SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________________ to _________________________
Commission file number 0-17231
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AUTOMOBILE PROTECTION CORPORATION - APCO
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(Exact name of registrant as specified in its charter)
Georgia 58-1582432
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 Dunwoody Park Drive, Suite 100
Atlanta, Georgia 30338
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 394-7070
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock - Par Value $.001 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes (X) No ( )
Based on the average of the bid and asked prices ($3.49) at the close of
business on March 20, 1997, the aggregate market value of the Registrant's
common stock held by non-affiliates of the Registrant was $31,241,000.
The number of shares outstanding of the Registrant's common stock, $.001
par value, was 10,667,101 on March 20, 1997.
DOCUMENTS INCORPORATED BY REFERENCE: The information required by Items 11 and 12
are incorporated by reference from the Registrant's Proxy Statement for the 1997
Annual Meeting of Stockholders.
Exhibit index is located on page 31.
Total number of pages, including cover page 47.
<PAGE>
PART 1
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ITEM 1. BUSINESS.
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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
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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.
3
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SEASONALITY
The VSC industry is subject to the seasonality of the automobile industry.
It is anticipated that the Company's revenues will be lower during its first and
fourth quarters due to lower sales of motor vehicles during the winter months as
compared to other times of the year.
GOVERNMENT REGULATION
Although the Company does not operate as an insurance company, the sale of
VSCs by dealers and the issuance of insurance policies is regulated by the
insurance laws of most states and the Company's ability to market and perform
its services is affected by such insurance laws. It is possible that some states
in which the Company now conducts business free of insurance regulation may
change their insurance laws to regulate the activities of the Company. In such
event, the Company would have to comply with the regulatory requirements of
those states or cease its business activities in those states. The Company is
not aware of any proposed legislative change which will materially affect its
business as it is currently conducted.
PROPRIETARY RIGHTS
The Company regards its VSC administration and software as proprietary. In
order to protect its software from illegal reproduction, the Company relies on
copyright protection, trade secret laws and restrictions in its license
agreements with respect to the use and reproduction of such software. The names
"APCO -- Automobile Protection Corp.(R) ", "Easy Care(R) " and "Perfect Profit
Program(R) " have been registered with the United States Patent and Trademark
Office. The Company uses these service marks in its sales and marketing
programs.
ITEM 2. PROPERTIES.
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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. LEGAL PROCEEDINGS.
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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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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No matter was submitted during the fourth quarter of the year covered by
this report to a vote of shareholders of the Company through the solicitation of
proxies or otherwise.
4
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PART II
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ITEM 5.MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
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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
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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:
<TABLE>
<CAPTION>
Exemption
Consideration from
Date of sale Title of security Number sold received registration Option terms
------------ ----------------- ----------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1/96 Options to 250,000 Options granted 4 (2) Exercisable
purchase for services - through 2/97 at
common stock additional consid- $3.50 per share
granted to eration will be
consultants received upon
exercise of options
1/96 Options to 15,000 Options granted - 4 (2) Exercisable
purchase no consideration through 10/97 at
common stock received until $2.50 per share
granted to options exercised
customer
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Exemption
Consideration from
Date of sale Title of security Number sold received registration Option terms
------------ ----------------- ----------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1/96 - 9/96 Options to 62,000 Options granted - 4 (2) Exercisable
purchase no consideration for five years at
common stock received until prices ranging
granted to options exercised from $2.00 to
employees $5.00 per share
2/96 Options to 2,000 Options granted 4 (2) Exercisable
purchase for services - through 8/98 at
common stock additional consid- $2.44 per share
granted to eration will be
consultants received upon
exercise of options
5/96 - 11/96 Common stock 572,500 $1,143,125 4 (2)
issued upon
exercise of options
granted to
consultants
6/96-10/96 Common stock 250,000 $875,000 4 (2)
issued upon
exercise of options
granted to
consultants in 1/96
7/96 Options to 12,500 Options granted - 4 (2) Exercisable
purchase no consideration through 7/06 at
common stock received until $4.00 per share
granted to options exercised
directors
8/96 - 11/96 Common stock 30,886 $68,029 4 (2)
issued upon
exercise of options
granted to
customers
</TABLE>
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ITEM 6. SELECTED FINANCIAL DATA.
