
offsetting these increases was a current quarter decrease in advertising.
Advertising declined $19,000 (72%) and $121,000 (78%) in the current three and
nine months as a result of re-branding efforts of the business during 2003.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased $40,000 (9%) but increased
$144,000 (11%) in the three and nine months ended September 30, 2004,
respectively, compared to the same periods in 2003. The current quarter decrease
was due to lower legal and audit fees, the result of non-recurring expenses
incurred in connection with our 2003 investment in Financial Industries.
Partially offsetting this current year three month
- 24 -
decline was a $28,000 increase in professional fees resulting from fees incurred
in connection with Sarbanes-Oxley internal controls procedures. Current year
nine month costs are higher due to increases in incentive compensation expense
of $155,000 (68%) as the monthly accrual has been raised in order to better
match anticipated annual earnings. The majority of last year's management
incentive costs were expensed in the final quarter of 2003 as it was not until
then that we were able to more accurately estimate 2003 earnings.
GAIN ON SALE OF ASSETS
Gain on sale of assets primarily represents the recognition of deferred
income. Approximately $760,000 of the $5,100,000 deferred gain on the sale of
real estate to Prime Medical in 2001 was due to our ownership interest in Prime
and is recognized upon the reduction of our ownership percentage in Prime
Medical through the sale of its stock. In the first nine months of 2004, we
recognized approximately $56,000 from the sale of Prime Medical common stock
versus a gain of $8,000 in the same period of 2003.
GAIN (LOSS) ON INVESTMENTS
The current three month loss was due to a write-down of our investment in
Financial Industries common stock. During the quarter, we determined that the
decline in market value of FIC common stock should be considered other than
temporary and we recorded a pretax charge to earnings of $2,374,000 in the
current period. This charge reduced our cost basis in FIC from $5,647,000, or
$14.67 per share, to $3,273,000, or $8.50 per share which is equal to the quoted
market price of FIC shares on September 30, 2004. As discussed in our Form 10-Q
dated June 30, 2004, we believe the decline in the market price of FIC has been
brought about by its failure to file its 2003 Form 10-K and its subsequent
de-listing from the NASDAQ Stock Market. We had expected FIC to bring its
filings current and pursue restoring its exchange listing by September 30, 2004.
These events have not yet occurred. While we currently continue to have the
ability and the intent to hold the stock indefinitely, we concluded that the
additional uncertainty created by the late filings together with the lack of
current financial information dictated that the decline should be viewed as
other than temporary.
Partially offsetting this write-down was gains recorded earlier in 2004
totaling $245,000 resulting from the sale of available-for-sale equity
securities.
- 25 -
GAIN ON FORGIVENESS OF DEBT
We recorded $76,000 in the nine months ended September 30, 2004 as a gain
on forgiveness of debt. This represents that amount of liability that were
released in the current year by participants in our loan to this affiliate, net
of $15,000 in expenses associated with these releases. Due to poor operating
results, Uncommon Care was in default and not making scheduled payments under
its loan agreement with us in which the participations had been sold. As a
result, the loan participants released us from any obligations under the
participation agreements. That portion of the releases entered into with related
parties, totaling $114,000, was taken directly into equity. The effect of these
transactions on our balance sheet for the period ended September 30, 2004 was to
reduce the long-term liability account, "Payable under loan participation
agreements", by $204,000.
INTEREST INCOME
Our interest income increased $40,000 (68%) and $25,000 (11%) in the three
and nine month periods ended September 30, 2004 compared to the same periods in
2003. The current year three month increase was due to an increase in interest
earned on securities traded at APS Financial resulting from holding securities
in inventory for a longer period of time than normal.
OTHER INCOME (LOSS)
Our other income rose $54,000 and $94,000 for the three and nine months
ended September 30, 2004, respectively compared to the same periods in 2003. The
increase in the current year represents primarily management fees received from
our former consulting division. In the same period in 2003, management fees from
our former consulting division were eliminated from earnings since they were
still consolidated and, as such, fees paid by them to us were eliminated as an
inter-company item. In addition, inventory losses at APS Financial totaled
$25,000 during the current year nine month period, which was $33,000 lower than
the same period in 2003.
