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 March 31, 1997
--------------
[ ] 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 May 6, 1997
- --------------------------------------- --------------------------
Common stock, $.001 par value per share 10,673,253
Exhibits - None.
Total number of pages, including cover page - 11.
1
<PAGE>
AUTOMOBILE PROTECTION CORPORATION - APCO
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements.
Consolidated Balance Sheet at March 31, 1997 and
December 31, 1996....................................................... 3
Consolidated Statement of Income for the Three
Month Period Ended March 31, 1997 and 1996.............................. 4
Consolidated Statement of Cash Flows for the Three
Month Period Ended March 31, 1997 and 1996 ............................. 5
Notes to Consolidated Financial Statements ............................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 8
Part II. Other Information
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
2
<PAGE>
AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED BALANCE SHEET (UNAUDITED)
March 31, * December 31,
1997 1996
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 7,852,265 $ 6,967,904
Trading securities, at fair value 5,951,216 5,721,730
Investment securities held to maturity 1,952,494 1,654,209
Accounts receivable, net of provision for
doubtful accounts of $30,000 and $30,000 2,947,363 2,160,236
Notes receivable 571,360 547,446
Officer and employee receivables 254,118 205,771
Income tax refund receivable 159,018 452,546
Prepaid expenses 804,104 658,074
Deferred tax asset 509,050 472,805
Restricted cash 6,684,202 8,330,106
----------- -----------
Total current assets 27,685,190 27,170,827
Property and equipment, net of accumulated
depreciation of $1,803,394 and $1,716,894 1,127,823 1,117,530
Investment securities held to maturity, non current 1,574,117 2,098,089
Deposits to secure licenses 739,141 730,276
Deferred tax asset 53,764 39,797
Other assets 61,440 104,304
=========== ===========
$31,241,475 $31,260,823
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Premiums, fees and taxes payable $ 6,684,202 $ 8,330,106
Accounts payable 1,191,675 1,156,118
Accrued liabilities 3,084,457 2,461,091
----------- -----------
Total current liabilities 10,960,334 11,947,315
Deferred income taxes 219,980 103,160
Redeemable preferred stock 300 300
----------- -----------
11,180,614 12,050,775
----------- -----------
Shareholders' equity:
Common stock; $.001 par value, 40,000,000
authorized, 10,673,253 and 10,564,323
issued and outstanding 10,673 10,564
Additional paid-in capital 15,274,746 15,053,345
Retained earnings 4,775,442 4,146,139
----------- -----------
Total shareholders' equity 20,060,861 19,210,048
----------- -----------
$31,241,475 $31,260,823
=========== ===========
* From audited financial statements contained in Registrant's Annual Report
on Form 10-K for the twelve months ended 12/31/96.
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE>
AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Three Months
Ended Ended
March 31, 1997 March 31, 1996
-------------- --------------
Revenues $ 20,095,314 $ 14,352,288
Cost of sales:
Premiums and taxes 14,176,616 10,239,400
Commissions and other costs 1,647,341 1,041,129
------------ ------------
Total cost of sales 15,823,957 11,280,529
------------ ------------
4,271,357 3,071,759
Expenses:
Compensation, selling and administrative 3,386,696 2,739,551
Depreciation and amortization 104,500 99,294
Interest, dividend and other income (234,142) (165,062)
------------ ------------
3,257,054 2,673,783
------------ ------------
Income before provision for income taxes 1,014,303 397,976
Provision for income taxes (385,000) (158,000)
------------ ------------
Net income $ 629,303 $ 239,976
============ ============
Net income per share $ 0.05 $ 0.02
============ ============
Number of shares used in computing
net income per share 11,459,000 10,730,000
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE>
AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
------------------ ------------------
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 629,303 $ 239,976
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 104,500 99,294
Deferred income taxes 66,608 --
Provision for doubtful accounts -- 4,650
Stock compensation expense -- 24,600
Change in operating assets and liabilities:
Restricted cash 1,645,904 (973,228)
Accounts receivable (787,127) (139,622)
Officer and employee receivables (48,347) (59,206)
Notes receivable (23,914) (291,727)
Income tax refund receivable 293,528 --
Prepaid expenses and other assets (121,166) (224,503)
Premiums, fees and taxes payable (1,645,904) 973,228
Accounts payable 35,557 248,297
Accrued liabilities 623,366 285,311
Income taxes payable -- 75,662
Purchases of trading securities (530,486) (2,159,012)
Sales of trading securities 301,000 1,563,715
----------- -----------
Total adjustments (86,481) (572,541)
----------- -----------
Net cash provided by (used in) operating activities 542,822 (332,565)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (96,793) (277,413)
Proceeds from sales of property and equipment -- 10,999
Purchases of investment securities -- (1,230,328)
Redemptions and maturities of investment securities 225,687 500,000
Increase in deposits to secure licenses (8,865) (2,592)
----------- -----------
Net cash provided by (used in) investing activities 120,029 (999,334)
----------- -----------
Cash flows from financing activities:
Issuance of common stock, net of underwriting fee 221,510 84,480
----------- -----------
Net cash provided by financing activities 221,510 84,480
----------- -----------
Net increase (decrease) in cash and cash equivalents 884,361 (1,247,419)
Cash and cash equivalents at beginning of period 6,967,904 6,746,886
----------- -----------
Cash and cash equivalents at end of period $ 7,852,265 $ 5,499,467
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ -- $ 80,000
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
<PAGE>
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, 1996.