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Set forth below is a summary of the selected financial data of the Company:
<TABLE>
<CAPTION>
For the For the Four months For the For the For the
year ended year ended ended year ended year ended year ended
December 31, December 31, December 31, August 31, August 31, August 31,
1996 1995 1994 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations:
Total revenues $ 67,208,406 $ 49,210,774 $ 11,197,168 $ 26,553,554 $ 23,507,191 $ 16,087,506
Income (loss) before
(provision) benefit for
income taxes and
cumulative effect of
accounting change 2,526,919 2,447,582 413,747 1,290,453 (232,047) (1,386,281)
(Provision) benefit for
income taxes (963,000) (922,000) (144,000) (445,705) 439,289
Cumulative effect of
accounting change 67,780
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Net income (loss) $ 1,563,919 $ 1,525,582 $ 269,747 $ 912,528 $ (232,047) $ (946,992)
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Per share data:
Primary
Income (loss) before
cumulative effect of
accounting change $ 0.14 $ 0.20 $ 0.04 $ 0.15 $ (0.04) $ (0.18)
Cumulative effect of
accounting change 0.01
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Net income (loss) $ 0.14 $ 0.20 $ 0.04 $ 0.16 $ (0.04) $ (0.18)
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Fully diluted
Income (loss) before
cumulative effect of
accounting change $ 0.14 $ 0.20 $ 0.04 $ 0.14 $ (0.04) $ (0.18)
Cumulative effect of
accounting change 0.01
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Net income (loss) $ 0.14 $ 0.20 $ 0.04 $ 0.15 $ (0.04) $ (0.18)
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As of As of As of As of As of As of
December 31, December 31, December 31, August 31, August 31, August 31,
1996 1995 1994 1994 1993 1992
---- ---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $ 15,223,512 $ 11,270,716 $ 3,317,098 $ 3,134,005 $ 2,164,306 $ 2,124,849
Total assets $ 31,260,823 $ 19,592,461 $ 9,352,256 $ 8,398,317 $ 6,720,107 $ 6,240,327
Total liabilities $ 12,050,775 $ 4,898,455 $ 3,931,752 $ 4,150,491 $ 3,405,559 $ 2,693,432
Shareholders' equity $ 19,210,048 $ 14,694,006 $ 5,420,504 $ 4,247,826 $ 3,314,548 $ 3,546,895
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS.
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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.
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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
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("1995").
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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.
9
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Year ended December 31, 1995 ("1995") compared to year ended August 31, 1994
- -----------------------------------------------------------------------------
("1994").
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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.
10
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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.
11
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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
12
<PAGE>
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.
13
<PAGE>
AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Twelve Months Twelve Months Four Months Twelve Months Four Months
------------- ------------- ----------- ------------- -----------
Ended Ended Ended Ended Ended
----- ----- ----- ----- -----
December 31, December 31, December 31, August 31, December 31,
------------ ------------ ------------ ---------- ------------
1996 1995 1994 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 67,208,406 $ 49,210,774 $ 11,197,168 $ 26,553,554 $ 7,848,154
Cost of sales:
Premiums and taxes 43,138,395 32,354,000 7,218,673 17,085,828 5,334,417
Commissions and other costs 9,360,491 6,968,773 1,553,273 3,566,338 888,831
------------ ------------ ------------ ------------ ------------
Total cost of sales 52,498,886 39,322,773 8,771,946 20,652,166 6,223,248
------------ ------------ ------------ ------------ ------------
14,709,520 9,888,001 2,425,222 5,901,388 1,624,906
Expenses:
Compensation, selling and administrative 11,658,784 7,548,902 1,914,130 4,650,231 1,425,101
Depreciation and amortization 440,760 361,129 117,588 416,322 144,638
Interest, dividend and other income (791,943) (469,612) (20,243) (108,572) (25,007)
Other item (Note 10) 875,000 -- -- (347,046) --
------------ ------------ ------------ ------------ ------------
12,182,601 7,440,419 2,011,475 4,610,935 1,544,732
------------ ------------ ------------ ------------ ------------
Income before provision for income taxes 2,526,919 2,447,582 413,747 1,290,453 80,174
Provision for income taxes 963,000 922,000 144,000 445,705 27,761
Cumulative effect of accounting change -- -- -- (67,780) (67,780)
============ ============ ============ ============ ============
Net income $ 1,563,919 $ 1,525,582 $ 269,747 $ 912,528 $ 120,193
============ ============ ============ ============ ============
Per share amounts:
Primary
Net income per share before cumulative
effect of accounting change $ 0.14 $ 0.20 $ 0.04 $ 0.15 $ 0.01
Cumulative effect of accounting change -- -- -- 0.01 0.01
============ ============ ============ ============ ============
Net income per share $ 0.14 $ 0.20 $ 0.04 $ 0.16 $ 0.02
============ ============ ============ ============ ============
Fully diluted
Net income per share before cumulative
effect of accounting change $ 0.14 $ 0.20 $ 0.04 $ 0.14 $ 0.01
Cumulative effect of accounting change -- -- -- 0.01 0.01
============ ============ ============ ============ ============
Net income per share $ 0.14 $ 0.20 $ 0.04 $ 0.15 $ 0.02
