-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RvJmmpt9ew1WpabCJFlKr7jA++dKxjlqFpAWQvulNBZlcrddXaiCItkSj2HKWC+C t08El6MBZq3qIg2ISDSFpw== 0000949459-97-000142.txt : 19970329 0000949459-97-000142.hdr.sgml : 19970329 ACCESSION NUMBER: 0000949459-97-000142 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTOMOBILE PROTECTION CORP APCO CENTRAL INDEX KEY: 0000833441 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT SERVICES [8741] IRS NUMBER: 581582432 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17231 FILM NUMBER: 97567134 BUSINESS ADDRESS: STREET 1: 15 DUNWOODY PK DR STE 100 CITY: ATLANTA STATE: GA ZIP: 30338 BUSINESS PHONE: 4043947070 10-K 1 AUTOMOBILE PROTECTION CORPORATION - APCO SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1996 ----------------------------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ____________________ to _________________________ Commission file number 0-17231 ---------------------------------------------------------- AUTOMOBILE PROTECTION CORPORATION - APCO - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Georgia 58-1582432 - ---------------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 15 Dunwoody Park Drive, Suite 100 Atlanta, Georgia 30338 - ---------------------------------------- ---------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (770) 394-7070 ---------------------------- Securities registered pursuant to Section 12(b) of the Act: None --------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock - Par Value $.001 per share - -------------------------------------------------------------------------------- (Title of class) 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes (X) No ( ) Based on the average of the bid and asked prices ($3.49) at the close of business on March 20, 1997, the aggregate market value of the Registrant's common stock held by non-affiliates of the Registrant was $31,241,000. The number of shares outstanding of the Registrant's common stock, $.001 par value, was 10,667,101 on March 20, 1997. DOCUMENTS INCORPORATED BY REFERENCE: The information required by Items 11 and 12 are incorporated by reference from the Registrant's Proxy Statement for the 1997 Annual Meeting of Stockholders. Exhibit index is located on page 31. Total number of pages, including cover page 47. PART 1 ------ ITEM 1. BUSINESS. - ----------------- GENERAL Automobile Protection Corporation - APCO and its subsidiaries (the "Company") are engaged principally in the marketing and administration of extended vehicle service contracts and extended vehicle warranty programs sold by automobile dealers located throughout the United States. The Company also provides insurance brokerage services to the automotive industry. EXTENDED VEHICLE SERVICE CONTRACTS AND EXTENDED VEHICLE WARRANTIES The Company derives the majority of its revenues from the marketing and administration of extended vehicle service contracts and extended vehicle warranties (hereinafter referred to as "VSCs"). A consumer purchases a VSC from an automobile dealer to provide for the repair or replacement of designated parts of a vehicle for the term of the agreement, which can extend to seven years and 100,000 miles depending on vehicle eligibility. A VSC on a new vehicle augments and enhances the original warranty provided by the manufacturer of the vehicle. VSCs are also available on used and leased vehicles. Dealers often engage a third party administrator, such as the Company, to design a VSC program, arrange for insurance to limit their financial risk, and to perform all of the related administrative functions associated therewith. A function of the Company is to arrange for insurance to cover obligations to pay all future claims. During 1996, the Company arranged for insurance coverage to be provided by certain Underwriters at Lloyd's of London ("Lloyd's"), Greenwich Insurance Company ("Greenwich") and Indian Harbor Insurance Company ("Indian Harbor"). Greenwich and Indian Harbor are wholly-owned subsidiaries of NAC Re Corporation, which is rated "A+" (Superior) by A.M. Best. Greenwich and Indian Harbor may choose to purchase reinsurance from Lloyd's and other reinsurers, including their parent, NAC Re Corporation. Also, during 1996, the Company arranged for insurance coverage with CIGNA Property and Casualty Insurance Company, Illinois Union Insurance Company and other insurers in the CIGNA Group, rated "A-" (Excellent) by A.M. Best, which will insure certain programs commencing in 1997. Most of the VSC's accepted by the Company for administration between 1991 and 1996 are insured by Lloyd's. The Company's management is of the opinion that the syndicates which provide payments pursuant to the VSC's carry acceptable independent ratings from Standard and Poor's. The Company has never experienced any difficulty in having claims paid by Lloyd's. All syndicates are members of a central fund which guarantees claims payments by the syndicates. The availability of insurance coverage at competitive rates and of insurance funds to make claims payments, including the financial condition of the insurance carriers, is critical to the Company and any disruption could have a material adverse effect on the Company. While the insurance carriers are obligated to pay for the costs of the repairs under the VSC's, the Company incurs business risks (other than underwriting risk) in the transaction with the dealer. Under the Company's agreements with certain insurers, the Company bears the credit risk because it is responsible for payment of the premiums to the insurance carriers, regardless of whether the Company is able to collect from the dealers. As a matter of course, the Company remits premiums to the insurance carriers each month, whether or not the Company has been paid by the dealer. The Company incurs collection losses from dealers from time to time, although they have not been significant to date. Billings to dealers are based on competitive conditions in the market place, and therefore the ability to bill dealers for any cost increases is not assured. Consequently, the Company bears a financial risk if it cannot control costs or increase its billings to cover cost increases. The Company markets its products under the trade name, EasyCare(R). There are EasyCare(R) products for new, used and leased vehicles, which provide an array of benefits, ranging from total mechanical breakdown (commonly referred to as "bumper-to-bumper") coverage to named peril (stated component) coverage. EasyCare(R) products include various benefits such as trip interruption, rental reimbursement and emergency roadside assistance. The Company also administers programs under private labels for large customers such as American Honda Finance 2 Corporation and certain automobile dealers/retailers. In late 1996, the Company launched the EasyCare(R) Certified Pre-Owned Vehicle program, which is a combination limited warranty and extended vehicle service contract product. Dealers who participate in this program identify eligible used vehicles as EasyCare(R) Certified and provide their customers with a limited warranty, at no additional charge to the customer. Vehicles eligible for certification meet age and mileage criteria and undergo a thorough inspection by the dealer. The dealer selects the limited warranty period, which ranges from 1 month/1,000 miles to 12 months/12,000 miles. The dealer offers the customer the option to extend the limited warranty coverage for longer periods under a vehicle service contract. Based on the rate of initial dealer sign ups, management of the Company anticipates that the EasyCare(R) Certified Pre-Owned Vehicle program will be an important growth area in the future. The Company's price of the VSC or limited warranty to the dealer includes: (a) The Company's fee for its administrative services, and (b) the cost of insurance, brokerage fees and taxes. The underlying insurance cost is determined by the VSC term and coverage, in addition to the repair profile of the specific vehicle. The Company also receives a fee for each claim processed, which is paid by the insurer. INSURANCE BROKERAGE SERVICES DIVISION In addition to being a third party administrator for VSCs, the Insurance Brokerage Services Division of the Company's wholly-owned subsidiary, The Aegis Group, Inc., markets and administers automotive related insurance products to automobile dealers, manufacturers, financial institutions and leasing companies. This division provided less than 1% of the Company's total revenues for the most recent year. MARKETING The Company's products are sold by automobile dealers to consumers. The Company markets its VSCs to dealers through a national network of independent sales representatives and a few employee sales representatives. The independent sales representatives often market other automotive related insurance products to dealers, in addition to the Company's VSCs. The Company's agreement with each independent sales organization and representative is terminable by the Company if production quotas are not met or by the representative upon the giving of written notice. Independent sales representatives are compensated on a commission basis which is linked to sales volumes. At March 20, 1997, 125 individual sales representatives represented the Company. The Company supports the sales representatives with a marketing department which is available to provide proposal assistance, competitive analysis and training of dealership personnel. In February 1994, the Company entered into a five year agreement with American Honda Finance Corporation to administer a VSC program for non-Honda and non-Acura vehicles sold through participating Honda and Acura dealerships. This agreement provided approximately 11% of the Company's revenues for 1996 and less than 10% in earlier years. To promote EasyCare(R) products, the Company extensively utilizes motorsports promotions, including sponsorship of the Joe Gibbs Racing, Inc. NASCAR and NHRA entries, sponsorship of individual races and sponsorship of race cars through arrangements with automobile dealers. The Company has an annually renewable agreement with Joe Gibbs Racing, Inc. which is in effect for 1997. Joe Gibbs is a national spokesperson for the Company and appears in trade publications, videos and in person at Company sponsored events. COMPETITION The VSC industry is highly competitive and is dominated by the major automobile manufacturers and several large third party administrators. Management believes the Company is competitive against both the factory products and other third party administrators. In order to be competitive, the Company designs products which enhance a dealer's Customer Satisfaction Index, provides training to dealership personnel, and obtains insurance for the dealer to provide comprehensive coverage at reasonable prices. EMPLOYEES At March 20, 1997, the Company had 120 employees. The Company is not subject to any collective bargaining agreements and considers its relationships with employees to be good. 3 SEASONALITY The VSC industry is subject to the seasonality of the automobile industry. It is anticipated that the Company's revenues will be lower during its first and fourth quarters due to lower sales of motor vehicles during the winter months as compared to other times of the year. GOVERNMENT REGULATION Although the Company does not operate as an insurance company, the sale of VSCs by dealers and the issuance of insurance policies is regulated by the insurance laws of most states and the Company's ability to market and perform its services is affected by such insurance laws. It is possible that some states in which the Company now conducts business free of insurance regulation may change their insurance laws to regulate the activities of the Company. In such event, the Company would have to comply with the regulatory requirements of those states or cease its business activities in those states. The Company is not aware of any proposed legislative change which will materially affect its business as it is currently conducted. PROPRIETARY RIGHTS The Company regards its VSC administration and software as proprietary. In order to protect its software from illegal reproduction, the Company relies on copyright protection, trade secret laws and restrictions in its license agreements with respect to the use and reproduction of such software. The names "APCO -- Automobile Protection Corp.