SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-17231
AUTOMOBILE PROTECTION CORPORATION - APCO
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1582432
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(State or other jurisdiction (I.R.S. Employer
of 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)
(770) 394-7070
--------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 30, 1998
- --------------------------------------- ---------------------------------
Common stock, $.001 par value per share 11,768,794
1
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AUTOMOBILE PROTECTION CORPORATION - APCO
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements.
Consolidated Balance Sheets at September 30, 1998 and
December 31, 1997........................................................................... 3
Consolidated Statements of Income for the Three
Month Period Ended September 30, 1998 and 1997.............................................. 4
Consolidated Statements of Income for the Nine
Month Period Ended September 30, 1998 and 1997.............................................. 5
Consolidated Statements of Cash Flows for the Nine
Month Period Ended September 30, 1998 and 1997 ............................................. 6
Notes to Consolidated Financial Statements ................................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................... 9
Part II. Other Information
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
2
<PAGE>
AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, * December 31,
------------- --------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $18,000,273 $11,297,049
Trading securities, at fair value 10,601,933 8,067,180
Investment securities held to maturity 612,390 1,851,019
Accounts receivable, net of provision for doubtful
accounts of $100,000 and $60,000 3,499,458 2,400,701
Notes receivable, net of provision for doubtful
accounts of $60,000 and $0 3,178,357 2,554,978
Officer and employee receivables 343,109 250,190
Income tax refund receivable 460,772
Prepaid expenses 1,161,688 287,766
Deferred tax asset 1,043,602 785,882
Restricted cash 12,531,045 8,324,628
----------------- ------------------
Total current assets 51,432,627 35,819,393
Property and equipment, net of accumulated
depreciation of $2,350,056 and $2,015,368 2,498,743 1,220,876
Investment securities held to maturity, non current 1,011,026 1,474,493
Deposits to secure licenses 760,322 743,762
Deferred tax asset 385 18,793
Other assets 39,756 37,733
----------------- ------------------
$55,742,859 $39,315,050
----------------- ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Premiums, fees and taxes payable $12,531,045 $8,324,628
Accounts payable 2,185,196 1,255,831
Accrued liabilities 7,017,880 4,805,471
Income taxes payable 399,033
----------------- ------------------
Total current liabilities 21,734,121 14,784,963
Deferred income taxes 408,325 254,420
Redeemable preferred stock 300
----------------- ------------------
22,142,446 15,039,683
----------------- ------------------
Shareholders' equity:
Common stock; $.001 par value, 40,000,000 authorized,
11,768,794 and 10,976,964 issued and outstanding 11,768 10,976
Additional paid-in capital 20,300,876 16,067,536
Retained earnings 13,287,769 8,196,855
----------------- ------------------
Total shareholders' equity 33,600,413 24,275,367
----------------- ------------------
$55,742,859 $39,315,050
================= ==================
</TABLE>
* From audited financial statements contained in Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
The accompanying notes are an integral part of these consolidated financial
statements.
3
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AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
------------ ------------
Ended Ended
----- -----
September 30, September 30,
------------- -------------
1998 1997
---- ----
<S> <C> <C>
Revenues $33,684,804 $27,087,863
----------------- ------------------
Cost of sales:
Premiums and taxes 21,920,276 17,604,493
Commissions and other costs 4,494,447 3,956,858
----------------- ------------------
Total cost of sales 26,414,723 21,561,351
----------------- ------------------
7,270,081 5,526,512
----------------- ------------------
Expenses:
Compensation, selling and administrative 4,568,936 3,565,656
Depreciation and amortization 101,000 111,000
Interest, dividend and other income (498,966) (326,745)
----------------- ------------------
4,170,970 3,349,911
----------------- ------------------
Income before provision for income taxes 3,099,111 2,176,601
Provision for income taxes 1,147,000 834,689
----------------- ------------------
Net income $1,952,111 $1,341,912
----------------- ------------------
Earnings per share:
Basic $0.17 $0.13
Diluted $0.16 $0.12
Number of shares used in computing earnings per share:
Basic 11,735,000 10,781,000
Diluted 12,480,000 11,677,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
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AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Nine Months
----------- -----------
Ended Ended
----- -----
September 30, September 30,
------------- -------------
1998 1997
---- ----
<S> <C> <C>
Revenues $89,559,194 $70,980,206
----------------- ------------------
Cost of sales:
Premiums and taxes 57,161,582 45,983,441
Commissions and other costs 12,697,605 10,349,247
----------------- ------------------
Total cost of sales 69,859,187 56,332,688
----------------- ------------------
19,700,007 14,647,518
----------------- ------------------
Expenses:
Compensation, selling and administrative 12,548,621 10,520,976
Depreciation and amortization 339,000 325,500
Interest, dividend and other income (1,267,528) (819,951)
----------------- ------------------
11,620,093 10,026,525
----------------- ------------------
Income before provision for income taxes 8,079,914 4,620,993
Provision for income taxes 2,989,000 1,764,689
----------------- ------------------
Net income $5,090,914 $2,856,304
----------------- ------------------
Earnings per share:
Basic $0.44 $0.27
Diluted $0.41 $0.25
Number of shares used in computing earnings per share:
Basic 11,517,000 10,699,000
Diluted 12,327,000 11,467,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Nine Months
----------- -----------
Ended Ended
----- -----
September 30, September 30,
------------- -------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $5,090,914 $2,856,304
----------------- ------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 339,000 325,500
Deferred income taxes (85,407) 78,665
Provision for doubtful accounts 100,000 10,000
Tax benefit from stock option exercise 2,442,000
Stock compensation expense 135,200
Changes in operating assets and liabilities:
Restricted cash (4,206,417) (2,206,152)
Accounts receivable (1,138,757) (1,731,580)
Officer and employee receivables (92,919) (34,623)
Notes receivable (683,379) (313,725)
Prepaid expenses and other assets (875,945) 95,379
Premiums, fees and taxes payable 4,206,417 2,206,152
Accounts payable 929,365 471,425
Accrued liabilities 2,212,409 1,927,108
Income taxes (859,805) 945,790
Purchases of trading securities (8,724,796) (4,226,207)
Sales of trading securities 6,190,043 3,234,265
----------------- ------------------
Total adjustments (112,991) 781,997
----------------- ------------------
Net cash provided by operating activities 4,977,923 3,638,301
----------------- ------------------
Cash flows from investing activities:
Purchases of property and equipment (1,623,800) (389,724)
Proceeds from sales of property and equipment 6,933 10,000
Purchases of investment securities (186,822) (386,467)
Redemptions and maturities of investment securities 1,888,918 393,308
Increase in deposits to secure licenses (16,560) (15,634)
----------------- ------------------
Net cash provided by (used in) investing activities 68,669 (388,517)
----------------- ------------------
Cash flows from financing activities:
Issuance of common stock 1,656,932 499,081
Redemption of preferred stock (300)
----------------- ------------------
Net cash provided by financing activities 1,656,632 499,081
----------------- ------------------
Net increase in cash and cash equivalents 6,703,224 3,748,865
Cash and cash equivalents at beginning of period 11,297,049 6,967,904
----------------- ------------------
Cash and cash equivalents at end of period $18,000,273 $10,716,769
----------------- ------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $1,492,212 $715,370
----------------- ------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
AUTOMOBILE PROTECTION CORPORATION - APCO
----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
-----------
1. Nature of Business and Summary of Significant Accounting Policies
Automobile Protection Corporation - APCO was incorporated in the State of
Georgia on September 10, 1984. APCO and its wholly-owned subsidiaries (the
"Company") are engaged primarily in the marketing and administration of extended
vehicle service contracts and extended vehicle warranty programs sold by new and
used automobile retailers located throughout the United States. Extended vehicle
service contracts augment and enhance upon the basic warranty offered by the
automobile manufacturer. The Company markets its contracts nationally under the
EasyCare(R) trade name and also administers vehicle service contracts under
private label programs for a major automobile manufacturer and others.