============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION
AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balances at August 31, 1993 5,168,000 $5,168 $3,435,017 ($125,637) $3,314,548
Net income for the period September 1, 1993
through August 31, 1994 912,528 912,528
Issuance of common stock upon exercise
of stock options 15,000 15 20,735 20,750
----------------------------------------------------------------------
Balances at August 31, 1994 5,183,000 5,183 3,455,752 786,891 4,247,826
Net income for the period September 1, 1994
through December 31, 1994 269,747 269,747
Issuance of common stock upon exercise
of stock options 496,895 496 975,265 975,761
Registration costs (82,830) (82,830)
Stock compensation expense 10,000 10,000
----------------------------------------------------------------------
Balances at December 31, 1994 5,679,895 5,679 4,358,187 1,056,638 5,420,504
Net income for the period January 1, 1995
through December 31, 1995 1,525,582 1,525,582
Issuance of common stock upon exercise
of stock options, net of underwriting fee 3,934,721 3,935 7,459,515 7,463,450
Registration costs (19,526) (19,526)
Stock compensation expense 54,996 54,996
Tax effect of option exercise 249,000 249,000
----------------------------------------------------------------------
Balances at December 31, 1995 9,614,616 9,614 12,102,172 2,582,220 14,694,006
Net income for the period January 1, 1996
through December 31, 1996 1,563,919 1,563,919
Issuance of common stock upon exercise
of stock options 949,707 950 2,205,927 2,206,877
Stock compensation expense 100,800 100,800
Tax effect of option exercise 644,446 644,446
======================================================================
Balances at December 31, 1996 10,564,323 $10,564 $15,053,345 $4,146,139 $19,210,048
======================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED STATEMENT OF CASH FLOWS
Twelve Months Twelve Months Four Months Twelve Months Four Months
------------ ------------- ----------- ------------- -----------
Ended Ended Ended Ended Ended
----- ----- ----- ----- -----
December 31, December 31, December 31, August 31, December 31,
------------ ------------ ------------ ---------- ------------
1996 1995 1994 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $1,563,919 $1,525,582 $269,747 $912,528 $120,193
------------ -------------- ------------ ------------- ------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 440,760 361,129 117,588 416,322 144,638
Cumulative effect of accounting change (67,780)
Deferred income taxes (135,268) (249,174) 42,780 (55,446)
Provision for doubtful accounts 35,031 1,367 3,000 (67,549)
Tax benefit from stock option exercise 644,446 249,000
Stock compensation expense 100,800 54,996 10,000
Change in operating assets and liabilities:
Restricted cash (4,862,159) (400,022) 315,580 (774,560) 55,947
Accounts receivable (978,267) (734,790) (201,912) 267,285 (91,236)
Officer and employee receivables (72,699) (51,918) (23,049) 24,972 (39,812)
Notes receivable (130,564) (366,400) 65,428 36,754 121,859
Income tax refund receivable (452,546) 57,000 19,789 70,350
Prepaid expenses and other assets (467,761) 16,913 (55,998) (16,956) (70,265)
Premiums, fees and taxes payable 4,862,159 400,022 (222,291) 575,800 (161,418)
Accounts payable 269,963 327,429 83,978 (14,748) 32,918
Accrued liabilities 1,990,368 258,440 (56,944) 197,218 (49,306)
Income taxes payable (51,000) 37,395 (82,395) 96,000
Purchases of trading securities (8,660,198) (5,319,442) (734,235)
Sales of trading securities 6,516,826 2,543,254 1,424,731
------------ -------------- ------------ ------------- ------------
Total adjustments (950,109) (2,814,801) 643,481 735,327 (41,771)
------------ -------------- ------------ ------------- ------------
Net cash provided by (used in) operating activities 613,810 (1,289,219) 913,228 1,647,855 78,422
------------ -------------- ------------ ------------- ------------
Cash flows from investing activities:
Purchases of property and equipment (736,025) (489,920) (98,431) (195,473) (19,740)
Proceeds from sales of property and equipment 127,747
Purchases of investment securities (3,570,332) (1,160,548) (500,000) (1,689,465)
Redemptions and maturities of investment securities 1,582,898 1,001,079 26,541
Decrease in margin loan (129,338) (28,501)
Increase in deposits to secure licenses (3,957) (73,069) (500,750) (152,500)
------------ -------------- ------------ ------------- ------------
Net cash used in investing activities (2,599,669) (1,723,537) (1,099,181) (1,165,697) (21,700)
------------ -------------- ------------ ------------- ------------
Cash flows from financing activities:
Issuance of common stock, net of underwriting fee 2,206,877 7,463,450 975,761 20,750
Registration costs (19,526) (23,120) (59,710)
------------ -------------- ------------ ------------- ------------
Net cash provided by (used in) financing activities 2,206,877 7,443,924 952,641 (38,960)
------------ -------------- ------------ ------------- ------------
Net increase in cash and cash equivalents 221,018 4,431,168 766,688 443,198 56,722
Cash and cash equivalents at beginning of period 6,746,886 2,315,718 1,549,030 1,105,832 1,105,832
============ ============== ============ ============= ============
Cash and cash equivalents at end of period $6,967,904 $6,746,886 $2,315,718 $1,549,030 $1,162,554
============ ============== ============ ============= ============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $957,368 $850,000 $226,075 $370,000 $0
============ ============== ============ ============= ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
16
<PAGE>
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.
17
<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.
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.