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MINORITY INTERESTS
During the first nine months of 2003, minority interests represented 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. Minority interests decreased in the
current year due to the repurchase of the 20% minority interest in Insurance
Services from the minority interest holder, FPIC Insurance Group effective
October 1, 2003.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Our net working capital was $6,212,000 and $8,537,000 at September 30, 2004
and December 31, 2003, respectively. The decrease in the current year was due in
part to cash used to purchase long-term available-for-sale fixed income and
equity securities. Partially offsetting this was cash received from operations
as well as tax refunds received in 2004 in excess of estimated tax payments made
on 2004 earnings. 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 2004, 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
$6.6 million comprising 26 percent of our total assets; (2) our investments in
available-for-sale equity and fixed income securities could provide an
additional $12.3 million should the need arise; and (3) we established a line of
credit in November 2003 that is described below.
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LINE OF CREDIT
During November 2003, we established a $3.0 million line of credit with
PlainsCapital Bank. The loan called for interest payments only to be made on any
amount drawn until April 15, 2004, when the entire amount of the note, principal
and interest then remaining unpaid, became due and payable. We have since
renewed this line of credit for a period of one year following the April 15,
2004 maturity date. At September 30, 2004, 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 debt to worth ratio.
CAPITAL EXPENDITURES
Our capital expenditures for equipment were $362,000 in the nine months of
2004. We expect capital expenditures in 2004 to be approximately $400,000,
including $270,000 in improvements to our reporting software. Our 2004 capital
expenditure budget is expected to be funded through cash on hand.
ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Financial Accounting Standards Board ("FASB") issued an
exposure draft entitled "Share-Based Payment, an Amendment of FASB Statements
No. 123 and 95." This proposed statement addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed Statement would eliminate the ability to account for share-based
compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued
to Employees", and generally would require instead that such transactions be
accounted for using a fair-value-based method. As proposed, this statement would
be effective for the Company on Jaunary 1, 2005. We are currently unable to
determine what effect this statement will have on our financial position or
results of operations, if any.
- 28 -
In March 2004, the FASB reached a consensus on EITF 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments" ("
EITF 03-1"). EITF 03-1 provides guidance for determining when an investment is
impaired and whether the impairment is other than temporary. EITF 03-1 also
incorporates into its consensus the required disclosures about unrealized losses
on investments announced by the EITF in late 2003 and adds new disclosure
requirements relating to cost-method investments. The impairment accounting
guidance is effective for reporting periods beginning after September 15, 2004
and the new disclosure requirements for annual reporting periods ending after
September 15, 2004. We are currently evaluating the impact that adoption of the
impairment guidance contained in EITF 03-1 may have on our financial position or
results of operations.
Item 3.
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
-Item 1. LEGAL PROCEEDINGS
We are involved in various claims and legal actions that have arisen in the
ordinary course of business. Management believes that any liabilities arising
from these actions will not have a significant adverse effect on our financial
condition or results of operations.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Items 2(a) through(d) are inapplicable.
(e) Stock Repurchases
(d) Maximum
Number of
Shares (or
Approximate
Dollar Value)
(c) Total Number of Shares that
of Shares May Yet be
Purchased as Part Purchased Under
Period (a) Total Number (b) Average of Publicly the Plans or
of shares Price Paid Annonuced Plans Programs
Purchased (1) per Share or Programs
------- --------- ---------- ------------ --------------
July 1, 2004-July 31, 2004 2,100 $ 9.80 -- N/A
August 1, 2004-August 31, 2004 4,337 $ 9.42 4,215 $1,960,000
Sept 1, 2004-Sept 30, 2004 76 $ 10.00 76 $1,959,000
(1) Of the total shares purchased 6,100 were purchased in open market
transactions and 413 were purchased in private transactions. Our share
repurchase program was announced August 17,2004 and authorizes the
purchase of up to $ 2million of common stock.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
(b) Reports on Form 8-K.
Report filed Ocotber 15, 2004 concerning an other than
temporary write-down totaling approximately $2.4 million of
our investment in Financial Industries Corporation.
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