SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
-------------------
[ ] 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
15 Dunwoody Park Drive, Suite 100
Atlanta, Georgia 30338
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(770) 394-7070
--------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1996
- --------------------------------------- -------------------------------
Common stock, $.001 par value per share 10,527,603
Exhibits - Exhibit 27 Financial Data Schedule (Electronic filing only)
Total number of pages, including cover page - 12
.
1
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AUTOMOBILE PROTECTION CORPORATION - APCO
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements.
Consolidated Balance Sheet at September 30, 1996 and
December 31, 1995......................................................... 3
Consolidated Statement of Income for the Three
Month Period Ended September 30, 1996 and 1995............................ 4
Consolidated Statement of Income for the Nine
Month Period Ended September 30, 1996 and 1995............................ 5
Consolidated Statement of Cash Flows for the Nine
Month Period Ended September 30, 1996 and 1995 ........................... 6
Notes to Consolidated Financial Statements ............................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8..................................... 10
2
<PAGE>
AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, * December 31,
1996 1995
------------- ----------------
ASSETS
Current Assets:
Cash and cash equivalents $13,712,944 $10,210,768
Trading securities, at fair value 5,197,155 3,582,423
Investment securities held to maturity 419,818 255,576
Accounts receivable, net of provision for
doubtful accounts of $47,000 and $36,000 1,550,421 1,212,000
Notes receivable, net of provision for
doubtful accounts of $13,650 and $9,000 437,660 421,882
Officer and employee receivables 102,253 133,072
Income tax refund receivable 803,675
Prepaid expenses 621,187 220,177
Deferred tax asset 128,161 110,643
------------- ----------------
Total current assets 22,973,274 16,146,541
Property and equipment, net of accumulated
depreciation of $1,661,800 and $1,389,800 1,209,341 874,718
Investment securities held to maturity 2,371,039 1,509,288
Deposits to secure licenses 735,223 726,319
Deferred tax asset 62,475 185,861
Other assets 98,940 149,734
------------- ----------------
$27,450,292 $19,592,461
============= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Premiums, fees and taxes payable $5,473,784 $3,467,947
Accounts payable 1,356,853 886,155
Accrued liabilities 1,303,027 470,723
Current income taxes payable 51,000
------------- ----------------
Total current liabilities 8,133,664 4,875,825
Deferred income taxes 219,009 22,330
Redeemable preferred stock 300 300
------------- ----------------
8,352,973 4,898,455
------------- ----------------
Shareholders' equity:
Common stock; $.001 par value, 40,000,000
authorized, 10,490,103 and 9,614,616
issued and outstanding 10,490 9,614
Additional paid-in capital 14,819,051 12,102,172
Retained earnings 4,267,778 2,582,220
------------- ----------------
Total shareholders' equity 19,097,319 14,694,006
------------- ----------------
$27,450,292 $19,592,461
============= ================
* From audited financial statements contained in Registrant's Annual Report on
Form 10-K for the twelve months ended 12/31/95
The accompanying notes are an integral part of
these consolidated financial statements.
3
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AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Three Months
Ended Ended
September September
30, 30,
1996 1995
------------ ------------
Revenues $ 18,642,959 $ 13,142,108
Cost of sales 14,624,419 10,370,119
------------ ------------
4,018,540 2,771,989
------------ ------------
Expenses:
Compensation, selling and administrative 2,952,983 1,911,188
Depreciation and amortization 121,500 91,941
Interest, dividend and other income (212,657) (105,468)
------------ ------------
2,861,826 1,897,661
------------ ------------
Income before provision for income taxes 1,156,714 874,328
Provision for income taxes (437,000) (326,893)
============ ============
Net income $ 719,714 $ 547,435
============ ============
Net income per share (primary and fully $ 0.06 $ 0.08
diluted basis) ============ ============
Number of shares used in computing net income per share:
Primary basis 11,495,000 6,987,000
Fully diluted basis 11,550,000 7,211,000
The accompanying notes are an integral part of
these consolidated financial statements.
4
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AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Nine Months Nine Months
Ended Ended
September September
30, 30,
1996 1995
------------ ------------
Revenues $ 50,721,885 $ 35,787,035
Cost of sales 39,812,630 28,696,316
------------ ------------
10,909,255 7,090,719
------------ ------------
Expenses:
Compensation, selling and administrative 8,401,337 5,358,517
Depreciation and amortization 327,794 263,823
Interest, dividend and other income (545,434) (294,023)
------------ ------------
8,183,697 5,328,317
------------ ------------
Income before provision for income taxes 2,725,558 1,762,402
Provision for income taxes (1,040,000) (676,407)
============ ============
Net income $ 1,685,558 $ 1,085,995
============ ============
Net income per share (primary and fully $ 0.15 $ 0.16
diluted basis) ============ ============
Number of shares used in computing net income per share:
Primary basis 11,027,000 6,993,000
Fully diluted basis 11,081,000 7,006,000
The accompanying notes are an integral part of
these consolidated financial statements.