18
<PAGE>
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:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
-------------- ----------------
<S> <C> <C>
Trading securities (at fair value):
Municipal bonds $ 4,773,327 $ 3,578,358
U.S. agencies 500,000
Preferred stocks 448,403
-------------- ----------------
$ 5,721,730 $ 3,578,358
============== ================
Investment securities held to maturity (at amortized cost):
U.S. Treasuries and agencies (market value: $2,103,622; $0 ) $ 2,100,336
Municipal bonds (market value: $1,238,174; $1,057,007) 1,230,886 $ 1,055,198
Corporate bonds (market value: $98,625; $0) 100,000
Preferred stocks (market value: $0; $500,000) 500,000
Certificates of deposit 321,076 209,666
-------------- ----------------
3,752,298 1,764,864
Less: Current investment securities 1,654,209 255,576
-------------- ----------------
Non-Current investment securities $ 2,098,089 $ 1,509,288
============== ================
</TABLE>
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:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
-------------- ----------------
<S> <C> <C>
Office and computer equipment $ 1,763,659 $ 1,406,553
Furniture and fixtures 367,057 273,435
Vehicles 216,763 172,194
Leasehold improvements 486,945 412,336
-------------- ----------------
2,834,424 2,264,518
Less: Accumulated depreciation
and amortization (1,716,894) (1,389,800)
-------------- ----------------
$ 1,117,530 $ 874,718
============== ================
</TABLE>
19
<PAGE>
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:
<TABLE>
<CAPTION>
Four months Four months
Year ended Year ended ended Year ended ended
December 31, December 31, December 31, August 31, December 31
1996 1995 1994 1994 1993
----------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Current:
Federal $ 1,009,268 $1,077,174 $ 141,000 $ 386,990 $ 24,052
State 89,000 94,000 3,000 15,935
----------- --------- ---------- ---------- -----------
1,098,268 1,171,174 144,000 402,925 24,052
----------- --------- ---------- ---------- ----------
Deferred:
Federal (124,268) (232,174) 41,088 3,709
State (11,000) (17,000) 1,692
----------- --------- ---------- ---------- ----------
(135,268) (249,174) 42,780 3,709
----------- --------- ---------- ---------- ----------
Provision for
income taxes $ 963,000 $ 922,000 $ 144,000 $ 445,705 $ 27,761
=========== ========= ========== ========== ==========
</TABLE>
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.
20
<PAGE>
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.
21
<PAGE>
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:
<TABLE>
<CAPTION>
Exercise price ranges Weighted
--------------------- Total shares average option
$0.65-$1.50 $1.51-$3.00 $3.01-$5.00 under option price per share
----------- ----------- ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Outstanding at August 31, 1994 912,491 1,220,595 350,000 2,483,086 $1.80
Granted 634,000 634,000 $2.26
Canceled (100,000) (100,000) $1.65
Outstanding at December 31, 1994 912,491 1,754,595 350,000 3,017,086 $1.90
Granted 424,083 424,083 $2.37
Exercised (350,380) (2,000) (352,380) $0.69
Canceled (141,633) (147,000) (350,000) (638,633) $2.59
Outstanding at December 31, 1995 420,478 2,029,678 0 2,450,156 $1.98
Granted 46,000 295,500 341,500 $3.43
Exercised (167,692) (528,015) (250,000) (945,707) $2.33
Canceled (100,450) (100,450) $2.35
Outstanding at December 31, 1996 252,786 1,447,213 45,500 1,745,499 $2.05
Exercisable at December 31, 1996 252,786 1,046,571 12,500 1,311,857 $1.93
Plan shares available for future grants 87,794
======
</TABLE>
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.
22
<PAGE>
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.
23
<PAGE>
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
24
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ---------------------
Since inception, the Company has not changed accountants and has had no
disagreement on any matter of accounting principles or practices or financial
statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------------------------------------------------------------
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.
25
<PAGE>
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. 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. 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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------
Not applicable.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- --------------------------------------------------------------------------
The following documents are filed as part of this report under Part II Item 8:
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
Reference is made to the Index to Financial Statements and Financial Statement
Schedules included in Item 8 of Part II hereof, where such documents are listed.
EXHIBITS AS REQUIRED BY ITEM 601 OF REGULATION S-K:
Exhibit
Number Description Page
- ------ ----------- ----
3(a) Restated Articles of Incorporation
(incorporated by reference to Exhibit
3.1(a) to the Registrant's Registration
Statement on Form S-1 (file number
33-22279) filed with the Commission on
June 3, 1988). *
3(b) Certificate of Amendment to Restated
Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to the
Registrant's Registration Statement on
Form S-1 (file number 33-22279) filed with
the Commission on June 3, 1988). *
3(c) 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). *
27
<PAGE>
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
28
<PAGE>
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
29
<PAGE>
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
30
<PAGE>
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
31
EXHIBIT 10 (g)
--------------
FORM 10-K
---------
DECEMBER 31, 1996
-----------------
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
AUTOMOBILE PROTECTION CORPORATION, )
)
Plaintiff, )
) CIVIL ACTION NO.
v. )
) -----------------
EVEREST REINSURANCE COMPANY, )
)
Defendant. )
)
COMPLAINT
Plaintiff Automobile Protection Corporation ("APCO") brings this Complaint
for damages and declaratory relief pursuant to 28 U.S.C. ss.ss. 1332(a)(1) and
2201 against defendant, Everest Reinsurance Company. Plaintiff seeks damages for
defendant's breach of its obligation to pay Losses covered under certain
Assumption of Liability Endorsements ("ALEs") issued by or due from defendant
and a declaration of defendant's obligation to continue to pay such Losses as
they are incurred.
PARTIES, JURISDICTION AND VENUE
-------------------------------
1.
Plaintiff APCO is a corporation organized under the laws of the State of
Georgia, whose principal place of business is in Atlanta, DeKalb County,
Georgia.
2.
