ITEM 1. BUSINESS. - -----------------
GENERAL Automobile Protection Corporation - APCO and its subsidiaries (the "Company") are engaged principally in the marketing and administration of extended vehicle service contracts and extended vehicle warranty programs sold by automobile dealers located throughout the United States. The Company also provides insurance brokerage services to the automotive industry.
EXTENDED VEHICLE SERVICE CONTRACTS AND EXTENDED VEHICLE WARRANTIES The Company derives the majority of its revenues from the marketing and administration of extended vehicle service contracts and extended vehicle warranties (hereinafter referred to as "VSCs"). A consumer purchases a VSC from an automobile dealer to provide for the repair or replacement of designated parts of a vehicle for the term of the agreement, which can extend to seven years and 100,000 miles depending on vehicle eligibility. A VSC on a new vehicle augments and enhances the original warranty provided by the manufacturer of the vehicle. VSCs are also available on used and leased vehicles.
Dealers often engage a third party administrator, such as the Company, to design a VSC program, arrange for insurance to limit their financial risk, and to perform all of the related administrative functions associated therewith. A function of the Company is to arrange for insurance to cover obligations to pay all future claims. During 1996, the Company arranged for insurance coverage to be provided by certain Underwriters at Lloyd's of London ("Lloyd's"), Greenwich Insurance Company ("Greenwich") and Indian Harbor Insurance Company ("Indian Harbor"). Greenwich and Indian Harbor are wholly-owned subsidiaries of NAC Re Corporation, which is rated "A+" (Superior) by A.M. Best. Greenwich and Indian Harbor may choose to purchase reinsurance from Lloyd's and other reinsurers, including their parent, NAC Re Corporation. Also, during 1996, the Company arranged for insurance coverage with CIGNA Property and Casualty Insurance Company, Illinois Union Insurance Company and other insurers in the CIGNA Group, rated "A-" (Excellent) by A.M. Best, which will insure certain programs commencing in 1997.
Most of the VSC's accepted by the Company for administration between 1991 and 1996 are insured by Lloyd's. The Company's management is of the opinion that the syndicates which provide payments pursuant to the VSC's carry acceptable independent ratings from Standard and Poor's. The Company has never experienced any difficulty in having claims paid by Lloyd's. All syndicates are members of a central fund which guarantees claims payments by the syndicates. The availability of insurance coverage at competitive rates and of insurance funds to make claims payments, including the financial condition of the insurance carriers, is critical to the Company and any disruption could have a material adverse effect on the Company.
While the insurance carriers are obligated to pay for the costs of the repairs under the VSC's, the Company incurs business risks (other than underwriting risk) in the transaction with the dealer. Under the Company's agreements with certain insurers, the Company bears the credit risk because it is responsible for payment of the premiums to the insurance carriers, regardless of whether the Company is able to collect from the dealers. As a matter of course, the Company remits premiums to the insurance carriers each month, whether or not the Company has been paid by the dealer. The Company incurs collection losses from dealers from time to time, although they have not been significant to date. Billings to dealers are based on competitive conditions in the market place, and therefore the ability to bill dealers for any cost increases is not assured. Consequently, the Company bears a financial risk if it cannot control costs or increase its billings to cover cost increases.
The Company markets its products under the trade name, EasyCare(R). There are EasyCare(R) products for new, used and leased vehicles, which provide an array of benefits, ranging from total mechanical breakdown (commonly referred to as "bumper-to-bumper") coverage to named peril (stated component) coverage. EasyCare(R) products include various benefits such as trip interruption, rental reimbursement and emergency roadside assistance. The Company also administers programs under private labels for large customers such as American Honda Finance
Corporation and certain automobile dealers/retailers. In late 1996, the Company launched the EasyCare(R) Certified Pre-Owned Vehicle program, which is a combination limited warranty and extended vehicle service contract product. Dealers who participate in this program identify eligible used vehicles as EasyCare(R) Certified and provide their customers with a limited warranty, at no additional charge to the customer. Vehicles eligible for certification meet age and mileage criteria and undergo a thorough inspection by the dealer. The dealer selects the limited warranty period, which ranges from 1 month/1,000 miles to 12 months/12,000 miles. The dealer offers the customer the option to extend the limited warranty coverage for longer periods under a vehicle service contract. Based on the rate of initial dealer sign ups, management of the Company anticipates that the EasyCare(R) Certified Pre-Owned Vehicle program will be an important growth area in the future.
The Company's price of the VSC or limited warranty to the dealer includes: (a) The Company's fee for its administrative services, and (b) the cost of insurance, brokerage fees and taxes. The underlying insurance cost is determined by the VSC term and coverage, in addition to the repair profile of the specific vehicle. The Company also receives a fee for each claim processed, which is paid by the insurer.
INSURANCE BROKERAGE SERVICES DIVISION In addition to being a third party administrator for VSCs, the Insurance Brokerage Services Division of the Company's wholly-owned subsidiary, The Aegis Group, Inc., markets and administers automotive related insurance products to automobile dealers, manufacturers, financial institutions and leasing companies. This division provided less than 1% of the Company's total revenues for the most recent year.
