-----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, ASo5WhgCUynRLnvdkUAIpzIkSJLzMwJKz9njVzX2/fSKdeQ7WVqGzToCrBQwMhrT K4TpyAi8yZm1XhVXtuH1zQ== 0001042910-99-000302.txt : 19990331 0001042910-99-000302.hdr.sgml : 19990331 ACCESSION NUMBER: 0001042910-99-000302 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: 99576896 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 FORM 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 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 (X) No ( ) Based on the average of the bid and asked prices ($10.63) at the close of business on March 12, 1999, the aggregate market value of the Registrant's common stock held by non-affiliates of the Registrant was $104,553,000. The number of shares outstanding of the Registrant's common stock, $.001 par value, was 11,887,334 on March 12, 1999. DOCUMENTS INCORPORATED BY REFERENCE: The information required by Items 10 - 12 are incorporated by reference from the Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders. 1 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 and recreational vehicle dealers located throughout the United States. 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. 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. 2 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 12, 1999, 140 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. The relationship was extended in January 1999 for an additional period of three years. This agreement provided approximately 14% of the Company's revenues for 1998 and 1997 and 11% for 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. Commencing in 1998, the Company entered into several national marketing/administrative agreements which are described below: During 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. This agreement provided less than 1% of the Company's revenues for 1998. During 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. This agreement provided less than 1% of the Company's revenues for 1998. During June 1998, the Company entered into an agreement to market maintenance reminder software developed by Interval, Inc. The Company plans to market this software, called Service Advisor Plus, to automobile dealers commencing in 1999. This product will be marketed through the Company's independent sales representatives to both existing and prospective dealers. During August 1998, the Company entered into a marketing agreement with Simoniz USA, Inc. to market Simoniz car care products under the name Simoniz EasyCare. This agreement had no financial impact in 1998. During October 1998, the Company entered into a three year agreement with Manheim Dealer Support Services, Inc. to administer a vehicle service contract program to be offered by Manheim to independent automobile dealers under the name Manheim EasyCare. This agreement provided less than 1% of the Company's revenues for 1998. During December 1998, the Company entered into a two year agreement with Dollar Thrifty Automotive Group to install the Company's limited warranty, extended service contract and certification products in all Thrifty Car Sales locations. This agreement had no financial impact in 1998. 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 12, 1999, the Company had 180 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. The Company's revenues tend to be lower in the 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 in 1999. Additionally, the Company leases approximately 1,600 sq. ft. of office space in Charlotte, North Carolina to conduct its motorsports sponsorship programs under a lease which expires in 2000. The Company acquired 9.6 acres of land during 1998 and is currently constructing a 52,000 square foot office building to accommodate its corporate and administrative offices. The Company's new address will be 6010 Atlantic Boulevard, Norcross, Georgia 30071. The Company expects to move prior to the expiration of its leases; however, in the event the new facility is not ready for occupancy before the expiration of the leases, the Company believes it will be able to negotiate an extension of the leases. ITEM 3. LEGAL PROCEEDINGS. - ------------------------- In July 1998, the Company settled the lawsuit which it had brought against Everest Reinsurance Company (formerly Prudential Reinsurance Company) in September 1996 in the United States District Court, Northern District of Georgia, Atlanta division. 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 ------- -------- 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 1998: First Quarter $6.00 $13.44 Second Quarter $9.00 $14.81 Third Quarter $5.00 $11.38 Fourth Quarter $5.00 $11.75 1999: First Quarter* $9.75 $13.63 * through March 12, 1999 The closing bid price for the common stock on March 12, 1999 was $10.25. There are approximately 180 holders of record of the Company's common stock. Additionally, the Company believes there are approximately 4,500 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 the fourth quarter of 1998, the Company issued the following unregistered securities:
Exemption Consideration from Date of sale Title of security Number sold received registration Option terms ------------ ----------------- ----------- -------- ------------ ------------ 10/98 -11/98 Common stock 454,750 - 4 (2) Vest over 4 years options granted to employees under 1998 Performance Equity Plan 10/98 -12/98 Common stock 56,500 $144,860 4 (2) issued upon exercise of options granted to consultants and customer