Defendant Everest Reinsurance Company, which until April 2, 1996 was known
as Prudential Reinsurance Company (collectively "Pru Re"), is a reinsurance
company and, upon information and belief, is a corporation organized under the
laws of the state of Delaware, whose principal place of business is Newark, New
Jersey.
32
<PAGE>
3.
Pru Re is and for many years has been licensed as an insurance company by
the State of Georgia and conducts the business of insurance in Georgia. Pru Re
is also and for many years has been registered to do business in Georgia.
4.
Pru Re has appointed Rachel Searcy, 66 Luckie Street, Atlanta, Fulton
County, Georgia 30303, as its registered agent on whom all process of law may be
served in any action.
5.
This court has jurisdiction over this matter pursuant to 28 U.S.C. ss.
1332(a)(1), because the matter in controversy exceeds Fifty Thousand and No/100
Dollars ($50,000.00), exclusive of interest and costs, and is between citizens
of different states.
6.
Venue is proper in this district pursuant to 28 U.S.C. ss. 1391(a).
FACTUAL ALLEGATIONS
-------------------
7.
APCO's business (hereinafter referred to as "the APCO programs") consists
of acting as a marketer and administrator of extended warranty and/or mechanical
breakdown vehicle service contracts (collectively "VSCs").
8.
Each APCO program dealer engages APCO to service its VSCs and appoints
APCO as its agent to secure and maintain insurance insuring the dealer's
obligations under the VSCs.
9.
On August 1, 1991, the primary insurance of the APCO program was moved to
National Colonial Insurance Company ("NCIC"), an insurance company organized
under the laws of the State of Kansas with administrative offices in Ridgefield,
New Jersey. NCIC is now in liquidation.
10.
The NCIC coverage was, in turn, reinsured by Pru Re pursuant to a Variable
Quota Share Reinsurance Agreement for Private Passenger Automobile Liability,
33
<PAGE>
Automobile Physical Damage, Excess Mechanical Breakdown and Related Business
(the "Reinsurance Treaty"), covering NCIC's entire book of vehicle service
contract insurance.
11.
Because APCO and many of the APCO program dealers did not regard NCIC as
sufficiently sound financially to accept NCIC coverage alone, APCO insisted on
the issuance of Assumption of Liability Endorsements ("ALEs") by Pru Re.
12.
In essence, the ALEs are endorsements to the NCIC insurance policies and
separate agreements by Pru Re, that, if NCIC became insolvent or bankrupt, Pru
Re would become directly liable to APCO, APCO program dealers or their service
contract holders as the loss payees under the ALEs for losses covered under the
APCO VSCs. The ALEs provide in pertinent part as follows:
In the event the Company [NCIC] and DSN [NCIC's parent
corporation] are declared insolvent and/or bankrupt by
courts of competent jurisdiction and, as a result
thereof, are unable to pay a loss from a peril covered
by the above cited [NCIC] policy, and in the event the
Trust Fund is also unable to pay such loss, the
Reinsurer [Pru Re] will immediately become liable to the
Loss Payee for the Loss Payee's loss and will make
payment directly to the Loss Payee, as its interest may
appear, subject to the terms and conditions of the above
cited policy and provided this Endorsement and the
policy were in effect prior to the time said loss
occurred.
13.
On July 16, 1993, the District Court of Shawnee County, Kansas, entered an
Agreed Order for Liquidation With a Finding of Insolvency ("Liquidation Order")
finding NCIC to be insolvent and granting the petition of the Commissioner of
Insurance of the State of Kansas to liquidate NCIC pursuant to the provisions of
Kan. Stat. Ann ss. 40-3605 et seq.
14.
On July 8, 1994, DSN filed for bankruptcy protection under Chapter 7 of
the bankruptcy code.
15.
As a result of NCIC's liquidation and DSN's bankruptcy, they have been
unable to pay claims under APCO VSCs insured by NCIC and the Pru Re ALEs. In
addition, by letter dated May 30, 1996, APCO was informed by the trustee that
the APCO Trust Fund holding the primary reserves under the APCO program was now
exhausted and unable to pay further claims. Accordingly, pursuant to the Pru Re
34
<PAGE>
ALEs, Pru Re became liable "immediately" to pay the claims, which have to date
exceeded One Hundred Thirty Thousand and No/100 Dollars ($130,000.00) and which
are actuarially predicted to exceed Five Hundred Thousand and No/100 Dollars
($500,000.00), directly to APCO or into the APCO Trust Fund for the benefit of
the APCO program dealers and service contract holders who are the loss payees
under the ALEs.
16.
By letter dated January 29, 1996, APCO requested that Pru Re either
establish a claims imprest account or make arrangements to replenish the
existing APCO Trust Fund in amounts sufficient to pay all valid claims under the
APCO service contracts. To date, Pru Re has not honored this request or any of
its obligations under the ALEs.
17.
In direct contradiction to the express terms of the ALEs, Pru Re has
asserted that the purported cancellation of NCIC policies by the NCIC liquidator
has cancelled its obligations under the ALEs, even though the ALEs were issued
for the specific purpose of providing protection to APCO and its dealers if NCIC
were to become insolvent.
18.
Pru Re has also alleged that some ALEs were never officially issued to
APCO or its dealers. However, APCO consented to the conversion to NCIC and
marketed the conversion to its dealers based primarily on Pru Re's
representations through NCIC that it had the necessary ALEs.