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 consist 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. Gains and losses during the periods encompassed by these
financial statements were insignificant. Held to maturity securities are stated
at their amortized cost. The market value of the Company's held-to-maturity
securities at March 31, 1997 is $3,523,164.
6
<PAGE>
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.
Reclassifications
- -----------------
Certain comparative amounts have been reclassified to conform with current year
presentation.
3. 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 NClC. 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 $285,000 through March 31, 1997. The
7
<PAGE>
Company estimates that claims and related expenses subsequent to March 31, 1997
will be an additional $590,000. 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 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 months ended March 31, 1997. 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, 1996.
FORWARD-LOOKING STATEMENTS
When used herein 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. Additional
risks related to insurance carriers are discussed in the "Overview" section.
8
<PAGE>
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. The Company has 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. During the first quarter of 1997, in addition to the above,
insurance coverage has also been provided by Illinois Union Insurance Company, a
subsidiary of CIGNA Property and Casualty Company (collectively "CIGNA").
Greenwich, Indian Harbor and CIGNA may choose to purchase reinsurance from
Lloyd's and other reinsurers, including 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 March 31, 1997, the
Company had working capital of $16,724,856 (compared to $15,223,512 at December
31, 1996) and investment securities with maturities greater than twelve months
of $1,574,117 (compared to $2,098,089 at December 31, 1996). The net increase in
working capital and investment securities of $977,372 is attributable to
operations ($755,862) and the exercise of stock options ($221,510). 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
Three months ended March 31, 1997 ("1997") compared to the three months ended
- --------------------------------------------------------------------------------
March 31, 1996 ("1996").
- ------------------------
Revenues for 1997 increased by 40% or $5,743,026 to $20,095,314 over 1996. The
Company's largest revenue source is from the marketing and administration of
9
<PAGE>
extended vehicle service contracts ("VSCs") under the EasyCare(R) name, which
provided 99% of revenues for 1996. EasyCare(R) revenues increased due to
production under the EasyCare(R) Certified Pre-Owned Vehicle Program, the
signing of additional automobile dealers to EasyCare(R) by the Company's
independent sales representatives and from 74% unit growth under the contract
with American Honda Finance Corporation.
The Company's gross margin declined slightly to 21.3% of revenues in 1997 from
21.4% 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 standard
EasyCare(R) service contract and offers additional benefits to the dealer and
consumer. 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 1997 increased by 24% or
$647,145 to $3,386,696 over 1996. The increase for 1997 is primarily
attributable to compensation and printing costs. Offsetting these costs was a
reduction in professional fees of $90,000. Compensation cost increased by
$493,000 in 1997 to support the growth of the business. The Company's printing
costs increased by $146,000 due to costs incurred in connection with higher
sales volumes and the introduction of the EasyCare(R) Certified Pre-Owned
Vehicle program.
Interest, dividend and other income for 1997 increased by 42% or $69,080 to
$234,142 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 $385,000 compared
to $158,000 for 1996. The increase is primarily due to higher pretax income.
II. OTHER INFORMATION
Item 2. Changes in Securities
- -----------------------------
<TABLE>
<CAPTION>
During the first quarter of 1997, the Company issued the following unregistered securities:
Exemption
Consideration from
Date of sale Title of security Number sold received registration Option terms
- ------------ ----------------- ----------- -------- ------------ ------------
<C> <C> <C> <C> <C>
1/97-2/97 Common stock 87,500 $196,875 4 (2)
issued upon
exercise of options
granted to
consultants
</TABLE>
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 May 7, 1997
- ----------------------------------- ------------------
Martin J. Blank Date
Secretary (Duly Authorized Officer)
/s/ Anthony R. Levinson May 7, 1997
- ----------------------------------- ------------------
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 THREE
MONTHS ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 7,852,265
<SECURITIES> 9,477,827
<RECEIVABLES> 2,977,363
<ALLOWANCES> 30,000
<INVENTORY> 0
<CURRENT-ASSETS> 27,685,190
<PP&E> 2,931,217
<DEPRECIATION> 1,803,394
<TOTAL-ASSETS> 31,241,475
<CURRENT-LIABILITIES> 10,960,334
<BONDS> 0
0
300
<COMMON> 10,673
<OTHER-SE> 20,050,188
<TOTAL-LIABILITY-AND-EQUITY> 31,241,475
<SALES> 20,095,314
<TOTAL-REVENUES> 20,095,314
<CGS> 15,823,957
<TOTAL-COSTS> 15,823,957
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,014,303
<INCOME-TAX> 385,000
<INCOME-CONTINUING> 629,303
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 629,303
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