5
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AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,685,558 $ 1,085,995
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 327,794 263,823
Deferred income taxes 302,547 (125,000)
Provision for doubtful accounts 15,650 6,367
Tax benefit from stock option exercise 634,000 188,000
Stock compensation expense 73,800 30,000
Change in operating assets and liabilities:
Increase in accounts receivable (349,421) (378,846)
Decrease (increase) in officer and employee receivables 30,819 (31,505)
Increase in notes receivable (20,428) (180,649)
(Increase) decrease in income tax refund receivable (803,675) 57,000
Increase in prepaid expenses and other assets (406,010) (24,677)
Increase in premiums, fees and taxes payable 2,005,837 3,000,915
Increase in accounts payable 470,698 489,777
Increase in accrued liabilities 832,304 346,152
(Decrease) increase in income taxes payable (51,000) 128,628
Purchases of trading securities (6,261,925) (2,549,035)
Sales of trading securities 4,647,193 2,138,738
------------ ------------
Total adjustments 1,448,183 3,359,688
------------ ------------
Net cash provided by operating activities 3,133,741 4,445,683
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (617,622) (325,323)
Sales of property and equipment 10,999
Purchases of investment securities (2,570,993) (200,000)
Sales of investment securities 1,545,000 52,515
Increase in deposits to secure licenses (8,904) (70,678)
------------ ------------
Net cash used in investing activities (1,641,520) (543,486)
------------ ------------
Cash flows from financing activities:
Issuance of common stock, net of underwriting fee 2,009,955 206,100
Registration costs (17,809)
------------ ------------
Net cash provided by financing activities 2,009,955 188,291
------------ ------------
Net increase in cash and cash equivalents 3,502,176 4,090,488
Cash and cash equivalents at beginning of period 10,210,768 4,501,527
============ ============
Cash and cash equivalents at end of period $ 13,712,944 $ 8,592,015
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 875,000 $ 475,000
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
6
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AUTOMOBILE PROTECTION CORPORATION - APCO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The financial information included herein is unaudited; however, such
information reflects all adjustments, consisting solely of normal recurring
adjustments which are, in the opinion of management, necessary for a fair
presentation of the periods indicated. The accompanying consolidated financial
statements include the accounts of Automobile Protection Corporation - APCO and
its wholly-owned subsidiaries (the "Company"). Certain information and footnote
disclosures normally included in financial statements prepared in conformity
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
These condensed financial statements should be read in conjunction with the
consolidated financial statements and related notes contained in the Company's
Annual Report on Form 10-K for the twelve months ended December 31, 1995.
2. Summary of Significant Accounting Policies
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.
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.
Investment Securities
- ---------------------
The Company's investments at September 30, 1996 are comprised of trading
securities and of 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 recognized in earnings as incurred. The Company had no
significant unrealized gains or losses on trading securities during the three
and nine months ended September 30, 1996. Held-to-maturity securities are stated
at their amortized cost. Market value of the Company's held-to-maturity
securities at September 30, 1996 is $2,777,953. The Company had no significant
concentration of credit risk at September 30, 1996.
7
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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, 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.
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.
3. Litigation
The Company filed a complaint against Everest Reinsurance Company (formerly
Prudential Reinsurance Company, hereinafter "Prudential") in September 1996 in
the United States District Court, Northern District of Georgia, Atlanta
division. The complaint arises from the denial of valid claims under various
assumption of liability endorsements issued by Prudential to participating
dealers in 1991. The Company is funding the claims under these assumption of
liability endorsements on behalf of Prudential. The underlying claims paid by
the Company are recorded as accounts receivable in the balance sheet and
aggregate $135,000 as of September 30, 1996. The Company estimates that ultimate
claims under these assumption of liability endorsements will approximate
$500,000 over the next few years. The Company intends to vigorously pursue this
action against Prudential; however, should the Company not prove successful at
recovering the amounts it will pay in claims, it will be required to record a
write-off of these accounts receivable. The Company is expensing legal costs as
incurred, although it also seeks to recover these expenses from Prudential.
Item 2. 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 three and nine months ended September 30, 1996. The discussion and analysis
should be read in conjunction with the unaudited consolidated financial
statements and related notes appearing elsewhere herein and the Company's Annual
Report on Form 10-K for the twelve months ended December 31, 1995.
