-----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, Ofm5vG3PYcvTBpMEgF1KecvU1ZywMEdLbx3ZDEPfx8fP3pi5w3m/iJ57QgDr3J7A Z3/vii7sr6nVkSL1Ka2bfw== 0001042910-98-000213.txt : 19980331 0001042910-98-000213.hdr.sgml : 19980331 ACCESSION NUMBER: 0001042910-98-000213 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 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: SEC FILE NUMBER: 000-17231 FILM NUMBER: 98578649 BUSINESS ADDRESS: STREET 1: 15 DUNWOODY PK DR STE 100 CITY: ATLANTA STATE: GA ZIP: 30338 BUSINESS PHONE: 4043947070 10-K 1 ANNUAL REPORT 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 For the fiscal year ended December 31, 1997 ----------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-17231 ------- 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 ( ) No (X) Based on the average of the bid and asked prices ($9.91) at the close of business on March 6, 1998, the aggregate market value of the Registrant's common stock held by non-affiliates of the Registrant was $92,070,000. The number of shares outstanding of the Registrant's common stock, $.001 par value, was 11,355,277 on March 6, 1998. DOCUMENTS INCORPORATED BY REFERENCE: The information required by Items 10 - 12 are incorporated by reference from the Registrant's Proxy Statement for the 1998 Annual Meeting of Stockholders. 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 recently introduced service contract products for the recreational vehicle industry. A subsidiary of 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 a dealer to provide for the repair or replacement of designated parts of a vehicle for the term of the agreement, which can extend to 7 years/100,000 miles depending on vehicle eligibility. VSCs are available for new, used and leased automobiles, light trucks and recreational vehicles. Dealers often engage a third party administrator, such as the Company, to design a VSC program, to 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, which the Company does through unrelated insurers, including: (a) Greenwich Insurance Company, a wholly-owned subsidiary of NAC Re Corporation, which is rated "A+" (Superior) by A.M. Best; (b) Indian Harbor Insurance Company, a wholly-owned subsidiary of NAC Re Corporation, which is rated "A+" (Superior) by A.M. Best; (c) Certain Underwriters at Lloyd's of London, which is rated "A" (Excellent) by A.M. Best; and (d) CIGNA Property and Casualty companies, which are rated "A-" (Excellent) by A.M. Best. Greenwich, Indian Harbor and CIGNA may choose to purchase reinsurance from Lloyd's, NAC Re Corporation or other reinsurers. 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 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) 2 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. 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 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 6, 1998, 130 individual sales representatives actively represented the Company. The Company supports the sales representatives with a marketing department which is available to provide proposal assistance, competitive analysis, training of dealership personnel and program installation. 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 14% and 11% of the Company's revenues for 1997 and 1996, respectively, and less than 10% prior to 1996. To promote EasyCare(R) products, the Company extensively utilizes motorsports promotions, including sponsorship of the Joe Gibbs Racing, Inc. NASCAR car driven by Bobby Labonte, sponsorship of individual races and sponsorship of race cars through arrangements with automobile dealers. Joe Gibbs is a national spokesperson for the Company and appears in trade publications, videos and in person at Company sponsored events. In March 1998, the Company's subsidiary, The Aegis Group, Inc., entered into a three year agreement with Allstate Insurance Company to administer a mechanical breakdown insurance policy to be marketed and underwritten by Allstate Insurance Company under the name Allstate Parts & Labor Plus. In March 1998, the Company's subsidiary, The Aegis Group, Inc., entered into a five year agreement with Banc One Insurance Services Corporation to administer a vehicle service contract program to be marketed by Banc One Insurance Services Corporation under the name The One(R) Care. 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. 3 Employees At March 6, 1998, the Company had 142 employees. The Company is not subject to any collective bargaining agreements and considers its relationships with employees to be good. 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 primary operations from approximately 20,000 sq. ft. of leased office space at 15 Dunwoody Park Drive, Suite 100, Atlanta, Georgia 30338 under leases which expire between 1999 and 2001. Additionally, the Company leases approximately 1,600 sq. ft. of office space in Charlotte, North Carolina to conduct its motorsport sponsorship programs under a lease which expires in 2000. 