19.
NCIC had actual, implied and apparent authority to issue the ALEs, with
effective dates of August 1, 1991, directly to properly enrolled APCO program
dealers insured by NCIC. Moreover, by letter dated February 23, 1990, Pru Re
confirmed to NCIC the consummation of a reinsurance agreement covering "all
aspects of the automobile warranty business now being undertaken by National
Colonial and provided to them by DSN Dealer Service Network, Inc."
20.
By letter dated June 4, 1991, NCIC advised APCO that Pru Re had agreed to
provide ALEs to all of those APCO program dealers insured by NCIC who requested
one.
35
<PAGE>
21.
By letter dated July 12, 1991, APCO informed NCIC that each APCO program
dealer insured by NCIC required an ALE from Pru Re.
22.
By letter dated July 17, 1991, NCIC again confirmed that "National
Colonial has been authorized and empowered by Prudential Re to issue these
Endorsements to Dealers properly enrolled in the APCO Service Contract Programs
and insured by National Colonial."
23.
By letter dated July 26, 1991, DSN reiterated to APCO that "Pru Re has
agreed to issue Assumption of Liability ("cut-through") Endorsements to dealers
that you service."
24.
NCIC had actual, implied and apparent authority to make these
representations and promises on behalf of Pru Re.
25.
Pru Re ratified NCIC's actions and representations.
26.
NCIC later represented that due to a delay in printing the final version
of the ALEs, it was unable to deliver all of the ALEs to APCO program dealers by
August 1, 1991, the date of the conversion to NCIC. By letter dated August 6,
1991, NCIC promised that this delay would "not in any material way adversely
impact the continued underwriting of National Colonial and Pru Re of the APCO
service contract program" and that "[o]nce the ALEs have been delivered they
will be executed retroactive with the inception date of the attendant National
Colonial Insurance Company documentation."
27.
Pru Re is therefore liable as if all ALEs had been formally issued with
August 1, 1991 effective dates.
28.
Pru Re has also alleged that APCO's only remedy is a complaint in the NCIC
liquidation.
36
<PAGE>
29.
NCIC and DSN have not been named as defendants to this action because of
their respective insolvency and bankruptcy and, more importantly, because they
are neither necessary nor appropriate parties. The very purpose of the ALEs is
to ensure prompt, direct payment by Pru Re to loss payees in the event that
NCIC, DSN, and the Trust Fund are unable to pay losses under VSCs covered by the
ALEs.
30.
The ALEs expressly provide that Pru Re's obligations thereunder were to
become due immediately upon the insolvency and/or bankruptcy of NCIC and DSN and
the depletion of the Trust Fund.
31.
To date, Pru Re has refused to honor its obligations under the ALEs on the
erroneous grounds that it is barred by the Liquidation Order from making any
payments to APCO. Specifically, Pru Re relies on Paragraph C of the Liquidation
Order, which provides that "all reinsurance companies involved with [NCIC] be
and are restrained from making any settlements with any claimant or policyholder
of [NCIC] or any other person other than the petitioner as Liquidator . . . ."
32.
On information and belief, at the time Pru Re issued the ALEs, provisions
such as paragraph C of the Liquidation Order were common provisions in insurance
company liquidation orders.
33.
On information and belief, when Pru Re issued the ALEs, it either knew or
recklessly disregarded the fact that such injunctions were common in the
liquidation of insolvent insurance companies.
34.
On information and belief, Pru Re also knew or recklessly disregarded the
fact that it would eventually assert such an injunction as a barrier to
performance of its obligations under the ALEs and, therefore, that its promise
to perform its obligations under the ALEs upon NCIC's insolvency were false when
made.
35.
Nevertheless, Pru Re made these false promises and failed to disclose this
alleged barrier to its performance of the ALEs in order to induce APCO and its
dealers to convert the APCO program to coverage under NCIC and Pru Re.
37
<PAGE>
36.
APCO and its dealers reasonably relied on Pru Re's false promises and
failure to disclose this alleged barrier to its performance of the ALEs by
converting the APCO program to coverage under NCIC and Pru Re.
37.
Pru Re's actions constitute fraudulent conduct.
38.
Pru Re has refused in bad faith to pay losses covered by the Pru Re ALEs
and NCIC policies for more than sixty (60) days after demand for such payment by
the holders of the ALEs and NCIC policies.
39.
Pru Re has acted in bad faith, has been stubbornly litigious, and has
caused plaintiff unnecessary trouble and expense.
40.
As a result of Pru Re's refusal to honor its obligations under the ALEs,
in order to preserve its business and reputation, APCO has been forced to
advance funds to pay losses under VSCs covered by the Pru Re ALEs.
41.
To date, those Losses exceed One Hundred Thirty Thousand and No/100
Dollars ($130,000.00).
42.
Total Losses payable under the ALEs are predicted to exceed Five Hundred
Thousand and No/100 Dollars ($500,000.00).
CAUSES OF ACTION
----------------
COUNT ONE
---------
BREACH OF CONTRACT
------------------
43.
The allegations contained in paragraphs 1 - 34 are incorporated herein
by reference.
38
<PAGE>
44.
