SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
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AUTOMOBILE PROTECTION CORPORATION - APCO
(Exact name of registrant as specified in its charter)
Georgia 58-1582432
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15 Dunwoody Park Drive, Suite 100
Atlanta, Georgia 30338
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(770) 394-7070
--------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 12, 1998
- -------------------------------------------- ---------------------------
Common stock, $.001 par value per share 11,664,766
Exhibits - None.
Total number of pages, including cover page - 12.
1
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AUTOMOBILE PROTECTION CORPORATION - APCO
INDEX
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements.
Consolidated Balance Sheets at March 31, 1998 and
December 31, 1997........................................................................... 3
Consolidated Statements of Income for the Three
Month Period Ended March 31, 1998 and 1997.................................................. 4
Consolidated Statements of Cash Flows for the Three
Month Period Ended March 31, 1998 and 1997 ................................................. 5
Notes to Consolidated Financial Statements ................................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................... 8
Part II. Other Information
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
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2
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<TABLE>
<CAPTION>
AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, * December 31,
--------- --------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $12,294,086 $11,297,049
Trading securities, at fair value 9,980,905 8,067,180
Investment securities held to maturity 1,607,781 1,851,019
Accounts receivable, net of provision for doubtful
accounts of $80,000 and $60,000 2,732,902 2,400,701
Notes receivable 3,324,913 2,554,978
Officer and employee receivables 342,759 250,190
Prepaid expenses 677,789 287,766
Deferred tax asset 837,160 785,882
Restricted cash 11,491,940 8,324,628
----------------- ------------------
Total current assets 43,290,235 35,819,393
Property and equipment, net of accumulated
depreciation of $2,133,368 and $2,015,368 1,424,599 1,220,876
Investment securities held to maturity, non current 1,266,977 1,474,493
Deposits to secure licenses 752,926 743,762
Deferred tax asset 26,501 18,793
Other assets 26,947 37,733
----------------- ------------------
$46,788,185 $39,315,050
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Premiums, fees and taxes payable $11,491,940 $8,324,628
Accounts payable 1,788,065 1,255,831
Accrued liabilities 5,811,670 4,805,471
Income taxes payable 47,013 399,033
----------------- ------------------
Total current liabilities 19,138,688 14,784,963
Deferred income taxes 348,471 254,420
Redeemable preferred stock 300
----------------- ------------------
19,487,159 15,039,683
----------------- ------------------
Shareholders' equity:
Common stock; $.001 par value, 40,000,000 authorized,
11,377,843 and 10,976,964 issued and outstanding 11,377 10,976
Additional paid-in capital 17,725,176 16,067,536
Retained earnings 9,564,473 8,196,855
----------------- ------------------
Total shareholders' equity 27,301,026 24,275,367
----------------- ------------------
$46,788,185 $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 Ended Three Months Ended
------------------ ------------------
March 31, 1998 March 31, 1997
-------------- ------------------
<S> <C> <C>
Revenues $25,813,515 $20,095,314
----------------- ------------------
Cost of sales:
Premiums and taxes 15,966,779 12,931,424
Commissions and other costs 4,002,282 2,892,533
----------------- ------------------
Total cost of sales 19,969,061 15,823,957
----------------- ------------------
5,844,454 4,271,357
----------------- ------------------
Expenses:
Compensation, selling and administrative 3,908,354 3,386,696
Depreciation and amortization 118,000 104,500
Interest, dividend and other income (352,518) (234,142)
----------------- ------------------
3,673,836 3,257,054
----------------- ------------------
Income before provision for income taxes 2,170,618 1,014,303
Provision for income taxes 803,000 385,000
----------------- ------------------
Net income $1,367,618 $629,303
================= ==================
Earnings per share:
Basic $0.12 $0.06
Diluted $0.11 $0.05
Number of shares used in computing earnings per share:
Basic 11,207,000 10,633,000
Diluted 12,287,000 11,419,000
</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 CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
------------------ ------------------
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,367,618 $629,303
----------------- ------------------
Adjustments to reconcile net income to net cash
(used in) provided by
operating activities:
Depreciation and amortization 118,000 104,500
Deferred income taxes 35,065 66,608
Provision for doubtful accounts 20,000
Tax benefit from stock option exercise 740,000
Stock compensation expense 35,600
Changes in operating assets and liabilities:
Restricted cash (3,167,312) 1,645,904
Accounts receivable (352,201) (787,127)
Officer and employee receivables (92,569) (48,347)
Notes receivable (769,935) (23,914)
Prepaid expenses and other assets (379,237) (121,166)
Premiums, fees and taxes payable 3,167,312 (1,645,904)
Accounts payable 532,234 35,557
Accrued liabilities 1,006,199 623,366
Income taxes (352,020) 293,528
Purchases of trading securities (3,742,776) (530,486)
Sales of trading securities 1,829,051 301,000
----------------- ------------------
Total adjustments (1,372,589) (86,481)
----------------- ------------------
Net cash (used in) provided by operating activities (4,971) 542,822
----------------- ------------------
Cash flows from investing activities:
Purchases of property and equipment (321,723) (96,793)
Purchases of investment securities (95,961)
Redemptions and maturities of investment securities 546,715 225,687
Increase in deposits to secure licenses (9,164) (8,865)
----------------- ------------------
Net cash provided by investing activities 119,867 120,029
----------------- ------------------
Cash flows from financing activities:
Issuance of common stock 882,441 221,510
Redemption of preferred stock (300)
----------------- ------------------
Net cash provided by financing activities 882,141 221,510
----------------- ------------------
Net increase in cash and cash equivalents 997,037 884,361
Cash and cash equivalents at beginning of period 11,297,049 6,967,904
----------------- ------------------
Cash and cash equivalents at end of period $12,294,086 $7,852,265
================= ==================
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $379,955 $0
================= ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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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 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, 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.