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. On August 12, 1997, the U.S. Judge issued an order which denied Everest's motion to dismiss. Both parties have been conducting discovery since the last order was issued. The Company is funding the claims submitted by dealers and has paid $525,000 through December 31, 1997, which amount has been charged against the reserve recorded in 1996. The Company is vigorously pursuing this action against Everest. 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 1996: First Quarter $2.69 $4.31 Second Quarter $3.44 $4.94 Third Quarter $3.13 $5.38 Fourth Quarter $4.00 $5.69 Calendar year 1997: First Quarter $3.38 $5.00 Second Quarter $3.19 $4.00 Third Quarter $3.50 $5.38 Fourth Quarter $4.75 $7.63 Calendar year 1998: First Quarter* $6.00 $10.13 * through March 6, 1998 The closing bid price for the common stock on March 6, 1998 was $9.88. There are approximately 190 holders of record of the Company's common stock. Additionally, the Company believes there are approximately 3,600 beneficial owners of its common stock, 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 1997, the Company issued the following unregistered securities:
Exemption Consideration from Date of sale Title of security Number sold received registration Option terms ------------ ----------------- ----------- -------- ------------ ------------ 10/97 Options to 255,000 Options granted 4(2) Exercisable purchase for services - pro-rata over 5 common stock additional consid- years, at $5.00 - granted to eration will be $5.09 per share customers received upon exercise of options
5 ITEM 6. SELECTED FINANCIAL DATA. - -------------------------------- Set forth below is a summary of the selected financial data of the Company:
Four months Year ended Year ended Year ended ended Year ended Year ended December 31, December 31, December 31, December 31, August 31, August 31, 1997 1996 1995 1994 1994 1993 ---- ---- ---- ---- ---- ---- Statement of Operations: Total revenues $ 93,935,167 $ 67,208,406 $ 49,210,774 $ 11,197,168 $ 26,553,554 $ 23,507,191 Income (loss) before provision for income taxes and cumulative effect of accounting change 6,530,716 2,526,919 2,447,582 413,747 1,290,453 (232,047) Provision for income taxes (2,480,000) (963,000) (922,000) (144,000) (445,705) Cumulative effect of accounting change 67,780 - ------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 4,050,716 $ 1,563,919 $ 1,525,582 $ 269,747 $ 912,528 $ (232,047) ============================================================================================================================== Per share data: Basic Earnings (loss) before cumulative effect of accounting change $ 0.38 $ 0.16 $ 0.23 $ 0.05 $ 0.17 $ (0.04) Cumulative effect of accounting change 0.01 - ------------------------------------------------------------------------------------------------------------------------------ Earnings (loss) $ 0.38 $ 0.16 $ 0.23 $ 0.05 $ 0.18 $ (0.04) ============================================================================================================================== Diluted Earnings (loss) before cumulative effect of accounting change $ 0.35 $ 0.14 $ 0.21 $ 0.04 $ 0.15 $ (0.04) Cumulative effect of accounting change 0.01 - ------------------------------------------------------------------------------------------------------------------------------ Earnings (loss) $ 0.35 $ 0.14 $ 0.21 $ 0.04 $ 0.16 $ (0.04) ============================================================================================================================== As of As of As of As of As of As of December 31, December 31, December 31, December 31, August 31, August 31, 1997 1996 1995 1994 1994 1993 ---- ---- ---- ---- ---- ---- Balance Sheet Data: Working capital $ 21,034,430 $ 15,223,512 $ 11,270,716 $ 3,317,098 $ 3,134,005 $ 2,164,306 Total assets $ 39,315,050 $ 31,260,823 $ 19,592,461 $ 9,352,256 $ 8,398,317 $ 6,720,107 Total liabilities $ 15,039,683 $ 12,050,775 $ 4,898,455 $ 3,931,752 $ 4,150,491 $ 3,405,559 Shareholders' equity $ 24,275,367 $ 19,210,048 $ 14,694,006 $ 5,420,504 $ 4,247,826 $ 3,314,548
6 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, to 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, which the Company does through unrelated insurers, including: (a) Greenwich Insurance Company, a wholly-owned subsidiary of NAC Re Corporation, which is rated "A+" (Superior) by A.M. Best; (b) Indian Harbor Insurance Company, a wholly-owned subsidiary of NAC Re Corporation, which is rated "A+" (Superior) by A.M. Best; (c) Certain Underwriters at Lloyd's of London, which is rated "A" (Excellent) by A.M. Best; and (d) CIGNA Property and Casualty companies, which are rated "A-" (Excellent) by A.M. Best. Greenwich, Indian Harbor and CIGNA may choose to purchase reinsurance from Lloyd's, NAC Re Corporation or other reinsurers. 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. 