(R) ", "Easy Care(R) " and "Perfect Profit Program(R) " have been registered with the United States Patent and Trademark Office. The Company uses these service marks in its sales and marketing programs. ITEM 2. PROPERTIES. - ------------------- The Company conducts its operations from a 16,434 sq. ft. leased office facility at 15 Dunwoody Park Drive, Suite 100, Atlanta, Georgia 30338. The lease expires in 2001. ITEM 3. LEGAL PROCEEDINGS. - -------------------------- The Company filed a complaint against Everest Reinsurance Company (formerly Prudential Reinsurance Company, hereinafter "Everest") in September 1996 in the United States District Court, Northern District of Georgia, Atlanta division. The complaint arises from the improper denial of valid claims under various assumption of liability endorsements issued by Everest to participating dealers in 1991. In October 1996, Everest filed a motion to dismiss, asserting that the liquidation order in the insolvency of National Colonial Insurance Company ("NCIC") enjoins Everest from making a payment under the reinsurance agreement to anyone, other than the liquidator of NCIC. The Company is awaiting the Court's decision on Everest's motion to dismiss. The Company is funding the claims submitted by dealers and has paid $225,000 through December 31, 1996. The Company estimates that claims and related expenses subsequent to December 31, 1996 will be an additional $650,000. The Company is vigorously pursuing this action against Everest; however, in view of the length of time that it may take to resolve the litigation and the uncertain outcome, the Company has recorded the total amount it has paid and expects to pay of $875,000 in the consolidated statement of income for the year ended December 31, 1996. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------------------------------------------------------------ No matter was submitted during the fourth quarter of the year covered by this report to a vote of shareholders of the Company through the solicitation of proxies or otherwise. 4 PART II ------- ITEM 5.MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. - -------------------------------------------------------------------------------- The Company's common stock is quoted on the National Market System of the NASDAQ Stock Market under the symbol "APCO." The following figures represent quarterly high and low bid information related to trading in the Company's common stock. The figures reflect inter dealer prices without retail markup, markdown or commissions and may not be representative of actual transactions which occurred in the market. Such information has been obtained from NASDAQ. Low Bid High Bid ------- -------- Calendar year 1995: Quarter 3/31/95 $1.75 $2.38 Quarter 6/30/95 $1.63 $2.38 Quarter 9/30/95 $2.13 $2.56 Quarter 12/31/95 $2.25 $3.31 Calendar year 1996: Quarter 3/31/96 $2.69 $4.31 Quarter 6/30/96 $3.44 $4.94 Quarter 9/30/96 $3.13 $5.38 Quarter 12/31/96 $4.00 $5.69 Calendar year 1997: First Quarter* $3.38 $5.00 * through March 20, 1997 The closing bid price for the common stock on March 20, 1997 was $3.44. There were approximately 220 holders of record of the Company's common stock as of March 20, 1997. The Company believes there are approximately 3,000 beneficial owners of its common stock, which is held in street name by brokerage firms. No dividends have been declared or paid to date on the Company's common stock, nor are any anticipated in the foreseeable future. During 1996, the Company issued the following unregistered securities:
Exemption Consideration from Date of sale Title of security Number sold received registration Option terms ------------ ----------------- ----------- -------- ------------ ------------ 1/96 Options to 250,000 Options granted 4 (2) Exercisable purchase for services - through 2/97 at common stock additional consid- $3.50 per share granted to eration will be consultants received upon exercise of options 1/96 Options to 15,000 Options granted - 4 (2) Exercisable purchase no consideration through 10/97 at common stock received until $2.50 per share granted to options exercised customer
5
Exemption Consideration from Date of sale Title of security Number sold received registration Option terms ------------ ----------------- ----------- -------- ------------ ------------ 1/96 - 9/96 Options to 62,000 Options granted - 4 (2) Exercisable purchase no consideration for five years at common stock received until prices ranging granted to options exercised from $2.00 to employees $5.00 per share 2/96 Options to 2,000 Options granted 4 (2) Exercisable purchase for services - through 8/98 at common stock additional consid- $2.44 per share granted to eration will be consultants received upon exercise of options 5/96 - 11/96 Common stock 572,500 $1,143,125 4 (2) issued upon exercise of options granted to consultants 6/96-10/96 Common stock 250,000 $875,000 4 (2) issued upon exercise of options granted to consultants in 1/96 7/96 Options to 12,500 Options granted - 4 (2) Exercisable purchase no consideration through 7/06 at common stock received until $4.00 per share granted to options exercised directors 8/96 - 11/96 Common stock 30,886 $68,029 4 (2) issued upon exercise of options granted to customers
6 ITEM 6. SELECTED FINANCIAL DATA. - ------------------------------- Set forth below is a summary of the selected financial data of the Company:
For the For the Four months For the For the For the year ended year ended ended year ended year ended year ended December 31, December 31, December 31, August 31, August 31, August 31, 1996 1995 1994 1994 1993 1992 ---- ---- ---- ---- ---- ---- Statement of Operations: Total revenues $ 67,208,406 $ 49,210,774 $ 11,197,168 $ 26,553,554 $ 23,507,191 $ 16,087,506 Income (loss) before (provision) benefit for income taxes and cumulative effect of accounting change 2,526,919 2,447,582 413,747 1,290,453 (232,047) (1,386,281) (Provision) benefit for income taxes (963,000) (922,000) (144,000) (445,705) 439,289 Cumulative effect of accounting change 67,780 - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 1,563,919 $ 1,525,582 $ 269,747 $ 912,528 $ (232,047) $ (946,992) - ---------------------------------------------------------------------------------------------------------------------------- Per share data: Primary Income (loss) before cumulative effect of accounting change $ 0.14 $ 0.20 $ 0.04 $ 0.15 $ (0.04) $ (0.18) Cumulative effect of accounting change 0.01 - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 0.14 $ 0.20 $ 0.04 $ 0.16 $ (0.04) $ (0.18) - ---------------------------------------------------------------------------------------------------------------------------- Fully diluted Income (loss) before cumulative effect of accounting change $ 0.14 $ 0.20 $ 0.04 $ 0.14 $ (0.04) $ (0.18) Cumulative effect of accounting change 0.01 - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 0.14 $ 0.20 $ 0.04 $ 0.15 $ (0.04) $ (0.18) - ---------------------------------------------------------------------------------------------------------------------------- As of As of As of As of As of As of December 31, December 31, December 31, August 31, August 31, August 31, 1996 1995 1994 1994 1993 1992 ---- ---- ---- ---- ---- ---- Balance Sheet Data: Working capital $ 15,223,512 $ 11,270,716 $ 3,317,098 $ 3,134,005 $ 2,164,306 $ 2,124,849 Total assets $ 31,260,823 $ 19,592,461 $ 9,352,256 $ 8,398,317 $ 6,720,107 $ 6,240,327 Total liabilities $ 12,050,775 $ 4,898,455 $ 3,931,752 $ 4,150,491 $ 3,405,559 $ 2,693,432 Shareholders' equity $ 19,210,048 $ 14,694,006 $ 5,420,504 $ 4,247,826 $ 3,314,548 $ 3,546,895
7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS. - ------------- The following discussion and analysis of financial condition and results of operations presents the more significant factors affecting the Company during the periods indicated. The discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes, and with the other financial information appearing herein. FORWARD-LOOKING STATEMENTS When used in Form 10-K and in future filings by the Company with the Securities & Exchange Commission, the words or phrases "will likely result", "management expects" or "the Company expects", "will continue", "is expected", "is anticipated", "estimated" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company has no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements. Certain of these risks and uncertainties are discussed herein. The industry in which the Company operates is highly competitive, with some competitors having significantly greater financial resources and name recognition than the Company. The Company depends on independent sales representatives, automobile dealers/retailers and a major automobile manufacturer to market its products. The distribution of automobiles has been subject to cyclical economic conditions in the past and could be subject to such conditions in the future, which could adversely impact the Company. A trend towards consolidation in the distribution of automobiles has commenced, which could reduce the number of franchised and independent dealers and consequently the Company's distribution. OVERVIEW The Company's primary business is the marketing and administration of extended vehicle service contracts (hereinafter referred to as "VSCs") for automobile dealers. Dealers often engage a third party administrator, such as the Company, to design a VSC program, arrange for insurance to limit their financial risk, and to perform all of the related administrative functions associated therewith. A function of the Company is to arrange for insurance to cover obligations to pay all future claims. During 1996, the Company arranged for insurance coverage to be provided by certain Underwriters at Lloyd's of London ("Lloyd's"), Greenwich Insurance Company ("Greenwich") and Indian Harbor Insurance Company ("Indian Harbor"). Greenwich and Indian Harbor are wholly-owned subsidiaries of NAC Re Corporation. Greenwich and Indian Harbor may choose to purchase reinsurance from Lloyd's and other reinsurers, including their parent, NAC Re Corporation. Most of the VSC's accepted by the Company for administration between 1991 and 1996 are insured by Lloyd's. The availability of insurance coverage at competitive rates and of insurance funds to make claims payments, including the financial condition of the insurance carriers, is critical to the Company and any disruption could have a material adverse effect on the Company. The Company's reported revenues represent the amount it bills to automobile dealers, which is based on rate schedules developed by the Company. The amounts billed consider insurance, taxes, commissions and other costs and profit. The Company's reported cost of sales represents the amounts it pays to the insurers for insurance, state insurance taxes and commissions to its sales representatives. 