The Company arranges for insurance coverage to be provided by certain
Underwriters at Lloyd's of London, Greenwich Insurance Company, Indian Harbor
Insurance Company and CIGNA Property & Casualty companies. 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 financial information included herein is unaudited; however, such
information reflects all adjustments, consisting solely of normal recurring
adjustments which are, in the opinion of management, necessary for a fair
presentation of the periods indicated. Certain information and footnote
disclosures normally included in financial statements prepared in conformity
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
These condensed financial statements should be read in conjunction with the
consolidated financial statements and related notes contained in the Company's
Annual Report on Form 10-K for the twelve months ended December 31, 1997.
The following is a summary of the significant accounting policies followed by
the Company:
Basis of Presentation
- ---------------------
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Certain
comparative amounts have been reclassified to conform with current year
presentation.
Revenues
- --------
Revenues from the sale of extended vehicle service contracts and extended
warranty programs are recognized when the service contract or extended warranty
sold by the dealer is received and accepted by the Company. Revenues are
comprised of the Company's administration fee, underlying insurance premium and
tax.
7
<PAGE>
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include all funds with an original maturity of ninety
days or less. Certain funds are considered restricted as they are held for the
benefit of the insurers and to pay claims.
Restricted Cash
- ---------------
Restricted cash represents funds collected by the Company on behalf of its
insurers and claims payment floats provided by the insurers, to enable the
Company to make claims payments on behalf of the insurers.
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. The market value of the Company's held-to-maturity
securities at September 30, 1998 is $1,630,529.
Property and Equipment
- ----------------------
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated using the
straight-line method for financial reporting purposes and accelerated methods
for income tax purposes over the estimated useful lives of the assets ranging
from three to seven years. Maintenance and repair costs are charged to expense
as incurred, and major renewals and betterments are capitalized. When property
and equipment is retired or sold, the related carrying value and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in income.
Premiums, Fees and Taxes Payable
- --------------------------------
Premiums and taxes payable includes premiums due to the insurers or their
agents, taxes payable to various states and amounts advanced to the Company by
the insurers for payment of claims.
Advertising costs
- -----------------
The Company sponsors motorsport activities to advertise its products. The
Company has entered into an associate sponsorship agreement with Joe Gibbs
Racing, Inc. and separate agreements with race track owners to sponsor race
events. Costs associated with the Joe Gibbs Racing, Inc. associate sponsorship
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 federal income tax return with its subsidiaries.
8
<PAGE>
Stock-based Compensation Plans
- ------------------------------
The Company has elected to account for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25) with the annual associated disclosure requirements of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" (SFAS No. 123). SFAS No. 123 requires that companies which elect
to not account for stock-based compensation as prescribed by that statement
shall disclose annually, among other things, pro forma effects on net income and
net income per share as if SFAS No. 123 had been adopted. Under APB No. 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of the grant, no compensation
expense is recognized.
Earnings Per Share
- ------------------
The Company follows Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS No. 128) for the calculation of earnings per share,
which was adopted during 1997. Basic earnings per share is based upon the
weighted average number of issued common shares for each period. Diluted
earnings per share is based upon the weighted average number of issued common
shares for each period, in addition to the effect of common stock equivalents
(stock options) which are calculated using the treasury stock method.
Comprehensive Income
- --------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (FAS 130) to be
effective for fiscal years beginning after December 15, 1997. This Statement
requires that all items which are to be recognized as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company's comprehensive
income is the same as its net income.
2. Other Items
In June 1998, the Company entered into a marketing and sales license agreement
with a software vendor, whereby the Company licensed certain computer software
for the automotive industry, which it intends to market to automobile dealers
and others. Under the agreement, the Company is required to purchase software
with a minimum aggregate value of $1,750,000, of which $250,000 has been paid
through September 30, 1998.
In July 1998, the Company settled its lawsuit against Everest Reinsurance
Company (formerly Prudential Reinsurance Company) under confidential terms. The
Company expects to pay claims under the various assumption of liability
endorsements through the third quarter of 1999 and believes the reserves
recorded for this liability are adequate. The Company recognized a pretax credit
of $400,000 during the third quarter to adjust the accrued liability to its
expected ultimate amount.
In September 1998, the Company acquired a 9.6 acre parcel of land in the City of
Norcross, Georgia and has commenced the design of a 50,000 square foot building
to accommodate the Company's corporate and administrative offices. The building
is expected to be available for occupancy during the second quarter of 1999. In
connection with the Company's relocation to this building, the Company has
recorded a reserve of approximately $350,000 related to costs to be incurred to
abandon its leased office location.
9
<PAGE>
3. Stockholders' Equity and Options
During the third quarter, the Company's board of directors approved the
formation of the 1998 Performance Equity Plan to enable the Company to offer its
key employees, officers, directors and consultants whose past, present and/or
potential contributions to the Company and its Subsidiaries have been, are or
will be important to the success of the Company, an opportunity to acquire a
proprietary interest in the Company. The Plan provides for the issuance of
550,000 options.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
The following discussion and analysis of financial condition and results of
operations presents the more significant factors affecting the Company during
the three and nine month periods ended September 30, 1998. The discussion and
analysis should be read in conjunction with the unaudited consolidated financial
statements and related notes appearing elsewhere herein and the Company's Annual
Report on Form 10-K for the twelve months ended December 31, 1997.
Forward-Looking Statements
When used herein and in future filings by the Company with the Securities and
Exchange Commission, the words or phrases "will likely result", "management
expects" or "the Company expects", "will continue", "is expected", "is
anticipated", "estimated" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance
on any such forward-looking statements, each of which speak only as of the date
made. Such statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected. The Company has no obligation to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect anticipated or unanticipated events or circumstances
occurring after the date of such statements.
Certain of these risks and uncertainties are discussed 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 market. Additional risks
related to insurance carriers are discussed in the "Overview" section.
10
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Overview
The Company's primary business is the marketing and administration of extended
vehicle service contracts (hereinafter referred to as "VSCs") for automobile
dealers. Dealers often engage a third party administrator, such as the Company,
to design a VSC program, to arrange for insurance to limit their financial risk
and to perform all of the related administrative functions associated therewith.