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 Year ended ended Year ended December 31, December 31, December 31, December 31, December 31, August 31, 1998 1997 1996 1995 1994 1994 ---- ---- ---- ---- ---- ---- Statement of Operations: Total revenues $ 119,953,682 $ 93,935,167 $ 67,208,406 $ 49,210,774 $ 11,197,168 $ 26,553,554 Income before provision for income taxes and cumulative effect of accounting change 10,487,485 6,530,716 2,526,919 2,447,582 413,747 1,290,453 Provision for income taxes (3,881,000) (2,480,000) (963,000) (922,000) (144,000) (445,705) Cumulative effect of accounting change 67,780 - ------------------------------------------------------------------------------------------------------------------------------ Net income $ 6,606,485 $ 4,050,716 $ 1,563,919 $ 1,525,582 $ 269,747 $ 912,528 ============================================================================================================================== Per share data: Basic Earnings before cumulative effect of accounting change $ 0.57 $ 0.38 $ 0.16 $ 0.23 $ 0.05 $ 0.17 Cumulative effect of accounting change 0.01 - ------------------------------------------------------------------------------------------------------------------------------ Earnings $ 0.57 $ 0.38 $ 0.16 $ 0.23 $ 0.05 $ 0.18 ============================================================================================================================== Diluted Earnings before cumulative effect of accounting change $ 0.53 $ 0.35 $ 0.14 $ 0.21 $ 0.04 $ 0.15 Cumulative effect of accounting change 0.01 - ------------------------------------------------------------------------------------------------------------------------------ Earnings $ 0.53 $ 0.35 $ 0.14 $ 0.21 $ 0.04 $ 0.16 ==============================================================================================================================
As of As of As of As of As of As of December 31, December 31, December 31, December 31, December 31, August 31, 1998 1997 1996 1995 1994 1994 ---- ---- ---- ---- ---- ---- Balance Sheet Data: - ------------------ Working capital $ 31,366,510 $ 21,034,430 $ 15,223,512 $ 11,270,716 $ 3,317,098 $ 3,134,005 Total assets $ 55,517,974 $ 39,315,050 $ 31,260,823 $ 19,592,461 $ 9,352,256 $ 8,398,317 Total liabilities $ 20,109,613 $ 15,039,683 $ 12,050,775 $ 4,898,455 $ 3,931,752 $ 4,150,491 Shareholders' equity $ 35,408,361 $ 24,275,367 $ 19,210,048 $ 14,694,006 $ 5,420,504 $ 4,247,826
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 and 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 elsewhere in this report, in addition to the following risk factors. 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, an automobile manufacturer and financial institutions 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. Additionally, automobile dealer consolidation could reduce the number of dealers and consequently the Company's addressable market. 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. 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, 1998, the Company had working capital of $31,366,510 (compared to $21,034,430 at December 31, 1997) and investment securities with maturities greater than twelve months of $602,950 (compared to $1,474,493 at December 31, 1997). The net increase in working capital and investment securities of $9,460,537 is attributable to operations of the Company and to proceeds from the exercise of stock options ($1,764,036) less the cost of the land purchased to construct the Company's corporate and administrative offices and other equipment purchases ($1,987,731). The Company expects to receive a tax benefit from stock option exercises of $2,500,000 through lower current tax payments. The Company primarily invests its funds in treasury securities, U.S. agencies, municipal bonds and financial instruments with maturities of less than five years and money market accounts. The Company hired a professional investment management firm in 1998 to invest $1,000,000 in a portfolio of equities. The Company expects to initially fund the construction of its corporate and administrative offices from working capital. During 1999, the Company expects to spend approximately $5,000,000. 7 Results of Operations Year ended December 31, 1998 ("1998") compared to year ended December - --------------------------------------------------------------------- 31, 1997 ("1997"). - -------------------- Revenues for 1998 increased by 28% or $26,018,515 to $119,953,682 over 1997. 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 1998. EasyCare(R) revenues increased due to the introduction of additional automobile dealers to EasyCare(R), increased average production by dealers and from growth under the contract with American Honda Finance Corporation, which provided 14% of the Company's 1998 and 1997 revenues. The Company also experienced growth from its national agreements with a major dealership group and from its third party administrative agreement with a major insurance company. Management expects future opportunities for growth to arise from these national agreements and from other national agreements entered into in late 1998. The national agreements, excluding the major dealership group agreement, impacted net revenues by less than 1% during 1998. The Company experienced reduced production from its certification program in 1998 and management expects it to decline further in 1999. The Company's gross margin was 21.8% of revenues in 1998 compared to 21.3% of revenues in 1997. Gross margin is impacted by the mix of new and used, and of makes and models of vehicles and the types of coverage sold. The gross margin for 1998 was also impacted by an insurance change introduced in late 1997. Management anticipates that if the new product introductions and