8 LIQUIDITY AND CAPITAL RESOURCES The Company believes that its current working capital and anticipated levels of internally generated funds will be sufficient to fund its operating and capital expenditure requirements for the next twenty four months. This estimate is based on the Company's current level of operations and certain assumptions relating to the Company's business and planned growth. At December 31, 1996, the Company had working capital of $15,223,512 (compared to $11,270,716 at December 31, 1995) and investment securities with maturities greater than twelve months of $2,098,089 (compared to $1,509,288 at December 31, 1995). The increase of $4,541,597 is attributable to operations ($2,334,720) and the exercise of stock options ($2,206,877). The Company invests its funds in treasury securities, municipal bonds and financial instruments with maturities of less than five years and money market accounts. There is no plan to distribute funds to shareholders through a dividend or to repurchase shares. RESULTS OF OPERATIONS Year ended December 31, 1996 ("1996") compared to year ended December 31, 1995 - -------------------------------------------------------------------------------- ("1995"). - --------- Revenues for 1996 increased by 37% or $17,997,632 to $67,208,406 over 1995. The Company's largest revenue source is from the marketing and administration of extended vehicle service contracts ("VSCs") under the EasyCare(R) name, which provided 99% of revenues for 1996. EasyCare(R) revenues increased due to the introduction of additional automobile dealers to EasyCare(R) by the Company's independent sales representatives and from growth under the contract with American Honda Finance Corporation, which provided 11% of the Company's 1996 revenues. The Company's gross margin increased to 21.9% of revenues in 1996 from 20% of revenues in 1995. The increase for 1996 is primarily attributable to improved rates. The change in the mix of new and used, makes and models of vehicles also impacts the gross margin. The gross margin is expected to decline by about 0.5% in 1997 due to an anticipated change in the product mix caused by the introduction of the EasyCare(R) Certified Pre-Owned Vehicle program, which offers additional benefits to the dealer and consumer as compared to the standard EasyCare(R) service contract. However, it is anticipated that the new program will generate additional gross profit for the Company due to the limited warranty component. Compensation, selling and administrative expenses for 1996 increased by 54% or $4,109,882 to $11,658,784 over 1995. The increase for 1996 is primarily attributable to compensation, marketing costs (including motorsports promotional activities), printing and professional fees. Compensation cost increased by $1,438,000 in 1996 to support the growth of the business. The Company's motorsports related marketing costs for 1996 were $1,274,000, compared to $98,000 for 1995, which was the first year of motorsports activities. The Company extensively utilizes motorsports to advertise its products to automobile dealers and consumers. The Company's printing costs increased by $373,000 due to costs incurred in connection with higher sales volumes and the introduction of the EasyCare(R) Certified Pre-Owned Vehicle program. The Company incurred legal fees of $220,000 in 1996 resulting from its litigation with a former sales representative and in connection with its lawsuit against Everest Reinsurance Company (formerly Prudential Reinsurance Company). The litigation with the former sales representative has been settled. The Company recorded a charge of $875,000 in 1996 in connection with its litigation against Everest. The charge is to reserve for claims paid to date, expected future claims and related costs. The recovery of amounts paid by the Company to contract holders is dependent on the outcome of the lawsuit brought by the Company against Everest, which has improperly denied coverage under certain service contracts. Interest, dividend and other income for 1996 increased by 69% or $322,331 to $791,943 over 1995. The increase is due to the larger cash and investment securities balances on hand from the exercise of stock options and warrants in late 1995 and 1996, net income and higher cash floats resulting from the increased volume of business. The Company recorded a provision for income taxes in 1996 of $963,000 compared to $922,000 for 1995. The increase is due to higher pretax income. 9 Year ended December 31, 1995 ("1995") compared to year ended August 31, 1994 - ----------------------------------------------------------------------------- ("1994"). - --------- Revenues for 1995 increased by 85% or $22,657,220 to $49,210,774 over 1994. The Company's largest revenue source is from the marketing and administration of extended vehicle service contracts ("VSCs") under the EasyCare(R) name, which provided 99% of revenues for 1995. EasyCare(R) revenues increased due to the introduction of additional automobile dealers to EasyCare(R) by the Company's independent sales representatives and from the contract with American Honda Finance Corporation. The Company's gross margin decreased to 20% of revenues in 1995 from 22% of revenues in 1994. The margin decrease is due to the increase in commissions and incentives to independent sales representatives and the inclusion of emergency roadside assistance benefits in the VSC. The change in the mix of new and used, makes and models of vehicles also impacts the gross margin. Compensation, selling and administrative expenses for 1995 increased by 62% or $2,898,671 to $7,548,902 over 1994. The increase for 1995 is primarily attributable to headcount and compensation for marketing personnel, related travel, printing and advertising costs. Additional administrative costs were incurred to support the higher volumes and resulting claims, principally in headcount and communications. The Company recorded a credit of $347,046 in 1994 from the recoupment of previously expensed legal costs related to the litigation with American Home Assurance Company, which was settled in April 1994. Interest, dividend and other income for 1995 increased by 332% or $361,040 to $469,612 over 1994. The increase is due to the larger cash and investment securities balances on hand from the exercise of stock warrants, net income and higher cash floats resulting from the increased volume of business. The Company recorded a provision for income taxes in 1995 of $922,000 compared to $445,705 for 1994. The increase is due to higher pretax income and a higher combined tax rate. IMPACT OF INFLATION Although the Company's costs may increase from time to time as a result of increases in some or all of the Company's costs, the precise effect of inflation on the operations of the Company cannot be determined. The Company believes that continuation of the general levels of inflation experienced in recent years should not have a significant impact on the Company's current and contemplated operations. RECENT ACCOUNTING PRONOUNCEMENTS In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 - "Earnings Per Share", which the Company is required to adopt next year. Basic earnings per share as defined by the new standard could result in earnings per share greater than primary earnings per share, which the Company now reports. Diluted earnings per share as defined by the new standard would be similar to primary earnings per share, which the Company now reports. 10 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ---------------------------------------------------- Index to Financial Statements and Financial Statement Schedules. Page ---- Financial Statements: - --------------------- Report of Independent Accountants 12 Consolidated Balance Sheet 13 Consolidated Statement of Income 14 Consolidated Statement of Changes in Shareholders' Equity 15 Consolidated Statement of Cash Flows 16 Notes to Consolidated Financial Statements 17 Financial Statement Schedules: - ------------------------------ II. Valuation and Qualifying Accounts 24 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 11 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Automobile Protection Corporation - APCO In our opinion, the accompanying consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Automobile Protection Corporation - APCO and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for the twelve months ended December 31, 1996, December 31, 1995 and August 31, 1994 and for the four months ended December 31, 1994 and December 31, 1993 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 6 to the consolidated financial statements, the Company changed its method of accounting for income taxes by adopting Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes during the year ended August 31, 1994. PRICE WATERHOUSE LLP Atlanta, Georgia March 12, 1997 12 AUTOMOBILE PROTECTION CORPORATION - APCO CONSOLIDATED BALANCE SHEET December 31, December 31, ------------ ------------ 1996 1995 ---- ---- ASSETS Current Assets: Cash and cash equivalents $ 6,967,904 $ 6,746,886 Trading securities, at fair value 5,721,730 3,578,358 Investment securities held to maturity 1,654,209 255,576 Accounts receivable, net of provision for doubtful accounts of $30,000 and $36,000 2,160,236 1,212,000 Notes receivable, net of provision for doubtful accounts of $0 and $9,000 547,446 421,882 Officer and employee receivables 205,771 133,072 Income tax refund receivable 452,546 -- Prepaid expenses 658,074 220,177 Deferred tax asset 472,805 110,643 Restricted cash 8,330,106 3,467,947 ----------- ----------- Total current assets 27,170,827 16,146,541 Property and equipment, net of accumulated depreciation of $1,716,894 and $1,389,800 1,117,530 874,718 Investment securities held to maturity, non current 2,098,089 1,509,288 Deposits to secure licenses 730,276 726,319 Deferred tax asset 39,797 185,861 Other assets 104,304 149,734 ----------- ----------- $31,260,823 $19,592,461 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Premiums, fees and taxes payable $ 8,330,106 $ 3,467,947 Accounts payable 1,156,118 886,155 Accrued liabilities 2,461,091 470,723 Current income taxes payable -- 51,000 ----------- ----------- Total current liabilities 11,947,315 4,875,825 Deferred income taxes 103,160 22,330 Redeemable preferred stock 300 300 ----------- ----------- 12,050,775 4,898,455 ----------- ----------- Shareholders' equity: Common stock; $.001 par value, 40,000,000 authorized, 10,564,323 and 9,614,616 issued and outstanding 10,564 9,614 Additional paid-in capital 15,053,345 12,102,172 Retained earnings 4,146,139 2,582,220 ----------- ----------- Total shareholders' equity 19,210,048 14,694,006 ----------- ----------- Commitments -- -- ----------- ----------- $31,260,823 $19,592,461 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. 13 AUTOMOBILE PROTECTION CORPORATION - APCO CONSOLIDATED STATEMENT OF INCOME
Twelve Months Twelve Months Four Months Twelve Months Four Months ------------- ------------- ----------- ------------- ----------- Ended Ended Ended Ended Ended ----- ----- ----- ----- ----- December 31, December 31, December 31, August 31, December 31, ------------ ------------ ------------ ---------- ------------ 1996 1995 1994 1994 1993 ---- ---- ---- ---- ---- Revenues $ 67,208,406 $ 49,210,774 $ 11,197,168 $ 26,553,554 $ 7,848,154 Cost of sales: Premiums and taxes 43,138,395 32,354,000 7,218,673 17,085,828 5,334,417 Commissions and other costs 9,360,491 6,968,773 1,553,273 3,566,338 888,831 ------------ ------------ ------------ ------------ ------------ Total cost of sales 52,498,886 39,322,773 8,771,946 20,652,166 6,223,248 ------------ ------------ ------------ ------------ ------------ 14,709,520 9,888,001 2,425,222 5,901,388 1,624,906 Expenses: Compensation, selling and administrative 11,658,784 7,548,902 1,914,130 4,650,231 1,425,101 Depreciation and amortization 440,760 361,129 117,588 416,322 144,638 Interest, dividend and other income (791,943) (469,612) (20,243) (108,572) (25,007) Other item (Note 10) 875,000 -- -- (347,046) -- ------------ ------------ ------------ ------------ ------------ 12,182,601 7,440,419 2,011,475 4,610,935 1,544,732 ------------ ------------ ------------ ------------ ------------ Income before provision for income taxes 2,526,919 2,447,582 413,747 1,290,453 80,174 Provision for income taxes 963,000 922,000 144,000 445,705 27,761 Cumulative effect of accounting change -- -- -- (67,780) (67,780) ============ ============ ============ ============ ============ Net income $ 1,563,919 $ 1,525,582 $ 269,747 $ 912,528 $ 120,193 ============ ============ ============ ============ ============ Per share amounts: Primary Net income per share before cumulative effect of accounting change $ 0.14 $ 0.20 $ 0.04 $ 0.15 $ 0.01 Cumulative effect of accounting change -- -- -- 0.01 0.01 ============ ============ ============ ============ ============ Net income per share $ 0.14 $ 0.20 $ 0.04 $ 0.16 $ 0.02 ============ ============ ============ ============ ============ Fully diluted Net income per share before cumulative effect of accounting change $ 0.14 $ 0.20 $ 0.04 $ 0.14 $ 0.01 Cumulative effect of accounting change -- -- -- 0.01 0.01 ============ ============ ============ ============ ============ Net income per share $ 0.14 $ 0.20 $ 0.04 $ 0.15 $ 0.02 ============ ============ ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements.