As a result of NCIC's insolvency, DSN's bankruptcy, and the depletion of
the APCO Trust Fund, Pru Re in March 1996 became directly liable under the ALEs
to APCO and covered APCO dealers and service contract holders for all covered
Losses.
45.
As a result of Pru Re's failure and refusal to pay these Losses covered by
the ALEs, APCO has been damaged in an amount that to date exceeds One Hundred
Thirty Thousand and No/100 Dollars ($130,000.00), plus interest, costs and
attorney's fees, and is predicted to exceed Five Hundred Thousand and No/100
Dollars ($500,000.00).
COUNT TWO
---------
INNOCENT, NEGLIGENT AND
-----------------------
FRAUDULENT MISREPRESENTATION
----------------------------
46.
The allegations contained in paragraphs 1 - 37 are incorporated herein
by reference.
47.
Pru Re authorized NCIC, acting as its agent, to make the representations
to APCO and APCO program dealers described above. Alternatively, including by
accepting and retaining APCO's premiums, Pru Re ratified these representations.
48.
NCIC's representations on behalf of Pru Re were intended to induce, and
did induce, detrimental reliance by APCO and its dealers.
49.
At the time Pru Re and NCIC made these representations, Pru Re and NCIC
knew or recklessly disregarded the fact that they were false.
50.
As a result, APCO has been damaged in an amount that to date exceeds One
Hundred Thirty Thousand and No/100 Dollars ($130,000.00), plus interest, costs
and attorney's fees, and is predicted to exceed Five Hundred Thousand and No/100
Dollars ($500,000.00).
39
<PAGE>
COUNT THREE
-----------
PROMISSORY ESTOPPEL
-------------------
51.
The allegations contained in paragraphs 1 - 42 are incorporated herein
by reference.
52.
As a result of Pru Re's promises, on which Pru Re reasonably should have
expected APCO and its program dealers to rely and on which they did rely, Pru Re
should be estopped to deny its liability to APCO and its dealers for all losses
that would have been covered by the ALEs, including the promised ALEs that were
never formally issued.
53.
Accordingly, Pru Re is liable to APCO and its dealers for losses incurred
under the promised but unissued ALEs, which Pru Re is estopped to deny, in an
amount to be determined at trial.
COUNT FOUR
----------
FRAUD
-----
54.
The allegations contained in paragraphs 1 - 50 are incorporated herein
by reference.
55.
As a result of Pru Re's fraud, APCO and its program dealers and service
contract holders have incurred unpaid losses that should have been paid by Pru
Re under the ALEs. In order to preserve its business and reputation, APCO has
been forced to cover these Losses.
56.
Pru Re's fraud has damaged APCO and its program dealers and service
contract holders in an amount to be determined at trial.
COUNT FIVE
----------
NEW JERSEY CONSUMER FRAUD ACT
-----------------------------
57.
The allegations contained in paragraphs 1 - 60 are incorporated herein
by reference.
40
<PAGE>
58.
Pursuant to N.J. Stat. Ann. ss. 56:8-2, "[t]he act, use or employment by
any person of any unconscionable commercial practice, deception, fraud, false
pretense, false promise, misrepresentation, or the knowing, concealment,
suppression, or omission of any material fact with intent that others rely
upon such concealment, suppression or omission, in connection with the sale
or advertisement of any merchandise or real estate, or with the subsequent
performance of such person as aforesaid, whether or not any person has in
fact been misled, deceived or damaged thereby, is declared to be an unlawful
practice; . . . ."
59.
Pru Re authorized NCIC, acting as Pru Re's agent, to make the
representations set forth above.
60.
The misrepresentations of Pru Re and its agent NCIC constitute an
unlawful practice under N.J. Stat. Ann. ss. 56:8-2.
61.
In addition, Pru Re's actions, in connection with the conversion of the
APCO program to coverage under NCIC and Pru Re, of promising to perform its
obligations under the ALEs immediately upon NCIC's insolvency when it knew or
recklessly disregarded the fact that it would in fact assert standard
injunctions in the Liquidation Order as a barrier to such performance
constitute an unlawful practice under N.J. Stat. Ann. ss. 56:8-2.
62.
As a result of Pru Re's unlawful practices, APCO and APCO program dealers
and service contract holders have incurred unpaid losses that would have
otherwise been covered by Pru Re ALEs. In order to preserve its business, APCO
has been forced to advance funds to pay these losses.
63.
As a result of Pru Re's unlawful practices, APCO and its dealers have been
damaged in an amount to be determined at trial.
COUNT SIX
---------
REFORMATION
-----------
64.
The allegations contained in paragraphs 1 - 67 are incorporated herein
by reference.
41
<PAGE>
65.
Pru Re authorized NCIC, acting as Pru Re's agent, to make the
representations and promises set forth above.
66.
In reliance on these representations and promises by Pru Re's agent, APCO
converted the APCO program to coverage under NCIC and Pru Re and persuaded many
APCO program dealers to continue with the APCO program despite this conversion.
67.
Contrary to these representations, some of the ALEs that were issued
indicated effective dates subsequent to August 1, 1991.
68.
As a result, APCO is entitled to a reformation of those ALEs issued with
effective dates later than August 1, 1991 to reflect effective dates of August
1, 1991.
COUNT SEVEN
-----------
DECLARATORY JUDGMENT
--------------------
69.