private label marketing agreements increase relative to its current mix of business, average gross margins will decline; however, the Company anticipates that the effects of this reduction would be offset by increased volumes from these new arrangements. Compensation, selling and administrative expenses for 1998 increased by 22% or $3,183,980 to $17,427,912 over 1997. The increase for 1998 is primarily attributable to compensation cost, which increased by approximately $2,432,000 to support the growth of the business. The Company also experienced a net increase in marketing expenses of $272,000. Marketing expenses include motorsports sponsorships and events, which totaled $1,386,000 in 1998 compared to $1,593,000 in 1997. Additionally, the Company recorded a pretax loss of $347,000 in 1998, in connection with its decision to relocate the administrative and corporate offices. The loss provision represents unamortized leasehold improvements and non-cancelable lease payments at its current facility. The Company settled its lawsuit with Everest Reinsurance Company during 1998 and recognized a pretax credit of $400,000 to adjust the reserve for claims which was recorded in 1996 in connection with this lawsuit. Interest, dividend and other income for 1998 increased by 49% or $572,599 to $1,744,218 over 1997. The increase is due to the larger cash and investment securities balances on hand. The Company recorded a provision for income taxes in 1998 of $3,881,000 compared to $2,480,000 for 1997. The increase is primarily due to higher pretax income, offset by a lower effective combined tax rate of 37% compared to 38% in 1997. 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. 8 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. 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. Year 2000 The Company's proprietary warranty administration system was developed internally and was designed with large enough "date" fields to accept and accurately process dates with the year 2000 and later. In fact, many of the contracts received for administration to date have expiration dates after 1999 and no processing problems have occurred. The Company has reviewed its mission critical systems and believes they are year 2000 compliant and it will not need to make significant expenditures to remedy year 2000 problems. While the Company is satisfied that its mission critical systems are year 2000 compliant, it cannot determine at this stage whether all of its customers' systems are compliant. The Company receives contracts from three discrete sources in the following formats: (a) Automobile dealers - Contracts are submitted in paper form by dealers, who generally utilize a computerized system to produce the contract form. (b) Automobile manufacturer - The manufacturer provides the Company with a daily electronic file of contracts sold by its participating dealers. (c) Insurance company - The insurance company provides the Company with a daily electronic file of contracts received and processed at its data center. Should any of these sources encounter difficulty generating or processing contracts due to year 2000 problems, the Company could face delays in receiving service contracts to process, which might delay the recognition of revenues and adversely impact customer service. The Company is querying its customers as to their progress in identifying and addressing year 2000 problems. The Company does not rely on its unrelated insurers' computer systems to a significant extent to conduct its critical business functions. The Company recognizes that many automobile components are electronic and contain embedded chips. From inquiries made of industry sources, the Company is not aware of any components being "date" sensitive. In the event certain components fail because of year 2000 problems, the Company's insurers' might be liable for the replacement or repair of the failed component. If such losses were significant, the Company's insurers' might increase premiums, thereby impacting the Company's competitive position and/or profitability. Recent Accounting Pronouncements In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance on the accounting for the costs of computer software developed or obtained for internal use and is effective for financial statements for fiscal years beginning after December 15, 1998. The Company does not believe SOP 98-1 will have a material impact on the Company's results of operations. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes guidance on the accounting for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities and is effective for financial statements for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company does not believe SFAS No. 133 will have a material impact on the Company's results of operations. 9 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - --------------------------------------------------- Index to Financial Statements and Financial Statement Schedules. Page ---- Financial Statements: - --------------------- Report of Independent Accountants 11 Consolidated Balance Sheet 12 Consolidated Statement of Income 13 Consolidated Statement of Changes in Shareholders' Equity 14 Consolidated Statement of Cash Flows 15 Notes to Consolidated Financial Statements 16 Financial Statement Schedules: - ------------------------------ II. Valuation and Qualifying Accounts 23 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 10 Report of Independent Accountants To the Board of Directors and Shareholders of Automobile Protection Corporation - APCO In our opinion, the 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, 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. PricewaterhouseCoopers LLP Atlanta, Georgia March 12, 1999 11