6
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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 March 31, 1998 is $2,871,109.
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.
7
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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 equal the
market price of the underlying stock on the date of the grant, no compensation
expense is recognized.
Earnings Per Share
- ------------------
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS No. 128) during 1997. SFAS No. 128 provides for new
accounting principles to be used in the calculation of earnings per share and
was effective for financial statements for both interim and annual periods ended
after December 15, 1997. The company has restated its net income per share for
all periods presented to give effect to SFAS No. 128. 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.
2. 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. In 1996, the Company recorded the
total amount it had paid and expected to pay, totaling $875,000, in the
consolidated statement of income. On August 12, 1997, the U.S. Judge issued an
order which denied Everest's motion to dismiss. Both parties have been
conducting discovery since the last order was issued and have mutually agreed to
a non-binding mediation process. The Company is funding the claims submitted by
dealers and has paid $580,000 through March 31, 1998, which amount has been
charged against the reserve recorded in 1996 of $875,000. The Company is
vigorously pursuing this action against Everest.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
The following discussion and analysis of financial condition and results of
operations presents the more significant factors affecting the Company during
the three months ended March 31, 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.
8
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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.
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.
9
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The Company's reported revenues represent the amount it bills to automobile
dealers, which is based on rate schedules developed by the Company. The amounts
billed consider insurance, taxes, commissions and other costs and profit. The
Company's reported cost of sales represents the amounts it pays to the insurers
for insurance, state insurance taxes and commissions to its sales
representatives.
Liquidity and Capital Resources
The Company believes that its current working capital and anticipated levels of
internally generated funds will be sufficient to fund its operating and capital
expenditure requirements for the next twenty four months. This estimate is based
on the Company's current level of operations and certain assumptions relating to
the Company's business and planned growth. At March 31, 1998, the Company had
working capital of $24,151,545 (compared to $21,034,430 at December 31, 1997)
and investment securities with maturities greater than twelve months of
$1,266,977 (compared to $1,474,493 at December 31, 1997). The net increase in
working capital and investment securities of $2,909,599 is attributable to
operations ($2,027,158) and the exercise of stock options ($882,441). The
Company invests its funds in treasury securities, municipal bonds and financial
instruments with maturities of less than five years and money market accounts.
Results of Operations
Three months ended March 31, 1998 ("1998") compared to the three months ended
- -----------------------------------------------------------------------------
March 31, 1997 ("1997").
- ----------------------
Revenues for 1998 increased by 28% or $5,718,201 to $25,813,515 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) and the EasyCare(R) Certified
Pre-Owned Vehicle Program by the Company's independent sales representatives,
increased average production by dealers and from 39% growth under the contract
with American Honda Finance Corporation.
The Company's gross margin was 22.6% of revenues in 1998 compared to 21.3% 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 year. The Company has
recently entered into agreements with two large dealership groups and with Banc
One Insurance Services Corporation and is also preparing to launch the
EasyCare(R) standard product line. Management anticipates future gross margins
will be reduced as a result of the expected change in the mix of business.
Compensation, selling and administrative expenses for 1998 increased by 15% or
$521,658 to $3,908,354 over 1997. The increase for 1998 is primarily
attributable to compensation cost, which increased to support the growth of the
business.
Interest, dividend and other income for 1998 increased by 51% or $118,376 to
$352,518 over 1997. The increase is due to the larger cash and investment
securities balances on hand.
10
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The Company recorded a provision for income taxes in 1998 of $803,000 compared
to $385,000 for 1997. The increase is primarily due to higher pretax income and
an effective combined tax rate of 37% compared to 38% in 1997.
II. OTHER INFORMATION
Item 2. Changes in Securities
- -----------------------------
During the first 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>
01/98-03/98 Common stock 15,000 $35,000 4 (2)
issued upon
exercise of options
granted to
consultants
02/98 Common stock 346,000 $756,840 4 (2)
issued upon
exercise of options
granted to two
executive officers
02/98 Options to 150,000 Options granted 4 (2) Exercisable
purchase for services - pro-rata over 5
common stock additional consid- years, at $9.00 -
granted to eration will be $13.00 per share
customer received upon
exercise of options
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits: None
(b) Reports on Form 8-K: None
11
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AUTOMOBILE PROTECTION CORPORATION - APCO
/s/ Martin J. Blank May 14, 1998
- ----------------------------------- ------------------
Martin J. Blank Date
Secretary (Duly Authorized Officer)
/s/ Anthony R. Levinson May 14, 1998
- ----------------------------------- ------------------
Anthony R. Levinson Date
Chief Financial Officer (Principal
Financial and Accounting Officer,
Duly Authorized Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 12,294,086
<SECURITIES> 12,855,663
<RECEIVABLES> 6,400,574
<ALLOWANCES> 80,000
<INVENTORY> 0
<CURRENT-ASSETS> 43,290,235
<PP&E> 1,424,599
<DEPRECIATION> 2,133,368
<TOTAL-ASSETS> 46,788,185
<CURRENT-LIABILITIES> 19,138,688
<BONDS> 0
0
0
<COMMON> 11,377
<OTHER-SE> 27,289,649
<TOTAL-LIABILITY-AND-EQUITY> 46,788,185
<SALES> 25,813,515
<TOTAL-REVENUES> 25,813,515
<CGS> 19,969,061
<TOTAL-COSTS> 19,969,061
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,170,618
<INCOME-TAX> 803,000
<INCOME-CONTINUING> 1,367,618
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,367,618
<EPS-PRIMARY> .012
<EPS-DILUTED> .011
</TABLE>