A function of the Company is to arrange for insurance to cover obligations to
pay all future claims, which the Company does through unrelated insurers,
including: (a) Greenwich Insurance Company, a wholly-owned subsidiary of NAC Re
Corporation, which is rated "A+" (Superior) by A.M. Best; (b) Indian Harbor
Insurance Company, a wholly-owned subsidiary of NAC Re Corporation, which is
rated "A+" (Superior) by A.M. Best; (c) Certain Underwriters at Lloyd's of
London, which is rated "A" (Excellent) by A.M. Best; and (d) CIGNA Property and
Casualty companies, which are rated "A-" (Excellent) by A.M. Best. Greenwich,
Indian Harbor and CIGNA may choose to purchase reinsurance from Lloyd's, NAC Re
Corporation or other reinsurers. Most of the VSC's accepted by the Company for
administration between 1991 and 1996 are insured by Lloyd's. The availability of
insurance coverage at competitive rates and of insurance funds to make claims
payments, including the financial condition of the insurance carriers, is
critical to the Company and any disruption could have a material adverse effect
on the Company.
The Company's reported revenues represent the amount it bills to automobile
dealers, which is based on rate schedules developed by the Company. The amounts
billed consider insurance, taxes, commissions and other costs and profit. The
Company's reported cost of sales represents the amounts it pays to the insurers
for insurance, state insurance taxes and commissions to its sales
representatives.
Liquidity and Capital Resources
The Company believes that its current working capital and anticipated levels of
internally generated funds will be sufficient to fund its operating and capital
expenditure requirements for the next twenty-four months. This estimate is based
on the Company's current level of operations and certain assumptions relating to
the Company's business and planned growth. At September 30, 1998, the Company
had working capital of $29,698,506 (compared to $21,034,430 at December 31,
1997) and investment securities with maturities greater than twelve months of
$1,011,026 (compared to $1,474,493 at December 31, 1997). The net increase in
working capital and investment securities of $8,200,609 is attributable to
operations of the Company and to proceeds from the exercise of stock options
($1,656,932) less the cost of the land for the Company's corporate and
administrative offices ($1,072,484). The Company expects to receive a tax
benefit from the stock option exercises of $2,442,000 over the remainder of the
year through lower current tax payments. The Company invests its funds in
treasury securities, municipal bonds and financial instruments with maturities
of less than five years and money market accounts. The Company expects to
initially fund the construction of its corporate and administrative offices from
working capital.
11
<PAGE>
Results of Operations
Three months ended September 30, 1998 ("1998") compared to the three months
- ---------------------------------------------------------------------------
ended September 30, 1997 ("1997").
- ----------------------------------
Revenues for 1998 increased by 24% or $6,596,941 to $33,684,804 over 1997. The
Company's largest revenue source is from the marketing and administration of
extended vehicle service contracts ("VSCs") under the EasyCare(R) name, which
provided 99% of revenues. EasyCare(R) revenues increased due to the introduction
of additional automobile dealers to EasyCare(R) vehicle service contracts by the
Company's independent sales representatives, increased average production by
dealers and from 15% growth under the contract with American Honda Finance
Corporation.
The Company's gross margin was 21.6% of revenues in 1998 compared to 20.4% of
revenues in 1997. Gross margin is impacted by the mix of new and used, makes and
models of vehicles and the types of coverage sold. Management anticipates future
gross margins will be reduced as new product introductions, such as EasyCare(R)
Standard, and private label marketing agreements, such as with Banc One
Insurance Services Corporation, - result in a change in the mix of business.
Compensation, selling and administrative expenses for 1998 increased by 28% or
$1,003,280 to $4,568,936 over 1997. The increase for 1998 is primarily
attributable to compensation cost, which increased to support the growth of the
business. During the third quarter, the Company recognized two "other items",
which are included in this income statement component: (a) Recognition of a
pretax credit of $400,000 to adjust the reserve for claims recorded in
connection with the Company's lawsuit against Everest Reinsurance Company, which
was settled this quarter; (b) A pretax loss of approximately $350,000 recognized
in connection with the abandonment of the Company's leased office location.
Interest, dividend and other income for 1998 increased by 53% or $172,221 to
$498,966 over 1997. The increase is due to the larger cash and investment
securities balances on hand.
The Company recorded a provision for income taxes in 1998 of $1,147,000 compared
to $834,689 for 1997. The increase is primarily due to higher pretax income,
offset by a lower effective combined tax rate of 37% compared to 38% in 1997.
Nine months ended September 30, 1998 ("1998") compared to the nine months ended
- -------------------------------------------------------------------------------
September 30, 1997 ("1997").
- ----------------------------
Revenues for 1998 increased by 26% or $18,578,988 to $89,559,194 over 1997. The
Company's largest revenue source is from the marketing and administration of
extended vehicle service contracts ("VSCs") under the EasyCare(R) name, which
provided 99% of revenues. EasyCare(R) revenues increased due to the introduction
of additional automobile dealers to EasyCare(R) vehicle service contracts by the
Company's independent sales representatives, increased average production by
dealers and from 27% growth under the contract with American Honda Finance
Corporation.
The Company's gross margin was 22% of revenues in 1998 compared to 20.6% of
revenues in 1997. Gross margin is impacted by the mix of new and used, makes and
models of vehicles and the types of coverage sold. The gross margin for 1998 was
also impacted by an insurance change introduced late last
12
<PAGE>
year, which impacted the first and second quarters. Management anticipates
future gross margins will be reduced as new product introductions, such as
EasyCare(R) Standard, and private label marketing agreements, such as with Banc
One Insurance Services Corporation, - result in a change in the mix of business.
Compensation, selling and administrative expenses for 1998 increased by 19% or
$2,027,645 to $12,548,621 over 1997. The increase for 1998 is primarily
attributable to compensation cost, which increased to support the growth of the
business. During the third quarter, the Company recognized two "other items",
which are included in this income statement component: (a) Recognition of a
pretax credit of $400,000 to adjust the reserve for claims recorded in
connection with the Company's lawsuit against Everest Reinsurance Company, which
was settled this quarter; (b) A pretax loss of approximately $350,000 recognized
in connection with the abandonment of the Company's leased office location.
Interest, dividend and other income for 1998 increased by 55% or $447,577 to
$1,267,528 over 1997. The increase is due to the larger cash and investment
securities balances on hand.
The Company recorded a provision for income taxes in 1998 of $2,989,000 compared
to $1,764,689 for 1997. The increase is primarily due to higher pretax income,
offset by a lower effective combined tax rate of 37% compared to 38% in 1997.
Year 2000
The Company's proprietary warranty administration system was developed
internally and was designed with large enough "date" fields to accept and
accurately process dates with the year 2000 and later. In fact, many of the
contracts received for administration to date have expiration dates after 1999
and no processing problems have occurred. The Company has reviewed its mission
critical systems and believes they are year 2000 compliant and it will not need
to make significant expenditures to remedy year 2000 problems.
While the Company is satisfied that its mission critical systems are year 2000
compliant, it cannot determine at this stage whether all of its customers'
systems are compliant. The Company receives contracts from three discrete
sources in the following formats:
(a) Automobile dealers - Contracts are submitted in paper form by dealers, who
generally utilize a computerized system to produce the contract form. (b)
Automobile manufacturer - The manufacturer provides the Company with a daily
electronic file of contracts sold by its participating dealers. (c) Insurance
company - The insurance company provides the Company with a daily electronic
file of contracts received and processed at its data center.