AUTOMOBILE PROTECTION CORPORATION - APCO CONSOLIDATED BALANCE SHEET December 31, December 31, ------------ ------------ 1998 1997 ---- ---- ASSETS Current Assets: Cash and cash equivalents $19,095,752 $11,297,049 Trading securities, at fair value 11,175,598 8,067,180 Held-to-maturity securities, current 1,157,249 1,851,019 Available-for-sale securities, at fair value 775,185 Accounts receivable, net of provision for doubtful accounts of $150,000 and $60,000 3,223,299 2,400,701 Notes receivable, net of provision for doubtful accounts of $60,000 and $0 2,476,062 2,554,978 Officer and employee receivables 503,273 250,190 Income tax receivable 164,238 Prepaid expenses, inventory and other assets 1,243,079 287,766 Deferred tax asset 1,124,240 785,882 Restricted cash 10,104,633 8,324,628 ----------------- ----------------- Total current assets 51,042,608 35,819,393 Property and equipment, net of accumulated depreciation of $2,449,133 and $2,015,368 2,761,092 1,220,876 Held-to-maturity securities, non current 602,950 1,474,493 Deposits to secure licenses 1,066,115 743,762 Deferred tax asset 18,793 Other assets 45,209 37,733 ----------------- ----------------- $55,517,974 $39,315,050 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Premiums, fees and taxes payable $10,104,633 $8,324,628 Accounts payable 2,131,045 1,255,831 Accrued liabilities 7,440,420 4,805,471 Income taxes payable 399,033 ----------------- ----------------- Total current liabilities 19,676,098 14,784,963 Deferred income taxes 433,515 254,420 Redeemable preferred stock 300 ----------------- ----------------- 20,109,613 15,039,683 ----------------- ----------------- Shareholders' equity: Common stock; $.001 par value, 40,000,000 authorized, 11,810,725 and 10,976,964 issued and outstanding 11,810 10,976 Additional paid-in capital 21,514,637 16,731,535 Retained earnings 14,803,340 8,196,855 Unearned compensation related to stock options (998,899) (663,999) Accumulated other comprehensive income 77,473 ----------------- ----------------- Total shareholders' equity 35,408,361 24,275,367 ----------------- ----------------- Commitments ----------------- ----------------- $55,517,974 $39,315,050 ================= =================
The accompanying notes are an integral part of these consolidated financial statements. 12
AUTOMOBILE PROTECTION CORPORATION - APCO CONSOLIDATED STATEMENT OF INCOME Year Ended Year Ended Year Ended ---------- ---------- ---------- December 31, December 31, December 31, ------------ ------------ ------------ 1998 1997 1996 ---- ---- ---- Revenues $119,953,682 $93,935,167 $67,208,406 ---------------- ----------------- ------------------- Cost of sales: Premium and taxes 76,856,837 60,233,162 43,138,395 Commissions and other costs 16,887,589 13,650,324 9,360,491 ---------------- ----------------- ------------------- Total cost of sales 93,744,426 73,883,486 52,498,886 ---------------- ----------------- ------------------- 26,209,256 20,051,681 14,709,520 ---------------- ----------------- ------------------- Expenses: Compensation, selling and administrative 17,427,912 14,243,932 11,658,784 Depreciation and amortization 438,077 448,652 440,760 Interest, dividend and other income (1,744,218) (1,171,619) (791,943) Litigation (settlement) charge (Note 14) (400,000) 875,000 ---------------- ----------------- ------------------- 15,721,771 13,520,965 12,182,601 ---------------- ----------------- ------------------- Income before provision for income taxes 10,487,485 6,530,716 2,526,919 Provision for income taxes 3,881,000 2,480,000 963,000 ---------------- ----------------- ------------------- Net income $6,606,485 $4,050,716 $1,563,919 ================ ================= =================== Earnings per share: Basic $0.57 $0.38 $0.16 Diluted $0.53 $0.35 $0.14 Number of shares used in computing Earnings per share: Basic 11,584,000 10,760,000 10,078,000 Diluted 12,508,000 11,584,000 10,980,000
The accompanying notes are an integral part of these consolidated financial statements. 13
AUTOMOBILE PROTECTION CORPORATION - APCO CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Unearned Accumulated Additional Compensation Other Common Stock Paid-in Retained Related to Comprehensive Shares Amount Capital Earnings Stock Options Income Total ------ ------ ------- -------- ------------- ------ ----- 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 Unearned compensation related to stock options 676,500 $(676,500) - 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 16,731,535 8,196,855 (663,999) 24,275,367 Comprehensive income: Net income 6,606,485 6,606,485 Unrealized gain on available-for-sale securities, net of tax effect of $77,473 77,473 $45,500 Total comprehensive income 6,683,958 Issuance of common stock upon exercise of stock options 833,761 834 1,763,202 1,764,036 Unearned compensation related to stock options 519,900 (519,900) - Stock compensation expense 185,000 185,000 Tax effect of option exercise 2,500,000 2,500,000 --------------------------------------------------------------------------------------------- Balances at December 31, 1998 11,810,725 $11,810 $21,514,637 $14,803,340 ($998,899) $77,473 $35,408,361 =============================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 14