MARKETING The Company's products are sold by automobile dealers to consumers. The Company markets its VSCs to dealers through a national network of independent sales representatives and a few employee sales representatives. The independent sales representatives often market other automotive related insurance products to dealers, in addition to the Company's VSCs. The Company's agreement with each independent sales organization and representative is terminable by the Company if production quotas are not met or by the representative upon the giving of written notice. Independent sales representatives are compensated on a commission basis which is linked to sales volumes. At March 20, 1997, 125 individual sales representatives represented the Company. The Company supports the sales representatives with a marketing department which is available to provide proposal assistance, competitive analysis and training of dealership personnel.
In February 1994, the Company entered into a five year agreement with American Honda Finance Corporation to administer a VSC program for non-Honda and non-Acura vehicles sold through participating Honda and Acura dealerships. This agreement provided approximately 11% of the Company's revenues for 1996 and less than 10% in earlier years.
To promote EasyCare(R) products, the Company extensively utilizes motorsports promotions, including sponsorship of the Joe Gibbs Racing, Inc. NASCAR and NHRA entries, sponsorship of individual races and sponsorship of race cars through arrangements with automobile dealers. The Company has an annually renewable agreement with Joe Gibbs Racing, Inc. which is in effect for 1997. Joe Gibbs is a national spokesperson for the Company and appears in trade publications, videos and in person at Company sponsored events.
COMPETITION The VSC industry is highly competitive and is dominated by the major automobile manufacturers and several large third party administrators. Management believes the Company is competitive against both the factory products and other third party administrators. In order to be competitive, the Company designs products which enhance a dealer's Customer Satisfaction Index, provides training to dealership personnel, and obtains insurance for the dealer to provide comprehensive coverage at reasonable prices.
EMPLOYEES At March 20, 1997, the Company had 120 employees. The Company is not subject to any collective bargaining agreements and considers its relationships with employees to be good.
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.
ITEM 2. PROPERTIES. - -------------------
The Company conducts its operations from a 16,434 sq. ft. leased office facility at 15 Dunwoody Park Drive, Suite 100, Atlanta, Georgia 30338. The lease expires in 2001.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS. - --------------------------
The Company filed a complaint against Everest Reinsurance Company (formerly Prudential Reinsurance Company, hereinafter "Everest") in September 1996 in the United States District Court, Northern District of Georgia, Atlanta division. The complaint arises from the improper denial of valid claims under various assumption of liability endorsements issued by Everest to participating dealers in 1991. In October 1996, Everest filed a motion to dismiss, asserting that the liquidation order in the insolvency of National Colonial Insurance Company ("NCIC") enjoins Everest from making a payment under the reinsurance agreement to anyone, other than the liquidator of NCIC. The Company is awaiting the Court's decision on Everest's motion to dismiss.
The Company is funding the claims submitted by dealers and has paid $225,000 through December 31, 1996. The Company estimates that claims and related expenses subsequent to December 31, 1996 will be an additional $650,000. The Company is vigorously pursuing this action against Everest; however, in view of the length of time that it may take to resolve the litigation and the uncertain outcome, the Company has recorded the total amount it has paid and expects to pay of $875,000 in the consolidated statement of income for the year ended December 31, 1996.
ITEM 4.
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.
PART II -------
ITEM 5.
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. - --------------------------------------------------------------------------------
The Company's common stock is quoted on the National Market System of the NASDAQ Stock Market under the symbol "APCO." The following figures represent quarterly high and low bid information related to trading in the Company's common stock. The figures reflect inter dealer prices without retail markup, markdown or commissions and may not be representative of actual transactions which occurred in the market. Such information has been obtained from NASDAQ.
Low Bid High Bid ------- -------- Calendar year 1995: Quarter 3/31/95 $1.75 $2.38 Quarter 6/30/95 $1.63 $2.38 Quarter 9/30/95 $2.13 $2.56 Quarter 12/31/95 $2.25 $3.31 Calendar year 1996: Quarter 3/31/96 $2.69 $4.31 Quarter 6/30/96 $3.44 $4.94 Quarter 9/30/96 $3.13 $5.38 Quarter 12/31/96 $4.00 $5.69 Calendar year 1997: First Quarter* $3.38 $5.00
* through March 20, 1997
The closing bid price for the common stock on March 20, 1997 was $3.44.
There were approximately 220 holders of record of the Company's common stock as of March 20, 1997. The Company believes there are approximately 3,000 beneficial owners of its common stock, which is held in street name by brokerage firms.
No dividends have been declared or paid to date on the Company's common stock, nor are any anticipated in the foreseeable future.
During 1996, the Company issued the following unregistered securities:
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA. - -------------------------------
Set forth below is a summary of the selected financial data of the Company:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS. - -------------
The following discussion and analysis of financial condition and results of operations presents the more significant factors affecting the Company during the periods indicated. The discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes, and with the other financial information appearing herein.
FORWARD-LOOKING STATEMENTS
When used in Form 10-K and in future filings by the Company with the Securities & Exchange Commission, the words or phrases "will likely result", "management expects" or "the Company expects", "will continue", "is expected", "is anticipated", "estimated" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company has no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.
Certain of these risks and uncertainties are discussed herein. The industry in which the Company operates is highly competitive, with some competitors having significantly greater financial resources and name recognition than the Company. The Company depends on independent sales representatives, automobile dealers/retailers and a major automobile manufacturer to market its products. The distribution of automobiles has been subject to cyclical economic conditions in the past and could be subject to such conditions in the future, which could adversely impact the Company. A trend towards consolidation in the distribution of automobiles has commenced, which could reduce the number of franchised and independent dealers and consequently the Company's distribution.