14
Balances at August 31, 1993 5,168,000 $5,168 $3,435,017 ($125,637) $3,314,548 Net income for the period September 1, 1993 through August 31, 1994 912,528 912,528 Issuance of common stock upon exercise of stock options 15,000 15 20,735 20,750 ---------------------------------------------------------------------- Balances at August 31, 1994 5,183,000 5,183 3,455,752 786,891 4,247,826 Net income for the period September 1, 1994 through December 31, 1994 269,747 269,747 Issuance of common stock upon exercise of stock options 496,895 496 975,265 975,761 Registration costs (82,830) (82,830) Stock compensation expense 10,000 10,000 ---------------------------------------------------------------------- Balances at December 31, 1994 5,679,895 5,679 4,358,187 1,056,638 5,420,504 Net income for the period January 1, 1995 through December 31, 1995 1,525,582 1,525,582 Issuance of common stock upon exercise of stock options, net of underwriting fee 3,934,721 3,935 7,459,515 7,463,450 Registration costs (19,526) (19,526) Stock compensation expense 54,996 54,996 Tax effect of option exercise 249,000 249,000 ---------------------------------------------------------------------- Balances at December 31, 1995 9,614,616 9,614 12,102,172 2,582,220 14,694,006 Net income for the period January 1, 1996 through December 31, 1996 1,563,919 1,563,919 Issuance of common stock upon exercise of stock options 949,707 950 2,205,927 2,206,877 Stock compensation expense 100,800 100,800 Tax effect of option exercise 644,446 644,446 ====================================================================== Balances at December 31, 1996 10,564,323 $10,564 $15,053,345 $4,146,139 $19,210,048 ====================================================================== The accompanying notes are an integral part of these consolidated financial statements.
15
AUTOMOBILE PROTECTION CORPORATION - APCO CONSOLIDATED STATEMENT OF CASH FLOWS Twelve Months Twelve Months Four Months Twelve Months Four Months ------------ ------------- ----------- ------------- ----------- Ended Ended Ended Ended Ended ----- ----- ----- ----- ----- December 31, December 31, December 31, August 31, December 31, ------------ ------------ ------------ ---------- ------------ 1996 1995 1994 1994 1993 ---- ---- ---- ---- ---- Cash flows from operating activities: Net income $1,563,919 $1,525,582 $269,747 $912,528 $120,193 ------------ -------------- ------------ ------------- ------------ Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 440,760 361,129 117,588 416,322 144,638 Cumulative effect of accounting change (67,780) Deferred income taxes (135,268) (249,174) 42,780 (55,446) Provision for doubtful accounts 35,031 1,367 3,000 (67,549) Tax benefit from stock option exercise 644,446 249,000 Stock compensation expense 100,800 54,996 10,000 Change in operating assets and liabilities: Restricted cash (4,862,159) (400,022) 315,580 (774,560) 55,947 Accounts receivable (978,267) (734,790) (201,912) 267,285 (91,236) Officer and employee receivables (72,699) (51,918) (23,049) 24,972 (39,812) Notes receivable (130,564) (366,400) 65,428 36,754 121,859 Income tax refund receivable (452,546) 57,000 19,789 70,350 Prepaid expenses and other assets (467,761) 16,913 (55,998) (16,956) (70,265) Premiums, fees and taxes payable 4,862,159 400,022 (222,291) 575,800 (161,418) Accounts payable 269,963 327,429 83,978 (14,748) 32,918 Accrued liabilities 1,990,368 258,440 (56,944) 197,218 (49,306) Income taxes payable (51,000) 37,395 (82,395) 96,000 Purchases of trading securities (8,660,198) (5,319,442) (734,235) Sales of trading securities 6,516,826 2,543,254 1,424,731 ------------ -------------- ------------ ------------- ------------ Total adjustments (950,109) (2,814,801) 643,481 735,327 (41,771) ------------ -------------- ------------ ------------- ------------ Net cash provided by (used in) operating activities 613,810 (1,289,219) 913,228 1,647,855 78,422 ------------ -------------- ------------ ------------- ------------ Cash flows from investing activities: Purchases of property and equipment (736,025) (489,920) (98,431) (195,473) (19,740) Proceeds from sales of property and equipment 127,747 Purchases of investment securities (3,570,332) (1,160,548) (500,000) (1,689,465) Redemptions and maturities of investment securities 1,582,898 1,001,079 26,541 Decrease in margin loan (129,338) (28,501) Increase in deposits to secure licenses (3,957) (73,069) (500,750) (152,500) ------------ -------------- ------------ ------------- ------------ Net cash used in investing activities (2,599,669) (1,723,537) (1,099,181) (1,165,697) (21,700) ------------ -------------- ------------ ------------- ------------ Cash flows from financing activities: Issuance of common stock, net of underwriting fee 2,206,877 7,463,450 975,761 20,750 Registration costs (19,526) (23,120) (59,710) ------------ -------------- ------------ ------------- ------------ Net cash provided by (used in) financing activities 2,206,877 7,443,924 952,641 (38,960) ------------ -------------- ------------ ------------- ------------ Net increase in cash and cash equivalents 221,018 4,431,168 766,688 443,198 56,722 Cash and cash equivalents at beginning of period 6,746,886 2,315,718 1,549,030 1,105,832 1,105,832 ============ ============== ============ ============= ============ Cash and cash equivalents at end of period $6,967,904 $6,746,886 $2,315,718 $1,549,030 $1,162,554 ============ ============== ============ ============= ============ Supplemental disclosure of cash flow information: Cash paid during the period for income taxes $957,368 $850,000 $226,075 $370,000 $0 ============ ============== ============ ============= ============ The accompanying notes are an integral part of these consolidated financial statements.
16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Automobile Protection Corporation - APCO was incorporated in the State of Georgia on September 10, 1984. APCO and its wholly-owned subsidiaries (the "Company") are engaged primarily in the marketing and administration of extended vehicle service contracts and extended vehicle warranty programs sold by new and used automobile retailers located throughout the United States. Extended vehicle service contracts augment and enhance upon the basic warranty offered by the automobile manufacturer. The Company markets its contracts nationally under the EasyCare(R) trade name and also administers vehicle service contracts under a private label program for a major automobile manufacturer. The Company arranges for insurance coverage to be provided by certain Underwriters at Lloyd's of London ("Lloyd's"), Greenwich Insurance Company and Indian Harbor Insurance Company. These insurers underwrite and insure the obligations to pay for covered mechanical repairs and benefits under all vehicle service contract and warranty programs marketed and administered by the Company. The Company's subsidiary, The Aegis Group, Inc., provides a wide range of third party administrative and insurance brokerage services to companies serving the automotive industry. The following is a summary of the significant accounting policies followed by the Company: PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. CHANGE IN REPORTING PERIOD On February 1, 1995, the Company's Board of Directors approved a change in the Company's fiscal year end from August 31 to December 31. REVENUES Revenues from the sale of extended vehicle service contracts and extended warranty programs are recognized when the service contract or extended warranty sold by the dealer is received and accepted by the Company. Revenues are comprised of the Company's administration fee, underlying insurance premium and tax. CASH AND CASH EQUIVALENTS Cash and cash equivalents include all funds with an original maturity of ninety days or less. Certain funds are considered restricted as they are held for the benefit of the insurers and to pay claims. INVESTMENT SECURITIES The Company's investments consist of trading securities and held to maturity securities. Trading securities are stated at their fair value, which is based on quoted market prices, and all unrealized gains and losses are recorded in earnings as incurred. Gains and losses during the periods encompassed by these financial statements were insignificant. Held to maturity securities are stated at their amortized cost. 17 PROPERTY AND EQUIPMENT Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes over the estimated useful lives of the assets ranging from three to seven years. Maintenance and repair costs are charged to expense as incurred, and major renewals and betterments are capitalized. When property and equipment is retired or sold, the related carrying value and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income. PREMIUMS AND TAXES PAYABLE Premiums and taxes payable includes premiums due to the insurers or their agents, taxes payable to various states and amounts advanced to the Company by the insurers for payment of claims. ADVERTISING COSTS The Company sponsors motorsport activities to advertise its products. The Company has entered into an annual associate sponsorship agreement with Joe Gibbs Racing, Inc. and separate agreements with race track owners to sponsor race events. Direct costs associated with the Joe Gibbs Racing, Inc. associate sponsorship are expensed evenly during the year, while costs associated with race events are expensed in the month the event takes place. INCOME TAXES The Company provides income taxes on income reported for financial statement purposes. Deferred income taxes are recorded for differences in the recognition of various items for financial reporting and income tax purposes. The Company files a consolidated income tax return with its subsidiaries. NET INCOME PER COMMON SHARE Net income per share has been calculated based on the weighted average number of common shares and common share equivalents outstanding during each period presented. The weighted average number of common shares and common share equivalents on a primary basis are 11,157,000, 7,531,000 and 5,818,451 for the twelve months ended December 31, 1996, December 31, 1995 and August 31, 1994, respectively, and 6,875,000 and 5,697,000 for the four months ended December 31, 1994 and December 31, 1993, respectively. The weighted average number of common shares and common share equivalents on a fully diluted basis are 11,157,000, 7,604,000 and 5,945,997 for the twelve months ended December 31, 1996, December 31, 1995 and August 31, 1994, respectively, and 6,875,000 and 5,697,000 for the four months ended December 31, 1994 and December 31, 1993, respectively. RECLASSIFICATIONS Certain comparative amounts have been reclassified to conform with current year presentation. NOTE 2 RISKS AND UNCERTAINTIES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in the financial statements. Actual results could differ from those estimates. The industry in which the Company operates is highly competitive, with some competitors having significantly greater financial resources and name recognition than the Company. The Company depends on independent sales representatives, automobile dealers/retailers and a major automobile manufacturer to market its products. Except for the major automobile manufacturer which provided 11% of the Company's 1996 revenues, no other distribution source provided more than 10% of the Company's 1996 revenues. The distribution of automobiles has been subject to cyclical economic conditions in the past and could be subject to such conditions in the future, which could adversely impact the Company. A trend towards consolidation in the distribution of automobiles has commenced, which could reduce the number of franchised and independent dealers and consequently the Company's distribution. 18 The insurance companies, including Lloyd's, insure the obligations under the vehicle service contracts. Most of the VSC's accepted by the Company for administration between 1991 and 1996 are insured by Lloyd's. The availability of insurance coverage at competitive rates and of insurance funds to make claims payments, including the financial condition of the insurance carriers, are critical to the Company. NOTE 3 TRADING AND INVESTMENT SECURITIES: Trading and investment securities are summarized as follows:
December 31, December 31, 1996 1995 -------------- ---------------- Trading securities (at fair value): Municipal bonds $ 4,773,327 $ 3,578,358 U.S. agencies 500,000 Preferred stocks 448,403 -------------- ---------------- $ 5,721,730 $ 3,578,358 ============== ================ Investment securities held to maturity (at amortized cost): U.S. Treasuries and agencies (market value: $2,103,622; $0 ) $ 2,100,336 Municipal bonds (market value: $1,238,174; $1,057,007) 1,230,886 $ 1,055,198 Corporate bonds (market value: $98,625; $0) 100,000 Preferred stocks (market value: $0; $500,000) 500,000 Certificates of deposit 321,076 209,666 -------------- ---------------- 3,752,298 1,764,864 Less: Current investment securities 1,654,209 255,576 -------------- ---------------- Non-Current investment securities $ 2,098,089 $ 1,509,288 ============== ================
Of the non-current investment securities at December 31, 1996, $1,805,989 matures within two years; $44,817 matures within three years; $100,000 matures within four years and $147,283 matures after five years. NOTE 4 PROPERTY AND EQUIPMENT: Property and equipment is summarized as follows:
December 31, December 31, 1996 1995 -------------- ---------------- Office and computer equipment $ 1,763,659 $ 1,406,553 Furniture and fixtures 367,057 273,435 Vehicles 216,763 172,194 Leasehold improvements 486,945 412,336 -------------- ---------------- 2,834,424 2,264,518 Less: Accumulated depreciation and amortization (1,716,894) (1,389,800) -------------- ---------------- $ 1,117,530 $ 874,718 ============== ================
19 NOTE 5 DEPOSITS TO SECURE LICENSES: Certain states require the Company to provide security in the form of pledged securities or bank certificates of deposit. Additionally, one state requires the Company's subsidiary to maintain capitalization of $500,000. NOTE 6 INCOME TAXES: The components of the provision for income taxes are as follows:
Four months Four months Year ended Year ended ended Year ended ended December 31, December 31, December 31, August 31, December 31 1996 1995 1994 1994 1993 ----------- --------- ---------- ---------- ----------- Current: Federal $ 1,009,268 $1,077,174 $ 141,000 $ 386,990 $ 24,052 State 89,000 94,000 3,000 15,935 ----------- --------- ---------- ---------- ----------- 1,098,268 1,171,174 144,000 402,925 24,052 ----------- --------- ---------- ---------- ---------- Deferred: Federal (124,268) (232,174) 41,088 3,709 State (11,000) (17,000) 1,692 ----------- --------- ---------- ---------- ---------- (135,268) (249,174) 42,780 3,709 ----------- --------- ---------- ---------- ---------- Provision for income taxes $ 963,000 $ 922,000 $ 144,000 $ 445,705 $ 27,761 =========== ========= ========== ========== ==========
An analysis of the differences between the statutory federal income tax rate of 34% and the effective tax rate is as follows: Year ended Year ended Year ended December 31, December 31, August 31, 1996 1995 1994 --------- ---------- ---------- Statutory federal taxes $ 859,152 $ 832,178 $ 438,754 State income taxes, net of federal tax benefit 51,480 50,729 11,634 Non-taxable income (79,126) (26,318) (12,117) Non-deductible expenses 131,494 65,411 47,823 Other (40,389) --------- ---------- ---------- $ 963,000 $ 922,000 $ 445,705 ========= ========== ========== There are no significant differences between income taxed at the statutory federal tax rate of 34% and the Company's effective tax rate for the four month periods ended December 31, 1994 and 1993. The Company recorded a benefit of $67,780 upon adoption of Statement of Financial Accounting Standards No. 109 effective September 1, 1993. 20 The components of deferred tax assets and liabilities are as follows: December 31, December 31, 1996 1995 ---------- ---------- Accounts receivable allowances $ 11,400 $ 27,916 Depreciation and amortization 50,544 37,648 Charge for litigation reserve 330,000 Non-deductible accruals 120,658 230,940 ---------- ---------- Deferred tax asset $ 512,602 $ 296,504 ========== ========== Deductible expenses and other $ 103,160 $ 22,330 ---------- ---------- Deferred tax liability $ 103,160 $ 22,330 ========== ========== NOTE 7 STOCKHOLDERS' EQUITY AND OPTIONS: During 1995 and 1994, the Company received net proceeds of $7,424,950 and $975,761, respectively, from the exercise of 3,853,876 Class A and Class B warrants and 75,120 underwriter's unit purchase options at an average exercise price of $2.06 per share, which were issued in connection with the Company's initial public offering. As of December 31, 1996, no warrants or underwriter's unit purchase options remained. The Company has two qualified stock option plans which provide for the granting of stock options to officers, employees and non-employee directors. Additionally, the Board of Directors has approved the granting of non-qualified stock options to consultants, company spokespersons, independent sales agents and certain senior executive officers. Under the Company's 1988 Stock Option Plan, the exercise price of any option granted may not be less than the fair market value of the Company's common stock at the date of grant. The term of each option and the manner in which it may be exercised are determined by the Board of Directors. The options are generally subject to vesting schedules which range from 2 years to 4 years and some are also subject to the attainment of specified corporate goals. The 1988 Stock Option Plan was registered in 1994. Under the Company's Outside Directors' Stock Option Plan, each eligible director is granted an option to purchase the maximum number of full shares having an aggregate fair market value on the date of grant equal to $25,000 on an annual basis at an exercise price per share equal to the fair market value of a share of common stock on the date of grant. These options can be exercised at any time for a ten year period from the date of grant. The Outside Directors' Stock Option Plan was registered in 1994. The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Had compensation cost for the Company's stock-based incentive compensation plans been determined based on the fair value at the grant dates for awards under these plans consistent with the methodology prescribed by SFAS 123 and if these values had been recorded in the statement of income, the Company's net income and income per share would have been reduced to the pro forma amounts indicated below. December 31, December 31, 1996 1995 ---------- ----------- Net income As reported $1,563,919 $1,525,582 Pro forma $1,485,352 $1,453,764 Income per share As reported $0.14 $0.20 Pro forma $0.13 $0.19 These pro forma amounts represent the estimated fair value of stock options issued during 1996 and 1995 and are being amortized to expense over the applicable vesting period. Additional options may be granted in future years. 21 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1996 and 1995, respectively; dividend yields of 0%; expected volatility of 55% and 30%; risk-free interest rates of 5.9% and 6.6%; and specific vesting periods for each option. The following table summarizes the changes in the number of shares under option:
Exercise price ranges Weighted --------------------- Total shares average option $0.65-$1.50 $1.51-$3.00 $3.01-$5.00 under option price per share ----------- ----------- ----------- ------------- ---------------- Outstanding at August 31, 1994 912,491 1,220,595 350,000 2,483,086 $1.80 Granted 634,000 634,000 $2.26 Canceled (100,000) (100,000) $1.65 Outstanding at December 31, 1994 912,491 1,754,595 350,000 3,017,086 $1.90 Granted 424,083 424,083 $2.37 Exercised (350,380) (2,000) (352,380) $0.69 Canceled (141,633) (147,000) (350,000) (638,633) $2.59 Outstanding at December 31, 1995 420,478 2,029,678 0 2,450,156 $1.98 Granted 46,000 295,500 341,500 $3.43 Exercised (167,692) (528,015) (250,000) (945,707) $2.33 Canceled (100,450) (100,450) $2.35 Outstanding at December 31, 1996 252,786 1,447,213 45,500 1,745,499 $2.05 Exercisable at December 31, 1996 252,786 1,046,571 12,500 1,311,857 $1.93 Plan shares available for future grants 87,794 ======
In connection with the issuance of certain non-plan options granted to consultants for various financial consulting and marketing services, the Company recorded non-cash stock compensation expense of $100,800 and $54,996 for the twelve months ended December 31, 1996 and December 31, 1995, respectively, and $10,000 for the four months ended December 31, 1994. The Company established the Automobile Protection Corporation Profit Sharing and 401(k) Plan (the "Plan") at the beginning of 1996. For 1996, the Company voluntarily matched employee contributions (subject to limitations), by purchasing the Company's common stock on the open market. During 1996, the Plan purchased 15,018 shares of the Company's common stock at a total cost of $64,692. Additionally, the Company purchased 29,334 shares of its common stock at a cost of $119,683 as a profit sharing contribution. Employer matching and profit sharing contributions vest over five years based on years of service. NOTE 8 PREFERRED STOCK: CLASS C REDEEMABLE PREFERRED STOCK: The Company issued 300 shares of Class C Redeemable Preferred Stock for $1.00 per share to its principal shareholders in 1988. The holders of the Class C Redeemable Preferred Stock, as a class, shall be entitled to elect a majority of the Board of Directors irrespective of any ownership of the Company's common stock. There are no dividend rights attached to the Class C Redeemable Preferred Stock. In the event of the Company's liquidation, the holders of the Class C Redeemable Preferred Stock will be entitled to $.01 per share. All the Class C Redeemable Preferred Stock is subject to mandatory redemption by the Company at $.01 per share on September 11, 1998. CLASS D PREFERRED STOCK: In 1987, the Board of Directors authorized the issuance of 5,000,000 shares of Class D Preferred Stock, with a $.01 par value. The rights and preferences of the Class D Preferred Stock are determined at the discretion of the Board of Directors. No Class D Preferred Stock is issued or outstanding. 