7 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, 1997, the Company had working capital of $21,034,430 (compared to $15,223,512 at December 31, 1996) and investment securities with maturities greater than twelve months of $1,474,493 (compared to $2,098,089 at December 31, 1996). The increase in working capital and non-current investment securities of $5,187,322 is attributable to operations and the exercise of stock options ($723,102). The Company invests its funds in treasury securities, municipal bonds and financial instruments with maturities of less than five years and money market accounts. Results of Operations Year ended December 31, 1997 ("1997") compared to year ended December 31, 1996 - ------------------------------------------------------------------------------- ("1996"). - --------- Revenues for 1997 increased by 40% or $26,726,761 to $93,935,167 over 1996. 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 1997. EasyCare(R) revenues increased due to the introduction of additional automobile dealers to EasyCare(R) and the EasyCare(R) Certified Pre-Owned Vehicle program by the Company's independent sales representatives, increased average production by dealers and from 76% growth under the contract with American Honda Finance Corporation, which provided 14% of the Company's 1997 revenues and 11% of 1996 revenues. The Company's gross margin was 21.3% of revenues in 1997 compared to 21.9% of revenues in 1996. Gross margin is impacted by the mix of new and used, makes and models of vehicles and the types of coverage sold. The overall gross margin for 1997 reflects production from the EasyCare(R) Certified Pre-Owned Vehicle program, which has a different margin structure to the EasyCare(R) service contract and offers additional benefits to the dealer and consumer. Additionally, the volume of business under the contract with American Honda Finance Corporation, which has a lower margin than the core business, increased at a faster rate than the core business. Compensation, selling and administrative expenses for 1997 increased by 22% or $2,585,148 to $14,243,932 over 1996. The increase for 1997 is primarily attributable to compensation, printing/fulfillment and marketing costs (including motorsports promotional activities), offset by reduced legal fees. Compensation cost increased by $1,717,000 in 1997 to support the growth of the business. The Company's printing/fulfillment costs increased by $435,000 due to costs incurred in connection with higher sales volumes and new programs. Marketing costs increased by $433,000 due to additional promotional events (including motorsports) and the EasyCare(R) Certified Pre-Owned Vehicle program in the current year. The Company's motorsports related marketing costs for 1997 were $1,593,000, compared to $1,274,000 for 1996. The Company extensively utilizes motorsports to advertise its products to automobile dealers and consumers. Interest, dividend and other income for 1997 increased by 48% or $379,676 to $1,171,619 over 1996. The increase is due to the larger cash and investment securities balances on hand. The Company recorded a provision for income taxes in 1997 of $2,480,000 compared to $963,000 for 1996. The increase is primarily due to higher pretax income. 8 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. 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. 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. 9 Year 2000 problem The Company's proprietary warranty administration system was developed internally and was designed with large enough "date" fields to counteract the effect of the Year 2000 problem. It is possible that the Company's customers and vendors, working either alone or in conjunction with other software systems, will not accept input of, store, manipulate and output dates for the years 1999, 2000 or thereafter without error or interruption. The Company has conducted a review of its business systems, including its computer systems, and is querying its customers and vendors as to their progress in identifying and addressing problems that their computer systems may face in correctly processing date information as the Year 2000 approaches and is reached. However, there can be no assurance that the Company will identify all such Year 2000 problems in its computer systems or those of its customers and vendors in advance of their occurrence or that the Company will be able to successfully remedy any problems that are discovered. The expenses of the Company's efforts to identify and address such problems, or the expenses or liabilities to which the Company may become subject as a result of such problems, could have a material adverse effect on the Company's business, financial condition and results of operations. The revenue stream and financial stability of existing customers may be adversely impacted by Year 2000 problems, which could cause fluctuations in the Company's revenues. In addition, failure of the Company to identify and remedy Year 2000 problems could put the Company at a competitive disadvantage relative to companies that have corrected Year 2000 problems. 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 25 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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. PRICE WATERHOUSE LLP Atlanta, Georgia March 12, 1998 12 AUTOMOBILE PROTECTION CORPORATION - APCO CONSOLIDATED BALANCE SHEET