OVERVIEW
The Company's primary business is the marketing and administration of extended vehicle service contracts (hereinafter referred to as "VSCs") for automobile dealers. Dealers often engage a third party administrator, such as the Company, to design a VSC program, arrange for insurance to limit their financial risk, and to perform all of the related administrative functions associated therewith. A function of the Company is to arrange for insurance to cover obligations to pay all future claims. During 1996, the Company arranged for insurance coverage to be provided by certain Underwriters at Lloyd's of London ("Lloyd's"), Greenwich Insurance Company ("Greenwich") and Indian Harbor Insurance Company ("Indian Harbor"). Greenwich and Indian Harbor are wholly-owned subsidiaries of NAC Re Corporation. Greenwich and Indian Harbor may choose to purchase reinsurance from Lloyd's and other reinsurers, including their parent, NAC Re Corporation. Most of the VSC's accepted by the Company for administration between 1991 and 1996 are insured by Lloyd's. The availability of insurance coverage at competitive rates and of insurance funds to make claims payments, including the financial condition of the insurance carriers, is critical to the Company and any disruption could have a material adverse effect on the Company.
The Company's reported revenues represent the amount it bills to automobile dealers, which is based on rate schedules developed by the Company. The amounts billed consider insurance, taxes, commissions and other costs and profit. The Company's reported cost of sales represents the amounts it pays to the insurers for insurance, state insurance taxes and commissions to its sales representatives.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that its current working capital and anticipated levels of internally generated funds will be sufficient to fund its operating and capital expenditure requirements for the next twenty four months. This estimate is based on the Company's current level of operations and certain assumptions relating to the Company's business and planned growth. At December 31, 1996, the Company had working capital of $15,223,512 (compared to $11,270,716 at December 31, 1995) and investment securities with maturities greater than twelve months of $2,098,089 (compared to $1,509,288 at December 31, 1995). The increase of $4,541,597 is attributable to operations ($2,334,720) and the exercise of stock options ($2,206,877). The Company invests its funds in treasury securities, municipal bonds and financial instruments with maturities of less than five years and money market accounts. There is no plan to distribute funds to shareholders through a dividend or to repurchase shares.
RESULTS OF OPERATIONS
Year ended December 31, 1996 ("1996") compared to year ended December 31, 1995 - -------------------------------------------------------------------------------- ("1995"). - ---------
Revenues for 1996 increased by 37% or $17,997,632 to $67,208,406 over 1995. The Company's largest revenue source is from the marketing and administration of extended vehicle service contracts ("VSCs") under the EasyCare(R) name, which provided 99% of revenues for 1996. EasyCare(R) revenues increased due to the introduction of additional automobile dealers to EasyCare(R) by the Company's independent sales representatives and from growth under the contract with American Honda Finance Corporation, which provided 11% of the Company's 1996 revenues.
The Company's gross margin increased to 21.9% of revenues in 1996 from 20% of revenues in 1995. The increase for 1996 is primarily attributable to improved rates. The change in the mix of new and used, makes and models of vehicles also impacts the gross margin. The gross margin is expected to decline by about 0.5% in 1997 due to an anticipated change in the product mix caused by the introduction of the EasyCare(R) Certified Pre-Owned Vehicle program, which offers additional benefits to the dealer and consumer as compared to the standard EasyCare(R) service contract. However, it is anticipated that the new program will generate additional gross profit for the Company due to the limited warranty component.
Compensation, selling and administrative expenses for 1996 increased by 54% or $4,109,882 to $11,658,784 over 1995. The increase for 1996 is primarily attributable to compensation, marketing costs (including motorsports promotional activities), printing and professional fees. Compensation cost increased by $1,438,000 in 1996 to support the growth of the business. The Company's motorsports related marketing costs for 1996 were $1,274,000, compared to $98,000 for 1995, which was the first year of motorsports activities. The Company extensively utilizes motorsports to advertise its products to automobile dealers and consumers. The Company's printing costs increased by $373,000 due to costs incurred in connection with higher sales volumes and the introduction of the EasyCare(R) Certified Pre-Owned Vehicle program. The Company incurred legal fees of $220,000 in 1996 resulting from its litigation with a former sales representative and in connection with its lawsuit against Everest Reinsurance Company (formerly Prudential Reinsurance Company). The litigation with the former sales representative has been settled.
The Company recorded a charge of $875,000 in 1996 in connection with its litigation against Everest. The charge is to reserve for claims paid to date, expected future claims and related costs. The recovery of amounts paid by the Company to contract holders is dependent on the outcome of the lawsuit brought by the Company against Everest, which has improperly denied coverage under certain service contracts.
Interest, dividend and other income for 1996 increased by 69% or $322,331 to $791,943 over 1995. The increase is due to the larger cash and investment securities balances on hand from the exercise of stock options and warrants in late 1995 and 1996, net income and higher cash floats resulting from the increased volume of business.
The Company recorded a provision for income taxes in 1996 of $963,000 compared to $922,000 for 1995. The increase is due to higher pretax income.
Year ended December 31, 1995 ("1995") compared to year ended August 31, 1994 - ----------------------------------------------------------------------------- ("1994"). - ---------
Revenues for 1995 increased by 85% or $22,657,220 to $49,210,774 over 1994. The Company's largest revenue source is from the marketing and administration of extended vehicle service contracts ("VSCs") under the EasyCare(R) name, which provided 99% of revenues for 1995. EasyCare(R) revenues increased due to the introduction of additional automobile dealers to EasyCare(R) by the Company's independent sales representatives and from the contract with American Honda Finance Corporation.