8
<PAGE>
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 September 30, 1996, the Company
had working capital of $14,839,610 and non-current investment securities of
$2,371,039. For the nine months ended September 30, 1996, the Company's working
capital and non-current investment securities increased by $4,430,645 primarily
due to net income of $1,685,558, non cash charges to income of $1,353,791 and
proceeds of $2,009,955 received from the exercise of 875,487 options into common
stock, after capital expenditures of $617,622.
Results of Operations
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 1996 ("1996") COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1995 ("1995").
Revenues for 1996 increased by 42% or $5,500,851 to $18,642,959 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 revenues increased due to the
introduction of additional Dealers to EasyCare by the Company's independent
sales representatives, from the exclusive agreement with Car Choice and from the
contract with American Honda Finance Corporation. These increases offset the
reduced production from our former sales representative in Louisiana.
The Company's gross margin increased to 21.6% of revenues in 1996 from 21.1%
of revenues in 1995. The increase is primarily attributable to revenues
collected under the motorsports sponsorship program. The change in the mix of
new and used, makes and models of vehicles also impacts the gross margin.
Compensation, selling and administrative expenses for 1996 increased by 55% or
$1,041,795 to $2,952,983 over 1995. The increase for 1996 is primarily
attributable to compensation, professional fees, printing and advertising costs,
including motorsports sponsorship programs and launch of the EasyCare(R)
Certified Pre-Owned Vehicle program.
Interest, dividend and other income for 1996 increased by 102% or $107,189 to
$212,657 over 1995. The increase is due to the larger cash and investment
securities balances on hand from the exercise of the Company's Class A and Class
B warrants in the fourth quarter of 1995, net income from operations and higher
cash floats resulting from the increased volume of business.
The Company recorded a provision for income taxes in 1996 of $437,000 as
compared to $326,893 for 1995. The increase is related to higher pretax income.
NINE MONTHS ENDED SEPTEMBER 30, 1996 ("1996") COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 ("1995").
Revenues for 1996 increased by 42% or $14,934,850 to $50,721,885 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 revenues increased due to the
9
<PAGE>
introduction of additional Dealers to EasyCare by the Company's independent
sales representatives, from the exclusive agreement with Car Choice and from the
contract with American Honda Finance Corporation. These increases offset the
reduced production from our former sales representative in Louisiana.
The Company's gross margin increased to 21.5% of revenues in 1996 from 19.8%
of revenues in 1995. The increase is primarily attributable to revenues
collected under the motorsports sponsorship program. The change in the mix of
new and used, makes and models of vehicles also impacts the gross margin.
Compensation, selling and administrative expenses for 1996 increased by 57% or
$3,042,820 to $8,401,337 over 1995. The increase for 1996 is primarily
attributable to compensation, professional fees, printing and advertising costs,
including motorsports sponsorship programs and launch of the EasyCare(R)
Certified Pre-Owned Vehicle program.
Interest, dividend and other income for 1996 increased by 86% or $251,411 to
$545,434 over 1995. The increase is due to the larger cash and investment
securities balances on hand from the exercise of the Company's Class A and Class
B warrants in the fourth quarter of 1995, net income from operations and higher
cash floats resulting from the increased volume of business.
The Company recorded a provision for income taxes in 1996 of $1,040,000 as
compared to $676,407 for 1995. The increase is related to higher pretax income.
II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Exhibit 27 - Financial Data Schedule
(Electronic filing only)
(b) Reports on Form 8-K: None
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AUTOMOBILE PROTECTION CORPORATION - APCO
/s/ Martin J. Blank November 4, 1996
- ----------------------------------- ------------------
Martin J. Blank Date
Secretary (Duly Authorized Officer)
/s/ Anthony R. Levinson November 4, 1996
- ----------------------------------- ------------------
Anthony R. Levinson Date
Chief Financial Officer (Principal
Financial and Accounting Officer,
Duly Authorized Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AUTOMOBILE PROTECTION CORPORATION - APCO FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 13,712,944
<SECURITIES> 7,988,012
<RECEIVABLES> 2,090,334
<ALLOWANCES> 60,650
<INVENTORY> 0
<CURRENT-ASSETS> 22,973,274
<PP&E> 1,209,341
<DEPRECIATION> 1,661,800
<TOTAL-ASSETS> 27,450,292
<CURRENT-LIABILITIES> 8,133,664
<BONDS> 0
0
300
<COMMON> 10,490
<OTHER-SE> 19,086,829
<TOTAL-LIABILITY-AND-EQUITY> 27,450,292
<SALES> 50,721,885
<TOTAL-REVENUES> 50,721,885
<CGS> 39,812,630
<TOTAL-COSTS> 39,812,630
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,725,558
<INCOME-TAX> 1,040,000
<INCOME-CONTINUING> 1,685,558
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,685,558
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