22 NOTE 9 COMMITMENTS AND CONTINGENCIES: The Company leases its office space, certain office equipment and vehicles under non-cancelable operating lease agreements. Future minimum annual rental payments under these leases as of December 31, 1996 are: Year Amount ---- ------ 1997 $ 291,711 1998 269,542 1999 249,799 2000 249,690 2001 68,064 ---------- $1,128,806 ========== Rent expense for all operating leases for the twelve months ended December 31, 1996, December 31, 1995 and August 31, 1994 was $287,000, $314,000 and $330,000, respectively. Rent expense for the four months ended December 31, 1994 and December 31, 1993 was $108,000 and $103,000, respectively. The Company renewed its associate sponsorship agreement with Joe Gibbs Racing, Inc. for 1997 and has also made commitments to sponsor racing events in Atlanta, Charlotte and Talladega. Commitments for 1997 approximate $1,200,000, of which $167,000 was prepaid at December 31, 1996. The Company expensed $1,274,000 in 1996 and $98,000 in 1995 related to motorsports activities. NOTE 10 OTHER ITEM: The Company filed a complaint against Everest Reinsurance Company (formerly Prudential Reinsurance Company, hereinafter "Everest") in September 1996 in the United States District Court, Northern District of Georgia, Atlanta division. The complaint arises from the improper denial of valid claims under various assumption of liability endorsements issued by Everest to participating dealers in 1991. In October 1996, Everest filed a motion to dismiss, asserting that the liquidation order in the insolvency of National Colonial Insurance Company ("NCIC") enjoins Everest from making a payment under the reinsurance agreement to anyone, other than the liquidator of NCIC. The Company is awaiting the Court's decision on Everest's motion to dismiss. The Company is funding the claims submitted by dealers and has paid $225,000 through December 31, 1996. The Company estimates that claims and related expenses subsequent to December 31, 1996 will be an additional $650,000. The Company is vigorously pursuing this action against Everest; however, in view of the length of time that it may take to resolve the litigation and the uncertain outcome, the Company has recorded the total amount it has paid and expects to pay of $875,000 in the consolidated statement of income for the year ended December 31, 1996. 23 AUTOMOBILE PROTECTION CORPORATION - APCO ---------------------------------------- SCHEDULE II: Valuation and Qualifying Accounts ---------------------------------------------- FORM 10-K --------- Balance at Charged to Balance beginning of costs and at end of Description period expenses Deductions period - ------------------------------------------------------------------------------ Year ended December 31, 1996: - ----------------------------- Allowance for doubtful accounts $ 45,000 $ 35,031 $ 50,031 $ 30,000 Year ended December 31, 1995: - ----------------------------- Allowance for doubtful accounts 61,000 1,367 17,367 45,000 Four months ended December 31, 1994: - ------------------------------------ Allowance for doubtful accounts 58,000 3,000 61,000 Year ended August 31, 1994: - --------------------------- Allowance for doubtful accounts 125,549 5,728 73,277 58,000 24 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - -------------------------------------------------------------------------------- FINANCIAL DISCLOSURE. - --------------------- Since inception, the Company has not changed accountants and has had no disagreement on any matter of accounting principles or practices or financial statement disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - ------------------------------------------------------------ The directors and executive officers of the Company and their positions are listed below, followed by a brief description of their business experience during the past five years. Director Name Age Since Position - -------------------------------------------------------------------------------- Martin J. Blank 50 1984 Chairman of the Board, Chief Operating Officer, Secretary and Director Larry I. Dorfman 41 1984 President, Chief Executive Officer and Director Anthony R. Levinson 39 - Chief Financial Officer, Treasurer Howard C. Miller 70 1989 Director Mechlin D. Moore 66 1991 Director MARTIN J. BLANK, a co-founder of the Company, has served as Secretary and Director since its incorporation in September 1984 and as the Chairman of the Board and Chief Operating Officer since April 1988. Mr. Blank is an attorney admitted to the bar in the States of Georgia and California. Mr. Blank's experience prior to co-founding the Company includes the practice of law and representation and financial management for professional athletes. LARRY I. DORFMAN, a co-founder of the Company, has served as President and Director since its incorporation in September 1984 and as Chief Executive Officer since April 1988. Prior to co-founding the Company, Mr. Dorfman was Vice President-Sales for Paymaster Checkwriter Company, Inc. in Atlanta with responsibility for the direction and supervision of its sales force. ANTHONY R. LEVINSON has served as Chief Financial Officer and Treasurer of the Company since November 1993. Prior to APCO, Mr. Levinson was with the accounting firm, Price Waterhouse, LLP. Mr. Levinson is a Certified Public Accountant in the State of Georgia. HOWARD C. MILLER has served as Director of the Company since January 1989. Mr. Miller currently serves on the audit committee of the United States Olympic Committee and as a Director of Stone Container Corporation. Mr. Miller's past experience includes President and CEO of Avis, Inc., Vice President of ITT, President and CEO of Canteen Corporation. MECHLIN D. MOORE has served as Director of the Company since June 1991. Mr. Moore is an independent consultant in insurance communication and marketing. Mr. Moore's past experience includes President of the Insurance Information Institute and Senior Vice President of United Air Lines, Inc. Directors are elected by the stockholders at each annual meeting (or in the case of a vacancy, are appointed by the directors then in office) to serve until the next annual meeting or until their successors are elected and qualified. Officers serve at the discretion of the Board of Directors. 25 COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's officers, directors and persons who beneficially own more than ten percent of a registered class of the Company's equity securities ("ten -percent stockholders") to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC") and with the National Association of Securities Dealers, Inc. ("NASD"). Officers, directors and ten-percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, the Company believes that all its officers, directors and ten-percent stockholders complied with the Section 16(a) reporting requirements for the year ended December 31, 1996. ITEM 11. EXECUTIVE COMPENSATION. - -------------------------------- Pursuant to General Instruction G (3), reference is made to the information contained in the Company's definitive proxy statement for its 1997 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or before April 30, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - -------------------------------------------------------------------------------- Pursuant to General Instruction G (3), reference is made to the information contained in the Company's definitive proxy statement for its 1997 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or before April 30, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------------------------------------------------------- Not applicable. 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - -------------------------------------------------------------------------- The following documents are filed as part of this report under Part II Item 8: FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. Reference is made to the Index to Financial Statements and Financial Statement Schedules included in Item 8 of Part II hereof, where such documents are listed. EXHIBITS AS REQUIRED BY ITEM 601 OF REGULATION S-K: Exhibit Number Description Page - ------ ----------- ---- 3(a) Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1(a) to the Registrant's Registration Statement on Form S-1 (file number 33-22279) filed with the Commission on June 3, 1988). * 3(b) Certificate of Amendment to Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (file number 33-22279) filed with the Commission on June 3, 1988). * 3(c) By-Laws (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (file number 33-22279) filed with the Commission on June 3, 1988). * 4(a) Certificate of Designation, Preferences and Rights of Series 1 Class D Preferred Stock (incorporated by reference to Registrant's Current Report on Form 8-K filed with the Commission on December 15, 1988). * 4(b) Certificate of Designation, Preferences and Rights of Series 2 Class D Preferred Stock (incorporated by reference to Registrant's Current Report on Form 8-K filed with the Commission on March 15, 1989). * 10(a) 1988 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (file number 33-22279) filed with the Commission on June 3, 1988). * 10(b) Outside Directors' Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (file number 33-22279) filed with the Commission on June 3, 1988). * 27 10(c) Cover Note Between Byas, Mosley & Co., Ltd. and The Aegis Group, Inc. dated June 6, 1991 (incorporated by reference to Exhibit 10(h) to the Registrant's Annual Report on Form 10-K for the year ended August 31, 1991 as filed with the Commission on December 13, 1991). * 10(d) Lease Agreement between Registrant and Dunwoody Shallowford Partners, L.P. dated July 27, 1989 (incorporated by reference to Exhibit 10(e) to the Registrant's Annual Report on Form 10-K filed with the Commission on November 30, 1989) * 10(e) Third Amendment to Lease Agreement between Registrant and Dunwoody Shallowford Partners, L.P. dated January 27, 1995 (incorporated by reference to Exhibit 10(f) to the Registrant's Annual Report on Form 10-K filed with the Commission on March 29, 1996) * 10(f) Fourth Amendment to Lease Agreement between Registrant and Dunwoody Shallowford Partners, L.P. dated May 16, 1995 (incorporated by reference to Exhibit 10(g) to the Registrant's Annual Report on Form 10-K filed with the Commission on March 29, 1996) * 10(g) Complaint filed by Automobile Protection Corporation against Everest Reinsurance Company in the United States District Court, Northern District of Georgia, Atlanta Division (96-CV-2368-JE) on September 12, 1996 32 11 Statement Re: Computation of Per Share Earnings 44 28 22 Subsidiaries of the Registrant: Name Of State of Subsidiary Incorporation ---------- ------------- APCO Finance and Insurance Systems, Inc. Georgia Aftermarket Profit Plus, Inc. Georgia W.I.N. Systems, Inc. Georgia The Aegis Group, Inc. Georgia Automobile Protection Corporation - APCO Florida 23 Consent of Independent Accountants (Price Waterhouse) 45 27 Financial Data Schedule 47 _____________________________ * Incorporated by reference to the referenced document previously filed by the registrant with the Commission. Reports on Form 8-K: None 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Automobile Protection Corporation - APCO has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: AUTOMOBILE PROTECTION CORPORATION - APCO /s/ Larry Dorfman - -------------------------------------------------------------------------------- By: Larry I. Dorfman Date: March 25, 1997 President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Larry Dorfman - -------------------------------------------------------------------------------- Larry I. Dorfman Date: March 25, 1997 President (Principal Executive Officer) and Director /s/ Martin Blank - -------------------------------------------------------------------------------- Martin J. Blank Date: March 25, 1997 Chairman of the Board, Secretary (Principal Operating Officer) and Director /s/ Anthony Levinson - -------------------------------------------------------------------------------- Anthony R. Levinson Date: March 25, 1997 Chief Financial Officer (Principal Accounting and Financial Officer) /s/ Howard Miller - -------------------------------------------------------------------------------- Howard C. Miller Date: March 25, 1997 Director /s/ Mechlin Moore - -------------------------------------------------------------------------------- Mechlin D. Moore Date: March 25, 1997 Director 30 EXHIBITS -------- TO ANNUAL REPORT ON FORM 10-K ----------------------------- DECEMBER 31, 1996 ----------------- EXHIBIT No. - ----------- 10(g) Complaint filed by Automobile Protection Corporation against Everest Reinsurance Company in the United States District Court, Northern District of Georgia, Atlanta Division (96-CV-2368-JE) on September 12, 1996 11 Statement Re: Computation of Per Share Earnings 23 Consent of Independent Accountants (Price Waterhouse) 27 Financial Data Schedule 31 EX-10 2 EXHIBIT 10 (G) EXHIBIT 10 (g) -------------- FORM 10-K --------- DECEMBER 31, 1996 ----------------- UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF GEORGIA ATLANTA DIVISION AUTOMOBILE PROTECTION CORPORATION, ) ) Plaintiff, ) ) CIVIL ACTION NO. v. ) ) ----------------- EVEREST REINSURANCE COMPANY, ) ) Defendant. ) ) COMPLAINT Plaintiff Automobile Protection Corporation ("APCO") brings this Complaint for damages and declaratory relief pursuant to 28 U.S.C. ss.ss. 1332(a)(1) and 2201 against defendant, Everest Reinsurance Company. Plaintiff seeks damages for defendant's breach of its obligation to pay Losses covered under certain Assumption of Liability Endorsements ("ALEs") issued by or due from defendant and a declaration of defendant's obligation to continue to pay such Losses as they are incurred. PARTIES, JURISDICTION AND VENUE ------------------------------- 1. Plaintiff APCO is a corporation organized under the laws of the State of Georgia, whose principal place of business is in Atlanta, DeKalb County, Georgia. 