The Company's gross margin decreased to 20% of revenues in 1995 from 22% of revenues in 1994. The margin decrease is due to the increase in commissions and incentives to independent sales representatives and the inclusion of emergency roadside assistance benefits in the VSC. The change in the mix of new and used, makes and models of vehicles also impacts the gross margin.
Compensation, selling and administrative expenses for 1995 increased by 62% or $2,898,671 to $7,548,902 over 1994. The increase for 1995 is primarily attributable to headcount and compensation for marketing personnel, related travel, printing and advertising costs. Additional administrative costs were incurred to support the higher volumes and resulting claims, principally in headcount and communications.
The Company recorded a credit of $347,046 in 1994 from the recoupment of previously expensed legal costs related to the litigation with American Home Assurance Company, which was settled in April 1994.
Interest, dividend and other income for 1995 increased by 332% or $361,040 to $469,612 over 1994. The increase is due to the larger cash and investment securities balances on hand from the exercise of stock warrants, net income and higher cash floats resulting from the increased volume of business.
The Company recorded a provision for income taxes in 1995 of $922,000 compared to $445,705 for 1994. The increase is due to higher pretax income and a higher combined tax rate.
IMPACT OF INFLATION
Although the Company's costs may increase from time to time as a result of increases in some or all of the Company's costs, the precise effect of inflation on the operations of the Company cannot be determined. The Company believes that continuation of the general levels of inflation experienced in recent years should not have a significant impact on the Company's current and contemplated operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 - "Earnings Per Share", which the Company is required to adopt next year. Basic earnings per share as defined by the new standard could result in earnings per share greater than primary earnings per share, which the Company now reports. Diluted earnings per share as defined by the new standard would be similar to primary earnings per share, which the Company now reports.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ----------------------------------------------------
Index to Financial Statements and Financial Statement Schedules. Page ----
Financial Statements: - --------------------- Report of Independent Accountants 12
Consolidated Balance Sheet 13
Consolidated Statement of Income 14
Consolidated Statement of Changes in Shareholders' Equity 15
Consolidated Statement of Cash Flows 16
Notes to Consolidated Financial Statements 17
Financial Statement Schedules: - ------------------------------ II. Valuation and Qualifying Accounts 24
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Automobile Protection Corporation - APCO
In our opinion, the accompanying consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Automobile Protection Corporation - APCO and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for the twelve months ended December 31, 1996, December 31, 1995 and August 31, 1994 and for the four months ended December 31, 1994 and December 31, 1993 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 6 to the consolidated financial statements, the Company changed its method of accounting for income taxes by adopting Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes during the year ended August 31, 1994.
PRICE WATERHOUSE LLP
Atlanta, Georgia March 12, 1997
AUTOMOBILE PROTECTION CORPORATION - APCO CONSOLIDATED BALANCE SHEET
December 31, December 31, ------------ ------------ 1996 1995 ---- ---- ASSETS Current Assets: Cash and cash equivalents $ 6,967,904 $ 6,746,886 Trading securities, at fair value 5,721,730 3,578,358 Investment securities held to maturity 1,654,209 255,576 Accounts receivable, net of provision for doubtful accounts of $30,000 and $36,000 2,160,236 1,212,000 Notes receivable, net of provision for doubtful accounts of $0 and $9,000 547,446 421,882 Officer and employee receivables 205,771 133,072 Income tax refund receivable 452,546 -- Prepaid expenses 658,074 220,177 Deferred tax asset 472,805 110,643 Restricted cash 8,330,106 3,467,947 ----------- ----------- Total current assets 27,170,827 16,146,541
Property and equipment, net of accumulated depreciation of $1,716,894 and $1,389,800 1,117,530 874,718 Investment securities held to maturity, non current 2,098,089 1,509,288 Deposits to secure licenses 730,276 726,319 Deferred tax asset 39,797 185,861 Other assets 104,304 149,734 ----------- ----------- $31,260,823 $19,592,461 =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Premiums, fees and taxes payable $ 8,330,106 $ 3,467,947 Accounts payable 1,156,118 886,155 Accrued liabilities 2,461,091 470,723 Current income taxes payable -- 51,000 ----------- ----------- Total current liabilities 11,947,315 4,875,825
Deferred income taxes 103,160 22,330 Redeemable preferred stock 300 300 ----------- ----------- 12,050,775 4,898,455 ----------- -----------
Shareholders' equity: Common stock; $.001 par value, 40,000,000 authorized, 10,564,323 and 9,614,616 issued and outstanding 10,564 9,614 Additional paid-in capital 15,053,345 12,102,172 Retained earnings 4,146,139 2,582,220 ----------- ----------- Total shareholders' equity 19,210,048 14,694,006 ----------- ----------- Commitments -- -- ----------- ----------- $31,260,823 $19,592,461 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
AUTOMOBILE PROTECTION CORPORATION - APCO CONSOLIDATED STATEMENT OF INCOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Automobile Protection Corporation - APCO was incorporated in the State of Georgia on September 10, 1984. APCO and its wholly-owned subsidiaries (the "Company") are engaged primarily in the marketing and administration of extended vehicle service contracts and extended vehicle warranty programs sold by new and used automobile retailers located throughout the United States. Extended vehicle service contracts augment and enhance upon the basic warranty offered by the automobile manufacturer. The Company markets its contracts nationally under the EasyCare(R) trade name and also administers vehicle service contracts under a private label program for a major automobile manufacturer.