13
<PAGE>
Should any of these sources encounter difficulty generating or processing
contracts due to year 2000 problems, the Company could face delays in receiving
service contracts to process, which might delay the recognition of revenues and
adversely impact customer service. The Company is querying its customers as to
their progress in identifying and addressing year 2000 problems.
The Company does not rely on its unrelated insurers' computer systems to a
significant extent to conduct its critical business functions. The Company
recognizes that many automobile components are electronic and contain embedded
chips. From inquiries made of industry sources, the Company is not aware of any
components being "date" sensitive. In the event certain components fail because
of year 2000 problems, the Company's insurers' might be liable for the
replacement or repair of the failed component. If such losses were significant,
the Company's insurers' might increase premiums, thereby impacting the Company's
competitive position and/or profitability.
Recent Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information (FAS 131) to be effective for fiscal years beginning after
December 15, 1997. This Statement requires a Company to report financial and
descriptive information about its operating segments, on the same basis used
internally by management. This Statement has no effect on the financial
position, results of operations, or cash flows of the Company.
II. OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
In July 1998, the Company settled a lawsuit, on confidential terms, which it had
brought against Everest Reinsurance Company (formerly Prudential Reinsurance
Company) in September 1996 in the United States District Court, Northern
District of Georgia, Atlanta division. The complaint arose from the improper
denial of valid claims under various assumption of liability endorsements issued
by Everest to participating dealers in 1991.
14
<PAGE>
Item 2. Changes in Securities
- -----------------------------
During the third quarter of 1998, the Company issued the following securities:
<TABLE>
<CAPTION>
Exemption
Consideration from
Date of sale Title of security Number sold received registration Option terms
- ------------ ----------------- ----------- -------- ------------ ------------
<S> <C> <C> <C> <C>
07/98-08/98 Common stock 26,000 $ - Vest over 4 years
options granted to
employees under
1997 Performance
Equity Plan
08/98 Common stock 26,000 $ - Vest over 4 years
options granted to
employees under
1998 Performance
Equity Plan
07/98-09/98 Common stock 24,500 $134,380 4 (2)
issued upon
exercise of
options granted
to customers
and consultant
09/98 Common stock 50 $ - 4 (2)
issued to
employee
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits: (I) 1998 Performance Equity Plan
(b) Reports on Form 8-K: None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AUTOMOBILE PROTECTION CORPORATION - APCO
/s/ Martin J. Blank November 10, 1998
- ----------------------------------- -----------------
Martin J. Blank Date
Secretary (Duly Authorized Officer)
/s/ Anthony R. Levinson November 10, 1998
- ----------------------------------- -----------------
Anthony R. Levinson Date
Chief Financial Officer (Principal
Financial and Accounting Officer,
Duly Authorized Officer)
16
AUTOMOBILE PROTECTION CORPORATION - APCO
1998 Performance Equity Plan
Section 1. Purpose; Definitions.
1.1 Purpose. The purpose of the Automobile Protection Corporation -
APCO (the "Company") 199-8 Performance Equity Plan (the "Plan") is to enable the
Company to offer to its key employees, officers, directors and consultants whose
past, present and/or potential contributions to the Company and its Subsidiaries
have been, are or will be important to the success of the Company, an
opportunity to acquire a proprietary interest in the Company. The various types
of long-term incentive awards which may be provided under the Plan will enable
the Company to respond to changes in compensation practices, tax laws,
accounting regulations and the size and diversity of its businesses.
1.2 Definitions. For purposes of the Plan, the following terms shall be
defined as set forth below:
(a) "Agreement" means the agreement between the Company and
the Holder setting forth the terms and conditions of an award under the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto and the regulations promulgated
thereunder.
(d) "Committee" means the Stock Option Committee of the Board
or any other committee of the Board, which the Board may designate to administer
the Plan or any portion thereof. If no Committee is so designated, then all
references in this Plan to "Committee" shall mean the Board.
(e) "Common Stock" means the Common Stock of the Company, par
value $.001 per share.
(f) "Company" means Automobile Protection Corporation - APCO,
a corporation organized under the laws of the State of Georgia.
(g) "Deferred Stock" means Stock to be received, under an
award made pursuant to Section 9, below, at the end of a specified deferral
period.
(h) "Disability" means disability as determined under
procedures established by the Committee for purposes of the Plan.
(i) "Effective Date" means the date set forth in Section
13.1, below.
(j) "Fair Market Value", unless otherwise required by any
applicable provision of the Code or any regulations issued thereunder, means, as
of any given date: (i) if the Common Stock is listed on a national securities
exchange or quoted on the Nasdaq National Market or Nasdaq SmallCap Market, the
last sale price of the Common Stock in the principal trading market for the
Common Stock on the last trading day preceding the date of grant of an award
hereunder, as reported by the exchange or Nasdaq, as the case may be; (ii) if
the Common Stock is not listed on a national securities exchange or quoted on
the Nasdaq National Market or Nasdaq SmallCap Market, but is traded in the
over-the-counter market, the closing bid price for the Common Stock on the last
trading day preceding the date of grant of an award hereunder for which such
quotations are reported by the OTC Bulletin Board or the National Quotation
Bureau, Incorporated or similar publisher of such quotations; and (iii) if the
fair market value of the Common Stock cannot be determined pursuant to clause
(i) or (ii) above, such price as the Committee shall determine, in good faith.
(k) "Holder" means a person who has received an award under
the Plan.
(l) "Incentive Stock Option" means any Stock Option intended
to be and designated as an "incentive stock option" within the meaning of
Section 422 of the Code.
1
<PAGE>
(m) "Nonqualified Stock Option" means any Stock Option that is
not an Incentive Stock Option.
(n) "Normal Retirement" means retirement from active
employment with the Company or any Subsidiary on or after age 65.
(o) "Other Stock-Based Award" means an award under Section 10,
below, that is valued in whole or in part by reference to, or is otherwise based
upon, Stock.
(p) "Parent" means any present or future parent corporation of
the Company, as such term is defined in Section 424(e) of the Code.
(q) "Plan" means the Automobile Protection Corporation - APCO
1998 Performance Equity Plan, as hereinafter amended from time to time.
(r) "Restricted Stock" means Stock, received under an award
made pursuant to Section 8, below, that is subject to restrictions under said
Section 8.
(s) "SAR Value" means the excess of the Fair Market Value (on
the exercise date) of the number of shares for which the Stock Appreciation
Right is exercised over the exercise price that the participant would have
otherwise had to pay to exercise the related Stock Option and purchase the
relevant shares.
(t) "Stock" means the Common Stock of the Company, par value
$.001 per share.
(u) "Stock Appreciation Right" means the right to receive from
the Company, on surrender of all or part of the related Stock Option, without a
cash payment to the Company, a number of shares of Common Stock equal to the SAR
Value divided by the exercise price of the Stock Option.
(v) "Stock Option" or "Option" means any option to purchase
shares of Stock which is granted pursuant to the Plan.