AUTOMOBILE PROTECTION CORPORATION - APCO CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended Year Ended Year Ended ---------- ---------- ---------- December 31, December 31, December 31, ------------ ------------ ------------ 1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net income $6,606,485 $4,050,716 $1,563,919 -------------- ------------- ------------ Adjustments to reconcile net income to net cash Provided by operating activities: Depreciation and amortization 438,077 448,652 440,760 Deferred income taxes (185,970) (140,813) (135,268) Provision for doubtful accounts 150,000 30,000 35,031 Gain on disposal of property and equipment (1,062) (41,479) (9,019) Tax benefit from stock option exercise 2,500,000 279,000 644,446 Stock compensation expense 185,000 12,501 100,800 Changes in operating assets and liabilities: Restricted cash (1,780,005) 5,478 (4,862,159) Accounts receivable (912,598) (270,465) (978,267) Officer and employee receivables (253,083) (44,419) (72,699) Notes receivable 18,916 (2,007,532) (130,564) Prepaid expenses and other assets (962,789) 364,938 (467,761) Premiums, fees and taxes payable 1,780,005 (5,478) 4,862,159 Accounts payable 875,214 99,713 269,963 Accrued liabilities 2,634,949 2,344,380 1,990,368 Income taxes (563,271) 851,579 (503,546) Purchases of trading securities (13,698,461) (7,899,117) (8,660,198) Sales of trading securities 10,590,043 5,553,667 6,516,826 -------------- ------------- ------------ Total adjustments 814,965 (419,395) (959,128) -------------- ------------- ------------ Net cash provided by operating activities 7,421,450 3,631,321 604,791 -------------- ------------- ------------ Cash flows from investing activities: Purchases of property and equipment (1,987,731) (543,578) (736,025) Proceeds from sales of property and equipment 10,500 105,000 136,766 Purchases of available-for-sale securities (652,212) Purchases of held-to-maturity securities (373,605) (1,413,672) (3,570,332) Redemptions and maturities of held-to-maturity securities 1,938,918 1,840,458 1,582,898 Increase in deposits to secure licenses (322,353) (13,486) (3,957) -------------- ------------- ------------ Net cash used in investing activities (1,386,483) (25,278) (2,590,650) -------------- ------------- ------------ Cash flows from financing activities: Issuance of common stock 1,764,036 723,102 2,206,877 Redemption of preferred stock (300) -------------- ------------- ------------ Net cash provided by financing activities 1,763,736 723,102 2,206,877 -------------- ------------- ------------ Net increase in cash and cash equivalents 7,798,703 4,329,145 221,018 Cash and cash equivalents at beginning of period 11,297,049 6,967,904 6,746,886 -------------- ------------- ------------ Cash and cash equivalents at end of period $19,095,752 $11,297,049 $6,967,904 ============== ============= ============ Supplemental disclosure of cash flow information: Cash paid during the period for income taxes $2,131,865 $1,465,370 $957,368 ============== ============= ============
The accompanying notes are an integral part of these consolidated financial statements. 15 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 private label programs for a major automobile manufacturer and others. During 1998, the Company arranged for insurance coverage for its automobile programs to be provided by Greenwich Insurance Company, Indian Harbor Insurance Company and CIGNA Property & Casualty companies. Insurance coverage for its non-automobile programs was provided by certain Underwriters at Lloyd's of London ("Lloyd's"). In prior years, Lloyd's also directly insured automobile programs. 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, and the related liability is included in Premiums, fees and taxes payable. Debt and Marketable Equity Securities Investments in debt and marketable equity securities are categorized as either trading, available-for-sale or held-to-maturity. 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. Available-for-sale securities are stated at their fair value, which is based on quoted market prices, and all unrealized gains and losses are recorded as other comprehensive income within shareholders' equity. 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. During 1998, the Company purchased land and commenced the design and construction of an office building, which is classified as construction-in-progress in Note 6. 16 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. Accrued Liabilities The Company self-insures its obligations to provide emergency roadside assistance to contract holders and accordingly accrues an estimate of the amount it expects to pay to provide these services through unaffiliated third parties. Additionally, the Company reserves for all costs and expenses it expects to incur under programs with its dealers, such as co-operative advertising. Advertising Costs The Company sponsors motorsport activities to advertise its products. The Company has entered into an 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 over the period of the annual contract, 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 10. 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 follows Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128) for the calculation of earnings per share, which was adopted during 1997. 