The Company arranges for insurance coverage to be provided by certain Underwriters at Lloyd's of London ("Lloyd's"), Greenwich Insurance Company and Indian Harbor Insurance Company. These insurers underwrite and insure the obligations to pay for covered mechanical repairs and benefits under all vehicle service contract and warranty programs marketed and administered by the Company.
The Company's subsidiary, The Aegis Group, Inc., provides a wide range of third party administrative and insurance brokerage services to companies serving the automotive industry.
The following is a summary of the significant accounting policies followed by the Company:
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
CHANGE IN REPORTING PERIOD On February 1, 1995, the Company's Board of Directors approved a change in the Company's fiscal year end from August 31 to December 31.
REVENUES Revenues from the sale of extended vehicle service contracts and extended warranty programs are recognized when the service contract or extended warranty sold by the dealer is received and accepted by the Company. Revenues are comprised of the Company's administration fee, underlying insurance premium and tax.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include all funds with an original maturity of ninety days or less. Certain funds are considered restricted as they are held for the benefit of the insurers and to pay claims.
INVESTMENT SECURITIES The Company's investments consist of trading securities and held to maturity securities. Trading securities are stated at their fair value, which is based on quoted market prices, and all unrealized gains and losses are recorded in earnings as incurred. Gains and losses during the periods encompassed by these financial statements were insignificant. Held to maturity securities are stated at their amortized cost.
PROPERTY AND EQUIPMENT Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes over the estimated useful lives of the assets ranging from three to seven years. Maintenance and repair costs are charged to expense as incurred, and major renewals and betterments are capitalized. When property and equipment is retired or sold, the related carrying value and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income.
PREMIUMS AND TAXES PAYABLE Premiums and taxes payable includes premiums due to the insurers or their agents, taxes payable to various states and amounts advanced to the Company by the insurers for payment of claims.
ADVERTISING COSTS The Company sponsors motorsport activities to advertise its products. The Company has entered into an annual associate sponsorship agreement with Joe Gibbs Racing, Inc. and separate agreements with race track owners to sponsor race events. Direct costs associated with the Joe Gibbs Racing, Inc. associate sponsorship are expensed evenly during the year, while costs associated with race events are expensed in the month the event takes place.
INCOME TAXES The Company provides income taxes on income reported for financial statement purposes. Deferred income taxes are recorded for differences in the recognition of various items for financial reporting and income tax purposes. The Company files a consolidated income tax return with its subsidiaries.
NET INCOME PER COMMON SHARE Net income per share has been calculated based on the weighted average number of common shares and common share equivalents outstanding during each period presented.
The weighted average number of common shares and common share equivalents on a primary basis are 11,157,000, 7,531,000 and 5,818,451 for the twelve months ended December 31, 1996, December 31, 1995 and August 31, 1994, respectively, and 6,875,000 and 5,697,000 for the four months ended December 31, 1994 and December 31, 1993, respectively.
The weighted average number of common shares and common share equivalents on a fully diluted basis are 11,157,000, 7,604,000 and 5,945,997 for the twelve months ended December 31, 1996, December 31, 1995 and August 31, 1994, respectively, and 6,875,000 and 5,697,000 for the four months ended December 31, 1994 and December 31, 1993, respectively.
RECLASSIFICATIONS Certain comparative amounts have been reclassified to conform with current year presentation.
NOTE 2 RISKS AND UNCERTAINTIES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in the financial statements. Actual results could differ from those estimates.
The industry in which the Company operates is highly competitive, with some competitors having significantly greater financial resources and name recognition than the Company. The Company depends on independent sales representatives, automobile dealers/retailers and a major automobile manufacturer to market its products. Except for the major automobile manufacturer which provided 11% of the Company's 1996 revenues, no other distribution source provided more than 10% of the Company's 1996 revenues. The distribution of automobiles has been subject to cyclical economic conditions in the past and could be subject to such conditions in the future, which could adversely impact the Company. A trend towards consolidation in the distribution of automobiles has commenced, which could reduce the number of franchised and independent dealers and consequently the Company's distribution.
The insurance companies, including Lloyd's, insure the obligations under the vehicle service contracts. Most of the VSC's accepted by the Company for administration between 1991 and 1996 are insured by Lloyd's. The availability of insurance coverage at competitive rates and of insurance funds to make claims payments, including the financial condition of the insurance carriers, are critical to the Company.
NOTE 3 TRADING AND INVESTMENT SECURITIES: Trading and investment securities are summarized as follows:
Of the non-current investment securities at December 31, 1996, $1,805,989 matures within two years; $44,817 matures within three years; $100,000 matures within four years and $147,283 matures after five years.
NOTE 4 PROPERTY AND EQUIPMENT: Property and equipment is summarized as follows:
NOTE 5 DEPOSITS TO SECURE LICENSES: Certain states require the Company to provide security in the form of pledged securities or bank certificates of deposit. Additionally, one state requires the Company's subsidiary to maintain capitalization of $500,000.