(w) "Stock Reload Option" means any option granted under
Section 6.3, below, as a result of the payment of the exercise price of a Stock
Option and/or the withholding tax related thereto in the form of Stock owned by
the Holder or the withholding of Stock by the Company.
(x) "Subsidiary" means any present or future subsidiary
corporation of the Company, as such term is defined in Section 424(f) of the
Code.
Section 2. Administration.
2.1 Committee Membership. The Plan shall be administered by the Board
or a Committee. Committee members shall serve for such term as the Board may in
each case determine, and shall be subject to removal at any time by the Board.
The Committee members, to the extent possible, shall be "non-employee" as
defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as
amended.
2.2 Powers of Committee. The Committee shall have full authority to
award, pursuant to the terms of the Plan: (i) Stock Options, (ii) Stock
Appreciation Rights, (iii) Restricted Stock, (iv) Deferred Stock, (v) Stock
Reload Options and/or (vi) Other Stock-Based Awards. For purposes of
illustration and not of limitation, the Committee shall have the authority
(subject to the express provisions of this Plan):
(a) to select the officers, key employees, directors and
consultants of the Company or any Subsidiary to whom Stock Options, Stock
Appreciation Rights, Restricted Stock, Deferred Stock, Reload Stock Options
and/or Other Stock-Based Awards may from time to time be awarded hereunder.
(b) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder (including, but not
limited to, number of shares, share price or other consideration, such as other
securities of the Company or other property, any restrictions or limitations,
and any vesting, exchange, surrender, cancellation, acceleration, termination,
exercise or forfeiture provisions, as the Committee shall determine);
2
<PAGE>
(c) to determine any specified performance goals or such other
factors or criteria which need to be attained for the vesting of an award
granted hereunder;
(d) to determine the terms and conditions under which awards
granted hereunder are to operate on a tandem basis and/or in conjunction with or
apart from other equity awarded under this Plan and cash awards made by the
Company or any Subsidiary outside of this Plan;
(e) to permit a Holder to elect to defer a payment under the
Plan under such rules and procedures as the Committee may establish, including
the crediting of interest on deferred amounts denominated in cash and of
dividend equivalents on deferred amounts denominated in Stock;
(f) to determine the extent and circumstances under which
Stock and other amounts payable with respect to an award hereunder shall be
deferred which may be either automatic or at the election of the Holder; and
(g) to substitute (i) new Stock Options for previously granted
Stock Options, which previously granted Stock Options have higher option
exercise prices and/or contain other less favorable terms, and (ii) new awards
of any other type for previously granted awards of the same type, which
previously granted awards are upon less favorable terms.
2.3 Interpretation of Plan.
(a) Committee Authority. Subject to Section 12, below, the
Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable, to interpret the terms and provisions of the
Plan and any award issued under the Plan (and to determine the form and
substance of all Agreements relating thereto), and to otherwise supervise the
administration of the Plan. Subject to Section 12, below, all decisions made by
the Committee pursuant to the provisions of the Plan shall be made in the
Committee's sole discretion and shall be final and binding upon all persons,
including the Company, its Subsidiaries and Holders.
(b) Incentive Stock Options. Anything in the Plan to the
contrary notwithstanding, no term or provision of the Plan relating to Incentive
Stock Options (including but limited to Stock Reload Options or Stock
Appreciation rights granted in conjunction with an Incentive Stock Option) or
any Agreement providing for Incentive Stock Options shall be interpreted,
amended or altered, nor shall any discretion or authority granted under the Plan
be so exercised, so as to disqualify the Plan under Section 422 of the Code, or,
without the consent of the Holder(s) affected, to disqualify any Incentive Stock
Option under such Section 422.
Section 3. Stock Subject to Plan.
3.1 Number of Shares. The total number of shares of Common Stock
reserved and available for distribution under the Plan shall be 550,000 shares.
Shares of Stock under the Plan may consist, in whole or in part, of authorized
and unissued shares or treasury shares. If any shares of Stock that have been
granted pursuant to a Stock Option cease to be subject to a Stock Option, or if
any shares of Stock that are subject to any Stock Appreciation Right, Restricted
Stock, Deferred Stock award, Reload Stock Option or Other Stock-Based Award
granted hereunder are forfeited or any such award otherwise terminates without a
payment being made to the Holder in the form of Stock, such shares shall again
be available for distribution in connection with future grants and awards under
the Plan. Only net shares issued upon a stock-for-stock exercise (including
stock used for withholding taxes) shall be counted against the number of shares
available under the Plan.
3.2 Adjustment Upon Changes in Capitalization, Etc. In the event of any
change in the number of outstanding shares of Common Stock of the Company
occurring as the result of a stock split, reverse stock split or stock dividend
on the Common Stock, after the grant of an Award, the Company shall
proportionately adjust the number of shares of Stock subject to the Award and
the price to be paid on exercise of an Award as well as the aggregate number of
shares reserved for issuance under the Plan. Any right to acquire a fractional
share of Stock resulting from any adjustments will be rounded to the nearest
whole share of Stock. If the Company shall be the surviving corporation in any
merger, combination or consolidation, any outstanding Award shall pertain and
apply to the shares of Stock to which the Holder is entitled, without adjustment
for issuance by the Company of any securities in the merger, combination or
consolidation. In the event of a change in the par value of the Common Stock of
the Company which is subject to any outstanding Award, such Award will be deemed
to pertain to the shares of Stock resulting from any such change. To the extent
that the foregoing adjustments relate to the Common Stock of the Company, the
adjustments will be made by the Committee whose determination will be final,
binding and conclusive.
3
<PAGE>
Section 4. Eligibility.
Awards may be made or granted to key employees, officers,
directors and consultants who are deemed to have rendered or to be able to
render significant services to the Company or its Subsidiaries and who are
deemed to have contributed or to have the potential to contribute to the success
of the Company. No Incentive Stock Option shall be granted to any person who is
not an employee of the Company or a Subsidiary at the time of grant.
Section 5. Required Six-Month Holding Period.
A period of not less than six months must elapse from the date of grant
of an award under the Plan, (i) before any disposition by a Holder of a
derivative security (as defined in Rule 16a-1 promulgated under the Securities
Exchange Act of 1934, as amended) issued under this Plan or (ii) before any
disposition by a Holder of any Stock purchased or granted pursuant to an award
under this Plan.
Section 6. Stock Options.
6.1 Grant and Exercise. Stock Options granted under the Plan may be of
two types: (i) Incentive Stock Options and (ii) Nonqualified Stock Options. Any
Stock Option granted under the Plan shall contain such terms, not inconsistent
with this Plan, or with respect to Incentive Stock Options, not inconsistent
with the Plan and the Code, as the Committee may from time to time approve. The
Committee shall have the authority to grant Incentive Stock Options,
Non-Qualified Stock Options, or both types of Stock Options and which may be
granted alone or in addition to other awards granted under the Plan. To the
extent that any Stock Option intended to qualify as an Incentive Stock Option
does not so qualify, it shall constitute a separate Nonqualified Stock Option.
An Incentive Stock Option may be granted only within the ten-year period
commencing from the Effective Date and may only be exercised within ten years of
the date of grant (or five years in the case of an Incentive Stock Option
granted to an optionee ("10% Stockholder") who, at the time of grant, owns Stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company.