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. Comprehensive Income The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) as of January 1, 1998. The adoption of this Statement had no impact on net income or shareholders' equity. SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components. SFAS 130 requires unrealized gains or losses on available-for-sale securities to be included in other comprehensive income. NOTE 2 USE OF ESTIMATES: 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. NOTE 3 ACCOUNTING PRONOUNCEMENTS: In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information," (SFAS 131) was issued prescribing new guidelines for the reporting of segment data. SFAS 131 is effective for 1998. The Company does not have any separately reportable business segments. NOTE 4 RISKS AND UNCERTAINTIES: 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, an automobile manufacturer and financial institutions to market its products. The automobile manufacturer provided 14% of the Company's 1998 and 1997 revenues. A single independent sales agency provided 11% of the Company's 1998 revenues and less than 10% of the Company's 1997 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. Additionally, automobile dealer consolidation could reduce the number of dealers and consequently the Company's addressable market. 17 The insurance companies described in Note 1 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 5 DEBT AND MARKETABLE EQUITY SECURITIES: Debt and marketable equity securities as of December 31, 1998 and 1997 are summarized as follows:
1998 1997 -------------- ---------------- Trading securities (at fair value): Municipal bonds $ 972,597 $ 4,904,862 U.S. agencies 9,697,999 1,996,328 Preferred stocks 505,002 466,253 Corporate bonds - 699,737 -------------- ---------------- $ 11,175,598 $ 8,067,180 ============== ================ Held-to-maturity securities (at amortized cost): Certificates of deposit $ 1,399,724 $ 1,122,789 U.S. treasuries and agencies (market value: $0; $1,071,040) - 1,068,918 Municipal bonds (market value: $260,797; $1,035,332) 260,475 1,033,805 Corporate bonds (market value: $100,696; $100,006) 100,000 100,000 -------------- ---------------- 1,760,199 3,325,512 Less: Current portion 1,157,249 1,851,019 -------------- ---------------- Non-current portion $ 602,950 $ 1,474,493 ============== ================ Maturities of non-current held-to-maturity securities are: Due within 2 years $ 404,316 $ 997,712 Due within 3 years - 407,863 Due within 4 years - - Due within 5 years 198,634 - Due thereafter - 68,918 -------------- ---------------- $ 602,950 $ 1,474,493 ============== ================ Available-for-sale securities (at fair value): Managed equity portfolio $ 775,185 $ - ============== ================ NOTE 6 PROPERTY AND EQUIPMENT: Property and equipment as of December 31, 1998 and 1997 are summarized as follows: 1998 1997 -------------- ---------------- Office and computer equipment $ 2,602,004 $ 2,192,735 Furniture and fixtures 448,764 418,439 Vehicles 347,885 135,655 Leasehold improvements 489,415 489,415 Construction-in-progess 1,322,157 -------------- ---------------- 5,210,225 3,236,244 Less: Accumulated depreciation and amortization (2,449,133) (2,015,368) -------------- ---------------- $ 2,761,092 $ 1,220,876 ============== ================
In September 1998, the Company acquired a 9.6 acre parcel of land in the City of Norcross, Georgia and has commenced the design and construction of a building to accommodate the Company's corporate and administrative offices. The building is expected to be available for occupancy in 1999. 18 NOTE 7 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 $750,000. NOTE 8 INCOME TAXES: The components of the provision for income taxes for the years ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996 ------------- --------------- ---------------- Current: Federal $ 1,434,318 $ 2,134,884 $ 1,009,268 State 132,652 206,929 89,000 ------------- --------------- ---------------- 1,566,970 2,341,813 1,098,268 ------------- --------------- ---------------- Deferred: Federal 2,127,572 125,187 (124,268) State 186,458 13,000 (11,000) ------------- --------------- ---------------- 2,314,030 138,187 (135,268) ------------- --------------- ---------------- Provision for income taxes $ 3,881,000 $ 2,480,000 $ 963,000 ============= =============== ================
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, 1998, 1997 and 1996 are as follows:
1998 1997 1996 ------------- --------------- ---------------- Statutory federal taxes $ 3,565,745 $ 2,220,443 $ 859,152 State income taxes, net of federal tax benefit 210,613 136,573 51,480 Non-taxable income (45,769) (92,460) (79,126) Non-deductible expenses 150,411 215,444 131,494 ------------- --------------- ---------------- $ 3,881,000 $ 2,480,000 $ 963,000 ============= =============== ================
The components of deferred tax assets and liabilities as of December 31, 1998 and 1997 are as follows:
1998 1997 ---------------- -------------- Current deferred tax asset: Accounts receivable allowances $ 83,420 $ 30,400 Charge for litigation reserve 36,354 109,234 Non-deductible accruals 1,004,466 646,248 ---------------- -------------- $ 1,124,240 $ 785,882 ================ ============== Non-current deferred tax asset: Depreciation and amortization $ - $ 18,793 ================ ============== Non-current deferred tax liability: Deductible expenses and other $ (433,515) $ (254,420) ================ ==============
19 NOTE 9 ACCRUED LIABILITIES: Accrued liabilities at December 31, 1998 and 1997 are as follows:
1998 1997 ---------------- -------------- Emergency roadside assistance reserve $ 4,718,251 $ 3,235,958 Accrued dealer program costs 1,424,507 795,344 Accrued abandonment costs 347,000 - Accrued litigation (Note 14) 98,254 287,458 Other accruals 852,408 486,711 ---------------- -------------- $ 7,440,420 $ 4,805,471 ================ ==============