NOTE 6 INCOME TAXES: The components of the provision for income taxes are as follows:
An analysis of the differences between the statutory federal income tax rate of 34% and the effective tax rate is as follows:
Year ended Year ended Year ended December 31, December 31, August 31, 1996 1995 1994 --------- ---------- ----------
Statutory federal taxes $ 859,152 $ 832,178 $ 438,754 State income taxes, net of federal tax benefit 51,480 50,729 11,634 Non-taxable income (79,126) (26,318) (12,117) Non-deductible expenses 131,494 65,411 47,823 Other (40,389) --------- ---------- ----------
$ 963,000 $ 922,000 $ 445,705 ========= ========== ==========
There are no significant differences between income taxed at the statutory federal tax rate of 34% and the Company's effective tax rate for the four month periods ended December 31, 1994 and 1993.
The Company recorded a benefit of $67,780 upon adoption of Statement of Financial Accounting Standards No. 109 effective September 1, 1993.
The components of deferred tax assets and liabilities are as follows:
December 31, December 31, 1996 1995 ---------- ----------
Accounts receivable allowances $ 11,400 $ 27,916 Depreciation and amortization 50,544 37,648 Charge for litigation reserve 330,000 Non-deductible accruals 120,658 230,940 ---------- ---------- Deferred tax asset $ 512,602 $ 296,504 ========== ==========
Deductible expenses and other $ 103,160 $ 22,330 ---------- ---------- Deferred tax liability $ 103,160 $ 22,330 ========== ==========
NOTE 7 STOCKHOLDERS' EQUITY AND OPTIONS: During 1995 and 1994, the Company received net proceeds of $7,424,950 and $975,761, respectively, from the exercise of 3,853,876 Class A and Class B warrants and 75,120 underwriter's unit purchase options at an average exercise price of $2.06 per share, which were issued in connection with the Company's initial public offering. As of December 31, 1996, no warrants or underwriter's unit purchase options remained.
The Company has two qualified stock option plans which provide for the granting of stock options to officers, employees and non-employee directors. Additionally, the Board of Directors has approved the granting of non-qualified stock options to consultants, company spokespersons, independent sales agents and certain senior executive officers.
Under the Company's 1988 Stock Option Plan, the exercise price of any option granted may not be less than the fair market value of the Company's common stock at the date of grant. The term of each option and the manner in which it may be exercised are determined by the Board of Directors. The options are generally subject to vesting schedules which range from 2 years to 4 years and some are also subject to the attainment of specified corporate goals. The 1988 Stock Option Plan was registered in 1994.
Under the Company's Outside Directors' Stock Option Plan, each eligible director is granted an option to purchase the maximum number of full shares having an aggregate fair market value on the date of grant equal to $25,000 on an annual basis at an exercise price per share equal to the fair market value of a share of common stock on the date of grant. These options can be exercised at any time for a ten year period from the date of grant. The Outside Directors' Stock Option Plan was registered in 1994.
The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Had compensation cost for the Company's stock-based incentive compensation plans been determined based on the fair value at the grant dates for awards under these plans consistent with the methodology prescribed by SFAS 123 and if these values had been recorded in the statement of income, the Company's net income and income per share would have been reduced to the pro forma amounts indicated below.
December 31, December 31, 1996 1995 ---------- ----------- Net income As reported $1,563,919 $1,525,582 Pro forma $1,485,352 $1,453,764
Income per share As reported $0.14 $0.20 Pro forma $0.13 $0.19
These pro forma amounts represent the estimated fair value of stock options issued during 1996 and 1995 and are being amortized to expense over the applicable vesting period. Additional options may be granted in future years.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1996 and 1995, respectively; dividend yields of 0%; expected volatility of 55% and 30%; risk-free interest rates of 5.9% and 6.6%; and specific vesting periods for each option.
The following table summarizes the changes in the number of shares under option:
In connection with the issuance of certain non-plan options granted to consultants for various financial consulting and marketing services, the Company recorded non-cash stock compensation expense of $100,800 and $54,996 for the twelve months ended December 31, 1996 and December 31, 1995, respectively, and $10,000 for the four months ended December 31, 1994.
The Company established the Automobile Protection Corporation Profit Sharing and 401(k) Plan (the "Plan") at the beginning of 1996. For 1996, the Company voluntarily matched employee contributions (subject to limitations), by purchasing the Company's common stock on the open market. During 1996, the Plan purchased 15,018 shares of the Company's common stock at a total cost of $64,692. Additionally, the Company purchased 29,334 shares of its common stock at a cost of $119,683 as a profit sharing contribution. Employer matching and profit sharing contributions vest over five years based on years of service.
NOTE 8 PREFERRED STOCK: CLASS C REDEEMABLE PREFERRED STOCK: The Company issued 300 shares of Class C Redeemable Preferred Stock for $1.00 per share to its principal shareholders in 1988. The holders of the Class C Redeemable Preferred Stock, as a class, shall be entitled to elect a majority of the Board of Directors irrespective of any ownership of the Company's common stock. There are no dividend rights attached to the Class C Redeemable Preferred Stock. In the event of the Company's liquidation, the holders of the Class C Redeemable Preferred Stock will be entitled to $.01 per share. All the Class C Redeemable Preferred Stock is subject to mandatory redemption by the Company at $.01 per share on September 11, 1998.
CLASS D PREFERRED STOCK: In 1987, the Board of Directors authorized the issuance of 5,000,000 shares of Class D Preferred Stock, with a $.01 par value. The rights and preferences of the Class D Preferred Stock are determined at the discretion of the Board of Directors. No Class D Preferred Stock is issued or outstanding.