2. Defendant Everest Reinsurance Company, which until April 2, 1996 was known as Prudential Reinsurance Company (collectively "Pru Re"), is a reinsurance company and, upon information and belief, is a corporation organized under the laws of the state of Delaware, whose principal place of business is Newark, New Jersey. 32 3. Pru Re is and for many years has been licensed as an insurance company by the State of Georgia and conducts the business of insurance in Georgia. Pru Re is also and for many years has been registered to do business in Georgia. 4. Pru Re has appointed Rachel Searcy, 66 Luckie Street, Atlanta, Fulton County, Georgia 30303, as its registered agent on whom all process of law may be served in any action. 5. This court has jurisdiction over this matter pursuant to 28 U.S.C. ss. 1332(a)(1), because the matter in controversy exceeds Fifty Thousand and No/100 Dollars ($50,000.00), exclusive of interest and costs, and is between citizens of different states. 6. Venue is proper in this district pursuant to 28 U.S.C. ss. 1391(a). FACTUAL ALLEGATIONS ------------------- 7. APCO's business (hereinafter referred to as "the APCO programs") consists of acting as a marketer and administrator of extended warranty and/or mechanical breakdown vehicle service contracts (collectively "VSCs"). 8. Each APCO program dealer engages APCO to service its VSCs and appoints APCO as its agent to secure and maintain insurance insuring the dealer's obligations under the VSCs. 9. On August 1, 1991, the primary insurance of the APCO program was moved to National Colonial Insurance Company ("NCIC"), an insurance company organized under the laws of the State of Kansas with administrative offices in Ridgefield, New Jersey. NCIC is now in liquidation. 10. The NCIC coverage was, in turn, reinsured by Pru Re pursuant to a Variable Quota Share Reinsurance Agreement for Private Passenger Automobile Liability, 33 Automobile Physical Damage, Excess Mechanical Breakdown and Related Business (the "Reinsurance Treaty"), covering NCIC's entire book of vehicle service contract insurance. 11. Because APCO and many of the APCO program dealers did not regard NCIC as sufficiently sound financially to accept NCIC coverage alone, APCO insisted on the issuance of Assumption of Liability Endorsements ("ALEs") by Pru Re. 12. In essence, the ALEs are endorsements to the NCIC insurance policies and separate agreements by Pru Re, that, if NCIC became insolvent or bankrupt, Pru Re would become directly liable to APCO, APCO program dealers or their service contract holders as the loss payees under the ALEs for losses covered under the APCO VSCs. The ALEs provide in pertinent part as follows: In the event the Company [NCIC] and DSN [NCIC's parent corporation] are declared insolvent and/or bankrupt by courts of competent jurisdiction and, as a result thereof, are unable to pay a loss from a peril covered by the above cited [NCIC] policy, and in the event the Trust Fund is also unable to pay such loss, the Reinsurer [Pru Re] will immediately become liable to the Loss Payee for the Loss Payee's loss and will make payment directly to the Loss Payee, as its interest may appear, subject to the terms and conditions of the above cited policy and provided this Endorsement and the policy were in effect prior to the time said loss occurred. 13. On July 16, 1993, the District Court of Shawnee County, Kansas, entered an Agreed Order for Liquidation With a Finding of Insolvency ("Liquidation Order") finding NCIC to be insolvent and granting the petition of the Commissioner of Insurance of the State of Kansas to liquidate NCIC pursuant to the provisions of Kan. Stat. Ann ss. 40-3605 et seq. 14. On July 8, 1994, DSN filed for bankruptcy protection under Chapter 7 of the bankruptcy code. 15. As a result of NCIC's liquidation and DSN's bankruptcy, they have been unable to pay claims under APCO VSCs insured by NCIC and the Pru Re ALEs. In addition, by letter dated May 30, 1996, APCO was informed by the trustee that the APCO Trust Fund holding the primary reserves under the APCO program was now exhausted and unable to pay further claims. Accordingly, pursuant to the Pru Re 34 ALEs, Pru Re became liable "immediately" to pay the claims, which have to date exceeded One Hundred Thirty Thousand and No/100 Dollars ($130,000.00) and which are actuarially predicted to exceed Five Hundred Thousand and No/100 Dollars ($500,000.00), directly to APCO or into the APCO Trust Fund for the benefit of the APCO program dealers and service contract holders who are the loss payees under the ALEs. 16. By letter dated January 29, 1996, APCO requested that Pru Re either establish a claims imprest account or make arrangements to replenish the existing APCO Trust Fund in amounts sufficient to pay all valid claims under the APCO service contracts. To date, Pru Re has not honored this request or any of its obligations under the ALEs. 17. In direct contradiction to the express terms of the ALEs, Pru Re has asserted that the purported cancellation of NCIC policies by the NCIC liquidator has cancelled its obligations under the ALEs, even though the ALEs were issued for the specific purpose of providing protection to APCO and its dealers if NCIC were to become insolvent. 18. Pru Re has also alleged that some ALEs were never officially issued to APCO or its dealers. However, APCO consented to the conversion to NCIC and marketed the conversion to its dealers based primarily on Pru Re's representations through NCIC that it had the necessary ALEs. 19. NCIC had actual, implied and apparent authority to issue the ALEs, with effective dates of August 1, 1991, directly to properly enrolled APCO program dealers insured by NCIC. Moreover, by letter dated February 23, 1990, Pru Re confirmed to NCIC the consummation of a reinsurance agreement covering "all aspects of the automobile warranty business now being undertaken by National Colonial and provided to them by DSN Dealer Service Network, Inc." 20. By letter dated June 4, 1991, NCIC advised APCO that Pru Re had agreed to provide ALEs to all of those APCO program dealers insured by NCIC who requested one. 35 21. By letter dated July 12, 1991, APCO informed NCIC that each APCO program dealer insured by NCIC required an ALE from Pru Re. 22. By letter dated July 17, 1991, NCIC again confirmed that "National Colonial has been authorized and empowered by Prudential Re to issue these Endorsements to Dealers properly enrolled in the APCO Service Contract Programs and insured by National Colonial." 23. By letter dated July 26, 1991, DSN reiterated to APCO that "Pru Re has agreed to issue Assumption of Liability ("cut-through") Endorsements to dealers that you service." 24. NCIC had actual, implied and apparent authority to make these representations and promises on behalf of Pru Re. 25. Pru Re ratified NCIC's actions and representations. 26. NCIC later represented that due to a delay in printing the final version of the ALEs, it was unable to deliver all of the ALEs to APCO program dealers by August 1, 1991, the date of the conversion to NCIC. By letter dated August 6, 1991, NCIC promised that this delay would "not in any material way adversely impact the continued underwriting of National Colonial and Pru Re of the APCO service contract program" and that "[o]nce the ALEs have been delivered they will be executed retroactive with the inception date of the attendant National Colonial Insurance Company documentation." 27. Pru Re is therefore liable as if all ALEs had been formally issued with August 1, 1991 effective dates. 28. Pru Re has also alleged that APCO's only remedy is a complaint in the NCIC liquidation. 36 29. NCIC and DSN have not been named as defendants to this action because of their respective insolvency and bankruptcy and, more importantly, because they are neither necessary nor appropriate parties. The very purpose of the ALEs is to ensure prompt, direct payment by Pru Re to loss payees in the event that NCIC, DSN, and the Trust Fund are unable to pay losses under VSCs covered by the ALEs. 30. The ALEs expressly provide that Pru Re's obligations thereunder were to become due immediately upon the insolvency and/or bankruptcy of NCIC and DSN and the depletion of the Trust Fund. 31. To date, Pru Re has refused to honor its obligations under the ALEs on the erroneous grounds that it is barred by the Liquidation Order from making any payments to APCO. Specifically, Pru Re relies on Paragraph C of the Liquidation Order, which provides that "all reinsurance companies involved with [NCIC] be and are restrained from making any settlements with any claimant or policyholder of [NCIC] or any other person other than the petitioner as Liquidator . . . ." 32. On information and belief, at the time Pru Re issued the ALEs, provisions such as paragraph C of the Liquidation Order were common provisions in insurance company liquidation orders. 33. On information and belief, when Pru Re issued the ALEs, it either knew or recklessly disregarded the fact that such injunctions were common in the liquidation of insolvent insurance companies. 34. On information and belief, Pru Re also knew or recklessly disregarded the fact that it would eventually assert such an injunction as a barrier to performance of its obligations under the ALEs and, therefore, that its promise to perform its obligations under the ALEs upon NCIC's insolvency were false when made. 35. Nevertheless, Pru Re made these false promises and failed to disclose this alleged barrier to its performance of the ALEs in order to induce APCO and its dealers to convert the APCO program to coverage under NCIC and Pru Re. 37 36. APCO and its dealers reasonably relied on Pru Re's false promises and failure to disclose this alleged barrier to its performance of the ALEs by converting the APCO program to coverage under NCIC and Pru Re. 37. Pru Re's actions constitute fraudulent conduct. 