6.2 Terms and Conditions. Stock Options granted under the Plan shall be
subject to the following terms and conditions:
(a) Exercise Price. The exercise price per share of Stock
purchasable under a Stock Option shall be determined by the Committee at the
time of grant and may not be less than 100% of the Fair Market Value of the
Stock as defined above; provided, however, that the exercise price of an
Incentive Stock Option granted to a 10% Stockholder shall not be less than 110%
of the Fair Market Value of the Stock.
(b) Option Term. Subject to the limitations in Section 6.1,
above, the term of each Stock Option shall be fixed by the Committee.
(c) Exercisability. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be determined by
the Committee and as set forth in Section 11, below. If the Committee provides,
in its discretion, that any Stock Option is exercisable only in installments,
i.e., that it vests over time, the Committee may waive such installment exercise
provisions at any time at or after the time of grant in whole or in part, based
upon such factors as the Committee shall determine.
(d) Method of Exercise. Subject to whatever installment,
exercise and waiting period provisions are applicable in a particular case,
Stock Options may be exercised in whole or in part at any time during the term
of the Option, by giving written notice of exercise to the Company specifying
the number of shares of Stock to be purchased. Such notice shall be accompanied
by payment in full of the purchase price, which shall be in cash or, unless
otherwise provided in the Agreement, in shares of Stock (including Restricted
Stock and other contingent awards under this Plan) or, partly in cash and partly
in such Stock, or such other means which the Committee determines are consistent
with the Plan's purpose and applicable law. Cash payments shall be made by wire
transfer, certified or bank check or personal check, in each case payable to the
order of the Company; provided, however, that the Company shall not be required
to deliver certificates for shares of Stock with respect to which an Option is
exercised until the Company has confirmed the receipt of good and available
funds in payment of the purchase price thereof. Payments in the form of Stock
shall be valued at the Fair Market Value of a share of Stock on the date prior
to the date of exercise. Such payments shall be made by delivery of stock
certificates in negotiable form which are effective to transfer good and valid
title thereto to the Company, free of any liens or encumbrances. Subject to the
terms of the Agreement, the Committee may, in its sole discretion, at the
request of the Holder, deliver upon the exercise of a Nonqualified Stock Option
a combination of shares of Deferred Stock and Common Stock; provided that,
4
<PAGE>
notwithstanding the provisions of Section 9 of the Plan, such Deferred Stock
shall be fully vested and not subject to forfeiture. A Holder shall have none of
the rights of a stockholder with respect to the shares subject to the Option
until such shares shall be transferred to the Holder upon the exercise of the
Option.
(e) Transferability. Except as may be set forth in the
Agreement, no Stock Option shall be transferable by the Holder other than by
will or by the laws of descent and distribution, and all Stock Options shall be
exercisable, during the Holder's lifetime, only by the Holder.
(f) Termination by Reason of Death. If a Holder's employment
by the Company or a Subsidiary terminates by reason of death, any Stock Option
held by such Holder, unless otherwise determined by the Committee at the time of
grant and set forth in the Agreement, shall be fully vested and may thereafter
be exercised by the legal representative of the estate or by the legatee of the
Holder under the will of the Holder, for a period of one year (or such other
greater or lesser period as the Committee may specify at grant) from the date of
such death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter.
(g) Termination by Reason of Disability. If a Holder's
employment by the Company or any Subsidiary terminates by reason of Disability,
any Stock Option held by such Holder, unless otherwise determined by the
Committee at the time of grant and set forth in the Agreement, shall be fully
vested and may thereafter be exercised by the Holder for a period of one year
(or such other greater or lesser period as the Committee may specify at the time
of grant) from the date of such termination of employment or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter.
(h) Other Termination. Subject to the provisions of Section
14.3, below, and unless otherwise determined by the Committee at the time of
grant and set forth in the Agreement, if a Holder is an employee of the Company
or a Subsidiary at the time of grant and if such Holder's employment by the
Company or any Subsidiary terminates for any reason other than death or
Disability, the Stock Option shall thereupon automatically terminate, except
that if the Holder's employment is terminated by the Company or a Subsidiary
without cause or due to Normal Retirement, then the portion of such Stock Option
which has vested on the date of termination of employment may be exercised for
the lesser of three months after termination of employment or the balance of
such Stock Option's term.
(i) Additional Incentive Stock Option Limitation. In the case
of an Incentive Stock Option, the aggregate Fair Market Value of Stock
(determined at the time of grant of the Option) with respect to which Incentive
Stock Options become exercisable by a Holder during any calendar year (under all
such plans of the Company and its Parent and Subsidiary) shall not exceed
$100,000.
(j) Buyout and Settlement Provisions. The Committee may at any
time, in its sole discretion, offer to buy out a Stock Option previously
granted, based upon such terms and conditions as the Committee shall establish
and communicate to the Holder at the time that such offer is made.
(k) Stock Option Agreement. Each grant of a Stock Option shall
be confirmed by, and shall be subject to the terms of, the Agreement executed by
the Company and the Holder.
6.3 Stock Reload Option. The Committee may also grant to the Holder
(concurrently with the grant of an Incentive Stock Option and at or after the
time of grant in the case of a Nonqualified Stock Option) a Stock Reload Option
up to the amount of shares of Stock held by the Holder for at least six months
and used to pay all or part of the exercise price of an Option and, if any,
withheld by the Company as payment for withholding taxes. Such Stock Reload
Option shall have an exercise price equal to the Fair Market Value as of the
date of the Stock Reload Option grant. Unless the Committee determines
otherwise, a Stock Reload Option may be exercised commencing one year after it
is granted and shall expire on the date of expiration of the Option to which the
Reload Option is related.
Section 7. Stock Appreciation Rights.
7.1 Grant and Exercise. The Committee may grant Stock Appreciation
Rights to participants who have been, or are being granted, Options under the
Plan as a means of allowing such participants to exercise their Options without
the need to pay the exercise price in cash. In the case of a Nonqualified Stock
Option, a Stock Appreciation Right may be granted either at or after the time of
the grant of such Nonqualified Stock Option. In the case of an Incentive Stock
Option, a Stock Appreciation Right may be granted only at the time of the grant
of such Incentive Stock Option.
7.2 Terms and Conditions. Stock Appreciation Rights shall be subject to
the following terms and conditions:
5
<PAGE>
(a) Exercisability. Stock Appreciation Rights shall be
exercisable as shall be determined by the Committee and set forth in the
Agreement, subject to the limitations, if any, imposed by the Code, with respect
to related Incentive Stock Options.
(b) Termination. A Stock Appreciation Right shall terminate
and shall no longer be exercisable upon the termination or exercise of the
related Stock Option.
(c) Method of Exercise. Stock Appreciation Rights shall be
exercisable upon such terms and conditions as shall be determined by the
Committee and set forth in the Agreement and by surrendering the applicable
portion of the related Stock Option. Upon such exercise and surrender, the
Holder shall be entitled to receive a number of Option Shares equal to the SAR
Value divided by the exercise price of the Option.