NOTE 9 COMMITMENTS AND CONTINGENCIES: The Company leases its office space, certain office equipment and vehicles under non-cancelable operating lease agreements. Future minimum annual rental payments under these leases as of December 31, 1996 are:
Year Amount ---- ------
1997 $ 291,711 1998 269,542 1999 249,799 2000 249,690 2001 68,064 ----------
$1,128,806 ==========
Rent expense for all operating leases for the twelve months ended December 31, 1996, December 31, 1995 and August 31, 1994 was $287,000, $314,000 and $330,000, respectively. Rent expense for the four months ended December 31, 1994 and December 31, 1993 was $108,000 and $103,000, respectively.
The Company renewed its associate sponsorship agreement with Joe Gibbs Racing, Inc. for 1997 and has also made commitments to sponsor racing events in Atlanta, Charlotte and Talladega. Commitments for 1997 approximate $1,200,000, of which $167,000 was prepaid at December 31, 1996. The Company expensed $1,274,000 in 1996 and $98,000 in 1995 related to motorsports activities.
NOTE 10 OTHER ITEM: The Company filed a complaint against Everest Reinsurance Company (formerly Prudential Reinsurance Company, hereinafter "Everest") in September 1996 in the United States District Court, Northern District of Georgia, Atlanta division. The complaint arises from the improper denial of valid claims under various assumption of liability endorsements issued by Everest to participating dealers in 1991. In October 1996, Everest filed a motion to dismiss, asserting that the liquidation order in the insolvency of National Colonial Insurance Company ("NCIC") enjoins Everest from making a payment under the reinsurance agreement to anyone, other than the liquidator of NCIC. The Company is awaiting the Court's decision on Everest's motion to dismiss. The Company is funding the claims submitted by dealers and has paid $225,000 through December 31, 1996. The Company estimates that claims and related expenses subsequent to December 31, 1996 will be an additional $650,000. The Company is vigorously pursuing this action against Everest; however, in view of the length of time that it may take to resolve the litigation and the uncertain outcome, the Company has recorded the total amount it has paid and expects to pay of $875,000 in the consolidated statement of income for the year ended December 31, 1996.
AUTOMOBILE PROTECTION CORPORATION - APCO ---------------------------------------- SCHEDULE II: Valuation and Qualifying Accounts ---------------------------------------------- FORM 10-K ---------
Balance at Charged to Balance beginning of costs and at end of Description period expenses Deductions period - ------------------------------------------------------------------------------
Year ended December 31, 1996: - ----------------------------- Allowance for doubtful accounts $ 45,000 $ 35,031 $ 50,031 $ 30,000
Year ended December 31, 1995: - ----------------------------- Allowance for doubtful accounts 61,000 1,367 17,367 45,000
Four months ended December 31, 1994: - ------------------------------------ Allowance for doubtful accounts 58,000 3,000 61,000
Year ended August 31, 1994: - --------------------------- Allowance for doubtful accounts 125,549 5,728 73,277 58,000
ITEM 9.
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.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - ------------------------------------------------------------
The directors and executive officers of the Company and their positions are listed below, followed by a brief description of their business experience during the past five years.
Director Name Age Since Position - -------------------------------------------------------------------------------- Martin J. Blank 50 1984 Chairman of the Board, Chief Operating Officer, Secretary and Director
Larry I. Dorfman 41 1984 President, Chief Executive Officer and Director
Anthony R. Levinson 39 - Chief Financial Officer, Treasurer
Howard C. Miller 70 1989 Director
Mechlin D. Moore 66 1991 Director
MARTIN J. BLANK, a co-founder of the Company, has served as Secretary and Director since its incorporation in September 1984 and as the Chairman of the Board and Chief Operating Officer since April 1988. Mr. Blank is an attorney admitted to the bar in the States of Georgia and California. Mr. Blank's experience prior to co-founding the Company includes the practice of law and representation and financial management for professional athletes.
LARRY I. DORFMAN, a co-founder of the Company, has served as President and Director since its incorporation in September 1984 and as Chief Executive Officer since April 1988. Prior to co-founding the Company, Mr. Dorfman was Vice President-Sales for Paymaster Checkwriter Company, Inc. in Atlanta with responsibility for the direction and supervision of its sales force.
ANTHONY R. LEVINSON has served as Chief Financial Officer and Treasurer of the Company since November 1993. Prior to APCO, Mr. Levinson was with the accounting firm, Price Waterhouse, LLP. Mr. Levinson is a Certified Public Accountant in the State of Georgia.
HOWARD C. MILLER has served as Director of the Company since January 1989. Mr. Miller currently serves on the audit committee of the United States Olympic Committee and as a Director of Stone Container Corporation. Mr. Miller's past experience includes President and CEO of Avis, Inc., Vice President of ITT, President and CEO of Canteen Corporation.
MECHLIN D. MOORE has served as Director of the Company since June 1991. Mr. Moore is an independent consultant in insurance communication and marketing. Mr. Moore's past experience includes President of the Insurance Information Institute and Senior Vice President of United Air Lines, Inc.