The Company recorded a reserve of $347,000 related to costs to be incurred to abandon its leased office location, primarily representing unamortized leasehold improvements and non-cancelable lease payments at the current facility. This accrual is subject to adjustment as the actual timing of the relocation and extent of costs incurred are completed during 1999. NOTE 10 SHAREHOLDERS' 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 terminated 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 1998 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. 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 terminated 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, 1998, 1997 and 1996:
1998 1997 1996 ---- ---- ---- Net income As reported $6,606,485 $4,050,716 $1,563,919 Pro forma $6,467,491 $3,973,104 $1,485,352 Basic EPS As reported $0.57 $0.38 $0.16 Pro forma $0.56 $0.37 $0.15 Diluted EPS As reported $0.53 $0.35 $0.14 Pro forma $0.52 $0.34 $0.14
20 These pro forma amounts represent the estimated fair value of stock options issued during the above periods 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 1998, 1997 and 1996, respectively; dividend yields of 0%; expected volatility of 50%, 58% and 55%; risk-free interest rates of 5.5%, 6.5% and 5.9%; and specific vesting periods for each option. Activity related to all stock options is summarized below:
1998 1997 1996 ---- ---- ---- Weighted- Weighted- Weighted- --------- --------- --------- Average Average Average ------- ------- ------- Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- Options outstanding As of January 1 2,059,281 $2.17 1,745,499 $2.05 2,450,156 $1.98 Granted 668,072 $7.57 806,784 $3.87 341,500 $3.43 Exercised (833,761) $2.12 (412,641) $1.75 (945,707) $2.33 Canceled (63,000) $2.61 (80,361) $2.86 (100,450) $2.35 ------------- ----------- ------------- Options outstanding As of December 31 1,830,592 $4.85 2,059,281 $2.17 1,745,499 $2.05 ============= =========== ============= Options exercisable As of December 31 552,720 $2.68 1,114,615 $2.07 1,311,857 $1.93 ============= =========== =============
The following table summarizes information about stock options outstanding at December 31, 1998:
Options outstanding Options exercisable Weighted- --------- Number Average Weighted- Number Weighted- ------ ------- --------- ------ --------- Outstanding Remaining Average Exercisable Average ----------- --------- ------- ----------- ------- December 31, Contractual Exercise December 31, Exercise ------------ ----------- -------- ------------ -------- Range of Exercise Prices 1998 Life Price 1998 Price - ------------------------ ---- ---- ----- ---- ----- $1.51 - $3.00 390,936 2.4 years $2.10 375,936 $ 2.06 $3.01 - $7.00 1,212,534 5.3 years $4.71 176,784 $ 3.98 $7.01 - $13.00 227,122 3.8 years $10.33 --------------- ----------- ------------------ ---------------- 1,830,592 4.5 years $4.85 552,720 $ 2.68 =============== =========== ================== ================
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 $185,000, $12,501 and $100,800 for 1998, 1997 and 1996, respectively. 21 NOTE 11 EMPLOYEE BENEFIT PLAN: The Company established the Automobile Protection Corporation Profit Sharing and 401(k) Plan (the "Plan") at the beginning of 1996. Since inception, the Company has voluntarily matched employee contributions (subject to limitations), by purchasing the Company's common stock on the open market. Employer matching purchases of the Company's common stock are as follows: 1998 - 7,535 shares at a cost of $68,525; 1997 - 15,225 shares at a cost of $65,371; 1996 - 15,018 shares at a cost of $64,692. 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, 1998, the Plan held 64,247 shares of the Company's common stock. NOTE 12 PREFERRED STOCK: Class C Redeemable Preferred Stock: During 1998, the Company redeemed and canceled all the outstanding Class C Redeemable Preferred Stock for an aggregate payment of $300. Class D Preferred Stock: In 1987, the Board of Directors was authorized the issue 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. NOTE 13 COMMITMENTS AND CONTINGENCIES: The Company leases office space and furniture under non-cancelable operating lease agreements. Future minimum annual rental payments under these leases approximate $281,000 for 1999 and $28,000 for year 2000. Rent expense for all operating leases for 1998, 1997 and 1996 was approximately $338,000, $292,000 and $287,000, respectively. The Company renewed its associate sponsorship agreement with Joe Gibbs Racing, Inc. for two years and also committed itself to other multi-year motorsports events. Minimum future commitments aggregate $1,993,000, of which $914,000 relates to 1999. The Company expensed $1,386,000, $1,593,000 and $1,274,000 in 1998, 1997 and 1996, respectively, related to motorsports activities. During 1998, the Company entered into a marketing and sales license agreement with a software vendor, whereby the Company licensed certain computer software for the automotive industry, which it intends to market to automobile dealers and others commencing in 1999. Under the agreement, the Company is required to purchase software with a minimum aggregate value of $1,750,000 over a period of two years, of which $485,000 has been paid as of December 31, 1998 and is recorded as an other asset. As noted in Note 6, the Company has commenced the construction of a building to accommodate the Company's administrative and corporate offices. Management expects future construction costs to approximate $5,000,000. NOTE 14 LITIGATION MATTER: In July 1998, the Company settled its lawsuit against Everest Reinsurance Company (formerly Prudential Reinsurance Company). The Company expects to pay claims under the various assumption of liability endorsements through the third quarter of 1999 and believes the reserves recorded for this liability are adequate. The Company recognized a pretax credit of $400,000 during the third quarter of 1998 to adjust the accrued liability to its expected ultimate amount. NOTE 15 UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA: The unaudited quarterly results of the Company for the years ended December 31, 1998 and 1997 are as follows:
March 31 June 30 September 30 December 31 Year -------- ------- ------------ ----------- ---- 1998: Revenues $ 25,813,515 $ 30,060,872 $ 33,684,804 $ 30,394,491 $ 119,953,682 Gross margin 5,844,454 6,585,469 7,270,081 6,509,252 26,209,256 Net income 1,367,618 1,771,182 1,952,111 1,515,574 6,606,485 Basic EPS 0.12 0.15 0.17 0.13 0.57 Diluted EPS 0.11 0.14 0.16 0.12 0.53 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
22 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, 1998: Allowance for doubtful accounts $ 60,000 $ 150,000 $ 0 $ 210,000 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
23 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 1999 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or before April 30, 1999. 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 1999 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or before April 30, 1999. 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 1999 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or before April 30, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - ------------------------------------------------------- Not applicable. 24 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 - ------- ----------- 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).* 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).* 25 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) 1997 Performance Equity Plan (incorporated by reference to the Registrant's Proxy Statement dated May 9, 1997 - Annex II).* 10(e) 1998 Performance Equity Plan (incorporated by reference to the Registrant's Form 10-Q for the quarter ended September 30, 1998 filed with the Commission on November 12, 1998).* 11 Statement Re: Computation of Per Share Earnings 21 Subsidiaries of the Registrant 23 Consents of Independent Accountants (PricewaterhouseCoopers LLP) 27 Financial Data Schedule
* Incorporated by reference to the referenced document previously filed by the registrant with the Commission. Reports on Form 8-K: None 26 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, 1999 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, 1999 President (Principal Executive Officer) and Director /s/ Martin Blank - ---------------------------------------------------------------------------------------------------- Martin J. Blank Date: March 12, 1999 Chairman of the Board, Secretary (Principal Operating Officer) and Director /s/ Anthony Levinson - ---------------------------------------------------------------------------------------------------- Anthony R. Levinson Date: March 12, 1999 Chief Financial Officer (Principal Accounting and Financial Officer) /s/ Howard Miller - ---------------------------------------------------------------------------------------------------- Howard C. Miller Date: March 12, 1999 Director /s/ Mechlin Moore - ---------------------------------------------------------------------------------------------------- Mechlin D. Moore Date: March 12, 1999 Director
27 EXHIBITS -------- TO ANNUAL REPORT ON FORM 10-K ----------------------------- DECEMBER 31, 1998 ----------------- EXHIBIT No. - ---------- 11 Statement Re: Computation of Per Share Earnings 21 Subsidiaries of the Registrant 23 Consents of Independent Accountants (PricewaterhouseCoopers LLP) 27 Financial Data Schedule EX-11 2 COMPUTATION OF PER SHARE EARNINGS AUTOMOBILE PROTECTION CORPORATION - APCO ---------------------------------------- EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS ---------------------------------------------------------- FORM 10-K --------- DECEMBER 31, 1998, 1997 AND 1996 --------------------------------
1998 1997 1996 ---- ---- ---- Weighted average number of issued shares each period 11,584,000 10,760,000 10,078,000 Common stock equivalents, computed using treasury method 924,000 824,000 902,000 ------------- -------------- -------------- 12,508,000 11,584,000 10,980,000 ============= ============== ============== Shares used in: Basic EPS 11,584,000 10,760,000 10,078,000 Diluted EPS 12,508,000 11,584,000 10,980,000
EX-21 3 SUBSIDIARIES OF THE REGISTRANT 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 APCO-Wyoming, Inc. Georgia EX-23 4 CONSENT OF INDEPENDENT ACCOUNTANTS AUTOMOBILE PROTECTION CORPORATION - APCO ---------------------------------------- EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS --------------------------------------------- FORM 10-K --------- DECEMBER 31, 1998 ----------------- 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, 1999 appearing on page 11 of this Form 10-K. PricewaterhouseCoopers LLP Atlanta, Georgia March 12, 1999 AUTOMOBILE PROTECTION CORPORATION - APCO ---------------------------------------- EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS --------------------------------------------- FORM 10-K --------- DECEMBER 31, 1998 ----------------- 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, 1999 appearing on page 11 of this Form 10-K. PricewaterhouseCoopers LLP Atlanta, Georgia March 12, 1999 EX-27 5 FDS --
5 12-MOS DEC-31-1998 DEC-31-1998 19,095,752 13,710,982 6,202,634 210,000 0 51,042,608 2,761,092 2,449,133 55,517,974 19,676,098 0 11,810 0 0 35,396,551 55,517,974 119,953,682 119,953,682 93,744,426 93,744,426 0 0 0 10,487,485 3,881,000 6,606,485 0 0 0 6,606,485 0.57 0.53
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