The allegations contained in paragraphs 1 - 72 are incorporated herein
by reference.
70.
An actual controversy exists between APCO and Pru Re about Pru Re's
obligation under the ALEs to pay Losses.
71.
As a result of the foregoing, APCO is entitled to a declaration that Pru
Re must "immediately" pay directly to APCO or into the APCO Trust Fund for the
benefit of APCO's dealers or service contract holders, as the loss payees under
ALEs issued by or due from Pru Re, all Losses arising under VSCs sold by APCO
dealers while insured by NCIC.
42
<PAGE>
PRAYER FOR RELIEF
WHEREFORE, Plaintiff prays that the Court grant the following relief:
(1) A declaration that defendant Pru Re is liable to pay directly to
APCO or into the APCO Trust Fund for the benefit of APCO's dealers or service
contract holders, as the loss payees under ALEs issued by or due from defendant,
all losses arising under VSCs sold by APCO and its program dealers while insured
by NCIC;
(2) Compensatory damages in an amount to be determined;
(3) Additional Damages in the amount of twenty-five percent of Pru
Re's liability for accrued losses under the ALEs as provided by O.C.G.A.
ss. 33-4-6 (1992);
(4) Exemplary damages;
(5) Treble damages as provided by N.J. Stat. Ann ss. 56:8-19 (1989);
(6) Reasonable attorney's fees and costs pursuant to O.C.G.A.
ss. 33-4-6 (1992), N.J. Stat. Ann ss. 56:8-19 (1989) and other applicable law;
(7) Prejudgment interest;
(8) Such other, additional and further relief as the Court deems just
and appropriate.
Respectfully submitted this 12th day of September, 1996.
-------------------------------
Caroline W. Spangenberg
Georgia Bar No. 669055
Attorney for Plaintiff
KILPATRICK & CODY, L.L.P.
Suite 2800
1100 Peachtree Street
Atlanta, Georgia 30309-4530
(404) 815-6500
43
AUTOMOBILE PROTECTION CORPORATION - APCO
----------------------------------------
EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
----------------------------------------------------------
FORM 10-K
---------
DECEMBER 31, 1996
-----------------
<TABLE>
<CAPTION>
For the For the Four months For the
year ended year ended ended year ended
December 31, December 31, December 31, August 31,
1996 1995 1994 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average number
of shares outstanding 10,156,994 6,703,332 5,679,895 5,183,000
Net effect of dilutive stock options
based on the treasury stock method,
using average market price 1,000,006 827,668 1,195,105 635,451
- --------------------------------------------------------------------------------------------------------
11,157,000 7,531,000 6,875,000 5,818,451
========================================================================================================
Net income $ 1,563,919 $ 1,525,582 $ 269,747 $ 912,528
========================================================================================================
Per share $ 0.14 $ 0.20 $ 0.04 $ 0.16
========================================================================================================
FULLY DILUTED
Weighted average number
of shares outstanding 10,156,994 6,703,332 5,679,895 5,183,000
Net effect of dilutive stock options
based on the treasury stock method,
using the year-end market price
which was higher than the average
market price 1,000,006 900,668 1,195,105 762,997
- --------------------------------------------------------------------------------------------------------
11,157,000 7,604,000 6,875,000 5,945,997
========================================================================================================
Net income $ 1,563,919 $ 1,525,582 $ 269,747 $ 912,528
========================================================================================================
Per share $ 0.14 $ 0.20 $ 0.04 $ 0.15
========================================================================================================
</TABLE>
44
AUTOMOBILE PROTECTION CORPORATION - APCO
----------------------------------------
EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS
---------------------------------------------
FORM 10-K
---------
DECEMBER 31, 1996
-----------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-86594) of Automobile Protection Corporation - APCO
of our report dated March 12, 1997 appearing on page 12 of this Form 10-K.
PRICE WATERHOUSE LLP
March 28, 1997
Atlanta, GA
45
<PAGE>
AUTOMOBILE PROTECTION CORPORATION - APCO
----------------------------------------
EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS
---------------------------------------------
FORM 10-K
---------
DECEMBER 31, 1996
-----------------
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-3473) of
Automobile Protection Corporation - APCO of our report dated March 12, 1997
appearing on page 12 of this Form 10-K.
PRICE WATERHOUSE LLP
March 28, 1997
Atlanta, GA
46
<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 TWELVE
MONTHS ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,967,904
<SECURITIES> 9,474,028
<RECEIVABLES> 2,913,453
<ALLOWANCES> 30,000
<INVENTORY> 0
<CURRENT-ASSETS> 27,170,827
<PP&E> 2,834,424
<DEPRECIATION> 1,716,894
<TOTAL-ASSETS> 31,260,823
<CURRENT-LIABILITIES> 11,947,315
<BONDS> 0
0
300
<COMMON> 10,564
<OTHER-SE> 19,199,484
<TOTAL-LIABILITY-AND-EQUITY> 31,260,823
<SALES> 67,208,406
<TOTAL-REVENUES> 67,208,406
<CGS> 52,498,886
<TOTAL-COSTS> 52,498,886
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,526,919
<INCOME-TAX> 963,000
<INCOME-CONTINUING> 1,563,919
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,563,919
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