December 31, December 31, ------------ ------------ 1997 1996 ---- ---- ASSETS Current Assets: Cash and cash equivalents $11,297,049 $6,967,904 Trading securities, at fair value 8,067,180 5,721,730 Investment securities held to maturity 1,851,019 1,654,209 Accounts receivable, net of provision for doubtful accounts of $60,000 and $30,000 2,400,701 2,160,236 Notes receivable 2,554,978 547,446 Officer and employee receivables 250,190 205,771 Income tax receivable 452,546 Prepaid expenses 287,766 658,074 Deferred tax asset 785,882 472,805 Restricted cash 8,324,628 8,330,106 ----------------- ------------------ Total current assets 35,819,393 27,170,827 Property and equipment, net of accumulated depreciation of $2,015,368 and $1,716,894 1,220,876 1,117,530 Investment securities held to maturity, non current 1,474,493 2,098,089 Deposits to secure licenses 743,762 730,276 Deferred tax asset 18,793 39,797 Other assets 37,733 104,304 ----------------- ------------------ $39,315,050 $31,260,823 ================= ================== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Premiums, fees and taxes payable $8,324,628 $8,330,106 Accounts payable 1,255,831 1,156,118 Accrued liabilities 4,805,471 2,461,091 Income taxes payable 399,033 ----------------- ------------------ Total current liabilities 14,784,963 11,947,315 Deferred income taxes 254,420 103,160 Redeemable preferred stock 300 300 ----------------- ------------------ 15,039,683 12,050,775 ================= ================== Shareholders' equity: Common stock; $.001 par value, 40,000,000 authorized, 10,976,964 and 10,564,323 issued and outstanding 10,976 10,564 Additional paid-in capital 16,067,536 15,053,345 Retained earnings 8,196,855 4,146,139 ----------------- ------------------ Total shareholders' equity 24,275,367 19,210,048 ----------------- ------------------ Commitments ----------------- ------------------ $39,315,050 $31,260,823 ================= ==================
The accompanying notes are an integral part of these consolidated financial statements. 13 AUTOMOBILE PROTECTION CORPORATION - APCO CONSOLIDATED STATEMENT OF INCOME
Year Ended Year Ended Year Ended December 31, December 31, December 31, 1997 1996 1995 ---- ---- ---- Revenues $93,935,167 $67,208,406 $49,210,774 --------------- --------------- --------------- Cost of sales: Premium and taxes 60,233,162 43,138,395 32,354,000 Commissions and other costs 13,650,324 9,360,491 6,968,773 --------------- --------------- --------------- Total cost of sales 73,883,486 52,498,886 39,322,773 --------------- --------------- --------------- 20,051,681 14,709,520 9,888,001 --------------- --------------- --------------- Expenses: Compensation, selling and administrative 14,243,932 11,658,784 7,548,902 Depreciation and amortization 448,652 440,760 361,129 Interest, dividend and other income (1,171,619) (791,943) (469,612) Other item 875,000 --------------- --------------- --------------- 13,520,965 12,182,601 7,440,419 --------------- --------------- --------------- Income before provision for income taxes 6,530,716 2,526,919 2,447,582 Provision for income taxes 2,480,000 963,000 922,000 --------------- --------------- --------------- Net income $4,050,716 $1,563,919 $1,525,582 =============== =============== =============== Earnings per share: Basic $0.38 $0.16 $0.23 Diluted $0.35 $0.14 $0.21 Number of shares used in computing earnings per share: Basic 10,760,000 10,078,000 6,722,000 Diluted 11,584,000 10,980,000 7,388,000
The accompanying notes are an integral part of these consolidated financial statements. 14 AUTOMOBILE PROTECTION CORPORATION - APCO CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Additional Common Stock Paid-in Retained Shares Amount Capital Earnings Total ------ ------ ------- -------- ----- Balances at December 31, 1994 5,679,895 $5,679 $4,358,187 $1,056,638 $5,420,504 Net income 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 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 Net income 4,050,716 4,050,716 Issuance of common stock upon exercise of stock options 412,641 412 722,690 723,102 Stock compensation expense 12,501 12,501 Tax effect of option exercise 279,000 279,000 -------------------------------------------------------------------------- Balances at December 31, 1997 10,976,964 $10,976 $16,067,536 $8,196,855 $24,275,367 ==========================================================================