(d) Shares Affected Upon Plan. The granting of a Stock
Appreciation Right shall not affect the number of shares of Stock available
under for awards under the Plan. The number of shares available for awards under
the Plan will, however, be reduced by the number of shares of Stock acquirable
upon exercise of the Stock Option to which such Stock Appreciation Right
relates.
Section 8. Restricted Stock.
8.1 Grant. Shares of Restricted Stock may be awarded either alone or in
addition to other awards granted under the Plan. The Committee shall determine
the eligible persons to whom, and the time or times at which, grants of
Restricted Stock will be awarded, the number of shares to be awarded, the price
(if any) to be paid by the Holder, the time or times within which such awards
may be subject to forfeiture (the "Restriction Period"), the vesting schedule
and rights to acceleration thereof, and all other terms and conditions of the
awards.
8.2 Terms and Conditions. Each Restricted Stock award shall be subject
to the following terms and conditions:
(a) Certificates. Restricted Stock, when issued, will be
represented by a stock certificate or certificates registered in the name of the
Holder to whom such Restricted Stock shall have been awarded. During the
Restriction Period, certificates representing the Restricted Stock and any
securities constituting Retained Distributions (as defined below) shall bear a
legend to the effect that ownership of the Restricted Stock (and such Retained
Distributions), and the enjoyment of all rights appurtenant thereto, are subject
to the restrictions, terms and conditions provided in the Plan and the
Agreement. Such certificates shall be deposited by the Holder with the Company,
together with stock powers or other instruments of assignment, each endorsed in
blank, which will permit transfer to the Company of all or any portion of the
Restricted Stock and any securities constituting Retained Distributions that
shall be forfeited or that shall not become vested in accordance with the Plan
and the Agreement.
(b) Rights of Holder. Restricted Stock shall constitute issued
and outstanding shares of Common Stock for all corporate purposes. The Holder
will have the right to vote such Restricted Stock, to receive and retain all
regular cash dividends and other cash equivalent distributions as the Board may
in its sole discretion designate, pay or distribute on such Restricted Stock and
to exercise all other rights, powers and privileges of a holder of Common Stock
with respect to such Restricted Stock, with the exceptions that (i) the Holder
will not be entitled to delivery of the stock certificate or certificates
representing such Restricted Stock until the Restriction Period shall have
expired and unless all other vesting requirements with respect thereto shall
have been fulfilled; (ii) the Company will retain custody of the stock
certificate or certificates representing the Restricted Stock during the
Restriction Period; (iii) other than regular cash dividends and other cash
equivalent distributions as the Board may in its sole discretion designate, pay
or distribute, the Company will retain custody of all distributions ("Retained
Distributions") made or declared with respect to the Restricted Stock (and such
Retained Distributions will be subject to the same restrictions, terms and
conditions as are applicable to the Restricted Stock) until such time, if ever,
as the Restricted Stock with respect to which such Retained Distributions shall
have been made, paid or declared shall have become vested and with respect to
which the Restriction Period shall have expired; (iv) a breach of any of the
restrictions, terms or conditions contained in this Plan or the Agreement or
otherwise established by the Committee with respect to any Restricted Stock or
Retained Distributions will cause a forfeiture of such Restricted Stock and any
Retained Distributions with respect thereto.
(c) Vesting; Forfeiture. Upon the expiration of the
Restriction Period with respect to each award of Restricted Stock and the
satisfaction of any other applicable restrictions, terms and conditions (i) all
or part of such Restricted Stock shall become vested in accordance with the
terms of the Agreement, subject to Section 11, below, and (ii) any Retained
Distributions with respect to such Restricted Stock shall become vested to the
extent that
6
<PAGE>
the Restricted Stock related thereto shall have become vested, subject to
Section 11, below. Any such Restricted Stock and Retained Distributions that do
not vest shall be forfeited to the Company and the Holder shall not thereafter
have any rights with respect to such Restricted Stock and Retained Distributions
that shall have been so forfeited.
Section 9. Deferred Stock.
9.1 Grant. Shares of Deferred Stock may be awarded either alone or in
addition to other awards granted under the Plan. The Committee shall determine
the eligible persons to whom and the time or times at which grants of Deferred
Stock will be awarded, the number of shares of Deferred Stock to be awarded to
any person, the duration of the period (the "Deferral Period") during which, and
the conditions under which, receipt of the shares will be deferred, and all the
other terms and conditions of the awards.
9.2 Terms and Conditions. Each Deferred Stock award shall be subject to
the following terms and conditions:
(a) Certificates. At the expiration of the Deferral Period (or
the Additional Deferral Period referred to in Section 9.2 (d) below, where
applicable), share certificates shall be issued and delivered to the Holder, or
his legal representative, representing the number equal to the shares covered by
the Deferred Stock award.
(b) Rights of Holder. A person entitled to receive Deferred
Stock shall not have any rights of a stockholder by virtue of such award until
the expiration of the applicable Deferral Period and the issuance and delivery
of the certificates representing such Stock. The shares of Stock issuable upon
expiration of the Deferral Period shall not be deemed outstanding by the Company
until the expiration of such Deferral Period and the issuance and delivery of
such Stock to the Holder.
(c) Vesting; Forfeiture. Upon the expiration of the Deferral
Period with respect to each award of Deferred Stock and the satisfaction of any
other applicable restrictions, terms and conditions all or part of such Deferred
Stock shall become vested in accordance with the terms of the Agreement, subject
to Section 11, below. Any such Deferred Stock that does not vest shall be
forfeited to the Company and the Holder shall not thereafter have any rights
with respect to such Deferred Stock.
(d) Additional Deferral Period. A Holder may request to, and
the Committee may at any time, defer the receipt of an award (or an installment
of an award) for an additional specified period or until a specified event (the
"Additional Deferral Period"). Subject to any exceptions adopted by the
Committee, such request must generally be made at least one year prior to
expiration of the Deferral Period for such Deferred Stock award (or such
installment).
Section 10. Other Stock-Based Awards.
10.1 Grant and Exercise. Other Stock-Based Awards may be awarded,
subject to limitations under applicable law, that are denominated or payable in,
valued in whole or in part by reference to, or otherwise based on, or related
to, shares of Common Stock, as deemed by the Committee to be consistent with the
purposes of the Plan, including, without limitation, purchase rights, shares of
Common Stock awarded which are not subject to any restrictions or conditions,
convertible or exchangeable debentures, or other rights convertible into shares
of Common Stock and awards valued by reference to the value of securities of or
the performance of specified Subsidiaries. Other Stock-Based Awards may be
awarded either alone or in addition to or in tandem with any other awards under
this Plan or any other plan of the Company.
10.2 Eligibility for Other Stock-Based Awards. The Committee shall
determine the eligible persons to whom and the time or times at which grants of
such other stock-based awards shall be made, the number of shares of Common
Stock to be awarded pursuant to such awards, and all other terms and conditions
of the awards.
10.3 Terms and Conditions. Each Other Stock-Based Award shall be
subject to such terms and conditions as may be determined by the Committee and
to Section 11, below.
Section 11. Accelerated Vesting and Exercisability.