Directors are elected by the stockholders at each annual meeting (or in the case of a vacancy, are appointed by the directors then in office) to serve until the next annual meeting or until their successors are elected and qualified. Officers serve at the discretion of the Board of Directors.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's officers, directors and persons who beneficially own more than ten percent of a registered class of the Company's equity securities ("ten -percent stockholders") to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC") and with the National Association of Securities Dealers, Inc. ("NASD"). Officers, directors and ten-percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, the Company believes that all its officers, directors and ten-percent stockholders complied with the Section 16(a) reporting requirements for the year ended December 31, 1996.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION. - --------------------------------
Pursuant to General Instruction G (3), reference is made to the information contained in the Company's definitive proxy statement for its 1997 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or before April 30, 1997.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - --------------------------------------------------------------------------------
Pursuant to General Instruction G (3), reference is made to the information contained in the Company's definitive proxy statement for its 1997 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or before April 30, 1997.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - --------------------------------------------------------
Not applicable.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - --------------------------------------------------------------------------
The following documents are filed as part of this report under Part II Item 8:
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
Reference is made to the Index to Financial Statements and Financial Statement Schedules included in Item 8 of Part II hereof, where such documents are listed.
EXHIBITS AS REQUIRED BY ITEM 601 OF REGULATION S-K:
Exhibit Number Description Page - ------ ----------- ----
3(a) Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1(a) to the Registrant's Registration Statement on Form S-1 (file number 33-22279) filed with the Commission on June 3, 1988). *
3(b) Certificate of Amendment to Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (file number 33-22279) filed with the Commission on June 3, 1988). *
3(c) By-Laws (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (file number 33-22279) filed with the Commission on June 3, 1988). *
4(a) Certificate of Designation, Preferences and Rights of Series 1 Class D Preferred Stock (incorporated by reference to Registrant's Current Report on Form 8-K filed with the Commission on December 15, 1988). *
4(b) Certificate of Designation, Preferences and Rights of Series 2 Class D Preferred Stock (incorporated by reference to Registrant's Current Report on Form 8-K filed with the Commission on March 15, 1989). *
10(a) 1988 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (file number 33-22279) filed with the Commission on June 3, 1988). *
10(b) Outside Directors' Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (file number 33-22279) filed with the Commission on June 3, 1988). *
10(c) Cover Note Between Byas, Mosley & Co., Ltd. and The Aegis Group, Inc. dated June 6, 1991 (incorporated by reference to Exhibit 10(h) to the Registrant's Annual Report on Form 10-K for the year ended August 31, 1991 as filed with the Commission on December 13, 1991). *
10(d) Lease Agreement between Registrant and Dunwoody Shallowford Partners, L.P. dated July 27, 1989 (incorporated by reference to Exhibit 10(e) to the Registrant's Annual Report on Form 10-K filed with the Commission on November 30, 1989) *
10(e) Third Amendment to Lease Agreement between Registrant and Dunwoody Shallowford Partners, L.P. dated January 27, 1995 (incorporated by reference to Exhibit 10(f) to the Registrant's Annual Report on Form 10-K filed with the Commission on March 29, 1996) *
10(f) Fourth Amendment to Lease Agreement between Registrant and Dunwoody Shallowford Partners, L.P. dated May 16, 1995 (incorporated by reference to Exhibit 10(g) to the Registrant's Annual Report on Form 10-K filed with the Commission on March 29, 1996) *
10(g) Complaint filed by Automobile Protection Corporation against Everest Reinsurance Company in the United States District Court, Northern District of Georgia, Atlanta Division (96-CV-2368-JE) on September 12, 1996 32
11 Statement Re: Computation of Per Share Earnings 44
22 Subsidiaries of the Registrant: Name Of State of Subsidiary Incorporation ---------- ------------- APCO Finance and Insurance Systems, Inc. Georgia Aftermarket Profit Plus, Inc. Georgia W.I.N. Systems, Inc. Georgia The Aegis Group, Inc. Georgia Automobile Protection Corporation - APCO Florida
23 Consent of Independent Accountants (Price Waterhouse) 45
27 Financial Data Schedule 47
_____________________________
* Incorporated by reference to the referenced document previously filed by the registrant with the Commission.
Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Automobile Protection Corporation - APCO has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
AUTOMOBILE PROTECTION CORPORATION - APCO
/s/ Larry Dorfman - -------------------------------------------------------------------------------- By: Larry I. Dorfman Date: March 25, 1997 President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Larry Dorfman - -------------------------------------------------------------------------------- Larry I. Dorfman Date: March 25, 1997 President (Principal Executive Officer) and Director
/s/ Martin Blank - -------------------------------------------------------------------------------- Martin J. Blank Date: March 25, 1997 Chairman of the Board, Secretary (Principal Operating Officer) and Director
/s/ Anthony Levinson - -------------------------------------------------------------------------------- Anthony R. Levinson Date: March 25, 1997 Chief Financial Officer (Principal Accounting and Financial Officer)
/s/ Howard Miller - -------------------------------------------------------------------------------- Howard C. Miller Date: March 25, 1997 Director
/s/ Mechlin Moore - -------------------------------------------------------------------------------- Mechlin D. Moore Date: March 25, 1997 Director
EXHIBITS -------- TO ANNUAL REPORT ON FORM 10-K ----------------------------- DECEMBER 31, 1996 -----------------
EXHIBIT No. - -----------
10(g) Complaint filed by Automobile Protection Corporation against Everest Reinsurance Company in the United States District Court, Northern District of Georgia, Atlanta Division (96-CV-2368-JE) on September 12, 1996
11 Statement Re: Computation of Per Share Earnings
23 Consent of Independent Accountants (Price Waterhouse)
27 Financial Data Schedule