The accompanying notes are an integral part of these consolidated financial statements. 15 AUTOMOBILE PROTECTION CORPORATION - APCO CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended Year Ended Year Ended ---------- ---------- ---------- December 31, December 31, December 31, ------------ ------------ ------------ 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net income $4,050,716 $1,563,919 $1,525,582 --------------- --------------- ---------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 448,652 440,760 361,129 Deferred income taxes (140,813) (135,268) (249,174) Provision for doubtful accounts 30,000 35,031 1,367 Gain on disposal of property and equipment (41,479) (9,019) Tax benefit from stock option exercise 279,000 644,446 249,000 Stock compensation expense 12,501 100,800 54,996 Changes in operating assets and liabilities: Restricted cash 5,478 (4,862,159) (400,022) Accounts receivable (270,465) (978,267) (734,790) Officer and employee receivables (44,419) (72,699) (51,918) Notes receivable (2,007,532) (130,564) (366,400) Prepaid expenses and other assets 364,938 (467,761) 16,913 Premiums, fees and taxes payable (5,478) 4,862,159 400,022 Accounts payable 99,713 269,963 327,429 Accrued liabilities 2,344,380 1,990,368 258,440 Income taxes 851,579 (503,546) 94,395 Purchases of trading securities (7,899,117) (8,660,198) (5,319,442) Sales of trading securities 5,553,667 6,516,826 2,543,254 --------------- --------------- ---------------- Total adjustments (419,395) (959,128) (2,814,801) --------------- --------------- ---------------- Net cash provided by (used in) operating 3,631,321 604,791 (1,289,219) activities --------------- --------------- ---------------- Cash flows from investing activities: Purchases of property and equipment (543,578) (736,025) (489,920) Proceeds from sales of property and equipment 105,000 136,766 Purchases of investment securities (1,413,672) (3,570,332) (1,160,548) Redemptions and maturities of investment securities 1,840,458 1,582,898 Increase in deposits to secure licenses (13,486) (3,957) (73,069) --------------- --------------- ---------------- Net cash used in investing activities (25,278) (2,590,650) (1,723,537) --------------- --------------- ---------------- Cash flows from financing activities: Issuance of common stock 723,102 2,206,877 7,463,450 Registration costs (19,526) --------------- --------------- ---------------- Net cash provided by financing activities 723,102 2,206,877 7,443,924 --------------- --------------- ---------------- Net increase in cash and cash equivalents 4,329,145 221,018 4,431,168 Cash and cash equivalents at beginning of period 6,967,904 6,746,886 2,315,718 --------------- --------------- ---------------- Cash and cash equivalents at end of period $11,297,049 $6,967,904 $6,746,886 =============== =============== ================ Supplemental disclosure of cash flow information: Cash paid during the period for income taxes $1,465,370 $957,368 $850,000 =============== =============== ================
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, Indian Harbor Insurance Company and CIGNA Property & Casualty companies. 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: Basis of Presentation 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. Certain comparative amounts have been reclassified to conform with current year presentation. 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. Restricted Cash Restricted cash represents funds collected by the Company on behalf of its insurers and claims payment floats provided by the insurers, to enable the Company to make claims payments on behalf of the insurers. 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. 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. 17 Premiums, Fees 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 a yearly associate sponsorship agreement with Joe Gibbs Racing, Inc. and separate agreements with race track owners to sponsor race events. Costs associated with the Joe Gibbs Racing, Inc. associate sponsorship agreement 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. Stock-based Compensation Plans The Company has elected to account for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) with the associated disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation" (SFAS No. 123) in Note 7. SFAS No. 123 requires that companies which elect to not account for stock-based compensation as prescribed by that statement shall disclose, among other things, pro forma effects on net income and net income per share as if SFAS No. 123 had been adopted. Under APB No. 25, because the exercise price of the Company's employee stock options equal the market price of the underlying stock on the date of the grant, no compensation expense is recognized. Earnings Per Share The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128) during 1997. SFAS No. 128 provides for new accounting principles to be used in the calculation of earnings per share and was effective for financial statements for both interim and annual periods ended after December 15, 1997. The company has restated its net income per share for all periods presented to give effect to SFAS No. 128. Basic earnings per share is based upon the weighted average number of issued common shares for each period. Diluted earnings per share is based upon the weighted average number of issued common shares for each period, in addition to the effect of common stock equivalents (stock options) which are calculated using the treasury stock method. 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 14% and 11% of the Company's 1997 and 1996 revenues, respectively, no agent or affiliated dealer group provided more than 10% of the Company's 1997 and 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 market. 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 as of December 31, 1997 and 1996 are summarized as follows:
1997 1996 -------------- ---------------- Trading securities (at fair value): Municipal bonds $ 4,904,862 $ 4,773,327 U.S. agencies 1,996,328 500,000 Preferred stocks 466,253 448,403 Corporate bonds 699,737 -------------- ---------------- $ 8,067,180 $ 5,721,730 ============== ================ Investment securities held to maturity (at amortized cost): Certificates of deposit $ 1,122,789 $ 321,076 U.S. Treasuries and agencies (market value: $1,071,040; $2,103,622) 1,068,918 2,100,336 Municipal bonds (market value: $1,035,332; $1,238,174) 1,033,805 1,230,886 Corporate bonds (market value: $100,006; $98,625) 100,000 100,000 -------------- ---------------- 3,325,512 3,752,298 Less: Current investment securities 1,851,019 1,654,209 -------------- ---------------- Non-Current investment securities $ 1,474,493 $ 2,098,089 ============== ================
Of the non-current investment securities at December 31, 1997, $997,712 matures within two years; $407,863 matures within three years and $68,918 matures after five years. NOTE 4 PROPERTY AND EQUIPMENT: Property and equipment as of December 31, 1997 and 1996 are summarized as follows:
1997 1996 -------------- ---------------- Office and computer equipment $ 2,192,735 $ 1,763,659 Furniture and fixtures 418,439 367,057 Vehicles 135,655 216,763 Leasehold improvements 489,415 486,945 -------------- ---------------- 3,236,244 2,834,424 Less: Accumulated depreciation and amortization (2,015,368) (1,716,894) -------------- ---------------- $ 1,220,876 $ 1,117,530 ============== ================
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. 19 NOTE 6 INCOME TAXES: The components of the provision for income taxes for the years ended December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995 ------------- --------------- ---------------- Current: Federal $ 2,413,884 $ 1,009,268 $ 1,077,174 State 206,929 89,000 94,000 ------------- --------------- ---------------- 2,620,813 1,098,268 1,171,174 ------------- --------------- ---------------- Deferred: Federal (153,813) (124,268) (232,174) State 13,000 (11,000) (17,000) ------------- --------------- ---------------- (140,813) (135,268) (249,174) ------------- --------------- ---------------- Provision for income taxes $ 2,480,000 $ 963,000 $ 922,000 ============= =============== ================
An analysis of the differences between the statutory federal income tax rate of 34% and the effective tax rate for the years ended December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995 ------------- --------------- ---------------- Statutory federal taxes $ 2,220,443 $ 859,152 $ 832,178 State income taxes, net of federal tax benefit 136,573 51,480 50,729 Non-taxable income (92,460) (79,126) (26,318) Non-deductible expenses 215,444 131,494 65,411 ------------- --------------- ---------------- $ 2,480,000 $ 963,000 $ 922,000 ============= =============== ================
The components of deferred tax assets and liabilities as of December 31, 1997 and 1996 are as follows:
1997 1996 ---------------- -------------- Current deferred tax asset: Accounts receivable allowances $ 30,400 $ 11,400 Charge for litigation reserve 109,234 330,000 Non-deductible accruals 646,248 131,405 ---------------- -------------- $ 785,882 $ 472,805 ================ ============== Non-current deferred tax asset: Depreciation and amortization $ 18,793 $ 39,797 ================ ============== Non-current deferred tax liability: Deductible expenses and other $ (254,420) $ (103,160) ================ ==============
20 NOTE 7 STOCKHOLDERS' EQUITY AND OPTIONS: The Company has three 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 non vested options are subject to vesting periods of up to five years. This plan was registered in 1994. The ability to grant options under this plan terminates on April 1, 1998. Under the Company's 1997 Performance Equity 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 non vested options are subject to vesting schedules which range from three to five years. The 1997 Performance Equity Plan was registered in 1997. 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. This plan was registered in 1994. The ability to grant options under this plan terminates on April 1, 1998. The Company accounts for stock-based compensation plans under APB No. 25. As a result, the Company has not recognized compensation expense for stock options granted with an exercise price equal to the quoted market price of the Company's common stock on the date of grant and which vest based solely on continuation of employment by the recipient of the option award. The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). 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 No. 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 for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ---- ---- ---- Net income As reported $4,050,716 $1,563,919 $1,525,582 Pro forma $3,973,104 $1,485,352 $1,453,764 Basic EPS As reported $0.38 $0.16 $0.23 Pro forma $0.37 $0.15 $0.22 Diluted EPS As reported $0.35 $0.14 $0.21 Pro forma $0.34 $0.14 $0.20