38. Pru Re has refused in bad faith to pay losses covered by the Pru Re ALEs and NCIC policies for more than sixty (60) days after demand for such payment by the holders of the ALEs and NCIC policies. 39. Pru Re has acted in bad faith, has been stubbornly litigious, and has caused plaintiff unnecessary trouble and expense. 40. As a result of Pru Re's refusal to honor its obligations under the ALEs, in order to preserve its business and reputation, APCO has been forced to advance funds to pay losses under VSCs covered by the Pru Re ALEs. 41. To date, those Losses exceed One Hundred Thirty Thousand and No/100 Dollars ($130,000.00). 42. Total Losses payable under the ALEs are predicted to exceed Five Hundred Thousand and No/100 Dollars ($500,000.00). CAUSES OF ACTION ---------------- COUNT ONE --------- BREACH OF CONTRACT ------------------ 43. The allegations contained in paragraphs 1 - 34 are incorporated herein by reference. 38 44. As a result of NCIC's insolvency, DSN's bankruptcy, and the depletion of the APCO Trust Fund, Pru Re in March 1996 became directly liable under the ALEs to APCO and covered APCO dealers and service contract holders for all covered Losses. 45. As a result of Pru Re's failure and refusal to pay these Losses covered by the ALEs, APCO has been damaged in an amount that to date exceeds One Hundred Thirty Thousand and No/100 Dollars ($130,000.00), plus interest, costs and attorney's fees, and is predicted to exceed Five Hundred Thousand and No/100 Dollars ($500,000.00). COUNT TWO --------- INNOCENT, NEGLIGENT AND ----------------------- FRAUDULENT MISREPRESENTATION ---------------------------- 46. The allegations contained in paragraphs 1 - 37 are incorporated herein by reference. 47. Pru Re authorized NCIC, acting as its agent, to make the representations to APCO and APCO program dealers described above. Alternatively, including by accepting and retaining APCO's premiums, Pru Re ratified these representations. 48. NCIC's representations on behalf of Pru Re were intended to induce, and did induce, detrimental reliance by APCO and its dealers. 49. At the time Pru Re and NCIC made these representations, Pru Re and NCIC knew or recklessly disregarded the fact that they were false. 50. As a result, APCO has been damaged in an amount that to date exceeds One Hundred Thirty Thousand and No/100 Dollars ($130,000.00), plus interest, costs and attorney's fees, and is predicted to exceed Five Hundred Thousand and No/100 Dollars ($500,000.00). 39 COUNT THREE ----------- PROMISSORY ESTOPPEL ------------------- 51. The allegations contained in paragraphs 1 - 42 are incorporated herein by reference. 52. As a result of Pru Re's promises, on which Pru Re reasonably should have expected APCO and its program dealers to rely and on which they did rely, Pru Re should be estopped to deny its liability to APCO and its dealers for all losses that would have been covered by the ALEs, including the promised ALEs that were never formally issued. 53. Accordingly, Pru Re is liable to APCO and its dealers for losses incurred under the promised but unissued ALEs, which Pru Re is estopped to deny, in an amount to be determined at trial. COUNT FOUR ---------- FRAUD ----- 54. The allegations contained in paragraphs 1 - 50 are incorporated herein by reference. 55. As a result of Pru Re's fraud, APCO and its program dealers and service contract holders have incurred unpaid losses that should have been paid by Pru Re under the ALEs. In order to preserve its business and reputation, APCO has been forced to cover these Losses. 56. Pru Re's fraud has damaged APCO and its program dealers and service contract holders in an amount to be determined at trial. COUNT FIVE ---------- NEW JERSEY CONSUMER FRAUD ACT ----------------------------- 57. The allegations contained in paragraphs 1 - 60 are incorporated herein by reference. 40 58. Pursuant to N.J. Stat. Ann. ss. 56:8-2, "[t]he act, use or employment by any person of any unconscionable commercial practice, deception, fraud, false pretense, false promise, misrepresentation, or the knowing, concealment, suppression, or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise or real estate, or with the subsequent performance of such person as aforesaid, whether or not any person has in fact been misled, deceived or damaged thereby, is declared to be an unlawful practice; . . . ." 59. Pru Re authorized NCIC, acting as Pru Re's agent, to make the representations set forth above. 60. The misrepresentations of Pru Re and its agent NCIC constitute an unlawful practice under N.J. Stat. Ann. ss. 56:8-2. 61. In addition, Pru Re's actions, in connection with the conversion of the APCO program to coverage under NCIC and Pru Re, of promising to perform its obligations under the ALEs immediately upon NCIC's insolvency when it knew or recklessly disregarded the fact that it would in fact assert standard injunctions in the Liquidation Order as a barrier to such performance constitute an unlawful practice under N.J. Stat. Ann. ss. 56:8-2. 62. As a result of Pru Re's unlawful practices, APCO and APCO program dealers and service contract holders have incurred unpaid losses that would have otherwise been covered by Pru Re ALEs. In order to preserve its business, APCO has been forced to advance funds to pay these losses. 63. As a result of Pru Re's unlawful practices, APCO and its dealers have been damaged in an amount to be determined at trial. COUNT SIX --------- REFORMATION ----------- 64. The allegations contained in paragraphs 1 - 67 are incorporated herein by reference. 41 65. Pru Re authorized NCIC, acting as Pru Re's agent, to make the representations and promises set forth above. 66. In reliance on these representations and promises by Pru Re's agent, APCO converted the APCO program to coverage under NCIC and Pru Re and persuaded many APCO program dealers to continue with the APCO program despite this conversion. 67. Contrary to these representations, some of the ALEs that were issued indicated effective dates subsequent to August 1, 1991. 68. As a result, APCO is entitled to a reformation of those ALEs issued with effective dates later than August 1, 1991 to reflect effective dates of August 1, 1991. COUNT SEVEN ----------- DECLARATORY JUDGMENT -------------------- 69. The allegations contained in paragraphs 1 - 72 are incorporated herein by reference. 70. An actual controversy exists between APCO and Pru Re about Pru Re's obligation under the ALEs to pay Losses. 71. As a result of the foregoing, APCO is entitled to a declaration that Pru Re must "immediately" pay directly to APCO or into the APCO Trust Fund for the benefit of APCO's dealers or service contract holders, as the loss payees under ALEs issued by or due from Pru Re, all Losses arising under VSCs sold by APCO dealers while insured by NCIC. 42 PRAYER FOR RELIEF WHEREFORE, Plaintiff prays that the Court grant the following relief: (1) A declaration that defendant Pru Re is liable to pay directly to APCO or into the APCO Trust Fund for the benefit of APCO's dealers or service contract holders, as the loss payees under ALEs issued by or due from defendant, all losses arising under VSCs sold by APCO and its program dealers while insured by NCIC; (2) Compensatory damages in an amount to be determined; (3) Additional Damages in the amount of twenty-five percent of Pru Re's liability for accrued losses under the ALEs as provided by O.C.G.A. ss. 33-4-6 (1992); (4) Exemplary damages; (5) Treble damages as provided by N.J. Stat. Ann ss. 56:8-19 (1989); (6) Reasonable attorney's fees and costs pursuant to O.C.G.A. ss. 33-4-6 (1992), N.J. Stat. Ann ss. 56:8-19 (1989) and other applicable law; (7) Prejudgment interest; (8) Such other, additional and further relief as the Court deems just and appropriate. Respectfully submitted this 12th day of September, 1996. ------------------------------- Caroline W. Spangenberg Georgia Bar No. 669055 Attorney for Plaintiff KILPATRICK & CODY, L.L.P. Suite 2800 1100 Peachtree Street Atlanta, Georgia 30309-4530 (404) 815-6500 43 EX-11 3 EXHIBIT 11 AUTOMOBILE PROTECTION CORPORATION - APCO ---------------------------------------- EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS ---------------------------------------------------------- FORM 10-K --------- DECEMBER 31, 1996 -----------------
For the For the Four months For the year ended year ended ended year ended December 31, December 31, December 31, August 31, 1996 1995 1994 1994 - -------------------------------------------------------------------------------------------------------- PRIMARY Weighted average number of shares outstanding 10,156,994 6,703,332 5,679,895 5,183,000 Net effect of dilutive stock options based on the treasury stock method, using average market price 1,000,006 827,668 1,195,105 635,451 - -------------------------------------------------------------------------------------------------------- 11,157,000 7,531,000 6,875,000 5,818,451 ======================================================================================================== Net income $ 1,563,919 $ 1,525,582 $ 269,747 $ 912,528 ======================================================================================================== Per share $ 0.14 $ 0.20 $ 0.04 $ 0.16 ======================================================================================================== FULLY DILUTED Weighted average number of shares outstanding 10,156,994 6,703,332 5,679,895 5,183,000 Net effect of dilutive stock options based on the treasury stock method, using the year-end market price which was higher than the average market price 1,000,006 900,668 1,195,105 762,997 - -------------------------------------------------------------------------------------------------------- 11,157,000 7,604,000 6,875,000 5,945,997 ======================================================================================================== Net income $ 1,563,919 $ 1,525,582 $ 269,747 $ 912,528 ======================================================================================================== Per share $ 0.14 $ 0.20 $ 0.04 $ 0.15 ========================================================================================================
44 EX-23 4 EXHIBIT 23 AUTOMOBILE PROTECTION CORPORATION - APCO ---------------------------------------- EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS --------------------------------------------- FORM 10-K --------- DECEMBER 31, 1996 ----------------- We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-86594) of Automobile Protection Corporation - APCO of our report dated March 12, 1997 appearing on page 12 of this Form 10-K. PRICE WATERHOUSE LLP March 28, 1997 Atlanta, GA 45 AUTOMOBILE PROTECTION CORPORATION - APCO ---------------------------------------- EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS --------------------------------------------- FORM 10-K --------- DECEMBER 31, 1996 ----------------- We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 333-3473) of Automobile Protection Corporation - APCO of our report dated March 12, 1997 appearing on page 12 of this Form 10-K. PRICE WATERHOUSE LLP March 28, 1997 Atlanta, GA 46 EX-27 5 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF AUTOMOBILE PROTECTION CORPORATION - APCO FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 12-MOS DEC-31-1996 DEC-31-1996 6,967,904 9,474,028 2,913,453 30,000 0 27,170,827 2,834,424 1,716,894 31,260,823 11,947,315 0 0 300 10,564 19,199,484 31,260,823 67,208,406 67,208,406 52,498,886 52,498,886 0 0 0 2,526,919 963,000 1,563,919 0 0 0 1,563,919 .14 .14
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