If (i) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934 (the "Exchange Act"), is or becomes the
"beneficial owner" (as referred in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 15% or more of the
combined voting power of the Company's then outstanding securities in one or
more transactions, or (ii) during any period of two consecutive years,
7
<PAGE>
individuals who at the beginning of such period constitute the board of
directors cease for any reason to constitute at least a majority thereof, unless
the election of each director who was not a director at the beginning of such
period has been approved in advance by directors representing at least
two-thirds of the directors then in office who were directors at the beginning
of the periods, then, the vesting periods of any and all Options and other
awards granted and outstanding under the Plan shall be accelerated and all such
Options and awards will immediately and entirely vest, and the respective
holders thereof will have the immediate right to purchase and/or receive any and
all Stock subject to such Options and awards on the terms set forth in this Plan
and the respective agreements respecting such Options and awards.
Section 12. Amendment and Termination.
The Board may at any time, and from time to time, amend alter, suspend
or discontinue any of the provisions of the Plan, but no amendment, alteration,
suspension or discontinuance shall be made which would impair the rights of a
Holder under any Agreement theretofore entered into hereunder, without the
Holder's consent.
Section 13. Term of Plan.
13.1 Effective Date. The Plan shall be effective as of August 7, 1998
("Effective Date"), subject to the approval of the Plan by the Company's
stockholders within one year after the Effective Date. Any awards granted under
the Plan prior to such approval shall be effective when made (unless otherwise
specified by the Committee at the time of grant), but shall be conditioned upon,
and subject to, such approval of the Plan by the Company's stockholders and no
awards shall vest or otherwise become free of restrictions prior to such
approval.
13.2 Termination Date. Unless terminated by the Board, this Plan shall
continue to remain effective until such time no further awards may be granted
and all awards granted under the Plan are no longer outstanding. Notwithstanding
the foregoing, grants of Incentive Stock Options may only be made during the ten
year period following the Effective Date.
Section 14. General Provisions.
14.1 Written Agreements. Each award granted under the Plan shall be
confirmed by, and shall be subject to the terms of the Agreement executed by the
Company and the Holder. The Committee may terminate any award made under the
Plan if the Agreement relating thereto is not executed and returned to the
Company within 10 days after the Agreement has been delivered to the Holder for
his or her execution.
14.2 Unfunded Status of Plan. The Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Holder by the Company, nothing contained herein shall
give any such Holder any rights that are greater than those of a general
creditor of the Company.
14.3 Employees.
(a) Engaging in Competition With the Company. In the event a
Holder's employment with the Company or a Subsidiary is terminated for any
reason whatsoever, and within eighteen months after the date thereof such Holder
accepts employment with any competitor of, or otherwise engages in competition
with, the Company, the Committee, in its sole discretion, may require such
Holder to return to the Company the economic value of any award which was
realized or obtained by such Holder at any time during the period beginning on
that date which is six months prior to the date of such Holder's termination of
employment with the Company.
(b) Termination for Cause . The Committee may, in the event a
Holder's employment with the Company or a Subsidiary is terminated for cause,
annul any award granted under this Plan to such employee and, in such event, the
Committee, in its sole discretion, may require such Holder to return to the
Company the economic value of any award which was realized or obtained by such
Holder at any time during the period beginning on that date which is six months
prior to the date of such Holder's termination of employment with the Company.
(c) No Right of Employment. Nothing contained in the Plan or
in any award hereunder shall be deemed to confer upon any Holder who is an
employee of the Company or any Subsidiary any right to continued employment with
the Company or any Subsidiary, nor shall it interfere in any way with the right
of the Company or any Subsidiary to terminate the employment of any Holder who
is an employee at any time.
8
<PAGE>
14.4 Investment Representations. The Committee may require each person
acquiring shares of Stock pursuant to a Stock Option or other award under the
Plan to represent to and agree with the Company in writing that the Holder is
acquiring the shares for investment without a view to distribution thereof.
14.5 Additional Incentive Arrangements. Nothing contained in the Plan
shall prevent the Board from adopting such other or additional incentive
arrangements as it may deem desirable, including, but not limited to, the
granting of Stock Options and the awarding of stock and cash otherwise than
under the Plan; and such arrangements may be either generally applicable or
applicable only in specific cases.
14.6 Withholding Taxes. Not later than the date as of which an amount
must first be included in the gross income of the Holder for Federal income tax
purposes with respect to any option or other award under the Plan, the Holder
shall pay to the Company, or make arrangements satisfactory to the Committee
regarding the payment of, any Federal, state and local taxes of any kind
required by law to be withheld or paid with respect to such amount. If permitted
by the Committee, tax withholding or payment obligations may be settled with
Common Stock, including Common Stock that is part of the award that gives rise
to the withholding requirement. The obligations of the Company under the Plan
shall be conditioned upon such payment or arrangements and the Company or the
Holder's employer (if not the Company) shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment of any kind otherwise
due to the Holder from the Company or any Subsidiary.
14.7 Governing Law. The Plan and all awards made and actions taken
thereunder shall be governed by and construed in accordance with the laws of the
State of New York (without regard to choice of law provisions).
14.8 Other Benefit Plans. Any award granted under the Plan shall not be
deemed compensation for purposes of computing benefits under any retirement plan
of the Company or any Subsidiary and shall not affect any benefits under any
other benefit plan now or subsequently in effect under which the availability or
amount of benefits is related to the level of compensation (unless required by
specific reference in any such other plan to awards under this Plan).
14.9 Non-Transferability. Except as otherwise expressly provided in the
Plan or the Agreement, no right or benefit under the Plan may be alienated,
sold, assigned, hypothecated, pledged, exchanged, transferred, encumbranced or
charged, and any attempt to alienate, sell, assign, hypothecate, pledge,
exchange, transfer, encumber or charge the same shall be void.
14.10 Applicable Laws. The obligations of the Company with respect to
all Stock Options and awards under the Plan shall be subject to (i) all
applicable laws, rules and regulations and such approvals by any governmental
agencies as may be required, including, without limitation, the Securities Act
of 1933, as amended, and (ii) the rules and regulations of any securities
exchange on which the Stock may be listed.
14.11 Conflicts. If any of the terms or provisions of the Plan or an
Agreement (with respect to Incentive Stock Options) conflict with the
requirements of Section 422 of the Code, then such terms or provisions shall be
deemed inoperative to the extent they so conflict with the requirements of said
Section 422 of the Code. Additionally, if this Plan or any Agreement does not
contain any provision required to be included herein under Section 422 of the
Code, such provision shall be deemed to be incorporated herein and therein with
the same force and effect as if such provision had been set out at length herein
and therein. If any of the terms or provisions of any Agreement conflict with
any terms or provision of the Plan, then such terms or provisions shall be
deemed inoperative to the extent they so conflict with the requirements of the
Plan. Additionally, if any Agreement does not contain any provision required to
be included therein under the Plan, such provision shall be deemed to be
incorporated therein with the same force and effect as if such provision had
been set out at length therein.
14.12 Non-Registered Stock. The shares of Stock to be distributed under this
Plan have not been, as of the Effective Date, registered under the Securities
Act of 1933, as amended, or any applicable state or foreign securities laws and
the Company has no obligation to any Holder to register the Stock or to assist
the Holder in obtaining an exemption from the various registration requirements,
or to list the Stock on a national securities exchange.
9
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