These pro forma amounts represent the estimated fair value of stock options issued during 1997, 1996 and 1995 and are being amortized to expense over the applicable vesting period. Additional options may be granted in future years. 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 1997, 1996 and 1995, respectively; dividend yields of 0%; expected volatility of 58%, 55% and 30%; risk-free interest rates of 6.5%, 5.9% and 6.6%; and specific vesting periods for each option. 21 The following table summarizes the changes in the number of shares under option:
Weighted Exercise price ranges Total shares average option $0.65-$1.50 $1.51-$3.00 $3.01-$7.00 under option price per share ----------- ----------- ----------- -------------- ---------------- Outstanding at 12/31/94 912,491 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 12/31/95 420,478 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 12/31/96 252,786 1,447,213 45,500 1,745,499 $2.05 Granted 806,784 806,784 $3.87 Exercised (129,147) (283,494) (412,641) $1.75 Canceled (3,018) (44,343) (33,000) (80,361) $2.86 ----------- ------------ ----------- ------------ -------- Outstanding 12/31/97 120,621 1,119,376 819,284 2,059,281 $2.17 =========== ============ =========== ============ ======== Exercisable at December 31, 1997 120,621 953,710 40,284 1,114,615 $2.07 =========== ============ =========== ============ ======== Plan shares available for future grants 75,371 ============
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 $12,501, $100,800 and $54,996 for 1997, 1996 and 1995, respectively. NOTE 8 EMPLOYEE BENEFIT PLAN: The Company established the Automobile Protection Corporation Profit Sharing and 401(k) Plan (the "Plan") at the beginning of 1996. For 1997 and 1996, the Company voluntarily matched employee contributions (subject to limitations), by purchasing the Company's common stock on the open market. During 1997 and 1996, the Plan purchased 15,225 and 15,018 shares of the Company's common stock at a total cost of $65,371 and $64,692, respectively. During 1996, the Company also 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. At December 31, 1997, the Plan held 59,557 shares of the Company's common stock. NOTE 9 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. On March 3, 1998, the Board of Directors redeemed, for an aggregate of $300, all the outstanding Class C Redeemable Preferred Stock which became mandatorily redeemable by the Company on September 11, 1997. Upon redemption, the Class C Redeemable Preferred Stock was canceled and the related voting rights were extinguished. 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 10 COMMITMENTS AND CONTINGENCIES: The Company leases office space and office equipment under non-cancelable operating lease agreements. Future minimum annual rental payments under these leases as of December 31, 1997 approximate: Year Amount ---- ------ 1998 $ 318,000 1999 293,000 2000 261,000 2001 68,000 ----------- $ 940,000 =========== Rent expense for all operating leases for 1997, 1996 and 1995 was approximately $292,000, $287,000 and $314,000, respectively. The Company renewed its associate sponsorship agreement with Joe Gibbs Racing, Inc. for 1998 and also committed itself to multi-year agreements to sponsor various racing events and to rent suites at certain racetracks. Future commitments aggregate $1,992,000, of which $1,064,000 relates to 1998. The Company expensed $1,593,000, $1,274,000 and $98,000 in 1997, 1996 and 1995, respectively, related to motorsports activities. NOTE 11 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. In 1996, the Company recorded the total amount it had paid and expected to pay, totaling $875,000, in the consolidated statement of income. On August 12, 1997, the U.S. Judge issued an order which denied Everest's motion to dismiss. Both parties have been conducting discovery since the last order was issued. The Company is funding the claims submitted by dealers and has paid $525,000 through December 31, 1997, which amount has been charged against the reserve recorded in 1996 of $875,000. The Company is vigorously pursuing this action against Everest. NOTE 12 SUBSEQUENT EVENT: Subsequent to December 31, 1997, the Company received proceeds of $825,000 from the exercise of 378,313 stock options, of which 346,000 options were attributable to the Company's Chairman and Chief Executive Officer. 23 NOTE 13 UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA: The unaudited quarterly results of the Company for the years ended December 31, 1997 and 1996 are as follows:
March 31 June 30 September 30 December 31 Year -------- ------- ------------ ----------- ---- 1997: Revenues $ 20,095,314 $ 23,797,029 $ 27,087,863 $ 22,954,961 $ 93,935,167 Gross margin 4,271,357 4,849,649 5,526,512 5,404,163 20,051,681 Net income 629,303 885,089 1,341,912 1,194,412 4,050,716 Basic EPS 0.06 0.08 0.13 0.11 0.38 Diluted EPS 0.05 0.08 0.12 0.10 0.35 1996: Revenues $ 14,352,288 $ 17,726,638 $ 18,642,959 $ 16,486,521 $ 67,208,406 Gross margin 3,071,759 3,818,956 4,018,540 3,800,265 14,709,520 Net income 239,976 725,867 719,714 (121,638) 1,563,919 Basic EPS 0.03 0.07 0.07 (0.01) 0.16 Diluted EPS 0.02 0.07 0.06 (0.01) 0.14
24 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, 1997: Allowance for doubtful accounts $ 30,000 $ 30,000 $ 0 $ 60,000 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
25 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. - ------------------------------------------------------------ Pursuant to General Instruction G(3), reference is made to the information contained in the Company's definitive proxy statement for its 1998 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or before April 30, 1998. 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 1998 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or before April 30, 1998. 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 1998 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or before April 30, 1998. 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) Certificate of Amendment to Restated Articles of Incorporation (incorporated by reference to the Registrant's Proxy Statement dated May 9, 1997 - Annex I). * 3 (d) 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). * 27 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). * 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, 1997). * 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, 1997). * 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, 1997. * 10 (h) 1997 Performance Equity Plan (incorporated by reference to the Registrant's Proxy Statement dated May 9, 1997 - Annex II). * 11 Statement Re: Computation of Per Share Earnings 32 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 Consents of Independent Accountants (Price Waterhouse) 33-34 27 Financial Data Schedule 35
* 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 12, 1998 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 12, 1998 President (Principal Executive Officer) and Director /s/ Martin Blank - -------------------------------------------------------------------------------- Martin J. Blank Date: March 12, 1998 Chairman of the Board, Secretary (Principal Operating Officer) and Director /s/ Anthony Levinson - -------------------------------------------------------------------------------- Anthony R. Levinson Date: March 12, 1998 Chief Financial Officer (Principal Accounting and Financial Officer) /s/ Howard Miller - -------------------------------------------------------------------------------- Howard C. Miller Date: March 12, 1998 Director /s/ Mechlin Moore - -------------------------------------------------------------------------------- Mechlin D. Moore Date: March 12, 1998 Director 30 EXHIBITS TO ANNUAL REPORT ON FORM 10-K DECEMBER 31, 1997 EXHIBIT No. 11 Statement Re: Computation of Per Share Earnings 23 Consents of Independent Accountants (Price Waterhouse) 27 Financial Data Schedule 31 EX-11 2
AUTOMOBILE PROTECTION CORPORATION - APCO EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS FORM 10-K DECEMBER 31, 1997, 1996 AND 1995 1997 1996 1995 ---- ---- ---- Weighted average number of issued shares each period 10,760,000 10,078,000 6,722,000 Common stock equivalents, computed using treasury method 824,000 902,000 666,000 -------------- --------------- --------------- 11,584,000 10,980,000 7,388,000 ============== =============== =============== Shares used in: Basic EPS 10,760,000 10,078,000 6,722,000 Diluted EPS 11,584,000 10,980,000 7,388,000
EX-23 3 AUTOMOBILE PROTECTION CORPORATION - APCO EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS FORM 10-K DECEMBER 31, 1997 We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-86594) and on Form S-8 (No. 333-35763) of Automobile Protection Corporation - APCO of our report dated March 12, 1998 appearing on page 12 of this Form 10-K. PRICE WATERHOUSE LLP Atlanta, Georgia March 12, 1998 AUTOMOBILE PROTECTION CORPORATION - APCO EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS FORM 10-K DECEMBER 31, 1997 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, 1998 appearing on page 12 of this Form 10-K. PRICE WATERHOUSE LLP Atlanta, Georgia March 12, 1998 EX-27 4 FDS--
5 AUTOMOBILE PROTECTION CORPORATION - APCO EXHIBIT 27 FINANCIAL DATA SCHEDULE FORM 10-K DECEMBER 31, 1997 12-MOS JAN-01-1997 DEC-31-1997 11,297,049 11,392,692 5,205,869 60,000 0 35,819,393 1,220,876 2,015,368 39,315,050 14,784,963 0 10,976 0 300 24,264,391 39,315,050 93,935,167 93,935,167 73,883,486 73,883,486 0 0 0 6,530,716 2,480,000 4,050,716 0 0 0 4,050,716 0.38 0.35
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